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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-K

Commission File Number 000-20537

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

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 ý    No o

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

        The aggregate market value of voting stock held by non-affiliates of the registrant, based on the closing price of the Common Stock on January 31, 2003 as reported by the New York Stock Exchange, was approximately $214.1 million.

        Number of shares of common stock outstanding as of January 31, 2003: 44,317,573

Documents Incorporated by Reference

        Applicable portions of the Proxy Statement for the 2003 Annual Meeting of Stockholders of the Company to be held April 24, 2003 are incorporated by reference in Part III of this Form 10-K.

PART I

Item 1. Description of Business

(a)

Narrative Description of Business

General

        Walter Industries, Inc. ("the Company"), organized in 1987, is a diversified company which operates in five reportable segments: Homebuilding, Financing, Industrial Products, Carbon and Metals, and Natural Resources. Through these operating segments, the Company offers a diversified line of products and services including home construction and financing, ductile iron pressure pipe, aluminum foil and sheet products, furnace and foundry coke, chemicals and slag fiber, alloys and metals, petroleum coke distribution, refinery outsourcing services and coal and methane gas production and distribution.

        During 2000, the Company changed its year end to December 31, resulting in a seven-month transition period ended December 31, 2000 ("the transition period"). The transition period results are shown in addition to results for the years ended December 31, 2002 and 2001 and the fiscal year ended May 31, 2000.

        The Company makes its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments thereto available on its website at www.walterind.com without charge as soon as reasonably practicable after filing or furnishing them to the SEC. Additionally, the Company will also provide without charge, a copy of its Form 10-K to any shareholder by mail. Requests should be sent to Walter Industries Inc., Attention: Shareholder Relations, 4211 W. Boy Scout Boulevard, Tampa, Florida 33607.

(b)

Industry Segments

        The Company's industry segment information is included in Note 18 of "Notes to Consolidated Financial Statements" included herein.

        During the year ended December 31, 2001, the Company realigned its segments. The Homebuilding and Financing segment was separated into two segments. The Homebuilding segment markets and supervises the construction of detached, single-family residential homes, primarily in the southern United States. The Financing segment provides mortgage financing and related products for such homes. Additionally, Sloss, previously included in the Industrial Products segment, was realigned with AIMCOR Carbon and AIMCOR Metals (previously the "Energy Services" segment) into the Carbon and Metals segment. Sloss primarily manufactures and markets foundry and furnace coke, which are used by foundries and blast furnaces in the production of iron and steel products.

        All prior year information reflects these changes.

Homebuilding

Jim Walter Homes, Inc.

        Jim Walter Homes, Inc. and its subsidiaries ("JWH"), headquartered in Tampa, Florida, markets and supervises the construction of detached, single-family residential homes, primarily in the southern United States where the weather permits year-round construction. JWH also provides mortgage financing on such homes. JWH historically has concentrated on the low to moderately priced segment of the housing market. Approximately 347,000 homes have been completed by JWH since its inception in 1946.

        JWH's products consist of over 100 models of conventionally-built (stick-built) homes (ranging in size from approximately 720 to 2,880 square feet) and over 75 modular home models (ranging in size from 990 to 2,860 square feet).

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        At December 31, 2002, JWH operated 108 branch offices located in 16 states and serving three additional adjoining states. During 2002, home sales in Texas represented 31% of JWH's net sales, North Carolina 20%, Mississippi 10%, Alabama and Florida 6% each. The remaining sales were spread throughout other southeastern states. Approximately 75% of the branch offices are owned, with the balance on leased land. Substantially all of these branch offices serve as "display parks" that are designed to allow customers to view actual models completed to the various stages of interior finish available.

        Consummation of a building and instalment sale contract is subject to (i) executing a promissory note which is secured by a first lien on the land and the home to be built, except in the State of Texas, (ii) executing a mortgage, deed of trust, mechanic's lien contract or other security instrument, (iii) receiving a satisfactory title report, (iv) inspecting the land to determine that it is suitable for building and (v) obtaining required permits. Although the mortgage, deed of trust and similar security instrument constitute a first lien on the land and the home to be built, such security instruments are not insured by the Federal Housing Administration, guaranteed by the Department of Veterans Affairs or otherwise insured or guaranteed.

        Historically, JWH did not own or acquire land for home construction purposes and was not a land developer. The actual construction of conventionally-built homes sold by JWH was performed on customer-owned land by local building sub-contractors with their own crews, pursuant to subcontracts executed in connection with each home. During 2001, JWH began implementing a strategy to grow its business through the planned construction of speculatively-built homes and subdivisions on land already owned by or to be purchased by the Company, in addition to its historical method of selling homes. Additional growth is also planned through expansion into the slightly higher-priced segment of the housing market represented by its Neatherlin Homes and Dream Homes subsidiaries.

        JWH builds its conventionally-built homes "on site" after the customer has entered into a building contract. Each conventionally-built home is built of wood on concrete foundations or wood pilings and is completely finished on the outside. Conventionally-built homes are constructed to varying degrees of interior completion, depending on the buyer's election to purchase optional interior components, including the installation thereof. Optional interior components include plumbing and electrical materials, heating and air conditioning, wallboard, interior doors, interior trim and floor finishing. JWH's product line includes "shell" homes, which are completely finished on the outside, with the inside containing only rough floors, ceiling joists, partition studding and closet framing. The majority of JWH's customers select all interior options, thereby purchasing a home considered to be "90% complete," which generally excludes only landscaping and utility connections. Remaining units are sold at varying stages of interior finishing.

        JWH, through its wholly-owned subsidiary Crestline Homes, Inc. ("CHI"), also manufactures and distributes modular homes. CHI manufactures modular (factory-built) homes in its Laurinburg, North Carolina facility, which are sold by a network of independent dealers, primarily in the southern United States.

        The following chart shows the unit sales volume of JWH and the percent of homes sold by category (shell, various stages, 90% complete and modular) for the years ended December 31, 2002 and 2001, the transition period ended December 31, 2000 and the fiscal year ended May 31, 2000.

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        The following chart shows the inventory positions for both spec homes and subdivisions, as well as the units sold during the year:

        During the years ended December 31, 2002 and 2001, the transition period ended December 31, 2000 and the fiscal year ended May 31, 2000, the average net sales price of a home was $63,000, $59,100, $57,900 and $55,800, respectively.

        The estimated backlog of homes to be constructed by JWH as of December 31, 2002 was $126.3 million, as compared to $110.9 million at December 31, 2001. The time to construct a home averages between twelve and thirteen weeks.

        The majority of homes sold by JWH are purchased with financing provided by JWH. Qualified customers are offered fixed rate mortgages generally requiring no down payment and are secured by the home and the land on which it is situated. JWH does not charge closing costs, points, credit service fees or similar add-on charges and does not require private mortgage insurance. JWH offers credit terms for up to a maximum of 30 years, usually for 100% of the purchase price of the home. As of December 31, 2002, stated annual percentage rates for new mortgage instalment notes ranged between 7.5% and 10.5%.

        Some customers who purchase and finance homes through JWH may not qualify for traditional mortgage financing. To qualify for financing, a potential customer generally must provide information concerning monthly income and employment history. If the customer owns the land on which the home is to be built, a legal description of the land and evidence of ownership is required. If the land is not owned outright, the purchase of the land and home can be financed through Walter Mortgage Company (see Financing, below). A customer's income and employment usually are verified through telephone conversations with the customer's employer and by examining pay stubs, W-2 forms or, if the customer is self-employed, income tax returns. An applicant generally must have a minimum of one year's continuous employment. Only a small percentage of secondary income (second jobs or part-time employment) is utilized in qualifying applicants. Ownership of land is verified by examining the title record. In addition, JWH's credit department obtains a credit report that includes, among other information, a point or grade credit score. Particular attention is paid to the credit information for the most recent two to three years. Attention is also given to the customer's total indebtedness and other monthly payments. The customer's credit standing is considered favorable if the employment history, income and credit report meet the aforementioned criteria. If a favorable report is obtained and the required monthly payment does not exceed 25% of the customer's monthly gross income, the application usually is approved and a building or instalment sale contract executed, a title report is ordered and, frequently, a survey of the property is made. Independent registered surveyors perform surveys when, in the opinion of JWH, additional information beyond examination of the title record is needed. Such additional information is primarily concerned with verification of legal description, ownership of land and existence of any encroachments.

        JWH does not obtain appraisals or title insurance. Although consideration is given to the ratio of the amount financed to the estimated value of the home and land securing such amount, there is no explicit appraisal-based loan-to-value test. However, there is a requirement that the value of the lot on which the home is to be built, as estimated primarily on the basis of JWH's mortgage servicing employees' experience and knowledge, be at least equal to 10% of the cash selling price of the home, resulting in a maximum initial loan-to-value ratio of approximately 90%. Prior to occupancy of the new

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home, the buyer must complete utility hook-ups and any other components not purchased from JWH, arrange for the final building inspection and, if required, obtain a certificate of occupancy. The cost incurred by customers to complete a new home depends on the stage of completion of the home purchased and whether public water and sewer systems are available or wells and septic tanks must be installed. Such costs to complete the home could range from 5% to 20% of the sales price (based upon a 90% complete home), thereby further reducing the initial loan-to-value ratio.

        Upon completion of construction of a new home to the agreed-upon percentage of completion, in the ordinary course of business, JWH sells the building and instalment sale contract, the note and the related mortgage, deed of trust or other security instrument to Mid-State Homes, Inc. ("MSH") pursuant to an agreement between JWH and MSH. Pursuant to the agreement with MSH, JWH performs loss mitigation services for MSH by administering the collection of delinquent payments, as well as managing foreclosures and the resale of foreclosed properties.

        The single-family residential housing industry is highly competitive. JWH competes in each of its market areas with numerous homebuilders, ranging from regional and national firms to small local companies, on the basis of price, quality, design, finishing options and accessibility to financing. JWH also competes with manufactured and modular housing builders. JWH's strategy is to compete in a specific segment of the housing market by offering customers quality traditionally-built homes, at affordable prices, with favorable financing and no closing costs. Based on the most recent data available, Jim Walter Homes was the seventeenth largest builder of detached single-family homes in the United States.

Financing

        Within the Financing Segment, both Mid-State Homes, Inc. and Walter Mortgage Company offer financing to homebuyers that is secured by mortgages and liens. The financing revenue generated by both MSH and WMC is recognized using the interest method, however, the legal instruments used by each company allow for different amounts to be charged to the customer and ultimately recognized as revenue. MSH services instalment notes originated by JWH, which state a maximum amount to be charged to the customer, and ultimately recognized as revenue, based on the contractual number of payments and dollar value of monthly payments, excluding late charges that may by levied. WMC offers mortgage loans that have fixed monthly payments and repayment terms similar to instalment notes, yet under laws governing mortgage loans, WMC has the ability to levy costs to protect WMC's collateral position upon default, such as attorney fees, inspections and late charges as allowed by state law. References to instalment notes or mortgage instalment notes include mortgage loans offered by WMC. Mortgage loans in the WMC portfolio, before allowances, were approximately $15.2 million and $0.6 million at December 31, 2002 and 2001, respectively.

Mid-State Homes, Inc.

        MSH, headquartered in Tampa, Florida, was established in 1958 to purchase and service mortgage instalment notes generated by JWH. Currently, MSH funds its purchase of these mortgage instalment notes using various business trusts organized by it for that purpose. These business trusts acquire the mortgage instalment notes using the proceeds from borrowings secured by the notes. MSH owns, directly or indirectly, all of the beneficial interests in these trusts. Only the notes and MSH's beneficial interests in Trust IV and Trust VIII secure the borrowings of these trusts. These borrowings are non-recourse to the Company. (For additional information on the trusts and their related borrowings, see Notes 5 and 11 of "Notes to Consolidated Financial Statements.")

        At December 31, 2002, MSH's portfolio was geographically distributed as follows: Texas (25.6%), Mississippi (14.3%), Alabama (9.1%) and Florida (8.4%). The remaining portfolio was spread primarily in other southeastern states.

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Walter Mortgage Company

        Walter Mortgage Company ("WMC") was established in 2001 to provide home financing to customers of Jim Walter Homes and its affiliated homebuilding companies. Through WMC, homebuyers have the option of financing land along with their home purchase, including a traditional cash down payment in lieu of land equity. Existing homeowners also have the option of refinancing their mortgage with WMC. The Company believes WMC will be a key component in achieving the growth plans of the Homebuilding and Financing Segments. Since inception and as of December 31, 2002, 192 mortgages totaling approximately $15.6 million have been originated and funded through WMC. WMC recently initiated a program to buy seasoned mortgage loans in 2003 that meet the Company's strict underwriting criteria.

Other

        Best Insurors, Inc. ("Best"), located in Tampa, Florida, is an agency that primarily places fire and extended insurance coverage soley for homeowners who finance through JWH or WMC. Cardem Insurance Company Ltd. ("Cardem"), located in Bermuda, primarily provides reinsurance of such insurance placed through Best and provides captive coverage for various company insurances, including workers' compensation for all significant subsidiaries except U.S. Pipe and Jim Walter Resources.

Industrial Products

United States Pipe and Foundry Company, Inc.

        United States Pipe and Foundry Company, Inc. ("U.S. Pipe") manufactures and sells a broad line of ductile iron pressure pipe, fittings, valves and hydrants, and a wide variety of gray and ductile iron castings. Founded in 1899 and headquartered in Birmingham, Alabama, it is one of the nation's largest producers of ductile iron pressure pipe. In the years ended December 31, 2002 and 2001, the transition period ended December 31, 2000, and the year ended May 31, 2000, net sales and revenues amounted to $457.2 million, $492.7 million, $310.9 million and $480.2 million, respectively.

        U.S. Pipe manufactures and markets a complete line of ductile iron pipe ranging from 4" to 64" in diameter as well as equivalent metric sizes, in lengths up to 20 feet. In addition, U.S. Pipe produces and sells a full line of fittings, valves and hydrants of various configurations to meet municipal specifications.

        Ductile iron pressure pipe is used primarily for drinking (potable) water distribution systems, small water system grids, reinforcing distribution systems (including looping grids and supply lines) and is used for major water and waste water transmission and collection systems.

        The ductile iron pressure pipe industry is highly competitive, with a small number of manufacturers of ductile iron pressure pipe, fittings, valves and hydrants. Major competitors of U.S. Pipe include McWane, Inc., Griffin Ductile Iron Pipe Company and American Cast Iron Pipe Company.

        Additional competition for ductile iron pressure pipe comes from pipe composed of other materials, such as polyvinylchloride (PVC), high density polyethylene (HDPE), concrete, fiberglass, reinforced plastic and steel. Although ductile iron pressure pipe is typically more expensive than competing forms of pipe, customers choose ductile iron for its quality, longevity, strength, ease of installation and lack of maintenance problems.

        U.S. Pipe has a sales force that sells pipe products throughout the United States. The organization is divided into four geographic territories each managed by a regional sales manager. International orders are sold directly by U.S. Pipe sales personnel as well as an extensive number of representatives principally in Central and South America and the Middle East.

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        U.S. Pipe products are sold primarily to contractors, water works distributors, municipalities, private utilities and other governmental agencies. A substantial percentage of ductile iron pressure pipe orders result from contracts that are bid by contractors or directly issued by municipalities or private utilities. An increasing portion of ductile iron pressure pipe sales is made through independent water works distributors. U.S. Pipe maintains numerous supply depots in leased space throughout the country, which are used as a source of pipe for start-up projects, to support ongoing projects and to aid in completing projects.

        During 2002, U.S. Pipe implemented a new ERP System, revising the method of calculating order backlog. The estimated order backlog consists of pressure pipe, valves and hydrants, fittings and castings. Backlog calculated under the revised method at December 31, 2002 was $66 million, compared to $75 million at December 31, 2001. The ductile iron pipe business is generally sensitive to economic recession because of its partial dependence on the level of new construction activity and state, municipal and federal tax revenues to fund water projects. However, certain aspects of U.S. Pipe's operations have in the past helped to reduce the impact of downturns in new construction. First, U.S. Pipe's products have experienced a strong level of demand in the replacement market, in part driven by mandates from the Safe Drinking Water Act. U.S. Pipe believes that growth of the replacement market will accelerate as a result of anticipated major expenditures by government entities, such as the New York, Boston, Washington, D.C., Atlanta and Philadelphia municipalities, to rehabilitate aging or inadequate water transmission systems. U.S. Pipe believes that this represents a significant growth opportunity and that it is well positioned to take advantage of this opportunity. Second, U.S. Pipe's Burlington, New Jersey plant is adjacent to the northeastern market with its significant replacement potential and its operations in the south are located in areas of steady economic growth. The west coast, served by the Union City, California plant, has a critical shortage of water for many of the large metropolitan areas that will require major transmission pipelines in the future. Because freight costs for pipe are high, locations close to important markets lower transportation costs, thereby making U.S. Pipe's products more competitive. During 2002, approximately 20% of U.S. Pipe's sales were to one customer. Foreign sales accounted for approximately 4% of sales during the year.

JW Aluminum Company

        Founded in 1980, JW Aluminum Company ("JW Aluminum") is headquartered in Mt. Holly, South Carolina and is a leading producer of fin stock (used in heating and air conditioning applications) and building sheet products. JW Aluminum's other foil and sheet products are used in a variety of applications such as lithoplate for newspapers and as a facer on foam insulation products. Aluminum sheet products are primarily used for general building applications such as siding, gutters, downspouts, roofing, mobile home siding and skirting, residential siding and window components. Products are marketed to original equipment manufacturers by a direct sales force. In the years ended December 31, 2002 and 2001, the transition period ended December 31, 2000 and the year ended May 31, 2000, net sales and revenues amounted to $202.1 million, $193.0 million, $128.1 million and $221.6 million, respectively. Approximately 209 million pounds of aluminum products were sold during 2002: 52% foil products and 48% sheet products.

Other

        The Industrial Products segment also includes foundry patterns and resin-coated sand products for the iron industry, tooling molds, custom machined components and cast iron products, principally municipal castings and fireplace tools and accessories.

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Carbon and Metals

        The Carbon and Metals segment consists of Applied Industrial Materials Corporation ("AIMCOR") and Sloss Industries Corporation ("Sloss"). AIMCOR consists of two divisions: the Carbon Group and the Metals Group. Through its Carbon Group, AIMCOR is a leading international provider of carbon products and value-added outsourcing services to the petroleum, steel, foundry, cement and aluminum industries. Through its Metals Group, AIMCOR is also a leading supplier of ferrosilicon in the southeastern United States. Sloss supplies carbon products to ductile iron pipe foundries, as well as to the domestic steel industry.

AIMCOR Carbon

        In the years ended December 31, 2002 and 2001, the seven-month transition period ended December 31, 2000 and the year ended May 31, 2000, net sales and revenues for AIMCOR Carbon amounted to $347.3 million, $344.8 million, $190.8 million and $276.8 million, respectively.

        AIMCOR Carbon markets petroleum coke ("petcoke") in three different quality types. Petcoke with a general specification for sulfur of less than 4% is used in the steel/foundry, chemical, cement, metallurgical or special fuel applications. AIMCOR Carbon personnel are responsible for the procurement, marketing and sale of this type of petcoke in addition to processing, storage, screening, blending and customized delivery. Petcoke with a general specification for sulfur of above 4% is sold primarily as a fuel to the cement industry and for utilities in the U.S. and worldwide market. AIMCOR Carbon personnel are also responsible for the procurement, marketing and sale of this type of petcoke. The third type, calcined petroleum coke is created through a heat-treating process, which drives moisture and gaseous materials from raw petroleum coke. Calcined petroleum coke is used as the main carbon source for anodes in aluminum smelting, and is also used in the titanium pigment, steel and foundry industries. AIMCOR markets and distributes raw petcoke for calcination and also markets and distributes the calcined petcoke supplied from calciners. The Carbon Group also performs (on a service contract basis) value-added services such as cutting, blending, inventory management, stock piling and removal of petcoke in the refinery, as well as handling, warehousing and distribution and shipping of petcoke from the refinery to a bulk terminal and ultimately to the end user.

        The Carbon Group purchases petcoke primarily from oil refiners. Petcoke is a coal-like, high carbon by-product of the refining process. By combining and processing the petcoke produced by several refineries, AIMCOR is able to custom blend and market large quantities of consistent quality petcoke, thereby creating a more marketable product than an individual refiner could produce on its own. Petcoke is used in industrial furnaces, cement kilns, steel plants, foundries, paper mills, co-generation plants and home heating. AIMCOR is one of the largest suppliers to the worldwide petcoke market, shipping approximately 4.0 million metric tons of petcoke annually.

        AIMCOR maintains relationships with all major United States oil refiners and has an in-depth knowledge of the end-user markets. In addition, through a joint venture relationship, AIMCOR also has established a relationship as sole supplier of raw petcoke and purchaser of refined calcined petcoke with a major Indian calciner, Rain Calcining Ltd. ("Rain") in which AIMCOR has a 5% equity interest. See Note 20 of "Notes to Consolidated Financial Statements."

        AIMCOR markets petcoke through a combination of its internal sales force and its strategically located shipping terminals throughout the world. AIMCOR's principal shipping locations are located in Long Beach, California; Texas City, Texas; Rotterdam, the Netherlands; Ghent, Belgium; and Red Car, United Kingdom. AIMCOR's sales offices market petcoke through an international network of 13 offices located in ten countries, including the Netherlands, Germany, England, Japan, Mexico, Brazil, Belgium, Egypt, Australia, and the U.S. AIMCOR maintains direct relationships with end-users through its 22 person sales force (6 domestic, 16 international). This approach allows AIMCOR to evaluate the customer's needs and enables AIMCOR to develop the optimum petcoke quality that meets the customer's specifications. For the period ended December 31, 2002, approximately 38% of AIMCOR

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Carbon revenues represented sales by AIMCOR Carbon's foreign operations to foreign customers and approximately 42% of AIMCOR Carbon revenues represented sales from the U.S. to foreign customers.

AIMCOR Metals

        AIMCOR's Metals Group is a leading manufacturer and marketer of ferrosilicon in the southeastern United States and is a producer and distributor of a variety of ferroalloys, metals, minerals and specialty materials used primarily as alloying agents, fluxing agents and/or performance improvement additives in steelmaking and metal casting production processes in North American foundry and steel industries. A ferroalloy is a refined combination of iron and one key element.

        The Metals Group manufactures and markets ferrosilicon, ferrovanadium, ferromolybdenum, metallurgical process materials, fluorspar and various other ferroalloys on both an agency and trading basis. AIMCOR's ferrosilicon business is conducted through Tennessee Alloys Company, a joint venture between AIMCOR (75%) and Allegheny Technologies, Inc. (25%), a major specialty steel producer.

Sloss Industries

        Sloss is a manufacturing operation, founded in 1918 and headquartered in Birmingham, Alabama, which has four major product lines: foundry coke, furnace coke, slag fiber and specialty chemicals. Foundry coke is marketed to ductile iron pipe plants and foundries producing castings, such as for the automotive and agricultural equipment industries. For the year ended December 31, 2002, approximately 60% of the foundry coke produced by Sloss was sold to U.S. Pipe. Furnace coke is sold primarily to the domestic steel industry for producing steel in blast furnaces. Slag fiber is an insulating fiber utilized principally as a raw material by acoustical ceiling tile manufacturers. Specialty chemical products are composed primarily of rubber additives, plastics additives, pharmaceutical raw materials, and nutraceutical components, as well as other custom manufactured products.

Natural Resources

Jim Walter Resources, Inc.

        The operations of Jim Walter Resources, Inc. ("JWR") are conducted through its Mining Division, which mines and sells coal from three mines in Alabama, and its De-Gas Division, which extracts and sells methane gas from the coal seams owned or leased by JWR.

Mining Division

        In the years ended December 31, 2002 and 2001 and the transition period ended December 31, 2000, Mining Division's net sales and revenues totaled $221.0 million, $197.8 million and $139.5 million, respectively. In the year ended May 31, 2000, Mining Division's net sales and revenues totaled $207.1 million.

        The Mining Division, headquartered in Brookwood, Alabama, has approximately 7.0 million tons of rated annual coal production capacity from three mines located in west central Alabama between the cities of Birmingham and Tuscaloosa. The Mining Division extracts coal primarily from Alabama's Blue Creek and Mary Lee seams, which contain high-quality bituminous coal. Blue Creek coal offers high coking strength with low coking pressure, low sulfur and low-to-medium ash content with high BTU values and can be sold either as metallurgical coal, used to produce coke, or as compliance steam coal, used by electric utilities because it meets current environmental compliance specifications.

        The majority of coal is mined using longwall extraction technology with development support from continuous miners. By replacing more traditional methods of underground mining with longwall technology, the Mining Division has achieved greater production efficiency, improved safety, higher coal recovery and lower production costs. The Mining Division currently operates three longwall mining

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systems for primary production and nine continuous miner sections for the development of mains and longwall panel entries. The Mining Division's normal operating plan is a longwall/continuous miner production ratio of approximately 80% / 20%.

        Environmental expenditures imposed by laws relating to mining have been insignificant to date and no substantial expenditures are expected in the future. The Mining Division does not engage in any surface mining.

        The Mining Division's coal is sold to a diversified base of domestic and foreign customers. In the United States, Alabama Power Company ("Alabama Power") is one of the division's major customers for low-sulfur steam coal. In January 1998, JWR entered into an agreement to supply coal to Alabama Power from January 1, 2000 to December 31, 2005. Under the agreement, Alabama Power agreed to purchase approximately 1.5 million tons of coal per year from JWR. In June 2001, the contract was amended to increase this tonnage to 1.8 million tons per year. The division's metallurgical coal is sold to customers in numerous markets throughout Europe, Latin America and the Middle East. Most metallurgical coal sales are made under supply contracts, negotiated in March through June of each year, for fixed prices that are typically one year in length. However, some sales, of both metallurgical and steam coal, are conducted in the spot market as dictated by available JWR supply and market demand.

De-Gas Division

        The De-Gas Division, headquartered in Brookwood, Alabama, extracts and sells methane gas from the coal seams owned or leased by JWR, primarily through Black Warrior Methane Corp., an equal joint venture with El Paso Production Co., a subsidiary of El Paso Corp. ("El Paso").

        The original motivation for the joint venture was to increase safety in JWR's Blue Creek mines by reducing methane gas concentrations with wells drilled in conjunction with the mining operations. There were 384 wells producing approximately 20 billion cubic feet per year (JWR's 50% interest is 10 billion cubic feet per year) as of December 2002. Approximately 35 additional wells are planned for development in 2003. The degasification operation, as originally expected, has improved mining operations and safety by reducing methane gas levels in the mines, and has developed into a profitable operation.

Seasonality

        Certain of the businesses of the Company are subject to seasonal fluctuations to varying degrees. Sales for U.S. Pipe and JWH are usually their lowest in the winter months due to weather and the level of construction activity. Sales for JW Aluminum usually peak in the spring and early summer associated with the level of sales of fin stock product to heating and air conditioning manufacturers. The businesses of the Company may also be significantly influenced by the general economy and, in particular, interest rates, levels of construction activity and commodity prices.

Trade Names, Trademarks and Patents

        The names of each of the Company's subsidiaries are well established in the respective markets served by them. Management believes that customer recognition of such trade names is of significant importance. The Company's subsidiaries have numerous patents and trademarks. Management does not believe, however, that any one such patent or trademark is material to the Company's individual segments or to the business as a whole.

Research and Development

        Research activities conducted by each business are directed toward new products, improvement of existing products, development of new uses for existing products, process and systems development, and

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cost reduction efforts. Total research and development expenditures for all of the businesses in the years ended December 31, 2002 and 2001, the transition period ended December 31, 2000 and the fiscal year ended May 31, 2000 were less than 1% of the Company's consolidated net sales and revenues.

Raw Materials

        Substantially all of the raw materials needed for the operations of the Company and its subsidiaries are either purchased from domestic sources or produced by the Company and its subsidiaries. All materials used by the various businesses of the Company are available in quantities required to support their respective operations. Availability and the cost of raw materials may have a significant influence over the revenues and costs of the Company. Costs potentially having a significant influence on the Company include costs for building materials, scrap iron, scrap aluminum and petroleum coke. Changes in prices for petroleum coke (which generally fluctuate with solid fuel prices) and primary aluminum have a direct impact on the reported sales and costs of goods sold of AIMCOR Carbon and JW Aluminum, respectively. However, AIMCOR Carbon's gross profit and operating margins are generally more impacted by volumes sold, supply and demand, competition, how quickly sales prices can be adjusted for commodity cost changes, and other factors, than by the actual changes in the underlying commodity prices themselves. JW Aluminum's gross profit is not typically affected by changes in the purchase price of primary aluminum, which are passed-through directly to customer, which negates the impact of aluminum price fluctuations. While these factors also impact the other businesses of the Company, the affect on these subsidiaries is more pronounced because of the larger relative amount of their costs comprised of the underlying commodity cost.

Environmental

        The Company and its subsidiaries are subject to a wide variety of laws and regulations concerning the protection of the environment, both with respect to the construction and operation of many of its plants, mines and other facilities, and with respect to remediating environmental conditions that may exist at its own and other properties. The Company believes that it and its subsidiaries are in substantial compliance with federal, state and local environmental laws and regulations. Expenditures charged to the statement of operations for compliance of ongoing operations and for remediation of environmental conditions arising from past operations in the years ended December 31, 2002 and 2001, the transition period ended December 31, 2000 and for the fiscal year ended May 31, 2000 were approximately $5.8 million, $7.8 million, $3.9 million and $7.8 million, respectively. Because environmental laws and regulations continue to evolve, and because conditions giving rise to obligations and liabilities under environmental laws are in some circumstances not readily identifiable, it is difficult to forecast the amount of such future environmental expenditures or the effects of changing standards on future business operations. Consequently, the Company can give no assurance that such expenditures will not be material in the future. Capital expenditures for environmental requirements are anticipated to average approximately $3.0 million per year in the next five years.

        U.S. Pipe has implemented an Administrative Consent Order ("ACO") for its Burlington, New Jersey plant that was required under the New Jersey Environmental Cleanup Responsibility Act (now known as the Industrial Site Recovery Act). The ACO required soil and ground water cleanup. U.S. Pipe has completed, and has received final approval on the soil cleanup required by the ACO. U.S. Pipe is continuing to address ground water issues at this site. Further remediation could be required. These remediation costs are expected to be minimal. Long term ground water monitoring will be required to verify natural attenuation. It is not known how long ground water monitoring will be required. Management does not believe any further cleanup costs will have a material adverse effect on the financial condition or results of operations of the Company and its subsidiaries.

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        The Federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), generally imposes liability, which may be joint and several and is without regard to fault or the legality of waste generation or disposal, on certain classes of persons, including owners and operators of sites at which hazardous substances are released into the environment (or pose a threat of such release), persons that disposed or arranged for the disposal of hazardous substances at such sites, and persons who owned or operated such sites at the time of such disposal. CERCLA authorizes the Environmental Protection Agency ("EPA"), the States and, in some circumstances, private entities to take actions in response to public health or environmental threats and to seek to recover the costs they incur from the same classes of persons. Certain governmental authorities can also seek recovery for damages to natural resources. Currently, U.S. Pipe has been identified as a potentially responsible party ("PRP") by the EPA under CERCLA with respect to cleanup of hazardous substances at two sites to which wastes allegedly were transported or deposited. U.S. Pipe is among many PRPs at such sites and management believes the extent of U.S. Pipe's involvement, if any, to be minor in relation to that of other named PRPs, a significant number of which are substantial companies. An agreement has been reached with the EPA and a Consent Order, signed by U.S. Pipe and the EPA, has been submitted to a California federal court respecting one of the sites. Claims respecting that same site have now also been made by the State of California, but U.S. Pipe as a member of the same group of PRPs believes it has adequate first dollar insurance coverage covering the State's claims. With respect to the other site, U.S. Pipe has advised the EPA that, according to its records, U.S. Pipe does not believe it ever transported hazardous substances to the site in question, and no response has been received from the EPA.

        Sloss Industries entered into a consent order in 1989 relative to a RCRA (Resource Conservation Recovery Act) compliance program mandated by EPA. An RFI (RCRA Facility Investigation) Work Plan was prepared which proposed investigative tasks to assess the presence/absence of contamination at the Sloss facility. The Work Plan was approved in 1994 and the Phase I investigations were conducted and completed between 1995 and 1999. Phase II investigations for the Chemical Plant/Coke Plant and Biological Treatment Facility and Sewers/Land Disposal Areas were performed in 2000 and 2001 and are substantively complete. An Interim Remedial Measure (IRM) Work Plan for the Chemical Plant groundwater, which has been presented to the EPA, will be implemented during 2003 and is expected to be completed in 2004. The RFI program, relative to monitoring requirements, will continue on a long-term basis, with remedial requirements declining annually because of the significant progress made by Sloss in the fourteen years since the Consent Order was signed. The United States Environmental Protection Agency, the Alabama Department of Environmental Management, and the Jefferson County Department of Health have alleged that Sloss has allowed discharges in excess of permitted limits and violated certain reporting requirements. These matters are currently under negotiation.

        Although no assurances can be given that the Company's subsidiaries will not be required in the future to make material expenditures relating to these or other sites, management does not believe at this time that the cleanup costs, if any, associated with these or other sites will have a material adverse effect on the financial condition or results of operations of the Company and its subsidiaries.

Employees

        As of December 31, 2002, the Company and its subsidiaries employed approximately 6,326 people, of whom 3,824 were hourly workers and 2,502 were salaried employees. Unions represented approximately 2,903 employees under collective bargaining agreements, of which approximately 1,022 were covered by one contract with the United Mine Workers of America, which expires on December 31, 2006.

        On December 7, 2001, Sloss union employees initiated a work stoppage after joint efforts to establish a new labor agreement were unsuccessful. Sloss continued to operate the Coke plant at reduced levels until August 9, 2002, when a union agreement was reached. The work stoppage had no material impact on the financial performance of Sloss.

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Item 2. Description of Property

        The administrative headquarters and manufacturing facilities of the Company and its subsidiaries are summarized as follows:

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        Recoverable coal reserves assigned to currently operating mines were estimated to be approximately 164 million tons as of December 31, 2002.

        A summary of mineral reserves, as calculated by Natural Resources' Mine Planning and Engineering department, is as follows:

ESTIMATED RECOVERABLE(1) COAL RESERVES AS OF DECEMBER 31, 2002
(In Thousands of Tons)

(1)

"Recoverable" reserves are defined as tons of mineable coal in the Blue Creek and Mary Lee seams which can be extracted and marketed after a deduction for coal to be left in pillars, etc. and adjusted for reasonable preparation and handling losses.

(2)

"Assigned" reserves represent coal which has been committed by JWR to its operating mines and plant facilities. "Unassigned" reserves represent coal which is not committed to an operating mine and would require additional expenditures to recover. The division of reserves into these two categories is based upon current mining plans, projections and techniques.

(3)

The recoverable reserves are the sum of "Measured" and "Indicated" resources. Measured coal extends ¹/4 mile from any point of observation or measurement. Indicated coal is projected to extend from ¹/4 mile to ³/4 mile from any point of observation or measurement. Inferred coal extends from ³/4 mile to 3 miles from any point of observation or measurement. Inferred reserves are not included in recoverable reserves.

(4)

All of the coal in the Blue Creek and Mary Lee seams is suitable for metallurgical purposes although, for marketing reasons, some is sold as compliance steam coal.

(5)

Leases are renewable until the reserves are mined to exhaustion or are of sufficient duration to permit mining of all of the reserves before the expiration of the term.

(6)

Production for 2002 and 2001 is for the years ended December 31, 2002 and 2001. Production for 2000T is for the seven month transition period ended December 31, 2000. Production for 2000 is for the fiscal year ended May 31, 2000.

(7)

In February 1999, a decision was made to shut down No. 3 Mine. The No. 3 Mine reserves accessible from No. 7 Mine were re-assigned to No. 7 Mine.

(8)

Bessie Mine suspended operations in August 1988.

(9)

In 2001, total reserves reported were 200,333 tons compared to 164,968 tons. Mine No. 5 decreased from 16,638 tons to 6,369 tons as the Company determined certain tonnage was not economically recoverable due to higher costs required to extract coal from certain areas of the mine. Bessie decreased from 24,919 tons in 2001 to 658 tons as the Company allowed a lease to expire as the Company no longer plans to mine this property. In January, 2003, the Company entered into an agreement with a land owner which increases the net tons available to economically mine in Mine No. 4 and Mine No. 7 by 14,176 tons and 3,612 tons, respectively.

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Item 3. Legal Proceedings

        See the section entitled "Environmental" in Management's Discussion and Analysis and Notes 10 and 16 of "Notes to Consolidated Financial Statements" included herein.

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

None.

Executive Officers of the Registrant

        Set forth below is a list showing the names, ages and positions of the executive officers of the Company.

        Don DeFosset was appointed President and Chief Executive Officer on November 2, 2000 and elected a Director on November 6, 2000. He was appointed to the additional position as Chairman of the Board of Directors on March 1, 2002. He served as Executive Vice President and Chief Operating Officer of Dura Automotive Systems, Inc. from 1999 through October 2000. From 1996 to 1999, he was Executive Vice President and President—Truck Group of Navistar International Transportation Corporation. From 1993 to 1996, he was President—Safety Restraint Systems division of AlliedSignal, Inc. He is also a Director of Terex Corporation and Safelite Glass Corp.

        William F. Ohrt was appointed Executive Vice President and Chief Financial Officer of the Company in January 2001. Prior thereto, he was Vice President and Chief Financial Officer of Dura Automotive Systems, Inc. from December 1999 through January 2001. From April 1998 to December 1999, he was Vice President and Chief Financial Officer—Truck Group of Navistar International Transportation Corporation. From May 1997 to April 1998, he was Vice President-Finance of ITT Automotive Electrical Systems. From February 1979 to May 1997, he held various financial positions within AlliedSignal, Inc., culminating with the position of Vice President-Finance of AlliedSignal Turbocharging Systems (December 1995 to May 1997).

        Charles E. Cauthen was appointed Senior Vice President and Controller in November 2000. Prior thereto, he was Senior Vice President and Chief Financial Officer—Consumer Products Group, Bank of America, from October 1999 to November 2000. From October 1997 to October 1999, he was Senior Vice President and Chief Financial Officer—Consumer Finance Group, Bank of America. From

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October 1992 to October 1997, he was Director-Strategic Planning and Corporate Development, Barnett Banks, Inc.

        Victor Patrick was appointed Senior Vice President, General Counsel and Secretary of the Company in August 2002. Prior to joining the Company, he worked for Honeywell International from November 1994 to July 2002, most recently as Vice President, Secretary and Deputy General Counsel.

        Joseph J. Troy was appointed President of Mid-State Homes in August 2001. Prior thereto, he was Senior Vice President and Treasurer of the Company in November 2000. He was Executive Vice President and Chief Financial Officer of Gold Standard Multimedia from February 2000 to November 2000. From March 1998 through February 2000, he was Vice President and Treasurer of the Company. Previously, he was employed by NationsBank as Senior Vice President—Corporate Finance (1993-1998).

        Larry E. Williams was appointed Senior Vice President, Human Resources in November 2001. Previously, he was Senior Vice President/Human Resources for CoBank from 1989 to 2001.

        Miles C. Dearden was appointed Vice President, Treasurer in April 2002. Previously, he was Assistant Treasurer in 2001. Prior to joining the Company, he worked for Bank of America from 1987 until 2001, most recently as a managing director for the bank's Healthcare Finance Group.

        George R. Richmond was appointed President and Chief Operating Officer of Jim Walter Resources in June 1997. Previously, he served as Senior Vice President of Operations (since 1993) of Jim Walter Resources.

        Gerard M. Sweeney was appointed President and Chief Executive Officer of AIMCOR in July 2000. Previously, he was President of AIMCOR's Carbon Group (June 2000), Vice President and General Manager of the Carbon Specialties Group (January 1998 to June 2000), Director and General Manager of the Calcined Specialties Group (January 1996 to January 1998).

        Michael Roberts was appointed President of Jim Walter Homes in August 2001. From February 2001 to August 2001 he was Executive Vice President and Chief Operating Officer of Jim Walter Homes. From September 2000 to February 2001 he served as Executive Vice President. Previously, he was Senior Vice President of Field Operations with Jim Walter Homes (April 1998 to September 2000), Senior Vice President of Construction-Jim Walter Homes (August 1992 to April 1998), and Vice President of Construction since 1975.

        Brad Kitterman was appointed President of U.S. Pipe in January 2003. Prior to joining the Company, from 1998 to 2002, he was President of the North American Utilities Division for Schlumberger Ltd., which specializes in providing oil and gas services. Prior thereto, he held various positions at Schlumberger since 1989.

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PART II

Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters

        The Company's common stock (the "Common Stock") has been listed on the New York Stock Exchange under the trading symbol "WLT" since December 18, 1997. Previously, the Common Stock had been listed on the Nasdaq National Market ("WLTR") since October 11, 1995. The table below sets forth, for the fiscal periods indicated, the range of high and low closing sales prices of the Common Stock.

        During the year ended December 31, 2002, the Company declared and paid to shareholders of record on February 20, May 15, August 15 and November 21 a dividend of $.03 per share on each of these dates. During the year ended December 31, 2001, the Company declared and paid to shareholders of record on May 16, August 15, and November 17, 2001, a dividend of $.03 per share on each of these dates. Additionally, the Company declared and paid a $.04 per share dividend to shareholders of record on February 15, 2001. The $.04 per share dividend reflected a one-time, non-recurring adjustment to the Company's regular dividend rate of $.03 per share because of a one-time dividend period of four months due to the change in fiscal year end. Covenants contained in certain of the debt instruments referred to in Note 11 of "Notes to Consolidated Financial Statements" may restrict the amount the Company can pay in cash dividends.

        As of February 1, 2003, there were 229 shareholders of record of the Common Stock.

        The following table sets forth certain information relating to our equity compensation plans as of December 31, 2002:

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Item 6. Selected Financial Data

        The following data, insofar as it relates to each of the fiscal years ended May 31, 1998 through 2000, the transition period ended December 31, 2000 and the years ended December 31, 2002 and 2001, has been derived from annual consolidated financial statements, including the consolidated balance sheets and the related consolidated statements of operations, changes in stockholders' equity and cash flows and the notes thereto. All of the information presented below should be read in conjunction with the Company's consolidated financial statements and the notes thereto, and the other information contained elsewhere in this report.

*

First quarter was $0.04

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

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

        Management's discussion and analysis is based on, and should be read in conjunction with, the consolidated financial statements and notes thereto, particularly Note 18 of "Notes to Consolidated Financial Statements" which presents net sales and revenues and operating income by operating segment. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in these financial statements or disclosed in the related notes thereto. Management evaluates these estimates and assumptions on an ongoing basis, utilizing historical experience, consultation with experts and other methods considered reasonable in the particular circumstances. Nevertheless, actual results may differ significantly from management's estimates under different assumptions and conditions.

        Management believes the following discussion addresses the Company's most critical accounting policies, which are those that are most important to the portrayal of the Company's financial condition and results and require management's most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

        Revenue is generally recognized when products are shipped or services are provided to customers. Revenue from the construction and sale of a home is included in income upon completion of construction and legal transfer of ownership to the customer. Time charges are recognized using the interest method. Instalment note payoffs received in advance of scheduled maturity (prepayments) cause time charge income to increase due to the recognition of remaining unamortized discounts arising from the application of ABP 21 at the note's inception. Instalment notes are placed on non-accrual status when any portion of the principal or time charges is ninety days past due. When placed on non-accrual status, the related time charges receivable is reversed against time charges of the current period. Instalment notes are removed from non-accrual status when principal and time charges become current. Recoveries of advanced taxes and insurance related to instalment notes are recognized as income when collected. For the Company's methane gas operations, revenues are recognized when the gas has been transferred to the customers' pipeline, at which time transfer of title occurs. Revenue earned by shipping cargo by ocean vessel is recognized under international shipping standards as defined by Incoterms 2000, when title and risk of loss transfer to the customer. Given the diversity of the Company's businesses, many transactions have unique characteristics, which have to be analyzed on a case-by-case basis. This diversity of products and contracts can lead to variations in the timing of income recognition. However, most transactions are not individually significant, nor could they materially impact earnings.

        Allowances for losses on instalment notes and trade and other accounts receivables are based, in large part, upon judgments and estimates of expected default rates on the pool of homogeneous instalment notes and specific identification of problem trade accounts and other receivables. Significantly weaker than anticipated economic conditions could impact customers' ability to pay or could impact the value of underlying collateral such that actual losses are greater than the amounts provided for in these allowances. See Notes 5 and 6 of "Notes to Consolidated Financial Statements."

        The Company provides a range of benefits to its employees and retired employees, including pensions and postretirement healthcare. The Company records annual amounts relating to these plans based on calculations specified by generally accepted accounting principles, which include various actuarial assumptions such as discount rates (7.25%), assumed rates of return (9.25%), compensation increases (3.5%), turnover rates and healthcare cost trend rates (11.5% annual rate of increase in the per capita cost of covered healthcare benefits, decreasing gradually to 5% in 2008 and remaining level thereafter). The discount rate is based on a model portfolio of AA rated bonds with a maturity

19

matched to the estimated payouts of future pension benefits. The expected return on plan assets is based on the Company's expectation of the long-term average rate of return on assets in the pension funds, which was modeled based on the current and projected asset mix of the funds and considering the historical returns earned on the type of assets in the funds. The Company reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when appropriate. As required by U.S. GAAP, the effects of the modifications are amortized over future periods. Based on information provided by its independent actuaries and other relevant sources, the Company believes that the assumptions used are reasonable.

        Assumed health care cost trend rates, discount rates, expected return on plan assets and salary increases have a significant effect on the amounts reported for the pension and health care plans. A one-percentage-point change in the trend rate for these assumptions would have the following effects (in thousands):

        The Company also has significant liabilities for uninsured or partially insured employee-related liabilities, including workers compensation liabilities, miners' Black Lung benefit liabilities and liabilities for various life and health benefits. The recorded amounts of these liabilities are based on estimates of loss from individual claims and on estimates determined on an actuarial basis from historical experience. Workers compensation and Black Lung benefit liabilities are also affected by discount rates used. Changes in the frequency or severity of losses from historical experience, changes in discount rates or actual losses on individual claims that differ materially from estimated amounts could affect the recorded amount of these liabilities. A one-percentage-point increase in the discount rate on the discounted workers' compensation liability would decrease the liability by $2.4 million, while a one-percentage-point decrease in the discount rate would increase the liability by $0.8 million. A one-percentage-point increase in the discount rate on the discounted Black Lung liability would decrease the liability by $1.5 million, while a one-percentage-point decrease in the discount rate would increase the liability by $2.0 million.

        Indefinite lived assets are reviewed annually for impairment. The fair value of each of the Company's reporting units was individually determined using valuation models reflecting the expected future cash flow projections related to each reporting unit, which were discounted using a risk-adjusted discount rate and adjusted for comparable industry earnings multiples. The Company's reporting units are similar, although not identical, to its reporting segments. This analysis indicated that the AIMCOR reporting units' carrying value, including its tax deductible goodwill, exceeded its fair value. The

20

Company then determined that the carrying value of the AIMCOR reporting units' goodwill exceeded the fair value of its goodwill by $201 million. This goodwill impairment resulted from a change in the profitability of the business since its acquisition due to increased competition and eroding industry margins.

        The Company is involved in litigation, investigations, and claims arising out of the normal conduct of its business, including those relating to commercial transactions, as well as to environmental, health and safety matters. The Company estimates and accrues its liabilities resulting from such matters based on a variety of factors, including outstanding legal claims and proposed settlements; assessments by internal and external counsel of pending or threatened litigation; and assessments by environmental engineers and consultants of potential environmental liabilities and remediation costs. The Company believes it has adequately accrued for these potential liabilities; however facts and circumstances may change that could cause the actual liability to exceed the estimates, or that may require adjustments to the recorded liability balances in the future.

        As discussed in Note 10 of "Notes to Consolidated Financial Statements," the Company is in dispute with the Internal Revenue Service (the "IRS") on a number of federal income tax issues. The Company believes that its tax filing positions have substantial merit and it intends to vigorously defend these positions. The Company has established reserves that it feels are sufficient to address claims, including related interest and penalties, where its defense may be unsuccessful or where a settlement of issues may be warranted. The amount of the reserve is based on an assessment by management of both the probability and extent of loss, in consultation with outside advisors, for each of the disputed issues involved. Since the issues involved are highly complex, are subject to the uncertainties of extensive litigation and/or administrative processes and may require an extended period of time to reach ultimate resolution, it is possible that management's estimate of this liability could change.

        Installment notes receivable from the sale of JWH's homes are initially recorded at the discounted value of the future instalment note payments using an imputed interest rate in accordance with APB Opinion No. 21, "Interest on Receivables and Payables." The imputed interest rate used represents the estimated prevailing market rate of interest for credit of similar terms issued to customers with similar credit ratings to JWH's customers. The Company estimates this rate by adding a credit spread and a margin to cover costs and expected losses to a benchmark funding rate. This rate is periodically compared to rates charged by competitors and other lenders to customers of similar credit quality to validate that the methodology results in a market rate of interest. These estimates affect revenue recognition by impacting the allocation of income between the amount recognized from the construction of the home and the amount recognized over the life of the instalment note as time charge income. Variations in the estimated market rate of interest used to initially record instalment notes receivable could affect the timing of income recognition.

RESULTS OF OPERATIONS

Year Ended December 31, 2002 and 2001

        Net sales and revenues for the year ended December 31, 2002 were $1.943 billion, an increase of $23.3 million from the year ended December 31, 2001. Revenue increases within the Homebuilding, Carbon and Metals, and Financing segments were partially offset by decreases in the Industrial Products and Natural Resources segments. Homebuilding revenues improved on increased unit completions and a higher average selling price. Carbon and Metals revenues increased due to increased volumes and pricing in specialty metals and furnace coke. Financing revenues increased primarily due to higher prepayment speeds. Industrial Products revenue decreased due to a decrease in shipments of ductile iron pipe during 2002, reflecting the impact the national recession had on demand for these products, combined with lower pricing due to intense pricing competition within the industry. Revenues were lower in Natural Resources due to a decline in natural gas prices, a $12.2 million federal excise

21

tax refund claim related to coal export sales recognized in the prior year, and the impact of the 2001 Mine No. 5 accident.

        Cost of sales, exclusive of depreciation, of $1.395 billion was 82.0% of net sales in the 2002 period versus $1.334 billion and 80.1% of net sales in the comparable period of 2001. The increase of $61.4 million is primarily due to an increase in completed homes within the Homebuilding segment, higher petroleum coke costs in Carbon and Metals, higher production costs and higher scrap iron prices in Industrial Products, partially offset by reduced volumes in the Industrial Products segment and productivity improvements of $60 million in 2002, compared to $49 million in 2001 (reflected in both cost of sales and selling, general and administrative expenses). The cost reductions and productivity improvements realized in 2001 and 2002 came from the elimination of manufacturing waste, improvements in yield, process improvements and simplifications, restructuring efforts in 2001 and other workforce reductions. In 2001, cost of sales reflects a $5.1 million reduction in the liability for Black Lung benefits in the Natural Resources segment.

        Depreciation for the year ended December 31, 2002 was $65.7 million, an increase of $4.3 million from the same period in 2001 due primarily to increases at Industrial Products related to the implementation of new software ($1.1 million) and at Natural Resources for new equipment purchased following the accident at Mine No. 5.

        Selling, general and administrative expenses were $189.6 million in 2002, compared to $188.9 million in 2001. The slight increase in expenses for 2002 was primarily due to a $2.6 million charge to bad debt expense related to a Carbon and Metal's customer that filed for bankruptcy protection, an increase in professional fees related to converting time charge income to the interest method early in the year, continued expansion into new homebuilding markets and higher legal and other professional expenses in Industrial Products and in Corporate functions. These increases were substantially offset by decreases related to various productivity and cost reduction projects in place throughout the Company including a 27% reduction in corporate headquarters staff in 2001. The 2001 expense reflects a $1.7 million charge to provide a legal reserve for an adverse verdict against one of the Company's subsidiaries in a contract dispute, offset by a $3.0 million reduction in the allowance for losses on trade receivables for the Natural Resources segment.

        Provision for losses on instalment notes increased to $12.4 million in the 2002 period, compared to $11.0 million in 2001 due to slightly higher levels of losses on resales of repossessed homes.

        Interest and amortization of debt expense was $154.0 million in the 2002 period, a decrease of $17.6 million from the same period in 2001 primarily due to lower interest rates and reduced borrowings. The average rate of interest for the year ended December 31, 2002, was 7.0% as compared to 7.5% for the year ended December 31, 2001.

        Amortization expense for goodwill and other intangibles was $7.2 million in the 2002 period, compared to $37.0 million from the same period in 2001. The decrease of $29.8 million was due to the adoption of FAS No. 142 "Goodwill and Other Intangible Assets" as of January 1, 2002 which requires the discontinuance of amortization for all goodwill and indefinite-lived intangible assets.

        The Company's effective tax rate for the year ended December 31, 2002 of 28% differed from the federal statutory tax rate primarily due to a $2.8 million tax benefit related to the November 1998 sale of JW Window Components, the utilization of certain federal tax credits principally related to the Company's mining operations, and the effect of state and foreign income taxes. The $2.8 million tax benefit was from an increased capital loss carryforward due to a change in the consolidated return loss disallowance rules, which favorably affected the Company's previous treatment of the November 1998 sale of JW Window Components. The effective tax rate for the year ended December 31, 2001 of 46% differed from the federal statutory tax rate primarily due to amortization of goodwill, the utilization of certain federal tax credits, and the effect of state and foreign income taxes.

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        Results for 2002 include a $1.7 million pre-tax impairment charge to write-off certain petroleum coke handling assets at Carbon and Metals. Restructuring and impairment charges totaling $6.9 million in 2001 include a $5.5 million charge associated with the planned shutdown of certain chemical operations at Sloss and a $1.4 million charge for severance related to headcount reductions from restructurings, principally at the corporate headquarters and in the Carbon and Metals segment.

        The 2001 period included an $12.2 million federal excise tax refund credit and a $10.8 million pre-tax charge related to the coal mining accident at Natural Resources. This charge principally included costs and expenses associated with the accident and the idling of Mine No. 5 that were not covered by insurance.

        The net loss for the year ended December 31, 2002 was $52.5 million, or $1.17 per diluted share, which included a charge of $125.9 million, net of tax, or $2.81 per diluted share, from the cumulative effect of a change in accounting principle related to the transitional goodwill impairment charge associated with the initial adoption of FAS No. 142. In 2001, net income was $43.3 million, or $0.95 per diluted share, which included approximately $25.7 million, or $0.57 per diluted share, of after-tax goodwill amortization, which is no longer being expensed under FAS No. 142. On a comparable basis, before the cumulative effect of the change in accounting principle, net income for the year ended December 31, 2002 was $1.64 per diluted share, up 7.9% or $0.12 per diluted share, versus a comparable $1.52 per diluted share in the 2001 period. The current and prior period results also include the impact of the factors discussed in the following segment analysis.

Segment Analysis:

Homebuilding

        Net sales and revenues were $270.2 million for the year ended December 31, 2002, an increase of $32.6 million from the prior period. As compared to the prior year, the Company completed more homes in 2002 and had an increase in average net selling price. Average net selling price increased as a result of the Company's ongoing strategy to market and sell new product options, amenity upgrades and larger, more upscale models.

        Sales of stick built homes increased by 311 units, or 9.5% in 2002, while modular homes sales fell to 671 units in 2002, compared to 736 in the prior year.

        Operating income was $17.1 million for the year ended December 31, 2002 compared to $2.8 million in the prior year period. The $14.3 million increase was principally caused by a $9.0 million decrease in goodwill amortization, higher average selling prices and increased unit completions. Margins increased principally from cost reductions and productivity improvements.

Financing

        Net sales and revenues were $241.0 million in the 2002 period, an increase of $2.9 million from $238.0 million for the prior year period. The increase reflects a $6.3 million increase in time charge income principally resulting from increased recognition of unamortized discounts which occurs when payoffs are received in advance of maturity offset by lower portfolio yields. Operating income (net of interest expense associated with Mid-State mortgage backed debt) was $55.0 million in the 2002 period, up significantly from $48.2 million in the prior year, primarily as the result of faster prepayment speeds of 6.9% in the 2002 period compared to 6.1% in the prior year period and $2.5 million lower interest

23

expense, offset by a $1.4 million increase in the provision for losses on installment notes. Delinquencies (the percentage of amounts outstanding over 30 days past due) were 7.6% at December 31, 2002, unchanged from December 31, 2001.

        Repossession inventory units at December 31, 2002 increased to 255 units ($10.3 million), compared to 195 units ($5.8 million) at December 31, 2001.

Industrial Products

        Net sales and revenues were $691.3 million for the year ended December 31, 2002, a decrease of $25.1 million from $716.4 million for the year ended December 31, 2001. The decrease is due to a decrease in average price per ton for pipe products attributable to pricing competition within the industry, fewer ductile iron pipe shipments, and a decrease in pass-through prime metal costs for aluminum products, which were partially offset by higher aluminum shipments. The economic downturn at the beginning of the year negatively impacted sales in the first half of the year as U.S. Pipe customers deferred and delayed construction and water projects. Volumes increased during the second half of 2002 as previously delayed projects were re-started. Third and fourth quarter 2002 shipments were 7.2% and 13% higher than the comparable periods in 2001, which partially offset lower shipments during the first half of 2002. Compared to the year ended December 31, 2001, U.S. Pipe revenues were down 7.3%, average price per ton for pipe products decreased 8.3%, and pipe shipments decreased 1.5%, while aluminum shipments for the 2002 period were 12.7% higher than the 2001 period. Overall, U.S. Pipe product price reductions reduced 2002 sales compared to 2001 by $33.5 million. JW Aluminum has increased aluminum shipments by expanding their building products customer base.

        Operating income of $41.9 million for the year ended December 31, 2002 was down $13.2 million from $55.0 million for the year ended December 31, 2001. Operating income for JW Aluminum was up $8.5 million compared to 2001, primarily due to higher volumes and improved productivity. Operating income for U.S. Pipe was down $33.6 million compared to 2001. Operating income decreased due to the lower volumes and decreases of $33.5 million in prices for U.S. Pipe products, $5.8 million of higher scrap iron costs, $1.5 million of increased legal expenses and $0.9 million of severance expenses related to a 19% workforce reduction at U.S. Pipe. This was partially offset by a $10.4 million reduction in goodwill amortization, increased aluminum shipments, and improved productivity at U.S Pipe and JW Aluminum from implementation of productivity initiatives such as the Six Sigma program.

Carbon and Metals

        Net sales and revenues were $499.2 million for the year ended December 31, 2002, an increase of $13.0 million from the prior year. AIMCOR Metals revenues increased $5.8 million due to higher volumes compared to the prior year, which included the temporary shut down of a significant production plant, and a short-term market price spike in ferro molybdenum that increased revenues by $1.4 million. Sloss revenues were $3.6 million higher than 2001 as a result of higher volumes and pricing in furnace coke, which were partially offset by the closure of the Birmingham Chemical Plant and lower fiber sales in 2002. AIMCOR Carbon revenues were $2.5 million higher than prior year due to higher calcined coke pricing, which reflects a pass-through of higher product costs, and additional revenues from in-refinery services at Gulf Coast refineries, partially offset by lower volumes from renegotiated supplier contracts.

        Operating income of $12.7 million was $2.2 million below the prior year. Operating income includes a $2.6 million charge to selling, general and administrative expense as a result of a customer bankruptcy at Sloss and a pre-tax impairment charge of $1.7 million to write-off certain petroleum coke handling assets located in the Gulf Coast region. These were partially offset by an $8.6 million reduction in goodwill amortization, furnace coke volume increases and productivity improvements. Consolidation of major oil refiners and intense competition continued to put significant volume and

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margin pressures on the Carbon businesses, further reducing its operating income. A contract with a major domestic refinery expired in March 2002. Although a revised contract was negotiated, the negative impact on margins in 2002 was approximately $12.0 million associated primarily with increased costs to purchase petcoke under this revised contract. To offset these impacts, the business has been aggressively reducing costs as well as pursuing new contracts for additional volumes and new services. Prior year operating income included a $5.5 million charge associated with the shutdown of certain of the chemical operations at Sloss.

Natural Resources

        Net sales and revenues were $249.8 million for the year ended December 31, 2002, a decrease of $3.9 million from the $253.7 million in the prior year period. The decrease in net sales and revenues in the current period is attributable to a $12.2 million excise tax refund in the prior year and a decrease in methane gas selling prices, which was partially offset by an increase in coal selling prices. Although Mine No. 5 was shutdown until June 2002, longwall efficiency in Mines No. 4 and 7 increased the tons available for sale.

        The average natural gas selling prices shown reflect the impact in 2001 of approximately $8.1 million of income recognized from gains on hedges of natural gas prices placed on anticipated production and sales in early 2001.

        For the year ended December 31, 2002, Natural Resources had operating income of $22.4 million, compared to $27.3 million for the year ended December 31, 2001. Prior year operating income included a $12.2 million excise tax refund claim, a $10.8 million pre-tax charge related to the accident at Mine No. 5, a $5.1 million reduction in the liability for Black Lung benefits, and a $3.0 million reduction in the allowance for losses on trade receivables. Operating income for 2001 also included $8.1 million paid to the Company by SONAT for a natural gas reservation fee. Under the terms of the agreement, this fee was no longer paid after December 31, 2001. Excluding these items, operating income for the segment increased by approximately $12.7 million. Operating income for 2002 improved due to a 16% increase in coal selling prices, partially offset by a 4% increase in average cost per ton of coal produced resulting from inefficiencies associated with the start-up of Mine No. 5. Results also reflect a decrease in the selling price of natural gas as compared to the prior year. During the third quarter of 2002, Natural Resources returned to full production following the 2001 Mine No. 5 accident. Business interruption and property insurance covered the impact on operating results of reduced production and shipments and higher costs during the recovery period. Natural Resources recognized $36.1 million and $16.7 million of business interruption insurance proceeds as a reduction to cost of sales in 2002 and 2001, respectively. The Company's claims under the insurance policies have been substantially completed and approximately $45 million of insurance proceeds have been collected through January 2003.

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General Corporate Expenses

        General corporate expenses were $24.4 million during the year ended December 31, 2002 compared to $30.3 million for the year ended December 31, 2001. The decrease was principally due to reduced headcount and workforce savings ($3.6 million) and other cost reduction efforts.

Year Ended December 31, 2001 and 2000

        Net sales and revenues for the year ended December 31, 2001 were $1.9 billion, a decrease of $82.8 million, or 4.1%, from the amount for the year ended December 31, 2000. The decrease was primarily attributable to declines in unit sales of homes, fewer shipped tons of coal and lower demand for furnace coke, ductile iron pipe products and aluminum products. The decrease in shipped tons of coal reflected large spot sales of excess coal inventories in the previous year at approximately our cost. The decrease also reflects approximately $8.8 million of non-recurring miscellaneous income from life insurance policies recognized in the previous year. These declines were partially offset by federal excise tax refund credits of $12.2 million recognized in 2001 related to coal export sales in prior years and higher selling prices for homes, coal and gas.

        Cost of sales, exclusive of depreciation, of $1.3 billion, was 80.1% of net sales in 2001 versus $1.4 billion and 81.0% of net sales in the year ended December 2000. The 2000 cost of sales included approximately $10.0 million of charges, primarily for inventory obsolescence and valuation reserves and environmental liabilities in the Industrial Products, Carbon and Metal and Natural Resources segments. The 2001 cost of sales reflected a $5.1 million reduction in the liability for Black Lung benefits in the Natural Resources segment. The remaining decrease in cost of sales was primarily from reduced volumes. The decrease in cost of sales as a percentage of net sales was attributable to improved margins from the higher home, coal and gas prices, as well as approximately $49 million in productivity improvements (reflected in both cost of sales and selling, general and administrative expenses) across all the businesses during the year. This was partially offset by lower margins from the product mix at JW Aluminum, higher petroleum coke costs, higher material costs at Sloss, higher energy costs and lost fixed cost absorption in some of the Industrial Products and Carbon and Metals businesses. The cost reductions and productivity improvements realized in 2001 came from the elimination of manufacturing waste, improvements in yields, process improvements and simplifications, restructuring efforts in 2001 and 2000 and other workforce reductions. These efforts include a company-wide headcount reduction of 8.2% during 2001.

        Depreciation for the year ended December 31, 2001 was $61.4 million, a decrease of $9.2 million from the previous year. This decrease was primarily attributable to a lower depreciable asset base as a result of a $166.7 million pretax asset impairment charge to the Company's coal mining assets taken in May 2000, as well as $1.5 million of accelerated depreciation taken on certain assets held for sale at JW Aluminum in 2000.

        Selling, general and administrative expenses were $193.1 million during the year ended December 31, 2001, compared to $216.4 million in the prior year. The previous year's selling, general and administrative expenses included approximately $14.8 million of charges, primarily for increased workers compensation expense ($6.5 million), an increase in the provision for losses on trade receivable in the Carbon and Metals segment ($3.9 million) and for certain non-restructuring-related severance and environmental costs. The 2001 expense reflected a $1.7 million charge to provide a legal reserve for an adverse verdict against one of the Company's subsidiaries in a contract dispute, offset by a $3.0 million reduction in the allowance for losses on trade receivables for the Natural Resources segment. The remaining decrease in expense from the previous year was attributable to the cost reductions referred to in the discussion of cost of sales above, including a 27% reduction in corporate headquarters staff.

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        Provision for losses on instalment notes was $11.0 million during 2001, compared to $9.8 million during 2000. The increase in provision for losses was due to higher losses on the sales of repossessed properties resulting from management's effort to reduce houses held inventory and to provide a slightly higher level of allowance for losses in light of an overall weakening of the economy in the later part of 2001.

        Interest and amortization of debt expense was $171.6 million during the year ended December 31, 2001 compared to $190.7 million during 2000. The average rate of interest in the 2001 period was 7.5% compared to 8.1% during 2000. Lower interest expense resulted from the lower interest rates as well as decreased average borrowings, principally from paying down senior debt.

        Results for 2001 included a $10.8 million charge related to a coal mining accident at Jim Walter Resources in September 2001. This accident resulted in the death of thirteen miners and significant damage to Mine No. 5. The mine was reopened in the second quarter of 2002. The charge principally included costs and expenses associated with the accident and the idling of the mine that were not covered by insurance.

        Restructuring and impairment charges totaling $6.9 million in 2001 included a $5.5 million charge associated with the shutdown of certain chemical operations at Sloss and a $1.4 million charge for severance related to headcount reductions from restructurings, principally at the corporate headquarters and in the Carbon and Metals segment. The $190.9 million charge in 2000 consisted principally of a $166.7 million impairment charge at Jim Walter Resources, a $6.2 million charge relating to the restructuring of AIMCOR's European operations, a $5.5 million charge for the closure of Sloss' Alexandria, Indiana fiber plant and $12.5 million associated with executive and other severance arrangements.

        The Company's effective tax rate in 2001 and 2000 differed from the statutory rate primarily due to the amortization of goodwill, which is not deductible for tax purposes (excluding amounts related to the AIMCOR acquisition), and nonconventional fuel tax credits. Taxes for the 2000 period also reflected recording of a valuation allowance associated with certain tax benefits which are not likely to be realized and the recognition of a tax reserve for the loss of certain tax litigation relating to leveraged buyout costs.

        Net income for the year ended December 31, 2001 was $43.3 million compared to a net loss of $124.5 million in the prior year. The Company's diluted net income per share in 2001 was $0.95 compared to a diluted net loss per share of $2.66 during 2000. The 2001 and 2000 results also reflect the factors discussed in the following Segment Analysis.

Segment Analysis

        Homebuilding net sales and revenues were $237.6 million during 2001, a decrease of $8.8 million, or 3.6%, from the prior year. This decrease reflects 250 fewer completed homes than in the prior year. The decrease in homes completed was partially offset by an increase in average net selling price. The average net selling price increased as a result of new product options, amenity upgrades and consumer preference for more upscale models.

        Operating income increased by $5.2 million from the prior year period to $2.8 million. This increase is primarily due to higher average net selling prices and improved operating margins attributable to lower material costs and productivity improvements, partially offset by lower revenues

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from fewer unit completions. In addition, the prior year included approximately $1.0 million of severance expenses.

        Financing net sales and revenues in 2001 were $238.0 million, up $2.4 million, or 1.0% above the prior year. This increase reflects a $2.3 million increase in time charge income principally resulting from recognition of unamortized discounts from an increase in payoffs received in advance of maturity. Prepayment speeds for 2001 were 6.1% compared to 4.8% in the prior year. Operating income (net of interest expense associated with Mid-State's mortgage-backed debt) was $48.2 million during 2001, $4.9 million higher than in the prior year. This increase is primarily the result of the increased time charge income, reduced interest expense due to lower interest rates and lower insurance reserves in the Company's captive insurance business.

        Industrial Products net sales and revenues in 2001 were $716.4 million, down $60.6 million from the prior year, reflecting decreased demand for the segment's products resulting from a weakened economy. The economic downturn resulted in decreased and delayed shipments at U.S. Pipe as customers deferred and delayed construction and water projects. Shipments of pipe products declined by 47,244 tons, or 6.8%, in 2001 as compared to the prior year. Revenues at U.S. Pipe declined by $16.9 million compared to 2000. JW Aluminum's revenues also declined $41.2 million from the prior year on a 12.8% decline in pounds shipped, resulting principally from reduced demand for its fin stock products used in air conditioners. Reflecting these significant volume declines, operating income for the segment of $55.0 for the year ended December 31, 2001 was $14.1 million lower than in 2000. Operating income at U.S. Pipe declined by $2.0 million as lower scrap iron costs, other cost reductions and productivity improvements offset much of the impact of declining volume. Most of the remaining decline in operating income occurred at JW Aluminum and was attributable to lower volume in specialty products, lower prices and a shift in product mix to lower margin building products.

        Carbon and Metals net sales and revenues decreased $11.0 million in 2001, or 2.2%, from the prior year. Weakness in the domestic steel industry, caused by competition from foreign suppliers and a weakening economy, significantly impacted sales at Sloss and AIMCOR Metals. Sloss' revenues decreased by $18.0 million from 2000, principally due to reduced sales of furnace coke. AIMCOR Metals revenues were $7.3 million lower on reduced demand from steelmakers for its ferroalloys. Operating income for the segment for the year ended December 31, 2001 was $15.0 million, a decrease of $1.7 million from 2000. Included in operating income in 2001 is a $5.5 million charge associated with the shutdown of certain of the chemical operations at Sloss. Operating income for 2000 included charges totaling $24.3 million, including $6.2 million related to the restructuring of AIMCOR's European operations, $5.5 million for the closure of Sloss' Alexandria fiber plant, a $3.9 million increase in the allowance for losses on accounts receivable and additional charges totaling $8.7 million for various inventory and environmental reserves. Excluding these items, Sloss had operating income $10.3 lower than 2000 due to weakness in the furnace coke market ($5.9 million), higher coal and other materials costs ($2.2 million), lost fixed cost absorption ($4.9 million) and lower chemical volumes ($1.2 million). These negatives were offset by significant headcount and other cost reductions and productivity improvements at Sloss. Operating income was also $3.7 million lower at AIMCOR Metals as the result of weak volumes in the metals additive business. Consolidation of the refiners and intense competition put significant volume and margin pressures on the Carbon businesses, further reducing its operating income. Several significant contracts expired in 2001 and were not renewed.

        Natural Resources net sales and revenues were $253.7 million in 2001, up $2.4 million, or 1.0%, over the prior year. Revenues in 2001 included federal excise tax refund credits of $12.2 million related to coal export sales in prior years. Revenues reflected a significant decrease in the tons of coal sold in 2001 as compared to 2000, principally due to large spot sales of excess coal inventories in the prior year at approximately cost, as well a reduced sales resulting from lower production due to the accident in Mine No. 5. Mine No. 5 shut down after the accident in September 2001 and remained closed through

28

the end of the year. The decrease in revenues from lower shipments was more than offset by higher average prices received for both coal and natural gas.

        The average natural gas selling prices shown reflect the impact in 2001 of approximately $8.1 million of income recognized from gains on hedges of natural gas prices placed on anticipated production and sales in early 2001.

        Operating income during 2001 was $27.3 million, compared to an operating loss of $198.4 million in 2000. Included in the operating income in 2001 is the $10.8 million pre-tax charge related to the accident at Mine No. 5, the $12.2 million of income from excise tax refund claims, a $5.1 million reduction in the liability for Black Lung benefits and a $3.0 million reduction in the allowance for losses on trade receivables. The operating loss for 2000 included a $166.7 million impairment charge related to two of the mines and other inventory and impairment charges totaling approximately $13.5 million. Excluding these items, operating income for the segment increased by approximately $37.0 million from 2000 to 2001. This is primarily due to the improvements in coal and gas prices and a 7.5% decline in production costs from productivity enhancements and successful cost reduction efforts in the mining operations. Profitability remained strong despite lower shipments due to the mining accident as business interruption insurance offset the impact. For the year, the Company recognized $16.6 million of business interruption insurance proceeds in income, of which $2.9 had been collected as of December 31, 2001. Operating income in both 2001 and 2000 included natural gas reservation fees of approximately $8.1 million paid to the Company by SONAT.

Seven Months Ended December 31, 2000 and 1999

        Net sales and revenues for the seven months ended December 31, 2000 were $1.2 billion, an increase of $102.6 million, or 9.5%, above the comparable seven-month period in 1999. The increase was primarily attributable to strong volume growth in the Industrial Products, Carbon and Metals, and Natural Resources segments, offset by lower period-over-period coal prices and a decline in time charges (revenues received from Mid-State's instalment note portfolio).

        Cost of sales, exclusive of depreciation, of $853.6 million was 81.3% of net sales in the 2000 period versus $753.4 million and 79.2% of net sales in the comparable period of 1999. The increase in cost of sales was principally the result of higher volumes and higher energy costs. The increase in cost of sales as a percent of net sales reflects lower gross profit margins realized on coal sales due to declining coal prices, despite significant productivity improvements in mining operations. This increase was partially offset by cost reductions and productivity improvements in other business segments, lower lumber and materials cost for homebuilding and higher gross profit margins in the Carbon and Metals segment.

        Depreciation for the seven-month transition period in 2000 was $38.4 million, a decrease of $7.0 million from the same period in 1999. This decrease was primarily attributable to lower depreciation expense resulting from the $166.7 million pretax asset impairment charge to the Company's coal mining assets taken in May 2000.

        Selling, general and administrative expenses of $112.2 million were 9.4% of net sales and revenues in the 2000 period, compared to $110.8 million and 10.2% in 1999. The increase in expenses was due to

29

higher selling expenses from increased sales volumes, increased expenditures associated with upgrading information technology and increased professional fees, partially offset by lower expenses from cost reduction programs.

        Provision for losses on instalment notes of $5.3 million were 4.3% of time charges in the 2000 period, compared to $1.2 million and 1.0% in 1999. The increase in provision for losses was due to higher losses on the sale of repossessed properties in the 2000 period resulting from management's effort to reduce houses held in inventory at the end of the period.

        Interest and amortization of debt expense was $112.2 million in the 2000 transition period versus $108.1 million in the comparable 1999 period. The average rate of interest in the 2000 period was 8.0% as compared to 7.5% in 1999. Higher interest expense from higher interest rates and increased borrowings in the non-recourse mortgage-backed/asset backed notes was partially offset by lower other senior debt borrowings.

        Restructuring and impairment charges were $23.0 million in the 2000 transition period compared to a $3.5 million credit in the comparable 1999 period. Restructuring charges in the 2000 transition period included: (1) $10.2 million of severance charges for executives and other corporate personnel, (2) $6.2 million attributable to the restructuring of AIMCOR's European operations, including the closure of AIMCOR's Luxembourg office and reductions in personnel at AIMCOR's headquarters and (3) $5.5 million for the closure of an underperforming Sloss slag fiber manufacturing plant in Alexandria, Indiana. The credit in 1999 was for the reversal of Mine No. 3 shutdown costs previously recorded in the fiscal year ended May 31, 1999.

        The Company's effective tax rate in the 2000 and 1999 periods differed from the statutory tax rate primarily due to amortization of goodwill, which is not deductible for tax purposes (excluding amounts related to the AIMCOR acquisition), and nonconventional fuel tax credits (in the 2000 transition period).

        Net income for the seven months ended December 31, 2000 was $3.2 million compared to $16.7 million in the comparable 1999 period. The Company's diluted earnings per share in the 2000 period was $.07 compared to $.36 in the 1999 period. The current and prior period results also reflect the factors discussed in the following Segment Analysis.

Segment Analysis

        Homebuilding net sales and revenues were $144.5 million in the 2000 transition period, an increase of $1.7 million, or 1.2%, from the 1999 seven-month period. Net sales and revenues increased due to an increase in average net selling price per home sold, from $54,700 in the 1999 period to $57,900 in 2000. This price increase was itself offset by a decrease in the number of homes sold, from 2,613 units in the 1999 period to 2,488 units in 2000. The higher average net selling price resulted from new product options, amenity upgrades and consumer preference for more upscale models being offered by JWH, as well as from price increases instituted in the prior year. Operating income was $0.2 million in the 2000 transition period, $10.0 million above the prior year period. This increase was primarily due to a 4% decline in raw material costs (primarily lumber), other cost reductions and productivity improvements and lower goodwill amortization in the 2000 period compared to 1999.

        Financing net sales and revenues were $136.2 million in the 2000 transition period, a decrease of $1.6 million, or 1.2%, from the 1999 seven-month period. This decrease reflects a $0.4 million decline in time charge income from $122.7 million in the 1999 period, to $122.3 million in the 2000 transition period. The decrease in time charges resulted from a reduction in payoffs received in advance of maturity and a reduction in the total number of instalment note accounts, partially offset by an increase in the average balance per account in the portfolio. Operating income (net of interest expense associated with Mid-State's mortgage-backed notes) was $23.1 million in the 2000 transition period, $6.6 million below the prior year

30

period. The decrease was primarily attributable to $2.7 million higher interest expense due to higher interest rates and increased borrowings, $1.0 million of restructuring charges, and the previously mentioned decline in time charges as well as the increase in provision for losses.

        Industrial Products net sales and revenues were $458.9 million, up $39.2 million, or 9.3%, above the same period in 1999. Strong volume growth and modestly higher average selling prices at U.S. Pipe principally drove the increase. Total ductile iron pipe shipments in the seven-month 2000 period were up approximately 8% from the same period in 1999. Average selling prices at U.S. Pipe were up approximately 2.4%, with a slightly more favorable product mix. Sales were also up at JW Aluminum on a 2% increase in pounds shipped and higher aluminum prices. Operating income of $45.6 million for the Industrial Products segment for the 2000 transition period was $2.7 million higher than the prior year's seven-month period. These increases were due to higher volumes and prices discussed above and reductions in other operating costs and productivity improvements, partially offset by higher natural gas and other energy costs.

        Carbon and Metals net sales and revenues increased $49.2 million, or 20.9%, to $284.1 million for the seven months ended December 31, 2000 as compared to $234.9 million in the prior seven-month period. This increase in sales was driven by higher trading/commodity prices for petroleum coke, and a change in mix toward more calcined coke, on 8% lower trading volumes. Sales at Sloss were significantly impacted by weakness in demand for furnace coke by the domestic steel industry, which was affected by low capacity utilization and competition from foreign steel makers. Operating income for the seven month period of 2000 was $10.6 million, $10.1 million lower than in the comparable prior year period. Operating income for the current period was reduced by the $6.2 million restructuring charge associated with the restructuring of AIMCOR's European operations and headquarters' personnel reductions and the $5.5 million of restructuring charges for the closure of Sloss' Alexandria, Indiana slag fiber manufacturing plant, a $1.3 million operating loss incurred at this plant prior to its closure, the weak market for furnace coke at Sloss and higher natural gas and other energy costs. The offsetting improvement in other operating income resulted from overall strong energy market demand and an improved product mix.

        Natural Resources net sales and revenues rose by $11.6 million, or 7.3%, from the prior year period to $170.6 million. This increase reflects 33% higher coal shipments, representing 1.2 million tons, in the 2000 period, as significant amounts of coal were sold out of existing inventories. This higher level of shipments was offset by 28% lower average coal selling prices in the 2000 transition period, reflecting overall coal market conditions as well as 1.6 million tons of coal sold to Alabama Power at higher contract rates than in the prior period. Comparing the seven month periods of 2000 and 1999, a total of 4.9 million tons of coal was sold at an average selling price per ton of $27.81 in 2000, compared with 3.7 million tons at $38.46 in 1999. Natural Resources also benefited from increases in methane gas sales volumes and price during the later portion of the 2000 period. Methane gas sales volumes were 5.8 billion cubic feet in the 2000 period versus 5.1 billion cubic feet in 1999. The average selling price per thousand cubic feet was $4.55 in the 2000 period versus $2.39 in 1999. Both periods included a monthly reservation fee of $0.7 million. The segment's operating loss for the seven months of 2000 was $14.4 million, compared to $5.9 million in the 1999 period. The operating loss for 1999 included a $3.5 million credit for the reversal of mine shutdown costs originally recorded in a prior fiscal period (year ended May 31, 1999). The 2000 transition period reflected a $6.6 million reduction in period-over-period depreciation expense primarily reflecting mining's asset impairment charge recorded in May 2000. In addition to the impact of changes in coal and gas prices and volumes, the 2000 period also benefited from a 14% reduction in average production costs, generating cost savings of approximately $14 million.

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Years Ended May 31, 2000 and 1999

        Net sales and revenues for the year ended May 31, 2000 were $1.9 billion, relatively consistent with the prior year period. The prior year results included revenues of $18.8 million from JW Window Components, Inc. ("JWWC") which was sold in the fiscal 1999 second quarter. Fiscal 2000 revenues includes a $2.4 million non-taxable gain from an executive life insurance policy.

        Cost of sales, exclusive of depreciation, of $1.3 billion was 79.7% of net sales in the 2000 period versus $1.3 billion and 80.0% of net sales in 1999. The improvement principally resulted from higher gross profit margins realized on pipe products, petroleum coke products, chemicals and aluminum foil and sheet products, partially offset by lower gross profit margins realized on coal.

        Selling, general and administrative expenses of $212.8 million were 11.2% of net sales and revenues in the 2000 period compared to $177.2 million and 9.3% in 1999. The increase was primarily attributable to the acquisitions of Dream Homes, Inc. ("Dream") in October 1998 and Crestline Homes, Inc. ("CHI") in February 1999, expenditures associated with upgrading information technology capabilities, addressing Year 2000 issues, and outside consultants who were assisting the Company in identifying cost reduction opportunities.

        Provision for losses on instalment notes of $10.7 million were 4.9% of time charges in the 2000 period, compared to $9.6 million and 4.2% in 1999.

        Interest and amortization of debt expense was $186.6 million in the 2000 period versus $185.1 million in 1999. The average rate of interest in the 2000 period was 7.8% as compared to 7.6% in 1999.

        Restructuring and impairment charges were $164.4 million in the 2000 period versus $27.5 million in 1999. In fiscal 2000, following the Company's unsuccessful efforts to dispose of its mining operations and the continued decline in the market price for coal, the Company recognized a $166.7 million non-cash pre-tax asset impairment charge related to two of JWR's three remaining coal mines, a $7.3 million pre-tax reversal of Mine No. 3 shutdown costs previously recorded in the fiscal 1999 third quarter, and a $5.0 million pre-tax severance charge. Prior year results included a $27.5 million pre-tax charge to shutdown Mine No. 3.

        The Company's effective tax rate in the 2000 and 1999 periods differed from the statutory tax rate primarily due to amortization of goodwill which is not deductible for tax purposes (excluding amounts related to the AIMCOR acquisition). Additionally, in the 2000 period, the Company's recognized a $2.4 million non-taxable gain from an executive life insurance policy, recorded a provision for additional income taxes relating to the Bankruptcy Court's unfavorable ruling regarding the deductibility of certain costs, and recorded a valuation allowance relating to certain state income tax benefits and net operating loss carryforwards of JWR which are unlikely to be utilized. In the 1999 period, the Company recognized a $9.8 million non-recurring tax benefit on the sale of JWWC.

        Net income (loss) in the 2000 period was $(111.0) million compared to $22.2 million in 1999. Fiscal 2000 results included the $166.7 million non-cash pre-tax ($108.3 million after-tax) asset impairment charge and recognition of the fiscal 2000 first quarter loss incurred by JWR of $3.0 million pre-tax ($1.6 million after-tax) which had been deferred pending its disposition. Prior year results included an after-tax gain of $4.9 million from the sale of JWWC. The Company's diluted earnings (loss) per share in the 2000 period was ($2.28) compared to $.43 in the 1999 period. The fiscal 2000 and 1999 results reflect all of the factors discussed in the following segment analysis.

Segment Analysis

        Homebuilding sales and revenues were $244.6 million, or $49.9 million, above the prior year period. The increase reflects an increase in the number of homes sold, from 3,737 units in the 1999

32

period to 4,396 units in 2000, combined with a higher average net selling price per home sold, from $52,000 in the 1999 period to $55,800 in 2000. The increase in unit sales principally resulted from a full year contribution from Dream and CHI. The higher average net selling price resulted from new product options, amenity upgrades and consumer preference for more upscale models being offered by JWH as well as from price increases instituted to compensate for higher building materials and labor costs. The operating loss of $11.9 million was $3.3 million below the prior year period, reflecting a decline in homebuilding gross profit margins due to increases in building materials and labor costs in excess of price increases realized and higher general and administrative expenses, partially offset by the increase in units sold and the average net selling price and lower goodwill amortization in the 2000 period ($19.7 million) compared to 1999 ($23.3 million).

        Financing sales and revenues were $242.1 million, or $17.6 million below the prior year period. The decrease reflects a $14.4 million decline in time charges (revenues received from Mid-State's instalment note portfolio) from $230.9 million in 1999 to $216.5 million in 2000. The decrease in time charges resulted from a reduction in payoffs received in advance of maturity and a reduction in the total number of accounts, partially offset by an increase in the average balance per account in the portfolio. Operating income of $49.9 million (net of interest expense) was $13.5 million below the prior year period, reflecting the lower time charges and higher general and administrative expenses, partially offset by lower interest expense in the 2000 period ($142.4 million) as compared to the prior year period ($144.2 million), and lower goodwill amortization in the 2000 period ($19.7 million) compared to 1999 ($23.3 million). Goodwill amortization decreased as the result of lower prepayments.

        Industrial Products sales and revenues were $42.0 million or 6.1%, above the prior year period. The increase was the result of higher ductile iron pipe shipments and increased sales of aluminum foil and sheet products, partially offset by a decline in ductile iron pressure pipe selling prices. Total ductile iron pipe shipments in the 2000 period were 618,600 tons compared to 615,800 tons in 1999. Operating income of $66.0 million exceeded the prior year period by $15.8 million. This performance was the result of improved gross profit margins reflecting lower raw material costs (primarily scrap iron) and improved operating efficiencies, combined with the previously mentioned increase in sales and revenues, partially offset by an increase in general and administrative expenses.

        Carbon and Metals sales and revenues decreased $15.6 million, or 3.4%, reflecting a year to year decline in world-wide market prices for petroleum coke and ferroalloys, partially offset by increased sales of slag fiber and specialty chemicals. Operating income of $26.6 million, was $6.2 million lower than the prior year period reflecting lower profit margins at Sloss.

        Natural Resources sales and revenues decreased $61.7 million, or 20.5%, from the prior year period. The decrease was the result of reduced coal and methane gas shipments coupled with lower average selling prices for coal. A total of 5.9 million tons of coal was sold at an average selling price per ton of $35.02 compared with 6.5 million tons at $41.80 in 1999. The decrease in shipments principally reflects lower production levels due to the shutdown of Mine No. 3 in fiscal 1999. Methane gas sales volumes were 9.0 billion cubic feet in the 2000 period versus 9.3 billion cubic feet in 1999. The average selling price per million cubic feet was $3.77 in the 2000 period versus $2.91 in 1999. Both periods included a monthly reservation fee of $0.7 million. The segment's operating loss was $182.4 million in the 2000 period which included the $166.7 million pre-tax impairment charge related to assets of two of the segment's three remaining coal mines, partially offset by the reversal of $7.3 million in Mine No. 3 shutdown costs previously recorded in the fiscal 1999 third quarter. The segment incurred an operating loss of $37.1 million in the 1999 period which included the $27.5 million charge for Mine No. 3 shutdown costs.

33

FINANCIAL CONDITION

        Restricted short-term investments of $97.9 million at December 31, 2002 decreased $28.9 million compared to December 31, 2001 as funds were set aside during the fourth quarter of 2001 under a pre-funding agreement related to the creation of Mid-State Trust X which were used to fund additional notes securitized in 2002.

        Net receivables, consisting principally of trade receivables, were $273.6 million at December 31, 2002, an increase of $50.0 million from December 31, 2001. Net receivables for Carbon and Metals increased $28.3 million due to the timing of foreign shipments of petroleum coke and calcined coke. Natural Resources receivables increased $19.3 million principally due to an increase in insurance claims receivable of $10.5 million related to the accident at one of the Company's mines and also due to a $13.5 million sales increase in December 2002 compared to December 2001.

        Other long-term assets were $38.6 million at December 31, 2002, a decrease of $5.9 million from December 31, 2001. Other long-term assets decreased due to the liquidation of certain assets related to deferred compensation and other employee related benefits.

        Goodwill and other intangibles of $215.5 million at December 31, 2002 decreased $208.2 million compared to December 31, 2001 due to the $201.0 million AIMCOR transitional goodwill impairment charge as a result of adopting FAS 142 and continued amortization of intangibles. In conjunction with the impairment charge, a deferred tax asset of $75.1 million was established, changing the December 31, 2001 net deferred tax liability of $49.9 million to a net deferred tax asset of $32.9 million after adjustments for changes in normal temporary differences.

        Accounts payable of $158.9 million at December 31, 2002 increased $43.6 million compared to December 31, 2001 primarily as a result of timing of vendor payments and efforts by the Company to improve management of accounts payable.

        Accrued expenses of $119.2 million at December 31, 2002 decreased $23.4 million compared to December 31, 2001 due primarily to a decrease in the restructuring reserves of $8.2 million and lower employee benefit related expenses.

        Other long-term liabilities of $121.5 million at December 31, 2002 increased $72.9 million compared to December 31, 2001 primarily due to an increase in the pension plan liability resulting from a decline in the value of pension plan assets during 2002 and changes in actuarial assumptions. As a result of the change in value in the pension plan assets, the pension liability increased, of which $43.7 million, net of tax, was recorded as a comprehensive loss in the consolidated statement of changes in shareholders equity.

        Net instalment note receivables, generated from the financing of homes constructed by the Homebuilding segment, were $1.718 billion at December 31, 2002, an increase of $28.0 million from December 31, 2001. The increase is due to higher volumes and higher average note balances financed, which was partially offset by customer repayments.     The allowance for losses on instalment notes receivable was $11.3 million at December 31, 2002 compared to $11.0 million at December 31, 2001. See Note 5 of "Notes to the Consolidated Financial Statements." The following table shows information about the balance of the allowance and losses charged to the allowance for the periods presented.

(1)

Annualized

34

        The following table presents information about delinquencies in the instalment notes receivable portfolio.

(2)

Based on gross instalment balances outstanding.

LIQUIDITY AND CAPITAL RESOURCES

        The Company's principal sources of short-term funding are operating cash flows, borrowings under the Revolving Credit Facility and the Trust IX Variable Funding Loan Agreement. The Company's principal sources of long-term funding are the Term Debt portion of its Credit Facilities and its permanent financings under mortgage-backed/asset-backed notes.

        The Company believes that, based on current forecasts and anticipated market conditions, sufficient operating cash flow will be generated to meet substantially all operating needs to make planned capital expenditures and to make all required interest payments on indebtedness. However, the Company's operating cash flows and liquidity are significantly influenced by the general economy and, in particular, levels of construction activity, levels of government spending on water projects, costs of raw materials, prices of gas and coal, and interest rates.

        Borrowings outstanding under the Credit Facilities totaled $308.9 million at December 31, 2002. This consisted of a $125.0 million Term Loan, and $183.9 million borrowed under the Revolving Credit Facility. The Revolving Credit Facility includes a sub-facility for trade and other standby letters of credit in an amount up to $75 million at any time outstanding. There were $56.2 million in face amount of letters of credit outstanding thereunder at December 31, 2002. There was $109.9 million available under the Revolving Credit Facility at that date. It is expected that amounts available under the Revolving Credit Facility will be sufficient to meet peak operating needs of the Company. The Term Loan and the Revolving Credit Facility mature on October 15, 2003. The Company is dependent on obtaining new financing to meet this obligation and has engaged Banc of America Securities LLC as the lead arranger to arrange and syndicate a $500 million Senior Secured Credit Facility that will replace the existing Term Loan and Revolving Credit Facility. The Senior Secured Credit Facility is expected to consist of (i) a five-year, $250 million revolving credit facility and (ii) a seven-year, $250 million term loan. Proceeds from the Senior Secured Credit Facility will be used to: (i) repay borrowings under the existing Credit Facilities (ii) pay fees and expenses and (iii) provide for working capital and other general corporate purposes. It is likely the cost of funds under this facility will increase compared to the current bank facility. The Company expects to consummate the refinancing

35

by the end of the second quarter of 2003, however, no assurances can be made that such financing will be completed. In the event the Company is unable to complete the $309 million refinancing described above prior to the October 2003 due date, the Company may have to obtain debt on less favorable terms than currently anticipated by management.

        In March 2003, the Company's long-term debt was rated BB by Standard & Poors and Ba2 by Moody's Investor Services, both with a stable outlook.

        At December 31, 2002, the mortgage-backed/asset-backed notes outstanding totaled $1.8 billion and consisted of six issues of public debt, providing permanent financing for instalment notes receivable purchased by Mid-State. These borrowings also include a $400 million warehouse facility (the "Mid-State Trust IX Variable Funding Loan Agreement"), providing temporary financing to Mid-State for its current purchases of instalment notes from JWH. At December 31, 2002, there was $177.0 million outstanding under this facility and $223.0 million available under the facility.

        In November 2001, Trust X issued Asset Backed Notes in the amount of $394.0 million. Approximately $77.7 million of the proceeds were set aside in a restricted cash account until additional instalment notes related to Trust X were purchased and securitized. As notes were added to Trust X, restricted cash was released. The remaining proceeds, net of underwriting fees, from this issuance were used to repay $266.0 million of outstanding borrowings under the Mid-State Trust IX Variable Funding Loan Agreement, with the remaining proceeds used to reduce borrowings under the Revolving Credit Facility.

        On October 1, 2002, all outstanding indebtedness under the Trust II Indenture was retired under provisions that allowed the trust's indebtedness to be called prior to its scheduled maturity. The Company used proceeds from the Mid-State Trust IX Variable Funding Loan Agreement to pay down all the remaining debt under Trust II. Trust IV owns the beneficial interest in Trust II and as a result, all collections on Trust II accounts are being used to pay interest, expenses and principal of Trust IV.

        The Company believes that the Mid-State Trust IX Variable Funding Loan Agreement will provide Mid-State with the funds needed to purchase the instalment notes and mortgages generated by JWH. It is anticipated that one or more permanent financings similar to the Trust X Asset Backed Notes and other previous Mid-State asset-backed financings will be required over the next several years to repay future borrowings under the Trust IX Variable Funding Loan Agreement. The Company currently anticipates such a financing to occur in the second quarter of 2003.

        The Credit Facilities contain a number of significant covenants that, among other things, restrict the ability of the Company and certain subsidiaries to dispose of assets, incur additional indebtedness, pay dividends, create liens on assets, enter into capital leases, make investments or acquisitions, engage in mergers or consolidations, or engage in certain transactions with subsidiaries and affiliates and otherwise restrict corporate activities (including change of control). In addition, under the Credit Facilities, the Company and its Restricted Subsidiaries (as defined in the Credit Facilities) are required to maintain specified financial ratios and comply with certain other financial tests. The most restrictive of these limitations are requirements to maintain (a) a minimum interest coverage ratio (the ratio of EBITDA to interest expense for the Company and its Restricted Subsidiaries as defined in the Credit Facilities) of at least 2.50-to-1 and (b) a maximum leverage ratio (the ratio of indebtedness to EBITDA for the Company and its Restricted Subsidiaries as defined in the Credit Facilities) of not more than 3.75-to-1. The Company was in compliance with these and all other covenants at December 31, 2002.

        The Trust IX Variable Funding Loan Agreement covenants, among other things, restrict the ability of Mid-State to dispose of assets, create liens and engage in mergers or consolidations. Mid-State was in compliance with these covenants at December 31, 2002.

        The Trust IX Variable Funding Loan Agreement, as amended, expired February 3, 2003, but was renewed to February 2, 2004.

36

        For descriptions of, and additional information about, the Company's debt, see Note 11 of "Notes to Consolidated Financial Statements."

Statement of Cash Flows

        Cash and cash equivalents were approximately $13.4 million at December 31, 2002. Cash flow from operating activities for the year ended December 31, 2002, was primarily used for reductions of borrowings under the mortgage-backed notes, capital expenditures and to purchase shares of treasury stock and pay dividends.

        Cash flow from operating activities for the year ended December 31, 2002, were $129.0 million, principally representing the net loss for the year and non-cash charges for depreciation, amortization, deferred taxes, the cumulative effect of change in accounting principle related to the transitional goodwill impairment charge and impairment charges, offset by an increase in working capital. The increase in working capital reflected an increase in instalment notes receivable, higher receivables due to increased December 2002 sales in both Industrial Products and Carbon and Metals segments, higher insurance receivables related to the property and business interruption insurance claim at Natural Resources and lower accrued expenses and income taxes payable. Partially offsetting these increases were higher accounts payable.

        Capital expenditures totaled $79.0 million in the year ended December 31, 2002. These capital expenditures reflect the Company's ongoing commitment to maintain safe, efficient plants and continually increase productivity. Commitments for capital expenditures at December 31, 2002 were not significant; however, it is estimated that gross capital expenditures for the year ending December 31, 2003 will approximate $75 to $85 million. Actual expenditures in 2003 may be more or less than this amount, depending upon the level of earnings and cash flow, or expansion opportunities in certain markets.

        The Company spent $1.9 million during 2002 to repurchase shares of its common stock. At December 31, 2002, the Company had approximately $23.9 million remaining under its repurchase authorization.

        During the year ended December 31, 2002, the Board of Directors announced and paid to shareholders of record on February 20, May 15, September 12, and November 21, 2002, a dividend of $.03 per share on each of these dates. Dividends for the year ended December 31, 2002 aggregated $5.3 million.

        During the year ended December 31, 2002, total debt decreased by $57.0 million. During the year, net borrowings under the Mid-State Trust IX Variable Funding Loan Agreement increased by $177.0 million, while scheduled payments on the mortgage-backed/asset-backed notes amounted to $234.4 million. Other senior debt increased by $0.4 million during the year.

Contractual Obligations and Commercial Commitments

        The Company has certain contractual obligations and commercial commitments. Contractual obligations are those that will require cash payments in accordance with the terms of a contract, such as a borrowing or lease agreement. Commercial commitments represent potential obligations for performance in the event of demands by third parties or other contingent events, such as lines of credit or guarantees of debt. The following tables summarize the Company's contractual obligations and commercial commitments as of December 31, 2002. The unconditional purchase obligations primarily represent commitments to purchase raw materials as well as certain property, plant and equipment.

37

Contractual obligations:

(1)

The Asset-Backed Notes are based on scheduled maturities, adjusted for estimated prepayments and delinquencies.

(2)

The Company expects refinancing of the long-term debt and revolving credit facility to be completed in March 2003.

Other commercial commitments:

(1)

Includes a sub-facility for standby and commercial letters of credit in the amount of $75,000.

MARKET RISK

        The Company is exposed to certain market risks inherent in the Company's financial instruments. These instruments generally arise from transactions entered into in the normal course of business. The Company's primary market risk exposures relate to (i) interest rate risk on the instalment notes receivable portfolio and (ii) interest rate risk on short- and long-term borrowings. In the past, the Company has periodically used derivative financial instruments to manage interest rate risk. At December 31, 2002 there were no such instruments outstanding.

        As shown in Note 5 of "Notes to Consolidated Financial Statements," the Company's fixed-rate installment notes receivable portfolio had an estimated fair value as of December 31, 2002 of approximately $2.0 billion. Similarly, the Company's fixed-rate mortgage-backed/asset-backed notes have an estimated fair value as of December 31, 2002 of approximately $1.9 billion. Changes in interest rates are substantially offset by the fixed rate nature of these assets and liabilities. A 1% increase in interest rates would result in approximately a $7.8 million decrease in the net difference in value between the instalment notes receivable portfolio and the mortgage-backed notes. All of the Company's other borrowings are at variable interest rates.

        In the ordinary course of business, the Company is also exposed to commodity price risks. These exposures primarily relate to the acquisition of raw materials and anticipated purchases and sales of natural gas. The Company occasionally utilizes derivative commodity instruments to manage certain of these exposures where considered practical to do so. During 2002 and 2001, the Company hedged approximately 23% and 44%, respectively of its natural gas production with swap contracts. These swap contracts effectively converted a portion of forecasted sales at floating-rate natural gas prices to a fixed-rate basis. As a result of increases in natural gas prices during 2002, these swap contracts resulted in cash outflows of $0.5 million decreasing net sales and revenues. During 2001, natural gas prices

38

declined and these swap contracts resulted in payments to the Company of approximately $8.1 million that were recognized and included in net sales in the statement of operations.

        During 2002, the Company hedged approximately 57% of it natural gas purchases with swap contracts. These swap contracts effectively converted a portion of forecasted natural gas purchases at floating-rate natural gas prices to a fixed-rate basis. As a result of increases in natural gas prices during 2002, these swap contracts resulted in cash inflows of $0.3 million decreasing cost of sales.

        As of December 31, 2002, swap contracts to hedge anticipated sales in 2003 of natural gas totaling 4.8 million mmbtu were outstanding at prices ranging from $4.30 to $4.44 per mmbtu. At December 31, 2002 the net loss from these hedging instruments, which was $1.1 million, was recorded in other liabilities and accumulated comprehensive income (loss). Also, at December 31, 2002, swap contracts to hedge anticipated purchases in 2003 of natural gas totaling 0.2 million mmbtu were outstanding at a price of $3.47 per mmbtu.

        The Company is also subject to a limited amount of foreign currency risk, but does not currently utilize any significant derivative foreign currency instruments to manage exposures for transactions denominated in currencies other than the U.S. dollar.

NEW ACCOUNTING PRONOUNCEMENTS

Accounting for Asset Retirement Obligations

        In June 2001, the Financial Accounting Standards Board (FASB) issued FAS 143, "Accounting for Asset Retirement Obligations", which requires the recognition of a liability at fair value for an asset retirement obligation in the period in which it is incurred. Retirement obligations associated with long-lived assets included within the scope of FAS 143 are those for which there is a legal obligation to settle under existing or enacted law, statute, written or oral contract, or by legal construction under the doctrine of promissory estoppel. Retirement obligations are included in the scope of the standard only if the legal obligation exists in connection with or as a result of the permanent retirement, abandonment or sale of a long-lived asset. When the liability is initially recorded, the carrying amount of the related long-lived asset is correspondingly increased. Over time, the liability is accreted to its future value. The corresponding amount capitalized at inception is depreciated over the useful life of the asset. The liability must be revalued each period based on current market prices. FAS 143 is effective for fiscal years beginning after June 15, 2002.

        The Company estimates that the adoption of FAS 143 will result in a non-cash increase to net property, plant and equipment of approximately $0.8 million, a non-cash net increase to asset retirement obligation of approximately $0.4 million, and as a cumulative effect of change in accounting principle, a non-cash pretax charge of approximately $0.4 million.

Other Pronouncements

        In April 2002, the FASB issued FAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." FAS 145 eliminates the requirement that gains and losses from the extinguishment of debt be aggregated and, if material, be classified as an extraordinary item, net of the related income tax effect and eliminates an inconsistency between the accounting for sale-leaseback transactions and certain lease modifications that have economic effects that are similar to sale-leaseback transactions. Generally, FAS 145 is effective for transactions occurring after May 15, 2002. As the Company refinances its senior debt in 2003, the Company expects a $0.6 million loss associated with the extinguishment of the Company's existing debt

39

that will be recorded as an operating expense and not as an extraordinary item in the statement of operations.

        In June 2002, the FASB issued FAS No. 146, "Accounting for Exit or Disposal Activities." FAS 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance that the Emerging Issues Task Force (EITF) has set forth in EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring". The scope of FAS 146 also includes: (1) costs related to terminating a contract that is not a capital lease and (2) termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. Under the new standard, exit and disposal activities are generally expensed as incurred. FAS 146 will be effective for exit or disposal activities that are initiated after December 31, 2002. Early application is encouraged.

        In December 2002, the FASB issued FAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123." This Statement amends FAS No. 123, "Accounting for Stock-Based Compensation" to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. FAS No. 148 provides for voluntary adoption of the fair value method for entities with fiscal years ending after December 15, 2002. The Company has elected to continue the use of the intrinsic value method for the fiscal year ending December 31, 2002 but has adopted the prominent disclosure provisions.

PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT

        This Form 10-K contains certain forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) and information relating to the Company that is based on the beliefs of the management of the Company, as well as assumptions made by and information currently available to the management of the Company. When used in this Form 10-K, the words "estimate," "project," "believe," "anticipate," "intend," "expect," and similar expressions are intended to identify forward-looking statements. Such statements reflect the current views of the Company with respect to future events and are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company does not undertake any obligation to publicly release any revisions to these forward looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

40

UNAUDITED INTERIM FINANCIAL INFORMATION:

(in thousands, except per share amounts)

        Reclassifications for the quarters ended March 31, 2002, June 30, 2002 and September 30, 2002 have been made that increased time charge income and provision for loan losses by $1.687 million, $1.789 million, and $1.110 million, respectively, to properly reflect the recording of sales and related cost of sales for repossessed homes. There is no net impact on gross margins, net income or diluted income per share.

        Diluted earnings per share was $.95 for 2001, which was lower than the sum of the quarterly EPS reported above as a result of purchases of treasury stock during the year.

        Reclassifications for the quarter ended March 31, 2001 have been made that reduced time charge income and provision for loan losses by $907 to properly reflect the recording of sales and related cost of sales for repossessed homes. There is no net impact on gross margins, net income or diluted income per share.

Item 8. Financial Statements and Supplementary Data

        Financial Statements and Supplementary Data consist of the financial statements as indexed on page F-1 and unaudited financial information presented in Part II, Item 7, "Management's Discussion and Analysis of Results of Operations and Financial Condition".

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

        None.

41

Part III

Item 10. Directors and Executive Officers of the Registrant

        Incorporated by reference to the Proxy Statement (the "Proxy Statement") included in the Schedule 14A to be filed by the Company with the Securities and Exchange Commission (the "Commission") under the Securities Exchange Act of 1934, as amended. Certain information with respect to executive officers is included in Part I, Item 4.

Item 11. Executive Compensation

        Incorporated by reference to the Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management

        Incorporated by reference to the Proxy Statement.

Item 13. Certain Relationships and Related Transactions

        Incorporated by reference to the Proxy Statement.

Item 14. Controls and Procedures

        As of March 21, 2003, under the supervision and with the participation of the Company's Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO"), management has evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of March 21, 2003. There were no significant changes in the Company's internal controls or in the other factors that could significantly affect those controls subsequent to the date of the evaluation.

Part IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)

(1) Financial Statements and Schedules—See Index to Financial Statements on page F-1.



(2)

II—Valuation and Qualifiying Accounts.



(b)

Reports on Form 8-K filed during the last quarter of the Company's fiscal year ended December 31, 2002—none.



(c)

Exhibits—See Index to Exhibits on page E-1 through E-3.

42

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.

        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.

43

* By: /s/  CHARLES E. CAUTHEN     

Charles E. Cauthen
Attorney-in-Fact

44

Walter Industries, Inc.

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Don DeFosset, Chief Executive Officer, certify that:

1.

I have reviewed this annual report on Form 10-K of Walter Industries, Inc. (the "Registrant");

2.

Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.

Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report;

4.

The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:  

a)

designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b)

evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and

c)

presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent function):

a)

all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and

6.

The Registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: March 21, 2003

/s/ Don DeFosset


---


Don DeFosset
Chief Executive Officer

45

Walter Industries, Inc.

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, William F. Ohrt, Chief Financial Officer, certify that:

1.

I have reviewed this annual report on Form 10-K of Walter Industries, Inc. (the "Registrant");

2.

Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.

Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report;

4.

The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:  

a)

designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b)

evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and

c)

presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent function):

a)

all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and

6.

The Registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: March 21, 2003

/s/ William F. Ohrt


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William F. Ohrt
Chief Financial Officer

46

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

F-1

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of
Walter Industries, Inc.

        In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes in stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Walter Industries, Inc. and its subsidiaries at December 31, 2002 and December 31, 2001, and the results of their operations and their cash flows for each of the two years ended December 31, 2002 and December 31, 2001, the seven months ended December 31, 2000, and the year ended May 31, 2000, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        As discussed in Note 9, the Company changed its method of accounting for amortization of goodwill in accordance with Statement of Financial Accounting Standards No.142, "Goodwill and Other Intangible Assets" effective January 1, 2002.

PricewaterhouseCoopers LLP

Tampa, Florida
February 12, 2003

F-2

WALTER INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)