Sensus Metering Systems (Bermuda 2) Ltd.

Notes to Consolidated Financial Statements

1. Description of Business and Summary of Significant Accounting Policies

Basis of Preparation and Description of Business

        Sensus Metering Systems (Bermuda 2) Ltd. ("the Company") is the parent company, which owns several U.S. domestic and foreign subsidiaries.

        On December 18, 2003 pursuant to a stock purchase agreement between Sensus Metering Systems Inc. and Invensys plc ("Invensys"), and certain of its subsidiaries, the Company acquired the metering systems and certain other businesses from Invensys ("Invensys Metering Systems"). Sensus Metering Systems Inc. is a wholly-owned subsidiary of the Company. The acquisition of Invensys Metering Systems ("the Predecessor") was financed with $230.0 million in term loan financing, the issuance of $275.0 million of senior subordinated notes, and an equity investment of $200.0 million by certain funds affiliated with The Resolute Fund, L.P., G.S. Capital Partners 2000, L.P. and certain of its affiliated investment partnerships and certain members of management.

        The Company is a leading provider of advanced metering and related communications solutions to the worldwide utility industry. The Company is a global manufacturer of water meters, gas meters, heat meters, electricity meters and automatic meter reading devices. In addition, the Company produces pipe joining and repair products for water and natural gas utilities and is a supplier of precision-manufactured aluminum die-castings.

        The consolidated financial statements of the Company included herein include the accounts of Sensus Metering Systems (Bermuda 2) Ltd. subsequent to the acquisition on December 18, 2003.

        The financial statements of the Predecessor are presented for comparative purposes and include the combined historical statements of the subsidiaries and operations of Invensys Metering Systems, which were acquired by the Company.

Principles of Consolidation

        The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Subsidiaries which are less than 100% owned, but greater than 50% owned, or which are 50% owned and for which the Company can exercise significant influence, are consolidated with a minority interest. All intercompany transactions and accounts have been eliminated.

Use of Estimates

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the financial statements. Actual results could differ from those estimates.

Cash and Cash Equivalents

        Highly liquid investments with original maturity dates of three months or less are classified as cash equivalents. Cash equivalents are stated at cost, which approximates fair value.

Third-Party Receivables

        The Company provides an allowance for doubtful accounts equal to estimated collection losses that will be incurred in the collection of receivables. Estimated losses are based on historical collection experience, as well as, a review by management of the current status of all receivables.

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Predecessor

        The Predecessor factored certain third-party trade receivables to unrelated financial institutions on a nonrecourse basis pursuant to certain agreements. The Predecessor accounted for the transfer of receivables pursuant to these agreements as a sale of financial assets. The agreements, which were negotiated and administered by Invensys or its affiliates, required the Predecessor to collect funds with respect to the factored receivables and remit the funds to the financial institutions. At March 31, 2003, the amount of outstanding receivables transferred under such factoring agreements totaled $2.2 million.

        The Predecessor also regularly factored certain third-party trade receivables to unrelated financial institutions which did not qualify as sales of financial assets. The Predecessor had short-term borrowings of $14.1 million outstanding as of March 31, 2003, relating to these arrangements.

        For the period April 1, 2003 through December 17, 2003, and the years ended March 31 2003, and 2002, costs incurred relating to factoring agreements amounted to $0.3 million, $0.6 million and $0.5 million, respectively. The Predecessor ceased all factoring activities prior to December 17, 2003.

Inventories

        Inventories are stated at the lower of cost or market using the first-in, first-out ("FIFO") method. Cost is determined based on standard cost with appropriate adjustments to approximate FIFO cost. Market is determined on the basis of estimated realizable values.

        Improvements and replacements are capitalized to the extent that they increase the useful economic life or increase the expected economic benefit of the underlying asset. Repairs and maintenance expenditures are charged to expense as incurred.

Intangible Assets

        Intangible assets consist of goodwill, tradenames, patents, a non-competition agreement, and customer and distributor relationships. Goodwill at March 31, 2004 represents the excess of the purchase price paid by the Company for the Predecessor over the fair value of the net assets acquired. The initial purchase price allocation resulted in $347.6 million of goodwill being recorded. The goodwill can be attributed to the value placed on the Company being an industry leader with market leading positions in the North American water metering market, the European water metering market, and the North American clamps and couplings market. The Company also has a number two position in the North American gas metering market, the European heat metering market, and the North American water AMR market. The Company has achieved these leadership positions by developing and manufacturing innovative products and it is expected that this track record will continue and enhance future earnings of the Company. In addition, future expansion of AMR technology in water meters

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provides a significant opportunity for the Company which contributed to goodwill being generated. Patents, trademarks, and customer and distributor relationships are stated at fair value on the date of acquisition as determined by an independent valuation firm. The non-competition agreement is stated at fair value per the purchase agreement. Trademarks are assumed to have indefinite lives and are not being amortized. Patents and customer and distributor relationships are amortized using the straight-line method over 3 to 15 years, and 5 to 25 years, respectively. The non-competition agreement is being amortized over 4 years, the contractual period of the agreement.

        For the Predecessor, goodwill at March 31, 2003 was primarily created at the time of the formation of Invensys in connection with the merger of BTR plc and Siebe plc via the purchase method of accounting outlined in Accounting Principles Board Opinion 16. Invensys Metering Systems was previously owned by BTR plc.

Deferred Financing Costs

        Other assets at March 31, 2004 include deferred financing costs of $22.2 million, net of accumulated amortization of $0.6 million. These costs were incurred to obtain long-term financing and are being amortized using the effective interest method over the term of the related debt.

Impairment of Long-Lived Assets

        Long-lived assets held for use are reviewed for impairment when events or circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. These assets are reviewed for impairment by comparing the carrying amount of an asset to the undiscounted future cash flows expected to be generated by the asset over its remaining useful life. If an asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value, and is charged to results of operations at that time. Assets to be disposed of are reported at the lower of the carrying amounts or fair value less cost to sell. Management determines fair value using discounted future cash flow analysis or other accepted valuation techniques.

        In each of the three years ended March 31, 2004, 2003, and 2002, the Predecessor identified certain assets that were considered impaired following changes in business activity. Impairment charges for the periods from April 1, 2003 through December 17, 2003 and the years ended March 31, 2003 and 2002 were $0.8 million, $4.4 million and $7.9 million, respectively, as discussed in Note 6.

Income Taxes

        The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement basis and the tax basis of the Company's assets and liabilities using enacted statutory tax rates applicable to future years when the temporary differences are expected to reverse. The Company records a valuation allowance when it determines that it is more likely than not that all or a portion of a deferred tax asset will not be realized.

Foreign Currency Translation

        Assets and liabilities of subsidiaries operating outside of the United States with a functional currency other than the U.S. dollar are translated into U.S. dollars using exchange rates at the end of

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the respective period. Revenues and expenses are translated at average exchange rates effective during the respective period.

        Foreign currency translation adjustments are included in accumulated other comprehensive income (loss) as a separate component of invested capital or stockholder's equity. Currency transaction gains (losses) are included in the results of operations in the period incurred and were not material for the periods from December 18, 2003 through March 31, 2004 and April 1, 2003 through December 17, 2003 and the years ended March 31, 2003 and 2002, respectively.

Revenue Recognition

        Sales and related cost of sales are recorded upon transfer of the title of the product, which generally occurs upon shipment to the customer. The Company has certain sales rebate programs with some customers which periodically require rebate payments. The Company estimates amounts due under these sales rebate programs at the time of shipment. Net sales relating to any particular shipment are based upon the amount invoiced for the shipped goods less estimated future rebate payments and sales returns. These estimates are based upon the Company's historical experience. Revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known.

Advertising Costs

        Advertising costs are charged to selling, general, and administrative expenses as incurred and amounted to $1.6 million, $3.0 million, $3.4 million and $4.0 million in the periods from December 18, 2003 through March 31, 2004 and April 1, 2003 through December 17, 2003 and the years ended March 31, 2003 and 2002, respectively.

Research and Development Costs

        Research and development costs are charged to selling, general, and administrative expenses as incurred and amounted to $6.3 million, $17.4 million, $19.1 million and $19.7 million in the periods from December 18, 2003 through March 31, 2004 and April 1, 2003 through December 17, 2003 and the years ended March 31, 2003 and 2002, respectively.

Stock-Based Compensation

        The Company's parent, Sensus Metering Systems (Bermuda 1) Ltd., maintains a Restricted Share Plan that provides for the award of restricted common shares to officers, directors and consultants of the Company. The restricted shares issued pursuant to the plan will be service time vested ratably over each of the five years from the date of grant, provided, that no vesting will occur until the second anniversary of the date of grant. In addition, the vesting of the restricted shares may accelerate upon the occurrence of certain stated liquidity events. Common shares awarded under the Restricted Share Plan are generally subject to restrictions on transfer, repurchase rights and other limitations as set forth in the management subscription and shareholders' agreement. The Company accounts for this plan under the intrinsic value method prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), and related Interpretations. No compensation expense was recognized during the period from December 18, 2003 to March 31, 2004 as the recipients of the restricted shares paid the fair value thereof.

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Predecessor

        The Predecessor provided stock-based compensation plans to certain members of senior management, which are described more fully in Note 11. The Predecessor accounted for those plans under the intrinsic value method prescribed by APB 25, and related Interpretations. Compensation cost recognized in the periods from April 1, 2003 through December 17, 2003 and the years ended March 31, 2003 and 2002 was not material to the net earnings of the Predecessor.

Concentration of Credit and Workforce

        Credit is extended by the Company based upon an evaluation of the customer's financial position, and generally collateral is not required. Credit losses are provided for in the consolidated financial statements and consistently have been within management's expectations.

        Approximately 12.2%, 10.8%, 11.7% and 11.0% of net sales for the periods from December 18, 2003 to March 31, 2004 and from April 1, 2003 to December 17, 2003, and during the years ended March 31, 2003 and 2002, respectively, were with one customer and its affiliates. No single affiliate of the customer accounted for more than 1% of net sales in any of the periods presented.

        Approximately 48% and 37% of the Company's labor force in the United States and Europe, respectively, is covered by collective bargaining agreements.

Shipping and Handling Costs

        The Company classifies costs associated with shipping and handling activities within cost of sales in the consolidated statements of operations. Shipping and handling costs were $2.2 million, $5.3 million, $7.7 million and $7.8 million in the periods from December 18, 2003 though March 31, 2004 and April 1, 2003 though December 17, 2003 and during the years ended March 31, 2003 and 2002, respectively.

Fair Value of Financial Instruments

        The carrying amounts of cash, trade receivables and trade payables approximated fair values as of March 31, 2004 and 2003. The carrying value of the Company's term loans and revolving credit facility borrowings approximates fair value as they bear interest at a variable market rate. The fair value of the Company's 8.625% senior subordinated notes was $261.3 million at March 31, 2004. The fair values of these notes was determined based upon discounted cash flows analysis at prevailing market rates.

Derivative Financial Instruments

        Effective April 1, 2001, the Predecessor adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("FAS 133"). FAS 133 requires the Company to record all derivatives on the balance sheet at fair value regardless of the purpose or intent for holding them. Derivatives that are not hedges are adjusted to fair value through earnings. For derivatives that are hedges, depending on the nature of the hedge, changes in fair value are either offset by changes in the fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value is immediately recognized in earnings. As the Company does not have any derivative instruments, the adoption of FAS 133 had no impact on the Company's net earnings or financial position.

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New Accounting Standards

        In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations ("FAS 143"). FAS 143 requires companies to record liabilities equal to the fair value of their asset retirement obligations when they are incurred (typically when the asset is installed at the production location). When the liability is initially recorded, companies capitalize an equivalent amount as part of the cost of the asset. Over time the liability is accreted for the change in its present value each period, and the initial capitalized cost is depreciated over the useful life of the related asset. FAS 143 is effective for fiscal years beginning after June 15, 2002. The Predecessor adopted FAS 143 effective April 1, 2003 and the adoption did not have any effect on the Predecessor's net earnings or financial position.

        In August 2001, FASB issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("FAS 144"). FAS 144 supercedes Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of , and Accounting Principles Board Opinion No. 30, Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary Unusual and Infrequently Occurring Events and Transactions . FAS 144 establishes criteria for the recognition and measurement of an impairment loss for long-lived assets to be held and used and defines classification of continuing and discontinued operations. FAS 144 also requires that assets held for sale be measured at the lower of their carrying amount or fair value less cost to sell. FAS 144 is effective for fiscal years beginning after December 15, 2001, with early adoption permitted. The Predecessor adopted SFAS 144 effective April 1, 2002. The adoption of FAS 144 did not have a material impact on the Predecessor's net earnings or financial position.

        In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146 Accounting for Costs Associated with Exit or Disposal Activities ("FAS 146"). FAS 146 requires that a liability for costs associated with an exit or disposal activity be recognized only when the liability is incurred, rather than at the date of an entity's commitment to an exit plan. The new standard requires that the liability be initially measured at fair value. FAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The Predecessor adopted FAS 146 effective for any restructurings occurring after January 1, 2003.

        In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others . The Interpretation includes additional disclosure requirements as well as recognition and measurement provisions, which require a liability to be recorded for certain guarantees at fair value. The initial recognition and measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year-end. The disclosure requirements in this Interpretation are effective for financial statements of the Company for all interim or annual periods ending after December 15, 2002. The Predecessor adopted FIN 45 effective January 1, 2003. The effect of such adoption was not material to the Predecessor's net earnings or financial position.

        In December 2002, the FASB issued FAS No. 148 Accounting for Stock-Based Compensation Transition and Disclosure . FAS No. 148 amends the disclosure requirements of FAS 123, "Accounting for Stock-Based Compensation," and provides alternative methods for accounting for stock-based compensation. The Predecessor adopted the disclosure requirements for the year ended March 31, 2003. The effect of such adoption was not material to the Company's net earnings or financial position.

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        In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46"). FIN 46 expands consolidated financial statements to include certain variable interest entities ("VIEs"). VIEs are to be consolidated by the Company which is considered to be the primary beneficiary of that entity, even if the Company does not have majority control. FIN 46 is immediately effective for VIEs created after January 31, 2003, and is effective for the Company in the third quarter of the fiscal year ended March 31, 2004 for VIEs created prior to February 1, 2003. The Company adopted the provisions of FIN 46 on October 1, 2003. As the Company does not have any VIE's, the effect of such adoption was not material to the Company's net earnings or financial position.

2.    Acquisition

        As of December 18, 2003, the Company acquired Invensys Metering Systems from Invensys and Invensys-affiliated entities via the acquisition of the stock of the entities comprising the Invensys Metering Systems group.

        This transaction has been accounted for in accordance with Statement of Financial Accounting Standards ("FAS") No. 141, Business Combinations . The consolidated financial statements herein include the Company's results of operations for the period since inception (December 18, 2003) through March 31, 2004.

        The Company has completed its preliminary purchase price allocation. The final purchase price is subject to certain purchase price adjustments with Invensys that, to date, have not been finalized. The final allocation will be completed within one year of the transaction and is not expected to have a material impact on the Company's financial position or results of operations. The preliminary purchase price allocation based on independent appraisals and management's estimates at the date of the acquisition is as follows (in millions):

        The preliminary allocation of the purchase price resulted in the recognition of $347.6 million of goodwill primarily related to the anticipated future earnings and cash flows of the businesses acquired. The Company preliminarily allocated $260.1 million to intangible assets, of which $27.3 million were indefinite-lived assets related to tradenames and trademarks and $232.8 million related to finite-lived assets, including patents, distributor and other customer relationships and a non-compete agreement, that will be amortized over periods ranging from 3 to 15 years for patents, 5 to 25 years for distributor and customer relationships, and 4 years for the non-compete agreement.

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3.    Inventories

        Inventories consist of the following (in millions):

4.    Property, Plant, and Equipment

        Property, plant, and equipment is summarized as follows (in millions):

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5.    Intangible Assets

        Intangible assets are summarized as follows (in millions):

        The following presents the estimated amortization expense (in millions) for intangible assets for each of the next five years:

        The following summarizes the weighted average amortization periods for intangible assets subject to amortization as of March 31, 2004:

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        The following represents a reconciliation of the changes in goodwill (in millions) for the periods presented:

        The goodwill presented on the balance sheets as of March 31, 2003 and March 31, 2002 was primarily created at the time of the formation of Invensys in connection with the merger of BTR plc and Siebe plc in February 1999. This merger was accounted for as an acquisition of BTR plc by Siebe plc via the purchase method of accounting outlined in APB 16. Invensys Metering Systems was previously owned by BTR plc. The year over year variance in the goodwill relates solely to foreign currency translation as portions of this historical goodwill is British Pound Sterling denominated.

        The Company performed its required impairment tests of goodwill as of year end and no impairment was present. The Company cannot predict the occurrence of certain events that might adversely affect the reported value of goodwill. Such events may include, but are not limited to, strategic decisions made in response to economic and competitive conditions, the impact of the economic environment on the Company's customer base, or a material negative change in its relationships with significant customers.

        The Company assesses the fair value of its reporting units for its goodwill impairment tests based upon a discounted cash flow methodology. Those estimated future cash flows—which are based upon historical results and current projections—are discounted at a rate corresponding to a "market" rate. If the carrying amount of the reporting unit exceeds the estimated fair value determined through that discounted cash flow methodology, goodwill impairment may be present. The Company would measure the goodwill impairment loss based upon the fair value of the underlying assets and liabilities of the reporting unit, including any unrecognized intangible assets, and estimate the implied fair value of goodwill. An impairment loss would be recognized to the extent that a reporting unit's recorded goodwill exceeded the implied fair value of goodwill.

6.    Restructuring and Other Similar Costs

        Prior to the date of the acquisition of Invensys Metering Systems, the Company identified opportunities to improve the operating performance of its business via the closure of a manufacturing facility in Europe. Subsequent to the acquisition, the Company approved restructuring actions of $5.1 million. These actions principally reflect severance benefits and asset impairments relating to the closure of the facility. These restructuring actions will commence in 2004 and the Company expects the actions will be completed by December 2004.

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        During the period from December 18, 2003 to March 31, 2004, the Company finalized the terms of 3 additional employee terminations at its Ludwigshafen, Germany manufacturing facility. These terminations are part of the Company's continuing efforts to move labor-intensive processes to low labor cost regions.

Predecessor

        Following the merger in February 1999 between BTR plc and Siebe plc to create Invensys, the Predecessor commenced a series of restructuring programs consistent with the objectives of the Invensys merger and integration program, namely, improving returns in core businesses by consolidating excess manufacturing capacity, rationalizing certain product lines, outsourcing of non-core production activity and streamlining of sales and administrative overhead.

        Under these restructuring programs, the Predecessor reduced its workforce by approximately 900 employees over the past 3 years as the Predecessor outsourced several processes, most notably all foundry operations, electronic PCB manufacturing and machining of meter bodies. During this time the Predecessor also extended its presence in low labor cost countries through acquisitions, adding 407 employees. As the Predecessor moved labor intensive processes to low labor cost regions, 228 employees were added and as a result about one-third of its employees are currently working in low labor cost regions.

        The restructuring initiatives included plant and overhead rationalization programs related to the Predecessor's European operations including the following:

•

In fiscal 2001, the Predecessor's German water metering operations began outsourcing electronics assembly and water meter body machining from Ludwigshafen, Germany to third-party contract manufacturers. These outsourcing initiatives were completed in fiscal 2002 (with respect to electronics assembly outsourcing) and in fiscal 2003 (with respect to water meter body machining outsourcing). In fiscal 2001, the Predecessor moved production of certain products to Stara Tura,

Slovakia, where labor rates are significantly lower. This production transfer initiative is ongoing. Each of these initiatives has resulted in a substantial workforce reduction in Ludwigshafen, Germany.

•

During fiscal 2001, the Predecessor reconfigured its operations in Belgium from an integrated manufacturing operation to a local assembly center. The Belgian facility located in Liege, Belgium was subsequently closed in fiscal 2004. Upon completion of this initiative, the product line that was manufactured in Belgium was abandoned, with sales volume absorbed by the highly automated production line in the Ludwigshafen, Germany facility through the sale of more advanced meters.



•

In fiscal 2001, the Predecessor decided to combine its gas and water metering businesses in the U.K. market. As a result, it closed a water meter manufacturing facility in Andover, England and consolidated its remaining U.K. operations at its Romsey, England facility. This initiative was begun and completed in fiscal 2001.



•

Beginning in fiscal 2002, the Predecessor began an initiative to reduce the administrative staff, and to reduce other overhead costs, in French and Spanish operations. These initiatives were completed in fiscal 2003 and resulted in lower headcount in both operations.

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•

Beginning in fiscal 2002, the Predecessor began an initiative to reduce its European headquarters personnel who were located in Raleigh, North Carolina, and to reduce other overhead costs for the European headquarters personnel. These initiatives were completed in fiscal 2003 and resulted in lower headcount at the Raleigh, North Carolina administrative office.



•

In fiscal 2003, the Predecessor announced further downsizing initiatives for Ludwigshafen, Germany, which require coordination with the German Works Council in order to approve all headcount reductions. These initiatives are ongoing.

        There were also several restructuring initiatives undertaken with respect to the Predecessor's North American operations. These initiatives included the following:

•

The Predecessor closed its Uniontown, Pennsylvania foundry in fiscal 2001. This initiative resulted in the outsourcing of the manufacture and machining of water meter bodies. The closure of the foundry also resulted in further reductions in administrative staff at the Uniontown facility in fiscal 2002.



•

The Predecessor moved North American production of gas regulators to a new facility in Monterrey, Mexico. This initiative was begun and substantially completed in fiscal 2001. Changing market conditions subsequently led to the decision to fully outsource production of gas regulators to a third party. This initiative was begun in fiscal 2003 and completed in fiscal 2004.



•

The Predecessor relocated a majority of its large meter product line production to an existing facility in Orlando, Florida. This initiative was begun in fiscal 2001 and substantially completed in fiscal 2002. By moving production, the Predecessor was able to increase its utilization of the Orlando, Florida facility.



•

In fiscal 2002, the Predecessor abandoned the licensing rights associated with a gas quality sensor. This initiative was completed in fiscal 2002. The impact to the Predecessor was not material since the sensor never reached the production stage. However, as a result of the abandonment of the licensing rights, the Predecessor may not be able to develop products that are as sophisticated as it might have otherwise.



•

The Predecessor outsourced the production of electronic assembly from Uniontown, Pennsylvania to Southeast Asia. This initiative was begun and completed in fiscal 2003.

        Restructuring initiatives undertaken by the Predecessor outside of its European and North American operations included the following:

•

The Predecessor downsized its Asian headquarters personnel who were located in Raleigh, North Carolina in fiscal 2002.



•

In fiscal 2001, the Predecessor began an initiative to consolidate its Santiago, Chile and Nova Odessa, Brazil facilities under a single management function located in Brazil. This initiative was

completed in early fiscal 2003 and resulted in the elimination of redundant management and administrative functions in South America.

        During the period from April 1, 2003 through December 17, 2003, the Company announced restructuring programs designed to rationalize its piston meter product line and its logistics process in Europe. These programs include the closure of the Company's piston meter manufacturing plant located in Belgium and the downsizing of an administrative office located in France. These programs

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will result in total headcount reductions of 45 employees, which includes both direct and indirect employees. As of December 17, 2003, 40 of the employees had been terminated. This program was completed by March 31, 2004.

        In addition, during the period from April 1, 2003 to December 17, 2003, the Company finalized the terms of an additional 24 employee terminations at its Ludwigshafen, Germany manufacturing facility. These terminations are part of a larger restructuring effort implemented by the Company to move labor-intensive processes to low labor cost regions. The Company accrued $2.9 million in severance payments associated with these programs during the period from April 1, 2003 to December 17, 2003, as the Company has committed to a detailed plan of termination, terms of the benefit arrangement were communicated to employees prior to December 17, 2003, and it is unlikely that significant changes will be made to the plan. The Company has paid $4.4 million associated with these programs, and the programs accrued as of the prior year-end, during the period from April 1, 2003 to December 17, 2003.

        Restructuring and other similar costs consist of the following (in millions):

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Employee Severance and Other Related Costs

        All of the aforementioned restructuring projects resulted in significant headcount reductions. A total of 3, 69, 200, 290 and 411, employees were made redundant as a result of restructuring projects in the period from December 18, 2003 to March 31, 2004, the period from April 1, 2003 to December 17, 2003, and the years ending March 31, 2003, 2002 and 2001, respectively. Over this time frame, the Company reduced its gross headcount by about 25%, with the main headcount reductions occurring in North America and Europe, down 448 and 539, respectively.

        Costs included in this section include employee severance and related costs and notice costs in Europe. Notice costs represent amounts paid to employees from the date of notification of their impending termination until their last day of employment. During this notification period, output is neither expected nor required.

Asset Impairment

        In connection with the closure and consolidation of certain manufacturing and administrative functions, the Company identified certain assets that were impaired as a result of the Company's restructuring efforts. The net book value of these assets, less any proceeds from disposition, has been charged to "Restructuring and other similar costs" as incurred. These amounts total $0.8 million, $1.4 million and $1.7 million for the period from April 1, 2003 to December 17, 2003 and the years ended March 31, 2003 and 2002, respectively. In addition, during the year ended March 31, 2003, the Company abandoned certain lease property, resulting in a $0.5 million charge to restructuring for abandoned leasehold improvements.

        The Company also implemented programs to identify non-core production processes that could be outsourced in an effective and efficient manner. Upon the completion of this outsourcing, the Company identified impaired assets totaling $2.5 million in the year ended March 31, 2003.

        During the year ended March 31, 2002, the Company abandoned the licensing rights associated with a gas quality sector, resulting in a $6.2 million restructuring charge.

Other

        These costs include $0.1 million, $0.2 million and $1.7 million, for the period from April 1, 2003 to December 17, 2003, and the years ended March 31, 2003 and 2002, respectively, for excess payroll costs. These costs represent inefficiencies resulting from the consolidation of facilities and outsourcing of processes described above.

        In addition, the Company has included $1.2 million and $1.1 million of excess scrap and production inefficiencies in restructuring for the years ended March 31, 2003 and 2002, respectively. These costs are comprised of incremental payroll costs incurred related to various restructuring efforts, and are comprised of the cost of temporary workforce, overtime costs, and other inefficiencies as a result of the implementation of various restructuring efforts.

        The Company has also included $0.2 million for the year ended March 31, 2003, for excess freight costs. These costs were incurred as a result of the consolidation efforts noted above, and represent incremental costs incurred in meeting customer expectations during the Company's transition period.

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        In addition, the Company abandoned a leased property during the year ended March 31, 2003 as a result of the consolidation of certain administration locations. The present value of the remaining lease payments on this lease, which total $1.2 million, have been included in restructuring and other related costs for the year ended March 31, 2003.

        Finally, other costs totaling $0.3 million, $0.8 million and $1.7 million, for the period from April 1, 2003 to December 17, 2003, and for the years ended March 31, 2003 and 2002, respectively, have been charged to the restructuring and other similar cost line items. These costs are comprised of (i) relocation of fixed assets and reconfiguration of manufacturing facilities directly related to manufacturing rationalization or manufacturing process change consisting of moving costs, outside contractors, supplies, and consulting fees; (ii) lean manufacturing and Six Sigma implementation costs to change manufacturing processes and layouts including equipment relocation costs, outside contractors, supplies, and consulting fees; and (iii) other incremental costs directly associated with restructuring projects consisting of equipment removal, rigging costs, temporary employment, consulting fees, and various other costs.

        The charge for restructuring and other similar costs in comprised of the following (in millions):

        Restructuring accruals are summarized as follows (in millions):

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7.    Accruals and Other Current Liabilities

        Accruals and other current liabilities are summarized as follows (in millions):

8.    Long-Term Debt

        On December 17, 2003, the Company entered into a bank term loan credit agreement (the "Credit Agreement") with Credit Suisse First Boston under which the Company has outstanding term loans of $230 million, comprised of $200 million of Term B-1 Loans and $30 million of Term B-2 Loans. Both have interest rates at adjusted LIBOR plus 3.0%, or the alternate base rate plus 2.0%. The weighted average interest rate for these loans was 4.2% at March 31, 2004. The term loans require quarterly payments of principal. The Credit Agreement contains numerous terms, covenants, conditions and financial ratio requirements which impose substantial limitations on the Company. The Company was in compliance with all covenants at March 31, 2004. The Credit Agreement is guaranteed by the Company's wholly-owned U.S domestic subsidiaries (excluding IMSoftech Inc.), and is secured by substantially all of their real and personal property. The Company is required under the Credit Agreement to make mandatory prepayments of its loan facilities, subject to certain exceptions, out of, among other things: (i) net cash proceeds received from the sales of any assets; (ii) the issuance of indebtedness for money borrowed; and (iii) a percentage of the Company's excess cash flow, as defined.

        The Company has a $70.0 million revolving credit facility in connection with the term loan facility with an interest rate of adjusted LIBOR plus 3.0%, or the alternate base rate plus 2.0% (inclusive in each case of a 0.50% facility fee) at March 31, 2004. The average interest rate was 4.1% at March 31, 2004. There was $2.2 million in borrowings outstanding under the revolving credit facility at March 31, 2004 and $5.4 million of the facility was utilized in connection with outstanding letters of credit. Issuance fees related to the letters of credit accrue interest at a rate of 2.63%. This facility expires on December 17, 2009.

        At March 31, 2004, the Company's subsidiary, Sensus Metering Systems Inc., had $275.0 million of 8.625% senior subordinated notes ("the Notes") outstanding which mature on December 15, 2013. The Notes contain numerous covenants and conditions that are similar to those of the Credit Agreement. The Company was in compliance with all covenants at March 31, 2004. Interest is payable semi-annually on June 15 and December 15. The Notes are unsecured obligations of Sensus Metering Systems Inc. and are guaranteed on a senior subordinated basis by the Company and, subject to certain limited exceptions, the Company's U.S. subsidiaries.

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        The following represents the scheduled maturities of long-term debt for the years ended March 31 (in millions):

9. Warranty Obligations

        Product warranty reserves are established in the same period that revenue from the sale of the related products is recognized. The amounts of those reserves are based on established terms and the Company's best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date.

        The following represents a reconciliation of the changes in product warranty reserves for the periods presented (in millions):

10. Stockholder's Equity

        The Company's stockholder's equity consists of $200.0 million of $1.00 par value common stock, all of which was purchased by the Company's parent, Sensus Metering Systems (Bermuda 1) Ltd. At March 31, 2004, the Company had 12,000 common shares authorized, issued and outstanding.

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11. Stock Compensation

        The Company's parent, Sensus Metering Systems (Bermuda 1) Ltd., adopted a Restricted Share Plan on March 5, 2004 to which officers, directors and consultants of the Company may be awarded restricted common shares. The maximum number of shares that are issuable under the plan is equal to 5% of the total issued shares outstanding of the Company, subject to adjustment for changes in the capital structure such as share dividends, share splits, mergers, and reorganizations of the Company. The compensation committee determines the number of shares awarded or, in the case of an award to a director, the entire Board of the Company. The restricted shares issued pursuant to the plan will be service time vested ratably over each of the five years from the date of grant, provided, that no vesting will occur until the second anniversary of the date of grant. In addition, the vesting of the restricted shares may accelerate upon the occurrence of certain stated liquidity events. Common shares awarded under the Restricted Share Plan are generally subject to restrictions on transfer, repurchase rights and other limitations as set forth in the management subscription and shareholders' agreement.

        As of March 31, 2004, there were 2,000,000 restricted shares authorized and 1,150,000 shares issued and outstanding. Cash received from participants for shares issued during the year were exchanged for $0.01 par value restricted common stock. Compensation expense recognized was not material to the Company's operations.

Predecessor

        Invensys operated two stock option plans in which certain of the Company's senior management participated.

Executive Stock Option Scheme ("the 1998 Scheme")

        Invensys maintained a discretionary stock option scheme under which options to purchase the Invensys' stock may be granted each year to senior management at multiples of salary, which reflect the prevailing market practice in the relevant country. When options were granted during 2003 and 2002, Invensys concluded that the salary multiple, which is appropriate for the Predecessor's senior management, is between 0.5 and 2.1 times annual salary.

        For the year under review, no option may be exercised unless a performance condition based on Total Shareholder Return ("TSR") is met. TSR is calculated as the percentage variance in the price of shares and the value of re-invested net dividend payments over the performance period compared to that of a group of comparator companies ("Peer Group") selected at discretion of the Remuneration Committee. The performance period will be the period of three, four or five years commencing on the date of the grant of the option. On the third anniversary of the date of the grant, each constituent of the Peer Group will be ranked in descending order of TSR. The TSR ranking of Invensys against the TSR of the Peer Group will determine the number of shares vested. Invensys must rank at the median position in order for 40% of the shares under option to become exercisable, rising to all the shares if the upper quartile position is achieved. Between these positions, the shares under option will vest on a straight-line basis. If the Invensys does not meet the performance condition in full at the first measurement, then it will be re-tested, from a fixed base, in years four and five. If the median position has not been achieved by the end of the fifth year, the option will lapse. The Peer Groups for the grants made on or after June 17, 2002 are the companies that comprise the FTSE 100 Index on the dealing day preceding the date of the grant. The Remuneration Committee will continue to set appropriate and stretching performance targets depending on the specific demands of the business and

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the operating environment. It is the Parent's policy to extend participation in the 1998 Scheme to overseas executives on terms as close as practicable to those applicable in the United Kingdom.

Savings Related Stock Option Scheme ("SRSOS")

        Invensys has established an SRSOS that operates in the United Kingdom together with a related international SRSOS that operates in over 20 overseas countries. It is based on a three, five or seven year savings plan and offered to eligible full- and part-time employees. Options may be granted at a 20% discount to the market price of the Invensys' shares immediately preceding the date of grant.

        The Predecessor accounted for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Stock compensation expense recognized in the periods April 1, 2003 though December 17, 2003 and the years ending March 31, 2003 and 2002 were not significant. Information relative to stock options granted to Company senior management pursuant to the aforementioned plans for the period ended December 17, 2003 and each of the two years ended March 31 is as follows (weighted average exercise prices are in pounds sterling since all stock options are issued and exercisable in that currency):

        The Predecessor's net income would not have been significantly different had the Predecessor accounted for stock-based compensation using the fair value method provided by FAS No. 123, Accounting for Stock-Based Compensation ("FAS 123").

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        The Predecessor determines the fair value of options granted using the Black-Scholes option pricing model. Fair value was determined using the following weighted-average assumptions:

12. Operating Leases

        The Company leases certain offices, warehouses, manufacturing facilities, automobiles, and equipment. Generally, these leases carry renewal provisions. Rent expense for operating leases was $0.7 million, $1.8 million, $2.6 million and $2.3 million in the period from December 18, 2003 to March 31, 2004 and the period from April 1, 2003 to December 17, 2003 and the years ending March 31, 2003 and 2002, respectively. Future minimum lease payments (in millions), by year and in the aggregate, under operating leases consisted of the following at March 31, 2004:

        Approximately $0.8 million of the future minimum payments, with no future sublease income assumed, are included in restructuring accruals at March 31, 2004, in the accompanying financial statements, as these payments relate to the abandoned headquarters facility.

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13. Retirement Benefits

        The Company has defined benefit plans, principally in Germany, where such plans are typically unfunded and provide for monthly pension payments to eligible employees upon retirement. Pension benefits for salaried employees generally are based on years of credited service and average earnings. Pension benefits for hourly employees generally are based on specified benefit amounts and years of service. The Company's policy is to fund its pension obligations in conformity with the funding requirements of laws and governmental regulations applicable in the respective country.

        The Company also has defined contribution plans and arrangements with its salaried and non-union hourly employees in the United States, the United Kingdom and France replacing defined benefit plans of the Predecessor. Arrangements in the United States for its salaried and non-union hourly employees were established in conjunction with the acquisition of the Company effective January 1, 2004. The Company has established defined benefit plans for its unionized hourly employees in the United States identical to the Predecessor pension plans. Total pension costs for these retirement benefit plans totaled approximately $0.4 million for the period from Inception (December 18, 2003) to March 31, 2004.

Predecessor

        Invensys sponsored defined-benefit pension plans which covered most of the Predecessor's employees in the United States, Germany, UK and France and provided for monthly pension payments to eligible employees upon retirement. The Predecessor's eligible employees were covered by Invensys' various pension plans, which were different for the United States, German, French and British employees. Pension benefits for salaried employees generally are based on years of credited service and average earnings. Pension benefits for hourly employees generally are based on specified benefit amounts and years of service. The Predecessor's policy was to fund its pension obligations in conformity with the funding requirements of laws and governmental regulations applicable in the respective country.

        As part of the acquisition, Invensys retained all liabilities in respect of benefits earned by eligible employees in the United States and the United Kingdom up to the date of sale of the Company, as well as all the related assets. Accordingly, no pension assets or liabilities have been reflected in the balance sheet of Predecessor in respect of the defined-benefit pension plans in the United States and the United Kingdom. Pension costs of $2.3 million, $2.4 million and $2.2 million for the period ending April 1, 2003 through December 17, 2003 and for the years ended March 31, 2003 and 2002, respectively, with respect to eligible employees in the United States and the United Kingdom have been reflected in the income statement of the Company. As these amounts have been allocated based on service cost, they may not be representative of ongoing costs. The pension costs and obligation related to the United States and United Kingdom have been excluded from the tabular disclosures included below.

        The Predecessor also had defined benefit plans, principally in Germany, where such plans are typically unfunded and provide for monthly pension payments to eligible employees upon retirement. Pension benefits for salaried employees generally are based on years of credited service and average earnings. Pension benefits for hourly employees generally are based on specified benefit amounts and years of service. The Predecessor's policy was to fund its pension obligations in conformity with the funding requirements of laws and governmental regulations applicable in the respective country.

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        The Predecessor used an actuarial measurement date of December 31 to measure its benefit obligations.

        The following information reflects the benefit obligation, plan assets and net liability information for participants in the Company's significant retirement benefit plans. That information is summarized as follows (in millions):

        The accumulated benefit obligation for these retirement benefit plans was $36.2 million as of March 31, 2004.

        The components of net periodic benefit cost for participants in the Company's significant retirement benefit plans of the Company are as follow (in millions):

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        The Company uses an actuarial measurement date of December 31 to measure its benefit obligations. Significant assumptions used in determining these benefit obligations and net periodic benefit cost for participants are summarized as follows (in weighted averages):

        The Company expects to continue to make contributions sufficient to fund benefits paid under its pension plans. Such contributions are expected to total approximately $1.8 million in fiscal 2005.

Defined-Contribution Savings Plans

        The Company sponsors certain defined-contribution savings plans for eligible employees. Expense related to these plans was $0.9 million, $0.3 million, $1.2 million and $1.2 million for the periods December 18, 2003 through March 31, 2004 and April 1, 2003 through December 17, 2003 and the years ended March 31, 2003 and 2002, respectively.

14. Income Taxes

        The components of the income tax provision are as follows (in millions):

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        The provision for income taxes was calculated based upon the following components of income (loss) before income taxes (in millions):

        The relationship of non-United States income tax expense to non-United States income before taxes is attributed to operating losses being incurred in Germany and the United Kingdom on which income tax carryforward benefits have been fully reserved as of March 31, 2004 and March 31, 2003. The losses in these jurisdictions exceeded income in other non-United States jurisdictions in the period from April 1, 2003 to December 17, 2003, and the year ended March 31, 2003.

        Deferred income taxes consist of the tax effects of the following temporary differences (in millions):

        These deferred tax assets and liabilities are classified in the consolidated balance sheet based on the balance sheet classification of the related assets and liabilities.

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        A valuation allowance will be established for any portion of a deferred tax asset that management believes may not be realized. A valuation allowance was established at March 31, 2004 and March 31, 2003 for deferred tax assets related to foreign and state net operating loss carryforwards for which utilization is uncertain.

        At March 31, 2004, the Company had federal tax loss carryovers of approximately $41.0 million, which will begin to expire after the year ending March 31, 2020. During the period December 18, 2003 through March 31, 2004, the Company generated state and foreign tax loss carryovers of approximately $6.0 million, which will begin expiring after March 31, 2009.

        The Predecessor statements have been prepared on the basis that the Company files a consolidated United States federal income tax return composed of its United States domiciled affiliates.

        The Predecessor statements have been prepared on the basis that the Predecessor's foreign affiliates file consolidated returns in taxing jurisdictions where permitted. For the period from April 1, 2003 to December 17, 2003 and for the years ended March 31, 2003 and March 31, 2002, these filings resulted in foreign net operating losses (Non-US NOL's) in Germany and the United Kingdom. A deferred tax asset has been established for the value of these losses. However, as the ability to utilize these losses is uncertain, a valuation allowance has been established as of March 31, 2003 to fully offset the deferred tax asset. These losses have no expiration date.

        No provision has been made for United States or foreign income taxes related to undistributed earnings of foreign subsidiaries at March 31, 2004 and March 31, 2003, which are considered to be permanently reinvested. It is not considered practical to determine the income tax liability, if any, which would be payable if such earnings were not permanently reinvested.

        Various United States and foreign subsidiaries of the Predecessor are included in consolidated tax filings with other affiliated companies of Invensys. The methodology applied for allocating taxes between affiliates that participate in consolidated tax filings is as follows: to the extent that a company generates taxable income, the company remits taxes to its affiliated parent company based upon the applicable statutory effective tax rate. If a taxable loss is generated by a company, the affiliated parent company does not provide any current or future cash benefit.

        Payments for United States federal income tax made by the Predecessor to non-Predecessor affiliates have historically been reflected as intercompany payments. These payments have been

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reflected herein as to an external party in order to reflect the Predecessor's satisfaction of these income tax liabilities.

        Cash paid for income taxes to governmental tax authorities and affiliates in the period from April 1, 2003 through December 17, 2003 and the years ending March 31, 2003 and 2002 was $47.9 million, $29.5 million and $28.8 million, respectively. Cash paid for income taxes for the period December 18, 2003 through March 31, 2004 was $2.5 million.

15. Guarantor Subsidiaries

        The following tables present condensed consolidating financial information as of March 31, 2004 and for the period from Inception (December 18, 2003) to March 31, 2004, and condensed combining financial information of the Predecessor at March 31, 2003 and for the period from April 1, 2003 through December 17, 2003 and for the year ended March 31, 2003 for: (a) on a combined basis the subsidiaries of the Company that are guaranteeing the Notes, which include all wholly-owned U.S. domestic subsidiaries of the Company other than IMSoftech Inc. ("Guarantor Subsidiaries"), and (b) on a combined basis, the subsidiaries of the Company that are not guaranteeing the Notes ("Non-Guarantor Subsidiaries"). Separate financial statements of the Guarantor Subsidiaries are not presented because their guarantees are full and unconditional and joint and several, and the Company believes separate financial statements and other disclosures regarding the Guarantor Subsidiaries are not material to investors. The Notes were entered into and issued in connection with the acquisition of Invensys Metering Systems by Sensus Metering Systems Inc. (see Note 1).

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