WATTS INDUSTRIES INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

|_| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the fiscal year ended _____________

or

|X| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from July 1, 1999 to December 31, 1999

Commission file number 0-14787

WATTS INDUSTRIES, INC.
-------------------------
(Exact name of registrant as specified in its charter)

Delaware 04-2916536
--------- ----------
(State of incorporation) (I.R.S. Employer Identification No.)

815 Chestnut Street, North Andover, MA 01845
-------------------------------------- -----
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (978) 688-1811

Securities registered pursuant to Section 12(b) of the Act:
Class A Common Stock, par value $.10 per share
Name of exchange on which registered: New York Stock Exchange
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 90 days. Yes X No___

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. |_|

Aggregate market value of the voting stock of the Registrant held by
non-affiliates of the Registrant on February 21, 2000 was $231,360,868.

As of February 21, 2000, 16,903,484 shares of Class A Common Stock, $.10
par value, 9,485,247 shares of Class B Common Stock, $.10 par value, of the
Registrant were outstanding.

Documents Incorporated by Reference

Portions of the Registrant's Proxy Statement for its Annual Meeting of
Stockholders to be held on April 26, 2000, are incorporated by reference into
Part III of this Report.

1

PART I

Item 1. BUSINESS.

General

Watts Industries, Inc., (the "Company") designs, manufactures and sells an
extensive line of valves for the plumbing and heating and water quality
industries. Watts has focused on the valve industry since its inception in 1874,
when it was founded to design and produce steam regulators for New England
textile mills. The Company was incorporated in Delaware in 1985. Today, the
Company is a leading manufacturer and supplier of plumbing and heating and water
quality valve products. The Company's growth strategy emphasizes expanding brand
preference with customers, focusing on code development and enforcement,
internal development of new valve products and entry into new markets for
specialized valves and related products through diversification of its existing
business, strategic acquisitions in related business areas, both domestically
and abroad, and continued development of products and services for the home
improvement, do it yourself (DIY) retail market.

As previously announced, on October 18, 1999, the Company spun-off its
industrial, oil and gas businesses into a separate publicly traded company,
CIRCOR International, Inc. ("CIRCOR"). Under the terms of the spin-off
transaction, the Company distributed to shareholders a tax-free dividend of one
share of CIRCOR common stock for every two shares of Company common stock owned
as of the record date by that shareholder (the "Distribution"). The Company will
continue to manufacture and distribute plumbing and heating and water quality
products through its three geographic business segments: North America, Europe,
and Asia.

On May 11, 1999, the Company's Board of Directors voted to amend the
Company's By-Laws to change the Company's fiscal year from June 30th of each
year to December 31st of each year. This report on Form 10-K covers the
transition period of July 1, 1999 to December 31, 1999 ("fiscal 1999.5").
References to fiscal years 1999 and 1998 herein refer to the twelve months ended
June 30, 1999 and June 30, 1998, respectively.

The business description which follows describes the general development
of the Company's plumbing and heating and water quality business for fiscal
1999.5. The Company's former industrial, oil and gas businesses were spun-off
from the Company on October 18, 1999 and are described, as appropriate, as
discontinued operations. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for further information on these
discontinued operations.

The Company's plumbing and heating and water quality product lines include
safety pressure relief valves, water pressure regulators, backflow preventers
for preventing contamination of potable water caused by reverse flow within
water supply lines and for fire protection equipment, thermostatic mixing
valves, ball valves, automatic control valves, water distribution manifolds,
zone valves, thermostatic radiator valves, check valves, and valves for water
service primarily in residential and commercial environments, and metal and
plastic water supply/drainage products including stop valves, tubular brass
products, faucets, drains, sink strainers, compression and flare fittings, and
plastic tubing and braided metal hose connectors for residential construction
and home repair and remodeling, and drain systems for laboratory drainage and
high purity process installations.

The Company's former industrial, oil and gas product lines included steam
regulators and control devices for industrial, HVAC and naval/marine
applications; pneumatic valve and motion switch products for medical,
analytical, military and aerospace applications; ball valves, solenoid valves,
cryogenic valves, pneumatic and electric actuators, strainers, relief valves,
check valves, and butterfly valves for industrial applications; and needle
valves, metering valves, plug valves, tube fittings, floating and trunnion ball
valves, pipeline closures, specialty gate valves, oil field check valves, and
large ball valves for the oil and gas, and chemical and petrochemical
industries.

Within a majority of the product lines the Company manufactures and
markets, the Company believes that it has one of the broadest product lines in
terms of the distinct designs, sizes and configurations of its valves. Products
representing a

2

majority of the Company's sales have been approved under regulatory standards
incorporated into state and municipal plumbing and heating, building and fire
protection codes, and similar approvals have been obtained from various agencies
in the European market. The Company has consistently advocated the development
and enforcement of performance and safety standards, and is committed to
providing products to meet these standards, particularly for safety and control
valve products. The Company maintains quality control and testing procedures at
each of its manufacturing facilities in order to produce products in compliance
with code requirements. Additionally, a majority of the Company's manufacturing
subsidiaries have either acquired or are working to acquire ISO 9000, 9001 or
9002 certification from the International Organization for Standardization
(ISO).

On March 9, 1999 a wholly-owned subsidiary of the Company acquired
Cazzaniga S.p.A. ("Cazzaniga") located in Biassono, Italy near Milan. Cazzaniga,
which had twelve (12) months sales prior to the acquisition of approximately $35
million, is an integrated manufacturer of plumbing and heating products
including water distribution manifolds, zone valves, check valves, and their
principal line of thermostatic radiator valves. The manufacturing plant features
a yellow brass forging foundry, high speed chucking machines with robotics,
automatic screw machines, and extensive automated assembly machines contained
within a 211,000 square foot facility. During fiscal 1999.5, Cazzaniga's
products were added to the Company's European distribution channels and some of
the Company's other European manufacturing and warehousing operations were
consolidated into Cazzaniga's facility.

The Company relies primarily on commissioned representative organizations,
some of whom maintain a consigned inventory of the Company's products, to market
its product lines. These organizations, which accounted for approximately 73% of
the Company's net sales in fiscal 1999.5, sell primarily to plumbing and heating
wholesalers and DIY Market accounts. The Company also sells metal and plastic
water supply/drainage products including valves, tubular brass products,
faucets, drains, sink strainers, compression and flare fittings, plastic tubing
and braided metal hose connectors for the residential construction and home
repair and remodeling industries through do-it-yourself plumbing retailers,
national catalog distribution companies, hardware stores, building material
outlets and retail home center chains ("DIY Markets") and through the Company's
existing plumbing and heating wholesalers. In addition, the Company sells
products directly to certain large original equipment manufacturers (OEM's) and
private label accounts, and maintains direct and indirect sales channels for
water valves, relief valves, shut-off valves, check valves, butterfly valves,
ball valves and flow meters to the heating, irrigation, and fire protection
industries. The Company believes that sales to the residential construction
market may be subject to cyclical variations to a greater extent than its other
targeted markets. However, because the Company sells into different geographic
areas, and to large and diverse customers, the potential adverse effects from
cyclical variations tend to be mitigated. No assurance can be given that the
Company will be protected from a broad downturn in the economy. There was no
single customer which accounted for more than 10% of the Company's net sales in
the fiscal 1999.5.

The Company has a fully integrated and highly automated manufacturing
capability including foundry operations, machining operations, plastic injection
molding and assembly. The Company's foundry operations include metal pouring
systems and automatic core making, yellow brass forging, mold making and pouring
capabilities. The Company's acquisition of Cazzaniga adds yellow brass forging
and machining capabilities to the Company's European operations. The Company's
machining operations feature computer-controlled machine tools, high-speed
chucking machines with robotics and automatic screw machines for machining
bronze, brass, iron and steel components. The Company has invested heavily in
recent years to expand its manufacturing base and to ensure the availability of
the most efficient and productive equipment. The Company is committed to
maintaining its manufacturing equipment at a level consistent with current
technology in order to maintain high levels of quality and manufacturing
efficiencies. As part of this commitment, the Company has spent a total of
$79,166,000 on capital expenditures over the last three and one-half years. The
Company has budgeted $17,500,000 for fiscal 2000 primarily for manufacturing
machinery and equipment. See "Properties" below. The Company has also
substantially completed its implementation of an integrated enterprise-wide
software system in most of its U.S. and Canadian locations with a focus on
inventory management, production scheduling, and electronic data interchange.
This has enabled the Company to provide better service to customers, improve
working capital management, lower transaction costs, and improve e-commerce
capabilities. Capital expenditures were $10,293,000, $21,532,000, and
$23,056,000 for fiscal 1999.5, 1999 and 1998, respectively. Depreciation and
amortization for such periods were $9,225,000 $17,456,000, and $15,341,000,
respectively.

Three significant raw materials used in the Company's production processes
are bronze ingot, brass rod, and cast iron. While the Company historically has
not experienced significant difficulties in obtaining these commodities in
quantities

3

sufficient for its operations, there have been significant changes in their
prices. The Company's gross profit margins are adversely affected to the extent
that the selling prices of its products do not increase proportionately with
increases in the costs of bronze ingot, brass rod, and cast iron. Any
significant unanticipated increase or decrease in the prices of these
commodities could materially affect the Company's results of operations. The
Company manages this risk by monitoring related market prices, working with its
suppliers to achieve the maximum level of stability in their costs and related
pricing, seeking alternative supply sources when necessary and passing increases
in commodity costs to its customers, to the maximum extent possible, when they
occur. Additionally, on a limited basis, the Company uses commodity futures
contracts to manage this risk. No assurances can be given that such factors will
protect the Company from future changes in the prices for such raw materials.
See Item 7A. "Quantitative and Qualitative Disclosures About Market Risk."

The domestic and international markets for valves are intensely
competitive and include companies possessing greater financial, marketing and
other resources than the Company. Management considers product reputation,
price, effectiveness of distribution and breadth of product line to be the
primary competitive factors. The Company believes that new product development
and product engineering are also important to success in the valve industry and
that the Company's position in the industry is attributable in significant part
to its ability to develop new and innovative products quickly and to adapt and
enhance existing products. During fiscal 1999.5, the Company continued to
develop new and innovative products to enhance market position and is continuing
to implement manufacturing and design programs to reduce costs. The Company
cannot be certain that its efforts to develop new products will be successful or
that its customers will accept its new products. The Company employs
approximately 38 engineers and technicians, which does not include engineers
working in the Chinese joint venture, who engage primarily in these activities.
Although the Company owns certain patents and trademarks that it considers to be
of importance, it does not believe that its business and competitiveness as a
whole is dependent on any one or more patents or trademarks or on patent or
trademark protection generally.

The Company's financial information by geographic business segment is
contained in Note 16 of Notes to Consolidated Financial Statements incorporated
herein by reference. From time to time, the Company's results of operations may
be adversely affected by fluctuations in foreign exchange rates. Backlog was
$28,889,000 at February 14, 2000 and $24,255,000 at August 14, 1999. The Company
does not believe that its backlog at any point in time is indicative of future
operating results. Available funds and funds provided from the Company's
operations are sufficient to meet anticipated capital requirements. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", below as it relates to the impact of foreign exchange rates and
capital requirements.

As of December 31, 1999, the Company's domestic and foreign operations
employed approximately 2,898 people, plus 830 employees in the Company's joint
venture located in the People's Republic of China. There are no employees that
are covered by collective bargaining agreements in the United States or Canada.
The Company believes that its employee relations are excellent.

Executive Officers

Information with respect to the executive officers of the Company is set forth
below:

Name Position Age
---- -------- ---

Timothy P. Horne Chairman of the Board, Chief Executive Officer 61
and Director

William C. McCartney Chief Financial Officer, Treasurer and Secretary 45

Michael O. Fifer Corporate Vice President 42

Robert T. McLaurin Corporate Vice President of Asian Operations 68

Lester J. Taufen General Counsel and Vice President of Legal Affairs, 56
and Assistant Secretary

4

Timothy P. Horne joined the Company in September 1959 and has been a
Director since 1962. Mr. Horne served as the Company's President from 1976 to
1978 and again from 1994 to April 1997. He has served as Chief Executive Officer
since 1978 and he became the Company's Chairman of the Board in April 1986.

William C. McCartney joined the Company in 1985 as Controller. He was
appointed the Company's Vice President of Finance in 1994, and served as
Corporate Controller of the Company from April 1988 to December 1999. Mr.
McCartney was appointed Chief Financial Officer, Treasurer and Secretary on
January 1, 2000.

Michael O. Fifer joined the Company in May 1994 and was appointed the
Company's Vice President of Corporate Development. He was recently appointed
Corporate Vice President. Prior to joining the Company, Mr. Fifer was Associate
Director of Corporate Development with Dynatech Corp., a diversified high-tech
manufacturer, from 1991 to April 1994.

Robert T. McLaurin was appointed Corporate Vice President of Asian
Operations in August 1994. He served as the Senior Vice President of
Manufacturing of Watts Regulator Co. from 1983 to August 1994. He joined Watts
Regulator Company as Vice President of Manufacturing in 1978.

Lester J. Taufen joined the Company in January 1999 as Associate Corporate
Counsel. He was recently appointed General Counsel and Vice President of Legal
Affairs, and Assistant Secretary. Prior to joining the Company, Mr. Taufen was
employed for 13 years at Elf Atochem North America, Inc. serving as Senior
Counsel.

Product Liability, Environmental and Other Litigation Matters

The Company, like other worldwide manufacturing companies, is subject to a
variety of potential liabilities connected with its business operations,
including potential liabilities and expenses associated with possible product
defects or failures and compliance with environmental laws. The Company
maintains product liability and other insurance coverage which it believes to be
generally in accordance with industry practices. Nonetheless, such insurance
coverage may not be adequate to protect the Company fully against substantial
damage claims which may arise from product defects and failures.

James Jones Litigation

On June 25, 1997, Nora Armenta sued James Jones Company, Watts Industries,
Inc., which formerly owned James Jones, Mueller Co., and Tyco International
(U.S.) Inc. in the California Superior Court for Los Angeles County with a
complaint that sought tens of millions of dollars in damages. By this complaint
and an amended complaint filed on November 4, 1998 ("First Amended Complaint"),
Armenta, a former employee of James Jones, sued on behalf of 34 municipalities
as a qui tam plaintiff under the California False Claims Act. Late in 1998, the
Los Angeles Department of Water and Power ("DWP") intervened. Of the remaining
33 named municipalities, four (Burbank, Pomona, Santa Monica and South Gate)
chose to intervene shortly before the Court-imposed deadline of July 15, 1999.
The municipality of South Gate recently withdrew its intervention and will
participate as a non-intervening city. The case will now go forward with the
municipalities that have intervened.

The First Amended Complaint alleges that the Company's former subsidiary
(James Jones Company) sold products that did not meet contractually specified
standards used by the named municipalities for their water systems and falsely
certified that such standards had been met. Armenta claims that these
municipalities were damaged by their purchase of these products, and seeks
treble damages, legal costs, attorneys' fees and civil penalties under the False
Claims Act.

The DWP's intervention filed on December 9, 1998 adopted the First Amended
Complaint and added claims for breach of contract, fraud and deceit, negligent
misrepresentation, and unjust enrichment. The DWP seeks past and future
reimbursement costs, punitive damages, contract difference in value damages,
treble damages, civil penalties under the False Claims Act and costs of the
suit.

One of the First Amended Complaint's allegations is the suggestion that
because some of the purchased James Jones products are out of specification and
contain more lead than the `85 bronze specified, a risk to public health might
exist. This contention is predicated on the average difference of about 2% lead
content in `81 bronze (6% to 8% lead) and `85 bronze (4% to 6% lead) alloys and
the assumption that this would mean increased consumable lead in public drinking
water. The evidence and discovery available to date indicate that this is not
the case.

5

In addition, bronze that does not contain more than 8% lead, like `81
bronze, is approved for home plumbing fixtures by the City of Los Angeles, and
the Federal Environmental Protection Agency defines metal for pipe fittings with
no more than 8% lead as "lead free" under Section 1417 of the Federal Safe
Drinking Water Act.

The Company intends to contest this matter vigorously, and discovery is
currently under way. Presently, the Company cannot determine whether any loss
will result from this litigation. See Note 14 of the Notes to the Consolidated
Financial Statements.

Product Liability

Leslie Controls, Inc. and Spence Engineering Company, both former
subsidiaries of the Company, were involved as third-party defendants in various
civil product liability actions pending in the U.S. District Court, Northern
District of Ohio. CIRCOR assumed these liabilities in connection with the
Distribution, and the Company has resort to indemnification from CIRCOR for
these claims.

Environmental

Certain of the Company's operations generate solid and hazardous wastes,
which are disposed of elsewhere by arrangement with the owners or operators of
disposal sites or with transporters of such waste. The Company's foundry and
other operations are subject to various federal, state and local laws and
regulations relating to environmental quality. Compliance with these laws and
regulations requires the Company to incur expenses and monitor its operations on
an ongoing basis. The Company cannot predict the effect of future requirements
on its capital expenditures, earnings or competitive position due to any changes
in federal, state or local environmental laws, regulations or ordinances.

The Company is currently a party to or otherwise involved in various
administrative or legal proceedings under federal, state or local environmental
laws or regulations involving a number of sites. During the quarter ending March
31, 1998, the Company received an administrative order from the New Hampshire
Department of Environmental Services (the "NHDES") with respect to management
and storage of process wastes and various recordkeeping and permit renewal rules
at its Franklin, New Hampshire operation. The NHDES has acknowledged compliance
with its administrative order and has proposed monetary assessments which are
currently being negotiated for the items identified in the administrative order.
With respect to the Sharkey and Combe Landfills in New Jersey, and the Solvent
Recovery Service of New England and the Old Southington Landfill sites in
Connecticut, all of which were on the National Priorities List as of the date of
the Distribution, and which were discussed in the Company's previous reports
filed with the Securities and Exchange Commission, CIRCOR assumed all liability
associated with these matters in connection with the Distribution and the
Company has resort to indemnification from CIRCOR for these matters.

Based on facts presently known to it, the Company does not believe that
the outcome of these environmental proceedings will have a material adverse
effect on its financial condition or results of operations. Given the nature and
scope of the Company's manufacturing operations, there can be no assurance that
the Company will not become subject to other environmental proceedings and
liabilities in the future which may be material to the Company. See Note 14 of
the Notes to the Consolidated Financial Statements.

Other Litigation

Other lawsuits and proceedings or claims, arising from the ordinary course
of operations, are also pending or threatened against the Company and its
subsidiaries. Based on the facts currently known to it, the Company does not
believe that the ultimate outcome of these other litigation matters will have a
material adverse effect on its financial condition or results of operation. See
Note 14 of the Notes to the Consolidated Financial Statements.

6

Item 2. PROPERTIES.

The Company maintains 22 facilities worldwide with its corporate
headquarters located in North Andover, Massachusetts. The manufacturing
operations include four casting foundries, two of which are located in the
United States, one in Europe and one at Tianjin Tanggu Watts Valve Company
Limited ("Tanggu Watts"), a joint venture located in the People's Republic of
China, and it maintains one yellow brass forging foundry located in Italy.
Castings and forgings from these foundries and other components are machined and
assembled into finished valves at 16 manufacturing facilities located in the
United States, Canada, Europe and China. Many of these facilities contain sales
offices or warehouses from which the Company ships finished goods to customers
and commissioned representative organizations. The vast majority of the
Company's operating facilities and the related real estate are owned by the
Company. The buildings and land located in Tianjin, People's Republic of China
are leased by Tanggu Watts, under a lease agreement, the remaining term of which
is approximately 25 years.

Certain of the Company's facilities are subject to mortgages and
collateral assignments under loan agreements with long-term lenders. In general,
the Company believes that its properties, including machinery, tools and
equipment, are in good condition, well maintained and adequate and suitable for
their intended uses. The Company believes that the manufacturing facilities are
currently operating at a level that management considers normal capacity. This
utilization is subject to change as a result of increases or decreases in sales.

Item 3. LEGAL PROCEEDINGS.

Item 3(a). The Company is from time to time involved in various legal and
administrative procedures. See Part I, Item 1, "Product Liability,
Environmental and Other Litigation Matters".

Item 3(b). See Part I, Item 1, "Product Liability, Environmental and Other
Litigation Matters".

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

There were no matters submitted during the second and final quarter of the
fiscal year covered by this Report to a vote of security holders through
solicitation of proxies or otherwise.

PART II

Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.

Market Information

The following tabulation sets forth the high and low sales prices of the
Company's Class A Common Stock on the New York Stock Exchange during fiscal
1999.5, fiscal 1999 and fiscal 1998 and cash dividends paid per share. The
prices of the Company's Class A Common Stock reported below were retroactively
adjusted to reflect the effect of the spin-off of CIRCOR on October 18, 1999. No
adjustments were made to the dividends reported.

High Low Dividend High Low Dividend High Low Dividend
----------------------------- ----------------------------- ----------------------------
1999.5 1999 1998
------ ----- -----

First Quarter $16.32 $13.07 $.0875 $17.84 $12.10 $.0875 $20.36 $16.60 $.0775
Second Quarter 16.09 12.63 .0875 15.13 11.74 .0875 21.05 17.97 .0775
Third Quarter -- -- -- 12.47 8.99 .0875 23.02 19.12 .0875
Fourth Quarter -- -- -- 14.58 9.95 .0875 22.70 15.31 .0875

7

There is no established public trading market for the Class B Common Stock
of the Company, which is held exclusively by members of the Horne family and
management. The principal holders of such stock are subject to restrictions on
transfer with respect to their shares. Each share of Class B Common Stock (10
votes per share) of the Company is convertible into one share of Class A Common
Stock (1 vote per share). Aggregate common stock dividend payments for fiscal
1999.5, 1999, and 1998 were $4,656,000, $9,358,000, and $8,936,000 respectively.
While the Company presently intends to continue to pay cash dividends, the
Company expects that the payment of future dividends should reflect the reduced
revenue and earnings base. The spin-off of CIRCOR reduced the Company's annual
revenue base from approximately $800 million to $520 million. The payment of
future cash dividends also depends upon the Board of Directors' assessment of
the Company's earnings, financial condition, capital requirements and other
factors.

The number of record holders of the Company's Class A Common Stock as of
February 21, 2000 was 179. The Company believes that the number of beneficial
shareholders of the Company's Class A Common Stock was approximately 4,000 as of
February 21, 2000. The number of record holders of the Company's Class B Common
Stock as of February 21, 2000 was 9.

Item 6. SELECTED FINANCIAL DATA.

The selected financial data set forth below should be read in conjunction
with the Company's consolidated financial statements, related Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included herein.

FIVE YEAR FINANCIAL SUMMARY
(Amounts in thousands, except per share information)

Six Months
Ended
12/31/99(1)(2) 1999 1998 1997 1996(3)
-------------- ---- ---- ---- -------

Selected Data
Net sales from continuing operations $259,110 $474,458 $442,077 $447,235 $411,261
Income (loss) from continuing operations 16,468 29,454 28,123 26,515 (24,824)
Income (loss) from discontinued operations, net of taxes (1,266) 6,502 25,246 25,232 (25,461)
Net income (loss) 15,242 35,956 53,369 51,747 (50,285)
Total assets 487,078 637,742 552,896 526,366 370,454
Long-term debt, net of current portion 123,991 118,916 71,647 94,841 111,715
Income (loss) per share from continuing operations-diluted 0.61 1.10 1.03 0.97 (0.84)
Income (loss) per share from discontinued operations-diluted (0.05) 0.24 0.92 0.92 (0.86)
Net income (loss) per share-diluted 0.56 1.34 1.95 1.89 (1.70)
Cash dividends declared per common share 0.175 0.350 0.330 0.295 0.265

1) On May 14, 1999, the Company filed a Form 10-Q in which it reported its
decision to change its fiscal year end from June 30 to a calendar year. As
a result the Company is reporting a six month transition period ending
December 31, 1999. See Note 2 of the Notes to the Consolidated Financial
Statements.
2) Fiscal 1999.5 net income includes an after-tax charge of $861,000 related
to restructuring costs.
3) Fiscal 1996 net income includes an after-tax charge of $44,682,000 related
to: restructuring costs of $22,390,000; an impairment of long-lived assets
of $24,603,000; other charges of $9,878,000 principally for product
liability costs, additional bad debt reserves and environmental
remediation costs; and additional inventory valuation reserves of
$6,566,000.

8

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

On December 15, 1998 the Company announced its plan to spin-off its
industrial, oil and gas business as a separately traded public company, CIRCOR
International, Inc. Under the terms of the spin-off, which was completed on
October 18, 1999, the holders of Watts common stock received one share of CIRCOR
common stock for every two shares of Watts stock held. The Company's results of
operations have been restated to reflect CIRCOR as discontinued operations for
all periods presented.

On May 11, 1999, the Company's Board of Directors voted to amend the
Company's By-Laws to change the Company's fiscal year end from June 30 to a
calendar year. As a result the Company is reporting a six month transition
period ending December 31, 1999.

Results of Operations
Six Months Ended December 31, 1999 Compared to
Six Months Ended December 31, 1998

Net sales for continuing operations increased $31,531,000 (13.9%) to
$259,110,000. The increase in net sales is attributable to the following:

Internal Growth $19,896,000 8.7%
Acquisitions $17,061,000 7.5%
Foreign Exchange ($5,426,000) (2.3%)
----------- ------
Total Change $31,531,000 13.9%
=========== ======

The increase in net sales from internal growth is primarily attributable
to increased unit shipments in the North American segment. The growth in net
sales from acquired companies is due to the inclusion of the net sales of
Cazzaniga S.p.A. of Biassono, Italy, which was acquired March 9, 1999. The
foreign exchange impact reflects the adverse affects of the Euro's devaluation
during the period. Excluding Cazzaniga, shipments in the European plumbing and
heating market were 9.2% higher than last year.

Watts monitors its net sales in three geographical segments: North
America, Europe and Asia. As outlined below, North America, Europe and Asia
accounted for 73.9%, 22.6%, and 3.5% of net sales, respectively, in the six
months ended December 31, 1999 compared to 77.1%, 19.1%, and 3.8%, respectively,
in the six months ended December 31, 1998. The Company's net sales in these
groups for the six months ended December 31, 1999 and 1998 were as follows:

(in thousands)
12/31/99 12/31/98 Change
-------- -------- -------
North America $191,349 $175,448 $15,901
Europe 58,651 43,497 15,154
Asia 9,110 8,634 476
-------- -------- -------
Total $259,110 $227,579 $31,531
======== ======== =======

The increase in North America is due to increased unit sales. The increase
in Europe is due to the Cazzaniga acquisition and increased unit sales, which
were partially offset by the devaluation of the Euro.

Gross profit increased $11,338,000 (13.8%) to $93,257,000 and remained
constant as a percentage of net sales at 36.0%. This increase is attributable to
increased net sales during the period.

9

During the period ended December 31, 1999 the Company recorded a
restructuring charge of $1,460,000 before taxes. The charge was comprised of
severance costs of $1,299,000 and contract termination costs of $134,000 and
other exit costs of $27,000. The Company is consolidating certain existing
Italian manufacturing and warehouse facilities into the Cazzaniga facility in
Biassono, Italy. The Company expects these projects, which include the
termination of 29 employees, to be completed in fiscal 2000. The anticipated
annual savings from these actions is $750,000. As of December 31, 1999, 10
employees have been released and $192,000 has been paid in severance.

Selling, general and administrative expenses increased $5,441,000 (9.6%)
to $62,239,000. This increase is primarily attributable to inclusion of the
selling, general and administrative expenses of Cazzaniga and increased variable
selling expenses, primarily commissions and freight costs.

Operating income in the six months ended December 31, 1999 increased
$4,437,000 (17.7%) to $29,558,000 due to the increased gross profit. Without the
restructuring charge operating income would have increased by 23.5% and
increased as a percentage of sales from 11.4% to 12.0%.

The Company's operating income by segment for the six months ended
December 31, 1999 and 1998 were as follows:

(in thousands)
12/31/99 12/31/98 Change
-------- -------- -------
North America $21,645 $18,151 $3,494
Europe 7,252 5,682 1,570
Asia 731 822 (91)
Corporate (70) 466 (536)
------- ------- ------
Total $29,558 $25,121 $4,437
======= ======= ======

The increase in North America is due to increased net sales. The increase
in Europe is primarily due to increased net sales and the Cazzaniga acquisition,
which were partially offset by the restructuring charge.

Interest expense increased $1,783,000 in the six months ended December 31,
1999, primarily due to increased levels of debt associated with the acquisition
of Cazzaniga.

The Company's effective tax rate for continuing operations increased from
32.1% to 35.2%. The increase is attributable to acquired companies operating in
higher tax rate jurisdictions than the rest of the Company, tax planning
strategies favorably impacting fiscal 1998 only and a revised tax structure
required to effect the Distribution.

Net income from continuing operations for the six months ended December
31, 1999 increased $1,243,000 (8.2%) to $16,468,000 or $0.61 per common share
compared to $0.56 per common share for the six months ended December 31, 1998 on
a diluted basis. Net income from continuing operations exclusive of the
restructuring charge would have increased $2,103,000 to $17,329,000 or $0.64 per
common share on a diluted basis. The impact of foreign exchange, primarily due
to the devaluation of the Euro, decreased net income $0.02 per common share on a
diluted basis in the period ended December 31, 1999.

For the six months ended December 31, 1999, discontinued operations
generated a net loss of $1,226,000 ($0.05 per share), compared to net income of
$8,419,000 ($0.31 per share) for six months ended December 31, 1998. Results for
the six months ended December 31, 1999 were negatively impacted by an after tax
charge of $2,433,000 for spin-off related costs, including professional fees,
facility relocation costs and income tax costs associated with the reorganizing
of the Company's legal entity structure in anticipation of the spin-off.
Excluding this charge, discontinued operations would have had net income of
$1,207,000 ($0.05 per share) for the six months ended December 31, 1999. Net
sales for the discontinued operations for the six months ended December 31, 1999
were $76,957,000, a decrease of $3,699,000 (4.8%) from the comparable period in
1998. The decrease in net sales is primarily attributable to lower demand for
oil and gas valve products. Declining prices, resulting from increased
competition; reduced manufacturing levels, resulting in lower absorption of
fixed manufacturing costs; and costs associated with the integration of acquired
companies negatively impacted operating profits during the six months ended
December 31, 1999. Additional details of the spin-off transaction are provided
in the Notes to the Consolidated Financial Statements (Note 3).

10

Results of Operations
Twelve Months Ended June 1999 Compared to
Twelve Months Ended June 1998

Net sales from continuing operations for the twelve months ended June 30,
1999 increased by $32,381,000 (7.3%) to $474,458,000 from $442,077,000 in the
fiscal year ended June 30, 1998. The increase in net sales is attributable to
the following:

Internal Growth $25,455,000 5.7%
Acquisitions $10,095,000 2.3%
Divestitures ($3,386,000) (0.8%)
Foreign Exchange $217,000 0.1%
----------- ----
Total Change $32,381,000 7.3%
=========== ====

The increase in net sales from internal growth is primarily attributable
to increased unit shipments in the North American segment. The growth in net
sales due to acquired companies is primarily attributable to the inclusion of
Cazzaniga S.p.A. of Biassono, Italy, which was acquired in March, 1999.
Excluding Cazzaniga, shipments in the European segment were consistent with the
prior year.

The Company monitors its net sales in three geographical segments: North
America, Europe and Asia. As outlined below, North America, Europe and Asia
accounted for 77.8%, 19.4% and 2.8% of net sales, respectively, in the twelve
months ended June 30, 1999 compared to 78.1%, 18.7% and 3.2%, respectively in
the twelve months ended June 30, 1998. The Company's net sales in these groups
for fiscal 1999 and 1998 were as follows:

(in thousands)
6/30/99 6/30/98 Change
-------- -------- -------
North America $369,193 $345,346 $23,847
Europe 92,247 82,837 9,410
Asia 13,018 13,894 (876)
-------- -------- -------
Total $474,458 $442,077 $32,381
======== ======== =======

The increase in net sales in North America is primarily due to increased
unit shipments. The increase in Europe is due primarily to the acquisition of
Cazzaniga.

The Company's gross profit increased $11,788,000 (7.4%) to $171,713,000.
The increased gross profit is primarily attributable to increased net sales.
Gross margin remained consistent at 36.2% in both fiscal 1999 and 1998.

Selling, general and administrative expenses increased $7,021,000 (6.2%)
to $119,875,000. This increase is attributable to the inclusion of the expenses
of Cazzaniga, and increased variable selling expenses including commissions and
freight costs.

Operating income from continuing operations increased $4,767,000 (10.1%)
from $47,071,000 to $51,838,000 primarily due to increased gross profit.

The Company's operating income by segment for the twelve months ended June
30, 1999 and 1998 were as follows:

(in thousands)
6/30/99 6/30/98 Change
------- ------- ------
North America $38,536 $36,754 $1,782
Europe 11,228 8,258 2,970
Asia 1,608 1,984 (376)
Corporate 466 75 391
------- ------- ------
Total $51,838 $47,071 $4,767
======= ======= ======

The increase in North America is due to increased net sales. The increase
in Europe is primarily due to the inclusion of Cazzaniga.

11

Other expense from continuing operations increased $1,256,000 to
$1,688,000. This increase is attributable to the Company's share of losses
related to its equity investment in Jameco International LLC. Increased minority
interest expense resulting from the improved performance at the Company's joint
venture in China also contributed to the increase in other expense.

Income from continuing operations increased $1,331,000 (4.7%) to
$29,454,000. This increase is primarily attributable to the income generated by
acquired companies and increased gross profit from existing companies.

The Company's consolidated results of operations are impacted by the
effect that changes in foreign exchange rates have on its international
subsidiaries' operating results. Changes in foreign exchange rates had an
immaterial impact on net income in fiscal 1999.

Net income from discontinued operations was $6,502,000 ($0.24 per share)
for fiscal 1999, compared to $25,246,000 ($0.93 per share) for fiscal 1998.
Fiscal 1999 results were negatively impacted by an after tax charge of
$6,166,000 for spin-off related costs, including professional fees, facility
relocation costs and income tax costs associated with the reorganizing of the
Company's legal entity structure in anticipation of the spin-off. Excluding this
charge, discontinued operations would have had net income of $12,668,000 ($0.59
per share) for fiscal 1999. Net sales for the discontinued operations for fiscal
1999 were $321,711,000, an increase of $33,822,000 (11.7%) from fiscal 1998. The
increase in net sales is primarily attributable to the inclusion of net sales
from acquired companies. Excluding the impact of acquisitions, net sales of
domestic oil and gas valves declined 29.8% and net sales of international oil
and gas valves declined 20.9% during fiscal 1999. Declining prices, resulting
from increased competition; and reduced manufacturing levels, resulting in lower
absorption of fixed manufacturing costs, negatively impacted operating profits
during fiscal 1999. Additional details of the spin-off transaction are provided
in the Notes to the Consolidated Financial Statements (Note 3).

The Company also recorded a charge to discontinued operations of
$5,000,000 ($3,000,000 net of tax), for legal expenses associated with the
litigation involving James Jones Company. James Jones Company was a subsidiary
of the Company in the municipal water works division until September 1996 when
it was sold to Tyco International Ltd. See Part I, Item 1, "Product Liability,
Environmental and Other Litigation Matters."

Liquidity and Capital Resources

During the six month period ended December 31, 1999, the Company generated
$29,009,000 in operating cash flow from continuing operations, which was
principally used to fund the purchase of $10,293,000 in capital equipment, pay
cash dividends to common shareholders and support the working capital needs of
discontinued operations. Capital expenditures were primarily for manufacturing
machinery and equipment as part of the Company's commitment to continuously
improve its manufacturing capabilities. The Company's capital expenditure budget
for the year ending December 31, 2000 is $17,500,000.

During fiscal 1999.5, the Company maintained a $125,000,000 line of credit
which was amended coincident with the spin-off of CIRCOR. The Company's amended
facility in effect as of December 31, 1999 is an unsecured $100,000,000 line of
credit to support the Company's acquisition program, working capital
requirements of acquired companies, and for general corporate purposes. At
December 31, 1999, the Company had $22,000,000 outstanding on the line of credit
and was in compliance with all banking covenants related to this facility.

As of December 31, 1999, the Company maintained a syndicated credit
facility with a group of European banks in the amount of 40,000,000 Euros. This
credit facility has several tranches which provide credit to the Company for a
period up to five (5) years. The purpose of this credit facility is to fund
acquisitions in Europe, support the working capital requirements of acquired
companies and for general corporate purposes. As of December 31, 1999,
21,980,000 Euros ($22,134,000) were borrowed under this line of credit.

Working capital from continuing operations at December 31, 1999 was
$141,740,000 compared to $144,941,000 at June 30, 1999. The ratio of current
assets to current liabilities was 2.3 to 1 at December 31, 1999 and 2.5 to 1 at
June 30, 1999. Cash and cash equivalents were $13,016,000 at December 31, 1999
compared to $12,774,000 at June 30, 1999. Debt as a percentage of total capital
employed was 37.4% at December 31, 1999 compared to 38.9% at June 30, 1999.

12

The Company anticipates that available funds and those funds provided from
current operations will be sufficient to meet current operating requirements and
anticipated capital expenditures for at least the next 24 months.

The Company from time to time is involved with product liability,
environmental proceedings and other litigation proceedings and incurs costs on
an ongoing basis related to these matters. The Company has not incurred material
expenditures in fiscal 1999.5 in connection with any of these matters. See Part
I, Item 1, "Product Liability, Environmental and Other Litigation Matters".

Year 2000

The Company's comprehensive program to address potential exposures to the
Year 2000 issues is complete. Since January 1, 2000 the Company has had no
business interruptions due to the Year 2000 issues. The Company is not aware of
any incidents or events caused by the Year 2000 issue that have had or could
have a material adverse effect on the results of operations or financial
condition. Spending for the Year 2000 program, expensed as incurred, was not
material.

Conversion To The Euro

On January 1, 1999, 11 of the 15 member countries of the European Union
adopted the Euro as their common legal currency and established fixed conversion
rates between their existing sovereign currencies and the Euro. The Euro trades
on currency exchanges and is available for non-cash transactions. The
introduction of the Euro will affect the Company as the Company has
manufacturing and distribution facilities in several of the member countries and
trades extensively across Europe. The long-term competitive implications of the
conversion are currently being assessed by the Company, however, the Company
will experience an immediate reduction in the risks associated with foreign
exchange. At this time, the Company is not anticipating that any significant
costs will be incurred due to the introduction and conversion to the Euro. The
Company is in the process of implementing systems to receive and make payments
in Euros. The Company anticipates these systems will be in place by January 1,
2002.

Other

Certain statements contained herein are forward looking. Many factors
could cause actual results to differ from these statements, including loss of
market share through competition; introduction of competing products by other
companies; pressure on prices from competitors, suppliers, and/or customers;
regulatory obstacles; lack of acceptance of new products; changes in the
plumbing and heating markets; changes in global demand for the Company's
products; changes in distribution of the Company's products; interest rates;
foreign exchange fluctuations; cyclicality of industries in which the Company
markets certain of its products and general and economic factors in markets
where the Company's products are sold, manufactured or marketed; and other
factors discussed in the Company's reports filed with the Securities and
Exchange Commission.

In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." The Company will
adopt SFAS 133 on January 1, 2001. The impact of SFAS 133 on the combined
financial statements is still being evaluated, but is not expected to be
material.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Company uses derivative financial instruments primarily to reduce
exposure to adverse fluctuations in foreign exchange rates, interest rates and
prices of certain raw materials used in the manufacturing process. The Company
does not enter into derivative financial instruments for trading purposes. As a
matter of policy, all derivative positions are used to reduce risk by hedging
underlying economic exposure. The derivatives the Company uses are
straightforward instruments with liquid markets.

The Company manages most of its foreign currency exposures on a
consolidated basis. The Company identifies all of its known exposures. As part
of that process, all natural hedges are identified. The Company then nets these
natural hedges from its gross exposures.

13

The Company's consolidated earnings are subject to fluctuations due to
changes in foreign currency exchange rates. However, its overall exposure to
such fluctuations is reduced by the diversity of its foreign operating locations
which encompass a number of different European locations, Canada and China.

The Company's foreign subsidiaries transact most business, including
certain intercompany transactions, in foreign currencies. Such transactions are
principally purchases or sales of materials and are denominated in European
currencies or the U.S. or Canadian dollar. The Company uses foreign currency
forward exchange contracts to manage the risk related to intercompany purchases
that occur during the course of a fiscal year and certain open foreign currency
denominated commitments to sell products to third parties. At December 31, 1999
the Company had no forward contracts to buy foreign currencies and no unrealized
gains or losses. See Note 15 of the Notes to the Consolidated Financial
Statements.

The Company has historically had a very low exposure to changes in
interest rates. Interest rate swaps are used to mitigate the impact of interest
rate fluctuations on certain variable rate debt instruments. Information about
the Company's long-term debt including principal amounts and related interest
rates appears in Note 10 to the Consolidated Financial Statements included
herein.

The Company purchases significant amounts of bronze ingot, brass rod and
cast iron which are utilized in manufacturing its many product lines. The
Company's operating results can be adversely affected by changes in commodity
prices if it is unable to pass on related price increases to its customers. The
Company manages this risk by monitoring related market prices, working with its
suppliers to achieve the maximum level of stability in their costs and related
pricing, seeking alternative supply sources when necessary and passing increases
in commodity costs to its customers, to the maximum extent possible, when they
occur. Additionally, on a limited basis, the Company uses commodity futures
contracts to manage this risk. See Note 15 of the Notes to the Consolidated
Financial Statements.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The index to financial statements is included in page 16 of this Report.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

14

PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Directors

The information appearing under the caption "Information as to Directors
and Nominees for Director" in the Registrant's Proxy Statement relating to the
Annual Meeting of Stockholders to be held on April 26, 2000 is incorporated
herein by reference. With respect to Directors and Executive Officers, the
information appearing under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Registrant's Proxy Statement relating to the Annual
Meeting of Stockholders to be held on April 26, 2000 is incorporated herein by
reference.

Executive Officers

Information with respect to the executive officers of the Company is set
forth in Item 1 of this Report under the caption "Executive Officers".

Item 11. EXECUTIVE COMPENSATION.

The information appearing under the caption "Compensation Arrangements" in
the Registrant's Proxy Statement relating to the Annual Meeting of Stockholders
to be held on April 26, 2000 is incorporated herein by reference.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information appearing under the caption "Principal and Management
Stockholders" in the Registrant's Proxy Statement relating to the Annual Meeting
of Stockholders to be held on April 26, 2000 is incorporated herein by
reference.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information appearing under the caption "Compensation
Arrangements-Certain Relationships and Related Transactions" in the Registrant's
Proxy Statement relating to the Annual Meeting of Stockholders to be held on
April 26, 2000 is incorporated herein by reference.

15

PART IV

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a)(1) Financial Statements
The following financial statements are included in a separate section of
this Report commencing on the page numbers specified below:

Report of Independent Auditors....................................... 20

Consolidated Statements of Operations for the six months ended
December 31, 1999, and December 31, 1998 (unaudited)
and the twelve months ended June 30, 1999 and 1998.......... 21

Consolidated Balance Sheets as of December 31, 1999, June 30,
1999 and June 30, 1998...................................... 22

Consolidated Statements of Stockholders' Equity for the six months
ended December 31, 1999 and the twelve months ended
June 30, 1999 and 1998...................................... 23

Consolidated Statements of Cash Flows for the six months ended
December 31, 1999, and the twelve months ended June 30,
1999 and 1998............................................... 24

Notes to Consolidated Financial Statements........................... 25

(a)(2) Schedules

Schedule II - Valuation and Qualifying Accounts for the six
months ended December 31, 1999, and the twelve months
ended June 30, 1999 and 1998. .............................. 40

All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted.

(a)(3) Exhibits

Exhibits 10.1-10.6, 10.8, 10.16, and 10.23 constitute all of the
management contracts and compensation plans and arrangements of the Company
required to be filed as exhibits to this Annual Report. Upon written request of
any stockholder to the Chief Financial Officer at the Company's principal
executive office, the Company will provide any of the Exhibits listed below.

16

Exhibit No. Description and Location
- ------------------------------------------

2.1 Distribution Agreement between Watts Industries, Inc. and
CIRCOR International, Inc. (20)
3.1 Restated Certificate of Incorporation, as amended. (12)
3.2 Amended and Restated By-Laws, as amended May 11, 1999. (1)
9.1 Horne Family Voting Trust Agreement-1991 dated as of October
31, 1991 (2), Amendments dated November 19, 1996 (18),
February 24, 1997 (18), June 5, 1997 (18), August 26, 1997
(18), and October 17, 1997. (21)
9.2 The Amended and Restated George B. Horne Voting Trust
Agreement-1997 dated as of September 14, 1999. (22)
10.1 Employment Agreement effective as of September 1, 1996
between the Registrant and Timothy P. Horne. (14)
10.2 Supplemental Compensation Agreement effective as of
September 1, 1996 between the Registrant and Timothy P.
Horne. (14)
10.3 Deferred Compensation Agreement between the Registrant and
Timothy P. Horne, as amended. (4)
10.4 1996 Stock Option Plan, dated October 15, 1996. (15)
10.5 1989 Nonqualified Stock Option Plan. (3)
10.6 Watts Industries, Inc. Retirement Plan for Salaried
Employees dated December 30, 1994, as amended and restated
effective as of January 1, 1994, (12), Amendment No. 1 (14),
Amendment No. 2 (14), Amendment No. 3 (14), Amendment No. 4
dated September 4, 1996. (18), Amendment No. 5 dated January
1, 1998, Amendment No. 6 dated May 3, 1999 (22), and
Amendment No. 7 dated June 7, 1999. (22)
10.7 Registration Rights Agreement dated July 25, 1986. (5)
10.8 Executive Incentive Bonus Plan, as amended. (12)
10.9 Indenture dated as of December 1, 1991 between the
Registrant and The First National Bank of Boston, as
Trustee, including form of 8-3/8% Note Due 2003. (8)
10.10 Loan Agreement and Mortgage among The Industrial Development
Authority of the State of New Hampshire, Watts Regulator Co.
and Arlington Trust Company dated August 1, 1985. (4)
10.11 Amendment Agreement relating to Watts Regulator Co. (Canaan
and Franklin, New Hampshire, facilities) financing dated
December 31, 1985. (4)
10.12 Loan Agreement between The Rutherford County Industrial
Facilities and Pollution Control Financing Authority and
Watts Regulator Company dated September 1, 1994. (12)
10.13 Letter of Credit, Reimbursement and Guaranty Agreement dated
September 1, 1994 by and among the Registrant, Watts
Regulator Company and The First Union National Bank of North
Carolina (12), Amendment No. 1 (14), Amendment No. 2 dated
October 1, 1996 (18), and Amendment No. 3 dated October 18,
1999 (11).
10.14 Trust Indenture from The Rutherford County Industrial
Facilities and Pollution Control Financing Authority to The
First National Bank of Boston,as Trustee, dated September 1,
1994. (12)
10.15 Amended and Restated Stock Restriction Agreement dated
October 30, 1991 (2), Amendment dated August 26, 1997. (18)
10.16 Watts Industries, Inc. 1991 Non-Employee Directors'
Nonqualified Stock Option Plan (7), Amendment No. 1. (14)
10.17 Letters of Credit relating to retrospective paid loss
insurance programs. (10)
10.18 Form of Stock Restriction Agreement for management
stockholders. (5)
10.19 Revolving Credit Agreement dated December 23, 1987 between
Nederlandse Creditbank NV and Watts Regulator (Nederland)
B.V. and related Guaranty of Watts Industries, Inc. and
Watts Regulator Co. dated December 14, 1987. (6)
10.20 Loan Agreement dated September 1987 with, and related
Mortgage to, N.V. Sallandsche Bank. (6)
10.21 Agreement of the sale of shares of Intermes, S.p.A., RIAF
Holding A.G. and the participations in Multiscope Due S.R.L.
dated November 6, 1992. (9)
10.22 Amended and Restated Revolving Credit Agreement dated March
27, 1998 between and among Watts Investment Company, certain
financial institutions, BankBoston N.A., as Administrative
Agent, and the Registrant, as Guarantor (17), and First
Amendment to Amended and Restated Revolving Credit Agreement
dated October 18, 1999 (11).

17

10.23 Watts Industries, Inc. Management Stock Purchase Plan dated
October 17, 1995 (13), Amendment No. 1 dated August 5, 1997.
(18)
10.24 Stock Purchase Agreement dated as of June 19, 1996 by and
among Mueller Co., Tyco Valves Limited, Watts Investment
Company, Tyco International Ltd. and Watts Industries, Inc.
(16)
11 Statement Regarding Computation of Earnings per Common
Share. (19)
21 Subsidiaries. *
23 Consent of KPMG LLP. *
27 Financial Data Schedule-Fiscal 1999.5. *

Incorporated By Reference To:

(1) Relevant exhibit to Registrant's Form 10-Q for quarter ended March 31,
1999.
(2) Relevant exhibit to Registrant's Form 8-K dated November 14, 1991.
(3) Relevant exhibit to Registrant's Form 10-K for the year ended June 30,
1989.
(4) Relevant exhibit to Registrant's Form S-1 (No. 33-6515) dated June 17,
1986.
(5) Relevant exhibit to Registrant's Form S-1 (No. 33-6515) as part of the
Second Amendment to such Form S-1 dated August 21, 1986.
(6) Relevant exhibit to Registrant's Form S-1 (No. 33-27101) dated February
16, 1989.
(7) Relevant exhibit to Registrant's Amendment No. 1 to Form 10-K for year
ended June 30, 1992.
(8) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1992.
(9) Relevant exhibit to Registrant's Amendment No. 2 dated February 22,
1993 to Form 8-K dated November 6, 1992.
(10) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1993.
(11) Relevant exhibit to Registrant's Form 10-Q for quarter ended September
30, 1999.
(12) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1995.
(13) Relevant exhibit to Registrant's Form S-8 (No. 33-64627) dated November
29, 1995.
(14) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1996.
(15) Relevant exhibit to Registrant's Form S-8 (No. 333-32685) dated August
1, 1997.
(16) Relevant exhibit to Registrant's Form 8-K dated September 4, 1996.
(17) Relevant exhibit to Registrant's Form 10-Q for quarter ended March 31,
1998.
(18) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1997.
(19) Notes to Consolidated Financial Statements, Note 2 of this Report.
(20) Exhibit 2.1 to CIRCOR International, Inc. Amendment No. 1 to its
registration statement on Form 10 filed on September 22, 1999. (File
No. 000-26961).
(21) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1998.
(22) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1999.

* Filed as an exhibit to this Report with the Securities and Exchange
Commission

(b) Reports on Form 8-K

A report on Form 8-K was filed with the Securities and Exchange commission
on October 22, 1999. The following item was reported on:

(1) Item 5. Other Events. There were no financial statements filed.

18

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

WATTS INDUSTRIES, INC.

By: /s/ Timothy P. Horne
--------------------
Timothy P. Horne
Chairman of the Board and
Chief Executive Officer
DATED: March 14, 2000

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

Signature Title Date
--------- ----- ----

/s/ Timothy P. Horne Chairman of the Board and March 14, 2000
- -------------------- Chief Executive Officer
Timothy P. Horne (Principal Executive
Officer) and Director

/s/ William C. McCartney Chief Financial Officer March 14, 2000
- ------------------------ and Treasurer (Principal
William C. McCartney Financial and Accounting Officer),
Secretary

/s/ Kenneth J. McAvoy Director March 14, 2000
- ---------------------
Kenneth J. McAvoy

/s/ Gordon W. Moran Director March 14, 2000
- -------------------
Gordon W. Moran

/s/ Daniel J. Murphy, III Director March 14, 2000
- -------------------------
Daniel J. Murphy, III

/s/ Roger A. Young Director March 14, 2000
- ------------------
Roger A. Young

19

Independent Auditors' Report

The Board of Directors and Stockholders
Watts Industries, Inc.:

We have audited the accompanying consolidated balance sheets of Watts
Industries, Inc. and subsidiaries as of December 31, 1999, and June 30, 1999 and
1998, and the related consolidated statements of operations, stockholders'
equity and cash flows for the six month period ended December 31, 1999, and the
fiscal years ended June 30, 1999 and 1998. In connection with our audits of the
consolidated financial statements, we also audited the accompanying financial
statement schedule of valuation and qualifying accounts. These consolidated
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Watts Industries,
Inc. and subsidiaries as of December 31, 1999, and June 30, 1999 and 1998, and
the results of their operations and their cash flows for the six month period
ended December 31, 1999, and the fiscal years ended June 30, 1999 and 1998, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.

/s/ KPMG LLP

Boston, Massachusetts
February 8, 2000

20

Watts Industries, Inc. and Subsidiaries
Consolidated Statements of Operations
(Amounts in thousands, except per share information)

For the Six Months Ended For the Fiscal Year Ended
December 31 June 30
1999 1998 1999 1998
--------- --------- --------- ---------
(unaudited)

Net sales .......................................................... $ 259,110 $ 227,579 $ 474,458 $ 442,077
Cost of goods sold ................................................. 165,853 145,660 302,745 282,152
--------- --------- --------- ---------
GROSS PROFIT .................................................. 93,257 81,919 171,713 159,925
Selling, general and administrative expenses ....................... 62,239 56,798 119,875 112,854
Restructuring Charge ............................................... 1,460 -- -- --
--------- --------- --------- ---------
OPERATING INCOME .............................................. 29,558 25,121 51,838 47,071
--------- --------- --------- ---------
Other (income) expense:
Interest income ............................................... (331) (413) (923) (1,228)
Interest expense .............................................. 4,456 2,673 6,150 6,514
Other ......................................................... 22 434 1,688 432
--------- --------- --------- ---------
4,147 2,694 6,915 5,718
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES ........................................... 25,411 22,427 44,923 41,353
Provision for income taxes ......................................... 8,943 7,202 15,469 13,230
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS ............................. 16,468 15,225 29,454 28,123
Income (loss) from discontinued operations, net of taxes ........... (1,226) 8,419 6,502 25,246
--------- --------- --------- ---------
NET INCOME .................................................... $ 15,242 $ 23,644 $ 35,956 $ 53,369
========= ========= ========= =========

Basic EPS
Income (loss) per share:
Continuing operations ......................................... $ 0.62 $ 0.57 $ 1.10 $ 1.04
Discontinued operations ....................................... (0.05) 0.31 0.24 0.93
--------- --------- --------- ---------
NET INCOME .................................................... $ 0.57 $ 0.88 $ 1.34 $ 1.97
========= ========= ========= =========
Weighted average number of shares .................................. 26,453 26,935 26,736 27,109
========= ========= ========= =========

Diluted EPS
Income (loss) per share:
Continuing operations ......................................... $ 0.61 $ 0.56 $ 1.10 $ 1.03
Discontinued operations ....................................... (0.05) 0.31 0.24 0.92
--------- --------- --------- ---------
NET INCOME .................................................... $ 0.56 $ 0.87 $ 1.34 $ 1.95
========= ========= ========= =========
Weighted average number of shares .................................. 27,081 27,062 26,799 27,423
========= ========= ========= =========

Dividends per share ............................................ $ 0.175 $ 0.175 $ 0.350 $ 0.330
========= ========= ========= =========

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

21

Watts Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts in thousands, except share information)

December 31 June 30 June 30
ASSETS 1999 1999 1998
--------- --------- ---------

CURRENT ASSETS:
Cash and cash equivalents ................................................. $ 13,016 $ 12,774 $ 10,767
Trade accounts receivable, less allowance for doubtful accounts
of $6,730, $7,747 and $6,821, respectively ........................... 94,305 89,315 77,325
Inventories ............................................................... 112,821 110,552 104,198
Prepaid expenses and other assets ......................................... 12,922 10,193 9,857
Deferred income taxes ..................................................... 19,774 21,271 17,963
Net current assets of discontinued operations ............................. -- 122,971 100,844
--------- --------- ---------
Total Current Assets ................................................. 252,838 367,076 320,954
PROPERTY, PLANT AND EQUIPMENT, NET .............................................. 130,231 129,163 105,487

OTHER ASSETS:
Goodwill, net of accumulated amortization
of $11,997, $10,921 and $8,389, respectively ......................... 95,311 96,285 79,837
Other ..................................................................... 8,698 9,027 9,765
Net noncurrent assets of discontinued operations .......................... -- 36,191 36,853
--------- --------- ---------
TOTAL ASSETS .................................................................... $ 487,078 $ 637,742 $ 552,896
========= ========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .......................................................... $ 46,904 $ 35,579 $ 28,327
Accrued expenses and other liabilities .................................... 48,629 48,843 37,100
Accrued compensation and benefits ......................................... 9,882 12,692 11,150
Income taxes payable ...................................................... -- -- 1,993
Current portion of long-term debt ......................................... 5,683 2,050 5,011
--------- --------- ---------
Total Current Liabilities ............................................ 111,098 99,164 83,581
LONG-TERM DEBT, NET OF CURRENT PORTION .......................................... 123,991 118,916 71,647
DEFERRED INCOME TAXES ........................................................... 13,630 13,070 9,209
OTHER NONCURRENT LIABILITIES .................................................... 11,150 11,450 6,798
MINORITY INTEREST ............................................................... 7,707 7,487 7,646

STOCKHOLDERS' EQUITY:
Preferred Stock, $.10 par value; 5,000,000 shares
authorized; no shares issued or outstanding .......................... -- -- --
Class A Common Stock, $.10 par value; 80,000,000 shares
authorized; 1 vote per share; 16,888,507, 16,158,807, and
16,859,027 shares, respectively, issued and outstanding .............. 1,689 1,616 1,686
Class B Common Stock, $.10 par value; 25,000,000 shares
authorized; 10 votes per share; 9,485,247, 10,285,247 and
10,296,827 shares, respectively, issued and outstanding ............. 949 1,029 1,030
Additional paid-in capital ................................................ 35,330 36,069 47,647
Retained earnings ......................................................... 196,733 364,089 337,565
Treasury stock ............................................................ -- -- (2,583)
Accumulated Other Comprehensive Income .................................... (15,199) (15,148) (11,330)
--------- --------- ---------
Total Stockholders' Equity ........................................... 219,502 387,655 374,015
--------- --------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ...................................... $ 487,078 $ 637,742 $ 552,896
========= ========= =========

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

22

Watts Industries, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(Amounts in thousands, except share information)

Class A Class B
Common Stock Common Stock Additional
---------------------- ---------------------- Paid-In Retained
Shares Amount Shares Amount Capital Earnings
-------------------------------------------------------------------------

Balance at June 30, 1997 ............................ 15,797,460 1,580 11,215,627 1,121 44,643 293,170
Comprehensive income:
Net income .................................. 53,369
Cumulative translation adjustment ...........

Comprehensive income .....................

Shares of Class B Common Stock
converted to Class A Common Stock ........... 918,800 91 (918,800) (91)
Shares of Class A Common Stock
issued upon the exercise of
stock options ............................... 153,400 16 2,998
Shares of Class A Common Stock
exchanged upon the exercise of
stock options and retired ................... (10,633) (1) (265)
Purchase of treasury stock, 100,000 shares
@ cost ........................................
Net change in restricted stock units .......... 271
Common Stock dividends ......................... (8,974)
-------------------------------------------------------------------------
Balance at June 30, 1998 16,859,027 1,686 10,296,827 1,030 47,647 337,565
Comprehensive income:
Net income .................................. 35,956
Cumulative translation adjustment ...........

Comprehensive income .....................

Shares of Class B Common Stock
converted to Class A Common Stock ........... 11,580 1 (11,580) (1)
Shares of Class A Common Stock
issued upon the exercise of
stock options. .............................. 3,700 1 60
Purchase of treasury stock, 615,000 shares
@ cost .......................................
Retirement of treasury stock ................... (715,500) (72) (11,926)
Net change in restricted stock units ........... 288
Common Stock dividends ......................... (9,432)
-------------------------------------------------------------------------
Balance at June 30, 1999 ............................ 16,158,807 $1,616 10,285,247 $1,029 $36,069 $364,089
Comprehensive income:
Net income .................................. 15,242
Cumulative translation adjustment ...........

Comprehensive income .....................

Shares of Class B Common Stock
converted to Class A Common Stock ........... 800,000 80 (800,000) (80)
Shares of Class A Common Stock
issued upon the exercise of
stock options ............................... 29,700 3 511
Purchase of treasury stock, 100,000 shares
@ cost .......................................
Retirement of treasury stock ................... (100,000) (10) (1,295)
Net change in restricted stock units ........... 45
Spin off of Industrial, Oil and Gas Group ...... (177,942)
Common Stock dividends ......................... (4,656)
-------------------------------------------------------------------------
Balance at December 31, 1999 ........................ 16,888,507 $1,689 9,485,247 $949 $35,330 $196,733
=========================================================================

Accumulated
Other Total
Comprehensive Treasury Stockholders'
Income Stock Equity
--------------------------------------------

Balance at June 30, 1997 ............................ (6,875) -- 333,639
Comprehensive income:
Net income .................................. 53,369
Cumulative translation adjustment ........... (4,455) (4,455)
---------
Comprehensive income ..................... 48,914
---------
Shares of Class B Common Stock
converted to Class A Common Stock ...........
Shares of Class A Common Stock
issued upon the exercise of
stock options ............................... 3,014
Shares of Class A Common Stock
exchanged upon the exercise of
stock options and retired ................... (266)
Purchase of treasury stock, 100,000 shares
@ cost ........................................ (2,583) (2,583)
Net change in restricted stock units .......... 271
Common Stock dividends ......................... (8,974)
--------------------------------------------
Balance at June 30, 1998 ............................ (11,330) (2,583) 374,015
Comprehensive income:
Net income .................................. 35,956
Cumulative translation adjustment ........... (3,818) (3,818)
---------
Comprehensive income ..................... 32,138
---------
Shares of Class B Common Stock
converted to Class A Common Stock ...........
Shares of Class A Common Stock
issued upon the exercise of
stock options ............................... 61
Purchase of treasury stock, 615,000 shares
@ cost ....................................... (9,415) (9,415)
Retirement of treasury stock ................... 11,998
Net change in restricted stock units ........... 288
Common Stock dividends ......................... (9,432)
--------------------------------------------
Balance at June 30, 1999 ............................ ($15,148) $ -- $387,655
Comprehensive income:
Net income .................................. 15,242
Cumulative translation adjustment ........... (51) (51)
---------
Comprehensive income ..................... 15,191
---------
Shares of Class B Common Stock
converted to Class A Common Stock ...........
Shares of Class A Common Stock
issued upon the exercise of
stock options ............................... 514
Purchase of treasury stock, 100,000 shares
@ cost ....................................... (1,305) (1,305)
Retirement of treasury stock ................... 1,305
Net change in restricted stock units ........... 45
Spin off of Industrial, Oil and Gas Group ...... (177,942)
Common Stock dividends ......................... (4,656)
--------------------------------------------
Balance at December 31, 1999 ........................ ($15,199) $ -- $219,502
============================================

23

Watts Industries, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Amounts in thousands)

For the Six Months Ended For the Fiscal Year Ended
December 31 June 30
1999 1999 1998
--------- --------- ---------

OPERATING ACTIVITIES
Income from continuing operations ........................................ $ 16,468 $ 29,454 $ 28,123
Adjustments to reconcile net income from continuing operations
to net cash provided by continuing operating activities:
Depreciation ........................................................... 7,869 14,745 12,908
Amortization ........................................................... 1,356 2,711 2,433
Deferred income taxes (benefit) ........................................ 154 (2,823) 884
Gain (Loss) on disposal of property, plant and equipment ............... 23 (19) (1,152)
Equity in undistributed earnings (loss) of affiliates .................. (78) 712 (192)
Changes in operating assets and liabilities, net of effects
from business acquisitions:
Accounts receivable ............................................... (5,883) (876) (2,493)
Inventories ....................................................... (2,830) (532) (8,959)
Prepaid expenses and other assets ................................. (2,456) (1,050) 408
Accounts payable, accrued expenses and other liabilities .......... 14,578 5,964 6,275
Accrued restructuring charge ...................................... (192) -- --
--------- --------- ---------
29,009 48,286 38,235
Net cash provided by (used in) discontinued operations ................ (18,163) 16,794 19,660
--------- --------- ---------
Net cash provided by operating activities ............................. 10,846 65,080 57,895
--------- --------- ---------

INVESTING ACTIVITIES
Additions to property, plant and equipment ............................... (10,293) (21,532) (23,056)
Proceeds from sale of property, plant and equipment ...................... -- 2,337 7,253
Increase in other assets ................................................. (862) (415) (578)
Business acquisitions, net of cash acquired .............................. -- (28,422) (1,129)
Discontinued operations:
Business acquisitions, net of cash acquired ......................... -- (74,176) (22,503)
Proceeds from sale of property, plant and equipment ................. 49 -- 146
Additions to property, plant and equipment .......................... (2,983) (9,499) (6,115)
--------- --------- ---------

Net cash provided by (used in) investing activities ................. (14,089) (131,707) (45,982)
--------- --------- ---------

FINANCING ACTIVITIES
Proceeds from long-term borrowings ....................................... 59,089 81,121 68,779
Payments of long-term debt ............................................... (49,831) (47,138) (85,971)
Proceeds from exercise of stock options .................................. 556 61 2,715
Dividends ................................................................ (4,656) (9,358) (8,936)
Purchase of Treasury stock ............................................... (1,305) (9,415) (2,583)
Discontinued operations:
Proceeds from long-term borrowings ................................... 21,958 79,289 25,484
Payments of long-term debt ........................................... (22,628) (28,546) (19,084)
--------- --------- ---------
Net cash provided by (used in) financing activities .................. 3,183 66,014 (19,596)
--------- --------- ---------
Effect of exchange rate changes on cash and cash equivalents ............. 302 2,620 (207)
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............................. 242 2,007 (7,890)
Cash and cash equivalents at beginning of year ........................... 12,774 10,767 18,657
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR ..................................... $ 13,016 $ 12,774 $ 10,767
========= ========= =========

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

24

Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Statements

(1) Description of Business

Watts Industries, Inc. ("the Company") designs, manufactures and sells an
extensive line of valves for the plumbing and heating and water quality
markets located predominately in North America, Europe, and Asia.

(2) Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the Company
and its majority and wholly-owned subsidiaries. Upon consolidation, all
significant intercompany accounts and transactions are eliminated. The
financial statements of the Company reflect the industrial oil and gas
businesses as discontinued operations for periods prior to a spin-off
transaction that was completed on October 18, 1999 (see Note 3).

Change in Fiscal Year

Effective July 1, 1999, the Company changed its fiscal year end from June
30 to December 31. Accordingly, the audited financial statements include
the results for the six-month period ended December 31, 1999 ("transition
period"), and the prior two fiscal years ended June 30, 1999 ("fiscal
1999"), and June 30, 1998 ("fiscal 1998"). In addition to the basic
audited financial statements and related notes, unaudited financial
information for the six month period ended December 31, 1998 has been
presented to enhance comparability.

Cash Equivalents
Cash equivalents consist of highly liquid investments with maturities of
three months or less at the date of original issuance.

Inventories

Inventories are stated at the lower of cost (first-in, first-out method)
or market.

Goodwill

Goodwill represents the excess of cost over the fair value of net assets
of businesses acquired. This balance is amortized over 40 years using the
straight-line method. The Company assesses the recoverability of this
intangible asset by determining whether the amortization of the goodwill
balance over its remaining life can be recovered through undiscounted
future operating cash flows of the acquired businesses. The amount of
goodwill impairment, if any, is measured based on projected discounted
future operating cash flows using a discount rate reflecting the Company's
average cost of funds.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost. Depreciation is
provided on a straight-line basis over the estimated useful lives of the
assets, which range from 10 to 40 years for buildings and improvements and
3 to 15 years for machinery and equipment.

Income Taxes

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

25

Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Statements (continued)

Foreign Currency Translation

Balance sheet accounts of foreign subsidiaries are translated into United
States dollars at fiscal year-end exchange rates. Operating accounts are
translated at weighted average exchange rates for each period. Net
translation gains or losses are adjusted directly to a separate component
of stockholders' equity. The Company does not provide for U.S. income
taxes on foreign currency translation adjustments since it does not
provide for such taxes on undistributed earnings of foreign subsidiaries.

Stock Based Compensation

As allowed under Statement of Financial Accounting Standards (SFAS) No.
123, Accounting for Stock-Based Compensation, the Company accounts for its
stock-based employee compensation plans in accordance with the provisions
of APB Opinion No. 25, Accounting for Stock Issued to Employees.

Net Income Per Common Share

Basic net income per common share is calculated by dividing net income by
the weighted average number of common shares outstanding. The calculation
of diluted earnings per share assumes the conversion of all dilutive
securities (see Note 12).

Net income and number of shares used to compute net income per share from
continuing operations, basic and assuming full dilution, are reconciled
below:

Six Months Ended Fiscal Year Ended June 30,
December 31, 1999 1999 1998
------------------ ---- ----
Income from Income from Income from
Continuing Per Share Continuing Per Share Continuing Per Share
Operations Shares Amount Operations Shares Amount Operations Shares Amount
---------- ------- ------- ---------- ------ ------ ---------- ------ ------

Basic EPS $ 16,468 26,453 $ 0.62 $ 29,454 26,736 $ 1.10 $ 28,123 27,109 $ 1.04

Dilutive
securities
principally
common stock
options -- 628 -- -- 63 -- -- 314 --
-------- ------ ------ -------- ------ ------ -------- ------ ------

Diluted EPS $ 16,468 27,081 $ 0.61 $ 29,454 26,799 $ 1.10 $ 28,123 27,423 $ 1.03
======== ====== ====== ======== ====== ====== ======== ====== ======

Derivative Financial Instruments

The Company uses derivative instruments, principally swaps, forward
contracts and options to achieve its financing strategy and to hedge
foreign currency and commodity exposures. These contracts hedge
transactions and balances for periods consistent with their committed
exposures, and do not constitute investments independent of these
exposures. The Company does not hold or issue financial instruments for
trading purposes, nor is it a party to any leveraged contracts.

Realized and unrealized foreign exchange gains and losses on financial
instruments are recognized and offset foreign exchange gains and losses on
the underlying exposures. Any gain or loss from a financial instrument
that ceases to be an effective hedge is recognized in the statement of
operations. The interest rate differential paid or received on swap
agreements is recognized as an adjustment to interest expense.

Estimates

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

26

Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Statements (continued)

New Accounting Standards

In 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." The
Company will adopt SFAS 133 on January 1, 2001. The impact of SFAS 133 on
the consolidated financial statements is still being evaluated, but is not
expected to be material.

Also in 1998, the American Institute of Certified Public Accountants
issued SOP 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use," and SOP 98-5, "Reporting on the Costs of
Start-Up Activities." The Company adopted SOP 98-1 and SOP 98-5 on July 1,
1999. The adoption of these pronouncements did not have a material effect
on the consolidated financial statements.

(3) Discontinued Operations

On December 18, 1998, the Company announced its intention to spin-off its
industrial, oil and gas businesses to its shareholders as an independent
publicly traded company. The spin-off was effected as a tax-free
distribution on October 18, 1999 ("Distribution Date"). Owners of Watts
common stock as of October 6, 1999 received one share of common stock of
CIRCOR International, Inc. ("CIRCOR"), the new company, for every two
shares of Watts Class A or Class B common stock held. Coincident with the
Distribution Date, the Company received $96.0 million in cash from CIRCOR
as repayment of inter-company loans and advances.

The historical operating results of CIRCOR are shown, net of tax, as
discontinued operations in the consolidated statements of operations. Net
assets of discontinued operations in the consolidated balance sheet
include those assets and liabilities attributable to the CIRCOR businesses
at June 30, 1999 and 1998. Included in the historical operating results of
the discontinued operations is an allocation of the Company's interest
expense based on an allocation of the Company's debt to discontinued
operations. Income taxes have been allocated to discontinued operations
based on their pretax income and calculated on a separate company basis
pursuant to the requirements of Statement of Financial Accounting
Standards No. 109.

Condensed operating statement data of the discontinued operations is
summarized below:

For the Six For the Year For the Year
Months Ended Ended Ended
December 31, June 30, June 30,
1999 1999 1998
---- ---- ----
(in thousands)

Net sales $85,473 $321,711 $287,889
Costs and expenses:
Municipal Water Group (a) - 5,000 -
CIRCOR 85,604 299,385 248,161
------- ------- -------
Total costs and expenses 85,604 304,385 248,161
------- ------- -------
Income (loss) before income taxes (131) 17,326 39,728
Provision for income taxes 1,095 10,824 14,482
------- ------- -------
Income (loss) from discontinued
operations, net of taxes $(1,226) $6,502 $25,246
======= ======= =======

(a) Costs and expenses related to the Municipal Water Group, which was
divested in 1996, for fiscal 1999 relate to legal costs associated
with the State of California litigation (see Note 14).

27

Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Statements (continued)

(4) Restructuring Activities

On December 2, 1999, the Company announced a restructuring of its
operations in Italy to consolidate the warehousing and manufacturing
operations of its existing Italian operation into the facilities of its
newly acquired Italian subsidiary, Cazzaniga S.p.A. The program, which
will include the termination of 29 employees (primarily manufacturing),
began in December of 1999 and is expected to be fully completed by June of
2000. As of December 31, 1999, 10 employees have been terminated.

In connection with this restructuring, and in accordance with EITF 94-3,
the Company recorded a charge to operating expenses of $1,460,000
($861,000 after taxes or $0.03 in net income per common share, fully
diluted) during the six-month period ended December 31, 1999. Details of
the restructuring charge are as follows:

Initial Utilized
Provision during 1999 Balance
--------- ----------- -------
(in thousands)

Severance and related benefits $1,299,000 $192,000 $1,107,000
Lease termination costs 134,000 - 134,000
Other exit costs 27,000 - 27,000
---------- -------- ----------
Total $1,460,000 $192,000 $1,268,000
========== ======== ==========

(5) Business Acquisitions

During 1999, the Company acquired Cazzaniga S.p.A. located in Biassono,
Italy for approximately $28.0 million. Cazzaniga is an integrated
manufacturer of plumbing and heating products with annual sales of
approximately $35.0 million. The goodwill resulting from this acquisition
of approximately $19.0 million is being amortized on a straight-line basis
over a 40-year period.

During fiscal 1999 and 1998, the Company also acquired several valve
companies which were included as part of the industrial, oil and gas
businesses that were spun-off into a separate publicly traded company,
CIRCOR. The aggregate purchase price of these acquisitions was
approximately $118.0 million.

All acquisitions have been accounted for under the purchase method of
accounting. Their results of operations since acquisition, which have been
included in the Company's consolidated financial statements, have not
materially affected the consolidated financial position, results of
operations or liquidity of the Company.

(6) Inventories

Inventories consist of the following:

December 31, June 30, June 30,
1999 1999 1998
---- ---- ----
(in thousands)

Raw materials $ 36,429 $ 36,901 $ 34,057
Work in process 10,355 7,493 6,128
Finished goods 66,037 66,158 64,013
-------- -------- --------
$112,821 $110,552 $104,198
======== ======== ========

28

Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Statements (continued)

(7) Property, Plant and Equipment

Property, plant and equipment consists of the following:

December 31, June 30, June 30,
1999 1999 1998
---- ---- ----
(in thousands)
Land $ 7,937 $ 7,964 $ 5,582
Buildings and improvements 56,478 53,867 48,676
Machinery and equipment 154,490 148,952 128,339
Construction in progress 7,787 7,932 10,861
-------- -------- --------
226,692 218,715 193,458
Accumulated Depreciation (96,461) (89,552) (87,971)
-------- -------- --------

$130,231 $129,163 $105,487
======== ======== ========

(8) Income Taxes

The significant components of the Company's deferred income tax
liabilities and assets are as follows:

December 31, June 30, June 30,
1999 1999 1998
---- ---- ----
(in thousands)

Deferred income tax liabilities:
Excess tax over book depreciation $ 12,516 $ 11,386 $ 5,809
Inventory 772 1,027 1,991
Other 342 657 1,409
-------- -------- --------
Total deferred income tax liabilities 13,630 13,070 9,209
-------- -------- --------

Deferred income tax assets:
Accrued expenses 11,868 13,037 9,120
Net operating loss carryforward 9,262 10,918 12,625
Other 4,064 3,441 3,979
-------- -------- --------
Total deferred income tax assets 25,194 27,396 25,724

Valuation allowance (5,420) (6,125) (7,761)
-------- -------- --------
Net deferred income tax assets 19,774 21,271 17,963
-------- -------- --------

Net deferred income tax asset $ 6,144 $ 8,201 $ 8,754
======== ======== ========

The provision for income taxes from continuing operations is based on the
following pre-tax income:

December 31, June 30, June 30,
1999 1999 1998
---- ---- ----
(in thousands)
Domestic $18,424 $33,787 $34,609
Foreign 6,987 11,136 6,744
------- ------- -------

$25,411 $44,923 $41,353
======= ======= =======

29

Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Statements (continued)

The provision for income taxes from continuing operations consists of the
following:

December 31, June 30, June 30,
1999 1999 1998
---- ---- ----
(in thousands)
Current tax expense:

Federal $ 7,177 $ 12,698 $ 10,551
Foreign 1,721 2,820 2,164
State 214 385 1,416
-------- -------- --------

9,112 15,903 14,131
-------- -------- --------

Deferred tax expense (benefit):
Federal (553) (577) (129)
Foreign 450 212 (750)
State (66) (69) (22)
-------- -------- --------
(169) (434) (901)
-------- -------- --------

$ 8,943 $ 15,469 $ 13,230
======== ======== ========

Actual income taxes reported from continuing operations are different than
would have been computed by applying the federal statutory tax rate to
income from continuing operations before income taxes. The reasons for
this difference are as follows:

December 31, June 30, June 30,
1999 1999 1998
---- ---- ----
(in thousands)

Computed expected federal income tax
expense (benefit) $ 8,894 $ 15,723 $ 14,474
State income taxes, net of federal tax benefit 96 366 1,614
Goodwill amortization 342 1,058 714
Foreign tax rate and regulation differential (205) (664) (1,830)
Other, net (184) (1,014) (1,742)
-------- -------- --------

$ 8,943 $ 15,469 $ 13,230
======== ======== ========

At December 31, 1999, the Company has foreign net operating loss
carryforwards of $15.4 million for income tax purposes that expire in 2000
through 2003. In addition, foreign net operating losses of $9.4 million
can be carried forward indefinitely. Undistributed earnings of the
Company's foreign subsidiaries amounted to approximately $43.0 million at
December 31, 1999, and $45.0 million and $33.0 million at June 30, 1999
and 1998, respectively. Those earnings are considered to be indefinitely
reinvested and, accordingly, no provision for U.S. federal and state
income taxes has been recorded thereon. Upon distribution of those
earnings, in the form of dividends or otherwise, the Company will be
subject to both U.S. income taxes (subject to an adjustment for foreign
tax credits) and withholding taxes payable to the various foreign
countries. Determination of the amount of U.S. income tax liability that
would be incurred is not practicable because of the complexities
associated with its hypothetical calculation; however, unrecognized
foreign tax credits would be available to reduce some portion of any U.S.
income tax liability. Withholding taxes of approximately $2.3 million
would be payable upon remittance of all previously unremitted earnings at
December 31, 1999. The Company made income tax payments of $11.2 million
for the six months ended December 31, 1999, and $24.8 million and $17.2
million in fiscal years ended June 30, 1999 and 1998, respectively.

30

Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Statements (continued)

(9) Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consist of the following:

December 31, June 30, June 30,
1999 1999 1998
---- ---- ----
(in thousands)

Commissions and sales incentives payable $ 9,734 $11,401 $ 8,990
Accrued insurance costs 11,217 10,801 9,394
Professional fees 4,689 6,154 908
Other 22,989 20,487 17,808
------- ------- -------

$48,629 $48,843 $37,100
======= ======= =======

31

Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Statements (continued)

(10) Financing Arrangements

Long-term debt consists of the following:

December 31, June 30, June 30,
1999 1999 1998
------------ -------- --------
(in thousands)

8-3/8%, debentures due December 2003 $75,000 $75,000 $75,000

Revolving line of credit facility, accruing
interest at a variable rate (7.05%, 5.37%
and 6.79% at December 31, 1999, June 30,
1999 and 1998, respectively) of either
Eurodollar rate plus .185%, Prime Rate or
a competitive money market rate to be
specified by the Lender, and expiring
March 2003 22,000 104,000 19,000

40 million Euro line of Credit, accruing
interest at a variable rate of EURIBOR
plus .75% (4.3% at December 31, 1999),
and expiring September 2004 22,134 20,223 --

Industrial Revenue Bonds, maturing September
2002 accruing interest at a variable rate
based on weekly tax-exempt interest rates
(4.07%, 3.96% and 3.60% at December 31,
1999, June 30, 1999 and 1998,
respectively) 5,000 5,000 5,400

Other (at interest rates ranging from 4.4% to 11.3%) 5,540 13,740 8,217

Allocation to discontinued operations -- (96,997) (30,959)
---------- ---------- --------
129,674 120,966 76,658
Less: current portion 5,683 2,050 5,011
---------- ---------- --------
$123,991 $118,916 $71,647
========== ========== ========

Coincident to the Distribution Date for the spin-off transaction, the
Company received $96.0 million in cash from CIRCOR as repayment of
inter-company loans and advances from the Company. This amount was based
on a formula that allocated borrowings between the Company and CIRCOR
based on their relative levels of business acquisition activity. Based on
this methodology, borrowings amounting to approximately $97.0 million and
$31.0 million were allocated to discontinued operations at June 30, 1999
and 1998, respectively. Additionally, coincident to the spin-off
transaction, the Company's revolving line of credit facility was amended
thereby reducing the maximum available borrowing amount from $125 million
to $100 million.

Principal payments during each of the next five fiscal years are due as
follows (in thousands): 2000 - $5,683; 2001 - $1,274; 2002 - $6,057; 2003
- $97,020; and 2004 - $18,320. Interest paid for all periods presented in
the accompanying consolidated financial statements approximates interest
expense.

Certain of the Company's loan agreements contain covenants that require,
among other items, the maintenance of certain financial ratios, and limit
the Company's ability to enter into secured borrowing arrangements.

32

Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Statements (continued)

(11) Common Stock

Since fiscal 1997, the Company's Board of Directors has authorized the
repurchase of 3,880,200 shares of the Company's common stock in the open
market and through private purchases. Since the inception of this
repurchase program, 3,595,700 shares of the Company's common stock have
been repurchased and retired.

The Class A Common Stock and Class B Common Stock have equal dividend and
liquidation rights. Each share of the Company's Class A Common Stock is
entitled to one vote on all matters submitted to stockholders and each
share of Class B Common Stock is entitled to ten votes on all such
matters. Shares of Class B Common Stock are convertible into shares of
Class A Common Stock, on a one-to-one basis, at the option of the holder.
The Company has reserved a total of 6,110,871 shares of Class A Common
Stock for issuance under its stock-based compensation plans and 9,485,247
shares for conversion of Class B Stock to Class A Common Stock.

(12) Stock-Based Compensation

The Company has several stock option plans under which key employees and
outside directors have been granted incentive (ISOs) and nonqualified
(NSOs) options to purchase the Company's Class A common stock. Generally,
options become exercisable over a five-year period at the rate of 20% per
year and expire ten years after the date of grant. ISOs and NSOs granted
under the plans have exercise prices of not less than 100% and 50% of the
fair market value of the common stock on the date of grant, respectively.
At December 31, 1999, 3,150,710 shares of Class A common stock were
authorized for future grants of options under the Company's stock option
plans.

The following is a summary of stock option activity and related
information:

For the Six
Months Ended For the Year Ended For the Year Ended
December 31, 1999 June 30, 1999 June 30, 1998
----------------- ------------- -------------

Weighted Weighted Weighted
average average average
(Options in thousands) exercise exercise exercise
Options price(b) Options price(b) Options price(b)
------- ------- ------- -------- ------- ---------

Outstanding at beginning of year 1,481 $13.38 1,362 $12.93 1,348 $13.58
Granted 178 12.34 201 11.87 284 16.24
Canceled (9) 11.17 (78) 13.82 (117) 13.39
Exercised (30) 13.50 (4) 10.59 (153)(c) 12.56
Spin-off related conversion
to CIRCOR options (a) (358) 11.17 -- -- -- --
Spin-off related modification
of Watts options (b) 698 -- -- -- -- --
------ ------ ------ ------ ------ ------

Outstanding at end of year 1,960 $13.25 1,481 $13.38 1,362 $12.93
====== ====== ====== ====== ====== ======

Exercisable at end of year 1,244 $13.36 808 $13.26 619 $13.18
====== ====== ====== ====== ====== ======

(a) Effective on the date of the CIRCOR spin-off, Watts stock options held by
CIRCOR employees were terminated and replaced by new CIRCOR stock options.

(b) Immediately following the spin-off, the number of options were increased
and exercise prices were decreased (the "modification") to preserve the
economic value of those options that existed just prior to the spin-off
transaction for holders of Watts stock options.

(c) Includes 13,100 options in 1998 exercised in exchange for 10,633 shares of
outstanding Class A common shares which were contributed to Treasury and
subsequently retired.

33

Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Statements (continued)

The following table summarizes information about options outstanding at
December 31, 1999:

Options Outstanding Options Exercisable
------------------------------------------ --------------------------
Weighted
average Weighted Weighted
(Options in thousands) remaining average average
Number contractual exercise Number exercise
Range of Exercise Prices outstanding life (years) price exercisable price
------------------------ ----------- ------------ ----- ----------- -----

$ 6.90 - $ 7.36 20 0.9 $ 7.01 20 $ 7.01
$ 9.20 - $10.59 342 6.3 10.48 231 10.43
$10.72 - $12.44 670 7.1 11.84 263 11.20
$14.29 - $16.40 928 5.2 15.42 730 15.24
-------- -------
$ 6.90 - $16.40 1,960 4.9 13.25 1,244 13.36
======== =======

The Company has a Management Stock Purchase Plan that allows for the
granting of Restricted Stock Units (RSUs) to key employees to purchase up
to 1,000,000 shares of Class A common stock at 67% of the fair market
value on the date of grant. RSUs vest annually over a three-year period
from the date of grant. The difference between the RSU price and fair
market value at the date of award is amortized to compensation expense
ratably over the vesting period. At December 31, 1999, 265,000 RSUs were
outstanding. Dividends declared for RSUs that remain unpaid at December
31, 1999 total $70,000.

Pro forma information regarding net income and net income per share is
required by SFAS No. 123 for awards granted after June 30, 1995 as if the
Company had accounted for its stock-based awards to employees under the
fair value method of SFAS 123. The weighted average grant date fair value
of options granted are $3.04 at December 31, 1999 and $2.47, $3.50 at June
30, 1999 and 1998, respectively. The fair value of the Company's
stock-based awards to employees was estimated using a Black-Scholes option
pricing model and the following assumptions:

December 31, June 30, June 30,
1999 1999 1998
---- ---- ----

Expected life (years) 5.0 5.0 5.0
Expected stock price volatility 15.0% 15.0% 15.0%

Expected dividend yield 1.4% 1.9% 1.3%
Risk-free interest rate 6.77% 5.92% 5.54%

The Company's pro forma information follows:

December 31, June 30, June, 30
1999 1999 1998
---- ---- ----
(in thousands, except
per share information)

Net income - as reported $15,242 $35,956 $53,369
Net income - pro forma 14,835 34,863 52,443
Basic EPS - as reported .57 1.34 1.97
Basic EPS - pro forma .56 1.30 1.93
Diluted EPS - as reported .56 1.34 1.95
Diluted EPS - pro forma .55 1.30 1.91

Because SFAS 123 is applicable only to awards granted subsequent to June
30, 1995, its pro forma effect will not be fully reflected until 2000.

34

Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Statements (continued)

(13) Employee Benefit Plans

The Company sponsors defined benefit pension plans covering substantially
all of its domestic non-union employees. Benefits are based primarily on
years of service and employees' compensation. The funding policy of the
Company for these plans is to contribute annually the maximum amount that
can be deducted for federal income tax purposes.

Additionally, substantially all of the Company's domestic non-union
employees are eligible to participate in a 401(k) savings plan. Under this
plan, the Company matches a specified percentage of employee
contributions, subject to certain limitations.

The components of benefit expense are as follows:

Six Months Ended Fiscal Year Ended June 30
December 31, -------------------------
1999 1999 1998
---- ---- ----

Components of net benefit expense (in thousands)
Service cost - benefits earned $ 631 $ 1,485 $ 953
Interest costs on benefits obligation 1,131 2,220 2,081
Estimated return on assets (1,358) (2,686) (1,970)
------- ------- -------
404 1,019 1,064
Defined contribution plans 78 215 222
------- ------- -------
Total benefit expense $ 482 $ 1,234 $ 1,286
======= ======= =======

The funded status of the defined benefit plan and amounts recognized in
the balance sheet follow:

June 30
December 31, -------
1999 1999 1998
---- ---- ----

Change in projected benefit obligation (in thousands)
Balance at beginning of period $ 33,520 $ 31,786 $ 24,026
Service cost 631 1,485 953
Interest cost 1,131 2,220 2,081
Actuarial (gain) / loss (4,288) (903) 5,244
Amendments / curtailments -- -- 763
Benefits paid (906) (1,068) (1,281)
-------- -------- --------
Balance at end of period 30,088 33,520 31,786
======== ======== ========

Change in fair value of plan assets
Balance at beginning of period 29,787 29,446 23,230
Actual return on assets 4,343 933 5,703
Employer contributions 4 476 1,794
Benefits paid (906) (1,068) (1,281)
-------- -------- --------
Fair value of plan assets at end of period 33,228 29,787 29,446
======== ======== ========

Plan assets in excess of (less than) benefit
obligation 3,140 (3,733) (2,340)
Unrecognized transition obligation (2,384) (1,322) (1,594)
Unrecognized prior service costs 2,340 1,388 1,535
Unrecognized net actuarial gain / (loss) (9,429) 1,604 870
-------- -------- --------
Net accrued benefit costs $ (6,333) $ (2,063) $ (1,529)
======== ======== ========

35

Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Statements (continued)

The weighted average assumptions used in determining the obligations of
pension benefit plans are shown below:

June 30
December 31, -------
1999 1999 1998
---- ---- ----
Discount rate 7.75% 7.00% 7.00%

Expected return on plan assets 9.00% 9.00% 9.00%

Rate of compensation increase 5.00% 5.00% 5.00%

Subsequent to the spin-off of CIRCOR which took place on October 18, 1999,
CIRCOR became liable for the payment of all pension plan benefits earned
by CIRCOR employees prior to and following the spin-off who retire after
the spin-off. The Company's pension plan transferred assets to the CIRCOR
pension plan and the amount of the assets was calculated based on the
relative percentage of the Projected Benefit Obligation. Such amount was
adjusted to comply with the asset allocation methodology set forth in
Section 4044 of the Employee Retirement Income Security Act of 1974, as
amended.

(14) Contingencies and Environmental Remediation

Contingencies

In April 1998, the Company became aware of a complaint that was filed
under seal in the State of California alleging violations of the
California False Claims Act. The complaint alleges that a former
subsidiary of the Company sold products utilized in municipal water
systems that failed to meet contractually specified standards and falsely
certified that such standards had been met. The complaint further alleges
that the municipal entities have suffered tens of millions of dollars in
damages as a result of defective products and seeks treble damages,
reimbursement of legal costs and penalties. The Company intends to
vigorously contest this matter but cannot presently determine whether any
loss will result from it. Other lawsuits and proceedings or claims,
arising from the ordinary course of operations, are also pending or
threatened against the Company and its subsidiaries.

The Company has established reserves which it presently believes are
adequate in light of probable and estimable exposure to pending and
threatened litigation of which it has knowledge. However, resolution of
any such matters during a specific period could have a material effect on
quarterly or annual operating results for that period.

Environmental Remediation

The company is currently a party to or otherwise involved in various
administrative or legal proceedings under federal, state or local
environmental laws or regulations involving a number of sites. The level
of contamination varies significantly from site to site as do the related
levels of remediation efforts. Environmental liabilities are recorded
based on the most probable cost, if known, or on the estimated minimum
cost of remediation. The Company's accrued estimated environmental
liabilities are based on assumptions, which are subject to a number of
factors and uncertainties. Circumstances which can affect the reliability
and precision of these estimates include identification of additional
sites, environmental regulations, level of cleanup required, technologies
available, number and financial condition of other contributors to
remediation and the time period over which remediation may occur. The
Company recognizes changes in estimates as new remediation requirements
are defined or as new information becomes available. The Company estimates
that its accrued environmental remediation liabilities will likely be paid
over the next five to ten years.

36

Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Statements (continued)

(15) Financial Instruments

Fair Value

The carrying amounts of cash and cash equivalents, trade receivables and
trade payables approximate fair value because of the short maturity of
these financial instruments.

The fair value of the Company's 8-3/8% notes, due December 2003, is based
on quoted market prices. The fair value of the Company's variable rate
debt approximates its carrying value. The carrying amount and the
estimated fair market value of the Company's long-term debt, including the
current portion, are as follows:

December 31, June 30, June 30,
1999 1999 1998
------------ -------- --------
(in thousands)

Carrying amount $129,674 $217,963 $107,617
Estimated fair value 131,452 222,441 114,907

Derivative Instruments

The Company uses foreign currency forward exchange contracts to reduce the
impact of currency fluctuations on certain anticipated intercompany
purchase transactions that are expected to occur within the fiscal year
and certain other foreign currency transactions. Related gains and losses
are recognized when the contracts expire, which is generally in the same
period as the underlying foreign currency denominated transaction. These
contracts do not subject the Company to significant market risk from
exchange movement because they offset gains and losses on the related
foreign currency denominated transactions. At June 30, 1999, the Company
had forward contracts to buy foreign currencies with a notional value $9.0
million and a fair market value of ($0.6) million. These contracts were
transferred to CIRCOR as part of the spin-off transaction. At December 31,
1999, the Company had no outstanding forward contracts to buy foreign
currencies.

The Company uses commodity futures contracts to fix the price on a certain
portion of certain raw materials used in the manufacturing process. These
contracts highly correlate to the actual purchases of the commodity and
the contract values are reflected in the cost of the commodity as it is
actually purchased. At June 30, 1999, the Company had outstanding
contracts with a notional value of $3.5 million and a fair value of $0.2
million. In December 1999, these contacts were sold and the Company
realized a gain of approximately $0.5 million. This gain has been deferred
at December 31, 1999 and will be off-set against the costs of January and
February 2000 raw material purchases, hedged in the original transaction.
There were no commodity contracts outstanding at December 31, 1999.

The Company also enters into derivative contracts that convert specific
variable rate borrowings into fixed rate debt instruments. At December 31,
1999, the Company had an outstanding interest rate swap that converted 20
million Euro of the borrowings under variable rate EURO Line of Credit to
a fixed rate borrowings at 4.3%. This swap agreement expires in September
2002 and has a fair value of $0.5 million at December 31, 1999.

37

Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Statements (continued)

(16) Segment Information

The following table presents certain operating segment information:

North Corporate
America Europe Asia Adjustments Consolidated
------- ------ ---- ----------- ------------
(in thousands)

Six Months Ended December 31, 1999

Net Sales $ 191,349 $58,651 $9,110 - $ 259,110
Operating income 21,645 7,252 731 (70) 29,558
Identifiable assets 328,249 136,246 23,401 (818) 487,078
Capital expenditures 8,764 1,396 133 - 10,293
Depreciation and amortization 6,373 2,537 315 - 9,225

Year Ended June 30, 1999

Net Sales $ 369,193 $92,247 $13,018 - $474,458
Operating income 38,536 11,228 1,608 466 51,838
Identifiable assets 484,784 133,720 22,374 (3,136) 637,742
Capital expenditures 17,987 3,471 74 - 21,532
Depreciation and amortization 12,851 3,921 684 - 17,456

Year Ended June 30, 1998

Net Sales $ 345,346 $82,837 $13,894 - $442,077
Operating income 36,754 8,258 1,984 75 47,071
Identifiable assets 443,224 87,463 23,719 (1,510) 552,896
Capital expenditures 19,839 2,621 596 - 23,056
Depreciation and amortization 11,491 3,182 668 - 15,341

Each operating segment is individually managed and has separate financial
results that are reviewed by the Company's chief operating decision-maker.

All intercompany transactions have been eliminated, and intersegment
revenues are not significant.

38

Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Statements (continued)

(17) Quarterly Financial Information (Unaudited)

First Second
Quarter Quarter
------- -------
(in thousands, except per share information)

Six months ended December 31, 1999:
Net sales $130,330 $128,780
Gross profit 46,894 46,363
Net income from continuing operations 9,042 7,426
Net income 8,297 6,945
Per common share:
Basic
Income from continuing operations .34 .28
Net income .31 .26
Diluted
Income from continuing operations .34 .28
Net income .31 .26
Dividends per common share .0875 .0875

First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------

(in thousands, except per share information)

Fiscal year ended June 30, 1999:
Net sales $113,269 $114,310 $116,972 $129,907
Gross profit 41,086 40,833 41,888 47,906
Net income from continuing operations 7,893 7,332 6,905 7,324
Net income 12,388 11,256 6,905 5,407
Per common share:
Basic
Income from continuing operations .29 .27 .26 .27
Net income .46 .42 .26 .20
Diluted
Income from continuing operations .29 .27 .26 .27
Net income .46 .42 .26 .20
Dividends per common share .0875 .0875 .0875 .0875

Fiscal year ended June 30, 1998:
Net sales $111,839 $111,844 $108,166 $110,228
Gross profit 41,163 40,496 39,028 39,238
Net income from continuing operations 7,326 7,613 7,259 5,925
Net income 13,620 13,609 14,041 12,099
Per common share:
Basic
Income from continuing operations .27 .28 .27 .22
Net income .50 .50 .52 .45
Diluted
Income from continuing operations .27 .28 .26 .22
Net income .50 .50 .51 .44
Dividends per common share .0775 .0775 .0875 .0875

39

Watts Industries, Inc. and Subsidiaries
Notes to Consolidated Statements (continued)

Schedule II-Valuation and Qualifying Accounts
Watts Industries, Inc. Continuing Operations
(Dollar amounts in thousands)

- ----------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- ----------------------------------------------------------------------------------------------------------------------------
Additions
--------------------------------------------------------------------------------------------------
Charged to Other Deductions-- Balance
Balance at Charged to Costs Accounts-- Describe at End of
Description Beginning of Period and Expenses Describe (1) Period
- ----------------------------------------------------------------------------------------------------------------------------

Six months ended
December 31, 1999
Deducted from asset
account:
Allowance for doubtful
accounts $7,747 $87 $98 (2) $1,202 $6,730

Year ended June 30, 1999
Deducted from asset
account:
Allowance for doubtful
accounts $6,821 $1,728 $747 (3) $1,549 $7,747

Year ended June 30, 1998
Deducted from asset
account:
Allowance for doubtful
accounts $6,236 $2,201 $1,616 $6,821

(1) Uncollectible accounts written off, net of recoveries.
(2) Reclassification of balance from discontinued operations to continuing
operations.
(3) Balance acquired through acquisition of Cazzaniga S.p.A during fiscal
1999.

40

Exhibit Index

Exhibit No. Description and Location
- --------------------------------------

2.1 Distribution Agreement between Watts Industries, Inc. and CIRCOR
International, Inc. (20)
3.1 Restated Certificate of Incorporation, as amended. (12)
3.2 Amended and Restated By-Laws, as amended May 11, 1999. (1)
9.1 Horne Family Voting Trust Agreement-1991 dated as of October 31,
1991 (2), Amendments dated November 19, 1996 (18), February 24,
1997 (18), June 5, 1997 (18), August 26, 1997 (18), and October
17, 1997. (21)
9.2 The Amended and Restated George B. Horne Voting Trust
Agreement-1997 dated as of September 14, 1999. (22)
10.1 Employment Agreement effective as of September 1, 1996 between the
Registrant and Timothy P. Horne. (14)
10.2 Supplemental Compensation Agreement effective as of September 1,
1996 between the Registrant and Timothy P. Horne. (14)
10.3 Deferred Compensation Agreement between the Registrant and Timothy
P. Horne, as amended. (4)
10.4 1996 Stock Option Plan, dated October 15, 1996. (15)
10.5 1989 Nonqualified Stock Option Plan. (3)
10.6 Watts Industries, Inc. Retirement Plan for Salaried Employees
dated December 30, 1994, as amended and restated effective as of
January 1, 1994, (12), Amendment No. 1 (14), Amendment No. 2 (14),
Amendment No. 3 (14), Amendment No. 4 dated September 4, 1996.
(18), Amendment No. 5 dated January 1, 1998, Amendment No. 6 dated
May 3, 1999 (22), and Amendment No. 7 dated June 7, 1999. (22)
10.7 Registration Rights Agreement dated July 25, 1986. (5)
10.8 Executive Incentive Bonus Plan, as amended. (12)
10.9 Indenture dated as of December 1, 1991 between the Registrant and
The First National Bank of Boston, as Trustee, including form of
8-3/8% Note Due 2003. (8)
10.10 Loan Agreement and Mortgage among The Industrial Development
Authority of the State of New Hampshire, Watts Regulator Co. and
Arlington Trust Company dated August 1, 1985. (4)
10.11 Amendment Agreement relating to Watts Regulator Co. (Canaan and
Franklin, New Hampshire, facilities) financing dated December 31,
1985. (4)
10.12 Loan Agreement between The Rutherford County Industrial Facilities
and Pollution Control Financing Authority and Watts Regulator
Company dated September 1, 1994. (12)
10.13 Letter of Credit, Reimbursement and Guaranty Agreement dated
September 1, 1994 by and among the Registrant, Watts Regulator
Company and The First Union National Bank of North Carolina (12),
Amendment No. 1 (14), Amendment No. 2 dated October 1, 1996 (18),
and Amendment No. 3 dated October 18, 1999 (11).
10.14 Trust Indenture from The Rutherford County Industrial Facilities
and Pollution Control Financing Authority to The First National
Bank of Boston,as Trustee, dated September 1, 1994. (12)
10.15 Amended and Restated Stock Restriction Agreement dated October 30,
1991 (2), Amendment dated August 26, 1997. (18)
10.16 Watts Industries, Inc. 1991 Non-Employee Directors' Nonqualified
Stock Option Plan (7), Amendment No. 1. (14)
10.17 Letters of Credit relating to retrospective paid loss insurance
programs. (10)
10.18 Form of Stock Restriction Agreement for management stockholders.
(5)
10.19 Revolving Credit Agreement dated December 23, 1987 between
Nederlandse Creditbank NV and Watts Regulator (Nederland) B.V. and
related Guaranty of Watts Industries, Inc. and Watts Regulator Co.
dated December 14, 1987. (6)
10.20 Loan Agreement dated September 1987 with, and related Mortgage to,
N.V. Sallandsche Bank. (6)
10.21 Agreement of the sale of shares of Intermes, S.p.A., RIAF Holding
A.G. and the participations in Multiscope Due S.R.L. dated
November 6, 1992. (9)
10.22 Amended and Restated Revolving Credit Agreement dated March 27,
1998 between and among Watts Investment Company, certain financial
institutions, BankBoston N.A., as Administrative Agent, and the

1

Registrant, as Guarantor (17), and First Amendment to Amended and
Restated Revolving Credit Agreement dated October 18, 1999 (11).
10.23 Watts Industries, Inc. Management Stock Purchase Plan dated
October 17, 1995 (13), Amendment No. 1 dated August 5, 1997. (18)
10.24 Stock Purchase Agreement dated as of June 19, 1996 by and among
Mueller Co., Tyco Valves Limited, Watts Investment Company, Tyco
International Ltd. and Watts Industries, Inc. (16)
11 Statement Regarding Computation of Earnings per Common Share. (19)
21 Subsidiaries. *
23 Consent of KPMG LLP. *
27 Financial Data Schedule-Fiscal 1999.5. *

Incorporated By Reference To:

(1) Relevant exhibit to Registrant's Form 10-Q for quarter ended March 31,
1999.
(2) Relevant exhibit to Registrant's Form 8-K dated November 14, 1991.
(3) Relevant exhibit to Registrant's Form 10-K for the year ended June 30,
1989.
(4) Relevant exhibit to Registrant's Form S-1 (No. 33-6515) dated June 17,
1986.
(5) Relevant exhibit to Registrant's Form S-1 (No. 33-6515) as part of the
Second Amendment to such FormS-1 dated August 21, 1986.
(6) Relevant exhibit to Registrant's Form S-1 (No. 33-27101) dated February
16, 1989.
(7) Relevant exhibit to Registrant's Amendment No. 1 to Form 10-K for year
ended June 30, 1992.
(8) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1992.
(9) Relevant exhibit to Registrant's Amendment No. 2 dated February 22,
1993 to Form 8-K dated November 6, 1992.
(10) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1993.
(11) Relevant exhibit to Registrant's Form 10-Q for quarter ended September
30, 1999.
(12) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1995.
(13) Relevant exhibit to Registrant's Form S-8 (No. 33-64627) dated November
29, 1995.
(14) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1996.
(15) Relevant exhibit to Registrant's Form S-8 (No. 333-32685) dated August
1, 1997.
(16) Relevant exhibit to Registrant's Form 8-K dated September 4, 1996.
(17) Relevant exhibit to Registrant's Form 10-Q for quarter ended March 31,
1998.
(18) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1997.
(19) Notes to Consolidated Financial Statements, Note 2 of this Report.
(20) Exhibit 2.1 to CIRCOR International, Inc. Amendment No. 1 to its
registration statement on Form 10 filed on September 22, 1999. (File
No. 000-26961).
(21) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1998.
(22) Relevant exhibit to Registrant's Form 10-K for year ended June 30, 1999.

* Filed as an exhibit to this Report with the Securities and Exchange
Commission

2