Back to GetFilings.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-K

Commission File Number 001-13711

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

        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

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes    ý No    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 June 30, 2004, the registrant's most recently completed second fiscal quarter, as reported by the New York Stock Exchange, was approximately $505.5 million.

        Number of shares of common stock outstanding as of February 28, 2005: 37,751,990

Documents Incorporated by Reference

        Applicable portions of the Proxy Statement for the Annual Meeting of Stockholders of the Company to be held April 28, 2005 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, Natural Resources, and Other. Through these operating segments, the Company offers a diversified line of products and services including home construction, mortgage financing, ductile iron pressure pipe and related products, coal, natural gas, furnace and foundry coke, chemicals and slag fiber.

        On December 3, 2003, the Company completed the sale of Applied Industrial Materials Corporation ("AIMCOR"), previously a wholly-owned subsidiary of the Company, to Oxbow Carbon and Minerals LLC. AIMCOR, based in Stamford, Connecticut, marketed and distributed petroleum coke and performed refinery outsourcing services and, through its Metals division, supplied ferroalloys and other steel and foundry products. The Company also completed the sale of JW Aluminum Company ("JW Aluminum"), previously a wholly-owned subsidiary of the Company, to Wellspring Capital Management LLC on December 5, 2003. JW Aluminum, based in Mount Holly, South Carolina, manufactured specialty flat-rolled aluminum foil and sheet products, including "fin stock," used by the heating and cooling industry.

        As a result of the above sales, in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the operations of AIMCOR and JW Aluminum have been classified as discontinued operations in the statements of operations.

        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 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. You may read and copy any document the Company files at the SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. The Company's SEC filings are also available to the public from the SEC's website at http://www.sec.gov.

(b)

Industry Segments

        The Company's industry segment information is included in Note 19 of "Notes to Consolidated Financial Statements" included herein.

(c)

Description of Business

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 generally permits year-round construction. JWH also provides mortgage financing on a significant portion of the homes sold. JWH historically has concentrated on the low- to moderately-priced segment of the housing market. Approximately 354,000 homes have been completed by JWH since its inception in 1946.

1

        JWH's products consist of over 50 models of conventionally-built homes (ranging in size from approximately 800 to 2,500 square feet) and its modular subsidiary has 14 separate home models (ranging in size from 900 to 2,900 square feet).

        At December 31, 2004, JWH operated 85 branch offices located in 16 states and serving one additional adjoining state. During 2004, home sales in Texas represented 26% of JWH's net sales; North Carolina 19%; Mississippi 11%; Alabama, Florida and Louisiana 7% each. The remaining sales were spread throughout other southeastern states. Approximately 78% 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 various actual models.

        Substantially all building and instalment sale contracts originated by JWH, are 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 where liens are not obtained, (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 instruments 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 has not owned or acquired significant land for home construction purposes and was not a land developer. The actual construction of conventionally-built homes sold by JWH is generally 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 a limited program of constructing speculatively-built homes and subdivisions on land already owned by or purchased by the Company, in addition to its historical method of selling homes. However, much of this activity was curtailed in 2004.

        JWH builds its conventionally-built homes "on site" after the customer has entered into a building contract. Each conventionally-built home is constructed of wood on concrete foundations or wood pilings or of concrete block and is completely finished on the outside. Non-concrete block 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, painting 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 driveway, landscaping and utility connections. Remaining units are sold at varying stages of interior finishing. All concrete block homes are built to 100% completion.

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

2

        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, 2004, 2003 and 2002.

        The following chart shows the inventory positions for both speculatively-built ("spec") homes and subdivisions, as well as the units sold during the year:

        During the years ended December 31, 2004, 2003 and 2002, the average net sales price of a home was $71,700, $66,200, and $63,000, respectively.

        The estimated backlog of homes to be constructed by JWH as of December 31, 2004 was $143.4 million, as compared to $136.4 million at December 31, 2003. After the land is cleared and appropriate building permits are obtained, the time to construct a home averages between eleven and seventeen weeks.

        Most 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, 2004, stated annual percentage rates offered for new mortgage instalment notes ranged between 7.0% and 10.0%.

        Some customers who purchase and finance homes through JWH may not qualify for traditional mortgage financing. To qualify for JWH financing, a potential customer generally must provide information concerning personal income and employment history. If the customer owns the land on which the home is to be built, a legal description of the land, evidence that there are no liens or encumbrances and evidence of ownership is required. If the land is not owned outright, the financing of the land and home may be obtained through Walter Mortgage Company ("WMC") (see Financing business description). A customer's income and employment are usually verified by examining pay stubs, W-2 forms and occasionally through telephone conversations with the customer's employer 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, a tri-bureau credit report is obtained that includes, among other information, a 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 payment and debt obligations. If a favorable credit report is obtained, the required monthly payment does not exceed 25% to 27% of the customer's monthly gross income, and the customers total debt payments don't exceed 50% of monthly gross income, there is a high likelihood that the applicant will be approved

3

subject to verification of land values. 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, necessary right-of-way easements and existence of any encroachments.

        When a home is financed by JWH, the Company does not generally obtain third party appraisals or title insurance. Although significant 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 rigid appraisal-based loan-to-value test. There is a minimum requirement that a lot evaluation be performed to determine the value of the lot on which the home is to be built, as estimated primarily on the basis of Walter Mortgage Company's servicing employees' experience and knowledge. Generally, the lot or land value must be at least 10% of the selling price of the home, resulting in an initial loan-to-value ratio of approximately 90%. Under certain favorable credit conditions, the loan-to-value ratio may be 95%. Prior to occupancy of the new home, the buyer must complete utility hook-ups and any other components not purchased from JWH, arrange for the final building inspection and, in most circumstances, 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.

        If JWH finances the new home purchase, upon completion of construction to the agreed-upon percentage, 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., a wholly-owned subsidiary of the Company ("MSH"), pursuant to an agreement between JWH and MSH.

        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, no down payment and no closing costs. Based on the most recent data available from Builder Magazine (May 2004), JWH was the twenty-fourth largest builder of detached single-family homes in the United States.

Financing

        Within the Financing Segment, MSH purchases and services instalment notes and mortgages originated by JWH. Walter Mortgage Company, a wholly-owned subsidiary of the Company ("WMC"), offers financing to JWH homebuyers that is secured by first mortgages and liens, and also originates mortgage loans by purchasing them from other homebuilders and third parties. WMC's mortgage loans are also sold to MSH, but are serviced by WMC. The interest income 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 for late fees and ultimately recognized as revenue. Both the MSH instalment notes and the WMC mortgage loans have fixed monthly payments, similar repayment terms and the ability to levy costs to protect collateral positions upon default, such as attorney fees 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 $109.3 million and $75.5 million at December 31, 2004 and 2003, respectively.

4

Mid-State Homes, Inc.

        MSH, headquartered in Tampa, Florida, was established in 1958 to purchase and service mortgage instalment notes originated by JWH. Currently, MSH funds its purchase of these mortgage instalment notes using various warehouse lines of credit. Historically, once a critical mass of assets have been accumulated, MSH would securitize the assets using a grantor trust structure, structured as a financing, which requires that the assets and liabilities be recorded on the balance sheet and there is no gain for tax purposes. 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 the trusts secure the borrowings of these trusts. These borrowings are non-recourse to the Company. (For additional information on the notes, the trusts and their related borrowings, see Notes 6 and 12 of "Notes to Consolidated Financial Statements.")

        At December 31, 2004, MSH's portfolio was geographically distributed as follows: Texas (31%), Mississippi (15%), Alabama (9%) and Florida (7%). The remaining portfolio was spread primarily in other southeastern states.

Walter Mortgage Company

        WMC was established in 2001 to provide home financing to customers of JWH. 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 MSH customers 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 through December 31, 2004, 1,809 mortgages totaling approximately $139.4 million have been originated, purchased, or funded through WMC. WMC initiated a program to acquire mortgage loans in 2003 that meet the Company's strict underwriting criteria. Loans are purchased from other mortgage companies, banks, thrifts, builders and other various sellers of first lien mortgages. During 2004, approximately $40.2 million of mortgage loans were purchased.

Other

        Best Insurors, Inc. ("Best"), located in Tampa, Florida, is an agency that primarily places fire and extended insurance coverage for homeowners who finance through MSH 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 other company risks, including primary and excess workers' compensation for all significant subsidiaries except U.S. Pipe.

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, hydrants and other cast iron products. Founded in 1899 and headquartered in Birmingham, Alabama, it is one of the nation's largest producers of ductile iron pressure pipe based on industry shipping information provided by the Ductile Iron Pipe Research Association. In the years ended December 31, 2004, 2003 and 2002, net sales and revenues amounted to $545.9 million, $452.9 million and $479.2 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 various 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.

5

        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.

        U.S. Pipe products are sold primarily to water works distributors, contractors, 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.

        The estimated order backlog consists of pressure pipe, valves and hydrants, fittings and castings and at December 31, 2004 was $115 million, compared to $86 million at December 31, 2003. 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 2004, approximately 26% of U.S. Pipe's sales were to one customer. The Company believes the loss of this single customer would not have a material adverse effect on the results of operations of the Company on a consolidated basis as a result of its size, impact on operating income, and because the Company believes that, based on an overall balance of supply and demand within the pipe industry, the loss of this customer would be replaced with sales to other existing or new customers. Foreign sales accounted for approximately 4% of U.S. Pipe's sales during the year.

6

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 underground mines in Alabama, and its De-Gas Division, which extracts and sells natural gas from the coal seams owned or leased by JWR. On December 1, 2003, the Company announced that it expected to close Mine No. 5 during the fourth quarter of 2004 due to adverse geologic conditions. The mine was originally scheduled to close in 2006. However, given the poor operating conditions, management concluded that it was not economically feasible to access Mine No. 5's remaining coal reserves beyond 2004. On April 6, 2004, the Company announced that it would extend its coal production schedule for Mine No. 5 to mid-2005 due to favorable increases in metallurgical coal prices around the world. In the fourth quarter of 2004, the Company decided to extend its coal production schedule for Mine No. 5 to fourth quarter 2006, due to favorable metallurgical coal prices around the world. Approximately 1.5 million tons of coal were produced by Mine No. 5 during 2004. Mine No. 5 is expected to produce approximately 1 million tons of coal per year in 2005 and 2006.

        On December 16, 2004, the Company announced a capital investment program up to $135.0 million to increase coal production capacity at Mine No. 7. The investment will occur over a four-year period and increase annual production capacity by approximately 2.7 million tons per year starting in the second half of 2008.

Mining Division

        In the years ended December 31, 2004, 2003 and 2002 Mining Division's net sales and revenues totaled $303.6 million, $218.4 million and $221.0 million, respectively.

        The Mining Division, headquartered in Brookwood, Alabama, has approximately 7.5 million tons of rated annual coal production capacity from its 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. Underground mining with longwall technology drives greater production efficiency, improved safety, higher coal recovery and lower production costs. The Mining Division currently operates one longwall mining system in each mine for primary production and up to four continuous miner sections in each mine 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%. This ratio is expected to remain consistent after the closure of Mine No. 5.

        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. 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 fixed price supply contracts, usually with the duration of one year, running from July through June. However, some sales, of both metallurgical and steam coal, are conducted in the spot market as dictated by available JWR supply and market demand. During 2004, JWR's two largest customers represented approximately 19% and 14% of the Mining Division's sales, respectively. The Company believes that the loss of those

7

customers would not have a material adverse effect on the results of operations of the Company as the loss of volume from these customers would be replaced with sales to other existing or new customers due to high worldwide demand of both metallurgical and steam coal. Foreign sales accounted for approximately 69% of of the Mining Division's sales during the year.

De-Gas Division

        The De-Gas Division, headquartered in Brookwood, Alabama, extracts and sells natural 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 natural gas concentrations with wells drilled in conjunction with the mining operations. There were 399 wells producing approximately 14.9 billion cubic feet of natural gas in 2004 (JWR's interest was 7.9 billion cubic feet in 2004). Approximately 52 additional wells are planned for development in 2005. The degasification operation, as originally expected, has improved mining operations and safety by reducing methane gas levels in the mines, and has also been a profitable operation.

Other

        The Other segment includes Sloss Industries Corporation ("Sloss"), the Company's land subsidiaries and corporate expenses. Sloss manufactures and distributes furnace and foundry coke to the domestic steel industry as well as to the ductile iron foundries, and also manufactures specialty chemicals and slag fiber. The land subsidiaries engage in maximizing the value of vacant land, primarily through outright property sales and realizing royalty income on coal, timber and other minerals. Corporate expenses consist primarily of salaries, overhead and other costs associated with executive management, finance, accounting, tax, treasury, legal, information technology, risk management, human resources, payroll, and other management services.

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, 2004, 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.

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. The businesses of the Company may also be significantly influenced by the general economy, 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 they serve. 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

8

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 cost reduction efforts. Total research and development expenditures for all of the businesses in the years ended December 31, 2004, 2003 and 2002, 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 scrap metal and steel as well as labor, lumber and other building materials.

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. Expenses 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, 2004, 2003 and 2002, were approximately $14.6 million, $10.8 million and $7.0 million, respectively. The increase in expenses from 2003 to 2004 was primarily due to a $4.0 million charge related to legacy environmental issues in Anniston, Alabama. The increase in expenses from 2002 to 2003 occurred at Sloss, which increased approximately $4.5 million due to additional compliance costs for ongoing operations primarily related to obtaining a new permit for its Biological Treatment Facility of $1.7 million and an increase of approximately $2.7 million related to remediation activities mandated by the Environmental Protection Agency ("EPA"). 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 or results. 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 $3.3 million per year in the next five years. Capital expenditures for the years ended December 31, 2004 and 2003 for environmental requirements were $3.8 million and $2.0 million, respectively.

        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

9

required. Management does not believe monitoring or further cleanup costs, if any, will have a material adverse effect on the financial condition or results of operations of the Company and its subsidiaries.

        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 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 its wastes allegedly were transported or deposited. U.S. Pipe is among many PRP's at such sites and a significant number of the PRP's 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 finalized respecting one of the sites. U.S. Pipe has satisfied its obligations under the Consent Order at a cost that was not material. Natural resource damage 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, located in Anniston, Alabama, the PRPs have been negotiating an administrative consent order with the EPA. Based on these negotiations, management estimates the Company's share of liability for cleanup, after allocation among several PRPs, will be approximately $4 million, which was accrued in 2004. Civil litigation in respect of the site is also ongoing. Management does not believe that U.S. Pipe's share of any liability will have a material adverse effect on the financial condition of the Company and its subsidiaries, but could be material to results of operations in future reporting periods.

        Sloss Industries entered into a consent order in 1989 relative to a Resource Conservation Recovery Act ("RCRA") compliance program mandated by the EPA. A RCRA Facility Investigation ("RFI") 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 was presented to the EPA, was implemented during 2003 with progress continuing in 2004. Monitoring requirements will continue on a long-term basis and contamination levels are expected to continue to decline. Additionally, new EPA requirements relating to surface soil sampling and results are now being considered. This change in focus will possibly delay the timing of efforts relating to ground water remediation.

        The Jefferson County (Alabama) Department of Health has alleged emissions and reporting failures that violated provisions of Sloss' Title V Air Permit and regulations under the Clean Air Act. A notice of violation was issued in December of 2003, and Sloss received notice of a proposed penalty of $0.3 million in January of 2005. The penalty is subject to 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, but such cleanup costs could be material to results of operations in a reporting period.

10

Employees

        As of December 31, 2004, the Company and its subsidiaries employed 4,953 people, of whom 2,964 were hourly workers and 1,989 were salaried employees. Unions represented approximately 2,705 employees under collective bargaining agreements, of which approximately 1,041 were covered by one contract with the United Mine Workers of America, which expires on December 31, 2006.

Item 2.    Description of Property

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

11

        Recoverable coal reserves assigned to currently operating mines were estimated to be approximately 147 million tons as of December 31, 2004.

        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, 2004
(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. The Company's coal reserves have not been reviewed by an independent third party in the last three years.

(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 (demonstrated resources) 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 and 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)

During December 2003, a determination was made to close Mine No. 5 during the fourth quarter of 2004. In April 2004, a determination was made to extend the coal production schedule for Mine No. 5 to mid-2005. In December 2004, the coal production schedule was further extended to fourth quarter 2006.

(7)

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

(8)

Bessie Mine suspended operations in August 1988.

(9)

Quality factors are on a "received basis", which includes an estimate for moisture, which averaged 1.4% to 1.8% during 2004.

Item 3.    Legal Proceedings

        See the section entitled "Environmental" in Description of Business and Notes 11 and 17 of "Notes to Consolidated Financial Statements" included herein.

12

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.

        Our executive officers as of March 16, 2005 are listed below. On February 22, 2005, the Company announced that Don DeFosset, Chairman, President and Chief Executive Officer, intends to retire. He will continue his duties as President, Chief Executive Officer and Chairman of the Board of Directors until the hiring of his successor.

        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 of 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. 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 1999 through January 2001.

        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 1999 to November 2000.

        Miles C. Dearden was appointed Senior Vice President in February 2005 and Vice President, Treasurer in April 2002. Previously, he was Assistant Treasurer beginning in March 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 Global Corporate and Investment Bank.

        Victor P. 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 1994 to July 2002, most recently as Vice President, Secretary and Deputy General Counsel.

        Joseph J. Troy was appointed Senior Vice President—Financial Services in April 2002 and President of Mid-State Homes in August 2001. Prior thereto, he was Senior Vice President and Treasurer of the Company from November 2000. He was Executive Vice President and Chief Financial Officer of Gold Standard Multimedia from February 2000 to November 2000. From 1998 through February 2000, he was Vice President and Treasurer of the Company.

13

        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.

        George R. Richmond was appointed President and Chief Operating Officer of Jim Walter Resources in 1997. Mr. Richmond has held various positions at JWR from 1978 to 1997.

        Lawrence S. Comegys was appointed President of Jim Walter Homes in January 2004. Prior to joining the Company, from January 2002 to January 2004 he was Vice President of the Wilherst Group, Inc. and President of Gulf Urban Group, from February 2002 to September 2002, Vice President of Landmar LLC., all companies involved in residential and commercial real estate development. Prior thereto, he was President of East Coast Homebuilding at WCI Communities from February 2001 to December 2001, and from 1997 to January 2001 was Florida Region President with Pulte Home Corporation.

        Ray Torok was appointed President of U.S. Pipe in July 2004. Prior to joining the Company, from May 2003 to December 2003, he was interim President at Golden Casting Corporation, a foundry operation producing highly engineered precision castings and from 1998 to February 2003, he was President and Chief Executive Officer at Cold Metal Products, a steel production company.

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. 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, 2004, the Company declared and paid to shareholders of record on February 18, May 13, and August 13, a dividend of $.03 per share as of each of these dates, and on November 12 a dividend of $.04 per share. During the year ended December 31, 2003, the Company declared and paid to shareholders of record on February 20, May 15, August 14 and November 13 a dividend of $.03 per share as of each of these dates. Covenants contained in certain of the debt instruments referred to in Note 12 of "Notes to Consolidated Financial Statements" may restrict the amount the Company can pay in cash dividends.

        As of March 1, 2005, there were 150 shareholders of record of the Common Stock.

14

        The following table sets forth certain information relating to the Company's equity compensation plans as of December 31, 2004:

Recent Sales of Unregistered Securities

        On April 20, 2004, the Company issued and sold in a private placement, $175 million principal amount of 3.75% convertible senior subordinated notes, due 2024, to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. Proceeds to the Company were approximately $168.9 million, net of approximately $6.1 million of underwriting fees and expenses.

        The convertible senior subordinated notes are convertible, subject to certain conditions and under certain circumstances, into the Company's common stock at an initial conversion rate of 56.0303 shares of common stock per $1,000 principal amount of notes, which is equivalent to an initial conversion price of approximately $17.85 per share, subject to adjustment.

        A registration statement in respect of the convertible senior subordinated notes and the shares issuable upon conversion was deemed effective by the SEC on October 13, 2004.

Purchase of Equity Securities by the Company and Affiliated Purchasers

        The following table presents information with respect to purchases of common stock of the Company made during the year ended December 31, 2004 by Walter Industries, Inc. or any "affiliated purchaser" of Walter Industries, Inc., as defined in Rule 10b-18(a)(3) under the Exchange Act.

(1)

The Company repurchased 3,960,784 shares of its common stock from certain affiliates of Kohlberg, Kravis, Roberts and Co. ("KKR") and 1,000,000 shares from the purchasers of the convertible senior subordinated notes. These shares were purchased pursuant to resolutions adopted by the Board of Directors on April 12 and April 22, 2004. There is no further authority available for stock repurchases pursuant to these resolutions.

(2)

The Company repurchased 1,997,805 shares of its common stock from certain affiliates of KKR. These shares were purchased pursuant to a resolution adopted by the Board of Directors on October 28, 2004. There is no further authority available for stock repurchases pursuant to this resolution.

15

Item 6.    Selected Financial Data

        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, 2004, 2003, 2002 and 2001 and the fiscal year ended May 31, 2000.

        The following data, insofar as it relates to each of the years ended December 31, 2004, 2003, 2002 and 2001, the transition period ended December 31, 2000 and the fiscal year ended May 31, 2000, 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 as they relate to the Company's continuing operations as of December 31, 2004. The information presented below is for continuing operations and should be read in conjunction with the Company's consolidated financial statements and the notes thereto including Note 2 related to discontinued operations, Note 3 related to significant accounting policies, and the other information contained elsewhere in this report.

(1)

Excludes assets of discontinued operations held for sale

(2)

Raised to $0.04 per common share in the fourth quarter of 2004.

(3)

First quarter of 2001 was $0.04 per common share due to a four-month transition period associated with a change in the Company's fiscal year end.

16

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 19 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 Recognition

        The Company recognizes revenue based on the recognition criteria set forth in the Securities and Exchange Commission's Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements."

        Homebuilding—The Company's homebuilding operations involve three principal types of homebuilding transactions:

a.

Selling a home constructed for consumers on real estate owned by the consumer ("On Your Lot Sales");



b.

Selling modular homes constructed in a factory principally to distributors for re-sale to consumers ("Modular Sales");



c.

Selling a home constructed for consumers on real estate owned by the consumer but encumbered by a previous borrowing ("Real Estate Sales");

        Sales for cash at closing do occasionally occur for each of the above categories. However, except for Modular Sales, most sales involve some form of seller financing.

        On Your Lot Sales constitute the majority of the sales in the homebuilding business (approximately 83% of new units sold in 2004). Since the real estate (land) is already owned by the customer and is not financed by the Company, these transactions represent sales of personal property financed by instalment sales contracts ("Notes"). Revenue from the construction and sale of a home is recognized upon completion of construction and legal transfer of ownership to the customer.

        Modular Sales are the second largest component of homebuilding sales. These sales are made principally to distributors for resale to consumers and do not involve sales of real estate. Sales are made under various customary industrial credit terms, with receivables typically due within 10 to 90 days following delivery. Revenue is recognized when legal ownership has transferred and upon delivery to the distributor or to a customer site.

17

        For Real Estate Sales, the Company finances both a home and the related real estate. Revenues on Real Estate Sales are recognized by the full accrual method in accordance with SFAS 66, "Accounting for Sales of Real Estate," when:

a.

The sale is consummated at closing with the customer after construction is completed and legal transfer of ownership has occurred.



b.

The buyer's initial cash investment is no less than 5% of the sales value. The buyer's continuing investment is required to be a level monthly payment sufficient to amortize the borrowing over a term not to exceed 30 years.



c.

The Company's receivable is secured by a first mortgage and is not subject to future subordination.



d.

The Company transfers to the buyer the risks and rewards of ownership and does not have any continuing involvement with the property.

        Financing—Within the Financing Segment, MSH purchases and services mortgage instalment notes originated by JWH and WMC offers financing to homebuyers that is secured by mortgages and liens. References to instalment notes or mortgage instalment notes include mortgage loans offered by WMC.

        Instalment notes receivable are initially recorded at the discounted value of the future instalment note payments using an imputed interest rate in accordance with Accounting Principles Board Opinion No. 21. "Interest on Receivables and Payables," ("APB 21") by JWH. 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 a benchmark funding rate in order to cover costs and expected losses. 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 determining the allocation of income between the amount recognized by the Homebuilding segment from the construction of the home and the amount recognized by the Financing Segment over the life of the instalment note as interest income. Variations in the estimated market rate of interest used to initially record instalment notes receivable could affect the amount and timing of income recognition in each of these segments. Instalment note payoffs received in advance of scheduled maturity (prepayments) cause interest income to increase due to the recognition of remaining unamortized discounts arising from the application of APB 21 at the note's inception.

        The interest income on instalment notes generated by both MSH and WMC is recognized using the interest method. The legal instruments used in each company allow for different amounts to be charged to the customer for late fees and ultimately recognized as revenue. JWH offers instalment notes, which state the maximum amount to be charged to the customer, and ultimately recognized as revenue, based on the contractual number of payments and dollar amount of monthly payments. WMC offers mortgage loans that have fixed monthly payments and repayment terms similar to instalment notes. Both MSH and WMC have the ability to levy costs to protect their collateral position upon default, such as attorney fees and late charges as allowed by state law.

        Instalment notes and mortgage loans are placed on non-accrual status when any portion of the principal or interest is ninety days past due. When placed on non-accrual status, the related interest accrued is reversed against interest income of the current period. Instalment notes are removed from non-accrual status when the amount financed and the associated interest income become current. Recoveries of advanced taxes and insurance related to instalment notes are recognized as income when collected.

18

        The Financing segment sells homes and related real estate repossessed or foreclosed on by MSH or WMC from customers in default of their loans or notes ("Repo Sales"). Repo Sales involve the sale and in most circumstances the financing of both a home and related real estate. Revenues from Repo Sales are recognized in accordance with SFAS 66 by the full accrual method where appropriate. However, the requirement for a minimum 5% initial cash investment per SFAS 66 is frequently not met. When this is the case, losses are immediately recognized, and gains are deferred and recognized by the instalment method until the buyer's investment reaches the minimum 5%. At that time, revenue is recognized by the full accrual method.

        Industrial Products—For shipments via rail or truck, revenue is recognized when title passes upon delivery to the customer. Revenue earned for shipments via ocean vessel is recognized under international shipping standards as defined by Incoterms 2000 when title and risk of loss transfer to the customer.

        Natural Resources—For coal shipments via rail, revenue is recognized when title and risk of loss transfer to the customer when the railcar is loaded. Revenue earned for coal shipments via ocean vessel is recognized under international shipping standards as defined by Incoterms 2000 when title and risk of loss transfer to the customer. For the Company's natural gas operations, revenues are recognized when the gas has been transferred to the customers' pipeline, at which time transfer of title occurs.

        Other—For products shipped via rail or truck, revenue is recognized when the product is placed on the rail or in the truck, which is when risk of loss and title transfers to the customer. Land sales are recognized as revenue when legal transfer of ownership to the buyer occurs, which is at closing.

        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

        Allowances for losses on trade and other accounts receivable are based, in large part, upon judgments and estimates of expected losses and specific identification of problem trade accounts and other receivables. Significantly weaker than anticipated industry or 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.

        Management's periodic evaluation of the adequacy of the allowance for losses on instalment notes is based on the Company's past loss experience, known and inherent risks in the portfolio, delinquencies, the estimated value of the underlying real estate collateral and current economic and market conditions within the applicable geographic areas surrounding the underlying real estate. The allowance for losses on instalment notes and mortgage loans is increased by provisions for losses charged to income and is reduced by charge-offs net of recoveries.

Employee Benefits

        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

19

based on calculations specified by generally accepted accounting principles, which include various actuarial assumptions including the following:

        The discount rate used to determine pension and other post-retirement expense was decreased to 6.00% for 2005 from 6.35% used in 2004. The rate of return on plan assets used to determine pension expense is 8.90% for both 2005 and 2004. The discount rate is based on a model portfolio of AA rated bonds with a maturity 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.

        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

20

one-percentage-point change in the rate for each of 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 Black Lung liability would decrease the liability by $0.9 million, while a one-percentage-point decrease in the discount rate would increase the liability by $1.1 million.

        The Company applies a discount rate at a risk-free interest rate, generally a U.S. Treasury bill rate, for each policy year. The rate used is one with a duration that corresponds to the weighted average expected payout period for each policy year. Once a discount rate is applied to a policy year, it remains the discount rate for the year until all claims are paid. The use of this method decreases the volatility of the liability as impacted by changes in the discount rate.

Litigation, Investigations and Claims

        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 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 counsel of pending or threatened litigation; and assessments 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 11 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

21

Company believes that its tax filing positions have substantial merit and it intends to vigorously defend these positions. The Company has established accruals 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 accrual is based on an assessment by management of both the probability and extent of loss 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.

Accounting for the Impairment of Long-Lived Assets Including Goodwill and Other Intangibles

        Long-lived assets, including goodwill and other intangibles, are reviewed for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable. The Company periodically evaluates whether events and circumstances have occurred that indicate possible impairment. Goodwill and other intangibles are also reviewed for possible impairment at least annually. The Company uses estimates of future cash flows of the related asset, asset grouping or reporting unit in measuring whether the assets are recoverable. Changes in actual or estimated future cash flows could have an impact on the recoverability of such assets, resulting in future impairment charges.

RESULTS OF OPERATIONS

2004 Summary Operating Results

(1)

Excludes corporate debt interest expense.

22

Year Ended December 31, 2004 and 2003

Overview

        The Company's net income for the year ended December 31, 2004 was $49.9 million, or $1.14 per diluted share, which compares to a net loss of $29.0 million, or $0.67 per diluted share in the prior year period. Net income in the year ago period includes a loss from discontinued operations of $32.7 million, or $0.76 per diluted share. Income from continuing operations for the year ago period was $3.3 million, or $0.08 per diluted share, which included income of $21.4 million due to favorable resolution of an IRS tax matter related to tax returns in fiscal years 1995 and 1996, partially offset by $8.1 million in after-tax expense in the Industrial Products segment related to settlements of litigation matters and ceasing manufacturing operations at U.S. Pipe's castings plant in Anniston, Alabama, $4.4 million in after-tax expense in the Natural Resources segment for increased benefits costs associated with the curtailment of the other postretirement benefits plan for the announced closure of Mine No. 5, $1.6 million of after-tax impairment charges for the write-off of remaining goodwill in connection with the shutdown of the pattern shop at Southern Precision and $1.1 million in an after-tax impairment charge related to the sale of the Company's former headquarters building.

        Other principal factors impacting income from continuing operations in the current year results compared to the prior year period include:

•

Average selling price increases at Natural Resources for coal and natural gas were 31% and 33%, respectively, in the current period compared to the prior year period.



•

Financing results in the current period include a decrease in provision for losses, lower delinquency rates and reduced interest expense, partially offset by a $4.0 million provision for estimated hurricane losses and increased loss accruals associated with the repossessed homes inventory.



•

Price increases in Industrial Products during 2004 have more than offset increases in scrap metal, transportation and other manufacturing costs.



•

Homebuilding had fewer unit completions and higher costs that resulted in lower margins.



•

The current period reflects a decrease in income from land sales compared to the year-ago period.



•

Results for 2004 reflect improvements at Sloss from higher prices for furnace and foundry coke.



•

The Company reversed certain valuation allowances related to state deferred income tax assets previously provided by $12.5 million in the Natural Resources and Other segments. The Company established valuation allowances of $4.6 million for certain state deferred income tax assets in the Industrial Products and Homebuilding segments.

        Natural Resources' dramatic increase in results in 2004 was due to a 31% increase in average coal prices, a strong increase in coal production, higher natural gas prices, lower production costs and increased shipments at favorable spot coal pricing. The improvement in Industrial Products (after excluding the prior year charges related to settled litigation matters, ceasing manufacturing operations at the U.S. Pipe castings plant in Anniston, Alabama and a write-off of goodwill related to a disposed entity and the current year environmental costs) is due to improved ductile iron pipe selling prices, partially offset by higher scrap metal and other costs. The current period results also include losses in the Homebuilding segment caused by lower new home order volumes in the second half of 2003 and first half of 2004, resulting in fewer unit completions during the current year, increased lumber costs, job cost overruns and expenses associated with closing and updating sales centers. Financing results, excluding the $4.0 million provision for estimated hurricane losses, improved $7.4 million compared to

23

the prior year period due to a decrease in the provision for losses, improved delinquency performance, lower interest expense and higher prepayment income.

Continuing Operations

        Net sales and revenues for the year ended December 31, 2004 were $1.462 billion, a 10% increase from $1.326 billion in 2003. Revenue increases within the Natural Resources and Industrial Products segments were partially offset by the decrease in the Homebuilding segment. Natural Resources revenues increased due to price increases for coal and natural gas and an increase in coal tons sold, partially offset by a decrease in natural gas volumes. Industrial Products revenues increased due to price increases implemented during the year to keep pace with the rising costs of scrap metal and other materials. Homebuilding revenues decreased due to the lower unit completions partially offset by higher average selling prices.

        Cost of sales, exclusive of depreciation, of $960.8 million was 78.5% of net sales in 2004 versus $922.0 million and 85.0% of net sales in 2003. Cost of sales increased $38.8 million primarily due to higher volumes and increased scrap metal and other costs in the Industrial Products segment. The gross margin percentage improved as compared to the prior year period because of increases in sales prices in Natural Resources and Industrial Products, partially offset by higher scrap metal and other costs in the Industrial Products segment and higher lumber costs and job cost overruns in the Homebuilding segment.

        Depreciation for the year ended December 31, 2004 was $60.2 million, an increase of $6.8 million compared with 2003, primarily as a result of the purchase of mining equipment at Natural Resources.

        Selling, general and administrative expenses of $207.5 million were 14.2% of net sales and revenues in 2004, compared to $178.3 million and 13.5% in 2003. An increase of $11.5 million in the Homebuilding segment related primarily to costs incurred to remodel and close branches and for higher insurance, employee-related, consulting and legal costs. The increase of $2.4 million in the Financing segment was due to higher employee-related and legal costs. This increase was slightly offset by a decrease at Industrial Products due to a legal settlement expensed in 2003 which was partially offset by current year environmental charges. The increase of $6.2 million in the Natural Resources segment was primarily due to increased legal expenses associated with the Mine No. 5 accident and increased employee-related costs. Corporate expenses increased $12.1 million mainly due to increased employee-related costs, plus higher internal and external audit and consulting fees related to Sarbanes-Oxley compliance.

        Provision for losses on instalment notes decreased to $12.4 million in 2004, compared to $15.7 million in 2003 due to improved recovery rates on sales of repossessed homes.

        Interest expense for mortgage-backed and asset-backed notes decreased to $127.3 million in 2004, compared to $129.3 million in 2003 due to the decrease in mortgage-backed and asset-backed note borrowings.

        Interest expense on corporate debt decreased $3.9 million to $18.7 million in 2004 due to reduced interest rates and lower debt balances in 2004. The 2003 period included a $2.5 million reduction related to the favorable IRS settlement. The convertible senior subordinated notes have a fixed interest rate of 3.75%. The prior year debt included a revolving credit facility, paid in full during the second quarter of 2004, which had an interest rate of 350 basis points over LIBOR and a term loan facility which had an interest rate of 425 basis points over LIBOR.

        The provision for estimated hurricane losses in 2004 of $4.0 million relates to estimated claims incurred by insurance customers of the Company's Financing segment from four major hurricanes that impacted the Southeastern United States during the third quarter.

24

        The Company's effective tax rate for 2004 and 2003 differed from the federal statutory rate primarily due to depletion deductions related to the Company's mining operations and the effect of state income taxes. Additionally, the Company had a net reduction of valuation allowances of $7.9 million related to deferred state income tax assets. The prior year tax rate also differed from the statutory tax rate due to a reduction of income tax accruals as a result of the favorable settlement of a dispute with the IRS. In connection with the IRS dispute settlement, the Company recorded reductions of $2.5 million and $18.9 million to interest expense and income taxes, respectively, in the statement of operations.

        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 $233.8 million during 2004, a decrease of $43.1 million, or 15.6% from the prior period as a result of fewer unit completions, partially offset by higher average selling prices. The higher selling price reflect price increases implemented in the first half of 2004, as well as the Company's on-going strategy to market and sell larger homes with more amenities. Total unit completions decreased by 913 or 22%, compared to the prior year, as a result of lower volumes of new sales orders beginning in the last half of 2003. This reduction was due to a variety of factors, including reduced advertising and promotional initiatives. Additionally, during the third quarter of 2004, a series of hurricanes and the resulting excessive rain caused construction delays, which reduced new starts and completions through much of the Southeast. This reduction also reflects market conditions that were weaker in the Company's historical affordable-housing market segment compared to the broader homebuilding industry. Excluding the modular business, 2,730 units were completed in the current period, compared to 3,523 in the year-ago period. The modular business completed 521 homes in the current period, 120 fewer than the year-ago period. This reduction reflects a weak economic environment in the Carolinas, the market area served by this business.

        The segment operating loss was $33.3 million for the year ended December 31, 2004, compared to an operating loss of $0.5 million in the prior year. This decrease was primarily due to fewer unit completions ($8.9 million), reduced margins primarily due to higher job and lumber costs ($13.6 million), increases in payroll costs ($6.3 million) related to market adjustments to salaries, severance related to more than 100 eliminated positions and a change in the commission structure. Additionally, other costs, primarily other employee costs increased $5.1 million in 2004 compared to the prior year primarily related to hiring experienced industry personnel, consulting expenses, legal expenses and the closure of twenty-six branches. The Homebuilding segment instituted one price increase in the fourth quarter of 2003 and two price increases in 2004 in response to rising lumber and other costs. The first of these increases was effective October 1, 2003 and increased prices 3%, the second was effective March 13, 2004 and increased prices 5% and the third increase of 3% was effective May 17, 2004.

        Homebuilding has instituted new sales and marketing initiatives, including the creation of a new training program for its sales force and a more aggressive and focused approach to advertising, which, coupled with the redesign of its sales centers and enhanced model offerings, are among the revitalized

25

business approaches being taken to drive higher volumes. Homebuilding is in the process of automating a new construction scheduling system and is upgrading the staffing and training in the purchasing and construction functions. These actions are expected to improve cycle times and accelerate new starts. Because of the long lot preparation and building cycle in the scattered lot business, it normally requires six to eight months for new sales to generate revenues. The Homebuilding segment is expected to return to a profitable run rate during the fourth quarter of 2005.

Financing

        Net sales and revenues were $242.8 million in 2004, an increase of $3.0 million from the prior year. This increase is attributable to higher prepayment-related interest income and higher property insurance revenues. Operating income was $54.8 million in 2004, compared to $51.4 million in the year-ago-period. The segment results improved as a result of a decline in provision for losses on instalment notes, higher prepayment income (prepayment speeds were 10.1% in 2004 compared to 8.9% in 2003) and lower interest expense partially offset by a $4.0 million provision for estimated hurricane losses. Delinquencies (the percentage of amounts outstanding over 30 days past due) were 4.9% at December 31, 2004, down from 5.7% at December 31, 2003, reflecting strong portfolio performance.

        Repossessed inventory units remained constant with 459 units ($28.9 million) at December 31, 2004, compared to 455 units ($27.5 million) at December 31, 2003.

        Financing expects instalment notes, related debt balances and corresponding interest income and expense to decrease due to unit declines at Homebuilding, which is expected to be partially offset by continued purchases of seasoned mortgages. The Financing segment has also completed a new warehouse facility for $200.0 million, which will provide temporary financing for the purchases of instalment notes and loans. Additionally, the segment anticipates to spend $3.0 to $5.0 million for system upgrades over the next two years to upgrade its portfolio management capabilities.

Industrial Products

        Net sales and revenues were $546.6 million for the year ended December 31, 2004, an increase of $84.7 million from $461.9 million for the year ended December 31, 2003. This increase was primarily due to higher sales prices and increased sales volumes, especially for ductile iron pipe which had a 22% increase in average selling price and an 8% increase in sales volume. Prices were lower in the prior year as a result of an industry price war that began in the second quarter of 2002. U.S. Pipe's pricing actions since June 2003 have offset scrap metal cost increases and other manufacturing costs. The increase in revenue from increased selling prices was partially offset by a decrease in revenues from the Southern Precision and Vestal Manufacturing subsidiaries, which were sold in 2003 and 2004, respectively.

        Operating income for the segment was $7.6 million, compared to a $13.5 million loss in the prior year. The profit improvement in 2004 was primarily attributable to higher sales prices ($77.7 million), slightly higher volumes ($8.2 million), recoveries from an environmental-related insurance settlement ($1.9 million), partially offset by higher costs for scrap metal and other materials ($64.1 million), higher manufacturing costs ($7.6 million), environmental costs ($4.0 million) and higher costs related to workers' compensation, salaries and wages, legal expenses and depreciation ($2.7 million). The current year also includes a loss resulting from the sale of Vestal Manufacturing ($1.2 million). Prior year operating income includes charges related to restructuring costs to cease operations at the castings plant in Annistion, Alabama ($5.9 million); settled litigation matters ($6.5 million); write-off of goodwill related to a disposed entity ($2.4 million); and settlement of a commercial dispute ($1.7 million).

26

        Significant increases in the cost of scrap metal occurred at U.S. Pipe in 2004. Scrap metal is a primary raw material in the production of ductile iron pipe, accounting for up to 40% of the costs of producing pipe. Historically averaging $110 per net ton or less in costs, scrap metal cost averages were in excess of $220 per ton in 2004. Unparalleled scrap export volume, especially to China, has been the principal reason for the record high costs of scrap metal. The Company believes that these sales price increases have more than offset the increases in cost that have occurred and have and will continue to enable the Company to enhance profitability. However, the Company's ability to achieve expected improved 2005 results is dependent on its continued ability to pass along scrap cost volatility to customers in the form of price increases. This ability could be affected by the reactions of customers or competitors to these price increases.

Natural Resources

        Net sales and revenues were $351.4 million for the year ended December 31, 2004, an increase of $93.6 million from $257.8 million in the prior year. The increase was primarily due to higher metallurgical coal and natural gas prices and increased coal production, partially offset by decreased natural gas volumes.

        The average natural gas selling prices shown for 2004 and 2003 include the effects of approximately $1.5 million of hedge gains and $5.6 million of hedge losses, respectively, on hedges of anticipated natural gas production and sales.

        For 2004, Natural Resources' operating income was $69.7 million, compared to an operating loss of $26.4 million in the prior year. The increase was due to higher metallurgical coal and natural gas sales prices and higher metallurgical coal volumes, partially offset by lower gas volumes, legal expenses related to the settlement of the Mine No. 5 accident and increased employee related costs. Prior year operating income included $6.7 million of restructuring charges related to the announced accelerated closure of Mine No. 5.

        In December 2003, the Company announced that JWR expected to close Mine No. 5 during the fourth quarter of 2004, approximately two years earlier than originally scheduled, due to continuing adverse geologic conditions. In April 2004, the Company announced that due to increases in metallurgical coal prices, it had extended its coal production schedule for Mine No. 5 into 2005. In December 2004, the Company extended its coal production schedule for Mine No. 5 into the fourth quarter of 2006. The Company previously estimated total costs of the shutdown at approximately $17.8 million, of which approximately $12.7 million would qualify as restructuring costs. As a result of the delay in the shutdown of the mine, total expected costs decreased to approximately $14.5 million, of which approximately $9.4 million would qualify as restructuring costs. Due to the change in the timing of the mine shutdown and the related decrease in estimated restructuring costs, the Company remeasured the liability, which resulted in a $0.7 million reversal during the first quarter of 2004 of amounts previously charged to restructuring expense in 2003 and $1.0 million reversal during the fourth

27

quarter of 2004 of amounts previously charged to restructuring expense during 2004. Estimated costs associated with the restructuring are as follows (in thousands):

        On December 16, 2004, the Company announced that it has approved up to $135 million for a capital investment program to increase coal production capacity at Mine No. 7. It is anticipated that the development of the program will occur over a four-year period and increase annual production capacity by approximately 2.7 million tons per year starting in the fourth quarter of 2008. Capital expenditures for 2005 related to this expansion project are expected to be $15.5 million. In addition, at Mine No.4, the Company expects to spend $4.5 million in 2005 to increase hoist capacity by 10% to alleviate a forecasted bottleneck in the production process starting in early 2006.

        Strong performance at Natural Resources is expected to continue in 2005. Increased demand, particularly from China, as well as reduced supplies, has contributed to price increases in the world's metallurgical coal markets. In the first quarter of 2005, Jim Walter Resources completed negotiations for most of its annual metallurgical coal supply contracts, which generally cover the period from July 2005 through June 2006 at prices of $107 per ton, nearly double the 2004 contract level. The price increase in metallurgical coal should have a positive impact on Natural Resources profitability in 2005. In 2005, Jim Walter Resources expects to produce between 6.0 and 6.4 million tons of coal, which is lower than 2004 primarily because output at Mine No. 5 is expected to decline over the course of the year due to shorter panels and more difficult geologic conditions related to the remaining coal.

Other

        Net sales and revenues were $109.8 million for 2004 compared to $107.0 million in the prior year. Sloss revenues were $13.0 million higher than the prior year, which were partially offset by land sales that were $8.6 million lower than the prior year. Sloss revenues increased in 2004 due to overall increased sales volumes and higher prices for furnace and foundry coke, which increased 37% and 10%, respectively, over the prior year. Sloss operating income was $12.1 million higher than the previous year due to higher coke volumes and increased pricing.

        Net general corporate expenses principally included in selling, general and administrative expenses were $28.6 million in 2004 compared to $16.5 million in 2003. In 2004, corporate expenses were higher due to employee costs of $5.3 million primarily related to incentive compensation expense, higher professional service fees of $4.5 million related to internal and external audit services related to implementation of Sarbanes-Oxley Act requirements and increased workers compensation and medical expenses.

28

2003 Summary Operating Results

(1)

Excludes corporate debt interest expense.

(2)

Effective January 1, 2004, the Company revised its methodology of allocating certain corporate overhead expenses to all segments. Operating income for each segment now includes on allocation of corporate overhead expenses that are directly attributable to each segment's operations. 2003 amounts have been reclassified to conform to the 2004 presentation.

Year Ended December 31, 2003 and 2002

Continuing Operations

        Net sales and revenues for the year ended December 31, 2003 were $1.325 billion, substantially the same as in 2002. Revenue decreases within the Industrial Products and Other segments were offset by increases in the Homebuilding and Natural Resources segments. Industrial Products segment revenues decreased due to lower pipe, valve, hydrant and fittings volumes, partially offset by price increases. The volume decline occurred during the course of 2003 as U.S. Pipe instituted multiple price increases. These price increases were in response to rising scrap metal and other costs and an easing of the intense pricing competition within the industry that occurred in 2002. Revenues for the Other segment declined on lower sales volume for Sloss, partially offset by higher pricing for furnace coke and increased sales of land. Homebuilding revenues improved on higher average selling prices, partially offset by lower unit completions. Revenues were higher in Natural Resources due to an increase in coal tons sold and higher natural gas prices, partially offset by a decrease in natural gas volumes and slightly lower coal prices.

        Cost of sales, exclusive of depreciation, of $922.0 million was 85.0% of net sales in 2003 versus $862.4 million and 78.6% of net sales in 2002. The increase in cost of sales as a percentage of net sales

29

is primarily due to increased costs of lumber and other building materials in the Homebuilding segment, higher scrap metal, alloy, natural gas and other costs in the Industrial Products segment and higher production costs in the Natural Resources segment.

        Depreciation for the year ended December 31, 2003 was $53.4 million, an increase of $2.0 million compared with 2002 primarily due to increases at Homebuilding and Financing related to implementations of new enterprise systems and at Natural Resources due to capital expenditures for mining equipment.

        Selling, general and administrative expenses were $178.3 million in 2003, compared to $167.2 million in 2002. The increase in the Homebuilding segment was a result of higher costs related to a reorganization of the sales and construction organizations, as well as the implementation of a new enterprise system and new advertising and marketing initiatives. Industrial Products' increase principally related to the settlement of a class action employment matter of $6.5 million. In addition, there was an increase in environmental-related expenses at Sloss in 2003 of approximately $2.3 million. The increased costs in 2003 were partially offset by productivity and cost reduction programs in place throughout the Company. The 2002 results included a $2.6 million charge to bad debt expense related to a Sloss customer that filed for bankruptcy protection, as well as higher professional fees related to restating Mid-State Home's accounting for interest income on instalment notes to the interest method.

        Provision for losses on instalment notes increased to $15.7 million in 2003, compared to $12.4 million in 2002 due principally to anticipated increases in the estimated level of losses, as indicated by an increase in the number of repossessions and slightly higher losses on resales of repossessed homes.

        Postretirement benefits expense was $8.1 million in 2003, a reduction of $7.6 million from 2002 due to plan amendments effective January 1, 2003, which placed a monthly cap on Company contributions for salary post retirement healthcare coverage.

        Interest expense for mortgage-backed and asset-backed notes decreased to $129.3 million in 2003, compared to $135.1 million in 2002. This reflected lower interest rates, partially offset by higher borrowings.

        Interest expense on corporate debt was $22.6 million in 2003 versus $18.1 million in 2002. This increase resulted from higher interest rates on the 2003 facility beginning in April 2003, as compared to the previous facility, as well as the accelerated recognition of $2.4 million of term loan debt issue costs and discount amortization as a result of mandatory debt repayments required by the sale of AIMCOR and JW Aluminum in December 2003.

        The Company recorded approximately $16.8 million in restructuring and impairment charges during 2003 related to the cessation of various operations in the Industrial Products segment, the anticipated closure of Mine No. 5 in the Natural Resources segment, and a write-down of the Company's former headquarters building to its net realizable value prior to its sale.

        The Company's effective income tax rate for the year ended December 31, 2003 differed from the Federal statutory tax rate due to a reduction of income tax accruals as a result of the favorable settlement of a dispute with the IRS, a deduction for depletion related to the Company's mining operations, the effect of state and foreign income taxes and amortization of goodwill. In July 2003, the Company favorably resolved a longstanding dispute with the IRS concerning Federal income tax returns for fiscal years ended May 31, 1995 and 1996. The IRS had previously disallowed deductions of $391 million and related legal fees of $15 million associated with the settlement of veil piercing litigation in the Bankruptcy Proceedings. The Company successfully defended its position through an IRS appeals process, and will not be required to pay income taxes related to this issue. The Company had previously established accruals for both Federal income taxes and interest associated with this issue that were no longer required. Accordingly, the Company recorded reductions of $2.5 million and

30

$18.9 million to interest expense and income tax expense, respectively, in the statement of operations. The Company's effective tax rate for the year ended December 31, 2002 of 22.6% differed from the federal statutory tax rate due to a $2.8 million tax benefit related to the November 1998 sale of JW Window Components, a deduction for depletion related to the Company's mining operations and the utilization of a nonconventional fuel credit. 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.

        Discontinued operations for the year ended December 31, 2003 produced a net loss of $32.7 million, or $0.76 per diluted share, including a net loss on the sale of AIMCOR and JW Aluminum of $51.4 million, or $1.18 per diluted share. Income from discontinued operations for 2003 was $18.7 million, or $0.43 per diluted share, as compared to $21.1 million, or $0.47 per diluted share in 2002.

        The net loss for the year ended December 31, 2003 was $29.0 million, or $0.67 per diluted share. The net loss for the year ended December 31, 2002 was $52.5 million, or $1.17 per diluted share, which included an after-tax charge of $125.9 million, or $2.81 per diluted share, from the cumulative effect of a change in accounting principle related to the initial adoption of SFAS No. 142.

        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 $276.9 million during 2003, an increase of $6.7 million, or 2.5%, from the prior period. As compared to the prior year, average net selling prices increased in 2003, but were partially offset by fewer home completions. Average net selling prices increased as a result of the Company's on-going strategy to market and sell new product options, amenity upgrades and larger, more upscale models. Excluding the modular business, 3,523 homes were completed in 2003, compared to 3,596 in 2002. This reduction principally reflects market conditions that were weaker in the Company's historical affordable-housing, credit-challenged customer base, as compared to the broader homebuilding industry. The Company's modular business completed 641 homes during 2003, 30 less than in 2002. This reduction reflects a weak economic environment in the Carolinas, the market area served by this business.

        The segment operating loss was $0.5 million for the year ended December 31, 2003 compared to operating income of $15.2 million in 2002. The $15.7 million decrease was principally caused by fewer unit completions, higher lumber and other material costs, and expenses related to significant investments in a major advertising campaign, a reorganization of the sales and construction organizations, and installation of a new enterprise system during 2003, partially offset by increases in average selling prices.

Financing

        Net sales and revenues were $239.8 million in 2003, a decrease of $1.2 million from 2002. This decrease is attributable to lower interest income earned on restricted cash balances due to lower interest rates, partially offset by higher insurance revenues. Operating income was $51.4 million in 2003,

31

compared to $54.5 million in 2002. The decrease was a result of an increase in the provision for losses on instalment notes receivable due to anticipated higher losses resulting from a record level of bankruptcies and related foreclosures that will continue to move through the repossession and resale process. Income was also impacted by increased expenses related to higher commissions paid for insurance placed on customer homes and costs related to the implementation of new financial systems. This increase was offset by a $5.7 million decrease in interest expense, principally as a result of a reduction in the interest rates on borrowings. In addition, there was an increase in interest income on instalment notes from higher prepayment speeds as a result of increased recognition of unamortized discount that occurs when payoffs are received in advance of maturity. Prepayment speeds were 8.88% in 2003 compared to 6.85% in 2002. Delinquencies (the percentage of amounts outstanding over 30 days past due) at December 31, 2003 were 5.7% of net instalment balances outstanding.

        Repossession inventory units at December 31, 2003 increased to 455 units ($27.5 million), compared to 255 units ($16.3 million) at December 31, 2002. This increase is attributable to higher levels of bankruptcies and the Company's efforts to accelerate foreclosure activity during 2002 and 2003.

Industrial Products

        Net sales and revenues were $461.9 million for the year ended December 31, 2003, a decrease of $27.3 million from $489.2 million for the year ended December 31, 2002. This decrease was due to lower pipe, valve, hydrant and fittings volumes, partially offset by price increases. Total U.S. Pipe tons shipped were down 5.6% in 2003 compared to 2002. The volume decline occurred during the course of the year as U.S. Pipe instituted multiple price increases. These price increases were in response to rising scrap metal and other costs and an easing of the intense pricing competition within the industry that occurred in 2002.

        The operating loss of $13.5 million for 2003 was a $38.1 million deterioration from operating income of $24.6 million for 2002. Operating income decreased as a result of lower volumes, higher scrap metal costs ($15.6 million), increased litigation accruals principally related to an employment matter at U.S. Pipe ($6.5 million), increased workers compensation costs ($3.5 million) and increased natural gas costs ($3.7 million). Segment results also reflected $1.7 million to settle a commercial dispute during 2003 that had previously been accrued in the Other segment and, accordingly, there was no net impact on consolidated results of operations. In addition, U.S. Pipe recorded a restructuring charge related to ceasing production and manufacturing operations at the U.S. Pipe Anniston casting plant ($5.9 million), which is more fully described below.

        Major increases in the cost of scrap metal occurred at U.S. Pipe in 2003. Scrap metal is a primary raw material in the production of ductile iron pipe, accounting for up to 40% of the costs of producing pipe. Historically averaging $110 per net ton or less in cost, scrap metal cost averaged in excess of $145 per ton in 2003. Unparalleled scrap export volume, especially to China, has been the principal reason for the record high costs of scrap metal.

        On April 29, 2003, U.S. Pipe ceased production and manufacturing operations at its U.S. Castings plant in Anniston, Alabama. The decision to cease operations was the result of several years of declining financial results and increased foreign competition and resulted in the termination of 80 employees. Exit costs associated with the plant closure are estimated to be $6.5 million and such costs

32

will be incurred within twelve months. Estimated costs associated with the restructuring are as follows (in thousands):

        Other associated costs principally included site clean-up costs that were expensed as incurred.

Natural Resources

        Net sales and revenues were $257.8 million for the year ended December 31, 2003, an increase of $8.0 million from the $249.8 million in 2002. The increase in net sales and revenues is attributable to an increase in coal tons sold and an increase in natural gas selling prices, partially offset by a decrease in natural gas volumes and slightly lower coal prices.

        The average natural gas selling prices shown for 2003 are net of approximately $5.6 million of losses on hedges of anticipated natural gas production and sales.

        For 2003, Natural Resources had an operating loss of $26.4 million, compared to income of $21.6 million for 2002. This decline was due to the effect of adverse geological conditions and unanticipated equipment repairs in Mine No. 7, which resulted in 31 days of lost longwall production. In Mine No. 5 a scheduled longwall move took longer than expected, resulting in 18 days of lost production, and a geologic fault slowed the longwall advance rate in the second half of 2003. Additionally, the Mine Safety and Health Administration temporarily ordered the closure of Mine No. 5 for approximately two weeks in July 2003, resulting in $1.3 million of idle mine costs. The temporary closure resulted in no fines or penalties. Partially offsetting these negatives, the natural gas operation posted increased revenue and operating income, due to higher gas prices.

        In December 2003, the Company announced that JWR expected to close Mine No. 5 during the fourth quarter of 2004, approximately two years earlier than originally scheduled, due to continuing adverse geologic conditions. As a result, Natural Resources expected to incur restructuring charges and additional operating costs associated with the shutdown of approximately $17.8 million, of which approximately $12.7 million would qualify as restructuring charges. Costs associated with this closure recorded in 2003 included $6.7 million recorded as restructuring charges, which was primarily for an increase in benefits costs associated with a curtailment of the other post-retirement benefits plan

33

($5.8 million) and severance costs ($0.8 million). Estimated costs associated with the restructuring were as follows (in thousands):

        The Company's remaining two mines will benefit from the closure by redeploying miners and equipment to increase productivity and reduce capital requirements.

        During the third quarter of 2002, Mine No. 5 returned to full production following a September 2001 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 $25.4 million of business interruption claims as reductions to cost of sales in 2002. In addition, cost of sales included $12.7 million for re-entry costs that were fully offset by property insurance and casualty claims reflected as reductions to cost of sales. The Company also recorded a $3.7 million reduction in the allowance for potential uncollectible insurance recoveries as a reduction of cost of sales in 2002. Additionally, approximately $2.2 million of expected insurance proceeds were recorded as miscellaneous income in 2002, representing the gain on a reimbursement of fully depreciated equipment, the replacement cost of which was capitalized during the year ended December 31, 2002. The only other insurance-related amounts reflected in 2003 was a further $1.9 million reduction in the allowance for potential uncollectible insurance recoveries recorded as a reduction to cost of sales, based on the final settlement of all insurance recoveries. As of the end of January 2004, approximately $54.7 million of insurance proceeds have been collected in full satisfaction of the Company's claims under its insurance policies.

Other

        Net sales and revenues were $107.0 million for 2003 compared to $109.8 million in the prior year. Sloss revenues were $9.1 million lower than the prior year, which were partially offset by higher revenues from land sales of $5.7 million compared to the prior year. Sloss revenues declined during the current period due to lower sales of foundry coke, fiber and specialty chemicals, partially offset by higher furnace coke volumes and favorable furnace coke pricing.

        The operating loss for the Other segment declined from $23.7 million in 2002, to $12.6 million in 2003. General corporate expenses included in this segment were approximately $16.5 million in 2003 compared to $21.9 million in 2002. Of the $5.4 million decrease, $2.2 million relates to credits to expenses of this segment in 2003 for charges made to other segments, primarily Industrial Products, in 2003. These expenses were included as costs of this segment in 2002. The remaining decrease was due to lower incentive compensation and other personnel-related costs ($4.1 million), lower depreciation expenses ($0.7 million) and higher life-insurance- related income ($0.9 million). Corporate expenses also reflected reduced income from land sales ($3.0 million) that was offset by increased gains of $6.4 million from sales of land in the Land Group. Sloss' operating loss increased by $0.7 million in 2003 on weaker slag wool and specialty chemical results, increases in environmental-related expenditures ($2.3 million), and other increased expenses, partially offset by income from asset sales ($1.1 million) and the effect of a $2.6 million bad debt expense in 2001.

34

Discontinued Operations

AIMCOR

        Net sales and revenues were $398.5 million for 2003, a decrease of $4.5 million from 2002. The decrease reflects approximately one less month of operations, as the sale of AIMCOR was effective on December 3, 2003, partially offset by higher fuels grade petcoke volumes from the start-up of St. Croix operations, higher calcined volumes and an increase in Metals volumes and pricing.

        Income from discontinued operations for AIMCOR was $7.6 million in 2003 compared to $10.3 million in 2002. This also reflected approximately one less month of operations, costs associated with repairing a furnace at the Bridgeport, Alabama ferrosilicon production facility, reduced petcoke margins and a decrease in terminal services activity.

        The loss in 2003 to dispose of AIMCOR's operations was $71.5 million, net of $27.6 million of income tax benefit.

JW Aluminum

        JW Aluminum's net sales and revenues were $209.9 million in 2003, compared to $202.1 million in 2002. The increase reflected strong demand for JW Aluminum's foil and sheet products, partially offset by approximately one less month of operations, as the sale of JW Aluminum was effective on December 5, 2003.

        Income from discontinued operations for JW Aluminum was $11.1 million, $0.2 million above 2002, even though 2003 results reflected only approximately 11 months of operations. These results also reflected increased shipments of aluminum foil and sheet products, as well as improved productivity.

        The gain resulting from the 2003 sale of JW Aluminum was $20.1 million, net of $15.5 million of income tax expense.

FINANCIAL CONDITION

        Cash and cash equivalents decreased from $60.0 million at December 31, 2003 to $46.9 million at December 31, 2004, reflecting $103.4 million in cash flows provided by operations, offset by $28.5 million of cash flows used in investing activities and $88.0 million of cash flows used in financing activities, which included $95.3 million used for share repurchases. See additional discussion in the Statement of Cash Flows section that follows.

        Net receivables, consisting principally of trade receivables, were $170.2 million at December 31, 2004, an increase of $14.7 million from December 31, 2003. The increase occurred primarily at Industrial Products which increased $20.0 million principally due to higher pricing and volume and at Corporate due to a $7.3 million increase in receivables from the exercise of employee stock options. These higher balances were partially offset by lower sales at Homebuilding and the timing of collections at Natural Resources.

        Inventories were $233.5 million at December 31, 2004, an increase of $9.0 million from December 31, 2003 primarily due to increased production in the Natural Resources segment ($13.7 million) partially offset by a decrease in homes under construction at Homebuilding ($10.1 million).

        Property, plant and equipment was $332.0 million at December 31, 2004, a decrease of $20.5 million reflecting depreciation expense ($60.2 million) and the sale of Vestal Manufacturing ($3.1 million), partially offset by additions, net of retirements ($42.8 million).

        Other long-term assets were $46.3 million at December 31, 2004, an increase of $10.2 million from $36.1 million at December 31, 2003, reflecting an increase in pensions of approximately $14.9 million.

35

        Goodwill and other intangibles, net, were $145.0 million at December 31, 2004, a decrease of $5.0 million from December 31, 2003. This decrease was due to the normal amortization associated with the reduction in the Financing segment's Trust II instalment notes receivable portfolio.

        Accounts payable of $90.2 million at December 31, 2004 decreased $9.7 million compared to December 31, 2003 primarily as a result of timing of vendor payments.