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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission File Number 1-14557

U.S. Industries, Inc.

(561) 514-3838

101 Wood Avenue South

Securities registered pursuant to Section 12(b) of the Act:

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 that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past ninety days:    Yes þ        No o

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    o

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

     The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of March 28, 2002 (based on the last reported sale price of such stock on the New York Stock Exchange on such date) was approximately $275,423,882.

     As of December 1, 2002, the registrant had 74,738,069 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

     Certain portions of the registrant’s definitive proxy statement pursuant to Regulation 14A of the Securities Exchange Act of 1934 in connection with the annual meeting of stockholders of the registrant to be held on February 20, 2003 are incorporated by reference into Part III of this Report.

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TABLE OF CONTENTS

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PART I

Item 1.     Business

General

      U.S. Industries, Inc. (“USI” and, together with its subsidiaries, the “Company”) is a leading international producer of bath and plumbing products. The Company serves residential markets through Jacuzzi Inc. and related subsidiaries (“Jacuzzi”) and commercial/institutional markets through Zurn Industries, Inc. (“Zurn”). The Company also manufactures premium RAINBOW® vacuum cleaner systems through Rexair Inc. (“Rexair”).

      The Company was originally formed in May 1995, when USI Atlantic, Inc. (“USI Atlantic”), a Company predecessor then known as U.S. Industries, Inc., was spun-off from Hanson PLC with holdings in 34 diverse businesses, including Jacuzzi and Rexair. In a merger transaction completed in June 1998, the Company acquired Zurn as a wholly-owned subsidiary. The Company has disposed of numerous businesses to reduce debt and achieve its present focus. These dispositions included Ames True Temper, Lighting Corporation of America, Selkirk and Spear & Jackson in fiscal 2002, and SiTeco in October 2002.

      The Company operates on a 52- or 53-week fiscal year ending on the last Saturday closest to September 30. The Company’s public filings may be obtained through the Securities and Exchange Commission at its website at www.sec.gov, free of charge.

Bath & Plumbing

      The JACUZZI® brand has worldwide recognition for innovative whirlpool baths, showers, outdoor spas and bathroom fixtures. Its products are used extensively in residential renovation and new construction.

      In North America, Jacuzzi Whirlpool Bath manufactures bath and shower systems in facilities in California and Georgia and distributes its products through wholesalers, home centers and specialty kitchen and bath retailers. The major homebuilders, as well as building and plumbing contractors, are principally served through the wholesale channels. The home centers and other mass merchants focus on do-it-yourself customers and local contractors.

      Sundance Spas manufactures outdoor jetted spas at facilities in California and Florida. These products are marketed under the SUNDANCE®, JACUZZI® and GATSBY® brands and distributed by specialty mass merchants and retailers in the U.S. and Europe.

      ELJER® is a leading North American manufacturer of bathroom products including toilets, baths and sinks, with facilities in Pennsylvania, Mississippi and Ohio. Its products are distributed by home centers and wholesalers.

      Jacuzzi Europe S.p.A. (JESPA), based in Italy, is a European market leader in whirlpool bath and shower products, with a manufacturing facility in Italy.

      Jacuzzi’s United Kingdom operations market a full line of bathroom products under the JACUZZI®, SANITAN® and FORDHAM® brands, with manufacturing facilities in England and France.

      The Company serves Asian markets from headquarters in Singapore, principally with JACUZZI® products manufactured in Europe and North America. The Company also serves South American markets with JACUZZI® bath and spa products, which are manufactured in Brazil and Chile.

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      Zurn is a leading North American manufacturer and distributor of plumbing products for commercial and institutional markets. The ZURN® brand is widely recognized by plumbing contractors, architects and other building professionals for high quality and innovation. Products manufactured by Zurn and related subsidiaries include:

	•	Specification Drainage — carriers and behind-the-wall fittings, floor and roof drains, trench drains, hydrants, grease traps, chemical drainage systems and roadside drainage systems.
	•	WILKINS® backflow preventers, automatic control valves and pressure reducing valves.
	•	Commercial Brass — sensor-operated flush valves and faucets, manual flush valves, commercial faucets and tubular brass products.
	•	ZURN® – PEX — cross-linked polyethylene pipes and fittings used in plumbing, radiant heat and snow melt systems.

      These products are distributed by wholesalers and are manufactured at several facilities in the United States. Zurn also sources some components from suppliers in Asia.

      Sales of several Jacuzzi products such as spas and swimming pool equipment are sensitive to weather conditions and tend to experience a significant decrease in sales during the fall and winter months (predominantly the first and second fiscal quarters). Sales at Jacuzzi and Zurn are also affected when weather impacts outside construction and installation.

      A single customer of the Bath & Plumbing segment accounts for 10%, 14% and 10% of sales from continuing operations in fiscal 2002, 2001 and 2000, respectively.

Rexair

      Rexair is a leading manufacturer of premium vacuum cleaner systems. Its RAINBOW® vacuum cleaners collect dirt particles by means of a water filtration and separator system. Sales to consumers are made through in-home demonstrations by sales representatives and are typically arranged by referrals from other consumers.

      Rexair distributes its RAINBOW® vacuum cleaners and related accessories through an extensive network of independent authorized distributors and sub-distributors. Rexair experiences competition in recruiting its distributors. In addition, its distributors experience competition in recruiting and retaining sales representatives. Independent consumer finance companies or, to a lesser extent, independent distributors finance most of the purchases of Rexair products in the United States.

      In fiscal 2002, 2001 and 2000, sales in the United States and Canada accounted for approximately 53%, 51% and 48%, respectively, of Rexair’s total unit sales. The remaining sales were spread over a number of foreign markets, with significant sales made in Europe. Rexair manufactures its products at a facility in Michigan.

      Rexair has been a wholly-owned subsidiary since August 15, 2001, when the Company re-acquired a 75% equity interest in Rexair originally sold to SILLC Holdings, LLC (“Strategic”) in March 2000.

Diversified

      In March 2000, the Company disposed of a majority equity interest in its Diversified segment. Diversified manufactured a wide range of consumer, precision engineered and automotive interior products. A comprehensive discussion of this disposition can be found under Results of Operations — Acquisition and Disposition of Businesses and Discontinued Operations in Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”).

Discontinued Operations

      On December 28, 2001, the Board of Directors approved a formal Disposal Plan in connection with the Company’s obligation to pay debt amortization as set forth in the restructured debt agreements. The

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      Ames True Temper is a leading manufacturer of non-powered lawn and garden tools and industrial hand and striking tools in North America. Spear & Jackson is a leading manufacturer and distributor of a broad line of hand tools, lawn and garden tools, industrial magnets and metrology tools primarily in the United Kingdom. Lighting Corporation of America and SiTeco Lighting manufacture and distribute indoor and outdoor lighting fixtures for markets in North America and Europe. Selkirk is involved in the manufacture and distribution of grilles, registers, chimneys, gas vents and other venting products to the North American HVAC (heating, venting and air conditioning) markets. Further information on these discontinued operations can be found under Results of Operations — Acquisition and Disposition of Businesses and Discontinued Operations in the MD&A.

Share Repurchase

      During 1999 and 2000, the Company’s Board of Directors authorized share repurchase programs aggregating $350 million. Prior to the termination of these programs in late 2001, the Company repurchased 21.8 million shares of its common stock for $331.8 million. During June 2000, in a separate transaction authorized and undertaken outside the existing share repurchase programs, the Company repurchased 3.7 million shares representing all of its common stock held by the former owners of Spear & Jackson for $44.2 million. The Company indefinitely suspended all share repurchase programs in 2001.

Competition

      The Company competes in mature and highly competitive industries on the basis of brand identification, quality, price, marketing and distribution. In some markets, certain competitors have greater financial strength, market share or product breadth than the Company.

Backlog Orders

      The Company’s backlogs, believed to be firm, were $62.8 million and $54.7 million as of September 30, 2002 and 2001, respectively. The backlog orders are all in the Bath & Plumbing segment.

Export and International Operations

      Certain of the Company’s domestic businesses generate revenue from export sales and/or revenue from operations conducted outside the United States. Export sales amounted to 7%, 4% and 9% of total revenues in fiscal 2002, 2001 and 2000, respectively, principally reflecting sales by Rexair to foreign distributors of RAINBOW® products in numerous countries. Revenue from foreign operations amounted to 27% of total revenues in fiscal 2002, 2001 and 2000. Identifiable assets of foreign operations represented approximately 17%, 21% and 26% of total identifiable assets (excluding net assets held for sale) at September 30, 2002, 2001 and 2000, respectively. Revenue and identifiable assets from foreign operations principally reflect certain Jacuzzi operations.

      The Company’s export sales and foreign manufacturing and sourcing are subject to certain risks including currency fluctuation, transportation delays, political and economic instability, restrictions on the transfer of funds, the imposition of duties, tariffs and import and export controls and changes in governmental policies. The Company has numerous sourcing relationships with companies in the Far East.

Employees

      As of September 30, 2002, the Company had approximately 6,562 employees in its continuing operations. Unions represented approximately 24% of those employees. The Company believes that the relations of its operating subsidiaries with its employees and unions are satisfactory.

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Governmental Regulation

      The Company’s operating units are subject to numerous federal, state and local laws and regulations concerning such matters as zoning, health and safety and protection of the environment. The Company believes that its operating units are currently operating in substantial compliance with, or under approved variances from, various federal, state and local laws and regulations.

      Certain present and former operating sites, or portions thereof, currently or previously owned and/or leased by current or former operating units of the Company are the subject of investigations, monitoring or remediation under the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA” or “Superfund”), the federal Resource Conservation and Recovery Act or comparable state statutes or agreements with third parties. These proceedings are in various stages ranging from initial investigations to active settlement negotiations to implementation of the clean-up or remediation of sites. The Company has been named as a Potentially Responsible Party (“PRP”) at 11 Superfund sites under CERCLA or comparable state statutes in a number of federal and state proceedings. In each of these matters, the operating unit of the Company is working with the governmental agencies involved and other PRPs to address environmental claims in a responsible and appropriate manner. Under CERCLA and other similar statutes, any generator of hazardous waste sent to a hazardous waste disposal site is potentially responsible for the clean-up, remediation and response costs required for such site in the event the site is not properly closed by its owner or operator, irrespective of the amount of waste which the generator sent to the site. No information currently available reasonably suggests that projected expenditures associated with any of these proceedings, whether for any single site or for those in the aggregate, will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

      From time to time, the Company may receive notices of violation or may be denied applications for certain licenses or permits because the practices of the operating unit are not consistent with regulations or ordinances. In some cases, the relevant operating unit may seek to meet with the agency to determine mutually acceptable methods of modifying or eliminating the practice in question. The Company believes that its operating units will comply with the applicable regulations and ordinances in a manner which will not have a material adverse effect on its financial condition, results of operations or cash flows.

      The Company’s subsidiaries have made capital and maintenance expenditures over time to comply with zoning, water, air and solid and hazardous waste regulations. While the amount of expenditures in future years will depend on legal and technological developments which cannot be predicted at this time, these expenditures may progressively increase if regulations become more stringent. Future costs for compliance cannot be predicted with precision and there can be no certainty with respect to any costs the Company may be forced to incur in connection with historical on-site or off-site waste disposal. No information currently available reasonably suggests that these expenditures will have a material adverse effect on the Company’s financial condition, results of operations or cash flows. Laws and regulations protecting the environment may in certain circumstances impose “strict liability”, rendering a person liable for environmental damage without regard to negligence or fault on the part of such person.

      At September 30, 2002, the Company has accrued approximately $9.1 million ($0.6 million accrued as current liabilities and $8.5 million as non-current liabilities), including $4.5 million for discontinued operations, for various environmental liabilities of which the Company is aware. The Company believes that the range of liability for these matters could reach $15.2 million if it included cases where the likelihood of an unfavorable outcome is only reasonably possible. The Company cannot predict whether future developments in laws and regulations concerning environmental protection or unanticipated enforcement actions, particularly with respect to environmental standards, will require material capital expenditures or otherwise affect its financial condition, results of operations or cash flows in a materially adverse manner, or whether its operating units will be successful in meeting future demands of regulatory agencies in a manner which will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

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Patents and Trademarks

      The Company’s subsidiaries have numerous United States and foreign patents, patent applications, registered trademarks and trade names, and licenses, that relate to various businesses. The Company believes that certain of the trademarks and trade names are of material importance to the businesses to which they relate and may be of material importance to the Company as a whole. None of the material trademarks or trade names are of limited duration. Although protection of the Company’s patents and related technologies are important components of its business strategy, none of the individual patents is material to the Company.

      This Report references trademarks of the Company such as JACUZZI®, ZURN®, ELJER®, SUNDANCE® and RAINBOW®, as well as other trademarks, trade names and product names.

Executive Officers

      The executive officers of the Company are as follows (ages shown as of September 30, 2002):

      David H. Clarke, 61, has served as Chairman of the Board and Chief Executive Officer of the Company since the spin-off of USI from Hanson. Mr. Clarke was Vice Chairman of Hanson from 1993 until the spin-off, Deputy Chairman and Chief Executive Officer of Hanson Industries, the U.S. arm of Hanson, from 1992 until the spin-off and a Director of Hanson from 1989 until May 1996. Mr. Clarke is a director of Fiduciary Trust International, a subsidiary of Franklin Mutual, a company engaged in investment management and administration of assets for individuals.

      Steven C. Barre, 42, has served as Senior Vice President, General Counsel and Secretary since September 2001. From April 2000 to September 2001, he served as Vice President, General Counsel and Secretary. Prior to that date, Mr. Barre served as Associate General Counsel beginning with the spin-off from Hanson in 1995.

      Dorothy E. Sander, 49, has served as Senior Vice President — Administration since June 1998. Previously she had served as Vice President — Administration of the Company since the spin-off from Hanson. She is a member of the Board of Directors of The Feminist Press, the Advisory Board of the Bank of New York and the Board of Editors of “HR-Law and Practice” magazine.

      Allan D. Weingarten, 64, has served as Senior Vice President and Chief Financial Officer since January 2001 when he joined the Company. Mr. Weingarten was previously a senior partner with the accounting firm of Ernst & Young, where he spent his entire 34-year career. Subsequent to his retirement from Ernst & Young in 1995, Mr. Weingarten was a business consultant and private investor. Mr. Weingarten is a director of Programmers Paradise, Inc. and AXS-One, Inc.

      Diana E. Burton, 57, has served as Vice President — Investor Relations of the Company since the spin-off from Hanson.

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      Francisco V. Puñal, 43, joined the Company as Vice President — Finance on January 2, 2001. Promoted to Controller in 2002. Mr. Puñal was previously with Vitas Healthcare Corporation where he was Vice President and Controller from 1997 to 2000. Prior to that, Mr. Puñal served as Director of Finance. Vitas Healthcare Corporation is a privately held healthcare provider.

      Alan Schutzman, 46, has served as Vice President and Associate General Counsel since September, 2001. Mr. Schutzman served as Associate General Counsel from January 1, 2001 until September, 2001. From July 1996 to December 2000, he served as Vice President and General Counsel of various operating subsidiaries, including Ames True Temper and Keller Ladders, Inc.

      R. Bruce Clithero, 49, has served as Treasurer since February 2001. Previously he served as Director of Treasury and Risk Management for Oxbow Corporation. Oxbow Corporation is a privately held company which manages a diverse array of businesses, including several in the energy-related field.

Item 2.     Properties

      The Company’s continuing operations own 38 and lease 55 properties, none of which has value that is significant in relation to the Company’s assets as a whole. These properties include offices, warehouses and manufacturing facilities. As described in Item 1, the principal manufacturing facilities are at various locations in the United States, Canada, Europe and South America.

Item 3.     Legal Proceedings

      The Company and its subsidiaries are parties to legal proceedings that are considered to be either ordinary, routine litigation incidental to the business of present and former operations or immaterial to the Company’s financial condition, results of operations or cash flows. For information concerning environmental proceedings, see Governmental Regulation under Item 1. Business.

      Certain of the Company’s subsidiaries are defendants or plaintiffs in lawsuits that have arisen in the normal course of business. While certain of these matters involve substantial amounts, it is management’s opinion, based on the advice of counsel, that the ultimate resolution of such litigation and environmental matters will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

      Zurn is a wholly-owned subsidiary of the Company which, along with many other companies, is a co-defendant in numerous asbestos related lawsuits pending in the United States. Plaintiffs’ claims against Zurn allege personal injuries allegedly caused by exposure to asbestos used primarily in industrial boilers formerly manufactured by a segment of Zurn that has been presented as a discontinued operation as of the date of the merger. Zurn did not manufacture asbestos or asbestos components but purchased it from other suppliers. As of September 30, 2002, the number of asbestos claims pending against Zurn was approximately 65,000.

      Since Zurn received its first asbestos claim in the 1980’s, Zurn has settled or otherwise disposed of approximately 48,000 asbestos claims. Zurn’s insurers have paid all settlement costs relating to these claims. Defense costs are currently being paid by Zurn’s insurers without eroding the coverage amounts of its insurance policies.

      Zurn estimates that its potential liability for asbestos claims pending against it and for claims estimated to be filed through 2012 is approximately $145 million. This estimate is based on its view of the current and anticipated number of future asbestos claims, the timing and amounts of asbestos payments, the status of ongoing litigation and the potential impact of defense strategies and settlement initiatives. However, there are inherent uncertainties involved in estimating both the number of future asbestos claims as well as future settlement costs, and the actual liability could exceed Zurn’s estimate due to changes in facts and circumstances after the date of the estimate. Zurn’s present estimate of its asbestos liability is predicated on the assumption that its recent vigorous defense strategy will enable it to reduce both its claim frequency and claim severity in the future. While Zurn believes there is evidence, in recent claims settlements, for such an impact of a successful defense strategy, if the defense strategy ultimately is not

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      Zurn’s analysis of its available insurance to cover its potential asbestos liability is between approximately $282 million to $350 million. The $68 million range involves a dispute with one of Zurn’s insurers regarding the availability of $68 million in insurance coverage under certain excess policies. Subject to completion of a definitive settlement agreement, the parties have preliminarily agreed to the terms of settlement of an action commenced by Zurn in the United States District Court of the Western District of Pennsylvania seeking, among other things, a declaration that the insurance coverage limits of certain excess policies provide $68 million in coverage. Under the terms of the proposed settlement, Zurn’s available insurance to cover its potential asbestos liability would be approximately $350 million.

      Zurn believes, based on its experience in defending and dismissing such claims and the amount of insurance coverage available, that it has sufficient insurance to cover the pending and reasonably estimable future claims. This conclusion was reached after considering Zurn’s experience in asbestos litigation, the insurance payments made to date by Zurn’s insurance carriers, existing insurance policies, the industry ratings of the insurers and the advice of insurance coverage counsel with respect to applicable insurance coverage law relating to the terms and conditions of those policies. After review of the foregoing with Zurn and its consultants, the Company believes that the resolution of Zurn’s pending and reasonably estimable asbestos claims will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

Item 4.     Submission of Matters to a Vote of Security Holders

      The Company did not submit any matter to a vote of its security holders during the fourth quarter of fiscal 2002.

PART II

Item 5.     Market for Registrant’s Common Equity and Related Stockholder Matters

      (a) Market Information.

      The Company’s Common Stock is traded on the NYSE under the symbol USI. The following table sets forth, for the fiscal periods indicated, the high and low closing sales price per share of Common Stock as reported by the NYSE.

      (b) Holders.

      As of December 2, 2002, there were approximately 19,423 record holders of Common Stock. The closing price per share of Common Stock as reported by the NYSE on such date was $2.99.

      (c) Dividends.

      Prior to March 2001, the Company’s Board of Directors adopted a cash dividend policy under which the Company paid cash quarterly dividends of $0.05 per share of Common Stock. The last dividend payment was declared on December 31, 2000 and paid on January 21, 2001. In March 2001, the Board of Directors indefinitely suspended the Company’s quarterly payment of dividends. Furthermore, the

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Item 6.     Selected Financial Data

      The following table sets forth the consolidated historical selected financial data of the Company:

      Financial data in fiscal 1998, 1999 and 2000 includes the Diversified segment and Rexair which were sold in March 2000. Rexair was repurchased in August of 2001. A comprehensive discussion of these dispositions can be found under Results of Operations — Acquisition and Disposition of Businesses and Discontinued Operations in Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”).

      Operating income for fiscal 2001, 2000, 1999 and 1998 includes goodwill amortization of $9.7 million, $13.2 million, $12.3 million and $14.1 million, respectively. The Company stopped amortizing goodwill after adopting SFAS No. 142 on October 1, 2001. Operating income for fiscal 1999 and 1998 includes $6.8 million and $2.4 million, respectively, of equity losses from the Company’s investment in the United Pacific Industries (“UPI”). These losses include charges associated with impairments of UPI and its subsidiaries of $5.5 million and $4.0 million in fiscal 1999 and 1998, respectively.

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      Income from continuing operations in fiscal 2002 includes non-recurring after-tax charges of $4.7 million, which consists of $2.2 million for a lease obligation, $2.0 million in severance charges and $0.5 million to increase reserves related to the U.S. Brass product lines which were discontinued in 2000.

      Loss from continuing operations in fiscal 2001 includes non-recurring after-tax charges of $176.7 million for 1) the recognition of goodwill impairment charges ($100.2 million), 2) the write-down of the carrying value of the Strategic Notes to net realizable value ($45.1 million), 3) the payment of advisory and other related fees associated with the debt restructuring ($6.7 million), 4) the write-off of deferred selling costs related to the original sale of Rexair in March 2000 ($17.4 million), 5) the payment of professional fees associated with the previously planned Spin-off of the LCA Group ($4.6 million), and 6) the elimination of certain product lines ($2.7 million).

      Income from continuing operations in fiscal 2000 includes non-recurring after-tax charges of $64.9 million for 1) the closure of the former Zurn corporate office ($8.0 million), 2) the elimination of certain products lines, write-down of inventory and other related costs at the U.S. Brass operations ($14.1 million), and 3) the recognition of goodwill and asset impairments at the European HVAC operations ($42.8 million). Fiscal 2000 also includes net after-tax credits of $24.4 million related to the gain on the sale of the Diversified Businesses, the gains on the sale of Strategic Notes and additional equity interest and costs written off related to the abandoned sale of the lighting segment. In addition, fiscal 2000 includes a $20.0 million reversal of tax contingencies related to the spin-off from Hanson.

      Income from continuing operations in fiscal 1999 includes $2.3 million after-tax of unusual costs in conjunction with severance for certain senior executives, and net after tax costs of $4.7 million primarily for the closure of a manufacturing facility and the elimination of certain product lines. Fiscal 1999 also includes a $6.2 million tax benefit from the resolution of prior years’ tax issues.

      Loss from continuing operations in fiscal 1998 includes non-recurring and unusual after-tax charges of $128.2 million of merger, restructuring and other costs, $7.0 million to write-off interest rate protection agreements, $34.1 million to discontinue a business and $5.0 million associated with the refinancing of Zurn’s outstanding indebtedness.

      Cash dividends exclude dividends declared and paid by Zurn prior to the Merger. In March 2001, the Board of Directors indefinitely suspended the Company’s quarterly payment of dividends. Furthermore, the restructured facilities include a restriction on the payment of dividends.

Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

      The Company redefined its business segments for fiscal 2002 due to the reacquisition of Rexair on August 15, 2001. The Company now has a Bath & Plumbing segment and a Rexair segment, which consists solely of the Rexair business. On December 28, 2001, the Company’s Board of Directors adopted a formal Disposal Plan in connection with the Company’s obligation to pay debt amortization. The Disposal Plan called for the sale of five businesses — Ames True Temper, Selkirk, Lighting Corporation of America, Spear & Jackson and SiTeco Lighting. The results of operations classified as discontinued are excluded from the following discussions of the Company’s continuing operating results and are discussed separately under the caption, “Discontinued Operations”. On March 24, 2000, the Company completed the disposition of a majority equity interest in its Diversified segment. The Company accounted for the

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(1)	Operating income for fiscal 2002 includes restructuring costs of $7.2 million (see Note 5 to the Company’s Consolidated Financial Statements).
(2)	The operating loss for fiscal 2001 includes restructuring, impairment and other unusual costs of $105.0 million (see Note 5 to the Company’s Consolidated Financial Statements).
(3)	Operating income for fiscal 2000 includes restructuring, impairment and other unusual costs of $79.7 million (see Note 5 to the Company’s Consolidated Financial Statements).
(4)	Rexair’s sales and operating income are included in the Diversified segment in fiscal 2000.

Overall

      The Company’s overall sales increased $52.4 million (5%) in 2002 when compared to 2001 due to the inclusion of Rexair in the fiscal 2002 results. On August 15, 2001, the Company reacquired the 75% equity interest in Rexair previously sold to Strategic as part of the Diversified transactions in March 2000. The Company previously accounted for Rexair under the equity method of accounting during the time period from March 24, 2000 until August 15, 2001 when the Company held only a 25% equity interest. The increase was partially offset by a 3% decrease in sales in the Bath & Plumbing segment.

      Overall sales in 2001 decreased $617.8 million (36%) from 2000. The 2001 results were impacted by the disposals of the Company’s Diversified businesses in March 2000, its fire protection business in January 2000 and its European HVAC business in November 2000, as well as the Company’s decision to exit certain unprofitable Bath & Plumbing product lines during 2000. The European HVAC and fire protection businesses were both included in the Company’s Bath & Plumbing segment. The remaining sales decrease of 9% was attributable to the weaker economy, inventory reduction programs instituted by major customers, inclement weather and unfavorable fluctuations in currency exchange rates.

      The Company’s operating income (loss) for 2002, 2001 and 2000 included goodwill impairment, restructuring, and other non-recurring charges of $7.2 million, $105.0 million and $79.7 million, respectively (see Note 5 to the Company’s consolidated financial statements). Also included in fiscal 2001 and 2000 results is goodwill amortization of $9.7 million and $13.2 million, respectively. The Company stopped amortizing goodwill after adopting SFAS No. 142 on October 1, 2001. Excluding all these items, operating income increased by $13.9 million (15%) in fiscal 2002 and decreased by $84.9 million (48%) in

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Bath & Plumbing

      Sales in the Bath & Plumbing segment decreased $32.9 million (3%) in 2002 in comparison with the prior year. The decrease was partially due to the disposal of the segment’s European HVAC businesses and discontinued product lines in the segment’s U.S. Brass operations, which contributed approximately $14.0 million to sales in fiscal 2001. In addition, the segment reported decreased sales in the non-premium spa, whirlpool bath and above-ground pools businesses, partially offset by sales increases in the U.K. bath and sink and domestic premium spa businesses. The non-premium spa and whirlpool bath businesses were affected by reduced sales to home center mass merchants. The above-ground pools business was negatively impacted by excess inventory levels experienced by their distributor network due to poor weather conditions over the last two selling seasons. The U.K. bath and sink business experienced improved weather conditions and implemented customer programs that have increased sales to existing customers. The premium spa businesses have been successful in adding a number of new products and dealers for its Jacuzzi and Sundance lines. Foreign currency exchange rates also favorably impacted the sales comparison with prior year by $2.2 million. In 2002, sales of the Company’s Eljer line of bathroom products increased over 2001 as a result of greater demand in the homecenter channel. In the industrial and commercial markets, sales of the Company’s Zurn Plumbing products in 2002 were flat when compared to 2001 as this sector experienced a decrease in construction activity.

      Sales in the Bath & Plumbing segment decreased $215.8 million (16%) in 2001 compared to 2000. The decrease was partially attributable to the disposal of the segment’s fire protection and European HVAC businesses and the discontinuance of certain unprofitable product lines at U.S. Brass, which provided the Company with $109.4 million of sales in 2000 while only contributing $14.0 million to sales in 2001. The remaining decrease in sales for 2001 was primarily the result of the economic downturn, inventory reduction programs instituted by major customers, inclement weather in the segment’s major markets and increased energy costs, which have softened consumer interest in purchasing spas. The domestic bath and spa businesses accounted for $93.2 million of the sales decrease in 2001. Overseas operations were impacted by unfavorable currency exchange rates, which accounted for approximately $23.7 million of the sales decrease in 2001.

      Operating income (loss) included goodwill impairment, restructuring and other non-recurring charges of $7.2 million, $105.0 million and $79.7 million for 2002, 2001 and 2000, respectively. In fiscal 2002, the restructuring charges of $7.2 million included $3.1 million in severance charges, $3.4 million associated with a lease obligation and $0.7 million to increase the reserve for the discontinued product lines of U.S. Brass. For fiscal 2001, the charges consisted of goodwill impairment charges of $100.2 million and non-recurring charges of $4.8 million related to the discontinued product lines at U.S. Brass. The 2000 charges included restructuring charges of $13.1 million related to the closure of the former Zurn corporate office and goodwill and property, plant and equipment impairment charges as well as restructuring charges related to the European HVAC and U.S. Brass operations totaling $45.8 million and $20.8 million, respectively. The segment also recorded goodwill amortization of $9.7 million and $11.1 million in fiscal 2001 and 2000, respectively. Excluding all these items, operating income decreased by $14.4 million (13%) in 2002 and $41.1 million (27%) in 2001 from their comparable prior year periods. The decreases in both years were primarily due to the decreases in sales discussed above. Also contributing to the decrease in fiscal 2002 were the costs of consolidating selected whirlpool bath manufacturing facilities, which were fully operational in the first fiscal quarter of 2003. These decreases were partially offset by an increase in operating margins at the domestic spa business due to a shift in the sales mix towards the premium spa lines, which are sold at higher margins. After factoring in the sales decrease in 2001 when compared with 2000, the decrease in operating income was further influenced by increased freight and energy costs, and an increase in unabsorbed overhead due to lower production levels.

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Rexair

      The Rexair segment consists solely of the Rexair business, which the Company reacquired in August 2001. While still owned by Strategic, Rexair recorded sales of $96.1 million and operating income of $24.3 million for the period ended August 15, 2001. For the year ended September 30, 2000, Rexair recorded sales of $109.5 million and operating income of $28.8 million. The sales decrease of $10.8 million in fiscal 2002 over the comparable prior year period is primarily attributable to a decrease in unit sales due to political uncertainty as a result of the events of September 11th and recent events in the Middle East. Operating income for fiscal 2001 and 2000 included goodwill amortization of $3.5 million and $2.4 million, respectively. Excluding goodwill amortization, the decrease in operating income in fiscal 2002 compared to 2001 was primarily due to lower sales, partially offset by reduced general and administrative costs.

Corporate expenses

      Corporate expenses decreased $2.8 million in fiscal 2002 in comparison with the prior year due to a decrease in staff over the latter half of the year, as well as an increase in pension income recognized in 2002. In July 2002, the Company announced the closure of its corporate office in Iselin, New Jersey, in conjunction with its consolidation into a smaller office in West Palm Beach, Florida. The increase in pension income was largely related to a $58 million pension asset retained as a result of the Ames True Temper sale in January 2002. Fiscal 2002 expenses include severance and related compensation expenses of $1.0 million and an increase in legal and other professional services of approximately $1.8 million.

      Corporate expenses increased in 2001 in comparison to 2000 because of less pension income and an increase in compensation expense. Also, the Company partially offset corporate expenses through fiscal 2000 with the amortization of a non-compete agreement. The Company amortized $2.2 million per year in connection with this agreement. The pension plans were reorganized in 2000 resulting in a $2.7 million reduction in pension income allocable to the corporate office in 2001. Compensation expenses increased in 2001 because of additional staff added in anticipation of a previously planned spin-off of Lighting Corporation of America and Spear & Jackson.

Interest Income and Expense

      Interest expense decreased $13.1 million in 2002 compared to 2001 largely due to lower debt balances resulting from payments made to satisfy the permanent debt reductions of the Restructured Credit Facilities. Interest expense increased $3.5 million in fiscal 2001 compared to 2000. This is largely the result of higher borrowing rates in connection with an amendment of the Company’s Revolving Facilities in February 2001, higher borrowing rates under the new Restructured Credit Agreement executed on August 15, 2001, and the assumption of Rexair’s $172.5 million debt on August 15, 2001.

      Interest income decreased by $20.6 million and increased by $8.5 million in fiscal 2002 and 2001, respectively, when compared with the respective prior years. The variation for both years is largely due to the interest earned on the senior notes received from Strategic as part of the sale of the Company’s Diversified businesses in March 2000 (see Acquisition and Disposition of Businesses). These notes were sold back to Strategic in January 2002. Interest on these notes totaled $1.6 million, $22.5 million and $12.7 million in fiscal 2002, 2001 and 2000, respectively.

Other

      The Company recorded a gain of $39.3 million on the sale of its Diversified businesses in fiscal 2000 (see Acquisition and Disposition of Businesses and Discontinued Operations).

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      The Company recorded equity losses related to its investment in Strategic and Rexair of $1.4 million in 2001, compared to equity earnings of $3.1 million in 2000. As a result of the Rexair acquisition on August 15, 2001, the Company now owns 100% of Rexair. In January 2002, the Company sold all of its remaining interests in Strategic.

      Other expense, net, was $15.6 million, $97.2 million and $4.7 million for fiscal 2002, 2001 and 2000, respectively. Fiscal 2002 primarily includes $9.2 million in financing related charges, $5.2 million associated with the Company’s ladder operations disposed of in October 1999, and $1.7 million in write-downs of property plant and equipment, offset by a gain on sale of excess property of $0.8 million. Fiscal 2001 included $45.1 million in impairment charges related to the Strategic Notes, $23.6 million in advisory and other related costs associated with the company’s debt restructuring, $17.4 million in deferred transaction costs related to the original sale of Rexair in March 2000, $8.1 million of professional fees related to the Company’s previously planned spin-off of the LCA group and $4.3 million related to the Company’s ladder operations. Expenses for 2000 include $5.7 million in charges related to the ladder operations and $0.9 million in charges related to the abandoned sale of the Lighting segment, partially offset by $3.2 million in gains on the sale of excess real estate.

Taxes

      The effective tax rates for continuing operations for 2002, 2001 and 2000 were (186.4%), 2.9% and 26.9%, respectively. The tax benefit recorded in 2002 is largely attributable to benefits that will be realized due to the recent completion of certain asset sales and changes in tax laws regarding the utilization of loss carry backs. For 2001, the difference between the U.S. statutory rate and the Company’s effective tax rate arose principally as a result of the non-deductibility of a portion of the goodwill impairments and non-recurring charges recorded during the year, as well as a valuation allowance for deferred tax assets. The 2000 tax provision includes a $20.0 million benefit from the reversal of tax contingencies established when the Company spun off from Hanson and excludes a tax benefit associated with the write-off of goodwill related to the Company’s European HVAC business.

Impairment, Restructuring and Other Non-Recurring Charges

      Operating results at a number of the Company’s subsidiaries declined during 2001. In the third quarter of 2001, the Company evaluated the recoverability of the goodwill of these subsidiaries based on a fair value methodology. This evaluation indicated that the carrying value of the goodwill of certain of its subsidiaries was impaired. As a result, the Company recorded goodwill impairment charges totaling $100.2 million in the Bath & Plumbing segment in fiscal 2001.

      In fiscal 2000, the Company conducted a strategic review of certain operations in the Bath & Plumbing segment. Upon completion of its review, the Company decided to dispose of its European HVAC operations and to exit three product lines at its U.S. Brass operations. In reaching this decision, the Company considered the profitability of these operations, the fact that the Company was not a market leader in these businesses and the fact that significant investment would be required in order to make these businesses competitive with no assurance of a reasonable return on such investment. As a result of this decision, the Company recorded goodwill impairment charges totaling $24.1 million related to its European HVAC operations and $1.4 million related to its U.S. Brass operations. Other non-recurring charges recorded in conjunction with this decision are discussed below.

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      In the latter half of 2002, the Company recorded restructuring charges of $7.2 million, which included $3.4 million associated with a lease obligation, $3.1 million in severance charges and $0.7 million to increase the reserve related to the discontinued U.S. Brass product lines. The $3.4 million lease charge related to a revised estimate on the lease obligation associated with the decision to close the Zurn corporate office in January 2000 (see below). In estimating its lease obligation, the Company assumed that it would be able to sublease sections of the building over the course of the lease. Due to the current real estate conditions in that market, the Company has not been able to sublease the office space. The severance charges relate to the elimination of the executive layer of management within the Bath & Plumbing segment and recent Jacuzzi management changes, which resulted in the termination of four employees. These charges consist of $2.3 million in cash related charges, which the Company expects to pay within the next twelve months and $0.8 million in non-cash related charges associated with the accelerated vesting of restricted stock. The reserve related to the U.S. Brass product lines discontinued in fiscal 2000 was increased largely due to an increase in the amount of estimated product liability and warranty claims related to those products.

      In September 2000, the Company’s Bath & Plumbing segment announced to its employees and to the marketplace that U.S. Brass was exiting its Valley line of faucets, Eastman line of connectors and Sanitary Dash line of under-the-sink pipes. Accordingly, in 2000, the Company recorded restructuring and other non-recurring charges of $19.4 million, which consists of severance and commitment costs of $3.4 million, inventory related charges of $16.0 million ($13.9 million recorded in cost of goods sold and $2.1 million recorded in selling, general and administrative expenses). The Company also recorded other non-recurring charges of $4.8 million in 2001 consisting primarily of accelerated depreciation on machinery that was used to complete the remaining in-process inventory. The Company’s decision to exit these three product lines required the closure of two manufacturing facilities in Abilene and Plano, Texas and the termination of approximately 335 employees.

      The Company recorded restructuring and other non-recurring charges of $21.7 million in 2000 related to its decision to dispose of its European HVAC operations (see Goodwill Impairment Charges). These charges consisted of $18.2 million in fixed asset impairments and $3.5 million in inventory-related charges (recorded in Cost of Goods Sold). The European HVAC operation was subsequently sold in November 2000 (See Acquisition and Disposition of Businesses and Discontinued Operations).

      In January 2000, a decision was made to close the former Zurn corporate office in Dallas, Texas which resulted in the termination of 30 employees. The Company recorded a restructuring charge in fiscal 2000 of $13.1 million relating to this decision, which included severance costs of $1.9 million, lease costs of $9.1 million for a lease expiring November 2007, and write-offs of $2.1 million relating to leasehold improvements and other fixed assets.

      The principal components of impairment and restructuring charges recorded for continuing operations are:

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      As of September 30, 2002, the Company had remaining accruals of $9.4 million for restructuring costs. The activity in the restructuring liability accounts by cost category is as follows:

      Approximately $2.2 million of the reserves are included in the balance sheet caption “Accrued expenses and other current liabilities,” while the remaining $7.2 million are recorded in the balance sheet caption “Other liabilities.” The Company expects the remaining accruals to be paid with cash over the periods provided by the severance and lease agreements of one and five years, respectively.

      In 2001, the Company incurred $8.1 million for professional fees associated with the previously planned spin-off of the LCA Group; recorded charges of $45.1 million to reflect the Strategic Notes at their net realizable value; expensed $17.4 million in deferred transaction costs previously incurred as part of the original sale of Rexair; and incurred $6.7 million in advisory and other related costs associated with the Company’s debt restructuring executed on August 15, 2001. During 2002, the Company sold the Strategic Notes together with its equity interest in Strategic for net proceeds of $105.9 million, which approximated their carrying value. In 2000, the Company recorded $0.9 million in charges related to the abandoned sale of the LCA Group. All of these costs have been classified as “Other expenses” in the Company’s consolidated statement of operations.

Acquisition and Disposition of Businesses and Discontinued Operations

      In connection with the Company’s sale to Strategic in March 2000 of a 75% interest in Rexair (see Disposition of Businesses below), the Company guaranteed Rexair’s $200 million credit facility (“Rexair Guarantee”). This guarantee required the Company to maintain certain credit rating levels. In response to a downgrade of its credit ratings in March 2001, the Company obtained waivers of the ratings default from Rexair’s lenders while it pursued the reacquisition of Rexair from Strategic and the restructuring of its debt. On August 15, 2001, the Company reacquired the 75% equity interest in Rexair previously sold to Strategic. The purchase consideration included the return to Strategic of $27.4 million in face value of Strategic’s senior notes and the assumption of borrowings outstanding under Rexair’s $200 million credit facility. In connection with the reacquisition, the Company reduced the reacquired basis in Rexair by the amount of its previously deferred gain and reclassified its retained 25% share of Rexair’s net liabilities from other long-term liabilities. The allocation of the purchase consideration, including the deferred gain and the carrying value of the retained liabilities, to the assets acquired and liabilities assumed resulted in intangible assets of approximately $73.7 million, the majority of which have indefinite lives and will not be amortized. The Company expensed $17.4 million of deferred transaction costs associated with the March 2000 sale of Rexair. The results of Rexair have been included in the Rexair segment from the date of re-

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      In June 2000, upon expiration of the contingency period related to the December 1997 acquisition of Spear & Jackson, the Company made additional cash payments totaling $71.4 million to the former owners of Spear & Jackson. The Company was required to pay $36.0 million because the Company’s stock price fell below a guaranteed minimum as defined in the acquisition agreement. This amount was recorded as an adjustment to paid-in capital as it was based upon the market price of the Company’s stock. The remaining $35.4 million payment was made in satisfaction of additional contingent consideration based on other criteria set forth in the purchase agreement. This amount was recorded as additional goodwill. In September 2002, the Company sold Spear & Jackson as part of its Disposal Plan (see Note 4 to the Company’s Consolidated Financial Statements).

      In November 2000, the Company sold its European HVAC business for proceeds of $7.5 million, which approximated its carrying value.

      On March 24, 2000, the Company disposed of a majority equity interest in its Diversified segment in two separate transactions. In the first transaction, the Company disposed of the following subsidiaries: Atech Turbine Components, Inc.; Bearing Inspection, Inc.; BiltBest Products, Inc.; EJ Footwear Corp. (including Georgia Boot Inc. and Lehigh Safety Shoe Co.); Garden State Tanning Inc.; Huron Inc.; Jade Holdings Pte Ltd (including Jade Technologies Singapore Ltd and FSM Europe B.B.); Leon Plastics Inc.; Native Textiles Inc. and SCF Industries, Inc. The Company received gross cash proceeds of approximately $203.4 million, retained a preferred equity interest in the buyer, Strategic, having a stated value of approximately $19.5 million, retained a common equity interest in Strategic of 17.7% and received approximately $209.0 million aggregate principal amount of 12% (12.5% effective August 18, 2000) senior notes (the “Strategic Notes”) due 2007. In addition, Strategic assumed approximately $7.9 million of existing bank debt. As a result of its disposal of the Diversified businesses, the Company recorded a pre-tax gain of $38.4 million.

      In the second transaction, Rexair sold newly issued shares to Strategic representing, after issuance, 75% of the equity interest in Rexair. The Company received approximately $195.0 million in cash and retained a 25% direct equity interest in Rexair. In addition, the Company guaranteed Rexair’s $200 million credit facility. In connection with the Rexair transaction, the Company recorded a liability of $82.2 million, related to its retained 25% share of Rexair’s net liabilities and a deferred gain, which together with the deferral of the related transaction costs, was to be deferred until the release of the Company’s guarantee of Rexair’s credit facility. On August 15, 2001, the Company reacquired Rexair from Strategic in exchange for $27.4 million in face value of the Strategic Notes. Accordingly, the Company’s retained 25% share of Rexair’s net liabilities reduced the reacquired basis in Rexair (see Acquisition of Businesses above).

      In August 2000, the Company sold $25.0 million of the Strategic Notes, approximately $1.8 million of the stated value of its preferred equity interest in Strategic and approximately 1.9% of its common equity interest in Strategic. This transaction resulted in a pre-tax gain of $0.9 million. In January 2002, the Company sold its remaining preferred equity interest in Strategic having a stated value of approximately $18 million, its 15.8% common equity interest and its Strategic Notes with a face value of $156.9 million back to Strategic for net proceeds of $105.9 million.

      In the second quarter of fiscal 2000, the Company sold its fire protection businesses. The cash consideration paid for these businesses totaled approximately $23.0 million, which approximated their carrying value.

      During the first quarter of fiscal 2000, the Company disposed of assets relating to its ladder operations and the infant and children footwear operation. The total proceeds of these separate transactions were

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      On December 28, 2001, the Board of Directors approved a formal Disposal Plan for five businesses in connection with the Company’s obligation to pay debt amortization as set forth in the restructured debt agreements. In connection with the Disposal Plan, the Company incurred a charge of $232.6 million, net of tax, in fiscal 2001, which represented the difference between the historical net carrying value and the estimated net realizable value of the five businesses — Ames True Temper, Selkirk, Lighting Corporation of America, Spear & Jackson and SiTeco Lighting. In fiscal 2002, the Company recorded income from discontinued operations of $7.8 million, as it re-evaluated the estimated loss on disposal of its discontinued operations. The discontinued businesses previously comprised the Company’s Lawn & Garden and Lighting segments. The net assets of the discontinued businesses are included in net assets held for sale in all periods presented. The Company completed the sales of Ames True Temper in January 2002, Lighting Corporation of America in April 2002, Selkirk in June 2002 and Spear & Jackson in September 2002. In October 2002, the Company completed the sale of SiTeco Lighting.

      The operating results of these businesses were classified as discontinued operations in 2001 and 2000 and, in accordance with APB No. 30, their estimated fiscal 2002 operating income was included in the Company’s expected loss on disposal of $232.6 million which was recorded in September 2001 and adjusted in fiscal 2002.

      Summarized results of these businesses are as follows:

      Included in operating income (loss) in fiscal 2001 and 2000 are goodwill impairment charges totaling $121.4 million and $84.0 million, respectively. These goodwill impairment charges resulted from evaluations of the recoverability of goodwill performed by the Company based on a fair value methodology. The impairment charges were recorded as part of continuing operations before the approval of the Disposal Plan and were reclassified into discontinued operations after the approval of the Disposal Plan. Excluding the impairment charges, the decrease in sales and operating income for these discontinued operations in fiscal 2002 compared to fiscal 2001 primarily relates to the lost contribution from businesses sold during fiscal 2002.

      The decrease in sales in 2001 compared to 2000 relates primarily to the Lighting companies (Lighting Corporation of America and SiTeco Lighting) and Spear & Jackson. Sales at the Lighting companies decreased $50.1 million due to the discontinuance of certain unprofitable product lines in 2000 combined with lower volume sales at the commercial and institutional indoor businesses. Sales at Spear & Jackson decreased primarily due to the sale of its Saw’s Division in March 2001. Excluding the goodwill impairment charges mentioned above, operating income for the discontinued operations decreased $24.4 million in 2001 compared to 2000. This decrease was largely from the Ames True Temper business. This was primarily the result of higher warehousing and distribution costs due to higher-than-normal inventory levels and the under-absorption of fixed costs as manufacturing production schedules were curtailed to reduce inventories. The inventory levels were higher than expected due to the opening of a new master distribution center in December 2000, which coincided with inventory reduction plans instituted by major customers. Ames True Temper also incurred $3.8 million in non-recurring charges related to the opening of the new master distribution center.

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Liquidity and Capital Resources

      The Company’s primary sources of liquidity and capital resources are cash and cash equivalents, cash provided from operations and available borrowings under the Company’s Restructured Facilities (as defined below and in Note 6 to the Company’s Consolidated Financial Statements). The Company expects to satisfy operating liquidity needs through operating cash flow.

      Net cash provided by (used in) operating activities of continuing operations was $35.8 million, $29.3 million and $(64.3) million in fiscal 2002, 2001 and 2000, respectively. The increase in fiscal 2002 over 2001 was primarily the result of increased operating income, largely due to a full year’s contribution from the Rexair business re-acquired in August 2001. The improvement in fiscal 2001 was principally realized through implementing liquidity management actions, primarily directed at accounts receivable, inventories and accounts payable. Also contributing to the improvement over 2000 was the fact that the Diversified businesses were net cash users during 2000. The Diversified businesses are seasonal in nature. They were divested in March 2000 just as they were starting their seasonal change from net cash users to cash generators. The Company has experienced some seasonality in its Jacuzzi and Zurn businesses. Sales of several Jacuzzi products such as spas and swimming pool equipment are sensitive to weather conditions and tend to experience a significant decrease in sales during the fall and winter months (predominantly the first and second fiscal quarters). Sales at Jacuzzi and Zurn are also negatively affected when weather impedes outside construction and installation.

      Net cash provided by discontinued operations was $24.7 million, $67.2 million and $28.8 million in 2002, 2001 and 2000, respectively. The decrease in cash provided by discontinued operations in 2002 compared to 2001 is due to the disposals during 2002, largely Ames True Temper in January 2002 and Lighting Corporation of America in April 2002. The increase in cash provided in 2001 over 2000 relates mainly to the implementation of the liquidity management actions described above in continuing operations. Also there were increased working capital requirements at Ames True Temper during 2000 due to a planned move into a new distribution center in early fiscal 2001.

      Net cash provided by investing activities was $481.8 million in 2002, compared to net cash used of $7.4 million in 2001, and net cash provided of $322.0 million in 2000. Net cash provided by investing activities in 2002 included $388.2 million in proceeds from the sale of businesses. These net proceeds consisted of $143.1 million for Ames True Temper, $210.2 million for Lighting Corporation of America and $34.9 million for Selkirk. Also included in cash provided from investing activities in 2002 was $105.9 million received from the sale of the Strategic Notes and $3.3 million from the sale of excess real estate, fixed assets and other investments, partially offset by $15.6 million in capital expenditures. Net cash used by investing activities in 2001 consisted of $22.9 million for capital expenditures, partially offset by cash proceeds of $7.5 million received from the sale of the European HVAC operations and $8.7 million from the sale of excess real estate and fixed assets. Net cash provided by investing activities in 2000 primarily consisted of cash proceeds of $402.2 million received from the sale of a majority equity interest in the Diversified businesses and the sale of its fire protection, children’s footwear and ladder operations, $24.3 million received from the sale of Strategic Notes and $6.7 million from the sale of excess real estate and property, plant and equipment. This increase in cash was partially offset by $33.1 million required for capital expenditures and $71.4 million for the Spear & Jackson contingency payment (see Note 3 to the Company’s Consolidated Financial Statements).

      The Company used net cash of $575.9 million, $39.5 million and $307.5 million for financing activities in fiscal 2002, 2001 and 2000, respectively. Cash used in financing activities in 2002 consisted of net repayments of debt and notes payable of $423.2 million and escrow deposits of $152.7 million. The escrow deposits, made for the benefit of the holders of the Company’s Senior Notes and certain other creditors, were required under the terms of the Restructured Facilities. Cash used in financing activities for fiscal 2001 includes net proceeds from long-term debt and notes of $16.3 million, offset by dividend payments of $7.7 million and $43.1 million of cash used to purchase the Company’s common stock for treasury. The fiscal 2000 amount primarily consists of net repayments of long-term debt and notes of $151.7 million, $143.4 million of cash used to purchase the Company’s common stock for treasury and

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      During October 1999, the Company entered into equity instrument contracts to purchase 2.8 million shares of its common stock. These contracts were settled during 2001 for $43.1 million. During 1999 and 2000, the Company’s Board of Directors authorized share repurchase programs aggregating $350.0 million. Under these programs, the Company repurchased $331.8 million of its common stock for treasury, of which $43.1 million and $99.2 million was purchased in 2001 and 2000, respectively. During June 2000, in a separate transaction authorized and undertaken outside the existing share repurchase programs, the Company repurchased all of its common stock held by the former owners of Spear & Jackson for $44.2 million. The repurchase programs have been suspended indefinitely, as the Restructured Facilities entered into on August 15, 2001 contains restrictions on the purchase of Company stock, dividends and other restrictive payments. In March 2001, the Company’s Board of Directors indefinitely suspended the Company’s quarterly payment of dividends.

      Total stockholders’ equity increased $38.1 million in fiscal 2002, primarily due to net income recorded for the year of $41.6 million.

      During fiscal 2002, the Company paid approximately $4.1 million related to its restructuring plans and expects an additional $2.2 million to be paid in the next 12 months (see Note 5 to the Company’s Consolidated Financial Statements for more information on the Company’s restructuring activities). Below is a summary of the Company’s significant contractual cash obligations as of September 30, 2002, which reflects the sale of SiTeco, the amendments to the Restructured Facilities and the exchange of the Senior Notes.

      In October 1998, USI and USI American Holdings, Inc. (“USIAH”), issued $250.0 million aggregate principal amount of Senior Notes due October 15, 2003, which bear interest at 7.125%, payable semiannually (“7.125% Notes”). The net cash proceeds were $247.7 million after transaction fees and discounts. A supplemental indenture was later executed adding USI Global Corporation (“USI Global”), a wholly owned subsidiary of USI, as a co-obligor under the 7.125% Notes. On September 9, 2002, the Company commenced an Exchange Offer to exchange cash and notes with an interest rate of 11.25% payable December 31, 2005 (the “New Notes”) for all outstanding 7.125% Notes due October 2003. In connection with the Exchange Offer, the Company also solicited consents from a majority of the 7.125% Note holders to a proposed amendment to the indenture under which the 7.125% Notes were issued so that the cash deposited into a cash collateral account from the sales of the Company’s non-core assets that is proportionally allocable to tendering holders may be used to pay the cash consideration in the Exchange Offer (“Consent Solicitation”).

      On November 4, 2002, the Company announced that it had accepted for payment all 7.125% Notes validly tendered in the exchange offer. Approximately $238.2 million or 95% of the 7.125% Notes were tendered for exchange. Note holders who tendered their 7.125% Notes received an amount of cash and principal amount of New Notes that together equaled the principal amount of the 7.125% Notes tendered. The transaction resulted in $104.8 million paid to the note holders from the 7.125% Notes escrow account, New Notes issued of $133.4 million and a balance remaining in 7.125% Notes of $11.8 million. The other

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      In fiscal 1997, USIAH issued $125.0 million aggregate principal amount of Senior Notes due December 1, 2006, which bear interest at 7.25%, payable semiannually (“7.25% Notes”). The net cash proceeds were $123.0 million after transaction fees and discounts. A supplemental indenture was later executed adding USI and USI Global as co-obligors with USIAH under the 7.25% Notes. On October 24, 2002, the Company commenced an offer to purchase up to $54.8 million in aggregate principal amount of its outstanding 2006 Notes. On November 7, 2002, the Company announced that it received tenders, and related consents, from a majority of the holders of its outstanding 7.25% Notes. An amount just shy of 100% or $125.0 million of the 7.25% Notes, were tendered for exchange. The transaction resulted in $54.8 million paid to the note holders from the 7.25% Notes escrow account.

      The 7.25% Notes, 7.125% Notes and New Notes (collectively, the “Senior Notes”) are guaranteed by USI Atlantic. The 7.25% and 7.125% Senior Notes are redeemable at the option of the Company, in whole or in part, at a redemption price equal to the greater of (i) 100% of the principal amount to be redeemed or (ii) the sum of the present values of the remaining scheduled payments of principal and interest on the Senior Notes to be redeemed, discounted at a rate based on the yield to maturity of the comparable U.S. Government securities plus a spread (10 basis points for the 7.25% Notes and 50 basis points for the 7.125% Notes) plus, in each case, accrued interest to the date of redemption. The New Notes are redeemable without premium or penalty using the New Notes escrow account or otherwise at 103% if redeemed from the issue date to, but not including, the first anniversary of issuance, 102% thereafter through December 30, 2004 and 101% from December 31, 2004 to, but not including, the maturity date. Certain restrictions on dividends and the purchase of common stock for treasury contained in the indenture for the 7.25% Notes were eliminated in August 1998 based upon the Company’s credit rating at that time. The 7.125% Notes and New Notes were issued without such restrictions; however, the Restructured Facilities (discussed below) contain restrictions on dividends as well as the purchase of common stock for treasury. The security interests granted to the holders of the Senior Notes as a result of the Restructured Facilities are discussed in more detail below.

      During fiscal 2001, the Company had a $300 million 364-day credit facility (the “Credit Facility”) scheduled to expire on October 26, 2001. The Company also had a five-year revolving line of credit providing for borrowings in both U.S. dollars and foreign currencies and letters of credit, which had original availability of $500 million (the “Credit Agreement”), scheduled to terminate on December 12, 2001. The Credit Facility and Credit Agreement (together, the “Revolving Facilities”) were restructured on August 15, 2001. The Company completed the re-acquisition of Rexair and restructured the Rexair Credit Facilities on the same date. The amended facilities (including the Rexair Credit Facility, the “Restructured Facilities”) extended the final maturity date of the Company’s debt under the Revolving Facilities to November 30, 2002, which coincided with the final maturity of the Rexair Credit Facility. On October 21, 2002, the Company announced that it obtained an amendment to the Restructured Facilities, providing for an extension of the maturity date to October 2004 (see further below for more details on the amended facilities).

      The Restructured Facilities originally provided for an increase in availability under the five-year Credit Agreement from $500 million to $830 million, availability under the Rexair Credit Facility of $195 million (reduced by $5 million in May 2002), the termination of the multi-currency borrowing feature under the five-year Credit Agreement, the elimination of the 364-day Credit Facility and scheduled permanent reductions of the Company’s senior debt (a combination of the Restructured Facilities, the Senior Notes and other defined obligations). The required cumulative permanent principal reductions of the Company’s senior debt were scheduled at $75 million, $200 million, $450 million and $600 million during the periods ending December 31, 2001; March 31, 2002; June 30, 2002 and October 15, 2002, respectively.

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      On December 21, 2001, the Company obtained a waiver from its lenders under the Restructured Facilities that permitted the Company to satisfy the remaining balance of the December 31, 2001 $75 million reduction through a permanent reduction of the unfunded commitments under the Restructured Facilities, to the extent not satisfied through cash flow or asset sale proceeds. Under the terms of the waiver, the permanent reduction resulting from the sale of Ames True Temper was reduced by the amount of the unfunded commitment (approximately $58 million) used to satisfy the December 31, 2001 amortization. In October 2002, the Company obtained a similar waiver from its lenders to satisfy the remaining balance of the October 15, 2002 reduction (approximately $27 million), through a reduction of the unfunded commitments. With the sale of SiTeco on October 18, 2002, this portion of the unfunded commitment was restored. On June 30, 2002, the Company obtained an amendment to the Rexair Credit Facility which contained, among other things, revised ratios for interest coverage and consolidated leverage as well as revised minimum EBITDA covenants.

      Under the Restructured Facilities, substantially all proceeds from the sale of assets are required to be applied to reduce the Company’s funded and unfunded senior debt, on a pro rata basis. The senior debt includes the Senior Notes where the Company or any subsidiary subject to the Senior Notes’ covenants completes an asset sale. Proceeds allocable to the Senior Notes and other defined obligations are required to be deposited in cash collateral accounts for the benefit of the relevant holders; any claims of the lenders of the Restructured Facilities to amounts on deposit in the cash collateral accounts are subordinated to the claims of the relevant holders, including the payment in full of the Senior Notes and other obligations. Any reductions of senior debt with asset sale proceeds are credited dollar-for-dollar towards the scheduled permanent principal reductions. Below is a summary of significant asset sales completed in fiscal 2002.

(1)	Estimated transaction and other costs include working capital adjustments and escrows for future liabilities. Approximately $24.3 million of these costs are still outstanding as of September 30, 2002 ($15.8 million in current liabilities and $8.5 million in long-term liabilities).

      On September 6, 2002, the Company sold substantially all of the assets of Spear & Jackson to MegaPro Tools, Inc. (“MegaPro”). Net proceeds consisted of notes from the buyer and an equity interest in the common shares of the buyer. The Company is subject to restrictions on the voting and disposition of these shares and has no involvement in the continuing management or operations of MegaPro. The investment was recorded at its fair value at the date of acquisition based on an independent valuation.

      On October 18, 2002, the Company completed the sale of SiTeco to funds advised by JPMorgan Partners, the private equity arm of JPMorgan Chase & Company. Net proceeds of approximately $103.8 million were applied to reduce the Company’s funded and unfunded senior debt, including $34.0 million deposited into escrow accounts for the benefit of the holders of the Company’s Senior Notes and certain other creditors.

      Also in October 2002, the Restructured Facilities were amended, extending the maturity of the facilities to October 4, 2004. The amended Restructured Facilities decrease the availability of USI borrowings (excluding Rexair, the “USI Facility”) to $365 million, which consists of a $250 million term loan and $115 million revolving facility. Availability on the Rexair portion of the facilities decreased to $90 million, which includes a $75 million term loan and $15 million revolver. Required cumulative permanent reductions of the USI Facility are scheduled on July 31, 2003 and August 31, 2004 for $20 million and $50 million, respectively. The Rexair Facility requires cumulative permanent reductions of $2 million per quarter in fiscal 2003 and $3 million for each of the first three quarters of 2004.

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      The Restructured Facilities require that the Company and Rexair maintain minimum monthly EBITDA, as defined; comply with maximum monthly capital expenditure limits; maintain minimum availability (as defined) of no less than $25 million and comply with other customary affirmative and negative covenants. In addition, the amended Rexair Credit Facility requires that excess cash generated by Rexair be segregated from excess cash generated by the remainder of the Company’s operations and used only to reduce the debt outstanding on the Rexair Credit Facility. The Senior Notes and the Restructured Facilities contain cross-default and cross-acceleration provisions.

      The Restructured Facilities provide for increasing interest rates over the remaining term. The spread over London Interbank Offered Rate (“LIBOR”) was 275 basis points until December 31, 2001, after which the spread increased by 50 basis points each quarter thereafter through December 2002. With the amendment in October 2002, the interest rate increases to 675 basis points over LIBOR from December 2002 through June 2003. Beginning July 2003 the spread will increase by 50 basis points on the first day of each quarter through the maturity date. The Restructured Facilities also provide for several new fees including an unused commitment fee of 0.50% (which increases to 0.75% with the October 2002 amendment) and a facing fee on all outstanding letters of credit of 0.25% per annum.

      The lenders of the Revolving Facilities were granted on April 30, 2001 security interests in substantially all of the assets of the Company and its domestic subsidiaries, including shares of the Company’s domestic subsidiaries and 65% of the shares of certain of the Company’s foreign subsidiaries. As a result of having the Revolving Facilities secured, the Rexair Guarantee became secured with certain assets. In addition, the Company’s Senior Notes also became equally and ratably secured with the Revolving Facilities and the Rexair Guarantee with respect to the assets of the Company and its subsidiaries that are subject to the covenant restrictions under the Senior Notes. The covenants contained in the indentures under which the Senior Notes were issued apply to the Company and any domestic subsidiary that is a “significant subsidiary” (within the meaning of rule 1-02(w) of Regulation S-X promulgated under the Securities and Exchange Act of 1934 or any successor provision). In accordance with the Rule, the determination that a subsidiary is a “significant subsidiary” is made on a consolidated basis, taking into account such subsidiary and all of its consolidated subsidiaries. The subsidiaries identified as significant subsidiaries at October 1, 2002 include USI Atlantic Corp., USI American Holdings, Inc., USI Global Corp., JUSI Holdings, Inc., Jacuzzi, Inc. and Zurn Industries, Inc. After considering the equal and ratable security interest of the Senior Notes, separate financial statements for USI Atlantic Corp.; USI American Holdings, Inc.; USI Global Corp. and JUSI Holdings, Inc. are included elsewhere in this annual report. A significant subsidiary may itself have one or more subsidiaries that, when looked at on a consolidated basis, do not constitute “significant subsidiaries” under the Rule. As a result, these subsidiaries, on a stand-alone basis, are not subject to the covenant restrictions under the Senior Notes, and no portion of the proceeds of assets sales completed by these subsidiaries would be allocable to the Senior Notes.

      The security interests that were granted to the lenders of the Revolving Facilities on April 30, 2001 remain in place under the Restructured Facilities, as do the arrangements to equally and ratably secure the Rexair Guaranty and to equally and ratably secure the Senior Notes with certain assets. In addition, certain domestic and foreign subsidiaries of the Company that are not subject to the Senior Notes’ covenant restrictions have guaranteed the Restructured Facilities. Under the Restructured Facilities, the Company also agreed to provide the lenders with security interests in the shares and assets of certain of the Company’s foreign subsidiaries.

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      Below is a pro forma summary of the new debt structure of the Company after considering the exchange offerings on the Senior Notes, the proceeds received on the sale of SiTeco and the amendment to the Restructured Facilities.

      At November 23, 2002, the Company had approximately $355.0 million committed under the USI Facility, of which approximately $261.2 million had been utilized and the balance of $93.8 million was available. Also as of November 23, 2002, $14.3 million was available for borrowing solely by Rexair under the Rexair Credit Facility. These amounts are net of letters of credit outstanding of $15.1 million. The Company also had letters of credit outstanding with other financial institutions totaling $28.6 million as of November 23, 2002. The Company believes that completed assets sales, cash flows from operations and proceeds from refundable taxes will be sufficient to meet future liquidity and other capital needs. The Company will continue to pursue alternative funding arrangements to fund amounts due upon the maturity of the Restructured Facilities and Senior Notes beginning on October 4, 2004.

New Accounting Pronouncements

      In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“Statement”) No. 143, Accounting for Asset Retirement Obligations, which is effective for fiscal years beginning after June 15, 2002. The Statement requires legal obligations associated with the retirement of long-lived assets to be recognized at their fair value at the time the obligations are incurred. Upon initial recognition of a liability, that cost should be capitalized as part of the related long-lived asset and allocated to expense over the useful life of the asset. The Company will adopt the new rules on asset retirement obligations on October 1, 2002. Application of the new rules is not expected to have a significant impact on the Company’s financial position and results of operations.

      In August 2001, the FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long-lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supercedes Statement No. 121, Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of, and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, Reporting the Results of Operations for a Disposal of a Segment of a Business. Statement No. 144 is effective for fiscal years beginning after December 15, 2001, with earlier application encouraged. The Company expects to adopt the new rules as of October 1, 2002, and it does not expect adoption of the Statement to have a significant impact on the Company’s financial position and results of operations.

      In April 2002, the FASB issued Statement No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Correction. This Statement eliminates extraordinary accounting treatment for reporting gain or loss on debt extinguishment, and amends other existing authoritative pronouncements to make various technical corrections, clarifies meanings or describes their applicability under changed conditions. The provisions of this Statement will be effective for the Company October 1, 2002; however, early application of the Statement is encouraged. Debt

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      In June 2002, the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This Statement requires that the Company record costs associated with exit or disposal activities at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management’s commitment to an exit plan, which is generally before an actual liability has been incurred. The Company is required to adopt this Statement on October 1, 2002. The Company does not expect the adoption of this Statement to have a material affect on its cash flows or the results of its operations.

Foreign Currency Matters

      The functional currency of each of the Company’s foreign operations at September 30, 2002 is the local currency. Assets and liabilities of foreign subsidiaries are translated at the exchange rates in effect at the balance sheet dates, while revenue, expenses and cash flows are translated at average exchange rates for the period. Translation gains and losses are reported as a component of Stockholders’ Equity.

Effects of Inflation

      Because of the relatively low level of inflation experienced in the Company’s principal markets, inflation did not have a material impact on its results of operations in fiscal 2002, 2001 or 2000.

Critical Accounting Policies and Estimates

      Management’s discussion and analysis of its financial condition and results of operations are based upon the Company’s condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses as well as the disclosure of contingent assets and liabilities. Management regularly reviews its estimates and assumptions. These estimates and assumptions, which are based upon historical experience and on various other factors believed to be reasonable under the circumstances, form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Reported amounts and disclosures may have been different had management used different estimates and assumptions or if different conditions had occurred in the periods presented. The Company’s accounting policies can be found in Note 2 to the Company’s Consolidated Financial Statements. Below is a discussion of the policies that the Company believes may involve a high degree of judgment and complexity.

      The Company records an allowance for doubtful accounts, reducing its receivables balance to an amount the Company estimates is collectible from its customers. Management uses significant judgment in estimating uncollectible amounts, considering numerous factors such as current overall economic conditions, industry-specific economic conditions, historical and current customer performance and customer relationships. Although the Company considers its allowances for uncollectible accounts to be adequate and proper, changes in economic conditions or customer circumstances could have a material effect on the reserve balances required. Historically, actual results have not deviated significantly from those previously estimated by management.

      The Company’s inventories are stated at the lower of cost or market value. Management reviews its inventory balances to determine if inventories can be sold at amounts equal to or greater than their recorded values. The review includes the identification of slow-moving inventories, obsolete inventories and

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      Deferred tax assets and liabilities represent the tax effects, based on current law, of any temporary differences in the timing of when revenues and expenses are recognized for tax purposes and when they are recognized for financial statement purposes. Management reviews the deferred tax assets periodically for recoverability, and valuation allowances are provided as necessary. The Company considers expected future income and gains from investments as well as tax planning strategies, including the potential sale of certain assets, in assessing the need for a valuation allowance against its deferred tax assets. If future taxable income is different than expected, the Company may need to change its valuation allowance on its deferred tax assets.

      The Company records reserves for the difference between the carrying value and the net realizable value of its net assets held for sale. These reserves require that management make assumptions about estimated proceeds, based on the demand for these assets and current market conditions, and about estimated costs to sell, based on management’s professional knowledge and experience. The Company monitors these reserves on an on-going basis and records adjustments to its estimates based on actual results and management’s updated knowledge.

      The Company has significant intangible assets related to goodwill and other acquired intangibles. The determination of related estimated useful lives and whether or not these assets are impaired involves significant judgment. Changes in strategy, reporting unit operating results and/or market conditions could significantly impact management’s judgment and could require adjustments to recorded asset balances.

      The Company is subject to proceedings, lawsuits and other claims related to environmental, labor, product and other matters. The Company is required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. Management determines the amount of reserves needed, if any, for each individual issue based on their professional knowledge and experience and discussions with legal counsel. The required reserves may change in the future due to new developments in each matter, the ultimate resolution of each matter or changes in approach, such as a change in settlement strategy, in dealing with these matters.

      The Company has significant pension and post-retirement benefit income and expense and assets/liabilities that are developed from actuarial valuations. These valuations include key assumptions regarding discount rates, expected return on plan assets, mortality rates, merit and promotion increases and the current health care cost trend rate. The Company considers current market conditions in selecting these assumptions. Changes in the related pension and post-retirement benefit income/costs or assets/liabilities may occur in the future due to changes in the assumptions. When valuing the pension plans at September 2002, the Company reduced its discount rate and expected rate of return on assets. This change in assumptions will reduce the amount of pension income recognized by approximately $5.2 million in fiscal 2003 as compared to fiscal 2002. The lower discount rate and increase in current healthcare costs are also expected to increase expenses related to post-retirement benefits by approximately $2.3 million in 2003.

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      It is often difficult to estimate the future impact of environmental matters, including potential liabilities. The Company accrues for losses associated with environmental remediation obligations when such losses are probable and reasonably estimable. This practice is followed whether the claims are asserted or unasserted. Reserves for estimated losses from environmental remediation are, depending on the site, based primarily upon internal or third party environmental studies, and estimates as to the number, participation level and financial viability of any other PRP’s, the extent of contamination and the nature of required remedial actions. Such accruals are adjusted as further information develops or circumstances change. Costs of future expenditures for environmental remediation obligations are not discounted to their present fair value. Recoveries of environmental remediation costs from other parties are recognized as assets when their receipt is deemed probable. Management expects that the amount reserved will be paid out over the periods of remediation for the applicable sites, which range up to 30 years, and that such reserves are adequate based on all current data. Each of the sites in question is at various stages of investigation or remediation; however, no information currently available reasonably suggests that projected expenditures associated with remedial action or compliance with environmental laws for any single site or for all sites in the aggregate, will have a material adverse affect on the Company’s financial condition, results of operations or cash flows.

      The estimate of Zurn’s asbestos liability is developed from actuarial valuations and is based on its view of the current and anticipated number of future asbestos claims, the timing and amounts of asbestos payments, the status of ongoing litigation and the potential impact of defense strategies and settlement initiatives. However, there are inherent uncertainties involved in estimating both the number of future asbestos claims as well as future settlement costs, and the actual liability could exceed Zurn’s estimate due to changes in facts and circumstances after the date of the estimate. Zurn’s present estimate of its asbestos liability is predicated on the assumption that its recent vigorous defense strategy will enable it to reduce both its claim frequency and claim severity in the future. While Zurn believes there is evidence, in recent claims settlements, for such an impact of successful defense strategy, if the defense strategy ultimately is not successful, to the extent assumed by Zurn, then severity and frequency of asbestos claims could increase substantially above Zurn’s estimates. Further, while there is presently no reasonable basis for estimating Zurn’s asbestos liability beyond 2012, such liability may continue beyond 2012, and such liability could be substantial.

      The Company records revenue when delivery has occurred and title has passed to the customer. Provisions are made for warranties and returns. Management uses significant judgment in estimating warranty and sales return costs, considering numerous factors such as current overall economic conditions, industry-specific economic conditions and historical sales return and warranty rates. Although the Company considers its warranty and sales return reserves to be adequate and proper, changes in historical customer patterns could require adjustments to the reserves. Historically, however, actual results have not deviated significantly from those previously estimated by management. The Company also records reductions to its revenues for customer and distributor programs and incentive offerings including special pricing agreements, promotions and other volume-based incentives. The Company may take actions to increase customer incentive offerings possibly resulting in an incremental reduction of revenue at the time the incentive is offered.

Disclosure Concerning Forward-Looking Statements and Factors That May Affect Future Results

      In December 1995, the Private Securities Litigation Reform Act of 1995 (the “Act”) was enacted by the United States Congress. The Act, as amended, contains certain amendments to the Securities Act of 1933 and the Securities Exchange Act of 1934. These amendments provide protection from liability in private lawsuits for “forward-looking” statements made by public companies. The Company takes advantage of the “safe harbor” provisions of the Act.

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      The Company’s Annual Report on Form 10-K, including the Letter of the Chairman and Chief Executive Officer included in the Annual Report to Stockholders contains both historical information and other information that may be used to infer future performance. Examples of historical information include the Company’s annual financial statements and the commentary on past performance contained in the MD&A. While the Company has specifically identified certain information as being forward-looking in the context of its presentation, the Company cautions the reader that, with the exception of information that is clearly historical, all the information contained in this Annual Report on Form 10-K and the letter of the Chairman and Chief Executive Officer included in the Report to Stockholders should be considered to be “forward-looking statements” as referred to in the Act. Without limitation, when it uses the words “believe,” “estimate,” “plan,” “expect,” “intend,” “anticipate,” “continue,” “project,” “probably,” “should,” and similar expressions, the Company intends to clearly express that the information deals with possible future events and is forward-looking in nature.

      Forward-looking information involves risks and uncertainties. This information is based on various factors and assumptions about future events that may or may not actually come true. As a result, the Company’s operations and financial results in the future could differ substantially from those the Company has discussed in the forward-looking statements in this Annual Report and other documents that have been filed with the Securities and Exchange Commission. In particular, various economic and competitive factors, including those discussed below could cause the Company’s actual results in future years to differ materially from those expressed in any forward-looking statement. All subsequent written and oral forward-looking statements attributable to the Company are expressly qualified in their entirety by the foregoing factors.

      The following are some of the factors we believe could cause our actual results to differ materially from expected and historical results. Other factors besides those listed here could also adversely affect results.

Covenants of Senior Secured Credit Facilities

      The senior secured credit facilities contain various provisions that limit our management’s discretion by restricting its ability to, among other things:

	•	incur additional debt or enter into sale and lease back transactions;
	•	pay dividends or distributions on our capital stock or repurchase our capital stock;
	•	issue preferred stock of subsidiaries;
	•	make certain investments;
	•	create liens to secure debt;
	•	enter into transactions with affiliates;
	•	merge or consolidate with another company; and
	•	transfer and sell assets.

      In addition, the senior secured credit facilities require the Company to meet specified financial ratios and tests. These restrictions could limit the Company’s ability to plan for or react to market conditions or meet extraordinary capital needs or otherwise restrict corporate activities.

      If the Company were to fail to comply with the covenants and restrictions of the senior secured credit facilities, senior notes or any other subsequent financing agreements, a default could occur. Such a default could allow the lenders, if the agreements so provide, to accelerate the related debt as well as any other debt to which a cross-acceleration or cross-default provision applies. In addition, the lenders could terminate any commitments they had made to supply us with further funds.

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      The Company is highly leveraged. The Company’s high level of indebtedness could further interfere with its ability to operate its business. For example, it could:

	•	increase our vulnerability to general adverse economic and industry conditions;
	•	limit our ability to obtain additional financing;
	•	require the dedication of a substantial portion of our cash flow from operations to the payment of principal of, and interest on, our indebtedness;
	•	limit our flexibility in planning for, or reacting to, changes in our business and the industry; and
	•	place us at a competitive disadvantage relative to less leveraged competitors.

      The Company’s ability to generate sufficient cash flow from operations to pay the principal of, and interest on, our indebtedness is uncertain. In particular, the Company may not meet its anticipated revenue and operating expense targets, and as a result, its future debt service obligations could exceed the cash available to it.

      The Company has certain customers that are very important to its business and the successful implementation of its business strategy. Some of the Company’s products are sold in very competitive markets. Competitors may adopt more aggressive policies and devote greater resources to the development, promotion and sale of their products than the Company, which could result in a loss of customers. The loss of one or more of these major customers could have a material adverse effect on the Company’s business, results of operations and financial condition.

      The Company purchases most of the raw materials for its products on the open market, and relies on third parties for the sourcing of certain finished goods. As such, cost of products sold may be affected by changes in the market price of raw materials or sourced finished goods. The Company does not generally engage in commodity hedging transactions for raw materials. Significant increases in the prices of the Company’s products due to increases in the cost of raw materials or sourcing could have a negative effect on demand for its respective end-products, or to the extent the Company cannot pass such increases on to its customers, on its margins and profitability, as well as a material adverse effect on the Company’s business, financial condition and results of operations.

      The interest rate relating to the Company’s Restructured Facilities is based on a spread over LIBOR. The Restructured Facilities represent a considerable portion of the Company’s debt, and a significant change in the LIBOR rate could have a material adverse effect on the Company’s business, financial condition and results of operations. Currently the Company is not utilizing any interest rate protection agreements to limit its exposure to this risk.

      The Company has significant operations outside the United States. Also, certain of its domestic businesses generate significant revenue from export sales and certain businesses obtain a significant amount of finished goods from unaffiliated suppliers in East Asia. The Company’s international operations subject it to risks associated with operating in foreign countries, including fluctuations in currency exchange rates, unstable political and economic conditions, imposition of limitations on conversion of foreign currencies into dollars or remittance of dividends and other payments by foreign subsidiaries, imposition or increase of withholding and other taxes on remittances and other payments of foreign subsidiaries, hyperinflation in

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      Historically, the Company’s businesses have sold a wide range of products. If the mix of products it sells shifts to include a larger percentage of products with lower profit margins, earnings may be negatively affected.

      The Company’s past and present business operations and its past and present ownership and operation of real property are subject to extensive and changing federal, state, local and foreign environmental laws and regulations pertaining to the discharge of materials into the environment, the handling and disposal of wastes (including solid and hazardous wastes) or otherwise relating to health, safety and protection of the environment. As such, the nature of its operations and previous operations by others at real property owned by the Company expose it to the risk of claims under environmental, health and safety laws and regulations, and there can be no assurance that material costs or liabilities will not be incurred in connection with such claims. Based on the Company’s experience to date, it does not expect such claims or the costs of compliance with federal, state, local and foreign environmental, health and safety laws and regulations to have a material impact on its capital expenditures, earnings or competitive position. No assurance can be given, however, that the discovery of presently unknown environmental conditions, changes in environmental, health and safety laws and regulations or their interpretation, or other unanticipated events will not give rise to expenditures or liabilities that may have such an effect.

      The Company’s business segments experience seasonal business swings, which correspond to the North American seasons. This seasonality requires the Company to manage its cash flows over the course of the year. If sales were to fall substantially below what the Company would normally expect during certain periods, its annual financial results would be adversely impacted and its ability to service debt may also be adversely affected.

      Weather could adversely affect the Company’s business, financial condition and our results of operation. Adverse weather, such as unusually prolonged periods of cold or rain, blizzards, hurricanes and other severe weather patterns, could delay or halt construction activity. For example, an unusually severe winter can lead to reduced construction activity and magnify the seasonal decline in the Company’s net sales and earnings during the winter months.

      The markets in which the Company sells its products are highly competitive. The Company competes against some international, national and many regional rivals, resulting in substantial pressure on our pricing and profit margins. In addition, certain of the Company’s products from foreign manufacturers are subject to competition from other importers and could even be subject to competition from certain of the Company’s customers seeking to source directly from such foreign manufacturers. As a result of pricing pressures, the Company may in the future experience reductions in profit margins. The Company believes that its purchasing power, nationwide distribution network and marketing capabilities and its manufacturing efficiency allow it to competitively price its products. The Company cannot assure you that it will be able to maintain or increase the current market share of its products successfully in the future.

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      Many individuals who purchase the Company’s products depend on financing either by independent consumer finance companies or, to a lesser extent, by independent distributors in order to make purchases. Fluctuations in the prevailing interest rates could affect the availability of financing to the Company’s customers. The unavailability of consumer credit could lead to a reduction in demand for the Company’s products and have a material adverse effect on the Company’s business, financial condition and results of operations.

      Furthermore, demand in the building and home improvement product industries is influenced by new construction activity and the demand for replacement products as well as repairs/remodeling activity. There can be no assurance that the Company will maintain a balanced mix of new and repair/remodel revenue within the Bath & Plumbing segment. Accordingly, the strength of the U.S. economy (including confidence in the U.S. economy by our customers), the strength of the residential and commercial real estate markets, institutional building activity, the age of existing housing stock, job growth and interest rates have a direct impact on the Company. Threat or actual break out of hostilities and acts of war or terrorism involving the U.S. could also negatively impact construction, repair or remodeling activity. Any declines in new housing or commercial construction starts or demand for replacement building and home improvement products may adversely impact the Company and there can be no assurance that any such adverse effects would not be material and would not continue for an indeterminate period of time.

      The Company believes that there is a trend among its distributors to increase in size and market power. If this trend continues, they may be able to exert pressure on the Company to reduce prices and create price competition. Any resulting price competition may adversely affect the Company’s sales and profit margins.

      The Company’s ability to implement its business strategy successfully is dependent upon a number of factors including competition, availability of working capital and general economic conditions. Significant elements of the business strategy include growth of market share and introduction of related and new products. There can be no assurance that the Company will be able to implement its strategy or be able to obtain financing for such strategy on acceptable terms. The Indentures governing the senior secured credit facilities and senior notes will substantially limit the Company’s ability to incur additional debt to finance its strategy. In addition, the failure to implement the Company’s business strategy successfully may adversely affect its ability in the future to service its debt.

Item 7A.     Qualitative and Quantitative Disclosures About Market Risk

      In the normal course of doing business, the Company is exposed to the risks associated with changes in interest rates and currency exchange rates. To limit the risks from such fluctuations, the Company enters into various hedging transactions that have been authorized pursuant to the Company’s policies, but does not engage in such transactions for trading purposes.

      To manage exposure to interest rate movements, the Company has used interest rate protection agreements. However, as of September 30, 2002, the Company does not have any such agreements outstanding. Based on the Company’s overall exposure to interest rate changes, a hypothetical increase of 100 basis points across all maturities of its floating rate debt obligations, would decrease the Company’s estimated pre-tax earnings by approximately $4.2 million in fiscal 2003, compared to an approximate $7.3 million decrease in fiscal 2002 pre-tax earnings had LIBOR rates been 100 basis points higher. Net payments (receipts) under swap agreements amounted to approximately $3.4 million, $1.0 million and $(0.7) million for fiscal 2002, 2001 and 2000, respectively. The swaps were of notional amounts and maturities that related to specific portions of outstanding debt, and accordingly, were accounted for as hedge transactions.

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      The Company is also exposed to foreign currency exchange risk related to its international operations as well as its U.S. businesses, which import or export goods. The Company has made limited use of financial instruments to manage this risk.

      Effective October 1, 2000, the Company adopted Financial Accounting Standard No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, which requires that all derivative instruments be reported on the balance sheet at fair value and establishes criteria for designation and effectiveness of hedging relationships. See Note 2 to the Company’s Consolidated Financial Statements for additional information on its derivative and hedging activities.

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Item 8.     Financial Statements and Supplementary Data

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of

      We have audited the consolidated balance sheets of U.S. Industries, Inc. (the “Company”) as of September 30, 2002 and 2001, and the related consolidated statements of operations, cash flows, and changes in stockholders’ equity for each of the three years in the period ended September 30, 2002. Our audits also included the financial statement schedule listed in the index at Item 14(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

      We conducted our audits in accordance with auditing standards generally accepted in the 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 consolidated financial position of the Company at September 30, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 30, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the financial statement schedule referred to above, 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 2 to the consolidated financial statements, the Company changed its method of accounting for goodwill and other intangible assets in 2002.

	/s/ Ernst & Young LLP

West Palm Beach, Florida

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U.S. INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

See notes to Consolidated Financial Statements.

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U.S. INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS