exv13w1

Consolidated Statements of Operations
NCI Building Systems, Inc.
Dollars in thousands, except per share data


						Fiscal year ended...
			October 31, 2001			November 2, 2002			November 1, 2003

Sales			$	954,877		$	953,442		$	898,150
Cost of sales				741,674			740,577			700,631

		Gross profit		213,203			212,865			197,519
Selling, general and administrative expenses				133,331			140,641			140,356
Goodwill amortization				12,232			–			–
Restructuring charge				2,815			–			–

		Income from operations		64,825			72,224			57,163
Interest expense				(33,090	)		(21,591	)		(19,777	)
Other income, net				951			216			172

		Income before income taxes and cumulative effect of change in accounting principle		32,686			50,849			37,558
Provision for income taxes				16,151			19,535			14,758

		Income before cumulative effect of change in accounting principle		16,535			31,314			22,800
Cumulative effect of change in accounting principle, net of tax				–			(65,087	)		–

Net income (loss)			$	16,535		$	(33,773	)	$	22,800

INCOME (LOSS) PER SHARE
Basic:
		Income before cumulative effect of change in accounting principle	$	0.91		$	1.70		$	1.21
	Cumulative effect of change in accounting principle, net of tax			–			(3.52	)		–

Net income (loss)			$	0.91		$	(1.82	)	$	1.21

Diluted:
	Income before cumulative effect of change in accounting principle		$	0.91		$	1.68		$	1.20
	Cumulative effect of change in accounting principle, net of tax			–			(3.49	)		–

Net income (loss)			$	0.91		$	(1.81	)	$	1.20

Consolidated Balance Sheets
NCI Building Systems, Inc.
Dollars in thousands, except share data


			November 2, 2002			November 1, 2003

ASSETS
Current assets:
	Cash and cash equivalents		$	9,530		$	14,204
	Accounts receivable, net			94,956			96,620
	Inventories			68,445			59,334
	Deferred income taxes			7,448			8,904
	Prepaid expenses			6,129			6,243

		Total current assets		186,508			185,305
Property, plant and equipment, net				205,334			201,826
Excess of cost over fair value of acquired net assets				318,247			318,247
Other assets				11,176			7,782

		Total assets	$	721,265		$	713,160

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Current portion of long-term debt		$	6,250		$	6,250
	Accounts payable			49,012			55,106
	Accrued compensation and benefits			22,418			19,529
	Accrued interest			583			6,406
	Other accrued expenses			28,088			31,429

		Total current liabilities		106,351			118,720
Long-term debt, noncurrent portion				291,050			242,500
Deferred income taxes				20,405			20,189
SHAREHOLDERS’ EQUITY
Preferred stock, $1 par value, 1.0 million shares authorized, none outstanding				–			–
Common stock, $.01 par value, 50.0 million shares authorized; 18.7 million shares and 19.0 million shares issued in 2002 and 2003, respectively				187			190
	Additional paid-in capital			97,903			103,076
	Retained earnings			205,688			228,488
Treasury stock; (0.02 million and 0.0002 million shares in 2002 and 2003, respectively), at cost				(319	)		(3	)

		Total shareholders’ equity		303,459			331,751

		Total liabilities and shareholders’ equity	$	721,265		$	713,160

Consolidated Statements
of Shareholders’ Equity
NCI Building Systems, Inc.
Dollars in thousands


				Additional			Retained			Treasury			Shareholders'
		Common Stock		Paid-in Capital			Earnings			Stock			Equity

Balance, October 31, 2000		$	186	$	97,224		$	222,926		$	(15,056	)	$	305,280
	Treasury stock purchases		–		–			–			(909	)		(909	)
	Treasury stock used for stock option exercises		–		(3,219	)		–			6,239			3,020
	Tax benefit from stock option exercises		–		1,619			–			–			1,619
	Treasury stock issued for debt payment		–		(48	)		–			422			374
	Treasury stock used for contribution to 401(k) plan		–		73			–			4,351			4,424
Net income			–		–			16,535			–			16,535

Balance, October 31, 2001			186		95,649			239,461			(4,953	)		330,343
	Treasury stock purchases		–		–			–			(175	)		(175	)
	Treasury stock used for stock option exercises		–		(1,007	)		–			3,938			2,931
	Tax benefit from stock option exercises		–		825			–			–			825
	Common stock issued for contribution to 401(k) plan		1		2,435			–			–			2,436
	Treasury stock used for contribution to 401(k) plan		–		1			–			871			872
Net loss			–		–			(33,773	)		–			(33,773	)

Balance, November 2, 2002			187		97,903			205,688			(319	)		303,459
	Treasury stock purchases		–		–			–			(114	)		(114	)
	Treasury stock used for stock option exercises		–		(79	)		–			430			351
	Tax benefit from stock option exercises		–		585			–			–			585
	Common stock issued for contribution to 401(k) plan		1		2,619			–			–			2,620
	Common stock issued for stock option exercises		2		2,048			–			–			2,050
Net income			–		–			22,800			–			22,800

Balance, November 1, 2003		$	190	$	103,076		$	228,488		$	(3	)	$	331,751

Consolidated Statements of Cash Flows
NCI Building Systems, Inc.
Dollars in thousands


							Fiscal year ended...
				October 31, 2001			November 2, 2002			November 1, 2003

Cash flows from operating activities:
	Net income (loss)			$	16,535		$	(33,773	)	$	22,800
	Adjustments to reconcile net income (loss) to net cash provided by operating activities:
		Cumulative effect of change in accounting principle, net of tax			–			65,087			–
		Loss on debt refinancing			–			1,243			–
		Depreciation and amortization			34,866			22,883			23,007
		(Gain) loss on sale of fixed assets			166			(782	)		975
		Restructuring charge			2,815			–			–
		Provision for doubtful accounts			2,396			3,280			3,842
		Deferred income tax benefit			(799	)		(895	)		(705	)
	Changes in operating assets and liabilities, net of effect of acquisitions:
			Accounts and other receivables		8,991			9,745			(5,506	)
			Inventories		16,181			4,019			10,065
			Prepaid expenses		1,991			(576	)		(114	)
			Accounts payable		(6,149	)		(23,414	)		6,094
			Accrued expenses		2,921			10,895			8,810

	Net cash provided by operating activities				79,914			57,712			69,268
Cash flows used in investing activities:
		Proceeds from sale of fixed assets			103			5,788			1,634
		Proceeds from sale of joint venture			4,000			–			–
		Acquisitions			(5,521	)		–			(4,310	)
		Changes in other noncurrent assets			1,925			1,524			2,257
		Capital expenditures			(15,026	)		(9,175	)		(17,912	)

	Net cash used in investing activities				(14,519	)		(1,863	)		(18,331	)
Cash flows used in financing activities:
		Proceeds from stock options exercised			3,020			2,931			2,401
		Net payments on revolving lines of credit			(6,938	)		(75,450	)		(42,300	)
		Borrowings on long-term debt			–			125,000			–
		Payments on long-term debt			(42,442	)		(119,750	)		(6,250	)
		Purchase of treasury stock			(909	)		(175	)		(114	)

	Net cash used in financing activities				(47,269	)		(67,444	)		(46,263	)
Net increase (decrease) in cash and cash equivalents					18,126			(11,595	)		4,674
Cash and cash equivalents at beginning of period					2,999			21,125			9,530

Cash and cash equivalents at end of period				$	21,125		$	9,530		$	14,204

1. Summary of Significant
Accounting Policies

(a) Reporting Entity
These financial statements include the operations and activities of NCI Building Systems, Inc. and its subsidiaries (the “Company”) after the elimination of intercompany accounts and balances. The Company designs, manufactures and markets metal building systems and components and provides metal coil coating services primarily for non-residential construction use. During 2002, the Company adopted a revised accounting calendar which incorporates a four-four-five week calendar each quarter with year end on the Saturday closest to October 31. The year end for fiscal 2003 is November 1, 2003.

The Company has historically accounted for its operations into two reportable segments: metal building components and engineered building systems. Sales and operating income of the metal coil coaters operations have risen and the Company believes that it should be reported as a separate business segment in fiscal 2003. Previously, operating results of the metal coil coaters operations were included in the metal building components segment. Effective as of the fourth quarter of fiscal 2003, the Company has reported three business units in its segment reporting. Prior periods have been reclassified to conform to the current presentation.

(b) Revenue Recognition
The Company recognizes revenues when the following conditions are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collectibility is reasonably assured. Generally, these criteria are met at the time product is shipped or services

are complete. Adequate provision is made, upon shipment, for estimated product returns and warranties. Costs associated with shipping and handling of products are included in cost of sales.

(c) Accounts Receivable and Related Allowance
The Company reports accounts receivable net of the allowance for doubtful accounts of $7.4 million and $10.2 million at November 2, 2002 and November 1, 2003, respectively. Trade accounts receivable are the result of sales of building systems, components and coating services to customers throughout the United States and affiliated territories including international builders who resell to end users. All sales are denominated in United States dollars. Credit sales do not normally require a pledge of collateral; however, various types of liens may be filed to enhance the collection process.

(d) Inventories
Inventories are stated at the lower of cost or market value, using specific identification or the weighted-average method for steel coils and other raw materials.

The components of inventory are as follows:


	Nov. 2, 2002		Nov. 1, 2003

	(in thousands)
Raw materials	$	49,064	$	40,173
Work in progress and finished goods		19,381		19,161

	$	68,445	$	59,334

During fiscal 2003, the Company purchased approximately 65% of its steel requirements from U.S. Steel and International Steel

Group. No other steel supplier accounted for more than 8% of steel purchases for the same period.

(e) Property, Plant and Equipment
Property, plant and equipment are stated at cost and depreciated using the straight-line method over their estimated useful lives. Computer software developed or purchased for internal use is depreciated using the straight-line method over its estimated useful life.

Depreciation expense for the fiscal years ended 2001, 2002 and 2003 was $22.4 million, $22.9 million and $23.0 million, respectively.

Property, plant and equipment consist of the following:


	Nov. 2, 2002			Nov. 1, 2003

	(in thousands)
Land	$	11,700		$	12,395
Buildings and improvements		111,991			113,500
Machinery, equipment and furniture		152,719			164,691
Transportation equipment		3,679			3,587
Computer software and equipment		32,325			34,687

		312,414			328,860
Less accumulated depreciation		(107,080	)		(127,034	)

	$	205,334		$	201,826

Estimated useful lives for depreciation are:


Buildings and improvements		10-40 years
Machinery, equipment and furniture		5-10 years
Transportation equipment		3-10 years
Computer software and equipment		3-7 years

(f) Statement of Cash Flows
For purposes of the statements of cash flows, the Company considers all highly liquid investments with an original maturity date of three months or less to be cash equivalents. Total interest paid for the fiscal years ended 2001, 2002 and 2003 was $29.9 million, $28.9 million and $14.0 million, respectively. Income taxes paid, including refunds and prepayments, for the years ended October 31, 2001, November 2, 2002 and November 1, 2003 was $12.1 million (of which $4.5 million related to 2000, but was payable in 2001), $18.9 million (of which $3.5 million

related to 2001, but was payable in 2002) and $14.8 million (of which $4.8 million related to 2002, but was payable in 2003), respectively. Noncash investing or financing activities included 401(k) contributions that are based on a calendar year: $2.5 million for the 2001 401(k) plan contributions through the third quarter of fiscal 2001, and $1.9 million for the related 2000 contributions, which were paid in common stock in 2001; $2.4 million for the 2002 401(k) plan contributions through the third quarter of fiscal 2002, and $0.9 million for the related 2001 contributions, which were paid in common stock in 2002; $1.6 million for the 2003 401(k) plan contributions through the third quarter of fiscal 2003, and $1.0 million for the related 2002 contributions, which were paid in common stock in 2003.

(g) Goodwill
The Company reviews the carrying values of goodwill and identifiable intangibles whenever events or changes in circumstances indicate that such carrying values may not be recoverable and annually for goodwill as required by the Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets. Unforeseen events, changes in circumstances and market conditions and material differences in the value of intangible assets due to changes in estimates of future cash flows could negatively affect the fair value of the Company’s assets and result in a non-cash impairment charge. Some factors considered important which could trigger an impairment review include the following: significant underperformance relative to expected historical or projected future operating results, significant changes in the manner of the Company’s use of the acquired assets or the strategy for its overall business and significant negative industry or economic trends. Fair value is the amount at which the asset could be bought or sold in a current transaction between willing parties and may be estimated using a number of techniques, including quoted market prices or valuations by third parties, present value techniques based on estimates of cash flow, or multiples of earnings or revenue performance measures. The fair value of the asset could be different using different estimates and assumptions in these valuation techniques. Refer to Note 3 for additional discussion of the adoption of SFAS No. 142.

(h) Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Examples include provisions for bad debts,

inventory reserves, accruals for employee benefits, warranties and certain contingencies. Actual results could differ from those estimates.

(i) Employee Benefits
The Company is self insured for a substantial portion of the cost of employee group and medical insurance and for the cost of workers compensation benefits. The Company purchases insurance from third parties which provides individual and aggregate stop loss protection for these costs. For health and medical costs, the Company accrues an estimate for incurred but unreported claims as of the balance sheet date. These estimates are based on current and historical experience in claim costs, known trends in health care cost and other information available from the third party insurance company which administers claims. For workers compensation costs, the Company monitors the number of accidents and the severity of such accidents to develop appropriate estimates for expected costs to provide both medical care and benefits during the period an employee is unable to work. These accruals are developed using third party estimates of the expected cost and length of time an employee will be unable to work based on industry statistics for the cost of similar disabilities. This statistical information is trended to provide estimates of future expected costs based on factors developed from the Company’s experience of actual claims cost compared to original estimates. For fiscal 2003, the Company expensed approximately $20 million for self insured employee benefits and at November 1, 2003, the balance of the self insured employee benefit accrual was $9 million.

(j) Advertising Costs
Advertising costs are expensed as incurred. Advertising expense was $3.5 million, $2.5 million and $2.6 million in fiscal 2001, 2002 and 2003, respectively.

(k) Long-Lived Assets
Impairment losses are recognized when indicators of impairment are present and the estimated undiscounted cash flows are not sufficient to recover the asset’s carrying amount. An impairment loss is calculated as the amount by which the carrying value of the asset exceeds its fair value. Assets held for disposal are measured at the lower of carrying value or estimated fair value, less costs to sell.

(l) Stock-Based Compensation
The Company uses the intrinsic value method in accounting for its stock-based employee compensation plans.

(m) Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.

(n) Recent Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 generally requires gains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt. Extraordinary treatment is required for certain extinguishments as provided in Accounting Principles Board (“APB”) No. 30, Reporting the Results of Operations. Accordingly, gains or losses from extinguishments of debt for fiscal years beginning after May 15, 2002 will not be reported as extraordinary items unless the extinguishment qualifies as an extraordinary item under the provisions of APB No. 30. Any gain or loss on extinguishment of debt previously classified as an extraordinary item in prior periods presented that does not meet the criteria of APB No. 30 for such classification has been reclassified to conform with the provisions of SFAS No. 145. During the fourth quarter of fiscal 2002, the Company refinanced its debt and wrote off $1.2 million ($0.8 million after tax) of unamortized deferred financing costs and classified the loss as an extraordinary item. The Company adopted SFAS No. 145 as of November 3, 2002. The Company determined that the write off of the unamortized deferred financing costs did not meet the criteria of APB No. 30 to be classified as extraordinary, and accordingly, the loss has been reclassified to other income, net in the accompanying fiscal 2002 statement of operations.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 nullifies Emerging Issues Task Force (“EITF”) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002 with early application encouraged. The Company adopted SFAS No. 146 as of August 3, 2003, and the adoption of the statement did not have a significant impact on the Company’s financial position and results of operations.

During November 2002, the EITF reached a consensus on EITF Issue 00-21, Multiple-Deliverable Revenue Arrangements, which addresses how to account for arrangements that may

involve the delivery or performance of multiple products, services, and/or rights to use assets. The final consensus will be applicable to agreements entered into in fiscal periods beginning after June 15, 2003, with early adoption permitted. The Company adopted EITF Issue 00-21 as of August 3, 2003, and the adoption did not have a significant impact on the Company’s financial position and results of operations.

During November 2002, the EITF reached a consensus on EITF Issue No. 02-16, Accounting by a Customer (including a Reseller) for Cash Consideration Received from a Vendor. EITF Issue No. 02-16 discusses how a customer should account for consideration received from a vendor. The consensus is applicable to all fiscal periods beginning after December 15, 2002, with early application permitted if there would be no net income statement impact to prior periods presented. The Company adopted EITF Issue No. 02-16 effective November 3, 2002, and such adoption did not have a significant impact on the Company’s financial position and results of operations.

SFAS No. 123’s fair value method of accounting for stock-based employee compensation. While the Statement does not amend SFAS No. 123 to require companies to account for employee stock options using the fair value method, the disclosure provisions of SFAS No. 148 are applicable to all companies with stock-based employee compensation, regardless of whether they account for that compensation using the fair value method of SFAS No. 123 or the intrinsic value method of APB No. 25, Accounting for Stock Issued to Employees. Effective February 2, 2003, the Company adopted the disclosure provisions of SFAS No. 148.

In January 2003, the FASB issued Financial Interpretation (“FIN”) No. 46, Consolidation of Variable Interest Entities. FIN No. 46 requires variable interest entities (“VIEs”) to be consolidated by their primary beneficiaries. A primary beneficiary is the party that absorbs a majority of the entity’s expected losses or residual benefits. FIN No. 46 is currently effective for public companies with variable interests in special purpose entities, or SPEs, as of December 15, 2003. The effective date for application to all other types of VIEs is March 15, 2004. The Company is currently reviewing the provisions of FIN No. 46. The Company does not expect that the adoption will have a significant impact on the Company’s financial position and results of operations.


	November 2, 2002			November 1, 2003

	(in thousands)
Five-year revolving credit line with banks bearing interest at rates of 30-day and 90-day LIBOR plus 2.5% (weighted average interest rate of 4.7% at November 2, 2002); outstanding borrowings at November 1, 2003 bear interest at daily base rate of 5.5%, maturing on September 15, 2007	$	47,300		$	5,000
Six-year term loan payable to banks bearing interest at a rate of 90-day LIBOR plus 3.25% (5.1% and 4.4% at November 2, 2002 and November 1, 2003, respectively) repayable beginning on December 31, 2002, in quarterly installments of $1.6 million with a final payment of $89.1 million on the maturity date, September 15, 2008		125,000			118,750
Unsecured senior subordinated notes bearing interest at a rate of 9.25%, maturing on May 1, 2009		125,000			125,000

		297,300			248,750
Current portion of long-term debt		(6,250	)		(6,250	)

Noncurrent portion of long-term debt	$	291,050		$	242,500

Aggregate required principal reductions are as follows for the respective fiscal years (in thousands):


2004	$	6,250
2005		6,250
2006		6,250
2007		6,250
2008 and thereafter		223,750

	$	248,750

On September 16, 2002, the Company completed a $250 million senior secured credit facility with a group of lenders and used the initial borrowings to repay in full its then existing credit facility. The current facility includes a $125 million (outstanding balance of $5 million at November 1, 2003), five-year revolving loan maturing on September 15, 2007 and a $125 million (outstanding balance of $118.8 million at November 1, 2003), six-year term loan maturing on September 15, 2008. The term loan requires mandatory prepayments of $1.6 million each quarter beginning in December 2002 with a final payment of $89.1 million at maturity.

The senior credit facility is secured by security interests in (1) accounts receivable, inventory and equipment and assets related thereto such as related software, chattel paper, instruments and contract rights of the Company (excluding foreign operations) and (2) 100% of the capital stock and other equity interests in each of the direct and indirect operating domestic subsidiaries of the Company.

The senior credit facility contains covenants that limit the Company’s senior debt and leverage ratios and require the

Company to maintain minimum interest coverage ratios and net worth, as those terms are defined in the senior credit facility. The required ratios for the periods indicated are as follows:


	2003			2004			2005			2006		2007

Maximum leverage ratio		4.00	¹		3.50	²		3.25	³		3.00		3.00
Minimum interest coverage ratio		2.50			3.00	⁴		3.50			3.50		3.50
Maximum senior debt ratio		2.25	⁵		2.00			2.00			2.00		2.00

		¹ Decreases to 3.50 on November 1, 2003

		² Decreases to 3.25 on May 1, 2004

		³ Decreases to 3.00 on April 30, 2005

		⁴ Increases to 3.50 on October 30, 2004

		⁵ Decreases to 2.00 on November 1, 2003

In addition to these ratios, the Company is required to maintain a minimum net worth that changes from quarter to quarter depending upon earnings, proceeds of stock sales, and issuances of stock upon conversions or exchanges of debt or preferred stock or acquisitions of other companies. The minimum net worth requirement at November 1, 2003 was $259 million. At that date, the Company’s leverage ratio was 3.05 to 1, its interest coverage ratio was 4.5 to 1, its senior debt ratio was 1.55 to 1, and its net worth was $331.8 million, and the Company was in compliance with all of these requirements. The senior credit agreement also limits the amount of permitted spending for capital additions, the repurchase of stock, payment of cash dividends, the disposition of assets and the amount of investments and other indebtedness. The Company was also in compliance with all of these limits at November 1, 2003.

Borrowings under the senior credit facility may be prepaid and the voluntary reduction of the unutilized portion of the five-year revolver may be made at any time, in certain amounts, without premium or penalty but subject to LIBOR breakage costs. The Company is required to make mandatory prepayments on the senior credit facility upon the occurrence of certain events, including the sale of assets and the issuance and sale of equity securities, in each case subject to certain limitations. These prepayments must first be applied to the term loan and then to reduction of the revolving commitment. The Company also is required to reduce the capacity of the revolver by $25 million if it issues an additional series of its senior subordinated notes due May 1, 2009, and in any event by December 31, 2005.

Loans on the senior credit facility bear interest, at the Company’s option, as follows: (1) base rate loans at the base rate plus a margin that fluctuates based on the Company’s leverage ratio and ranges from 1.0% to 1.75% on the revolving loan and from 2.0% to 2.25% on the term loan and (2) LIBOR loans at LIBOR plus a margin that fluctuates based on the Company’s leverage ratio and ranges from 2.0% to 2.75% on the revolving loan and from 3.0% to 3.25% on the term loan. Base rate is defined as the higher of Bank of America, N.A. prime rate or the overnight Federal Funds rate plus 0.5% and LIBOR is defined as the applicable London interbank offered rate adjusted for reserves.

In addition, the Company has outstanding $125 million of unsecured senior subordinated notes, which mature on May 1, 2009. The notes bear interest at 9.25%. The indenture governing the Company’s senior subordinated notes includes covenants which, among other things, limit the repurchase of stock, payment of cash dividends, the disposition of assets and the amount of investments and other indebtedness.

As a result of the September 16, 2002 refinancing of the senior credit facility, unamortized deferred financing costs of $1.2 million ($0.8 million after tax effect of $0.4 million) were written off during the fourth quarter of fiscal 2002. At November 2, 2002 and November 1, 2003, the remaining unamortized balance in deferred financing costs was $5.8 million and $4.8 million, respectively.

At November 1, 2003, the Company had approximately $115 million in unused borrowing capacity (net of outstanding letters of credit of $5 million) under the senior credit facility, of which a total of $20 million could be utilized for standby letters of credit.

At November 1, 2003, the fair value of the Company’s long-term debt, based on current interest rates and quoted market prices was $255.3 million, compared with the carrying amount of $248.8 million.

3. Adoption of SFAS NO. 142,
“Goodwill And Other Intangible Assets"

Effective November 1, 2001, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, which prohibits the amortization of goodwill and intangible assets with indefinite useful lives. SFAS No. 142 requires that these assets be reviewed for impairment at least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives.

In accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, the Company historically evaluated goodwill for impairment by comparing the entity level unamortized balance of goodwill to projected undiscounted cash flows, which did not result in an indicated impairment. SFAS No. 142 requires that goodwill be tested for impairment at the reporting unit level upon adoption and at least annually thereafter, utilizing a two-step methodology. The initial step requires the Company to determine the fair value of each reporting unit and compare it to the carrying value, including goodwill, of such unit. If the fair value exceeds the carrying value, no impairment loss would be recognized. However, if the carrying value of the reporting unit exceeds its fair value, the goodwill of this unit may be impaired. The amount of the impairment, if any, would then be measured in the second step. The Company determines the fair value of each reporting unit by using a combination of present value and multiple of earnings valuation techniques and compared it to each reporting unit’s carrying value. The Company completed the first step during the second quarter of fiscal 2002 which indicated that goodwill recorded in the metal building components and metal coil coaters segments was impaired as of November 1, 2001. Due to the potential impairment, the Company then completed step two of the test to measure the amount of the impairment. Based on that analysis, the transitional impairment losses for the metal building components and metal coil coaters segments were $57.1 million ($55.4 million after tax effect of $1.7 million) and $10.3 million ($9.7 million after tax effect of $0.6 million), respectively. The total transitional impairment loss of $67.4 million ($65.1 million after tax effect of $2.3 million) was recognized during the second quarter of fiscal 2002 as a cumulative effect of a change in accounting principle. The Company updated this review at year end as required by SFAS No. 142 and identified no additional impairment of goodwill.

The following table reflects the Company’s comparative income before and after the cumulative effect of the change in accounting principle and goodwill amortization under SFAS No. 142 (in thousands):


				Fiscal year ended...
		October 31, 2001		November 2, 2002			November 1, 2003

Reported income before cumulative effect of change in accounting principle		$	16,535	$	31,314		$	22,800
	Add back: Goodwill amortization, net of tax		11,229		–			–

Adjusted income before cumulative effect of change in accounting principle			27,764		31,314			22,800
Cumulative effect of change in accounting principle, net of tax			–		(65,087	)		–

Adjusted net income (loss)		$	27,764	$	(33,773	)	$	22,800

BASIC INCOME (LOSS) PER SHARE:
Reported income before cumulative effect of change in accounting principle		$	0.91	$	1.70		$	1.21
	Add back: Goodwill amortization, net of tax		0.62		–			–

Adjusted income before cumulative effect of change in accounting principle			1.53		1.70			1.21
Cumulative effect of change in accounting principle, net of tax			–		(3.52	)		–

Adjusted net income (loss)		$	1.53	$	(1.82	)	$	1.21

DILUTED INCOME (LOSS) PER SHARE:
Reported income before cumulative effect of change in accounting principle		$	0.91	$	1.68		$	1.20
	Add back: Goodwill amortization, net of tax		0.61		–			–

Adjusted income before cumulative effect of change in accounting principle			1.52		1.68			1.20
Cumulative effect of change in accounting principle, net of tax			–		(3.49	)		–

Adjusted net income (loss)		$	1.52	$	(1.81	)	$	1.20

The following table displays the changes in the carrying amount of goodwill by operating segment (in thousands):

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Taxes on income from continuing operations consist of the following:

The reconciliation of income tax computed at the United States federal statutory tax rate to the effective income tax rate is as follows:

Significant components of the Company’s deferred tax liabilities and assets are as follows:

Other accrued expenses include accrued income taxes of $2.1 million at November 2, 2002 and $2.2 million at November 1, 2003.

5. Operating Lease Commitments

Total rental expense incurred from operating leases for the fiscal years ended 2001, 2002 and 2003 was $7.3 million, $6.9 million and $6.0 million, respectively. Aggregate minimum required annual payments on long-term non-cancelable operating leases at November 1, 2003 were as follows for the respective fiscal years (in thousands):


2004	$	5,049
2005	$	3,959
2006	$	2,601
2007	$	1,880
2008	$	1,584

6. Shareholders’ Rights Plan

In June 1998, the Board of Directors adopted a Shareholders’ Rights Plan and declared a dividend of one preferred stock purchase right (“Right”) for each outstanding share of the Company’s common stock for stockholders of record at the close of business on July 8, 1998. Each Right entitles the holder to purchase one one-hundredth (1/100th) of a share of the Company’s Series A Junior Participating Preferred Stock at a price of $62.50 per share upon certain events. Generally, if a person or entity acquires, or initiates a tender offer to acquire, at least 20% of the Company’s then outstanding common stock, the Rights will become exercisable for common stock having a value equal to two times the exercise price of the Right, or effectively at one-half of the Company’s then current stock price. The Rights are redeemable under certain circumstances at $0.005 per Right and will expire, unless earlier redeemed, on June 24, 2008.

7. Shareholders’ Equity

On November 3, 1999, the Company’s Board of Directors authorized the repurchase of 1.0 million shares of the Company’s common stock, and an additional 1.5 million shares on November 7, 2000. Subject to applicable federal securities law, such purchases occur at times and in amounts that the Company deems appropriate. No time limit was placed on the duration of the repurchase program. Shares repurchased are reserved primarily for later re-issuance in connection with the Company’s stock option and 401(k) profit sharing plans. At November 1, 2003, the Company had repurchased 1.3 million shares of its common stock for $21.6 million since the inception of the repurchase program in November 1999.

Changes in treasury common stock, at cost, were as follows:


		No. of Shares			Amount

		(in thousands)
Balance, October 31, 2001			301		$	4,953
	Purchases		12			175
	Issued in exercise of stock options		(240	)		(3,938	)
	Issued in 401(k) contributions		(53	)		(871	)

Balance, November 2, 2002			20			319
	Purchases		8			114
	Issued in exercise of stock options		(28	)		(430	)
	Issued in 401(k) contributions		–			–

Balance, November 1, 2003			–		$	3

8. Stock Incentive Plans

On December 12, 2002, the Board of Directors approved a new long-term stock incentive plan that provides for the grant of stock options, stock appreciation rights, restricted stock awards, performance share awards and phantom stock awards. The aggregate number of shares of common stock that may be issued under the new plan may not exceed 1.5 million. Awards will normally terminate on the earlier of (i) 10 years from the date of grant, (ii) 30 days after termination of employment or service for a reason other than death, disability or retirement, (iii) one year after death or (iv) one year (for incentive stock options) or five years (for other awards) after disability or retirement. Awards are non-transferable except by disposition on death or to certain family members, trusts and other family entities as the Compensation Committee may approve. Awards may be paid in cash, shares of the Company’s common stock or a combination, in lump sum or installments and currently or by deferred payment, all as determined by the Compensation Committee. On August 28, 2003, the Board of Directors, upon recommendation of the Compensation Committee, approved a special long-term grant of 54,526 shares of restricted stock. Prior to December 16, 2002, the Company maintained an employee stock option plan under which both statutory and non-statutory options could be granted. All options granted under the old plan were non-statutory options. No further options are permitted to be granted under the old plan after the shareholders approved the new long-term stock incentive plan in March 2003. At November 2, 2002 and November 1, 2003, a total of 1.0 million shares and 1.4 million shares, were available

under the old and new plan, respectively, for the further grants of awards. Stock option transactions during 2001, 2002 and 2003 are as follows (in thousands, except per share amounts):


					Weighted Average
		No. of Shares			Exercise Price

Balance Oct. 31, 2000			1,884		$	15.42
	Granted		313			16.60
	Cancelled		(164	)		(19.83	)
	Exercised		(370	)		(8.17	)

Balance Oct. 31, 2001			1,663		$	16.82
	Granted		491			16.01
	Cancelled		(53	)		(19.00	)
	Exercised		(239	)		(12.21	)

Balance Nov. 2, 2002			1,862		$	17.14
	Granted		292			19.37
	Cancelled		(26	)		(19.53	)
	Exercised		(196	)		(12.25	)

Balance Nov. 1, 2003			1,932		$	17.94

Options exercisable at fiscal years ended 2001, 2002 and 2003 were 0.9 million, 1.0 million and 1.1 million, respectively. The weighted average exercise prices for options exercisable at fiscal years ended 2001, 2002 and 2003 were $16.29, $17.97 and $18.50 respectively. Exercise prices for options outstanding at November 1, 2003 range from $8.38 to $28.13. The weighted average remaining contractual life of options outstanding at November 1, 2003 is 6.7 years. The following summarizes additional information concerning outstanding options at November 1, 2003:

Because options vest over several years and additional option grants are expected, the effects of these calculations may not be representative of similar future calculations.


Basic and diluted net income per share computations				Fiscal year ended...
were derived using the following information:		October 31, 2001		November 2, 2002			November 1, 2003

Income before cumulative effect of change in accounting principle		$	16,535	$	31,314		$	22,800
Cumulative effect of change in accounting principle, net of tax			–		(65,087	)		–

	Net income (loss)		16,535		(33,773	)		22,800
Interest, net of tax, on convertible debenture assumed converted			27		–			–

Adjusted net income (loss)		$	16,562	$	(33,773	)	$	22,800

Weighted average common shares outstanding			18,075		18,512			18,811
Common stock equivalents:
	Stock options		148		180			158
	Convertible debenture		42		–			–

Weighted average common shares outstanding, assuming dilution			18,265		18,692			18,969

10. Employee Benefit Plan

The Company has a 401(k) profit sharing plan (the “Savings Plan”) which covers all eligible employees. The Savings Plan requires the Company to match employee contributions up to a certain percentage of a participant’s salary. No other contributions may be made to the Savings Plan. Contributions expense for the fiscal years ended 2001, 2002 and 2003 was $3.5 million, $3.6 million and $3.2 million, respectively, for contributions to the Savings Plan, all of which were made by contributing shares of common stock of the Company.

11. Acquisitions

During July 2003, the Company acquired certain operating assets and the business of Able Manufacturing and Wholesale Garage Door Company (“Able”) in a cash transaction of approximately $3.2 million. Able manufactures and distributes a complete line of metal sectional doors for both the commercial and residential markets. In a separate transaction, the Company also acquired a retail store located in Baytown, Texas, which became the fifth NCI Metal Depot. NCI Metal Depots sell a wide range of commercial and residential metal components and accessories, as well as a variety of small metal building packages directly to the public. The purchase price for the assets of the Baytown location was approximately $1.1 million. The combined annual sales of both companies were less than $20 million for the previous calendar year.

12. Restructuring

In October 2001, management announced a plan to realign its manufacturing capabilities to increase efficiencies, raise productivity and lower operating expenses. The pretax restructuring charge of $2.8 million related to the planned closing of five manufacturing facilities as part of this plan. This included a $2.1 million non-cash charge for an identified impairment to property, plant and equipment for the expected loss on the sale of two of the five facilities. The actions were substantially completed by the end of the first quarter of fiscal 2002. During fiscal 2002, the Company recognized a gain of $1.3 million ($0.8 million after tax) for the sale of certain real estate and equipment associated with the restructuring. During fiscal 2003, the Company recognized a loss of $0.9 million ($0.6 million after tax) due to the sale of one of the remaining facilities and the reduction of the remaining facility due to the continuing deterioration of the local industrial resale market. The remaining facility, not yet sold, has a net carrying value of $0.5 million and the Company does not anticipate a selling price significantly different from this amount.

13. Contingencies

The Company’s primary steel suppliers, Bethlehem Steel Corporation and National Steel Corporation, filed for protection under Federal Bankruptcy laws on October 15, 2001, and March 6, 2002, respectively. During the third quarter of fiscal 2003, U.S. Steel bought substantially all of the integrated steel-making assets of National Steel, and International Steel Group, Inc. acquired the assets of Bethlehem Steel. During fiscal 2003, the Company purchased approximately 65% of its steel requirements from U.S. Steel and International Steel Group, Inc. The Company does not maintain an inventory of steel in excess of its current production requirements. Should either of these companies cease operations, essential supply of primary raw materials could be temporarily interrupted. The Company believes that its other steel suppliers can meet its demand for steel if its supply from any of these sources is interrupted.

As a result of the Company’s restatement of its financial results for the last half of fiscal 1999, all of fiscal 2000 and the first quarter of fiscal 2001, several class action lawsuits were filed against the Company and certain of its current officers in the United States District Court for the Southern District of Texas, commencing in April 2001. The lawsuits were consolidated into one class action lawsuit on August 16, 2001, and the plaintiffs filed a consolidated amended complaint on February 1, 2002. In the consolidated complaint the plaintiffs allege, among other things, that during the financial periods that were restated the Company made materially false and misleading statements about the status and effectiveness of a management information and accounting system used by the Company’s components division and costs associated with that system, failed to assure that the system maintained books and records accurately reflecting inventory levels and costs of goods sold, failed to maintain internal controls on manual accounting entries made to certain inventory-related accounts in an effort to correct the data in the system, otherwise engaged in improper accounting practices that overstated earnings, and issued materially false and misleading financial statements. The plaintiffs further allege that the individual defendants traded in the Company’s common stock while in possession of material, non-public information regarding the foregoing. The plaintiffs in the consolidated complaint assert various claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and seek unspecified amounts of compensatory damages, interest and costs, including legal fees. On March 15, 2002, the Company filed a motion to dismiss plaintiffs’ consolidated complaint and a memorandum in support. The Company and the individual defendants deny the material allegations in the complaint and intend to defend against them vigorously. In January 2004, the Company entered into an agreement to settle the lawsuits, without admitting any of the allegations against the Company or its officers,

and agreed to pay $7.0 million for the dismissal of all claims, which is within our insurance coverage limits and has been agreed to by the Company’s insurance carriers. The settlement is subject to the approval of the court. Discovery in the consolidated cases is at a very early stage. Consequently, if the proposed settlement should not be approved by the court or implemented for any reason, at this time the Company is not able to predict whether it will incur any liability in excess of insurance coverages or to estimate the damages, or the range of damages, if any, that it might incur in connection with the lawsuit, or whether an adverse outcome could have a material adverse impact on the Company’s business, consolidated financial condition or results of operations.

On November 20, 2003, Bethlehem Steel Corporation filed several adversary proceedings in the United States Bankruptcy Court for the Southern District of New York against Metal Building Components, L.P., NCI Group, L.P., and Metal Coaters of California, Inc. (three of the Company’s operating subsidiaries), seeking reimbursement of alleged preferential transfers made by Bethlehem Steel to the Company’s subsidiaries of approximately $15.4 million. The Company has not received formal service of the lawsuit and discovery has not commenced. The Company denies the allegations set forth in the complaints and intends to vigorously defend against these claims. While the Company is not able to predict whether it will incur any liability or to accurately estimate the damages, or the range of damages, if any, that the Company might incur in connection with these proceedings, the Company believes that these legal proceedings will not have a material adverse effect on its business, consolidated financial condition or results of operations.

The Company has discovered the existence of polychlorinated biphenyls and certain other heavy metals at one of its facilities. Soil borings have been sampled and analyzed to determine the impact on the soil at the site and the findings indicate that remediation of the site will likely be necessary, although it appears that contaminated area does not extend beyond the boundary of the real property boundary line. The Company has filed an application with the Texas Commission of Environmental Quality for entry into the Voluntary Cleanup Program. Based upon an analysis of projected remediation costs of the known contamination, the Company estimates that it will spend approximately $1.5 million to remediate this site, which includes future environmental consulting fees, oversight expenses and additional testing expenses, although the Company can give no assurance that actual costs will not significantly exceed its estimate. The Company has made an accrual in the amount of $1.5 million to cover the estimated anticipated costs of remediation of these environmental issues. The Company does not believe that the remediation of the site will have a material adverse effect on its business, consolidated financial condition or results of operations. Findings of polychlorinated biphenyls and certain other heavy metals at the site are not consistent with the Company’s historical or ongoing operations conducted at the site. Thus, it appears that any

contamination was likely produced by and/or brought onto the site by previous property owners/users or by a third party. The Company has an indemnity obligation from the immediate prior owner of the property with respect to environmental issues. The Company intends to identify previous property owners/users who might be culpable for the contamination and determine whether it is practical to seek contribution and indemnification for remediation costs. As with any dispute involving technical issues of expertise, however, these efforts could be very costly and time consuming. It is possible, therefore, that efforts to pursue previous property owners/users and/or potentially responsible parties may not be cost-effective for the Company.

From time to time, the Company is involved in various other legal proceedings and contingencies that are considered to be in the ordinary course of business. While the Company is not able to predict whether it will incur any liability in excess of insurance coverages or to accurately estimate the damages, or the range of damages, if any, that the Company might incur in connection with these litigations, the Company believes that these legal proceedings will not have a material adverse effect on its business, consolidated financial condition or results of operations.

14. Business Segments

The Company has divided its operations into three reportable segments: metal building components, engineered building systems and metal coil coaters, based upon similarities in product lines, manufacturing processes, marketing and management of its businesses. Products of all three segments are similar in basic raw materials used. The metal building component segment products include roof and wall panels, doors, metal partitions, metal trim and other related accessories. The engineered building systems segment includes the manufacturing of structural framing and supplies and value added engineering and drafting, which are typically not part of metal building component or metal coil coating products or services. Metal coil coating consists of cleaning, treating and painting continuous steel coils before the steel is fabricated for use by construction and industrial users. The reporting segments follow the same accounting policies used for the Company’s consolidated financial statements. Management evaluates a segment’s performance based upon operating income. Intersegment sales are recorded based on weighted average costs and consist of building components provided to the engineered building systems segment, structural framing provided to the metal building components segment by the engineered building systems segment, and hot rolled, light gauge painted, coated and slit material and services provided by the metal coil coaters segment to both of the other segments. The Company is not dependent on any one significant customer or group of customers. Substantially all of the Company’s sales are made within the United States. Financial data for prior periods has been reclassified to conform to the current presentation.

Summary Financial Data by Segment
NCI Building Systems, Inc.
Dollars in thousands


		2001			%			2002			%			2003			%

SALES TO OUTSIDE CUSTOMERS
Metal building components		$	516,564			54		$	507,079			53		$	473,499			53
Engineered building systems			320,789			34			317,926			33			297,304			33
Metal coil coaters			117,524			12			128,437			14			127,347			14
Intersegment sales			96,834			10			97,024			10			106,338			12
Eliminations			(96,834	)		(10	)		(97,024	)		(10	)		(106,338	)		(12	)

	Total net sales	$	954,877			100		$	953,442			100		$	898,150			100

OPERATING INCOME¹
Metal building components		$	40,429			8		$	46,829			9		$	45,851			10
Engineered building systems			43,827			14			28,695			9			18,055			6
Metal coil coaters			20,318			17			23,578			18			21,204			17
Restructuring charge			(2,815	)		–			–			–			–			–
Corporate			(36,934	)		–			(26,878	)		–			(27,947	)		–

	Total operating income	$	64,825			7		$	72,224			8		$	57,163			6

PROPERTY, PLANT AND EQUIPMENT, NET
Metal building components		$	103,590			46		$	93,577			46		$	90,428			45
Engineered building systems			48,424			22			44,006			21			47,831			24
Metal coil coaters			53,386			24			51,394			25			48,487			24
Corporate			19,193			8			16,357			8			15,080			7

	Total property, plant and equipment, net	$	224,593			100		$	205,334			100		$	201,826			100

DEPRECIATION AND AMORTIZATION¹
Metal building components		$	16,962			49		$	9,336			41		$	9,042			39
Engineered building systems			8,008			23			6,401			28			6,134			27
Metal coil coaters			7,039			20			4,523			20			4,919			21
Corporate			2,857			8			2,623			11			2,912			13

	Total depreciation and amortization	$	34,866			100		$	22,883			100		$	23,007			100

CAPITAL EXPENDITURES
Metal building components		$	5,388			36		$	4,179			46		$	4,023			22
Engineered building systems			4,409			29			1,589			17			10,309			58
Metal coil coaters			3,299			22			2,512			27			1,962			11
Corporate			1,930			13			895			10			1,618			9

	Total capital expenditures	$	15,026			100		$	9,175			100		$	17,912			100

TOTAL ASSETS
Metal building components		$	519,256			62		$	307,539			43		$	304,910			43
Engineered building systems			93,094			11			206,429			29			204,931			29
Metal coil coaters			166,918			20			161,128			22			158,553			22
Corporate			59,544			7			46,169			6			44,766			6

Total assets		$	838,812			100		$	721,265			100		$	713,160			100

We have audited the accompanying consolidated balance sheets of NCI Building Systems, Inc. as of November 1, 2003 and November 2, 2002, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three fiscal years in the period ended November 1, 2003. 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 in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of NCI Building Systems, Inc. at November 1, 2003 and November 2, 2002 and the consolidated results of its operations and its cash flows for each of the three fiscal years in the period ended November 1, 2003, in conformity with accounting principles generally accepted in the United States.

As discussed in Note 3 to the consolidated financial statements, effective November 1, 2001, the Company changed its method of accounting for goodwill.

Management’s Discussion and Analysis
of Financial Condition and Results of Operations

The following table presents, as a percentage of sales, certain selected consolidated financial data for the Company for the periods indicated:


					Fiscal Year ended...
		October 31, 2001			November 2, 2002			November 1, 2003

Sales			100.0	%		100.0	%		100.0	%
Cost of sales			77.7			77.7			78.0
	Gross profit		22.3			22.3			22.0
Selling, general and administrative expenses			13.9			14.7			15.6
Goodwill amortization			1.3			–			–
Restructuring charge			0.3			–			–

	Income from operations		6.8			7.6			6.4
Interest expense			(3.5	)		(2.3	)		(2.2	)
Other income, net			0.1			–			–

	Income before income taxes and cumulative effect of change in accounting principle		3.4			5.3			4.2
Provision for income taxes			1.7			2.0			1.7

	Income before cumulative effect of change in accounting principle		1.7			3.3			2.5
Cumulative effect of change in accounting principle, net of tax			–			(6.8	)		–

Net income (loss)			1.7	%		(3.5)	%		2.5	%

The Company’s various product lines have been aggregated into three business segments: metal building components, engineered building systems and metal coil coaters. These aggregations are based on the similar nature of the products, distribution channels, and management and reporting for those products within the Company. All segments operate primarily in the non-residential construction market. Sales and earnings are influenced by general economic conditions, the level of non-residential construction activity, roof repair and retrofit demand and the availability and terms of financing available for construction. The reporting segments follow the same accounting policies used for the Company’s consolidated financial statements.

Products of all business segments are similar in basic raw materials used. The metal building component segment products include roof and wall panels, doors, metal partitions, metal trim and other related accessories. The engineered building systems segment includes the manufacturing of structural framing and supplies and value added engineering and drafting, which are typically not part of metal building component or metal coil coating products or services. Metal coil coating consists of cleaning, treating and painting continuous steel coils before the steel is fabricated for use by construction and industrial users. The Company believes it has one of the broadest product offerings of metal building products in the industry which include metal coil coating services for both internal requirements and external customers.

Intersegment sales are based on weighted average costs and consist of building components provided to the engineered building systems segment, structural framing provided to the metal building components segment by the engineered building systems segment, and hot rolled, light gauge painted, coated and slit material and services provided by the metal coil coaters segment to both of the other segments. This provides better customer service, shorter delivery time and minimizes transportation costs to the customer. Segment information is included in the three-year comparison in Note 14 of the consolidated financial statements.

Results of Operations for
Fiscal 2003 Compared to 2002

Consolidated sales for fiscal 2003 were $898.2 million compared with $953.4 million for fiscal 2002. Sales were down 6% due to the continued slowdown in non-residential construction. The metal construction industry has experienced declines in the past two years and this trend continued throughout fiscal 2003. Based on Metal Building Manufacturers Association reports and public company information, the Company believes it has outperformed its competitors in the metal construction industry, despite the difficult environment, due to increased market penetration, a low cost infrastructure, and a broad product offering including retrofit and repair, which is counter cyclical in an economic downturn. Intersegment sales in fiscal 2003 of $106.3 million represent products and services provided between the three segments for metal building components, engineered building systems and metal coil coaters of $45.1 million, $13.2 million and $48.0 million, respectively.

Metal Building Components’ sales for fiscal 2003 were $473.5 million compared to $507.1 million for fiscal 2002. Sales were down 7% due to the decline in general industry activity.

Operating income of the metal building components segment declined in fiscal 2003 by 2%, to $45.9 million compared to $46.8 million in the prior year. Of this $0.9 million decline, $6.3 million resulted from lower sales volume offset by an increase in margins of $2.5 million and a decrease of $2.9 million in selling and administrative expenses. As a percent of sales, operating income in fiscal 2003 was 10% compared to 9% in fiscal 2002.

Engineered Building Systems’ sales were $297.3 million for fiscal 2003 compared with $317.9 million for fiscal 2002, representing a 6% decline. The sales were down due to the industry decline in non-residential construction. There has been a continuing overall decline in larger, more expensive projects and increased focus on smaller, more complex projects that provide lower overall operating margins and require additional engineering effort, which is harder to absorb on smaller projects.

Operating income of the engineered building systems segment declined in fiscal 2003 by 37%, to $18.1 million, compared to $28.7 million in the prior year. Of this $10.6 million decline, $5.7 million resulted from lower sales volume, $3.1 million resulted from lower margins because of unabsorbed overhead and lower selling prices due to competition, $4.0 million resulted from higher engineering and selling expenses driven by smaller, more complex jobs and increases in the provision for

doubtful accounts offset by a decrease in administrative expenses of $2.2 million. As a percent of sales, operating income in fiscal 2003 was 6% compared to 9% in fiscal 2002.

Metal Coil Coaters’ sales were $127.3 million for fiscal 2003 compared with $128.4 million for fiscal 2002, representing a 1% decline. Sales were down slightly due to the decline in non-residential construction activity.

Operating income of the metal coil coaters segment declined in fiscal 2003 by 10%, to $21.2 million, compared to $23.6 million in the prior year. Of this $2.4 million decline, $0.2 million resulted from lower sales volume, $2.7 million resulted from lower margins due to a $1.5 million expense associated with the establishment of a reserve for a known environmental liability discussed in Note 13 and lower selling prices due to competition offset by a $0.5 million decrease in selling and administrative expenses. As a percent of sales, operating income in fiscal 2003 was 17% compared to 18% in fiscal 2002.

Consolidated selling, general and administrative expenses, consisting of engineering, drafting, selling and administrative costs, decreased only slightly to $140.4 million in fiscal 2003 compared to $140.6 million in the prior year. Decreases in selling and administrative costs described above were partially offset by increased drafting and engineering expenses involved with the greater proportion of small, complex projects of the engineered building systems segment. As a percent of sales, selling, general and administrative expenses for fiscal 2003 were 16% compared to 15% for fiscal 2002.

Consolidated interest expense for fiscal 2003 decreased by 8%, to $19.8 million compared to $21.6 million for the prior year. This decline resulted from a decrease in outstanding debt for the period of $48.6 million. Although LIBOR and prime rates in fiscal 2003 were lower than fiscal 2002, the Company’s borrowing rates increased slightly in fiscal 2003 as a result of the debt refinancing in September 2002.

Results of Operations for
Fiscal 2002 Compared to 2001

Consolidated sales for fiscal 2002 were $953.4 million compared with $954.9 million for fiscal 2001. Sales were flat despite a continued slowdown in non-residential construction. Many companies in the metal construction industry have shown declines in the past years and this trend continued through fiscal 2002. Various trade reports have estimated that spending

on non-residential construction declined at least 10% in 2002. The Company believes that it performed at a higher sales level than the industry due to its continued ability to increase market penetration, the expansion of its structural operations and the growth in new products. Intersegment sales in fiscal 2002 of $97.0 million represent products and services provided between the three segments for metal building components, engineered building systems and metal coil coaters of $43.2 million, $11.2 million and $42.6 million, respectively.

Metal Building Components’ sales for fiscal 2002 were $507.1 million compared to $516.6 million for fiscal 2001. Sales were down 2% due to the decline in the industry.

Operating income of the metal building components segment increased in fiscal 2002 by 16%, to $46.8 million compared to $40.4 million in the prior year. Of this $6.4 million increase, $8.8 million was due to an increase in margins resulting from improved plant efficiencies and $0.4 million due to a decrease in selling expenses offset by a decrease of $1.6 million due to lower sales volume and an increase of $1.2 million in administrative expenses. As a percent of sales, operating income in fiscal 2002 was 9% compared to 8% in fiscal 2002.

Engineered Building Systems’ sales were $317.9 million for fiscal 2002 compared with $320.8 million for fiscal 2001, a decline of 1%. The sales were down slightly due to the industry decline in non-residential construction. There has been an overall decline in larger, more expensive projects and increased focus on smaller, more complex projects. These smaller projects provide lower overall operating margins and require additional engineering effort, which is harder to absorb on smaller projects. The reduction in large projects has continued as a result of the economic downturn in the non-residential construction market as builders are reluctant to expand ahead of a market recovery and instead focus on smaller, less risky projects.

Operating income of the engineered building systems segment declined in fiscal 2002 by 35%, to $28.7 million compared to $43.8 million in the prior year. Of this $15.1 million decline, $0.9 million resulted from lower sales volume, $9.8 million resulted from lower margins from lower selling prices due to competition and $4.4 million resulted from higher engineering and administrative expenses due to an increase in the complexity of orders and higher freight costs. As a percent of sales, operating income in fiscal 2002 was 9% compared to 14% in fiscal 2001.

Metal Coil Coaters’ sales were $128.4 million for fiscal 2002 compared with $117.5 million for fiscal 2001. Sales were up 9%

despite the decline in the industry due primarily to increased market penetration within the non-residential construction market.

Operating income of the metal coil coaters segment increased in fiscal 2002 by 16%, to $23.6 million compared to $20.3 million in the prior year. Of this $3.3 million increase, $2.4 million resulted from higher sales volume, $0.8 million resulted from higher margins and lower administrative expenses of $0.1 million.

Consolidated selling, general and administrative expenses, consisting of engineering, drafting, selling and administrative costs, increased 5%, to $140.6 million in fiscal 2002 compared to $133.3 million in the prior year. This increase was mainly attributable to cost increases in the areas of employee benefits, particularly health care, general insurance and bonuses, and increased engineering and drafting costs due to the higher complexity of engineered building systems’ projects. As a percent of sales, selling, general and administrative expenses for fiscal 2002 were 15% compared to 14% for fiscal 2001, excluding goodwill amortization in the prior year.

Consolidated interest expense for fiscal 2002 decreased by 35%, to $21.6 million compared to $33.1 million for the prior year. This decline resulted from lower average interest rates in fiscal 2002 and a decrease in outstanding debt for the year of $70.2 million.

Other income, net includes a gain of $1.3 million ($0.8 million after tax) in fiscal 2002 resulting from the sale of three facilities and related equipment that were associated with the restructuring actions and closure of five plants in October 2002 offset by a loss of $1.2 million ($0.8 million after tax) due to the debt refinancing of the senior credit facility.

Other matters
Effective November 1, 2001, the Company adopted SFAS No. 142. In accordance with this standard, the Company ceased amortization of all goodwill as of the effective date. This resulted in a favorable impact to consolidated pre-tax income from operations of $12.2 million and to net income of $11.2 million ($0.61 per diluted share) for the year ended November 2, 2002.

During the second quarter of fiscal 2002, the Company completed the transitional review for goodwill impairment required under SFAS No. 142. This review indicated that goodwill recorded in the metal building components and metal coil coaters segments was impaired as of November 1, 2001. Accordingly, the Company measured and recognized a

transitional impairment charge of $57.1 million ($55.4 million after tax) for the metal building components segment and $10.3 million ($9.7 million after tax) for the metal coil coaters segment as a cumulative effect of a change in accounting principle. See Note 3 of the “Notes to Consolidated Financial Statements” for additional discussion of the impact of this statement on the Company’s consolidated financial statements.

Liquidity And Capital Resources

At November 1, 2003, the Company had working capital of $66.6 million compared to $80.2 million at the end of fiscal 2002. This decline resulted primarily from a decrease of $9.1 million in inventory, an increase in other accrued expenses of $9.0 million, an increase in accounts payable of $6.1 million offset by an increase in cash of $4.7 million and a decrease in accrued compensation and benefits of $2.8 million. During fiscal 2003, the Company generated cash flow from operations of $66.7 million. This cash flow, along with cash from the beginning of the period, was used to fund capital expenditures of $17.9 million, complete acquisitions of $4.3 million and repay $48.6 million in debt under the Company’s senior credit facilities.

On September 15, 2002, the Company had a senior credit facility with a syndicate of banks, which consisted of (i) a five-year revolving credit facility of up to $200 million (outstanding balance of $83.8 million at September 15, 2002), (ii) a five-year term loan facility in the original principal amount of $200 million (outstanding balance of $50.0 million at September 15, 2002) and (iii) a $40 million term note (outstanding balance of $34.1 million at September 15, 2002).

On September 16, 2002, the Company completed a $250 million senior secured credit facility with a group of lenders and used the initial borrowings to repay in full the then existing credit facility. The new facility includes a $125 million (outstanding balance of $5 million at November 1, 2003), five-year revolving loan maturing on September 15, 2007 and a $125 million (outstanding balance of $118.8 million at November 1, 2003), six-year term loan maturing on September 15, 2008. The term loan requires mandatory prepayments of $1.6 million each quarter beginning in December 2002 with a final payment of $89.1 million at maturity.

The new senior credit facility is secured by security interests in (1) accounts receivable, inventory and equipment and related assets such as software, chattel paper, instruments and contract rights of the Company (excluding foreign operations) and (2) 100% of the capital stock and other equity interests in each of the direct and indirect operating domestic subsidiaries of the Company.

The new senior credit facility contains covenants that limit the Company’s senior debt and leverage ratios and require the Company to maintain minimum interest coverage ratios and net worth, as those terms are defined in the senior credit facility. The required ratios for the periods indicated are as follows:


	2003			2004			2005			2006		2007

Maximum leverage ratio		4.00	¹		3.50	²		3.25	³		3.00		3.00
Minimum interest coverage ratio		2.50			3.00	⁴		3.50			3.50		3.50
Maximum senior debt ratio		2.25	⁵		2.00			2.00			2.00		2.00

		¹ Decreases to 3.50 on November 1, 2003

		² Decreases to 3.25 on May 1, 2004

		³ Decreases to 3.00 on April 30, 2005

		⁴ Increases to 3.50 on October 30, 2004

		⁵ Decreases to 2.00 on November 1, 2003

Borrowings under the new senior credit facility may be prepaid and the voluntary reduction of the unutilized portion of the five-year revolver may be made at any time, in certain amounts, without premium or penalty but subject to LIBOR breakage costs. The Company is required to make mandatory prepayments on the new senior credit facility upon the occurrence of certain events, including the sale of assets and the issuance and sale of equity securities, in each case subject to certain limitations. These prepayments must first be applied to the term loan and then to the reduction of the revolving commitment. The Company is also required to reduce the revolving commitment by $25 million if it issues an additional series of its senior subordinated notes due May 1, 2009, and in any event by December 31, 2005.

Loans on the new senior credit facility bear interest, at the Company’s option, as follows: (1) base rate loans at the base rate plus a margin that fluctuates based on the Company’s leverage ratio and ranges from 1.0% to 1.75% on the revolving loan and from 2.0% to 2.25% on the term loan and (2) LIBOR loans at LIBOR plus a margin that fluctuates based on the Company’s leverage ratio and ranges from 2.0% to 2.75% on the revolving loan and from 3.0% to 3.25% on the term loan. Base rate is defined as the higher of Bank of America, N.A. prime rate or the overnight Federal Funds rate plus 0.5% and LIBOR is defined as the applicable London interbank offered rate adjusted for reserves. Based on its current leverage ratios, the Company pays a margin of 1.50% on base rate loans and 2.50% on LIBOR loans under the revolving loan and a margin of 2.25% on base rate loans and 3.25% on LIBOR loans under the term loan.

At November 1, 2003, the Company had approximately $115 million in unused borrowing capacity (net of letters of credit outstanding of $5 million) under the new senior credit facility, of which a total of $20 million can be utilized for standby letters of credit.

Under the most restrictive of the covenants limiting the Company’s ability to pay cash dividends and repurchase capital stock, the Company had available approximately $5 million to use for those purposes at November 1, 2003.

Inflation has not significantly affected the Company’s financial position or operations. Metal building components and engineered building systems sales are affected more by the availability of funds for construction than interest rates. No assurance can be given that inflation or interest rates will not fluctuate significantly, either or both of which could have an adverse effect on the Company’s operations.

The Company expects that, for the foreseeable future, cash generated from operations, sales of assets no longer needed for efficient operations and the available borrowings under its senior credit facility will be sufficient to provide it the ability

to fund its operations, provide the increased working capital necessary to support expected growth, fund planned capital expenditures for fiscal 2004 of approximately $21 million and expansion when needed, and pay scheduled interest and principal payments on its indebtedness. Historically since 1999, cash generated from operations and from sales of assets and investments has generated sufficient cash to fund acquisitions for an aggregate of approximately $34 million and to repay an aggregate of $316 million of the $565 million of long-term indebtedness outstanding after the acquisition of Metal Building Components, Inc. and California Finished Metals, Inc. in May 1998. To the extent the Company has insufficient cash available for one or more of these purposes, such as a large acquisition, the Company would be required to obtain funds from other sources, which may include refinance of or an increase in its senior debt facility or public or private debt or equity financings, or a combination of those sources, all of which likely will be dependent on the Company’s continued compliance with the financial and other covenants in its senior credit facility and the indenture for its senior subordinated debentures. The Company expects that, to the extent it has not been able to prepay in full the outstanding balance of the revolving portion of its senior credit facility when it matures in September 2007, or the $89.1 million final installment of its term loan when it matures in September 2008 or its $125 million of senior subordinated debentures when they mature in May 2009, it will refinance any then outstanding balance by means of a new senior credit facility or other public or private equity or debt financings. There can be no assurance that any of these external sources of funds will be available to the Company at the time or that any of those financings can be arranged on acceptable terms, or terms as favorable as those now enjoyed by the Company on its existing credit facilities.

Material, primarily steel, constituted approximately 70% of the Company’s cost of sales for the fiscal period ended November 1, 2003. No assurance can be given that steel will remain available or that prices will remain stable. The steel industry is highly cyclical in nature, and steel prices are influenced by numerous factors beyond the Company’s control. These factors include general economic conditions, competition, labor costs, import duties and other trade restrictions. Furthermore, a prolonged labor strike against one or more of the Company’s principal domestic suppliers could have a material adverse effect on the Company’s operations. If the available supply of steel declines or if one or more of the Company’s current suppliers is unable for financial or any other reason to continue in business or produce steel sufficient to meet the Company’s requirements, the Company could experience price increases, a deterioration

of service from its suppliers or interruptions or delays that may cause the Company not to meet delivery schedules to its customers. Any of these problems could adversely affect the Company’s financial condition and results of operations

Off-Balance Sheet Arrangements

At November 1, 2003, the Company did not have any off-balance sheet arrangements.

Contractual Obligations

The table below shows the Company’s known contractual obligations as of November 1, 2003 (in thousands).

Contingent Liabilities and Commitments

NCI is required to have standby letters of credit as a collateral requirement of its insurance carrier for the Company’s projected exposure for worker’s compensation, general liability and auto claims. For all insurance carriers, the total standby letters of credit are approximately $5 million at November 1, 2003 and the Company has $20 million total available under its current senior credit facility.

Critical Accounting Policies

The consolidated financial statements of the Company are prepared in accordance with United States generally accepted accounting principles, which require the Company to make estimates and assumptions. The significant accounting policies of the Company are disclosed in Note 1 to the consolidated financial statements. The following discussion of critical accounting policies addresses those policies which are both important to the portrayal of the Company’s financial condition and results of operations and require significant judgment and estimates. The Company bases its estimates and judgment on historical experience and on various other factors that are believed to be reasonable. Actual results may differ from these estimates under different assumptions or conditions.

Revenue recognition
The Company recognizes revenues when all of the following conditions are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collectability is reasonably assured. Generally, these criteria are met at the time product is shipped or services are complete. Adequate provision is made, upon shipment, for estimated product returns and other costs. Costs associated with shipping and handling of products are included in cost of sales.

Accruals for employee benefits
The Company is self insured for a substantial portion of the cost of employee group and medical insurance and for the cost of workers compensation benefits. The Company purchases insurance from third parties which provides individual and aggregate stop loss protection for these costs. For health and medical costs, the Company uses estimates for incurred but unreported claims as of each balance sheet date. These

estimates are based on current and historical experience in claims costs, known trends in health care cost and other information available from the third party insurance company which administers claims. For workers compensation costs, the Company monitors the number of accidents and the severity of such accidents to develop appropriate reserves for expected costs to provide both medical care and benefits during the period an employee is unable to work. These reserves are developed using third party estimates of the expected cost and length of time an employee will be unable to work based on industry statistics for the cost of similar disabilities. This statistical information is trended to provide estimates of future expected cost based on the factors developed from the Company’s experience of actual claims cost compared to original estimates.

The Company believes that the assumptions and information used to develop these accruals provide the best basis for these estimates each quarter. However, significant changes in expected medical and health care costs, negative changes in the severity of previously reported claims or changes in legislative laws and statutes which govern the administration of these plans could have an impact on the determination of the amount of these accruals in future periods. For fiscal 2003, the Company expensed approximately $20 million for employee benefits and at November 1, 2003, the balance of the employee benefits accrual was $9 million.

Goodwill
The Company reviews the carrying values of its long-lived assets, including goodwill and identifiable intangibles, whenever events or changes in circumstances indicate that such carrying values may not be recoverable and annually for goodwill as required by SFAS No. 142. Unforeseen events, changes in circumstances and market conditions and material differences in the value of intangible assets due to changes in estimates of future cash flows could negatively affect the fair value of the Company’s assets and result in a non-cash impairment charge. Some factors considered important which could trigger an impairment review include the following: significant underperformance relative to expected historical or projected future operating results, significant changes in the manner of the Company’s use of the acquired assets or the strategy for its overall business and significant negative industry or economic trends. Fair value is the amount at which the asset could be bought or sold in a current transaction between willing parties and may be estimated using a number of techniques, including quoted market prices or valuations by third parties, present value techniques based on estimates of cash flow, or multiples of earnings or revenue performance measures. The fair value

of the asset could be different using different estimates and assumptions in these valuation techniques. At November 1, 2003, the total value of goodwill was $318.2 million.

As required by SFAS No. 142, goodwill must be tested for impairment at the reporting unit level upon adoption and at least annually thereafter, utilizing a two-step methodology. The initial step requires the Company to determine the fair value of each reporting unit and compare it to the carrying value, including goodwill, of such unit. The Company determined the fair value of each reporting unit by using a combination of present value and multiple of earnings valuation techniques and compared it to each reporting unit’s carrying value. If the fair value exceeds the carrying value, no impairment loss would be recognized. However, if the carrying value of the reporting unit exceeds its fair value, the goodwill of this unit may be impaired. The amount, if any, of the impairment would then be measured in the second step. The Company completed the first step during the second quarter of fiscal 2002 which indicated that goodwill recorded in the metal building components and metal coil coaters segments was impaired as of November 1, 2001. Due to the potential impairment, the Company then completed step two of the test to measure the amount of the impairment. Based on that analysis, the transitional impairment losses for the metal building components and metal coil coaters segments were $57.1 million ($55.4 million after tax effect of $1.7 million) and $10.3 million ($9.7 million after tax effect of $0.6 million), respectively. The total transitional impairment charge of $67.4 million ($65.1 million after tax) was recognized as a cumulative effect of a change in accounting principle. The Company updated this review at year end as required by SFAS No. 142 and identified no additional impairment of goodwill. See Note 3 of the consolidated financial statements for additional discussion of the adoption of SFAS No. 142.

Allowance for Doubtful Accounts
The Company’s allowance for doubtful accounts reflects reserves for customer receivables to reduce receivables to amounts expected to be collected. Management uses significant judgment in estimating uncollectible amounts. In estimating uncollectible amounts, management considers factors such as current overall economic conditions, industry-specific economic conditions, historical customer performance and anticipated customer performance. While the Company believes these processes effectively address its exposure for doubtful accounts and credit losses have historically been within expectations, changes in the economy, industry, or specific customer conditions may require adjustments to the allowance for doubtful accounts recorded by the Company. The Company had bad debt expense of $4.9

million for fiscal 2003 and at November 1, 2003, the balance of the consolidated allowance for doubtful accounts was $9.5 million.

Contingencies
As discussed in Note 13 to the consolidated financial statements, the Company is involved in various legal proceedings and other contingencies and the Company records liabilities for these types of matters in accordance with Statement of Financial Accounting Standards No. 5, Accounting for Contingencies (SFAS No. 5). SFAS No. 5 requires a liability to be recorded based on the Company’s estimates of the probable cost of the resolution of a contingency. The actual resolution of these contingencies may differ from the Company’s estimates and an appropriate adjustment to income could be required in a future period.

Recent Accounting Pronouncements

In April 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 generally requires gains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt. Extraordinary treatment is required for certain extinguishments as provided in APB No. 30, Reporting the Results of Operations. Accordingly, gains or losses from extinguishments of debt for fiscal years beginning after May 15, 2002 will not be reported as extraordinary items unless the extinguishment qualifies as an extraordinary item under the provisions of APB No. 30. Any gain or loss on extinguishment of debt previously classified as an extraordinary item in prior periods presented that does not meet the criteria of APB No. 30 for such classification will be reclassified to conform with the provisions of SFAS No. 145. During the fourth quarter of fiscal 2002, the Company refinanced its debt and wrote off $1.2 million ($0.8 million after tax) of unamortized deferred financing costs and classified the loss as an extraordinary item. The Company adopted SFAS No. 145 as of November 3, 2002. The Company determined that the write off of the unamortized deferred financing costs did not meet the criteria of APB No. 30 to be classified as extraordinary, and accordingly, the loss has been reclassified to other income, net in the accompanying fiscal 2002 statement of operations.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146

nullifies Emerging Issues Task Force (“EITF”) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002 with early application encouraged. The Company adopted SFAS No. 146 as of August 3, 2003, and the adoption of the statement did not have a significant impact on the Company’s financial position and results of operations.

During November 2002, the EITF reached a consensus on EITF Issue 00-21, Multiple-Deliverable Revenue Arrangements, which addresses how to account for arrangements that may involve the delivery or performance of multiple products, services, and/or rights to use assets. The final consensus will be applicable to agreements entered into in fiscal periods beginning after June 15, 2003, with early adoption permitted. The Company adopted EITF Issue 00-21 as of August 3, 2003, and the adoption did not have a significant impact on the Company’s financial position and results of operations.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition to SFAS No. 123’s fair value method of accounting for stock-based employee compensation. While the Statement does not amend SFAS No. 123 to require companies to account for employee stock options using the fair value method, the disclosure provisions of SFAS No. 148 are applicable to all companies with stock-based employee compensation, regardless of whether they account for that compensation using the fair value method of SFAS No. 123 or the intrinsic value method of APB No. 25, Accounting for Stock Issued to Employees. Effective February 2, 2003, the Company adopted the disclosure provisions of SFAS No. 148.

In January 2003, the FASB issued Financial Interpretation (“FIN”) No. 46, Consolidation of Variable Interest Entities. FIN No. 46 requires variable interest entities (“VIEs”) to be consolidated by their primary beneficiaries. A primary beneficiary is the party that absorbs a majority of the entity’s expected losses or residual benefits. FIN No. 46 is currently effective for all public companies with variable interests in special purpose entities, or SPEs, as of December 15, 2003. The effective date for application to all other types of VIEs is March 15, 2004. The Company is currently reviewing the provisions of FIN No. 46. The Company does not expect that the adoption will have a significant impact on the Company’s financial position and results of operations.

Legal Proceedings

without admitting any of the allegations against the Company or its officers, and agreed to pay $7.0 million for the dismissal of all claims, which is within our insurance coverage limits and has been agreed to by the Company’s insurance carriers. The settlement is subject to the approval of the court. Discovery in the consolidated cases is at a very early stage. Consequently, if the proposed settlement should not be approved by the court or implemented for any reason, at this time the Company is not able to predict whether it will incur any liability in excess of insurance coverages or to estimate the damages, or the range of damages, if any, that it might incur in connection with the lawsuit, or whether an adverse outcome could have a material adverse impact on the Company’s business, consolidated financial condition or results of operations.

exceed its estimate. The Company has made an accrual in the amount of $1.5 million to cover the estimated anticipated costs of remediation of these environmental issues. The Company does not believe that the remediation of the site will have a material adverse effect on its business, consolidated financial condition or results of operations. Findings of polychlorinated biphenyls and certain other heavy metals at the site are not consistent with the Company’s historical or ongoing operations conducted at the site. Thus, it appears that any contamination was likely produced by and/or brought onto the site by previous property owners/users or by a third party. The Company has an indemnity obligation from the immediate prior owner of the property with respect to environmental issues. The Company intends to identify previous property owners/users who might be culpable for the contamination and determine whether it is practical to seek contribution and indemnification for remediation costs. As with any dispute involving technical issues of expertise, however, these efforts could be very costly and time consuming. It is possible, therefore, that efforts to pursue previous property owners/users and/or potentially responsible parties may not be cost-effective for the Company.

Market Risk Disclosure

The Company is subject to market risk exposure related to changes in interest rates on its senior credit facility, which includes revolving credit notes and term notes. These instruments bear interest at a pre-agreed upon percentage point spread from either the prime interest rate or LIBOR. Under its senior credit facility, the Company may, at its option, fix the interest rate for certain borrowings based on a spread over LIBOR for 30 days to six months. At November 1, 2003, the Company had $123.8 million outstanding under its senior credit facility. Based on this balance, an immediate change of one percent in the interest rate would cause a change in interest expense of approximately $1.2 million on an annual basis. Based on November 2, 2002 outstanding floating rate debt, a one percent change in the interest rate would have caused a change in interest expense of approximately $1.7 million on an annual basis. The Company’s objective in maintaining these variable rate borrowings is the flexibility obtained regarding early repayment without penalties and lower overall cost as compared to fixed-rate borrowings.

Quarterly Financial Information
NCI Building Systems, Inc.
Dollars in thousands, except per share data


			First		Second		Third		Fourth
			Quarter		Quarter		Quarter		Quarter

FISCAL YEAR 2002
	Sales		$	228,565	$	213,224	$	257,837	$	253,816
	Gross profit		$	45,545	$	45,519	$	61,415	$	60,386
	Income before cumulative effect		$	3,090	$	4,817	$	12,570	$	10,837
	Income before cumulative effect per share:¹
		Basic	$	0.17	$	0.26	$	0.68	$	0.58
		Diluted	$	0.17	$	0.26	$	0.67	$	0.58
FISCAL YEAR 2003
	Sales		$	207,864	$	199,198	$	236,262	$	254,826
	Gross profit		$	43,881	$	41,600	$	53,308	$	58,730
	Income before cumulative effect		$	3,842	$	2,018	$	6,828	$	10,112
	Income before cumulative effect per share:¹
		Basic	$	0.21	$	0.11	$	0.36	$	0.53
		Diluted	$	0.20	$	0.11	$	0.36	$	0.53

The Company’s common stock is listed on the NYSE under the symbol “NCS.” As of January 16, 2004, there were 120 holders of record of the Company’s common stock. The Company has over 8,600 beneficial owners. The following table sets forth the quarterly high and low sale prices of the Company’s common stock, as reported by the NYSE, for the prior two years


								Transitional
	Balance					Adj. Balance		Impairment						Balance		Impairment		Balance
	Nov. 1, 2001		Allocation¹			Nov. 1, 2001		Charge			Other²			Nov. 2, 2002		Charge		Nov. 1, 2003

Metal building components	$	6,919	$	169,239		$	176,158	$	(57,052	)	$	(1,500	)	$	117,606	$	–	$	117,606
Engineered building systems		7,762		110,920			118,682		–			–			118,682		–		118,682
Metal coil coaters ³		–		92,428			92,428		(10,307	)		(162	)		81,959		–		81,959
Corporate		372,587		(372,587	)		–		–			–			–		–		–

Total	$	387,268	$	–		$	387,268	$	(67,359	)	$	(1,662	)	$	318,247	$	–	$	318,247


					Fiscal year ended...
		October 31, 2001			November 2, 2002			November 1, 2003

					(in thousands)
Current:
	Federal	$	15,319		$	18,392		$	13,882
	State		1,631			2,028			1,581

	Total current		16,950			20,420			15,463
Deferred:
	Federal		(734	)		(823	)		(606	)
	State		(65	)		(62	)		(99	)

	Total deferred		(799	)		(885	)		(705	)

Total provision		$	16,151		$	19,535		$	14,758


		November 2, 2002			November 1, 2003

		(in thousands)
DEFERRED TAX ASSETS:
	Inventory	$	1,627		$	1,523
	Bad debt reserve		1,992			2,709
	Accrued insurance reserves		2,624			2,487
	Warranty reserve		1,405			1,728
	Restructuring and impairment		617			791
	Accrued and deferred compensation		1,393			2,756
	Other reserves		568			1,115

Total deferred tax assets			10,226			13,109
DEFERRED TAX LIABILITIES:
	Depreciation and amortization		21,061			22,421
	Other		2,132			1,973

Total deferred tax liabilities			23,193			24,394
Net deferred tax liability		$	(12,967	)	$	(11,285	)


			Weighted Average	Weighted Average
Range of Exercise Prices	Number of Options		Remaining Life	Exercise Price

$8.38–14.25		166,900	2.8 years	$	13.34
$15.13–17.70		928,539	7.4 years	$	15.83
$18.00–28.13		836,790	6.7 years	$	21.21

		1,932,229


			Weighted Average
Range of Exercise Prices	Number of Options		Exercise Price

$8.38–14.25		163,900	$	13.34
$15.13–17.70		434,962	$	15.80
$18.00–28.13		473,195	$	22.77

		1,072,057

		¹ Allocation refers to the reclassification of goodwill from corporate to the metal building components, engineered building systems and metal coil coaters segments. SFAS No. 142 requires the review of prior acquisitions to determine reasonableness of goodwill. Prior to adoption of SFAS No. 142, goodwill resulting from acquisitions was considered on a consolidated basis.

		² Other refers to a purchase accounting adjustment to goodwill associated with a contingency that was resolved during fiscal 2002 relating to a specifically identified deferred tax asset from a prior acquisition.

		³ During fiscal year 2003, the Company determined that metal coil coaters should be a reportable segment. Metal coil coaters was previously included in the metal building components segment.


	Payments due by period

			Less than						More than
	Total		1 year		1-3 years		4-5 years		5 years

Long-term debt	$	248,750	$	6,250	$	18,750	$	12,500	$	211,250
Operating leases		18,994		5,049		6,560		3,464		3,921
Purchase obligations		–		–		–		–		–
Other long-term obligations¹		5,373		415		1,578		1,010		2,370
Total contractual
obligations	$	273,117	$	11,714	$	26,888	$	16,974	$	217,541


FISCAL YEAR 2002	High		Low		FISCAL YEAR 2003	High		Low

February 2	$	19.25	$	12.75	February 1	$	23.03	$	17.98
May 4	$	24.75	$	16.53	May 3	$	21.50	$	14.90
August	$	24.90	$	15.05	August 1	$	18.83	$	16.55
November 2	$	19.95	$	16.85	November 1	$	22.40	$	17.07