EX-99.1 7 dex991.htm INFORMATION RELATING TO INTEGRIS METALS, INC. Information relating to Integris Metals, Inc.

Exhibit 99.1

 

Information relating to Integris Metals, Inc.

 

In this Exhibit 99.1, unless the context otherwise require, “we” “us,” “our,” “Integris” and “Integris Metals” and similar terms refer to Integris Metals, Inc. and subsidiary. Unless the context otherwise requires, “Alcoa” refers to Alcoa Inc. and its subsidiaries and affiliates and “BHP Billiton” refers to BHP Billiton Plc and BHP Billiton Limited and their respective subsidiaries and affiliates.

 

1


Integris Metals, Inc. and Subsidiary

 

INDEX TO FINANCIAL STATEMENTS

 

     Page

Report of Independent Auditors

   3

Consolidated Financial Statements—Integris Metals, Inc. and Subsidiary

    

Consolidated Balance Sheets at January 2, 2004, January 3, 2003 and October 1, 2004 (unaudited)

   4

Consolidated Statements of Income for the Period from November 1, 2001 Through December 28, 2001, the 53-Week Period Ended January 3, 2003, the 52-Week Period Ended January 2, 2004, and for the 39-Week Periods Ended October 3, 2003 (unaudited) and October 1, 2004 (unaudited)

   5

Consolidated Statements of Cash Flows for the Period from November 1, 2001 Through December 28, 2001, the 53-Week Period Ended January 3, 2003, the 52-Week Period Ended January 2, 2004, and for the 39-Week Periods Ended October 3, 2003 (unaudited) and October 1, 2004 (unaudited)

   6

Consolidated Statements of Changes in Stockholders’ Equity for the Period from November 1, 2001 Through December 28, 2001, the 53-Week Period Ended January 3, 2003, the 52-Week Period Ended January 2, 2004, and for the 39-Week Period Ended October 1, 2004 (unaudited)

   7

Notes to Consolidated Financial Statements

   8

Reports of Independent Auditors

   33

Combined Financial Statements—The Metals Distribution Businesses of NAMD Inc.

    

Combined Balance Sheet at October 31, 2001 (Successor Entity)

   35

Combined Statement of Operations and Comprehensive Income (Loss) for the Six-Month Period Ended June 30, 2001 (Predecessor Entity) and the Four-Month Period Ended October 31, 2001 (Successor Entity)

   36

Combined Statement of Cash Flows for the Six-Month Period Ended June 30, 2001 (Predecessor Entity) and the Four-Month Period Ended October 31, 2001 (Successor Entity)

   37

Combined Statements of Changes in Parent Company Investment for the Six-Month Period Ended
June 30, 2001 (Predecessor Entity) and the Four-Month Period Ended October 31, 2001 (Successor Entity)

   38

Notes to Combined Financial Statements

   39

Report of Independent Auditors

   51

Combined Financial Statements—Reynolds Aluminum Supply Company

    

Combined Balance Sheet at October 31, 2001

   52

Combined Statement of Income, Comprehensive Income and Parent Company Investment for the
Ten-Month Period Ended October 31, 2001

   53

Combined Statement of Cash Flows for the Ten-Month Period Ended October 31, 2001

   54

Notes to Combined Financial Statements

   55

 

2


Report of Independent Auditors

 

To the Board of Directors and Stockholders

of Integris Metals, Inc. and Subsidiary

 

In our opinion, the accompanying consolidated balance sheets and related consolidated statements of income, of cash flows and of changes in stockholders’ equity present fairly, in all material respects, the consolidated financial position of Integris Metals, Inc. and Subsidiary (the “Company”) at January 3, 2003 and January 2, 2004, and the consolidated results of their operations and their cash flows for the period from November 1, 2001 through December 28, 2001, the 53-week period ended January 3, 2003, and the 52-week period ended January 2, 2004, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

/S/    PRICEWATERHOUSECOOPERS LLP

                                                                                                         

        PricewaterhouseCoopers LLP

 

Minneapolis, Minnesota

March 11, 2004, except for Note 16 and Note 17,

for which the date is July 28, 2004

 

3


Integris Metals, Inc. and Subsidiary

 

Consolidated Balance Sheets

 

     January 3,
2003


    January 2,
2004


   October 1,
2004


(dollars in thousands)               (unaudited)

Assets

                     

Current assets

                     

Cash and cash equivalents

   $ 6,904     $ 2,847    $ 4,225

Trade receivables, less allowances of $5,834, $6,173 and $6,074

     158,872       179,248      258,989

Inventories

     277,593       273,013      369,710

Prepaid expenses and other current assets

     6,256       17,969      14,920
    


 

  

Total current assets

     449,625       473,077      647,844

Restricted cash

     6,591       —        —  

Property, plant and equipment, net (Note 4)

     171,022       161,169      155,105

Goodwill, net (Note 5)

     40,609       40,609      40,609

Other intangibles, net (Note 5)

     8,284       7,024      6,038

Other assets

     3,585       3,800      1,615

Deferred income taxes (Note 8)

     —         2,030      5,850
    


 

  

Total assets

   $ 679,716     $ 687,709    $ 857,061
    


 

  

Liabilities and Stockholders’ Equity

                     

Current liabilities

                     

Book overdraft

   $ 12,612     $ 27,309    $ 33,384

Notes payable—related party (Note 6)

     76,000       —        —  

Accounts payable

     59,760       43,851      68,119

Payable to related parties, net (Note 15)

     3,349       2,426      3,997

Accrued expenses

     30,869       17,864      26,434

Income taxes payable

     1,285       2,067      7,657

Deferred income taxes (Note 8)

     11,754       14,657      14,138
    


 

  

Total current liabilities

     195,629       108,174      153,729

Notes payable—noncurrent (Note 6)

     109,789       167,028      247,320

Deferred income taxes (Note 8)

     1,820       —        —  

Accrued pension and postretirement obligations (Note 11)

     61,041       75,947      80,804

Other liabilities

     4,826       2,609      3,441
    


 

  

Total liabilities

     373,105       353,758      485,294
    


 

  

Commitments and contingencies

                     

Stockholders’ equity

                     

Common stock, 100,000 shares authorized, par value $.01, 100 shares issued and outstanding (Note 7)

     —         —        —  

Paid-in capital

     307,741       317,616      317,616

Retained (deficit) earnings

     (141 )     10,786      47,059

Accumulated other comprehensive (loss) income

     (989 )     5,549      7,092
    


 

  

Total stockholders’ equity

     306,611       333,951      371,767
    


 

  

Total liabilities and stockholders’ equity

   $ 679,716     $ 687,709    $ 857,061
    


 

  

 

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

 

4


Integris Metals, Inc. and Subsidiary

 

Consolidated Statements of Income

 

   

Period From

November 1,

2001 Through

December 28,

2001


   

53-Week

Period Ended

January 3,

2003


   

52-Week

Period Ended

January 2,

2004


   

39-Week

Period Ended

October 3,

2003


 

39-Week

Period Ended

October 1,

2004


           
(dollars in thousands)                     (unaudited)   (unaudited)

Net sales

  $ 221,048     $ 1,520,332     $ 1,494,088     $ 1,132,307   $ 1,491,480

Cost of sales

    183,566       1,242,683       1,248,911       945,679     1,213,968
   


 


 


 

 

Gross profit

    37,482       277,649       245,177       186,628     277,512

Selling, general and administrative expenses

    42,156       242,604       217,619       164,310     194,320

Restructuring and other related costs (Note 3)

    6,900       8,946       1,123       822     1,642
   


 


 


 

 

Operating (loss) income

    (11,574 )     26,099       26,435       21,496     81,550

Other expense (income), net

                                   

Interest

    1,332       8,381       10,340       7,827     7,649

Other

    834       (1,054 )     (51 )     —       1,192
   


 


 


 

 

(Loss) income before income taxes

    (13,740 )     18,772       16,146       13,669     72,709

Income tax (benefit) provision (Note 8)

    (3,716 )     8,889       5,219       4,612     26,220
   


 


 


 

 

Net (loss) income

  $ (10,024 )   $ 9,883     $ 10,927     $ 9,057   $ 46,489
   


 


 


 

 

 

 

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

 

5


Integris Metals, Inc. and Subsidiary

 

Consolidated Statements of Cash Flows

 

   

Period From

November 1,

2001 Through

December 28,

2001


   

53-Week

Period Ended

January 3,

2003


   

52-Week

Period Ended

January 2,

2004


   

39-Week

Period Ended

October 3,

2003


   

39-Week

Period Ended

October 1,

2004


 
(dollars in thousands)                     (unaudited)     (unaudited)  

Cash flows from operating activities

                                       

Net (loss) income

  $ (10,024 )   $ 9,883     $ 10,927     $ 9,057     $ 46,489  

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities

                                       

Depreciation and amortization

    2,523       16,202       16,275       12,198       11,935  

Provision for doubtful accounts receivable

    1,062       3,812       1,658       1,060       1,117  

Deferred income tax (benefit) provision

    (3,736 )     1,881       1,740       (249 )     (4,455 )

Asset write-downs

    —         1,208       1,499       1,042       854  

Gain on disposal of fixed assets

    (25 )     (509 )     (378 )     (101 )     82  

Amortization of deferred financing costs

    —         572       995       741       791  

Impact on cash flows from changes in working capital

                                       

Accounts receivable

    (41,120 )     6,214       (13,845 )     (29,883 )     (79,681 )

Inventories

    14,433       11,723       12,606       25,361       (95,342 )

Income tax receivable/payable

    158       3,522       760       2,477       5,585  

Prepaid expenses and other current assets

    1,490       (953 )     206       758       2,257  

Accounts payable and accrued expenses

    7,359       (18,628 )     (32,447 )     (29,219 )     33,928  

Accrued pension and postretirement obligations

    963       7,339       6,362       5,664       4,766  

Other liabilities

    (80 )     (308 )     (2,626 )     (2,701 )     787  
   


 


 


 


 


Net cash (used in) provided by operating activities

    (26,997 )     41,958       3,732       (3,795 )     (70,887 )
   


 


 


 


 


Cash flows from investing activities

                                       

Purchase of property, plant and equipment

    (1,589 )     (8,948 )     (16,384 )     (13,199 )     (4,953 )

Proceeds from sales of fixed assets

    63       7,060       1,650       257       310  

(Increase) decrease in restricted cash

    (2,000 )     (4,591 )     6,591       6,591       —    

Other

    —         (37 )     (98 )     25       1,837  
   


 


 


 


 


Net cash used in investing activities

    (3,526 )     (6,516 )     (8,241 )     (6,326 )     (2,806 )
   


 


 


 


 


Cash flows from financing activities

                                       

Change in book overdraft

    —         12,612       13,730       2,387       5,966  

Borrowings on debt due to related parties

    50,000       10,000       —         —         —    

Repayment on debt due to related parties

    —         (194,707 )     (66,125 )     (55,875 )     —    

Borrowings on revolving debt

    —         215,844       543,222       448,274       750,741  

Repayment on revolving debt

    —         (106,231 )     (490,758 )     (391,593 )     (672,230 )

Related party receivable/payable, net

    (31,790 )     31,139       (1,010 )     (260 )     —    

Deferred financing costs

    —         (4,075 )     (127 )     (127 )     (175 )

Dividends paid

    —         —         —         —         (10,216 )
   


 


 


 


 


Net cash provided by (used in) financing activities

    18,210       (35,418 )     (1,068 )     2,806       74,086  
   


 


 


 


 


Net (decrease) increase in cash and cash equivalents

    (12,313 )     24       (5,577 )     (7,315 )     393  

Effect of exchange rate changes on cash

    788       (95 )     1,520       1,014       985  
   


 


 


 


 


Net change in cash and cash equivalents

    (11,525 )     (71 )     (4,057 )     (6,301 )     1,378  

Cash and cash equivalents

                                       

Beginning of period

    18,500       6,975       6,904       6,904       2,847  
   


 


 


 


 


End of period

  $ 6,975     $ 6,904     $ 2,847     $ 603     $ 4,225  
   


 


 


 


 


Supplemental disclosures of cash flow information

                                       

Cash paid for interest

  $ 777     $ 8,065     $ 8,831     $ 6,976     $ 6,851  

Cash paid for income taxes

    176       6,524       2,447       2,160       20,630  

Supplemental disclosures of noncash items

                                       

Noncash capital contribution (Note 6)

  $ —       $ —       $ 9,875     $ 9,875     $ —    

Net unrealized gain on derivative instruments, net of deferred tax liability

    —         —         580       —         182  

Additional minimum pension liability adjustments, net of deferred tax benefit

    —         2,241       4,780       —         —    

 

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

 

6


Integris Metals, Inc. and Subsidiary

 

Consolidated Statements of Changes in Stockholders’ Equity

For the Period from November 1, 2001 through December 28, 2001,

the 53-Week Period Ended January 3, 2003, the 52-Week Period Ended

January 2, 2004, and the 39-Week Period Ended October 1, 2004

 

     Common Stock

   Paid-in
Capital


   Retained
Earnings
(Deficit)


   

Accumulated
Other
Comprehensive
Income

(Loss)


    Total
Stockholders’
Equity


 
     Shares

   Amount

         
(dollars in thousands)                                  

November 1, 2001 (date of formation) issuance of 100 shares in exchange for net assets contributed by stockholders

   100    $ —      $ 307,741    $ —       $ —       $ 307,741  

Net loss for the period

   —        —        —        (10,024 )     —         (10,024 )

Foreign currency translation adjustment

   —        —        —        —         287       287  
                                       


Comprehensive loss

                                        (9,737 )
    
  

  

  


 


 


Balances at December 28, 2001

   100      —        307,741      (10,024 )     287       298,004  

Net income for the period

   —        —        —        9,883       —         9,883  

Other comprehensive income

                                           

Foreign currency translation adjustment

   —        —        —        —         965       965  

Additional minimum pension liability, net of $1,432 of deferred tax benefit

   —        —        —        —         (2,241 )     (2,241 )
                                       


Comprehensive income

                                        8,607  
    
  

  

  


 


 


Balances at January 3, 2003

   100      —        307,741      (141 )     (989 )     306,611  

Net income for the period

   —        —        —        10,927       —         10,927  

Other comprehensive income

                                           

Foreign currency translation adjustment

   —        —        —        —         10,738       10,738  

Additional minimum pension liability, net of $3,057 of deferred tax benefit

   —        —        —        —         (4,780 )     (4,780 )

Net unrealized gain on derivative instruments, net of $370 of deferred tax liability

   —        —        —        —         580       580  
                                       


Comprehensive income

                                        17,465  

Noncash capital contribution

   —        —        9,875      —         —         9,875  
    
  

  

  


 


 


Balances at January 2, 2004

   100      —        317,616      10,786       5,549       333,951  

Net income for the period (unaudited)

   —        —        —        46,489       —         46,489  

Other comprehensive income (unaudited)

                                           

Foreign currency translation adjustment (unaudited)

   —        —        —        —         1,361       1,361  

Net unrealized gain on derivative instruments, net of $116 of deferred tax liability (unaudited)

   —        —        —        —         182       182  
                                       


Comprehensive income (unaudited)

                                        48,032  

Dividends paid

   —        —        —        (10,216 )     —         (10,216 )
    
  

  

  


 


 


Balances at October 1, 2004 (unaudited)

   100    $ —      $ 317,616    $ 47,059     $ 7,092     $ 371,676  
    
  

  

  


 


 


 

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

 

7


Integris Metals, Inc. and Subsidiary

 

Notes to Consolidated Financial Statements

(dollars in thousands, unless otherwise noted)

 

1. Business Description and Basis of Presentation

 

Integris Metals, Inc. (the “U.S. Parent”) and its wholly owned Canadian Subsidiary (collectively the “Company”) was formed effective November 1, 2001, pursuant to the terms of a Contribution and Dissolution Agreement (the “Agreement”) by and among Reynolds Metals Company (“RMC”), NAMD Inc. (“NAMD”) and Billiton Investments Ireland Limited (“Billiton Ireland”). The Company is a metals service center, specializing primarily in stainless steel and aluminum products which are sourced globally, further processed to customer specifications, and delivered to customers across North America. The Company has three dedicated processing centers and 59 regional branches throughout the U.S. and Canada.

 

In accordance with the terms of the Agreement, RMC contributed certain assets and liabilities of its metals distribution businesses (hereinafter referred to as the “RASCO Businesses”) to the Company in exchange for 50 shares of the Company’s common stock. In addition, NAMD Inc. contributed certain assets and liabilities of its metals distribution businesses (the “NAMD Businesses”) to the Company in exchange for 50 shares of the Company’s common stock.

 

The RASCO Businesses

 

Reynolds Aluminum Supply Company (“RASCO”) was a component of RMC. RMC was a wholly owned subsidiary of Alcoa, Inc. (a Delaware corporation) (“Alcoa”). Alcoa acquired RMC in May 2000. Accordingly, the assets and liabilities of the RASCO Businesses contributed to the Company reflect the effects of push-down purchase accounting in connection with the May 2000 acquisition of RMC by Alcoa.

 

The accompanying financial statements include the RASCO Businesses (including (i) the assets and liabilities of the U.S. Operations of RASCO, (ii) the Canadian subsidiary of RASCO Specialty Metals (“RASCO Specialty Metals Ltd.”), and (iii) a U.S. subsidiary of RMC (“Permamet Inc.”)) (collectively the “RASCO Businesses predecessor entities”).

 

The NAMD Businesses

 

The NAMD Businesses were a component of NAMD Inc. NAMD Inc. (a U.S. Holding Company) was a wholly owned subsidiary of Billiton Ireland. Prior to October 6, 2000, NAMD Inc. was a wholly owned subsidiary of Rio Algom Limited (a Canadian corporation). On October 6, 2000, Rio Algom Limited was acquired by Billiton Plc (a United Kingdom corporation and ultimate parent company of Billiton Ireland).

 

Effective June 30, 2001, Billiton Plc entered into a merger agreement with BHP, Ltd. (an Australian corporation) (“BHP”). For accounting purposes in the U.S., this merger was treated as an acquisition of Billiton Plc by BHP. Accordingly, the accompanying assets and liabilities of the NAMD Businesses contributed to the Company reflect the effects of push-down purchase accounting in connection with the BHP acquisition of Billiton Plc on June 30, 2001.

 

The accompanying financial statements reflect the contribution of the NAMD Businesses’ which consisted of metals distribution operations in the U.S. and Canada. The NAMD Businesses’ operations in the U.S. and Canada were comprised of two separate businesses, Vincent Metal Goods (“VMG”) in the U.S. and Atlas Ideal Metals (“AIM”) in Canada (collectively, the “NAMD Businesses”).

 

8


Integris Metals, Inc. and Subsidiary

 

Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, unless otherwise noted)

 

Contributed Assets and Liabilities

 

Our initial formation on November 1, 2001, was accounted for as a corporate joint venture. A corporate joint venture is a jointly controlled entity (whose ownership seldom changes) that is owned and operated by and for the mutual benefit of the joint venture partners, who share in the risks and rewards of the joint ventures business purpose. Assets contributed in the initial formation of a corporate joint venture are valued at their historical cost (or predecessor basis).

 

Included in the assets contributed by NAMD is approximately $40.8 million of goodwill. This goodwill did not result from our formation since the assets contributed at our formation were valued at historical cost. The goodwill contributed by NAMD was pre-existing goodwill which resulted from the June 30, 2001 merger of Billiton Plc with BHP Limited as described further above.

 

As such, the assets and liabilities of the RASCO Businesses and the NAMD Businesses contributed to the Company at November 1, 2001, are based upon the predecessor basis of NAMD and RASCO respectively and consisted of the following:

 

    

RASCO

Businesses


   

NAMD

Businesses


   

Amount

Contributed at

November 1,

2001


 

Current assets

   $ 154,093     $ 312,123     $ 466,216  

Noncurrent assets

     78,342       162,309       240,651  

Current liabilities

     (45,196 )     (67,551 )     (112,747 )

Noncurrent liabilities

     (30,550 )     (255,829 )     (286,379 )
    


 


 


Net assets contributed

   $ 156,689     $ 151,052     $ 307,741  
    


 


 


 

2. Summary of Significant Accounting Policies

 

Basis of Financial Statements

 

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The consolidated financial statements include those of the U.S. parent company and its wholly owned Canadian Subsidiary. The Company’s fiscal year ends on the Friday closest to December 31. As such, the consolidated financial statements include the accounts of the Company’s operations at January 3, 2003, January 2, 2004 and October 1, 2004 (unaudited), and for the period from November 1, 2001 through December 28, 2001, the 53-week period ended January 3, 2003, the 52-week period ended January 2, 2004, and for the 39-week periods ended October 3, 2003 (unaudited) and October 1, 2004 (unaudited). All significant intercompany investments, accounts and transactions have been eliminated in consolidation.

 

Use of Estimates

 

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

 

Interim Financial Information (Unaudited)

 

The accompanying consolidated financial statements at October 1, 2004 and for the 39-week periods ended October 3, 2003 and October 1, 2004, are unaudited. In the opinion of management, these consolidated

 

9


Integris Metals, Inc. and Subsidiary

 

Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, unless otherwise noted)

 

statements have been prepared on the same basis as the audited consolidated financial statements included herein and include all adjustments, consisting of only normal recurring adjustments, necessary for the fair statement of results of the interim periods.

 

Revenue Recognition

 

The Company recognizes revenue from product sales (including amounts billed for shipping and handling) when ownership and risk of loss passes to the customer which is upon shipment. The Company records estimated discounts and rebates in the same period revenue is recognized based on historical experience.

 

Cash and Cash Equivalents

 

Cash equivalents are highly liquid short-term investments that are readily convertible to known amounts of cash and have original maturities of three months or less at date of purchase.

 

Restricted Cash

 

Included in restricted cash were proceeds held in escrow from the sale of property located in St. Louis, Missouri.

 

Inventories

 

Product inventories primarily consist of aluminum, stainless steel and other metal products for resale. Certain additional incremental processing costs are incurred based on customer specifications. All product inventories are considered finished goods. Product inventories are valued and recorded at the lower of cost or market value. Cost is determined on the first-in, first-out (“FIFO”) method for all inventories, except U.S. aluminum inventory, which is determined on the last-in, first-out (“LIFO”) method. LIFO inventory represented approximately 36%, 37% and 33% of consolidated inventories at January 3, 2003, January 2, 2004 and October 1, 2004, respectively. At January 3, 2003, the LIFO cost of aluminum inventories exceeded the FIFO cost of such inventories. At January 2, 2004 and October 1, 2004 (unaudited), the FIFO value of aluminum inventories exceeded the LIFO value by $1,185 and $14,311, respectively.

 

Property, Plant and Equipment

 

Property, plant and equipment is stated at cost. Initial contributions of property, plant and equipment from the stockholders were based upon their net book value.

 

Depreciation and amortization are computed on the straight-line method over the estimated useful lives of the assets including assets acquired under capital leases.

 

Land improvements

   15 years

Buildings

   25 to 40 years

Building improvements

   20 to 40 years

Leasehold improvements

   Term of lease

Machinery and equipment

   5 to 25 years

Major processing equipment

   12 to 18 years

 

Maintenance and repairs are charged to operations as incurred and additions or improvements are capitalized. When assets are sold, retired or otherwise disposed of, the asset cost and related accumulated depreciation or amortization are removed from the respective accounts and any gains or losses are included in operations.

 

10


Integris Metals, Inc. and Subsidiary

 

Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, unless otherwise noted)

 

Property, plant and equipment amounts are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset (asset group) may not be recoverable. An impairment loss would be recognized when the carrying amount of an asset exceeds the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition. The impairment loss to be recorded would be the excess of the asset’s carrying value over its fair value. Fair value would be determined based upon the best information available in the circumstances including quoted prices or other valuation techniques.

 

Goodwill and Identified Intangible Assets

 

Goodwill and indefinite-lived intangible assets are not amortized. The carrying value of goodwill and indefinite-lived intangible assets are tested for impairment at least annually. The recoverability of unamortized goodwill assets is based upon the fair value of the Company determined by using a discounted cash flow analysis or other valuation techniques.

 

Prior to January 1, 2002, the excess of cost over net assets of businesses acquired was amortized on a straight-line basis over a period of 20 years. Effective January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 primarily addresses the accounting for acquired goodwill and intangible assets (i.e., the post-acquisition accounting). The most significant changes made by SFAS No. 142 were (1) goodwill and indefinite-lived intangible assets are no longer amortized; (2) goodwill and indefinite-lived intangible assets are tested for impairment at least annually; and (3) the amortization period of intangible assets with finite lives is no longer limited to 40 years.

 

Identified intangible assets, specifically customer relationships and intellectual property, are amortized over a period of 4 and 20 years, respectively. Identified intangible assets are tested for impairment whenever events or circumstances indicate that the carrying amount of the asset may not be recoverable.

 

Shipping and Handling Fees and Costs

 

The Company classifies shipping and handling fees and costs as a component of selling, administrative and other expenses on the Consolidated Statements of Income. Total shipping and handling fees and costs for the period from November 1, 2001 through December 28, 2001, the 53-week period ended January 3, 2003, the 52-week period ended January 2, 2004, and for the 39-week periods ended October 3, 2003 (unaudited) and October 1, 2004 (unaudited), were $7,217, $45,574, $46,686, $35,881 and $37,893, respectively.

 

Derivatives and Hedging

 

The fair values of all outstanding derivative instruments are recorded on the Consolidated Balance Sheets.

 

All derivatives are held for purposes other than trading. The Company measures hedge effectiveness by formally assessing, at least quarterly, the historical and probable future high correlation of changes in the fair value or expected future cash flows of the hedged item. The ineffective portions, if any, are recorded in other expense (income) in the current period. If the hedging relationship ceases to be highly effective or it becomes probable that an expected transaction will no longer occur, gains or losses on the derivative are recorded in other expense (income).

 

Changes in the fair value of derivatives are recorded in current earnings along with the change in the fair value of the underlying hedged item if the derivative is designated as a fair value hedge or in other comprehensive income if the derivative is designated as a cash flow hedge. If no hedging relationship is designated, the derivative is marked to market through earnings.

 

11


Integris Metals, Inc. and Subsidiary

 

Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, unless otherwise noted)

 

Cash flows from derivative instruments are recognized in the Consolidated Statements of Cash Flows in a manner consistent with the underlying transactions. See Note 9 for additional information regarding the Company’s accounting for derivatives.

 

Foreign Currency Translation

 

For Canadian operations, the functional currency is the Canadian dollar. Assets and liabilities of these operations are translated at the exchange rate in effect at year end. Income statement accounts are translated at the average rate of exchange prevailing during the year. Translation adjustments arising from the use of differing exchange rates from period to period are included as other comprehensive income. Realized gains and losses from Canadian currency transactions are included in net income for the period.

 

Comprehensive Income (Loss)

 

Comprehensive income (loss) includes net income, foreign currency translation adjustments, additional minimum pension liabilities and gains and losses on derivative instruments designated and effective as cash flow hedges that are charged or credited to the accumulated other comprehensive income (loss) account in stockholders’ equity.

 

Income Taxes

 

The Company recognizes a liability or asset for the deferred tax consequences of temporary differences between the tax bases of assets or liabilities and their reported amounts in the financial statements. These temporary differences will result in taxable or deductible amounts in future years when the reported amounts of the assets or liabilities are recovered or settled. The deferred tax assets are reviewed periodically for recoverability and valuation allowances are provided, as necessary.

 

New Accounting Pronouncements

 

Effective January 4, 2003, the Company adopted SFAS No. 143, Accounting for Asset Retirement Obligations. This statement establishes accounting standards for recognition and measurement of a liability for an asset retirement obligation and the associated asset retirement cost. The adoption of this standard did not impact the Company’s consolidated financial position or results of operations.

 

Effective January 4, 2003, the Company adopted SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This statement supersedes existing accounting literature related to accounting and reporting for costs associated with exit or disposal activities. The provisions of this statement were effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of this standard did not impact the Company’s consolidated financial position or results of operations as the restructuring plan described in Note 3 was initiated prior to December 31, 2002.

 

In April 2003, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133. SFAS No. 149 is effective for certain contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The adoption of this standard did not impact the Company’s consolidated financial position or results of operations.

 

12


Integris Metals, Inc. and Subsidiary

 

Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, unless otherwise noted)

 

In May 2003, Emerging Issues Task Force No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables was finalized. This addresses certain aspects of accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. The guidance in the consensus is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of this standard did not impact the Company’s consolidated financial position or results of operations.

 

On May 19, 2004, the FASB issued FASB Staff Position (“FSP”) 106-2, (FSP 106.2) Accounting and Disclosure Requirements relates to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”). The Act introduces a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care benefit plans. The Company’s U.S. Postretirement Health Care Benefits plan offers prescription drug benefits and the Company expects to benefit from this legislation. The Company does not anticipate that its plan will need to be amended to obtain the benefits provided under the Act. In accordance with the FASB’s original guidance on the accounting for the Act, the Company elected to defer recognition of the effects of the Act and any measures of benefit cost or benefit obligation in the financial statements or accompanying notes. The Company will comply with the guidance set forth in FSP 106-2 in the third quarter of 2004. The impact, however, is not anticipated to be significant.

 

In December 2003, the FASB issued SFAS No. 132R, Employers’ Disclosures about Pensions and Other Postretirement Benefits. This statement requires additional disclosures to be made by employers regarding pensions and other postretirement benefit plans, but does not change the measurement or recognition of those plans. Under this Statement, the disclosure provisions regarding foreign plans and estimated future benefit payments are effective for fiscal years ending after December 15, 2003 and interim periods beginning after December 15, 2003. The Company has adopted the interim provisions of this Statement during the current fiscal year. The annual disclosure provisions of this Statement have been included in Note 11.

 

In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities. This is an interpretation of ARB No. 51, Consolidation of Financial Statements, which addresses the consolidation by business enterprises of variable interest entities that either: (1) do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) the equity investors lack an essential characteristic of a controlling interest. In December 2003, the FASB issued a revision of FIN 46 (“FIN 46R”), which clarified certain complexities of FIN 46 and generally requires adoption of all special-purpose entities that qualify as variable interest entities no later than the end of the first reporting period ending after December 15, 2003, and to all non special-purpose entities that qualify as variable interest entities no later than the end of the first reporting period ending after March 15, 2004. The Company does not have any entities that require disclosure or new consolidation as a result of adopting the provisions of FIN 46 or FIN 46R.

 

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in certain circumstances). Many of those instruments were previously classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Statement is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the Statement and still existing at the beginning of the interim period of adoption. Adoption of this standard did not impact the Company.

 

13


Integris Metals, Inc. and Subsidiary

 

Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, unless otherwise noted)

 

3. Restructuring and Other Related Costs

 

Prior to 2002, management approved various actions to expedite the integration of the Company’s two predecessor entities and to improve the long-term efficiency and competitiveness of the Company and reduce costs. These actions included certain restructuring charges related to employee reductions, changes to certain distribution operations and other merger-related costs in connection with the integration of business processes and systems. These restructuring and other charges and the subsequent reduction to the related accrued liability are as follows:

 

    

Employee

Termination

Benefits


   

Asset

Write-
Downs


   

Other

Related

Costs


   

Total

Restructuring

and Other

Related

Costs


 

Initial charges for the period ended December 28, 2001

   $ 5,753     $ —       $ 1,147     $ 6,900  

Cash payments

     (343 )     —         (393 )     (736 )
    


 


 


 


Remaining liability, December 28, 2001

     5,410       —         754       6,164  

Net charges for the period ended January 3, 2003

     1,698       849       6,399       8,946  

Cash payments

     (2,990 )     —         (3,732 )     (6,722 )

Reclassifications

     (920 )     —         —         (920 )

Noncash adjustments

     —         (849 )     —         (849 )
    


 


 


 


Remaining liability, January 3, 2003

     3,198       —         3,421       6,619  

Net (credits) charges for the period ended January 2, 2004

     (314 )     1,499       (62 )     1,123  

Cash payments

     (2,538 )     —         (4,526 )     (7,064 )

Noncash adjustments

     —         (1,499 )     1,456       (43 )

Effect of changes in exchange rate

     61       —         142       203  
    


 


 


 


Remaining liability, January 2, 2004

     407       —         431       838  

Net charges for the 39-week period ended October 1, 2004 (unaudited)

     2       384       1,256       1,642  

Cash payments (unaudited)

     (376 )     —         (1,481 )     (1,857 )

Noncash adjustments (unaudited)

     —         (384 )     —         (384 )

Effect of changes in exchange rate (unaudited)

     (3 )     —         (1 )     (4 )
    


 


 


 


Remaining liability, October 1, 2004 (unaudited)

   $ 30     $ —       $ 205     $ 235  
    


 


 


 


 

The remaining accrued liabilities for all periods presented for employee termination benefits and for other related costs have been classified as a component of accrued expenses.

 

Employee termination benefit charges in 2001 included 206 personnel reductions through voluntary and involuntary terminations primarily in the U.S. sales, marketing and corporate administrative functions of the Company. Employee termination benefit changes for the 53-week period ended January 3, 2003, represented severance charges related to the termination of 67 employees within the Company’s U.S. operations and its Canadian subsidiary. Terminated employees related primarily to the closing of distribution centers in Canada and the combination of corporate administrative functions in the U.S. In addition, for the 53-week period ended January 3, 2003, certain terminated U.S. employees also received additional bridged pension and OPEB benefits, the cost of which ($920) was reclassified as a component of accrued pension and postretirement obligations. Employee termination credits for the 52-week period ended January 2, 2004, related solely to adjustments to prior period amounts that were over accrued.

 

14


Integris Metals, Inc. and Subsidiary

 

Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, unless otherwise noted)

 

Asset write-downs for the 53-week period ended January 3, 2003, related primarily to the closure and sale of land and buildings in the U.S., including the write-down of certain processing equipment that will not be transferred to other locations. The $849 charge recognized, included $993 of asset write-downs and $215 of accelerated depreciation related to assets held and used that the Company intends to dispose of. The amount recorded is also net of a $359 gain on the sale of land and building in St. Louis, Missouri. The $1,499 charge for the 52-week period ended January 2, 2004, primarily represents a write-down of the carrying value of assets held for sale and the write-down of miscellaneous equipment. The $384 charge recognized in the 39-week period ended October 1, 2004, included $814 of asset write-downs of the carrying value of assets held for sale. The amount recorded is also net of a $430 gain on the sale of land and buildings in Philadelphia, Pennsylvania and Charlotte, North Carolina.

 

Other related costs in 2001 included a lease termination of $671 related to the closing of a distribution center in Canada and nonrecurring business integration costs of $476 incurred during the period primarily related to systems integration costs. Other related costs in the 53-week period ended January 3, 2003, included $2,318 of lease termination costs in the U.S. and Canada related to the exiting of certain leased facilities, for which the Company was still party to a lease obligation. In addition, the Company incurred $4,081 of nonrecurring merger integration costs during the period related primarily to systems integration costs ($1,335), benefit plan redesign and implementation ($544), employee and facility relocations ($1,797) and other nonrecurring merger-related costs ($405). These merger integration costs, which were charged to expense as incurred, were classified as a component of restructuring and other related costs on the accompanying Consolidated Statements of Income due to their nonrecurring nature. The net credit for other related costs in the 52-week period ended January 2, 2004, included the reversal of $1,045 of previously accrued lease termination costs offset by $983 of net period costs primarily associated with facility and employee relocation. The net charge for other related costs in the 39-week period ended October 1, 2004, was $1,256 of period costs which primarily consisted of facility and employee relocation costs.

 

The Company also maintains land, building and equipment in facilities that the Company intends to sell. These assets have a carrying value of $2,453, $13,605 and $10,608 at January 3, 2003, January 2, 2004 and October 1, 2004, respectively, and have been classified as assets held for sale and are included as a component of other current assets on the accompanying Consolidated Balance Sheets.

 

4. Supplemental Consolidated Financial Statement Information

 

Property, Plant and Equipment, Net

 

Property, plant and equipment, net, consisted of the following components:

 

     January 3,
2003


    January 2,
2004


    October 1,
2004


 
                 (unaudited)  

Land and improvements

   $ 25,188     $ 23,183     $ 24,688  

Buildings and leasehold improvements

     80,432       76,217       80,448  

Machinery and equipment

     91,805       98,432       100,436  

Construction in progress

     2,945       7,589       3,457  
    


 


 


Total cost

     200,370       205,421       209,029  

Less: Accumulated depreciation and amortization

     (29,348 )     (44,252 )     (53,924 )
    


 


 


     $ 171,022     $ 161,169     $ 155,105  
    


 


 


 

15


Integris Metals, Inc. and Subsidiary

 

Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, unless otherwise noted)

 

Accumulated Other Comprehensive Income (Loss)

 

Accumulated other comprehensive income (loss) consisted of the following components:

 

     January 3,
2003


    January 2,
2004


    October 1,
2004


 
                 (unaudited)  

Cumulative translation adjustment

   $ 1,252     $ 11,990     $ 13,351  

Additional minimum pension liability, net of deferred tax benefit

     (2,241 )     (7,021 )     (7,021 )

Net unrealized gain on derivative instruments, net of deferred tax liability

     —         580       762  
    


 


 


     $ (989 )   $ 5,549     $ 7,092  
    


 


 


 

5. Goodwill and Other Intangible Assets

 

Other intangible assets were comprised of the following:

 

     January 3,
2003


    January 2,
2004


    October 1,
2004


 
                 (unaudited)  

Other intangibles assets

                        

Customer relationships

   $ 5,100     $ 5,100     $ 5,100  

Less: Accumulated amortization

     (1,276 )     (2,550 )     (3,506 )

Technology and patents

     800       800       800  

Less: Accumulated amortization

     (40 )     (80 )     (110 )

Intangible pension asset

     3,700       3,754       3,754  
    


 


 


     $ 8,284     $ 7,024     $ 6,038  
    


 


 


 

The Company has completed its annual goodwill impairment test (performed in the fourth fiscal quarter) and has determined that there was no impairment at January 3, 2003 and January 2, 2004. Nothing has come to the Company’s attention that would indicate any impairment of its goodwill at October 1, 2004.

 

The goodwill contributed by the NAMD Businesses relates to the acquisition of Billiton (the “NAMD Businesses ultimate parent”) by BHP on June 30, 2001, as described in Note 1. The excess of the allocated purchase price to the NAMD Businesses over the tangible net assets acquired was allocated to goodwill with a 20-year estimated useful life.

 

Effective January 1, 2002, the Company ceased amortization of goodwill in connection with the adoption of SFAS No. 142, the effects of which increased pre-tax income for the fiscal year ended January 3, 2003, by approximately $2.0 million. Goodwill amortization expense recorded for the period from November 1, 2001 through December 28, 2001, was $235.

 

The estimated useful lives of customer relationships and technology and patents are 4 years and 20 years, respectively. The Company amortizes these intangible assets over their respective lives on the straight-line method. The straight-line method of amortization reflects an appropriate allocation of the costs of the intangible

 

16


Integris Metals, Inc. and Subsidiary

 

Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, unless otherwise noted)

 

assets to earnings in proportion to the amount of economic benefits obtained by the Company in each reporting period. Estimated amortization expense for the next five fiscal years is as follows:

 

2004

   $ 1,315

2005

     1,315

2006

     40

2007

     40

2008

     40

 

6. Notes Payable

 

Notes payable consisted of the following:

 

    

January 3,

2003


   

January 2,

2004


  

October 1,

2004


       
                (unaudited)

Senior Euro-Dollar Revolving Loan (LIBOR), with interest rates ranging from 3.38% to 4.38% at January 2, 2004

   $ 75,000     $ 150,000    $ 205,000

Senior Revolving Loan (Prime Rate), with an interest rate of 5.75% at January 2, 2004

     15,000       5,400      15,400

Senior Canadian Revolving Loan (Bankers’ Acceptance Rate), with an interest rate of 5.50% at January 2, 2004

     19,789       9,302      19,794

Senior Canadian Revolving Loan (Prime Rate), with an interest rate of 6.25% at January 2, 2004

     —         2,326      7,126

Billiton Facility B

     38,000       —        —  

RMC Liquidity Facility

     38,000       —        —  
    


 

  

Total loans payable

     185,789       167,028      247,320

Less: Current maturities

     (76,000 )     —        —  
    


 

  

Noncurrent portion

   $ 109,789     $ 167,028    $ 247,320
    


 

  

 

The Senior Euro-Dollar Revolving Loan, the Senior Revolving Loan, and the Senior Canadian Euro-Dollar Revolving Loan (collectively, the “outstanding revolving loans”) are pursuant to a $350,000 Credit Agreement (the “Credit Agreement”) with a consortium of financial institutions entered into by the Company on August 26, 2002, as amended on April 28, 2004. The amended Credit Agreement increased the Company’s limit on the overall credit facility of $350,000. The Credit Agreement expires in August 2006 and allows the Company’s U.S. entity to borrow a maximum of $300,000 and the Company’s Canadian subsidiary to borrow a maximum of $50,000 (or the Canadian dollar equivalent). The amounts outstanding under the Senior Canadian Revolving Loan are denominated in Canadian dollars. These maximum loan amounts are subject to limitations as determined by a calculated borrowing base. Total availability is limited to, among other things, the eligible accounts receivables and inventory pledged as collateral under the credit agreement. The debt can be either revolving loans or term loans due no earlier than August 26, 2006. Interest on the U.S. entity loans (both revolving and term) are determined at the option of the Company at the JPMorgan Prime Rate (currently 3% over the federal funds rate) plus margin or the (Euro-Dollar) LIBOR plus margin. Interest rates on the Canadian entity loans are determined at the option of the Company at the JPMorgan Prime Rate plus margin or the Canadian Bankers’ Acceptance Rate plus margin. The margins on each of the interest rates noted above are subject to change in future periods based upon certain financial ratios which correspond to the Company’s creditworthiness. For U.S. Prime Rate loans, the margin on the JPMorgan Prime Rate can range from 1% to 2% and the margin on the Euro-Dollar LIBOR can range from 2% to 3%. For Canadian loans, the margin on the JPMorgan Prime Rate can range from 1% to 2% and the margin on the Bankers’ Acceptance Rate can range from 2% to 3%.

 

17


Integris Metals, Inc. and Subsidiary

 

Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, unless otherwise noted)

 

At January 2, 2004 and October 1, 2004, the JPMorgan Prime Rate was 4.0% and 5.75%, respectively, and the LIBOR ranged from 1.125% to 1.25% and from 1.6875% to 2.0%, respectively, depending upon the term of the outstanding revolving debt.

 

Amounts outstanding under the revolving credit facility have been classified as long-term, to the extent of available long-term back-up facilities pursuant to the Credit Agreement, in accordance with the Company’s ability and intent to refinance such obligations on a long-term basis. The Credit Agreement requires the Company to meet a fixed charge coverage ratio and limited the capital expenditures of the Company to $40,000 in 2003. Capital expenditures under the Credit Agreement are limited to $30,000 in both 2004 and 2005. As of January 2, 2004 and October 1, 2004, the Company was in compliance with all debt covenant requirements.

 

The Billiton Facility B and the RMC Liquidity Facility are revolving credit facilities and are subordinate to the debt outstanding under the Credit Agreement. The two facilities rank equal with each other and are subject to substantially the same terms and conditions. Both facilities were originally available through June 30, 2003 and were subsequently extended through June 30, 2004, and have interest due at the end of each calendar quarter at an annual rate of the three-month LIBOR plus 2.5%.

 

Effective March 24, 2003, and in connection with the settlement of contributed pension obligations described in Note 11, the Billiton Facility B Loan was reduced to reflect the contributed net pension differential pursuant to the terms of the Agreement. The corresponding decrease to the Billiton Facility B Loan of $9,875 was treated as a noncash capital contribution during the period ending January 2, 2004.

 

7. Stockholders’ Equity

 

The Company is authorized to issue 100,000 shares of common stock, 100 of which were issued on November 1, 2001 (50 shares each to RMC and NAMD Inc. in exchange for their respective net asset contributions). The common stock is subject to a stockholders’ agreement by and among the Company, Billiton Ireland, RMC, Billiton Company B.V. (a wholly owned subsidiary of BHP Billiton Plc) and Alcoa (a Delaware corporation).

 

The stockholders’ agreement addresses, among other things, corporate governance, including the composition of the Board of Directors and senior management, voting and transfer rights of the stockholders, additional capital contributions and dividend policies.

 

In addition, the stockholders’ agreement covers the buy-out or purchase rights of the stockholders in the event of a deadlock (as defined) as well as a call option right of a stockholder in the event the other stockholder ceases to own at least one-third of the issued and outstanding common stock.

 

Presently, the stock ownership and voting rights are shared 50% by RMC and Billiton Ireland (as parent company to NAMD Inc.). In connection with the contemplated initial public offering described in Note 17, the stockholders’ agreement will terminate upon completion of the contemplated transaction.

 

8. Income Taxes

 

The contribution of the net assets of the NAMD Businesses and RASCO Businesses to the Company was a tax-free transaction. As a result, the tax basis of the assets and tax attributes carried over to the Company on the effective date of contribution. The Company’s U.S. operations file a consolidated income tax return in the U.S. The Company’s Canadian operations file a separate income tax return for Canadian purposes.

 

18


Integris Metals, Inc. and Subsidiary

 

Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, unless otherwise noted)

 

(Loss) income before income taxes consisted of:

 

    

Period From

November 1,

2001 Through

December 28,

2001


   

53-Week

Period Ended

January 3,

2003


   

52-Week

Period Ended

January 2,

2004


United States

   $ (9,975 )   $ 21,836     $ 11,971

Canada

     (3,765 )     (3,064 )     4,175
    


 


 

     $ (13,740 )   $ 18,772     $ 16,146
    


 


 

 

The income tax (benefit) provision consisted of:

 

    

Period From

November 1,

2001 Through

December 28,

2001


   

53-Week

Period Ended

January 3,

2003


  

52-Week

Period Ended

January 2,

2004


Current provision

                     

U.S. federal and state

   $ 20     $ 7,008    $ 3,479

Canada

     —         —        —  
    


 

  

Current provision

     20       7,008      3,479
    


 

  

Deferred (benefit) provision

                     

U.S. federal and state

     (3,736 )     1,881      1,740

Canada

     —         —        —  
    


 

  

Deferred (benefit) provision

     (3,736 )     1,881      1,740
    


 

  

Income tax (benefit) provision

   $ (3,716 )   $ 8,889    $ 5,219
    


 

  

 

The income tax provision is different from that which would be obtained by applying the statutory federal income tax rate to income before income taxes. Differences between the statutory rates in the U.S. and Canada do not have a significant impact on the effective income tax rate reconciliation presented below. The items causing this difference are as follows:

 

    

Period From

November 1,

2001 Through

December 28,

2001


   

53-Week

Period Ended

January 3,

2003


  

52-Week

Period Ended

January 2,

2004


 

Tax (benefit) expense at U.S. statutory rate

   $ (4,809 )   $ 6,571    $ 5,788  

Change in valuation allowance for Canadian net deferred tax assets

     1,318       1,072      (1,453 )

State income taxes, net of federal benefit

     (487 )     873      479  

Nondeductible expenses and other

     262       373      405  
    


 

  


     $ (3,716 )   $ 8,889    $ 5,219  
    


 

  


 

19


Integris Metals, Inc. and Subsidiary

 

Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, unless otherwise noted)

 

The tax effects of temporary differences that give rise to significant portions of the deferred income tax assets and deferred income tax liabilities are as follows:

 

    

January 3,

2003


   

January 2,

2004


 

Deferred income tax assets

                

Trade receivables

   $ 2,007     $ 2,359  

Accrued expenses

     2,650       640  

Accrued pension and postretirement obligations

     20,574       24,937  

Canadian operating loss carryforwards

     3,570       2,257  

U.S. operating loss carryforward

     1,008       924  

U.S. AMT NOL-carryforward

     3,815       2,213  

Additional minimum pension liability

     1,432       4,489  

Other

     1,539       799  
    


 


Total gross deferred income tax assets

     36,595       38,618  

Less: Valuation allowance for Canadian deferred tax assets

     (6,796 )     (6,768 )
    


 


Net deferred income tax assets

     29,799       31,850  
    


 


Deferred income tax liabilities

                

Intangible assets

     (1,959 )     (2,977 )

Inventories

     (15,732 )     (17,286 )

Property, plant and equipment

     (25,682 )     (23,844 )

Unrealized gain on derivatives

     —         (370 )
    


 


Total gross deferred income tax liabilities

     (43,373 )     (44,477 )
    


 


Net deferred income tax liabilities

   $ (13,574 )   $ (12,627 )
    


 


 

The U.S. operating loss carryforward at January 2, 2004, represents various state net operating losses that expire at various dates between 2007 and 2022. In addition, a valuation allowance at January 2, 2004 has been provided against deferred tax assets related to the Canadian net operating loss carryforwards as well as other Canadian deferred tax assets because it is more likely than not that these tax benefits will not be realized based upon the existing uncertainty as to the ability of the Canadian operations to generate future taxable income. At January 2, 2004, Canadian net operating loss carryforwards of approximately $6,400 existed and will begin to expire in 2008.

 

The change in the valuation allowance for Canadian deferred tax assets includes the impact of foreign exchange, which has not been included in the Company’s annual effective tax rate. The change in the valuation allowance for Canadian deferred tax assets is as follows:

 

Balance at January 3, 2003

   $ 6,796  

Utilization of Canadian deferred tax assets

     (1,453 )

Foreign exchange impact

     1,425  
    


Balance at January 2, 2004

   $ 6,768  
    


 

During the 39-week period ended October 1, 2004, the Company’s Canadian entity generated in excess of $6.4 million of taxable income and has projected additional taxable income to be generated throughout the remainder of fiscal 2004. In this regard, the Company will utilize all of its existing Canadian net operating loss

 

20


Integris Metals, Inc. and Subsidiary

 

Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, unless otherwise noted)

 

carryforwards in 2004. As such, all of the $2.3 million of valuation allowance recorded at January 2, 2004, related to the Canadian net operating loss carryforwards has been reversed at July 2, 2004 (as a discreet item in the 39-week period ended October 1, 2004). The Company continues to maintain a deferred tax asset valuation allowance of approximately $4.5 million at October 1, 2004, related to the remaining deferred tax assets in Canada as these deferred tax assets relate to temporary differences that are longer term in nature (primarily certain recurring book reserves, pension and OPEB liabilities and fixed assets). Because of the cyclical nature of the Company’s operations, it is not possible to forecast future taxable income into future years to currently conclude that it is “more likely than not” that these remaining Canadian deferred tax assets will ultimately be realized.

 

9. Financial Instruments and Derivatives

 

The carrying amounts of cash and cash equivalents, book overdraft and short-term debt approximate fair value because of the short maturity of the instruments.

 

The Company holds or purchases derivative financial instruments for purposes other than trading. The following are the details of the fair values of these investments as of:

 

    

January 3,

2003


  

January 2,

2004


   

October 1,

2004


 
                (unaudited)  

Commodities, principally aluminum and nickel

   $ —      $ 443     $ 35  

Interest rates

     —        950       1,248  

Foreign currency

     —        (398 )     (1,863 )

 

From time to time, the Company may enter into fixed price sales contracts with its customers for certain of its inventory components (primarily aluminum and stainless steel). The Company enters into commodity futures and options contracts to reduce volatility in the price of these commodities. Currently, these commodity contracts cover periods commensurate with known exposures, generally within one year, and had an asset value of $443 and $35 at January 2, 2004 and October 1, 2004, respectively. The Company currently does not account for these contracts as hedges, but rather marks these contracts to market with a corresponding offset to current earnings.

 

The Company uses interest rate swaps to help maintain a strategic balance between fixed- and floating-rate debt and to manage overall financing costs. The Company has entered into pay fixed, receive floating interest rate swaps to effectively convert the interest rate from floating to fixed on $85,000 of debt, through June 2006. These interest rate swaps were designated as cash flow hedges and had an asset value of approximately $950 and $1,248 at January 2, 2004 and October 1, 2004, respectively, with a corresponding offset as a component of accumulated other comprehensive income, offset by a deferred tax liability of $370 and $486, respectively.

 

The interest rate swaps were fully effective and as such, no gain or loss from hedge ineffectiveness was recognized. Approximately $380 of the amount included in Other Comprehensive Income at January 2, 2004 will be reclassified as a component of interest expense within the next fiscal year.

 

The Company is subject to exposure from fluctuations in foreign currencies. Foreign currency exchange contracts are used by the Company’s Canadian subsidiary to hedge the variability in cash flows from the forecasted payment of currencies other than the functional currency. The Company’s Canadian subsidiary’s foreign currency contracts were principally used to purchase U.S. dollars. The U.S. dollar notional amount of all foreign currency contracts outstanding was $13,720 and $32,065 at January 2, 2004 and October 1, 2004 (unaudited), respectively, and had a liability value of $398 and $1,863, respectively. The Company currently does not account for these contracts as hedges but rather marks these contracts to market with a corresponding offset to current earnings.

 

21


Integris Metals, Inc. and Subsidiary

 

Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, unless otherwise noted)

 

The Company’s net derivative balance from the contracts described above was a $995 asset and a $580 liability at January 2, 2004 and October 1, 2004, respectively, and is included as a component of other assets on the accompanying Consolidated Balance Sheets.

 

10. Lease Commitments

 

The Company is party to numerous lease agreements in both the U.S. and Canada related to buildings, vehicles and office equipment leases. These building leases run into the beginning of 2012. The vehicle and office equipment leases run into the beginning of 2010. These leases are all accounted for as operating leases. The following are the minimum lease payments for the next five fiscal years and thereafter based on operating leases in effect at January 2, 2004:

 

2004

   $ 11,736

2005

     9,305

2006

     7,090

2007

     4,652

2008

     2,852

Thereafter

     3,690
    

     $ 39,325
    

 

Rental expense under operating lease agreements was $13,379 and $12,691 for the 53-week period ended January 3, 2003 and for the 52-week period ended January 2, 2004, respectively.

 

11. Employee Benefit Plans

 

Certain of the Company’s predecessors had noncontributory defined benefit pension plans (defined benefit plans), which provided retirement benefits for the majority of its predecessor company employees in both the U.S. and Canada. The Company’s predecessor NAMD U.S. business as well as the Company’s predecessor Canadian businesses (AIM for NAMD and RASCO Specialty Metals Ltd. for RASCO) had defined benefit pension plans specific to its respective predecessor business employees as well as plans which provided health care and life insurance benefits which were specific to substantially all of its retirees in the U.S. or Canada (other post employment benefits (“OPEB”)).

 

Prior to January 1, 2002, the Company’s predecessor U.S. RASCO businesses provided its predecessor employees pension and OPEB benefits through multi-employer plans along with Alcoa and its affiliates. Effective January 1, 2002, predecessor U.S. RASCO employees became legal employees of the Company (from November 1, 2001 through January 1, 2002, such employees were leased to the Company by Alcoa), and became participants in the Integris Pension Plan for U.S. employees.

 

In connection with the terms of the Agreement, effective January 1, 2002, both the U.S. employees and the Canadian employees became participants of the newly formed Integris pension and OPEB plans in both the U.S. and Canada. As such, the funded status of the respective U.S. and Canadian pension and OPEB predecessor plans were transferred to the newly formed Integris plans effective January 1, 2002.

 

22


Integris Metals, Inc. and Subsidiary

 

Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, unless otherwise noted)

 

Subsequent to formation (and merger) of the Integris U.S. and Canadian pension and OPEB plans, the Company’s Board of Directors approved amendments to the existing pension and OPEB benefits for both U.S. and Canadian employees. These amendments essentially resulted in equal benefits being provided to all employees since the predecessor company plans had differing benefit formulas. For accounting purposes, these plan amendments have been treated as a component of prior service cost and will be included as a component of pension and OPEB expense in future periods. For the purposes of the Agreement, however, the change in the pension/OPEB obligation resulting from these amendments resulted in an adjustment to the Billiton Facility B as described further in the last paragraph of Note 6.

 

In addition, and in accordance with the terms of the Agreement, Alcoa agreed to contribute a fully funded pension obligation for the U.S. RASCO employees that were previously participants of the multi-employer Alcoa pension plans. As such, effective January 1, 2002, $21,843 of pension obligation and related pension assets of $23,944 were contributed by Alcoa to the newly formed U.S. Integris Pension Plan related to the U.S. RASCO employees.

 

23


Integris Metals, Inc. and Subsidiary

 

Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, unless otherwise noted)

 

Actuarial valuations for the respective pension and OPEB plans are as of October 1 of each year. The benefit obligation, fair value of plan assets, funded status and actuarial assumption for the Integris plans based upon the October 1, 2003 and 2002, valuations are as follows:

 

2002 Plan Information

     U.S.

    Canada

 
     Pension
Benefits


    OPEB

    Pension
Benefits


    OPEB

 

Changes in benefit obligations

                                

Benefit obligations at beginning of period

   $ 88,204     $ 31,560     $ 29,410     $ 8,204  

Service cost

     3,730       1,555       790       90  

Interest cost

     8,433       2,503       1,910       444  

Plan participants’ contributions

     —         168       —         —    

Plan amendments

     3,309       (7,791 )     —         —    

Actuarial (gains) losses

     8,819       5,915       (17 )     (1,583 )

Transfer from RASCO plan

     21,843       7,778       —         —    

Benefits paid

     (2,741 )     (1,219 )     (2,404 )     (296 )

Effect of changes in exchange rate

     —         —         933       185  
    


 


 


 


Benefit obligations at end of period

     131,597       40,469       30,622       7,044  
    


 


 


 


Changes in plan assets

                                

Fair value of plan assets at beginning of period

     74,951       —         33,078       —    

Actual return on plan assets

     (5,848 )     —         (2,424 )     —    

Transfer from RASCO plan

     23,944       —         —         —    

Employer contribution

     159       1,051       98       296  

Plan participants’ contributions

     —         168       —         —    

Benefits paid

     (2,741 )     (1,219 )     (2,404 )     (296 )

Effect of changes in exchange rate

     —         —         613       —    
    


 


 


 


Fair value of plan assets at end of period

     90,465       —         28,961       —    
    


 


 


 


Funded status

     (41,132 )     (40,469 )     (1,661 )     (7,044 )

Unrecognized net actuarial loss

     28,426       6,233       7,448       —    

Unrecognized prior service cost

     3,151       (7,494 )     —         (1,460 )

Contributions after measurement date

     43       291       —         —    
    


 


 


 


Net amount recognized

   $ (9,512 )   $ (41,439 )   $ 5,787     $ (8,504 )
    


 


 


 


Amounts recognized in the combined balance sheet consist of:

                                

Accrued benefit liability

   $ (16,885 )   $ (41,439 )   $ 5,787     $ (8,504 )

Intangible asset

     3,700       —         —         —    

Accumulated other comprehensive income

     3,673       —         —         —    
    


 


 


 


Net amount recognized

   $ (9,512 )   $ (41,439 )   $ 5,787     $ (8,504 )
    


 


 


 


Weighted-average assumptions to determine the obligation at the end of the period

                                

Discount rate

     6.75 %     6.75 %     6.50 %     6.50 %

Expected return on plan assets

     9.60 %     —         8.00 %     —    

Rate of compensation increase

     4.50 %     4.50 %     3.50 %     3.50 %

Weighted-average assumptions to determine cost

                                

Discount rate

     7.50 %     7.50 %     6.50 %     6.50 %

Expected return on plan assets

     9.60 %     —         8.00 %     —    

Rate of compensation increase

     5.00 %     5.00 %     3.50 %     3.50 %

 

24


Integris Metals, Inc. and Subsidiary

 

Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, unless otherwise noted)

 

2003 Plan Information

 

    U.S.

    Canada

 
    Pension
Benefits


    OPEB

    Pension
Benefits


    OPEB

 

Changes in benefit obligations

                               

Benefit obligations at beginning of period

  $ 131,597     $ 40,469     $ 30,622     $ 7,044  

Service cost

    3,337       1,533       806       165  

Interest cost

    8,768       2,695       2,284       584  

Plan participants’ contributions

    —         231       —         —    

Plan amendments

    455       —         —         —    

Actuarial (gains) losses

    (2,300 )     709       952       942  

Assumption change

    9,144       2,705       —         —    

Benefits paid

    (3,506 )     (1,491 )     (2,619 )     (380 )

Effect of changes in exchange rate

    —         —         6,780       1,722  
   


 


 


 


Benefit obligations at end of period

    147,495       46,851       38,825       10,077  
   


 


 


 


Changes in plan assets

                               

Fair value of plan assets at beginning of period

    90,465       —         28,961       —    

Actual return on plan assets

    13,102       —         4,273       —    

Transfer from RASCO plan

    —         —         —         —    

Employer contribution

    181       1,260       287       380  

Plan participants’ contributions

    —         231       —         —    

Benefits paid

    (3,506 )     (1,491 )     (2,619 )     (380 )

Effect of changes in exchange rate

    —         —         6,207       —    
   


 


 


 


Fair value of plan assets at end of period

    100,242       —         37,109       —    
   


 


 


 


Funded status

    (47,253 )     (46,851 )     (1,716 )     (10,077 )

Unrecognized net actuarial loss

    30,678       9,655       8,000       936  

Unrecognized prior service cost

    3,274       (6,899 )     —         (826 )

Contributions after measurement date

    44       352       —         —    
   


 


 


 


Net amount recognized

  $ (13,257 )   $ (43,743 )   $ 6,284     $ (9,967 )
   


 


 


 


Amounts recognized in the combined balance sheet consist of:

                               

Accrued benefit liability

  $ (28,521 )   $ (43,743 )   $ 6,284     $ (9,967 )

Intangible asset

    3,754       —         —         —    

Accumulated other comprehensive income

    11,510       —         —         —    
   


 


 


 


Net amount recognized

  $ (13,257 )   $ (43,743 )   $ 6,284     $ (9,967 )
   


 


 


 


Weighted-average assumptions to determine obligation at the end of the period

                               

Discount rate

    6.00 %     6.00 %     6.00 %     6.00 %

Expected return on plan assets

    8.75 %     —         7.00 %     —    

Rate of compensation increase

    4.25 %     4.25 %     3.50 %     3.50 %

Weighted-average assumptions to determine cost

                               

Discount rate

    6.75 %     6.75 %     6.50 %     6.50 %

Expected return on plan assets

    8.75 %     —         8.00 %     —    

Rate of compensation increase

    4.50 %     4.50 %     3.50 %     3.50 %

 

25


Integris Metals, Inc. and Subsidiary

 

Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, unless otherwise noted)

 

The aggregate projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were as follows as of January 3, 2003 and January 2, 2004:

 

     January 3,
2003


   January 2,
2004


Projected benefit obligation

   $ 131,597    $ 147,496

Accumulated benefit obligation

     105,990      128,807

Fair value of plan assets

     90,465      100,242

 

Components of Net Periodic Benefit Costs—53-Week Period Ended January 3, 2003

 

     U.S.

    Canada

     Pension
Benefits


    OPEB

    Pension
Benefits


    OPEB

Service cost

   $ 3,730     $ 1,555     $ 790     $ 90

Interest cost

     8,433       2,503       1,910       444

Expected return on plan assets

     (9,767 )     —         (2,402 )     —  

Amortization of prior service cost

     158       (297 )     (41 )     —  

Recognized net actuarial loss

     4       —         —         —  

Special termination benefits

     522       398       —         —  
    


 


 


 

Net periodic benefit cost

   $ 3,080     $ 4,159     $ 257     $ 534
    


 


 


 

 

Components of Net Periodic Benefit Costs—52-Week Period Ended January 2, 2004

 

     U.S.

    Canada

 
     Pension
Benefits


    OPEB

    Pension
Benefits


    OPEB

 

Service cost

   $ 3,337     $ 1,533     $ 806     $ 165  

Interest cost

     8,768       2,695       2,284       584  

Expected return on plan assets

     (8,781 )     —         (2,720 )     —    

Amortization of prior service cost

     331       (595 )     —         (826 )

Recognized net actuarial loss

     426       186       443       —    
    


 


 


 


Net periodic benefit cost

   $ 4,081     $ 3,819     $ 813     $ (77 )
    


 


 


 


 

 

For OPEB measurement purposes as of October 1, 2003 and 2002, a 12% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2003. The rate was assumed to decrease gradually to 5% for 2009 and remain at that level thereafter.

 

26


Integris Metals, Inc. and Subsidiary

 

Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, unless otherwise noted)

 

Components of Net Periodic Benefit Costs for the 39-week periods ended October 3, 2003 and October 1, 2004, are as follows:

 

     (Unaudited)

 
     39-Week Period Ended October 3, 2003

 
     U.S.

    Canada

 
     Pension
Benefits


    OPEB

   

Pension

Benefits


    OPEB

 

Service cost

   $ 2,504     $ 1,151     $ 605     $ 125  

Interest cost

     6,576       2,022       1,713       438  

Expected return on plan assets

     (6,587 )     —         (2,040 )     —    

Amortization of prior service cost

     249       (447 )     —         (620 )

Recognized net actuarial loss

     320       140       333       —    
    


 


 


 


Net periodic benefit cost

   $ 3,062     $ 2,866     $ 611     $ (57 )
    


 


 


 


     (Unaudited)

 
     39-Week Period Ended October 1, 2004

 
     U.S.

    Canada

 
    

Pension

Benefits


    OPEB

   

Pension

Benefits


    OPEB

 

Service cost

   $ 3,138     $ 1,117     $ 632     $ 140  

Interest cost

     6,546       2,037       1,535       437  

Expected return on plan assets

     (6,623 )     —         (1,809 )     —    

Amortization of prior service cost

     282       (446 )     —         (597 )

Recognized net actuarial loss

     1,131       222       359       —    
    


 


 


 


Net periodic benefit cost

   $ 4,474     $ 2,930     $ 717     $ (20 )
    


 


 


 


 

In June 2004, the Company contributed approximately $1.7 million and $0.4 million to its U.S. and Canadian pension plans, respectively. The Company has no plans to make any further contribution in the current fiscal year.

 

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage-point change in assumed health care cost trend rates would have the following:

 

     U.S.

    Canada

 
    

1-Percentage

Point

Increase


  

1-Percentage

Point

Decrease


   

1-Percentage

Point

Increase


  

1-Percentage

Point

Decrease


 

Effect on total of service and interest cost components

   $ 453    $ (373 )   $ 112    $ (94 )

Effect on the postretirement benefit obligation

     5,103      (4,220 )     1,132      (965 )

 

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) introduces a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care benefit plans. The Company’s U.S. Postretirement Health Care Benefits plan offers prescription drug benefits. The Company adopted the effects of the Act in the fiscal third quarter of the 2004 fiscal year. The Company plan was

 

27


Integris Metals, Inc. and Subsidiary

 

Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, unless otherwise noted)

 

not amended in order to benefit from the new legislation and does not expect a significant impact on future benefit expenses or the future financial status of the plan. The impact of adopting the accounting requirements of the Act was not significant.

 

Plan Assets

 

The Company’s plan assets allocations for its U.S. defined benefit pension and postretirement health care benefits plans at January 2, 2004 and January 3, 2003, target allocation for fiscal year 2005 are as follows:

 

    

2004

Target

Asset

Allocation

Percentage


  

Percentage of

Plan Assets


 

Asset Category


     

October 1,

2003


   

October 1,

2002


 

Domestic equity

   32-70%    39.7 %   42.4 %

International equity

   0-18%    15.5 %   13.3 %

Fixed income

   30-50%    33.0 %   38.6 %

Cash and cash equivalents

   0%    11.8 %   5.7 %
         

 

          100.0 %   100.0 %
         

 

 

The expected long-term rate of return is generally based on the pension plan’s asset mix, assumptions of equity returns based on historical long-term returns on asset categories, expectations for inflation, and estimates of the impact of active management of the assets.

 

The Company’s U.S. investment strategy and policies are designed to maximize the possibility of having sufficient funds to meet the long-term liabilities of the pension fund, while achieving a balance between the goals of growing the assets of the plan and keeping risk at a reasonable level. Current income is not a key goal of the plan. The asset allocation position reflects the ability and willingness to accept relatively more short-term variability in the performance of the pension plan portfolio in exchange for the expectation of a better funded status, better long-term returns and lower pension costs in the long run.

 

The plan prohibits investing in warrants and options, and engaging in short sales, margin transactions, and other specialized investment activities. The use of derivatives is also prohibited for the purpose of speculation or introducing leverage in the portfolio, circumventing the investment guidelines or taking risks that are inconsistent with the fund’s guidelines.

 

Cash Flows

 

The Company’s funding policy for the U.S. pension plan is to achieve a return on assets that meets the long-term funding requirements identified by the projections of the pension plan’s actuaries while simultaneously satisfying the fiduciary responsibilities prescribed by the Employee Retirement Income Security Act of 1974, as amended. The Company is not required to make any contributions to the U.S. pension plan in the fiscal year ended December 31, 2004.

 

Other Market Multi-Employer Benefit Plan Arrangements

 

The Company also participates in various multi-employer defined benefit pension plans that cover eligible employees covered by collective bargaining agreements. The Company made contributions related to these plans of $101, $583 and $522, respectively, for the period from November 1, 2001 through December 28, 2001, the 53-week period ended January 3, 2003 and the 52-week period ended January 2, 2004, respectively.

 

28


Integris Metals, Inc. and Subsidiary

 

Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, unless otherwise noted)

 

Benefit Plan Information for the Period Ended December 31, 2001

 

Alcoa 2001 Multi-Employer Plans

 

As described above, prior to January 1, 2002, Alcoa maintained various multi-employer defined benefit pension plans that covered substantially all of RASCO’s U.S. employees. Plans covering salaried employees provided pension benefits based on a formula that considers length of service and earnings during years of service. Plans covering hourly employees generally provided a specific amount of benefits for each year of service. For purposes of the 2001 financial statements, the predecessor RASCO U.S. plans were accounted for as multi-employer plans as defined in SFAS No. 87, Employer’s Accounting for Pensions. Costs related to these multi-employer plans have been charged to the Company for the period ended December 28, 2001, based on the number of predecessor RASCO U.S. employees participating in the various plans on an average cost per employee. The Company’s pension expense for the two-month period ended December 31, 2001, related to predecessor RASCO U.S. employees was $492.

 

Alcoa also maintained other post-retirement benefit plans that provided most of predecessor RASCO’s U.S. retired employees with health care and life insurance benefits. For purposes of the 2001 financial statements, the predecessor RASCO U.S. plans were accounted for as multi-employer plans as defined by SFAS No. 106, Employer’s Accounting for Postretirement Benefits Other than Pensions. Costs related to these Alcoa plans have been charged to the Company for the period ended December 28, 2001, based on the number of predecessor U.S. RASCO employees participating in the various plans on an average cost per employee.

 

The Company recognized an unfunded post-retirement benefit obligation of $7,778 at December 28, 2001, related to the predecessor RASCO multi-employer OPEB plan. These amounts were calculated assuming a discount rate of 7%. The plan is unfunded.

 

For measurement purposes, a 10% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2001 and future years.

 

2001 Funded Status of Predecessor Plans

 

The Company’s pension and OPEB plans, which are specific to the respective predecessor businesses account for such liabilities using actuarial methodologies. The actuarial valuations for the respective pension and OPEB plans are as of October 31, 2001. The benefit obligation, fair value of plan assets, funded status and actuarial assumption for these plans based upon the October 31, 2001, valuation are as follows:

 

    

Predecessor

NAMD U.S.


   

Predecessor

NAMD Canada


   

Predecessor

RASCO Canada


 
    

Pension

Benefit


    OPEB

   

Pension

Benefit


   OPEB

   

Pension

Benefit


    OPEB

 

Benefit obligation

   $ 88,204     $ 31,560     $ 27,746    $ 8,045     $ 1,664     $ 159  

Fair value of plan assets

     74,951       —         32,573      —         505       —    
    


 


 

  


 


 


Funded status

     (13,253 )     (31,560 )     4,827      (8,045 )     (1,159 )     (159 )

Unrecognized net actuarial loss

     6,802       909       2,579      —         55       —    
    


 


 

  


 


 


Net amount recognized at December 28, 2001

   $ (6,451 )   $ (30,651 )   $ 7,406    $ (8,045 )   $ (1,104 )   $ (159 )
    


 


 

  


 


 


Net periodic benefit cost for the period ended December 28, 2001

   $ 259     $ 579     $ 17    $ 124     $ 22     $ 2  
    


 


 

  


 


 


 

29


Integris Metals, Inc. and Subsidiary

 

Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, unless otherwise noted)

 

    

Predecessor

NAMD U.S.


   

Predecessor

NAMD Canada


   

Predecessor

RASCO Canada


 
    

Pension

Benefit


    OPEB

   

Pension

Benefit


    OPEB

   

Pension

Benefit


    OPEB

 

Weighted-average assumptions at October 31, 2001

                                    

Discount rate

   7.5 %   7.5 %   6.5 %   6.5 %   6.0 %   7.0 %

Expected return on plan assets

   9.6 %   —       8.0 %   —       6.0 %   —    

Rate of compensation increase

   5.0 %   5.0 %   3.5 %   3.5 %   3.7 %   —    

 

For measurement purposes, a 10% annual rate of increase in the per capita cost of covered health care benefit was assumed for 2001. The rate was assumed to decrease gradually to 5% for 2007 and remain at that level thereafter.

 

12. Employee 401(k) Savings Plan

 

Prior to July 1, 2002, the Company’s U.S. predecessor entities (VMG for the NAMD Businesses and RASCO U.S. including Permamet) provided separate 401(k) savings plans for substantially all U.S. predecessor employees. Predecessor employee contributions of up to 6% of eligible compensation were matched 66.67% by the VMG plan and predecessor employee contributions of up to 6% of eligible compensation were matched up to 50% by the RASCO U.S. plans. The Company’s combined matching contributions under both plans amounted to $570 and $1,008 for the period from November 1, 2001 through December 28, 2001 and for the period from December 29, 2001 through June 30, 2002, respectively.

 

Effective July 1, 2002, the respective U.S. predecessor company plans were merged and all U.S. employees began participating in the Integris Metals, Inc. 401(k) savings plan (the “Integris Plan”). Those employees eligible for early retirement as of June 30, 2002, and those within one year of becoming eligible are considered grandfathered and will continue to earn the 401(k) savings plan benefits that were in effect prior to the creation of the Integris Plan. Employees are allowed to participate in the 401(k) savings plan following 30 days of employment. Employee contributions are matched based on employee savings rates, employee contributions from 1% to 3% are matched 100% by the Company, employee contributions from 4% to 5% are matched 50% by the Company, and employee contributions from 6% to 9% are matched 25% by the Company. The Company’s matching contributions under the merged plan amounted to $1,296 from July 1, 2002 through January 3, 2003, and $2,800 during the 52-week period ended January 2, 2004.

 

13. Long-term Incentive Compensation Plan

 

During the 53-week period ended January 3, 2003, the Company adopted the 2002 Phantom Stock Option Plan (the “Plan”) for executive officers and key employees of the Company and its subsidiaries. The total number of phantom stock options that may be granted to employees under the Plan is 50 million. The Plan will automatically terminate on January 1, 2012. The phantom stock options provide the holder the opportunity to a cash award based upon future increases in a calculated value of the Company, as defined, further adjusted for certain performance goals. These awards vest over a four-year period with 50% vesting after year two and 25% vesting in each of the next two years. No awards were issued under this plan during the 53-week period ended January 3, 2003. During the 52-week period ended January 2, 2004, the Company’s Board of Directors authorized the issuance of approximately 1.5 million of such phantom stock options. None of the performance criteria had been met as of January 2, 2004, and as such, no compensation cost was recognized in the period ended January 2, 2004, in connection with the issuance of these phantom stock options. Subsequent to January 2, 2004, the Company’s Board of Directors authorized the issuance of 800,000 additional phantom stock units.

 

30


Integris Metals, Inc. and Subsidiary

 

Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, unless otherwise noted)

 

At October 1, 2004, the Company anticipates that certain performance goals will be met by the end of the current fiscal year. As such, the Company recorded approximately $4,200 of expense in the 39-week period ended October 1, 2004, related to these phantom stock awards.

 

14. Contingent Liabilities and Indemnification of Certain Claims

 

The Company is subject to various claims and actions including those pertaining to environmental laws and regulations, product liability, and health and safety matters arising in the ordinary course of business. Management believes, however, that the disposition of such claims and actions, either individually or in the aggregate, are not expected to have a material adverse effect on the Company’s financial position. No assurances can be given, however, that the disposition of one or more of such claims or actions in a particular reporting period will not be material in relation to the reported results for such period.

 

During 2002, Alcoa became aware of claims related to RASCO’s sale of certain allegedly defective aluminum products to maritime customers for use in the construction of ships prior to the formation of the Company, and the Company’s subsequent sale of such products after formation of the Company. In connection with the Company’s formation as described in Note 1, Alcoa has agreed to provide the Company with defense and indemnity to legal matters and claims associated with this matter for shipments prior to November 1, 2001. Based on the percentage of product purchased and shipped after November 1, 2001, the Company has recorded a $250 liability at January 2, 2004, related to its exposure. All other claims for product sold prior to November 1, 2001, are the responsibility of Alcoa.

 

15. Related Party Transactions

 

Alcoa is a supplier of aluminum products to the Company. During the period from November 1, 2001 through December 28, 2001, the 53-week period ended January 3, 2003, the 52-week period ended January 2, 2004, and the 39-week period ended October 1, 2004 (unaudited), the Company purchased from Alcoa $10,700, $172,125, $181,074, and $187,752, respectively, of aluminum products.

 

In connection with its formation, the Company entered into a Master Transition Services Agreement with Alcoa whereby Alcoa agreed to provide certain transition services to the Company for a fee to be calculated monthly. This agreement expired during 2003. The services related to this agreement primarily related to, but were not limited to (i) the provision of RASCO manufacturing and administrative personnel until such employees were legally transferred to the Company’s payroll on January 1, 2002, (ii) administrative services and expenses such as cash management, accounts receivable, accounts payable, and human resources, postage, telephone and facility rental, and (iii) information technology usage and support.

 

Total charges by Alcoa to the Company under this agreement for the period from November 1, 2001 through December 28, 2001, the 53-week period ended January 3, 2003, and the 52-week period ended January 2, 2004, were $2,683, $7,139 and $400, respectively. At January 3, 2003 and January 2, 2004, net amounts collectively due to/from Alcoa under all these arrangements are shown separately on the accompanying Consolidated Balance Sheets. See also Note 6 for a description of related party debt arrangements.

 

In addition, commencing in 2004 the Company began paying BHP Billiton for certain consulting and other employee related services. Total expenses related to these arrangements were $473 for the 39-week period ended October 1, 2004.

 

31


Integris Metals, Inc. and Subsidiary

 

Notes to Consolidated Financial Statements—(Continued)

(dollars in thousands, unless otherwise noted)

 

16. Geographic and Product Information

 

The operations of the Company are comprised as follows:

 

    

Period From

November 1,
2001 Through
December 28,
2001


  

53-Week

Period Ended

January 3,

2003


   52-Week
Period Ended
January 2,
2004


  

39-Week
Period Ended

October 3,

2003


  

39-Week
Period Ended
October 1,

2004


                    (unaudited)    (unaudited)

Net sales to customers

                                  

U.S.

   $ 182,162    $ 1,281,894    $ 1,226,784    $ 928,534    $ 1,261,052

Canada

     38,886      238,438      267,304      203,773      230,428
    

  

  

  

  

Total net sales

   $ 221,048    $ 1,520,332    $ 1,494,088    $ 1,132,307    $ 1,491,480
    

  

  

  

  

 

    

January 3,

2003


  

January 2,

2004


  

October 1,

2004


               (unaudited)

Tangible long-lived assets

                    

U.S.

   $ 155,346    $ 143,304    $ 137,627

Canada

     15,676      17,865      17,478
    

  

  

Total tangible long-lived assets

   $ 171,022    $ 161,169    $ 155,105
    

  

  

 

The following presents the percentage of sales by product line for the periods indicated:

 

     Period From
November 1,
2001 Through
December 28,
2001


   

53-Week

Period Ended

January 3,

2003


   

52-Week
Period Ended
January 2,

2004


   

39-Week
Period Ended

October 3,

2003


   

39-Week
Period Ended
October 1,

2004


 

Category


                     (unaudited)     (unaudited)  

Aluminum

   43 %   44 %   42 %   43 %   41 %

Stainless steel

   43     41     43     43     46  

Carbon steel

   10     5     5     4     4  

Other

   4     10     10     10     9  
    

 

 

 

 

     100 %   100 %   100 %   100 %   100 %
    

 

 

 

 

 

17. Subsequent Event

 

On April 22, 2004, the Company’s Board of Directors authorized the filing of a registration statement with the Securities and Exchange Commission that would permit the Company to sell shares of the Company’s common stock in connection with a proposed initial public offering. In connection with the proposed initial public offering, a process was begun to incorporate a Delaware holding company. Upon the completion of this process, the Company will be a wholly owned subsidiary of Integris Metals Corporation, a Delaware Corporation. On August 20, 2004 the Company filed a registration statement on Form S-1 with the Securities and Exchange Commission. The registration process was subsequently cancelled and on October 26, 2004, the shareholders entered into a definitive agreement to sell all of the capital stock of the Company.

 

32


Report of Independent Auditors

 

To the Management of

NAMD Inc.

 

In our opinion, the accompanying combined balance sheet and related combined statements of operations and comprehensive income (loss), of changes in parent company investment and of cash flows present fairly, in all material respects, the combined financial position of The Metals Distribution Businesses of NAMD Inc.—Successor Entity (the NAMD Businesses Successor Entity) at October 31, 2001, and the combined results of their operations and their cash flows for the four-month period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the NAMD Businesses Successor Entity’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

/S/    PRICEWATERHOUSECOOPERS LLP

                                                                                                         

        PricewaterhouseCoopers LLP

 

Minneapolis, Minnesota

June 17, 2002, except for Note 8 and Note 9,

For which the date is July 28, 2004

 

33


Report of Independent Auditors

 

To the Management of

NAMD Inc.

 

In our opinion, the accompanying combined statements of operations and comprehensive income (loss), of changes in parent company investment and of cash flows present fairly, in all material respects, the combined results of operations and cash flows of The Metals Distribution Businesses of NAMD Inc.—Predecessor Entity (the NAMD Businesses Predecessor Entity) for the six-month period ended June 30, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the NAMD Businesses Predecessor Entity’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

/S/    PRICEWATERHOUSECOOPERS LLP

                                                                                                         

        PricewaterhouseCoopers LLP

 

Minneapolis, Minnesota

June 17, 2002, except for Note 8 and Note 9,

For which the date is July 28, 2004

 

34


The Metals Distribution Businesses of NAMD Inc.

 

Combined Balance Sheet

 

(dollars in thousands)   

October 31,

2001


Assets

      

Current assets

      

Cash and cash equivalents

   $ 16,669

Trade receivables, net of allowance for doubtful accounts of $3,304

     115,072

Inventories

     174,881

Income taxes receivable

     2,392

Deferred income taxes

     7,929

Prepaid expenses and other current assets

     3,109
    

Total current assets

     320,052

Property, plant and equipment, net

     109,357

Goodwill, net

     44,990

Other assets

     33
    

Total assets

   $ 474,432
    

Liabilities and Parent Company Investment

      

Current liabilities

      

Accounts payable

   $ 54,392

Accrued expenses

     13,159

Current portion of long-term debt due to Billiton (RA) Limited

     145,797
    

Total current liabilities

     213,348

Accrued pension and postretirement obligations

     37,266

Long-term debt due to Billiton (RA) Limited, less current portion

     60,000

Other liabilities

     7,856
    

Total liabilities

     318,470
    

Commitments

      

Parent company investment

     155,962
    

Total liabilities and parent company investment

   $ 474,432
    

 

 

The accompanying notes are an integral part of the combined financial statements.

 

35


The Metals Distribution Businesses of NAMD Inc.

 

Combined Statement of Operations and Comprehensive Income (Loss)

 

     Predecessor

     Successor

 
    

For the

Six-Month

Period Ended

June 30,

2001


     For the
Four-Month
Period Ended
October 31,
2001


 
(dollars in thousands)              

Net sales

   $ 533,478      $ 317,633  

Cost of sales

     449,774        268,473  
    


  


Gross profit

     83,704        49,160  

Selling, administrative and other expenses

     70,313        42,539  
    


  


Operating income

     13,391        6,621  
 

Other income (expense), net

                 

Interest expense

     (8,711 )      (3,971 )

Other

     447        (3,910 )
    


  


Income (loss) before income taxes

     5,127        (1,260 )
 

Income taxes

     (3,993 )      (1,760 )
    


  


Net income (loss)

     1,134        (3,020 )
 

Other comprehensive income (loss)

                 

Foreign currency translation adjustments

     263        (2,303 )
    


  


Comprehensive income (loss)

   $ 1,397      $ (5,323 )
    


  


 

 

 

The accompanying notes are an integral part of the combined financial statements.

 

36


The Metals Distribution Businesses of NAMD Inc.

 

Combined Statement of Cash Flows

 

     Predecessor

     Successor

 
    

For the

Six-Month

Period Ended

June 30,

2001


     For the
Four-Month
Period Ended
October 31,
2001


 
(dollars in thousands)              

Cash flows from operating activities

                 

Net income (loss)

   $ 1,134      $ (3,020 )

Adjustments to reconcile net income (loss) to net cash provided by operating activities, excluding impact of acquisition

                 

Depreciation and amortization

     5,202        3,751  

Deferred income tax benefit

     (3,670 )      (2,082 )

Provision for doubtful trade receivables

     628        384  

(Gain) loss on disposal of fixed assets

     (1,771 )      3  

Effects on cash flows from changes in working capital

                 

Accounts receivable

     26        9,850  

Inventories

     30,250        11,315  

Prepaid and other current assets

     (641 )      (1,300 )

Accounts payable and accrued expenses

     (5,960 )      (5,070 )

Accrued pension and post-retirement obligations

     3,689        970  

Other liabilities

     (633 )      661  
    


  


Net cash provided by operating activities

     28,254        15,462  
    


  


Cash flows from investing activities

                 

Purchase of property, plant and equipment, net

     (5,295 )      (2,687 )

Proceeds from sale of property, plant and equipment

     2,020           
    


  


Net cash used in investing activities

     (3,275 )      (2,687 )
    


  


Cash flows from financing activities

                 

Net increase (decrease) in amounts due affiliate

     2,019        (14,557 )

Net cash activity with NAMD, Inc.

     (18,126 )      5,181  
    


  


Net cash used in financing activities

     (16,107 )      (9,376 )
    


  


Effect of exchange rate changes on cash

     596        (1,826 )
    


  


Net change in cash and cash equivalents

     9,468        1,573  
 

Cash and cash equivalents

                 

Beginning of period

     5,628        15,096  
    


  


End of period

   $ 15,096      $ 16,669  
    


  


Supplemental disclosures of cash flow information

                 

Cash paid for interest

   $ 10,105      $ 5,201  

Cash paid for income taxes

     6,770        3,144  

 

The accompanying notes are an integral part of the combined financial statements.

 

37


The Metals Distribution Businesses of NAMD Inc.

 

Combined Statements of Changes in Parent Company Investment

 

(dollars in thousands)    Total

 

Parent company investment at December 31, 2000

   $ 155,128  

Net income

     1,134  

Foreign currency translation adjustments

     263  

Net cash and financing activity with NAMD Inc.

     (18,126 )
    


Parent company investment at June 30, 2001, Predecessor Entity

   $ 138,399  
    


Parent company investment at July 1, 2001, Successor Entity

   $ 144,204  

Net loss

     (3,020 )

Foreign currency translation adjustments

     (2,303 )

Net cash and financing activity with NAMD Inc.

     17,081  
    


Parent company investment at October 31, 2001

   $ 155,962  
    


 

 

 

 

The accompanying notes are an integral part of the combined financial statements.

 

38


The Metals Distribution Businesses of NAMD Inc.

 

Notes to Combined Financial Statements

(dollars in thousands, unless otherwise noted)

 

1. Business Description and Basis of Presentation

 

The Metals Distribution Businesses of NAMD Inc. (the “NAMD Businesses”) specialize primarily in stainless steel and aluminum, further processed to customer specifications, and delivered to customers across North America. The NAMD Businesses have more than 50 distribution and/or processing facilities throughout the U.S. and Canada.

 

The NAMD Businesses consist of metals distribution operations in the U.S. and Canada. Each of the NAMD Businesses’ U.S. and Canadian operations are part of the NAMD Inc. (the “Parent Company”) consolidated group, but were operated autonomously as two separate entities (Vincent Metal Goods (“VMG”) in the U.S. and Atlas Ideal Metals (“AIM”) in Canada). VMG in the U.S. is a division of NAMD Inc. and AIM in Canada is a wholly owned subsidiary of NAMD Inc. In addition, NAMD Inc. also owned 100% of numerous mining subsidiaries operated within the U.S. In connection with the preparation of these financial statements, the assets and liabilities of VMG have been combined with the assets and liabilities of AIM.

 

Effective November 11, 2001, NAMD Inc. contributed its metals distribution businesses (the “NAMD Businesses”) to a newly formed joint venture (“Integris Metals, Inc.”) in exchange for a 50% interest and Alcoa, Inc. (a Delaware Corporation) contributed its metals distribution business for the remaining 50% interest.

 

Initial October 2000 Acquisition

 

NAMD Inc. is a wholly owned subsidiary of Billiton Investments Ireland Ltd. (a wholly owned subsidiary of Billiton Plc.). Prior to October 6, 2000, NAMD Inc. was a wholly owned subsidiary of Rio Algom Limited (“RAL”) (a Canadian corporation). On October 6, 2000, RAL was acquired by Billiton Plc (“Billiton”). Accordingly, the parent company investment in the NAMD Businesses as of December 31, 2000, reflected in the accompanying Statements of Changes in Parent Company Investment reflects the carve out accounting described above, as well as the effects of the push down of the purchase accounting related to the proportionate consideration allocated to the NAMD Businesses in connection with the October 2000 acquisition.

 

Subsequent June 30, 2001 Acquisition

 

Effective June 30, 2001, Billiton entered into a merger agreement with BHP Ltd. (an Australian corporation) (“BHP”). For accounting purposes in the U.S., this merger was treated as a purchase of Billiton by BHP (the “June 2001 acquisition”). Accordingly, the accompanying combined financial statements as of October 31, 2001, and the four-month period then ended reflect the effects of the push down of the purchase accounting related to the NAMD Businesses in connection with the June 2001 acquisition.

 

The allocated purchase price to the net assets acquired as of the acquisition date in accordance with the purchase method of accounting is as follows:

 

Current assets

   $ 332,341  

Property, plant and equipment

     110,249  

Deferred income taxes

     5,847  

Goodwill

     45,754  

Current liabilities

     (73,289 )

Accrued pension and postretirement benefits

     (36,348 )

Long-term debt

     (234,796 )

Other liabilities

     (5,554 )
    


     $ 144,204  
    


 

39


The Metals Distribution Businesses of NAMD Inc.

 

Notes to Combined Financial Statements—(Continued)

(dollars in thousands, unless otherwise noted)

 

The allocation to the tangible assets acquired and liabilities assumed was on the basis of their estimated fair values. The excess over the estimated fair value of the tangible net assets acquired ($45.8 million) has preliminarily been allocated to goodwill with a 20-year useful life. Management is in the process of obtaining appropriate valuations of identifiable intangible assets acquired (primarily customer relationships), and the applicable useful lives, and will finalize the preliminary purchase price allocation when those valuations are completed. Management believes the 20-year life assumed in the preliminary allocation will approximate the weighted average lives of all intangible assets upon finalization of the allocation.

 

Effective January 1, 2002, the NAMD Businesses will cease amortization of residual goodwill and intangible assets with indefinite lives in connection with the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 142 (see “New Accounting Pronouncements” in Note 2), the effects of which will increase pre-tax income on an annual basis by approximately $2.1 million based upon the preliminary purchase price allocation described above.

 

In connection with the push down of the purchase accounting of the June 2001 acquisition, the accompanying Combined Statement of Operations and Comprehensive Income (Loss) reflects the operations of the NAMD Businesses Predecessor for the six-month period ended June 30, 2001, acquisition and the Successor for the four-month period ended October 31, 2001.

 

Corporate Charges

 

Charges by the parent company to NAMD are based on costs that directly relate to NAMD or a percentage allocation of the total cost for the service provided. These services generally include legal, treasury, human resource and risk management services. Management believes that the allocation methods are reasonable. Management further believes these expenses to be reflective of same on a stand-alone basis.

 

2. Summary of Significant Accounting Policies

 

Basis of Financial Statements

 

The accompanying combined financial statements include the accounts of the metals distribution businesses of NAMD Inc. comprising the U.S. VMG business combined with the Canada AIM business. All significant intercompany accounts and transactions have been eliminated in the combination.

 

Use of Estimates

 

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

 

Revenue Recognition

 

The NAMD Businesses recognize revenue from product sales (including amounts billed for shipping and handling) when ownership and risk of loss passes to the customer, which is upon shipment. The NAMD Businesses record estimated discounts and rebates in the same period revenue is recognized based on historical experience.

 

40


The Metals Distribution Businesses of NAMD Inc.

 

Notes to Combined Financial Statements—(Continued)

(dollars in thousands, unless otherwise noted)

 

Cash and Cash Equivalents

 

Cash equivalents are highly liquid short-term investments that are readily convertible to known amounts of cash and have original maturities of three months or less at date of purchase.

 

Inventories

 

Product inventories primarily consist of aluminum, stainless steel and other metal products for resale. Certain additional incremental processing costs are incurred as a result of cutting to length based on customer specifications. All product inventories are considered finished goods. Product inventories are valued at the lower of cost with cost determined on the last-in, first-out (“LIFO”) method or market based upon replacement cost. Materials and supplies inventories are carried at the lower of average cost or market. At October 31, 2001, the LIFO cost of product inventories exceeded the replacement cost of such inventories.

 

Property, Plant and Equipment

 

Property, plant and equipment are stated at cost (based on the June 2001 acquisition described in Note 1). Depreciation and amortization are provided by charges to operations using the straight-line method over the estimated useful lives of the assets set forth below:

 

      

Land improvements

   20 years

Buildings

   40 years

Building improvements

   20 to 40 years

Leasehold improvements

   Term of lease

Machinery and equipment

   5 to 12 years

Major processing equipment

   12 to 18 years

 

Maintenance and repairs are charged to operations as incurred and additions or improvements are capitalized. When assets are sold, retired or otherwise disposed of, the cost of the asset and the related accumulated depreciation or amortization are removed from the respective accounts and any gains or losses are included in operations.

 

Shipping and Handling Fees and Costs

 

The Company classifies shipping and handling fees and costs as a component of selling, administrative and other expenses on the Combined Statement of Operations and Comprehensive Income (Loss). Total shipping and handling fees and costs for the six months ended June 30, 2001 and for the four months ended October 31, 2001, were $7,389 and $5,742, respectively.

 

Goodwill

 

The excess of cost over net assets of businesses acquired is charged against earnings over a period of 20 years. The recoverability of unamortized goodwill assets is assessed on an ongoing basis by comparing anticipated undiscounted future cash flows from operations to the recorded unamortized cost (see however the description of SFAS No. 142 under “New Accounting Pronouncements” below).

 

Foreign Currency Translation

 

For Canadian operations, the functional currency is the Canadian dollar. Assets and liabilities of these operations are translated into U.S. dollars at the exchange rate in effect at year-end. Income statement accounts

 

41


The Metals Distribution Businesses of NAMD Inc.

 

Notes to Combined Financial Statements—(Continued)

(dollars in thousands, unless otherwise noted)

 

are translated at the average rate of exchange prevailing during the year. Translation adjustments arising from the use of differing exchange rates from period to period are included as other comprehensive income (loss). Realized gains and losses from Canadian currency transactions are included in net income (loss) for the period.

 

Comprehensive Income (Loss)

 

Other comprehensive income (loss) refers to gains and losses that, under accounting principles generally accepted in the United States of America, are excluded from net income as these amounts are recorded directly as an adjustment to equity as a component of accumulated other comprehensive income. The NAMD Businesses’ accumulated other comprehensive income (loss) is comprised of the translation into U.S. dollars of the financial statements of its Canadian operations. The NAMD Businesses do not utilize any derivative financial instruments, the fair value of which would also be included as a component of accumulated other comprehensive income.

 

Income Taxes

 

Historically, VMG’s results of U.S. operations have been included in the consolidated U.S. federal income tax return of NAMD Inc. AIM’s results of operations in Canada were included in a separate tax return in Canada. The income tax expense and other tax related information as it relates to the U.S. operations has been calculated as if VMG had not been eligible to be included in the consolidated tax returns of NAMD Inc. (i.e., on a “separate return” basis).

 

The NAMD Businesses recognize an asset or liability for the deferred tax consequences of temporary differences between the tax bases of assets or liabilities and their reported amounts in the financial statements. These temporary differences will result in taxable or deductible amounts in future years when the reported amounts of the assets or liabilities are recovered or settled. The deferred tax assets are reviewed periodically for recoverability and valuation allowances are provided, as necessary.

 

New Accounting Pronouncements

 

In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.

 

The most significant changes made by SFAS No. 141 are: 1) requiring that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, and 2) establishing specific criteria for the recognition of intangible assets separately from goodwill.

 

SFAS No. 142 primarily addresses the accounting for acquired goodwill and intangible assets (i.e., the post-acquisition accounting). The provisions of SFAS No. 142 will be effective for the NAMD Businesses beginning in 2002. The most significant changes made by SFAS No. 142 are: 1) goodwill and indefinite-lived intangible assets will no longer be amortized; 2) goodwill and indefinite-lived intangible assets will be tested for impairment at least annually; and 3) the amortization period of intangible assets with finite lives will no longer be limited to forty years.

 

Effective January 1, 2001 the NAMD Businesses adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. This standard requires that all derivative instruments be recorded, at fair value, on the balance sheet. The adoption of this SFAS did not have an impact on the financial statements.

 

42


The Metals Distribution Businesses of NAMD Inc.

 

Notes to Combined Financial Statements—(Continued)

(dollars in thousands, unless otherwise noted)

 

In December 2003, the FASB issued SFAS No. 132R, Employers’ Disclosures about Pensions and Other Postretirement Benefits. This statement requires additional disclosures to be made by employers regarding pensions and other postretirement benefit plans, but does not change the measurement or recognition of those plans. Under this Statement, the disclosure provisions regarding foreign plans and estimated future benefit payments are effective for fiscal years ending after December 15, 2003, and interim periods beginning after December 15, 2003. The disclosure provisions of this Statement for the U.S. plans have been included in Note 8.

 

3. Supplemental Balance Sheet Information

 

Property, Plant and Equipment, Net

 

Property, plant and equipment, net at October 31, 2001, included the following components:

 

Land and improvements

   $ 22,148  

Buildings and leasehold improvements

     52,681  

Machinery and equipment

     33,765  

Construction in progress

     3,688  
    


Total cost

     112,282  

Less: Accumulated depreciation and amortization

     (2,925 )
    


     $ 109,357  
    


 

Depreciation expense for the six-month period ended June 30, 2001, was $4,274 and the four-month period ended October 31, 2001, was $2,987.

 

Goodwill, Net

 

Goodwill, net at October 31, 2001, was comprised of the following:

 

Goodwill

   $ 45,754  

Less: Accumulated amortization

     (764 )
    


     $ 44,990  
    


 

Goodwill amortization expense recorded for the six-month period ended June 30, 2001, was $928 which reflected the amortization of the goodwill generated in the initial October 2000 acquisition and the expense recorded for the four-month period ended October 31, 2001, was $764 which reflected amortization of the goodwill resulting from the June 30, 2001, acquisition.

 

Accrued Expenses

 

Accrued expenses at October 31, 2001, were as follows:

 

Payroll

   $ 4,857

Vacation

     3,179

Real estate taxes

     2,090

Other

     3,033
    

     $ 13,159
    

 

43


The Metals Distribution Businesses of NAMD Inc.

 

Notes to Combined Financial Statements—(Continued)

(dollars in thousands, unless otherwise noted)

 

4. Debt Due Billiton (RA) Limited

 

At October 31, 2001, debt obligations due to Billiton (RA) Limited were as follows:

 

Billiton Loan I, due December 31, 2005

   $ 51,886  

Billiton Loan II, due March 31, 2005

     99,735  

Loan agreement with Billiton, due November 30, 2009

     2,907  

Grid note with Billiton, due on demand

     2,049  

AIM debt facility payable to Billiton, due January 7, 2008

     49,220  
    


Total notes payable

     205,797  

Less: Current portion

     (145,797 )
    


Total long-term debt, less current portion

   $ 60,000  
    


 

In connection with the joint venture formation described in Note 1, all of the amounts due to Billiton set forth above were refinanced into a Billiton A facility ($145,797) and a Billiton B facility ($60,000). In accordance with the terms of the Joint Venture Contribution Agreement, the Billiton A facility is due June 30, 2002, therefore amounts due under the Billiton A facility have been classified as current portion of long-term debt.

 

The Billiton A facility accrues interest at the three-month LIBOR plus 1.5% with interest payments due quarterly and the Billiton B facility accrues interest at an annual rate of LIBOR plus 1% with interest payments due quarterly. The Billiton B facility is due June 30, 2003. At October 31, 2001, the LIBOR was 2.2%.

 

5. Parent Company Investment

 

The parent company investment in the NAMD Businesses is presented as the equity component of the accompanying combined balance sheet since the combined NAMD Businesses are not a separate legal entity within the NAMD Inc. consolidated group. Certain cash flows generated by the NAMD Businesses’ VMG operations were used by NAMD Inc. to fund the operations of other entities within the consolidated NAMD group as well as other general corporate purposes. These cash transactions have been reported as net cash and financing activity with NAMD Inc. in the accompanying Combined Statements of Changes in Parent Company Investment and include the following:

 

    

For the

Six-Month

Period Ended

June 30,

2001


   

For the

Four-Month

Period Ended

October 31,

2001


Net cash (advances to) proceeds from NAMD Inc.

   $ (18,126 )   $ 5,181

Noncash transfer to NAMD Inc. of certain debt due to Billiton Plc

     —         11,900
    


 

     $ (18,126 )   $ 17,081
    


 

 

On October 22, 2001, NAMD Inc. was reorganized. In connection with this reorganization, the NAMD Businesses received approximately $15.0 million of cash from NAMD Inc. (included above as a component of net cash proceeds) and also transferred $11.9 million of debt (due to Billiton) to NAMD Inc.

 

6. Income Taxes

 

As described in Note 1, the VMG operations in the U.S. were part of the U.S. operations of NAMD Inc. NAMD Inc. filed a consolidated income tax return in the U.S. The income tax information presented below for

 

44


The Metals Distribution Businesses of NAMD Inc.

 

Notes to Combined Financial Statements—(Continued)

(dollars in thousands, unless otherwise noted)

 

the U.S. reflects VMG operations on a “separate return” basis. AIM in Canada files a separate income tax return for Canadian purposes. As described below, no tax benefits for AIM’s operating losses have been recorded for either period presented.

 

Income (loss) before income taxes consisted of:

 

    

For the

Six-Month

Period Ended

June 30,

2001


   

For the

Four-Month

Period Ended

October 31,

2001


 

United States

   $ 8,684     $ 3,328  

Canada

     (3,557 )     (4,588 )
    


 


     $ 5,127     $ (1,260 )
    


 


 

The provision for income taxes consisted of:

 

    

For the

Six-Month

Period Ended

June 30,

2001


   

For the

Four-Month

Period Ended

October 31,

2001


 

Current provision

                

U.S. Federal and state

   $ 7,663     $ 3,842  

Canada

     —         —    
    


 


Current provision

     7,663       3,842  
    


 


Deferred benefit

                

U.S. Federal and state

     (3,670 )     (2,082 )

Canada

     —         —    
    


 


Deferred benefit

     (3,670 )     (2,082 )
    


 


Provision for income taxes

   $ 3,993     $ 1,760  
    


 


 

The provision for income taxes is different from that which would be obtained by applying the statutory federal income tax rate to income (loss) before income taxes. The items causing this difference are as follows:

 

    

For the

Six-Month

Period Ended

June 30,

2001


  

For the

Four-Month

Period Ended

October 31,

2001


 

Tax expense (benefit) at U.S. statutory rate

   $ 1,794    $ (441 )

Valuation allowance for Canadian net deferred tax assets

     1,246      1,606  

State income taxes

     424      201  

Nondeductible expenses and other

     529      394  
    

  


Tax expense as reported

   $ 3,993    $ 1,760  
    

  


 

45


The Metals Distribution Businesses of NAMD Inc.

 

Notes to Combined Financial Statements—(Continued)

(dollars in thousands, unless otherwise noted)

 

The tax effects of temporary differences that give rise to significant portions of the deferred income tax assets and deferred income tax liabilities at October 31, 2001, are as follows:

 

    

October 31,

2001


 

Deferred income tax assets

        

Accounts receivable

   $ 1,108  

Inventories

     6,174  

Accrued expenses

     1,739  

Accrued pension and postretirement obligations

     15,815  

Canadian net operating loss carryforwards

     2,915  

Other

     109  
    


Total gross deferred income tax assets

     27,860  

Less: Valuation allowance for Canadian deferred tax assets

     (3,890 )
    


Net deferred income tax assets

     23,970  
    


Deferred income tax liabilities

        

Property, plant and equipment

     (16,041 )
    


Total gross deferred income tax liabilities

     (16,041 )
    


Net deferred income tax assets

   $ 7,929  
    


 

A valuation allowance as of December 31, 2001, has been provided against deferred tax assets related to the Canadian net operating loss carryforwards as well as other Canadian net deferred tax assets because it is more likely than not these tax benefits will not be realized based on uncertainty as to the ability of the Canadian operations to generate future taxable income. At October 31, 2001, Canadian net operating loss carryforwards of approximately $3.7 million existed and will begin to expire in 2007.

 

7. Lease Commitments

 

The NAMD Businesses are party to numerous lease agreements in both the U.S. and Canada related to buildings, vehicles and office equipment leases. These leases have remaining terms ending through 2007 and are all accounted for as operating leases. The following are the minimum lease payments in each of the periods indicated based on operating leases in effect at October 31, 2001:

 

For the Period

      

November 1, 2001 to December 31, 2001

   $ 991

For the Years Ended

      

2002

   $ 5,211

2003

     4,209

2004

     3,067

2005

     2,110

2006

     1,819

Thereafter

     4,895
    

Total minimum lease payments

   $ 22,302
    

 

Rental expense for all operating leases charged against earnings for the six-month period ended June 30, 2001, was $3,210, and the rental expense charged against earnings for the four-month period ended October 31, 2001, was $1,822.

 

46


The Metals Distribution Businesses of NAMD Inc.

 

Notes to Combined Financial Statements—(Continued)

(dollars in thousands, unless otherwise noted)

 

8. Employee Benefit Plans

 

The NAMD Businesses have noncontributory defined benefit pension plans (defined benefit plans), which provide retirement benefits for the majority of its employees in both the U.S. and Canada. The U.S. plans were specific to the U.S. VMG operations. The Canadian plan was specific to the Canadian AIM operations. The NAMD Businesses also have plans which provide health care and life insurance benefits for substantially all of its retirees in the U.S. (other post employment benefits or OPEB).

 

The following tables set forth the components of the changes in benefit obligations and fair value of plan assets during the six-month period ended June 30, 2001 and the four-month period ended October 31, 2001, as well as the funded status and amounts both recognized and not recognized in the balance sheet at October 31, 2001:

 

   

Six-Month Period

Ended June 30, 2001


   

Four-Month Period

Ended October 31, 2001


 
    U.S.

    Canada

    U.S.

    Canada

 
   

Pension

Benefits


    OPEB

   

Pension

Benefits


    OPEB

   

Pension

Benefits


    OPEB

   

Pension

Benefits


    OPEB

 

Changes in benefit obligations

                                                               

Benefit obligations at beginning of period

  $ 78,072     $ 27,923     $ 28,356     $ 8,029     $ 83,034     $ 29,343     $ 28,673     $ 8,256  

Service cost

    1,415       696       382       113       943       464       252       74  

Interest cost

    2,920       1,041       918       263       1,946       694       591       171  

Plan participants’ contributions

    —         77       —         —         —         51       —         —    

Actuarial (gains) or losses

    1,952       31       —         —         3,211       1,330       (1,246 )     (360 )

Benefits paid

    (1,325 )     (425 )     (983 )     (149 )     (930 )     (324 )     (524 )     (96 )
   


 


 


 


 


 


 


 


Benefit obligations at end of period

    83,034       29,343       28,673       8,256       88,204       31,558       27,746       8,045  
   


 


 


 


 


 


 


 


Changes in plan assets

                                                               

Fair value of plan assets at beginning of period

    77,197       —         37,202       —         77,272       —         36,373       —    

Actual return on plan assets

    1,313       —         302       —         (1,449 )     —         (4,895 )     —    

Employer contribution

    87       348       (148 )     149       58       273       —         96  

Plan participants’ contributions

    —         77       —         —         —         51       —         —    

Benefits paid

    (1,325 )     (425 )     (983 )     (149 )     (930 )     (324 )     (619 )     (96 )
   


 


 


 


 


 


 


 


Fair value of plan assets at end of period

    77,272       —         36,373       —         74,951       —         30,859       —    
   


 


 


 


 


 


 


 


Funded status

    (5,762 )     (29,343 )     7,700       (8,256 )     (13,253 )     (31,558 )     3,113       (8,045 )

Unrecognized net actuarial loss

    —         —         107       —         7,032       1,330       4,293       —    
   


 


 


 


 


 


 


 


Net amount recognized

  $ (5,762 )   $ (29,343 )   $ 7,807     $ (8,256 )   $ (6,221 )   $ (30,228 )   $ 7,406     $ (8,045 )
   


 


 


 


 


 


 


 


Amounts recognized in the combined balance sheet consist of

                                                               

Prepaid benefit cost

  $ 1,357     $ —       $ 7,807     $ —       $ 1,378     $ —       $ 7,406     $ —    

Accrued benefit liability

    (7,119 )     (29,343 )     —         (8,256 )     (7,599 )     (30,228 )     —         (8,045 )
   


 


 


 


 


 


 


 


Net amount recognized

  $ (5,762 )   $ (29,343 )   $ 7,807     $ (8,256 )   $ (6,221 )   $ (30,228 )   $ 7,406     $ (8,045 )
   


 


 


 


 


 


 


 


 

47


The Metals Distribution Businesses of NAMD Inc.

 

Notes to Combined Financial Statements—(Continued)

(dollars in thousands, unless otherwise noted)

 

    

Six-Month Period

Ended June 30, 2001


   

Four-Month Period

Ended October 31, 2001


 
     U.S.

    Canada

    U.S.

    Canada

 
    

Pension

Benefits


    OPEB

   

Pension

Benefits


    OPEB

   

Pension

Benefits


    OPEB

   

Pension

Benefits


    OPEB

 

Weighted-average assumptions to determine obligation at the end of the period

                                                

Discount rate

   7.75 %   7.75 %   6.50 %   6.50 %   7.50 %   7.50 %   6.50 %   6.50 %

Expected return on plan assets

   9.60 %   —       8.00 %   —       9.60 %   —       8.00 %   —    

Rate of compensation increase

   5.00 %   5.00 %   3.50 %   3.50 %   5.00 %   5.00 %   3.50 %   3.50 %

Weighted-average assumptions to determine cost

                                                

Discount rate

   7.75 %   7.75 %   6.50 %   6.50 %   7.50 %   7.50 %   6.50 %   6.50 %

Expected return on plan assets

   9.60 %   —       8.00 %   —       9.60 %   —       8.00 %   —    

Rate of compensation increase

   5.00 %   5.00 %   3.50 %   3.50 %   5.00 %   5.00 %   3.50 %   3.50 %

 

The net pension and OPEB amounts recognized as of June 30, 2001, do not include any unrecognized amounts since these obligations were revalued in connection with the June 2001 acquisition accounting. For OPEB measurement purposes as of June 30, 2001, a 7.8% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2001. The rate was assumed to decrease gradually to 5.5% for 2007 and remain at that level thereafter. For OPEB measurement purposes as of October 31, 2001, a 10.0% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2002. The rate was assumed to decrease gradually to 5.0% for 2007 and remain at that level thereafter.

 

    

Six-Month Period

Ended June 30, 2001


  

Four-Month Period

Ended October 31, 2001


     U.S.

   Canada

   U.S.

   Canada

    

Pension

Benefits


    OPEB

  

Pension

Benefits


    OPEB

  

Pension

Benefits


    OPEB

  

Pension

Benefits


    OPEB

Components of net periodic benefit cost

                                                           

Service cost

   $ 1,415     $ 696    $ 382     $ 113    $ 943     $ 464    $ 252     $ 74

Interest cost

     2,920       1,041      918       263      1,946       694      591       171

Expected return on plan assets

     (3,558 )     —        (1,466 )     —        (2,372 )     —        (877 )     —  
    


 

  


 

  


 

  


 

Net periodic benefit cost

   $ 777     $ 1,737    $ (166 )   $ 376    $ 517     $ 1,158    $ (34 )   $ 245
    


 

  


 

  


 

  


 

 

Assumed health care cost trend rates have a significant effect on the amounts reported for the OPEB plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects on an annualized basis:

 

    

1-Percentage

Point

Increase


  

1-Percentage

Point

Decrease


 

Effect on total of service and interest cost components

   $ 216    $ (171 )

Effect on the postretirement benefit obligation

     4,980      (4,022 )

 

48


The Metals Distribution Businesses of NAMD Inc.

 

Notes to Combined Financial Statements—(Continued)

(dollars in thousands, unless otherwise noted)

 

Plan Assets

 

The Company’s plan assets allocated for its U.S. defined benefit pension and postretirement health care benefits plans at October 31, 2001, are as follows:

 

     Percentage of
Plan Assets


 
     October 31,
2001


 

Asset Category


      

Domestic equity

   40.8 %

International equity

   15.2 %

Fixed income

   41.0 %

Cash and cash equivalents

   3.0 %
    

     100.0 %
    

 

In accordance with the joint venture formation described in Note 1, newly formed pension and OPEB plans were formed in the U.S. and Canada. Target asset allocation in future periods will be based on those of the new plans of the combined entity.

 

The expected long-term rate of return is generally based on the pension plan’s asset mix, assumptions of equity returns based on historical long-term returns on asset categories, expectations for inflation, and estimates of the impact of active management of the assets.

 

The Company’s U.S. investment strategy and policies are designed to maximize the possibility of having sufficient funds to meet the long-term liabilities of the pension fund, while achieving a balance between the goals of growing the assets of the plan and keeping risk at a reasonable level. Current income is not a key goal of the plan. The asset allocation position reflects the ability and willingness to accept relatively more short-term variability in the performance of the pension plan portfolio in exchange for the expectations of a better funded status, better long-term returns and lower pension costs in the long run.

 

The plan prohibits investing in warrants and options, and engaging in short sales, margin transactions, and other specialized investment activities. The use of derivatives is also prohibited for the purpose of speculation or introducing leverage in the portfolio, circumventing the investment guidelines or taking risks that are inconsistent with the fund’s guidelines.

 

Cash Flows

 

The Company’s funding policy for the U.S. pension plan is to achieve a return on assets that meets the long-term funding requirements identified by the projections of the pension plan’s actuaries while simultaneously satisfying the fiduciary responsibilities prescribed by the Employee Retirement Income Security Act of 1974, as amended. The Company is not required to make any contributions to the U.S. pension plan in the next fiscal year.

 

Defined Contribution Plan

 

The VMG operations in the U.S. also sponsor a defined contribution 401(k) employee savings and profit sharing plan. Employee contributions of up to 6% of eligible compensation are matched 66.67% by the VMG plan. Company contributions to the VMG plan for the six-month period ended June 30, 2001, were $3,256 and the four-month period ended October 31, 2001, were $1,828.

 

49


The Metals Distribution Businesses of NAMD Inc.

 

Notes to Combined Financial Statements—(Continued)

(dollars in thousands, unless otherwise noted)

 

9. Geographic and Product Information

 

The operations of the NAMD Businesses are comprised as follows:

 

     Predecessor

   Successor

    

For the

Six-Month

Period Ended

June 30,

2001


  

For the

Four-Month

Period Ended

October 31,

2001


Net sales to customers

             

U.S.

   $ 415,354    $ 251,423

Canada

     118,124      66,210
    

  

Total net sales

   $ 533,478    $ 317,633
    

  

 

    

At

October 31,

2001


Assets

      

U.S.

   $ 368,235

Canada

     106,197
    

Total assets

   $ 474,432
    

 

The following table shows sales by product line for the periods indicated:

 

     Predecessor

    Successor

 
    

For the

Six-Month

Period Ended

June 30,

2001


   

For the

Four-Month

Period Ended

October 31,

2001


 

Aluminum

   38.6 %   37.6 %

Stainless steel

   36.3     37.3  

Carbon steel

   5.7     5.8  

Other

   19.4     19.3  
    

 

     100.0 %   100.0 %
    

 

 

50


Report of Independent Auditors

 

To the Management of

Reynolds Aluminum Supply Company

 

In our opinion, the accompanying combined balance sheet and the related combined statements of income, comprehensive income and parent company investment, and of cash flows present fairly, in all material respects, the financial position of Reynolds Aluminum Supply Company (RASCO) at October 31, 2001, and the results of its operations and its cash flows for the ten months then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of RASCO’s management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

/S/    PRICEWATERHOUSECOOPERS LLP

                                                                                                         

        PricewaterhouseCoopers LLP

 

Pittsburgh, Pennsylvania

March 15, 2002, except for Note 9,

for which the date is July 28, 2004

 

51


Reynolds Aluminum Supply Company

(The Distribution Business of Reynolds Metals Company)

 

Combined Balance Sheet

 

(dollars in thousands)   

October 31,

2001


  

Assets

      

Current assets

      

Cash and cash equivalents

   $ 1,831

Trade receivable from customers, net of allowance for doubtful accounts of $910

     83,455

Inventories (Notes 2 and 3)

     134,982

Prepaid expenses and other current assets

     1,226
    

Total current assets

     221,494

Property, plant and equipment, net (Note 5)

     78,342
    

Total assets

   $ 299,836
    

Liabilities and Parent Company Investment

      

Current liabilities

      

Accounts payable

   $ 23,175

Due to Parent (Note 4)

     13,439

Deferred income tax (Note 8)

     18,245

Other accrued liabilities (Note 6)

     8,582
    

Total current liabilities

     63,441

Accrued pension and postretirement benefits (Notes 10 and 11)

     18,727

Deferred income tax (Note 8)

     1,927
    

Total liabilities

     84,095
    

Commitments and contingencies (Note 12)

      

Parent company investment

     215,741
    

Total liabilities and parent company investment

   $ 299,836
    

 

 

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

 

52


Reynolds Aluminum Supply Company

(The Distribution Business of Reynolds Metals Company)

 

Combined Statement of Income, Comprehensive Income and

Parent Company Investment

 

(dollars in thousands)   

For the

Ten-Month

Period Ended

October 31,

2001


 

Net sales (Note 1)

   $ 645,949  

Cost of sales

     543,890  
    


Gross profit

     102,059  

Selling, administrative and other expenses

     98,358  
    


Income before income taxes

     3,701  

Provision for income taxes (Note 8)

     1,410  
    


Net income

     2,291  

Other comprehensive income

        

Foreign currency translation adjustment

     (624 )
    


Comprehensive income

   $ 1,667  
    


Parent company investment at December 31, 2000

   $ 271,372  

Net income

     2,291  

Distributions to Alcoa, net (Notes 2 and 4)

     (57,298 )

Other comprehensive income

     (624 )
    


Parent company investment at October 31, 2001

   $ 215,741  
    


 

 

 

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

 

53


Reynolds Aluminum Supply Company

(The Distribution Business of Reynolds Metals Company)

 

Combined Statement of Cash Flows

 

(dollars in thousands)   

For the

Ten-Month

Period Ended

October 31,

2001


 

Cash flows from operating activities

        

Net income

   $ 2,291  

Adjustments for noncash transactions

        

Depreciation

     4,365  

Deferred income taxes

     (5,987 )

Increase (decrease) in cash due to changes in

        

Receivables

     12,473  

Inventories

     44,246  

Accounts payable

     (1,505 )

Accrued liabilities

     (1,723 )

Other liabilities

     1,637  

Other assets

     575  
    


Net cash provided by operations

     56,372  
    


Cash flows from financing activities

        

Distributions to Parent Company, net

     (57,298 )

Change in amounts due to Parent

     1,922  
    


Net cash used in financing activities

     (55,376 )
    


Cash flows from investing activities

        

Capital expenditures

     (3,738 )
    


Net cash used in investing activities

     (3,738 )
    


Net change in cash and cash equivalents

     (2,742 )

Cash and cash equivalents

        

Beginning of period

     4,573  
    


End of period

   $ 1,831  
    


 

 

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

 

54


Reynolds Aluminum Supply Company

(The Distribution Business of Reynolds Metals Company)

 

Notes to Combined Financial Statements

(dollars in thousands, unless otherwise noted)

 

1. Business Description and Basis of Presentation

 

Reynolds Aluminum Supply Company (“RASCO”) is the metals distribution business of Reynolds Metals Company (“Reynolds”), a wholly owned subsidiary of Alcoa Inc. (“Alcoa”). The accompanying financial statements include the assets and liabilities of the U.S. operations of RASCO, RASCO Specialty Metals, Inc. (“RSM”), a Canadian subsidiary of Reynolds, and Permamet, Inc. a U.S. subsidiary of Reynolds. All such operations are herein referred to as RASCO. RASCO is in the business of supply chain management, specializing in aluminum and stainless steel products which are sourced globally, processed on its cut-to-length lines, slitters, shears, precision saws and plasma burners, and delivered to customers across North America. RASCO is a distributor of stainless steel and aluminum products. It manages the supply chain through a network of 38 locations in the United States and Canada.

 

On May 3, 2000, Alcoa and Reynolds completed a merger, which was accounted for as a purchase transaction. Accordingly, Alcoa has adjusted the assets and liabilities of RASCO to reflect the effects of the acquisition.

 

On November 1, 2001, Alcoa and Billiton Investments Ireland Limited (“Billiton”) formed a joint venture, Integris Metals, Inc. (“Integris”). Alcoa contributed RASCO to the joint venture for a 50% interest and Billiton contributed its metals distribution business for the remaining 50% interest.

 

The combined financial statements are prepared in conformity with accounting principles generally accepted in the United States of America.

 

All intercompany transactions have been eliminated.

 

The preparation of these financial statements include the use of “carve-out” accounting procedures wherein certain assets, liabilities and expenses historically recorded or incurred at the parent company level of Reynolds or Alcoa, which relate to or were incurred on behalf of RASCO, have been identified and pushed down or allocated as appropriate to reflect the financial results of RASCO for the period presented. For additional information concerning expenses charged or allocated to RASCO by the Parent Company (Note 4).

 

The accompanying financial statements do not reflect any allocation of general corporate debt or interest expense incurred by Alcoa or Reynolds in financing RASCO’s operations and activities. Alcoa and Reynolds do not make such allocations to its operations. For additional information concerning related party transactions (Note 4).

 

2. Significant Accounting Policies

 

Use of Estimates

 

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

 

Cash and Cash Equivalents

 

The carrying amounts relate to cash held at RSM and Permamet, and approximate fair value because of the short maturity of the investments. All investments purchased, with a maturity of three months or less, are

 

55


Reynolds Aluminum Supply Company

(The Distribution Business of Reynolds Metals Company)

 

Notes to Combined Financial Statements—(Continued)

(dollars in thousands, unless otherwise noted)

 

considered cash equivalents. RASCO’s U.S. operations utilize a centralized cash management system with Alcoa. Cash receipts are transferred to Alcoa and cash disbursements are made by Alcoa on behalf of RASCO, each on a current basis. The net cash generated by RASCO during each period is reflected as distributions to the parent company, net in the accompanying statement of cash flows and charged directly to the Parent Company Investment account.

 

Revenue Recognition

 

Revenues (including amounts billed for shipping and handling) are recognized when title, ownership and risk of loss pass to the customers, which is generally upon shipment. RASCO records estimated discounts and rebates in the same period revenue is recognized based on historical experience.

 

Inventories

 

Inventories primarily consist of aluminum and stainless steel products purchased for resale. Certain additional incremental processing costs are incurred as a result of cutting to length based on customer specifications. All inventories are considered finished goods. Inventories are stated at the lower of cost or market with the cost for a substantial portion of the inventories determined under the last-in, first-out (“LIFO”) method. The cost of other inventory is principally determined under the first-in, first-out (“FIFO”) method.

 

Property, Plant and Equipment

 

Property, plant and equipment are recorded at cost, which includes any fair market value adjustments made by Alcoa in connection with the acquisition of Reynolds. Depreciation of property, plant and equipment is computed using the straight-line method based on the estimated useful lives of the assets (buildings—25 to 33 years, machinery and equipment—10 to 25 years). Amortization of leasehold improvements is computed on the straight-line method over the life of the lease. Maintenance and repairs are charged to expense as incurred. Renewals and betterments, which extend the useful lives of assets, are capitalized. At the time property, plant and equipment is retired or otherwise disposed of, the cost and the related accumulated depreciation are adjusted and any profit or loss on disposition is included in the combined statement of operations.

 

Shipping and Handling Fees and Costs

 

The Company classifies shipping and handling fees as a component of selling, administrative and other expenses on the accompanying statement of income. Total shipping and handling fees and costs for the ten-month period ended October 31, 2001, were $13,816.

 

Income Taxes

 

Historically, RASCO’s results of U.S. operations have been included in the consolidated U.S. federal income tax return of Alcoa. RASCO’s results of operations in Canada were included in separate tax returns in that jurisdiction. For the U.S. operations that do not pay their own income tax, Alcoa internally allocates income tax expense at the statutory rate after adjustment for state income taxes and several other permanent items. The income tax expense and other tax related information as it relates to the U.S. operations has been calculated as if RASCO had not been eligible to be included in the consolidated tax returns of Alcoa (i.e., on a “stand-alone” basis). The calculation of tax provisions and deferred taxes necessarily required certain assumptions, allocations and estimates that management believes are reasonable to accurately reflect the tax reporting for RASCO as a stand-alone taxpayer.

 

56


Reynolds Aluminum Supply Company

(The Distribution Business of Reynolds Metals Company)

 

Notes to Combined Financial Statements—(Continued)

(dollars in thousands, unless otherwise noted)

 

Parent Company Investment

 

Since RASCO is not a separate legal entity (see Note 1 for a description of the nature of operations), there are no customary equity and capital accounts. Instead a Parent Company Investment is maintained by RASCO to account for transactions as described in Notes 1 and 4. Parent Company Investment is comprised of the original investment by Alcoa, accumulated comprehensive income and other transactions with the Parent.

 

Comprehensive Income (Loss)

 

Other comprehensive income (loss) refers to gains and losses that, under accounting principles generally accepted in the United States of America, are excluded from net income as these amounts are recorded directly as an adjustment to equity as a component of accumulated other comprehensive income. The RASCO Business accumulated the comprehensive income is comprised of the translation into U.S. dollars of the financial statements of its Canadian operations. RASCO does not utilize any derivative financial instruments, the fair value of which would also be included as a component of accumulated other comprehensive income.

 

Foreign Currency Translation

 

The functional currency for RASCO’S Canadian operations is the Canadian dollar. Assets and liabilities of these operations are translated at the exchange rate in effect on the balance sheet date. Income statement accounts are translated at the average rate of exchange prevailing during the year. Translation adjustments are included as a component of the parent company investment. Gains and losses from foreign currency transactions are included in net income for the period. Gains and losses are not material to RASCO’s combined financial statements.

 

Recently Adopted Accounting Standards

 

Effective January 1, 2001, RASCO adopted Statement of Financial Accounting Standards (“SFAS”) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. This standard requires that all derivative instruments be recorded, at fair value, on the balance sheet. The adoption of this SFAS did not have an impact on RASCO’s financial statements.

 

RASCO adopted SFAS No. 141, Business Combinations, effective for all business combinations after June 30, 2001. This standard requires that all business combinations be accounted for using the purchase method of accounting and further clarifies the criteria for recognition of intangible assets separately from goodwill. The adoption of this SFAS did not have an impact on RASCO’s financial statements.

 

Recently Issued Accounting Standards

 

In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 142, Goodwill and Other Intangible Assets. This standard eliminates the amortization of goodwill and intangible assets with indefinite useful lives and requires annual testing for impairment. The adoption of this SFAS is not expected to have a material impact on RASCO’s financial statements.

 

In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement supersedes or amends existing accounting literature related to the impairment and disposal of long-lived assets. Management is currently developing a plan to apply the provisions of this standard to its operations on an ongoing basis.

 

57


Reynolds Aluminum Supply Company

(The Distribution Business of Reynolds Metals Company)

 

Notes to Combined Financial Statements—(Continued)

(dollars in thousands, unless otherwise noted)

 

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. This statement establishes standards for accounting for obligations associated with the retirement of tangible long-lived assets. The standard is required to be adopted by RASCO beginning on January 1, 2003. Management is currently assessing the details of the standard and is preparing a plan of implementation.

 

3. Inventory

 

Approximately 45% of the total inventory at October 31, 2001, was valued on a LIFO basis. If valued on an average-cost basis, total inventory would have been $3,299 lower at October 31, 2001.

 

4. Related Party Transactions

 

Alcoa is a major supplier of aluminum products to RASCO from its other operations. During the ten-month period ended October 31, 2001, RASCO purchased from Alcoa approximately $80 million of aluminum sheet, plate and extrusions based on market prices as quoted on the London Metal Exchange. RASCO also participates in the Alcoa cash management system in which the cash collections are transferred to Alcoa on a daily basis, with the exception of certain minimum cash balances. The amounts due to Parent Company at October 31, 2001, were $13,439. RASCO also purchases certain services from Alcoa. These transactions and services are discussed in further detail below.

 

Alcoa Corporate Charges

 

RASCO uses, and is charged directly for, certain services that Alcoa corporate provides to its divisions. These services generally include information systems support, human resources, taxes, legal and certain shared accounting functions and are included in the general corporate charges below. In addition, Alcoa develops, negotiates and administers RASCO’s insurance programs. The insurance coverage includes coverage for real and personal property, workers compensation, automobile, general product and other standard liability coverage. Charges by Alcoa corporate to RASCO are based on costs that relate directly to RASCO or a percentage allocation of the total cost for the service provided. Where percentage allocations are used, such allocations are primarily based on a percentage of revenue or headcount, as applicable, which management believes represents a reasonable allocation of these costs from Alcoa corporate. Management further believes it is not practicable to estimate these expenses on a stand-alone basis.

 

The expenses charged to RASCO by Alcoa consist of the following and are reflected in cost of products sold and selling, general and administrative expenses in the combined statement of income, comprehensive income and Parent Company investment:

 

Employee benefits

      

Pensions

   $ 302

Other postretirement benefits

     1,620

Insurance (principally medical for active personnel)

     4,058

Workers’ compensation

     283

General insurance

     499

General corporate charges

     7,495
    

     $ 14,257
    

 

Of the $14,257, $10,050 and $4,207 are recorded in cost of products sold and selling, general and administrative expense, respectively.

 

58


Reynolds Aluminum Supply Company

(The Distribution Business of Reynolds Metals Company)

 

Notes to Combined Financial Statements—(Continued)

(dollars in thousands, unless otherwise noted)

 

The charges for pension and other postretirement benefit costs included in these financial statements were actuarially determined expenses allocated based on the number of RASCO employees participating in the various plans and average costs per employee. See Notes 10 and 11 for additional discussion of pension and other postretirement benefits.

 

Medical insurance costs are allocated based upon historical claims cost per person for RASCO.

 

5. Property, Plant and Equipment, at Cost

 

Property, plant and equipment at October 31 consisted of:

 

Land and land improvements

   $ 5,032  

Buildings

     33,271  

Machinery and equipment

     43,939  

Construction in progress

     6,164  
    


       88,406  

Accumulated depreciation and amortization

     (10,064 )
    


Net property, plant and equipment

   $ 78,342  
    


 

6. Accrued Liabilities

 

Accrued liabilities at October 31 consisted of:

 

Compensation accrual

   $ 3,042

Vacation accrual

     301

Accrued employee benefits

     2,340

Other current liabilities

     2,899
    

     $ 8,582
    

 

7. Operating Leases

 

RASCO has entered into noncancelable operating leases for land, buildings, office space and equipment, which have various expiration dates through 2006.

 

As of October 31, future minimum lease payments under noncancelable operating leases with terms longer than one year are as follows:

 

2002

   $ 3,272

2003

     1,354

2004

     608

2005

     271

2006

     40

Thereafter

     —  
    

     $ 5,545
    

 

Rent expense was approximately $3,200 for the ten-month period ended October 31, 2001.

 

59


Reynolds Aluminum Supply Company

(The Distribution Business of Reynolds Metals Company)

 

Notes to Combined Financial Statements—(Continued)

(dollars in thousands, unless otherwise noted)

 

8. Income Taxes

 

The provision for income taxes consisted of:

 

    

For the

Ten-Month

Period Ended

October 31,
2001


 

Current

        

Federal

   $ 6,788  

Foreign

     398  

State and local

     211  
    


       7,397  

Deferred

        

Federal/State

     (5,979 )

Foreign

     (8 )
    


       (5,987 )
    


     $ 1,410  
    


 

The components of income before U.S. and foreign taxes on income were:

 

   

For the

Ten-Month

Period Ended
October 31,
2001


United States

  $ 2,725

Foreign

    976
   

    $ 3,701
   

 

The provision for income taxes differs from the amount computed using the U.S. federal tax rate for the following reasons:

 

    For the
Ten-Month
Period Ended
October 31,
2001


 

Amount computed using the statutory rate

  $ 1,295  

Increase (reduction) in taxes resulting from

       

Taxes on foreign income

    49  

State taxes, net of federal benefit

    154  

Other

    (88 )
   


Provision for income taxes

  $ 1,410  
   


 

60


Reynolds Aluminum Supply Company

(The Distribution Business of Reynolds Metals Company)

 

Notes to Combined Financial Statements—(Continued)

(dollars in thousands, unless otherwise noted)

 

The components of net deferred tax assets and liabilities at October 31 were as follows:

 

    

Deferred

Tax

Assets


  

Deferred

Tax

Liabilities


Inventory

   $ —      $ 19,240

Property, plant and equipment

     —        8,967

Employee benefits

     7,040      —  

Allowance for bad debts and inventory reserves

     718      —  

Reserve for curtailment/shutdown

     277      —  
    

  

     $ 8,035    $ 28,207
    

  

 

9. Geographic and Product Information

 

The operations of the Company are comprised as follows:

 

    

For the

Ten-Month

Period Ended

October 31,

2001


Sales to customers

      

U.S.

   $ 581,154

Canada

     64,795
    

Total sales and operating revenues

   $ 645,949
    

Assets

      

U.S.

   $ 267,012

Canada

     32,824
    

Total assets

   $ 299,836
    

 

Sales by product line for the ten-month period ended October 31, 2001, were as follows:

 

    

For the

Ten-Month

Period Ended

October 31,
2001


 

Asset Category

      

Aluminum

   48.8 %

Stainless steel

   50.3  

Other

   0.9  
    

     100.0 %
    

 

10. Pension Plans

 

Alcoa maintained various defined benefit pension plans that cover substantially all of RASCO’s employees. Substantially all of the U.S. employees of RASCO are covered by noncontributory defined benefit pension plans maintained by Alcoa. Plans covering salaried employees provide pension benefits based on a formula that

 

61


Reynolds Aluminum Supply Company

(The Distribution Business of Reynolds Metals Company)

 

Notes to Combined Financial Statements—(Continued)

(dollars in thousands, unless otherwise noted)

 

considers length of service and earnings during years of service. Plans covering hourly employees generally provide a specific amount of benefits for each year of service. For purposes of these financial statements, the U.S. plans are accounted for as multi-employer plans as defined in SFAS No. 87, Employer’s Accounting for Pensions. Costs related to these multi-employer plans have been charged to RASCO based on the number of RASCO employees participating in the various plans on an average costs per employee. RSM maintains separate pension plans for certain Canadian employees.

 

As a result of the formation of Integris on November 1, 2001, it is probable that the U.S. employees covered by Alcoa plans will withdraw from the plans to participate in newly formed plans to be established by Integris. RASCO’s U.S. pension obligation is expected to be fully funded and therefore no obligation has been recognized as of October 31, 2001. RASCO’s domestic pension expense for the ten-month period ended October 31, 2001, was $808. There were no contributions due at October 31, 2001.

 

The table below reflects the status of RSM’s pension plans at October 31 as determined by actuarial valuation:

 

    

For the

Ten-Month

Period Ended

October 31,

2001


 
  

Change in benefit obligation

        

Benefit obligation at beginning of period—January 1, 2001

   $ 2,008  

Service cost

     85  

Interest cost

     117  

Actuarial losses

     (56 )

Benefits paid

     (513 )
    


Benefit obligation at end of period—October 31, 2001

     1,641  
    


Change in plan assets

        

Fair value of plan assets at beginning of period—January 1, 2001

     994  

Actual return on plan assets

     (39 )

Employer contribution

     27  

Benefits paid

     (513 )
    


Fair value of plan assets at end of period—October 31, 2001

     469  
    


Funded status

     (1,172 )

Unrecognized actuarial loss

     130  
    


Net amount recognized

   $ (1,042 )
    


 

Amount recognized in the consolidated balance sheet:

 

    

For the

Ten-Month

Period Ended

October 31,

2001


  

Accrued benefit liability

     $1,042
    

Net amount recognized

     $1,042
    

 

62


Reynolds Aluminum Supply Company

(The Distribution Business of Reynolds Metals Company)

 

Notes to Combined Financial Statements—(Continued)

(dollars in thousands, unless otherwise noted)

 

The components of net periodic benefit costs are reflected below:

 

    

For the

Ten-Month

Period Ended

October 31,
2001


Components of net periodic benefit costs

      

Service cost

   $ 85

Interest cost

     117

Expected return on plan assets

     50
    

     $ 252
    

 

Weighted average assumptions used in the accounting for RSM’s plan follows:

 

    

For the

Ten-Month

Period Ended

October 31,
2001


 

Weighted average assumptions

      

Discount rate

   6.00 %

Rate of compensation increase

   3.66 %

Expected return on plan assets

   6.00 %

 

Alcoa also sponsors a number of defined contribution pension plans. Expenses charged to RASCO for the period were $655,000.

 

11. Other Postretirement Benefits

 

Alcoa also maintains other postretirement benefit plans that provide most of RASCO’s U.S. retired employees with healthcare and life insurance benefits. Substantially, all employees may become eligible for these benefits if they work for RASCO until retirement age. For purposes of these financial statements, the U.S. plans are accounted for as multi-employer plans as defined by SFAS No. 106, Employer’s Accounting for Postretirement Benefits Other than Pensions. Costs related to these Alcoa plans have been charged to RASCO based on the number of RASCO employees participating in the various plans on an average costs per employee.

 

As a result of the formation of Integris on November 1, 2001, it is probable that the employees covered by this plan will withdraw from the plan to participate in a newly formed plan to be established by Integris. As a result, RASCO has recognized an unfunded postretirement benefit obligation of approximately $17,685 at October 31, 2001. These amounts were calculated assuming a discount rate of 7.0%. The plan is unfunded.

 

For measurement purposes, a 10% annual rate of increase in the per capita cost of covered healthcare benefits was assumed for 2001 and future years.

 

12. Contingent Liabilities

 

RASCO is subject to various claims and actions including those pertaining to environmental laws and regulations, product liability and health and safety matters arising in the ordinary course of business.

 

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Reynolds Aluminum Supply Company

(The Distribution Business of Reynolds Metals Company)

 

Notes to Combined Financial Statements—(Continued)

(dollars in thousands, unless otherwise noted)

 

In early 2002, Alcoa became aware of asserted and potentially unasserted claims related to RASCO’s sale of certain aluminum products to maritime customers for use in the construction of ships prior to October 31, 2001. The matter is still in the preliminary stages of investigation. Therefore, it is not possible to determine the outcome or to estimate with any degree of accuracy the potential costs associated with these claims. Based on these facts, it is possible that future results of operations or liquidity could be materially affected. Due to this uncertainty, no amounts have been provided for such matters in the accompanying financial statements as of October 31, 2001. As a result of the formation of Integris on November 1, 2001, Alcoa has agreed to provide Integris with defense and indemnity to certain legal matters and claims.

 

Except for matters discussed above, management believes that the disposition of other claims and actions, either individually or in the aggregate, are not expected to have a material adverse effect on RASCO’s competitive or financial position. No assurance can be given, however, that the disposition of one or more of such claims or actions in a particular reporting period will not be material in relation to the reported results for such period.

 

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