**EXHIBIT 13**

 

**ANNUAL REPORT**

 

Exhibit 13 isthe Corporation’s 2003 Annual Report to Stockholders.

 

This 10-KReport should be read only in conjunction with that Annual Report.

 

In the eventyou do not already have a copy of the Annual Report, one may be obtained bycontacting Ameron, attention; Corporate Secretary, Post Office Box 7007,Pasadena, California 91109-7007. The telephone number is (626) 683-4000.

 

Shareholdersmay also obtain a copy of the Form 10-K by accessing the Company website atwww.ameron.com.

 

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**2003FINANCIALSECTION**

 
| Selected  Consolidated Financial Information                                                | 22     |
|---------------------------------------------------------------------------------------------|--------|
|                                                                                        |   |
| Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 23     |
|                                                                                        |   |
| Consolidated  Statements of Income                                                          | 31     |
|                                                                                        |   |
| Consolidated Balance Sheets                                                                 | 32     |
|                                                                                        |   |
| Consolidated  Statements of Stockholders’ Equity                                       | 34     |
|                                                                                        |   |
| Consolidated  Statements of Comprehensive Income                                            | 34     |
|                                                                                        |   |
| Consolidated  Statements of Cash Flows                                                      | 35     |
|                                                                                        |   |
| Notes to  Consolidated Financial Statements                                                 | 36     |
|                                                                                        |   |
| Report of Independent  Auditors                                                             | 49     |
|                                                                                        |   |
| Management’s  Letter                                                                   | 49     |

 

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**SELECTED CONSOLIDATED FINANCIAL INFORMATION**

** **
|                                               |   | **Year ended  November 30,** |        |
|----------------------------------------------------|--------|------------------------------|-------------|
| **(Dollars in thousands, except per  share data)** |   | **2003**                     |        | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                                               |   |                         |        |   |   |   |   |   |   |   |   |
| **PER COMMON SHARE DATA(1)**                       |   |                         |        |   |   |   |   |   |   |   |   |
| Net income—basic                              |   | **$**                        | **3.77**    | ** ** | $ | 3.61 |   | $ | 3.58 |   | $ | 3.21 |   | $ | 2.79 |   |
| Net income—diluted                            |   | **3.67**                     | ** **  | 3.49 |   | 3.45 |   | 3.21 |   | 2.77 |   |
| Dividends                                          |   | **.76**                      | ** **  | .64 |   | .64 |   | .64 |   | .64 |   |
| Weighted-average shares (basic)                    |   | **7,925,229**                | ** **  | 7,772,032 |   | 7,742,690 |   | 7,893,132 |   | 7,992,474 |   |
| Weighted-average shares (diluted)                  |   | **8,149,460**                | ** **  | 8,052,164 |   | 8,048,588 |   | 7,905,026 |   | 8,046,496 |   |
| Stock price – high                            |   | **35.53**                    | ** **  | 38.74 |   | 38.94 |   | 21.50 |   | 23.88 |   |
| Stock price – low                             |   | **24.89**                    | ** **  | 22.26 |   | 17.03 |   | 16.10 |   | 17.35 |   |
| Price/earnings ratio (range)                       |   | **10-7**                     | ** **  | 11-6 |   | 11-5 |   | 7-5 |   | 9-7 |   |
| **OPERATING RESULTS**                              |   |                         | ** **  |   |   |   |   |   |   |   |   |
| Sales                                              |   | **$**                        | **600,495** | ** ** | $ | 539,473 |   | $ | 551,396 |   | $ | 550,661 |   | $ | 545,081 |   |
| Gross profit                                       |   | **166,488**                  | ** **  | 141,883 |   | 138,084 |   | 139,792 |   | 142,982 |   |
| Interest expense, net                              |   | **(6,645**                   | **)**       | (6,836 | ) | (10,213 | ) | (12,244 | ) | (12,938 | ) |
| Provision for income taxes                         |   | **(14,070**                  | **)**       | (14,454 | ) | (10,850 | ) | (8,448 | ) | (10,482 | ) |
| Net income                                         |   | **29,900**                   | ** **  | 28,059 |   | 27,741 |   | 25,345 |   | 22,273 |   |
| Net income/sales                                   |   | **5.0**                      | **%**       | 5.2 | % | 5.0 | % | 4.6 | % | 4.1 | % |
| Return on equity                                   |   | **12.8**                     | **%**       | 13.5 | % | 14.3 | % | 14.1 | % | 12.9 | % |
| **FINANCIAL CONDITION AT YEAR-END**                |   |                         | ** **  |   |   |   |   |   |   |   |   |
| Working capital                                    |   | **$**                        | **177,009** | ** ** | $ | 149,205 |   | $ | 155,356 |   | $ | 135,626 |   | $ | 123,748 |   |
| Property,   plant and equipment, net          |   | **150,586**                  | ** **  | 145,242 |   | 145,801 |   | 145,196 |   | 149,597 |   |
| Investments in joint ventures                      |   |                         | ** **  |   |   |   |   |   |   |   |   |
| Equity method                                      |   | **13,064**                   | ** **  | 12,940 |   | 12,793 |   | 15,786 |   | 17,126 |   |
| Cost method                                        |   | **5,479**                    | ** **  | 5,987 |   | 5,987 |   | 5,987 |   | 5,920 |   |
| Total assets                                       |   | **533,492**                  | ** **  | 462,942 |   | 485,080 |   | 478,449 |   | 470,569 |   |
| Long-term debt, less current portion               |   | **86,044**                   | ** **  | 102,823 |   | 137,197 |   | 140,718 |   | 135,237 |   |
| **CASH FLOW**                                      |   |                         | ** **  |   |   |   |   |   |   |   |   |
| Expenditures for property, plant and  equipment    |   | **$**                        | **17,107**  | ** ** | $ | 14,514 |   | $ | 19,297 |   | $ | 21,050 |   | $ | 19,672 |   |
| Depreciation and amortization                      |   | **18,371**                   | ** **  | 18,572 |   | 18,633 |   | 18,022 |   | 18,986 |   |

 

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***(1) Share and pershare data reflect a two-for-one stock split declared in 2003.***

 

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**MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

AmeronInternational Corporation (“Ameron” or the “Company”) is a multinationalmanufacturer of highly-engineered products and materials for the chemical,industrial, energy, transportation and infrastructure markets. Ameron is aleading producer of water transmission lines; high-performance coatings andfinishes for the protection of metals and structures; fiberglass-composite pipefor transporting oil, chemicals and corrosive fluids and specialized materialsand products used in infrastructure projects. The Company operates businessesin North America, South America, Europe, Australasia and Asia. The Company hasfour operating segments. The Performance Coatings & Finishes Groupmanufactures and markets high-performance industrial and marine coatings. TheFiberglass-Composite Pipe Group manufactures and markets filament-wound andmolded composite fiberglass pipe, tubing, fittings and well screens. The WaterTransmission Group manufactures and supplies concrete and steel pressure pipe,concrete non-pressure pipe, protective linings for pipe, and fabricated steelproducts. The Infrastructure Products Group manufactures and sells ready-mixconcrete, sand and aggregates, concrete pipe and culverts, and concrete andsteel lighting and traffic poles. The markets served by the PerformanceCoatings & Finishes Group and the Fiberglass-Composite Pipe Group areworldwide in scope. The Water Transmission Group serves primarily the westernU.S. The Infrastructure Products Group’s quarry and ready-mix business operatesexclusively in Hawaii, and poles are sold throughout the U.S. Ameron alsoparticipates in several joint-venture companies, directly in the U.S. and SaudiArabia, and indirectly in Kuwait and Egypt.

 

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

Management’sDiscussion and Analysis of Liquidity and Capital Resources and Results ofOperations are based upon the Company’s consolidated financial statements,which have been prepared in accordance with accounting principles generallyaccepted in the United States of America. The preparation of these financialstatements requires management to make certain estimates and assumptions thataffect the reported amounts of assets, liabilities, revenues and expenses, andrelated disclosure of contingent assets and liabilities during the reportingperiods. Management bases its estimates on historical experience and on variousother assumptions that are believed to be reasonable under the circumstances,the results of which form the basis for making judgments about the carryingvalues of assets and liabilities. Actual results could differ from thoseestimates.

 

TheCompany’s significant accounting policies are disclosed in Note 1 of Notes toConsolidated Financial Statements in the Company’s 2003 Annual Report.Management believes the following accounting policies affect the moresignificant estimates used in preparing the consolidated financial statements.

 

Theconsolidated financial statements include the accounts of Ameron and allwholly-owned subsidiaries. All material intercompany accounts and transactionshave been eliminated. The functional currencies for the Company’s foreignoperations are the applicable local currencies. The translation from theapplicable foreign currencies to U.S. dollars is performed for balance sheetaccounts using current exchange rates in effect at the balance sheet date andfor revenue and expense accounts using a weighted-average exchange rate duringthe period. The resulting translation adjustments are recorded in accumulatedother comprehensive loss. The Company advances funds to certain foreignsubsidiaries that are not expected to be repaid in the foreseeable future.Translation adjustments arising from these advances are also included inaccumulated other comprehensive loss. The timing of repayments of intercompanyadvances could impact the components of equity on the Company’s consolidatedbalance sheets but would not be expected to impact consolidated incomestatements. Additionally, earnings of foreign subsidiaries are often reinvestedoutside the U.S. Repatriation of such earnings could result in unrecognizedU.S. tax liability. Gains or losses resulting from foreign currencytransactions are included in other income.

 

Revenuefor the Performance Coatings & Finishes, Fiberglass-Composite Pipe andInfrastructure Products segments is recognized when risk of ownership and titlepass, primarily at the time goods are shipped, provided that an agreementexists between the customer and the Company, the price is fixed or determinableand collection is reasonably assured. In limited circumstances within thePerformance Coatings & Finishes Group, revenue recognition associated withshipment of coatings for marine dry dockings is delayed until product returnsare processed. Revenue is recognized for the Water Transmission Group primarilyunder the percentage-of-completion method, typically based on completed unitsof production, since products manufactured under enforceable and bindingconstruction contracts typically are designed for specific applications, arenot interchangeable between projects, and are not manufactured for stock. Insome cases, if products are manufactured for stock or are not related tospecific construction contracts, revenue is recognized under the same criteriaused by the other three segments. Revenue under the percentage-of-completionmethod is subject to a greater level of estimation, which affects the timing ofrevenue recognition, costs and profits. Estimates are reviewed on a consistentbasis and are adjusted periodically to reflect current expectations.

 

TheCompany expenses environmental clean-up costs related to existing conditionsresulting from past or current operations on a site-by-site basis. Liabilitiesand costs associated with these matters, as well as other pending litigationand asserted claims arising in the ordinary course of business, requireestimates of future costs and judgements based on the knowledge and experienceof management and its legal counsel. When estimates of the Company’s exposurecan be reasonably estimated and are probable, liabilities and expenses arerecorded. The ultimate resolution of any such exposure to the Company maydiffer due to subsequent developments.

 

Inventoriesare stated at the lower of cost or market with cost determined principally onthe first-in, first-out (FIFO) method. Certain steel inventories used by theWater Transmission Group are valued using the last-in, first-out (LIFO) method.Reserves are established for excess, obsolete and rework inventories based onage, estimates of salability and forecasted future demand. Management recordsan allowance for doubtful accounts receivable based on historical experienceand expected trends. A significant reduction in demand or significant worseningof customer credit quality could materially impact the Company’s consolidatedfinancial statements. Property, plant and equipment is stated 

 

23

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onthe basis of cost and depreciated principally on a straight-line method basedon the estimated useful lives of the related assets, generally two to 40 years.

 

Investmentsin unconsolidated joint ventures or affiliates (“joint ventures”) over whichthe Company has significant influence are accounted for under the equity methodof accounting, whereby the investment is carried at the cost of acquisition,plus the Company’s equity in undistributed earnings or losses sinceacquisition. Investments in joint ventures over which the Company does not havethe ability to exert significant influence over the investee’s operating andfinancing activities are accounted for under the cost method of accounting. TheCompany’s investment in TAMCO is accounted for under the equity method.Investments in Ameron Saudi Arabia, Ltd., Bondstrand, Ltd. and Oasis-Ameron,Ltd. are accounted for under the cost method due to management’s currentassessment of the Company’s influence over these joint ventures.

 

TheCompany reviews long-lived assets for impairment whenever events or changes incircumstances indicate that the carrying value of such assets may not berecoverable. If the estimated future, undiscounted cash flows from the use ofan asset are less than its carrying value, a write-down is recorded to reduce therelated assets to estimated fair value.

 

TheCompany is self insured for a portion of the losses and liabilities primarilyassociated with workers’ compensation claims and general, product and vehicleliability. Losses are accrued based upon the Company’s estimates of theaggregate liability for claims incurred using historical experience and certainactuarial assumptions followed in the insurance industry. The estimate of selfinsurance liability includes an estimate of incurred but not reported claims, basedon data compiled from historical experience. Actual experience could differsignificantly from these estimates and could materially impact the Company’sconsolidated financial statements.

 

TheCompany follows the guidance of Statement of Financial Accounting Standards(“SFAS”) No. 87, “Employers’ Accounting for Pensions,”and SFAS No. 106,“Employers’ Accounting for Postretirement Benefits Other Than Pensions,” whenaccounting for pension and other postretirement benefits. Under theseaccounting standards, assumptions are made regarding the valuation of benefitobligations and, in certain cases the performance of plan assets that arecontrolled and invested by third-party fiduciaries. Delayed recognition ofdifferences between actual results and expected or estimated results is aguiding principle of these standards. Such delayed recognition provides agradual recognition of benefit obligations and investment performance over theworking lives of the employees who benefit under the plans, based on variousassumptions. Unforecasted program changes, including termination, freezing ofbenefits or acceleration of benefits, could result in an immediate recognitionof unrecognized benefit obligations; and such recognition could materiallyimpact the Company’s consolidated financial statements. Assumed discount ratesare used to calculate the present value of benefit payments which are projectedto be made in the future, including projections of increases in employees’annual compensation and health care costs. Management also projects the futurereturn on invested assets based principally on prior performance and futureexpectations. These projected returns reduce the net benefit costs the Companyrecords in the current period. Management consults with actuaries whendetermining these assumptions.

 

During2003, the Company changed the assumed discount rate, expected rate of return onassets and projected rates of increase in compensation levels and health carecosts. The discount rate is based on market interest rates. At November 30,2003, the Company decreased the discount rate from 6.75% to 6.00% as a resultof the then current market interest rates on long-term, fixed-income debtsecurities of highly-rated corporations. In estimating the expected return onassets, the Company considers past performance and future expectations forvarious types of investments as well as the expected long-term allocation ofassets. At November 30, 2003, the Company reduced the expected long-term rateof return on assets assumption from 9.75% to 8.75% to reflect reducedexpectations for future returns in the equity markets. In projecting the rateof increase in compensation levels, the Company considers movements ininflation rates as reflected by market interest rates. At November 30, 2003,the Company decreased the assumed annual rate of compensation increase from4.25% to 3.50%. In selecting the rate of increase in health care costs, theCompany considers past performance and forecasts of future health care costtrends. At November 30, 2003, the Company increased the rate of increase inhealth care costs from 9.00% to 10.00%, decreasing ratably until reaching 5.00%in 2008 and beyond.

 

Differentassumptions would impact the Company’s projected benefit obligations and annualnet periodic benefit costs related to pensions, and the accrued other benefitobligations and benefit costs related to postretirement benefits. The followingreflects the impact associated with a change in certain assumptions (inthousands):

 
|                                    |   | **1% Increase**                                   |    | **1% Decrease**                             |   |
|-----------------------------------------|--------|---------------------------------------------------|---------|---------------------------------------------|--------|
|                                    |   | **Increase  (Decrease)  in Benefit  Obligations** |    | **Increase  (Decrease)  in Benefit  Costs** |   | **Increase  (Decrease)  in Benefit  Obligations** |   | **Increase********(Decrease)********in Benefit********Costs** |   |
|                                    |   |                                              |    |                                        |   |
|                                    |   |                                              |    |                                        |   |
|                                    |   |                                              |    |                                        |   |
| Discount Rate:                          |   |                                              |    |                                        |   |   |   |   |   |
| Pensions                                |   | $                                                 | (24,989 | )                                           | $      | (3,130 | ) | $ | 30,639 |   | $ | 3,849 |   |
| Other postretirement benefits           |   | (272                                              | )       | (13                                         | )      | 319 |   | (3 | ) |
| Expected rate of return on assets       |   | Not Applicable                                    |    | (1,303                                      | )      | Not Applicable |   | 1,303 |   |
| Rate of increase in compensation levels |   | 4,731                                             |    | 1,032                                       |   | (4,274 | ) | (889 | ) |
| Rate of increase in health care costs   |   | 111                                               |    | 16                                          |   | (96 | ) | (18 | ) |
|                                         |        |                                                   |         |                                             |        |  |  |  |  |  |  |  |  |

 

Additionalinformation regarding pensions and other postretirement benefits is disclosedin Note 15 of Notes to Consolidated Financial Statements in the Company’s 2003Annual Report.

 

Managementincentive compensation is accrued based on current estimates of the Company’sability to achieve short-term and long-term performance targets.

 

Deferredincome tax assets and liabilities are computed for differences between thefinancial statement and income tax bases of assets and 

 

24

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liabilities.Such deferred income tax asset and liability computations are based on enactedtax laws and rates applicable to periods in which the differences are expectedto reverse. No deferred taxes have been provided for the undistributed earningsof Ameron’s foreign subsidiaries that are expected to be permanently reinvestedoffshore. Valuation allowances are established, when necessary, to reducedeferred income tax assets to the amounts expected to be realized. Quarterlyincome taxes are estimated based on the mix of income by jurisdictionforecasted for the full fiscal year. The Company believes that it hasadequately provided for tax-related matters. The Company is subject toexamination by taxing authorities in various jurisdictions. Matters raised uponaudit may involve substantial amounts and could be material. Managementconsiders it unlikely that resolution of any such matters would have a materialadverse effect upon the Company’s consolidated financial statements.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

During2003, the Company generated $43.2 million of cash from operating activitiescompared to $54.6 million in the same period in 2002. The lower operating cashflow in 2003 was due to an increase in operating assets partially offset by anincrease in operating liabilities. Much of the asset change came from higherreceivables and higher other assets. Receivables grew due to increased salesand the timing of collections. Other assets rose due to an increase in the cashsurrender value of life insurance policies related to executive benefit plansand prepaid costs related to pensions. Operating liabilities increased duepartly to higher pension liabilities and also to deferred payments associatedwith the settlement of the Central Arizona Project lawsuits reached in January2003.

 

Netcash used in investing activities totaled $13.9 million in 2003, compared to$14.0 million in 2002. Net cash used in investing activities consisted ofproceeds from the sale of assets, including $3.0 million from the sale of theCompany’s interest in a Mexican coatings venture in 2003, offset by capitalexpenditures which were primarily for normal replacement and upgrades ofmachinery and equipment. Additionally, a coatings distribution warehouse waspurchased in 2003 for $1.3 million. During the fiscal year ending November 30,2004, the Company anticipates spending between $20 and $30 million on capitalexpenditures. Capital expenditures are expected to be funded by existing cashbalances, cash generated from operations or additional borrowings.

 

Netcash used in financing activities was $19.8 million in 2003, compared to $41.9million in 2002. The net cash used in 2003 consisted of the net repayment ofdebt of $18.8 million, debt issuance costs of $1.6 million, payment of commonstock dividends totaling $6.1 million, offset by $6.6 million from the issuanceof common stock related to the exercise of stock options.

 

InJanuary 2003, the Company finalized a three-year, $100 million revolving creditfacility with six banks (the “Revolver”). Under the Revolver, the Company may,at its option, borrow at floating interest rates based on specified marginsover money market rates, at any time until January 2006, when all borrowingsunder the Revolver must be repaid. Also in January 2003, the Company issued $50million of notes payable to an insurance company at a fixed rate of 5.36%.These fixed-rate notes are payable $10 million per year beginning in November2005, with a final maturity in November 2009. The Revolver and the 5.36% notespayable replaced a $150 million revolving credit facility that was maintainedat November 30, 2002.

 

Thelending agreements contain various restrictive covenants, including therequirement to maintain specified amounts of net worth and restrictions on cashdividends, borrowings, liens, investments and guarantees. The Company isrequired to maintain consolidated net worth of $181.5 million plus 50% of netincome and 75% of proceeds from any equity issued after January 24, 2003. TheCompany’s consolidated net worth exceeded the covenant amount by $71.1 millionas of November 30, 2003. The Company is required to maintain a consolidatedleverage ratio of consolidated funded indebtedness to earnings before interest,taxes, depreciation and amortization (“EBITDA”) of no more than 3 times. As ofNovember 30, 2003, the Company maintained a consolidated leverage ratio of 1.43times EBITDA. The Revolver and the notes payable require that the Companymaintain qualified consolidated tangible assets at least equal to theoutstanding secured funded indebtedness. As of November 30, 2003 qualifyingtangible assets equaled 1.89 times funded indebtedness. Under the mostrestrictive fixed charge coverage ratio, the sum of EBITDA, rental expense andcash taxes must be at least 1.5 times the sum of interest expense, rentalexpense, dividends and scheduled funded debt payments. As of November 30, 2003,the Company maintained a ratio of 2.38.

 

Cashand cash equivalents at November 30, 2003 totaled $20.4 million, an increase of$10.0 million from November 30, 2002. At November 30, 2003, the Company hadtotal debt outstanding of $94.4 million and approximately $104 million inunused committed and uncommitted credit lines available from foreign anddomestic banks. The Company’s highest borrowing and the average borrowinglevels during 2003 were $166.6 million and $107.7 million, respectively. Thehighest borrowing was $50.0 million higher than necessary to fund operationsdue to the refinancing in 2003, as the new debt was issued prior to therepayment of the replaced debt.

 

Managementbelieves that cash flows from operations and current cash balances, togetherwith currently available lines of credit will be sufficient to meet operatingrequirements in 2004. Cash available from operations could be affected by anygeneral economic downturn or any downturn or adverse changes in the Company’sbusiness, such as loss of customers or significant raw material price increases.Management believes it is unlikely that business or economic conditions willworsen or that costs will increase sufficiently to impact short-term liquidity.

 

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TheCompany’s contractual obligations and commercial commitments at November 30,2003 are summarized as follows (in thousands):

 
|                              |   | **Payments  Due by Period** |    |
|-----------------------------------|--------|-----------------------------|---------|
| **Contractual Obligations**       |   | **Total**                   |    | **Less than  1 year** |   | **1-3  years** |   | **3-5  years** |   | **After 5  years** |   |
|                              |   |                        |    |   |   |   |   |   |   |   |   |
| Long-Term Debt (a)                |   | $                           | 94,377  |   | $ | 8,333 |   | $ | 40,344 |   | $ | 20,000 |   | $ | 25,700 |   |
|                              |   |                        |    |   |   |   |   |   |   |   |   |
| Operating Leases                  |   | 36,963                      |    | 4,694 |   | 6,385 |   | 4,147 |   | 21,737 |   |
|                              |   |                        |    |   |   |   |   |   |   |   |   |
| Total Contractual Obligations (b) |   | $                           | 131,340 |   | $ | 13,027 |   | $ | 46,729 |   | $ | 24,147 |   | $ | 47,437 |   |

 
|                             |   | **Commitments  Expiring Per Period** |   |
|----------------------------------|--------|--------------------------------------|--------|
| **Commercial Commitments**       |   | **Total**                            |   | **Less than  1 year** |   | **1-3  years** |   | **3-5  years** |   | **After 5  years** |   |
| Standby Letters of Credit (c)    |   | $                                    | 2,150  |   | $ | 2,150 |   | $ | — |   | $ | — |   | $ | — |   |
|                             |   |                                 |   |   |   |   |   |   |   |   |   |
| Total Commercial Commitments (b) |   | $                                    | 2,150  |   | $ | 2,150 |   | $ | — |   | $ | — |   | $ | — |   |

 

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(a)          Included in long-term debt is $3,677outstanding under a revolving credit facility, due in 2006, supported by theRevolver.

(b)         The Company has no capitalized leaseobligations, unconditional purchase obligations, or standby repurchaseobligations.

(c)          Not included are standby letters of credittotaling $16,065 supporting industrial development bonds with a principal of$15,700. The principal amount of the industrial development bonds is includedin long-term debt.

 

**RESULTS OF OPERATIONS: 2003 COMPARED WITH2002**

 

***General***

 

Netincome totaled $29.9 million, or $3.67 per diluted share, on sales of $600.5million for the year ended November 30, 2003, compared to net income of $28.1million, or $3.49 per diluted share, on sales of $539.5 million for the sameperiod in 2002. All operating segments had higher sales. The PerformanceCoatings & Finishes and Fiberglass-Composite Pipe Groups had higher segmentincome, while the Water Transmission and Infrastructure Products Groups hadlower segment income. The increase in net income came from higher sales andhigher gross profit, offset by higher selling, general and administrativeexpenses and lower equity in earnings of TAMCO.

 

***Sales***

 

Salesincreased by $61.0 million in 2003. While all operating segments improved, thelargest gains came from the Company’s Fiberglass-Composite Pipe and the WaterTransmission businesses. The Fiberglass-Composite Pipe Group benefited fromstrong demand in Asia for fiberglass piping for construction of offshore oiland marine vessels, and the Water Transmission Group’s increase came from thefabrication of steel pilings for the San Francisco/Oakland Bay Bridge.

 

PerformanceCoatings & Finishes’ sales increased by $7.0 million due to theappreciation of foreign currencies relative to the U.S. dollar. Sales in localcurrencies by operations outside the U.S. were relatively flat, while sales inthe U.S. were lower.  Sales ofprotective coatings in the U.S. declined due to continued sluggishness in U.S.chemical, industrial and marine markets caused by general economic conditions.The industrial markets in Europe were similarly sluggish. However, theinternational demand for offshore and marine coatings improved in 2003. Futureimprovements by the group remain dependent on increased spending in worldwideindustrial, marine and offshore markets, which appear to be strengthening. Amarket improvement should bode well for the Performance Coatings & FinishesGroup.

 

Fiberglass-CompositePipe’s sales increased by $26.2 million due primarily to the strength of Asianoperations and partly to the impact of favorable foreign exchange rates. Asianoperations benefited from the strong worldwide demand for oil tankers andoffshore production vessels driven by high oil prices. The industrial markets inthe U.S. and Europe remained depressed due to general economic conditions.Sales of onshore oilfield piping improved during 2003 as oil prices remained ata relatively high level and oilfield spending increased. The outlook for theFiberglass-Composite Pipe Group is positive and improving.

 

TheWater Transmission Group’s sales increased in 2003 by $20.5 million due tosales of steel pilings for the San Francisco/Oakland Bay Bridge. Sales ofconcrete and steel pipe for fresh and waste water applications declined duringthe year due to a cyclical slowdown in the water market in the western U.S.Revenue is recognized in the Water Transmission Group primarily under thepercentage-of-completion method and is subject to a certain level ofestimation, which affects the timing of revenue recognition, costs and profits.Estimates are reviewed on a consistent basis and are adjusted when actualresults are expected to significantly differ from those estimates. WaterTransmission’s year-end backlog was lower than at the end of 2002, reflectingthe recent lull in water projects in the western U.S.  The business may be unable to sustain the unusually high level ofthe last several years in 2004; however, the future outlook for the WaterTransmission Group remains positive.

 

26

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InfrastructureProducts’ sales increased by $6.9 million due to strong housing and commercialconstruction spending, which was spurred by low interest rates. Ameron’sHawaiian operations benefited from improved demand for ready-mix concrete andconcrete pipe used for public infrastructure, housing and militaryconstruction. Ameron’s pole business had higher sales of concrete poles used instreet lighting, primarily associated with housing starts. Sales of steeltraffic poles declined due to the lack of steel tubes. The outlook for theInfrastructure Products Group remains favorable.

 

***Gross Profit***

 

Grossprofit in 2003 was $166.5 million, or 27.7% of sales, compared to gross profitof $141.9 million, or 26.3% of sales, in 2002. Gross profit increased $24.6million due to higher sales and improved margins. Overall margins improvedprimarily due to a change in product mix as the proportion of higher-marginfiberglass-pipe sales increased.

 

Grossprofit of the Performance Coatings & Finishes Group increased by $2.8million, with $2.0 million from higher profit on increased sales and $.8million from higher margins. Margins improved due to better inventorymanagement in 2003, with lower reserves needed for obsolete and slow-movinginventory.

 

TheFiberglass-Composite Pipe Group’s gross profit increased $14.3 million in 2003.The increase was based almost equally on higher sales and higher margins. Grossprofit margins improved due to lower raw material costs of $2.0 million, andimproved plant efficiencies of $5.2 million. Plant efficiencies improved due tomore balanced use of capacity and cost containment programs initiated in 2002.

 

Grossprofit of the Water Transmission Group increased $4.2 million due to highersales. However, profit margins decreased, offsetting the increase in grossprofit by approximately $1.0 million. Margins were impacted by a change inproduct mix in 2003 due to the higher level of lower-margin steel pilings. Thesupply of steel pilings for the San Francisco/Oakland Bay Bridge is roughly 50%completed. The balance of the pilings are expected to be supplied in 2004, thusmargins in 2004 are expected to be similarly impacted as in 2003.

 

TheInfrastructure Products Group’s gross profit increased $1.1 million, onslightly lower margins, due to higher sales. Margins declined as the mix ofconcrete pole sales included a higher proportion of lower-margin, smallerpoles.

 

Additionally,gross profit was $2.1 million higher in 2003 due primarily to the establishmentin 2002 of reserves associated with LIFO accounting of certain steelinventories and certain slow-moving fiberglass-pipe inventories which did notrepeat in 2003.

 

***Selling, General and AdministrativeExpenses***

 

Selling,general and administrative (“SG&A”) expenses totaled $127.4 million, or21.2% of sales, in 2003, compared to $105.9 million, or 19.6%, in 2002.SG&A increased $21.5 million due to higher pension costs of $9.6 millionand higher costs for third-party insurance coverage of $2.9 million.Additionally, SG&A in 2003 included higher new product development andmarketing costs of $3.5 million, higher employee benefit costs of $2.8 million,higher legal fees of $1.4 million and higher marketing costs associated withhigher sales of $.7 million. The appreciation of foreign currencies increasedSG&A of the Company’s foreign operations by about $4.7 million in 2003;however, the increase was more than offset by the estimated impact of costreduction programs initiated in 2002. Legal fees were higher due to asbestosand silica claims and due to lower recovery related to the Central ArizonaProject lawsuits. In 2003, $1.0 million was recovered representing amountsagreed to be reimbursed to the Company by its own and a supplier’s insurancecompanies for past legal fees and costs in excess of the negotiated settlementof the Central Arizona Project lawsuits reached in January 2003. The resolutionof the lawsuit enabled the reversal in 2002 of reserves totaling $1.7 million.Pension and insurance costs are expected to be stable in 2004.

 

***Equity in Earnings of Joint Venture andOther Income***

 

Equityin earnings of joint venture decreased to $.7 million in 2003 from $3.6 millionin 2002. Equity income declined due to TAMCO, Ameron’s 50%-owned mini-mill inCalifornia. Ameron’s equity in TAMCO’s earnings decreased as TAMCO sufferedthroughout 2003 from higher energy and scrap costs. Energy costs reflected thelingering impact of California’s electricity crisis. Scrap costs rose due todemand for Asian consumption. TAMCO is increasing pricing to recoup these costincreases, and operating results for TAMCO are expected to improve in 2004.

 

Otherincome increased to $10.9 million in 2003 from $9.8 million in 2002. Otherincome included earnings from investments accounted for under the cost method,royalties and fees from licensees, foreign currency transaction gains andlosses, and other miscellaneous income. Included in 2003 was a gain of $2.5million on the sale of Ameron’s minority interest in a Mexican coatingsventure. Income from investments accounted for under the cost method increasedfrom $5.9 million in 2002 to $6.3 million in 2003. The increase was dueprimarily to higher dividends received from Ameron’s fiberglass-pipe jointventure in Saudi Arabia. The near-term outlook for Ameron’s Saudi Arabian jointventures is uncertain given the competitive environment facing each business.

 

***Interest***

 

Interestexpense totaled $6.6 million in 2003, compared to $6.8 million in 2002. Thedecrease reflected lower average borrowing levels in 2003 offset by the higherinterest on the fixed-rate notes placed early in 2003.

 

***Provision for Income Taxes***

 

Theprovision for income taxes in 2003 was $14.1 million, a decrease of $.4 millionfrom 2002. The effective tax rate decreased to 32% in 2003 from 34% in 2002.The effective tax rate was lower due to the increase of foreign profits,especially from Asia, and lower foreign income tax rates.

 

27

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**RESULTS OF OPERATIONS: 2002 COMPARED WITH2001**

 

***General***

 

Netincome totaled $28.1 million, or $3.49 per diluted share, on sales of $539.5million for the year ended November 30, 2002, compared to net income of $27.7million, or $3.45 per diluted share, on sales of $551.4 million for the sameperiod in 2001. Higher segment income from the Infrastructure Products Groupmore than offset lower segment income from the other three groups. The overallimprovement in net income came primarily from higher operating margins, higherequity income and lower interest expense.

 

***Sales***

 

Salesdecreased by $11.9 million in 2002 primarily due to the sluggishness in U.S.and European chemical and industrial markets, as well as softening in theworldwide oilfield market, that negatively impacted the Company’sFiberglass-Composite Pipe and Performance Coatings & Finishes Groups. Thestrong U.S. housing market and continued infrastructure spending helped boostsales of the Water Transmission and Infrastructure Products Groups.

 

PerformanceCoatings & Finishes’ sales decreased by $5.4 million because of the declinein sales of high-performance protective coatings by the Company’s U.S. andEuropean operations due to general economic conditions. Market demand remainedweak throughout 2002. Sales of light-industrial finishes in Australia and NewZealand were higher, reflecting improved economic conditions.

 

TheFiberglass-Composite Pipe Group’s sales decreased by $18.5 million in 2002,compared to 2001, due to sluggishness in domestic and European industrial andfuel-handling markets, as well as softening in the worldwide oilfield market.Demand for oilfield piping remained lower throughout the year because of lowerspending associated with uncertainty regarding the sustainability of oilprices. Additionally, Ameron’s U.S. industrial business completed deliveries ofa large water pipeline for a project in California during 2001 that did notrepeat in 2002.

 

TheWater Transmission Group had $1.8 million higher sales in 2002 than in 2001,primarily as a result of a major sewer pipe project in Southern California anddemand for water piping to meet the needs of population growth, infrastructurerehabilitation and the energy markets. During 2002, the Water TransmissionGroup received a $57 million contract to provide steel pilings for therenovation of the San Francisco / Oakland Bay Bridge. The project did notmaterially impact 2002.

 

TheInfrastructure Products Group completed 2002 with $9.8 million higher sales.Ameron’s Hawaiian operations benefited from the continued strength ofresidential, military and road construction in Hawaii. Sales of poles increasedas low interest rates continued to drive the strong U.S. housing market.

 

***Gross Profit***

 

Grossprofit in 2002 was $141.9 million or 26.3% of sales, compared to gross profitof $138.1 million or 25.0% of sales in 2001. Gross profit would have declinedan estimated $3.0 million due to lower sales; however, the decline was morethan offset by profits associated with higher margins, totaling about $6.8million. Gross margins increased due a to change in product and project mix,lower raw material costs and improved plant utilization.

 

PerformanceCoatings & Finishes’ benefited from productivity enhancements, as well asfavorable raw material costs. Likewise, margins of the Fiberglass-CompositePipe Group improved as a result of profitability enhancements, favorableproduct and project mix and lower raw material costs. Margins of the WaterTransmission Group declined due to unfavorable product and project mix and productiondelays associated with the San Francisco/Oakland Bay Bridge. InfrastructureProducts had higher margins as a result of the better product mix, increasedplant utilization and more consistent production by the new concrete pole plantin Alabama.

 

***Selling, General and AdministrativeExpenses***

 

Selling,general and administrative expenses totaled $105.9 million or 19.6% of sales in2002, compared to $101.8 million or 18.5% in 2001. The $4.1 million increase inexpenses was due primarily to higher pension costs of approximately $4.9million, and severance and productivity enhancement costs for the U.S. andEuropean Fiberglass-Composite Pipe operations and U.S. Performance Coatings& Finishes operation of $2.1 million . Partially offsetting the increaseswas a reversal of $1.7 million of reserves previously established for theCentral Arizona Project lawsuit, based on the settlement reached in early 2003.

 

***Equity in Earnings of Joint Venture andOther Income***

 

Equityin earnings of joint venture increased to $3.6 million in 2002 from $2.3million in 2001. Equity income improved as TAMCO benefited from continueddemand for rebar in the western U.S. and stable energy supplies.

 

Otherincome included earnings from investments accounted for under the cost method,royalties and fees from licensees, foreign currency transaction gains andlosses, and other miscellaneous income. Other income decrease to $9.8 millionfrom $10.3 million in 2001 primarily due to lower royalties and fees. Incomefrom investments accounted for under the cost method decreased from $6.3million in 2001 to $5.9 million in 2002. The decrease was due primarily toreduced dividends from Ameron’s coatings ventures in Mexico and Saudi Arabia.

 

***Interest***

 

Interestexpense totaled $7.0 million in 2002, compared to $10.5 million in 2001. Thedecrease reflected lower rates and lower average borrowing levels in 2002 thanin 2001.

 

***Provision for Income Taxes***

 

Theeffective tax rate increased to 34% in 2002 from 28% in 2001. The provision forincome taxes in 2002 was $14.5 million, an increase of $3.6 million from 2001.In 2001, the Company recorded a $4.0 million benefit from research anddevelopment credits related to the 1990 through 2000 tax years, which did notrepeat in 2002.

 

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**OFF-BALANCE SHEET FINANCING**

 

TheCompany does not have any off-balance sheet financing, other than listed in theliquidity and capital resources section herein. All the Company’s subsidiariesare included in the financial statements, and the Company does not haverelationships with any special purpose entities.

 

**MARKET RISKS**

 

***Foreign Currency Risk***

 

TheCompany operates internationally, giving rise to exposure to market risks fromchanges in foreign exchange rates. From time to time, the Company borrows invarious currencies to reduce the level of net assets subject to changes inforeign exchange rates. In addition, the Company purchases foreign exchangeforward and option contracts to hedge firm commitments, such as receivables andpayables, denominated in foreign currencies. The Company does not use thecontracts for speculative or trading purposes. At November 30, 2003, theCompany had 27 foreign currency forward contracts expiring at various datesthrough May 2004, with an aggregate face value and fair value of $9.4 millionand $9.5 million, respectively. Such instruments are carried at fair value,with related adjustments recorded within other income.

 

***Debt Risk***

 

TheCompany has variable-rate, short-term and long-term debt as well as fixed-rate,long-term debt. The fair value of the Company’s fixed-rate debt is subject tochanges in interest rates. The estimated fair value of the Company’svariable-rate debt approximates the carrying value of the debt since thevariable interest rates are market-based, and the Company believes such debtcould be refinanced on materially similar terms. The Company is subject to theavailability of credit to support new requirements, to refinance amortizinglong-term debt and to refinance short-term debt.

 

Asof November 30, 2003, the estimated fair value of notes payable by the Companytotaling $25.0 million, with a fixed rate of 7.92%, was $27.1 million. TheCompany is required to repay these notes in annual installments of $8.3 millionfrom 2004 to 2006, inclusive. As of November 30, 2003, the estimated fair valueof notes payable by the Company totaling $50.0 million, with a fixed rate of5.36%, was $50.4 million. The Company is required to repay these notes inannual installments of $10.0 million from 2005 to 2009, inclusive. The Companyhad $7.2 million of variable-rate industrial development bonds payable at arate of 1.20% as of November 30, 2003, payable in 2016. The Company also had$8.5 million of variable-rate industrial development bonds payable at a rate of1.35% as of November 30, 2003, payable in 2021. As of November 30, 2003, theCompany borrowed $3.7 million under a revolving credit facility supported bythe Revolver which permits borrowings up to $100 million through January, 2006.The average interest rate of such borrowings was 4.75% as of November 30, 2003.

 

**CONTINGENCIES**

 

TheCompany is one of numerous defendants in various asbestos-related personalinjury lawsuits. These cases generally seek unspecified damages forasbestos-related diseases based on alleged exposure to certain productspreviously manufactured by the Company and others, and at this time the Companyis generally not aware of the extent of injuries allegedly suffered by theindividuals or the facts supporting the claim that injuries were caused by theCompany’s products. Based upon the information available to it at this time,the Company is not in a position to evaluate its potential exposure, if any, asa result of such claims. Hence, no amounts have been accrued for losscontingencies related to these lawsuits in accordance with SFAS No. 5,“Accounting for Contingencies.” The Company continues to vigorously defend allsuch lawsuits. As of November 30, 2003, the Company was a defendant inasbestos-related cases involving 17,447 claimants, compared to 8,382 claimantsas of November 30, 2002. The Company is not in a position to estimate thenumber of additional claims that may be filed against it in the future. For thefiscal year ended November 30, 2003, there were new claims involving 9,279claimants, dismissals and/or settlements involving 211 claimants and judgmentsinvolving 3 claimants. Net costs and expenses incurred by the Company for thefiscal year ended November 30, 2003 in connection with asbestos-related claimswere less than $.6 million.

 

TheCompany is one of numerous defendants in various silica-related personal injurylawsuits. These cases generally seek unspecified damages for silica-relateddiseases based on alleged exposure to certain products previously manufacturedby the Company and others, and at this time the Company is not aware of theextent of injuries allegedly suffered by the individuals or the factssupporting the claim that injuries were caused by the Company’s products. Basedupon the information available to it at this time, the Company is not in aposition to evaluate its potential exposure, if any, as a result of theseclaims. Hence, no amounts have been accrued for loss contingencies related tothese lawsuits in accordance with SFAS No. 5. The Company continues tovigorously defend all such lawsuits. As of November 30, 2003, the Company was adefendant in silica-related cases involving 6,847 claimants, compared to 48claimants as of November 30, 2002. The Company is not in a position to estimatethe number of additional claims that may be filed against it in the future. Forthe fiscal year ended November 30, 2003, there were new claims involving 6,880claimants, dismissals and/or settlements involving 81 claimants and nojudgments. Net costs and expenses incurred by the Company for the fiscal yearended November 30, 2003 in connection with silica-related claims were about $.3million.

 

Inaddition, certain other claims, suits and complaints that arise in the ordinarycourse of business, have been filed or are pending against the Company.Management believes that these matters are either adequately reserved, coveredby insurance, or would not have a material effect on the Company’s financialposition or its results of operations if disposed of unfavorably.

 

TheCompany is subject to federal, state and local laws and regulations concerningthe environment and is currently participating in administrative proceedings atseveral sites under these laws. While the Company finds it difficult toestimate with any certainty the total cost of remediation at the several sites,on the basis of currently available information and reserves provided, theCompany believes that the outcome of such environmental regulatory proceedingswill not have a material effect on the Company’s financial position or itsresults of operations.

 

29

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**CONTROLS AND PROCEDURES**

 

The Company carried out an evaluation, under the supervision and withthe participation of the Company’s management, including the Company’s ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of thedesign and operation of the Company’s disclosure controls and procedures as ofNovember 30, 2003 pursuant to Exchange Act Rule 13a-14.  Based upon that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures are effective in timely alerting them tomaterial information relating to the Company (including its consolidated subsidiaries)required to be included in the Company’s periodic Securities and ExchangeCommission filings.  No significantchanges were made in the Company’s internal controls or in other factors thatcould significantly affect these controls subsequent to November 30, 2003.

 

**NEW ACCOUNTING PRONOUNCEMENTS**

 

The Financial Accounting Standards Board (“FASB”) issued FASBInterpretation (“FIN”) No. 46, “Consolidation of Variable Interest Entities” inJanuary 2003, and issued a revision in December 2003. FIN No. 46 clarifies theapplication of Accounting Research Bulletin No. 51, “Consolidated FinancialStatements,” and addresses consolidation by business enterprises of variableinterest entities. FIN No. 46 requires existing unconsolidated variableinterest entities to be consolidated by their primary beneficiaries if theentities do not effectively disperse risk among the parties involved. FIN No.46 also enhances the disclosure requirements related to variable interestentities. This statement is effective for the Company for variable interestentities in the quarter ending May 31, 2004. The adoption of FIN No. 46 is notexpected to have a material impact on the Company’s consolidated financialstatements.

 

InApril 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 onDerivative Instruments and Hedging Activities.” SFAS No. 149 amends andclarifies financial accounting and reporting for derivative instruments underSFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.”SFAS No. 149 requires that contracts with comparable characteristics beaccounted for similarly. In particular, SFAS No. 149 (1) clarifies under whatcircumstances a contract with an initial net investment meets thecharacteristic of a derivative discussed in paragraph 6(b) of SFAS No. 133, (2)clarifies when a derivative contains a financing component, (3) amends thedefinition of an underlying to conform it to language used in FIN No. 45,“Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others,” and (4) amends certain otherexisting pronouncements. SFAS No. 149 will result in more consistent reportingof contracts as either derivatives or hybrid instruments. SFAS No. 149 iseffective prospectively for contracts entered into or modified after June 30,2003, except in certain circumstances, and for hedging relationships designatedafter June 30, 2003. The adoption of SFAS No. 149 did not have a materialimpact on the Company’s consolidated financial statements.

 

OnMay 15, 2003, the FASB issued SFAS No. 150, “Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity,” which waseffective May 31, 2003 for all new and modified financial instruments. SFAS No.150 changes the accounting for certain financial instruments that, underprevious guidance, issuers could account for as equity. SFAS No. 150 requiresthat those instruments be classified as liabilities (or assets in somecircumstances). The adoption of SFAS No. 150 did not have a material impact onthe Company’s consolidated financial statements.

 

**CAUTIONARY STATEMENT FOR PURPOSES OF THE“SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF1995**

 

Anyof the statements contained in this Annual Report that refer to the Company’sestimated or anticipated future results are forward-looking and reflect theCompany’s current analysis of existing trends and information. Actual resultsmay differ from current expectations based on a number of factors affectingAmeron’s businesses, including competitive conditions and changing marketconditions. In addition, matters affecting the economy generally, including thestate of economies worldwide, can affect the Company’s results. Theseforward-looking statements represent the Company’s judgment only as of the dateof this Annual Report. Since actual results could differ materially, the readeris cautioned not to rely on these forward-looking statements. Moreover, theCompany disclaims any intent or obligation to update these forward-lookingstatements.

 

30

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**CONSOLIDATEDSTATEMENTS OF INCOME**

 
|                                               |   | **Year ended  November 30,** |        |
|----------------------------------------------------|--------|------------------------------|-------------|
| **(Dollars in thousands, except per  share data)** |   | **2003**                     |        | **2002** |   | **2001** |   |
|                                               |   |                         |        |   |   |   |   |
| Sales                                              |   | **$**                        | **600,495** | ** ** | $ | 539,473 |   | $ | 551,396 |   |
| Cost of sales                                      |   | **(434,007**                 | **)**       | (397,590 | ) | (413,312 | ) |
|                                               |   |                         |        |   |   |   |   |
| Gross profit                                       |   | **166,488**                  | ** **  | 141,883 |   | 138,084 |   |
| Selling, general and administrative  expenses      |   | **(127,392**                 | **)**       | (105,898 | ) | (101,828 | ) |
| Equity in earnings of joint venture                |   | **667**                      | ** **  | 3,597 |   | 2,279 |   |
| Other income, net                                  |   | **10,852**                   | ** **  | 9,767 |   | 10,269 |   |
|                                               |   |                         |        |   |   |   |   |
| Income before interest and income taxes            |   | **50,615**                   | ** **  | 49,349 |   | 48,804 |   |
| Interest expense, net                              |   | **(6,645**                   | **)**       | (6,836 | ) | (10,213 | ) |
|                                               |   |                         |        |   |   |   |   |
| Income before income taxes                         |   | **43,970**                   | ** **  | 42,513 |   | 38,591 |   |
| Provision for income taxes                         |   | **(14,070**                  | **)**       | (14,454 | ) | (10,850 | ) |
|                                               |   |                         |        |   |   |   |   |
| Net income                                         |   | **$**                        | **29,900**  | ** ** | $ | 28,059 |   | $ | 27,741 |   |
|                                               |   |                         |        |   |   |   |   |
| Net income per share (basic)                       |   | **$**                        | **3.77**    | ** ** | $ | 3.61 |   | $ | 3.58 |   |
| Net income per share (diluted)                     |   | **$**                        | **3.67**    | ** ** | $ | 3.49 |   | $ | 3.45 |   |
|                                               |   |                         | ** **  |   |   |   |   |
| Weighted-average shares (basic)                    |   | **7,925,229**                | ** **  | 7,772,032 |   | 7,742,690 |   |
| Weighted-average shares (diluted)                  |   | **8,149,460**                | ** **  | 8,052,164 |   | 8,048,588 |   |

 

***The accompanying notes are an integral partof these consolidated financial statements.***

 

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**CONSOLIDATEDBALANCE SHEETS**

 
|                                                                                     |   | **As of  November 30,** |        |
|------------------------------------------------------------------------------------------|--------|-------------------------|-------------|
| **(Dollars in thousands, except per  share data)**                                       |   | **2003**                |        | **2002** |   |
|                                                                                     |   |                    |        |   |   |
| **ASSETS**                                                                               |   |                    |        |   |   |
| Current assets                                                                           |   |                    |        |   |   |
| Cash and cash equivalents                                                                |   | **$**                   | **20,390**  | ** ** | $ | 10,360 |   |
| Receivables, less allowances of $8,168 in 2003 and  $6,652 in 2002                       |   | **155,629**             | ** **  | 131,283 |   |
| Inventories                                                                              |   | **91,371**              | ** **  | 88,020 |   |
| Deferred income taxes                                                                    |   | **19,241**              | ** **  | 16,528 |   |
| Prepaid expenses and other current assets                                                |   | **8,882**               | ** **  | 6,671 |   |
|                                                                                     |   |                    |        |   |   |
| Total current assets                                                                     |   | **295,513**             | ** **  | 252,862 |   |
|                                                                                     |   |                    |        |   |   |
| Investments in joint ventures                                                            |   |                    | ** **  |   |   |
| Equity method                                                                            |   | **13,064**              | ** **  | 12,940 |   |
| Cost method                                                                              |   | **5,479**               | ** **  | 5,987 |   |
|                                                                                     |   |                    |        |   |   |
| Property, plant and equipment                                                            |   |                    | ** **  |   |   |
| Land                                                                                     |   | **37,787**              | ** **  | 35,730 |   |
| Buildings                                                                                |   | **84,426**              | ** **  | 75,147 |   |
| Machinery and equipment                                                                  |   | **283,123**             | ** **  | 267,607 |   |
| Construction in progress                                                                 |   | **6,169**               | ** **  | 4,400 |   |
|                                                                                     |   |                    |        |   |   |
| Total property, plant and equipment at cost                                              |   | **411,505**             | ** **  | 382,884 |   |
| Accumulated depreciation                                                                 |   | **(260,919**            | **)**       | (237,642 | ) |
|                                                                                     |   |                    |        |   |   |
| Total property, plant and equipment, net                                                 |   | **150,586**             | ** **  | 145,242 |   |
| Deferred income taxes                                                                    |   | **6,744**               | ** **  | — |   |
| Intangible assets, net of accumulated  amortization of $9,738 in 2003 and $8,551 in 2002 |   | **13,526**              | ** **  | 13,013 |   |
| Other assets                                                                             |   | **48,580**              | ** **  | 32,898 |   |
|                                                                                     |   |                    |        |   |   |
| Total assets                                                                             |   | **$**                   | **533,492** | ** ** | $ | 462,942 |   |

 

***The accompanyingnotes are an integral part of these consolidated financial statements.***

 

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|                                                                                                                                                             |   | **As of  November 30,** |        |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|-------------|
|                                                                                                                                                             |   | **2003**                |        | **2002** |   |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**                                                                                                                   |   |                    |        |   |   |
| Current liabilities                                                                                                                                              |   |                    |        |   |   |
| Short-term borrowings                                                                                                                                            |   | **$**                   | **—**  | ** ** | $ | 1,009 |   |
| Current portion of long-term debt                                                                                                                                |   | **8,333**               | ** **  | 8,333 |   |
| Trade payables                                                                                                                                                   |   | **47,512**              | ** **  | 46,295 |   |
| Accrued liabilities                                                                                                                                              |   | **53,091**              | ** **  | 45,994 |   |
| Income taxes payable                                                                                                                                             |   | **9,568**               | ** **  | 2,026 |   |
|                                                                                                                                                             |   |                    |        |   |   |
| Total current liabilities                                                                                                                                        |   | **118,504**             | ** **  | 103,657 |   |
|                                                                                                                                                             |   |                    | ** **  |   |   |
| Long-term debt, less current portion                                                                                                                             |   | **86,044**              | ** **  | 102,823 |   |
| Other long-term liabilities                                                                                                                                      |   | **72,832**              | ** **  | 44,636 |   |
|                                                                                                                                                             |   |                    | ** **  |   |   |
| Total liabilities                                                                                                                                                |   | **277,380**             | ** **  | 251,116 |   |
|                                                                                                                                                             |   |                    | ** **  |   |   |
| Commitments and contingencies                                                                                                                                    |   |                    | ** **  |   |   |
| Stockholders’ equity                                                                                                                                        |   |                    | ** **  |   |   |
|                                                                                                                                                             |   |                    | ** **  |   |   |
| Common stock, par value $2.50 a share,  authorized 12,000,000 shares, outstanding 8,214,563 shares in 2003 and  3,945,662 shares in 2002, net of treasury shares |   | **27,186**              | ** **  | 13,198 |   |
| Additional paid-in capital                                                                                                                                       |   | **16,443**              | ** **  | 23,950 |   |
| Unearned restricted stock                                                                                                                                        |   | **(1,481**              | **)**       | (2,164 | ) |
| Retained earnings                                                                                                                                                |   | **294,255**             | ** **  | 270,449 |   |
| Accumulated other comprehensive loss                                                                                                                             |   | **(31,768**             | **)**       | (44,948 | ) |
| Treasury stock (2,659,810 shares in 2003  and 1,333,655 in 2002)                                                                                                 |   | **(48,523**             | **)**       | (48,659 | ) |
|                                                                                                                                                             |   |                    | ** **  |   |   |
| Total stockholders’ equity                                                                                                                                  |   | **256,112**             | ** **  | 211,826 |   |
|                                                                                                                                                             |   |                    | ** **  |   |   |
| Total liabilities and stockholders’ equity                                                                                                                  |   | **$**                   | **533,492** | ** ** | $ | 462,942 |   |

 

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**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

 
|                                                  |   | **Common  Stock**       |       | **Additional  Paid-in Capital** |       | **Unearned  Restricted  Stock** |       | **Retained  Earnings** |       | **Accumulated********Other  Comprehensive  Loss** |       | **Treasury  Stock** |       | **Total**   |       |
|-------------------------------------------------------|--------|-------------------------|------------|---------------------------------|------------|---------------------------------|------------|------------------------|------------|---------------------------------------------------|------------|---------------------|------------|-------------|------------|
| **(Dollars in thousands)**                            |   | **Shares  Outstanding** |       | **Amount**                      |       |                            |       |                   |       |                                              |       |
|                                                  |   |                    |       |                            |       |                            |       |                   |       |                                              |       |                |       |        |       |   |   |
| December 1, 2000 balance                              |   | 3,869,357               |       | $                               | 13,007     |                            | $          | 17,857                 |       | $                                                 | —     |                | $          | 224,620     |       | $ | (24,382 | ) | $ | (48,672 | ) | $ | 182,430 |   |
|                                                  |   |                    |       |                            |       |                            |       |                   |       |                                              |       |                |       |        |       |   |   |
| Net income — 2001                                |   |                    |       |                            |       |                            |       |                   |       | 27,741                                            |       |                |       |        |       | 27,741 |   |
| Exercise of stock options                             |   | 3,650                   |       | 10                              |       | 120                             |       |                   |       |                                              |       |                |       |        |       | 130 |   |
| Foreign currency translation adjustment               |   |                    |       |                            |       |                            |       |                   |       |                                              |       | 95                  |       |        |       | 95 |   |
| Comprehensive loss from joint venture                 |   |                    |       |                            |       |                            |       |                   |       |                                              |       | (2,687              | )          |        |       | (2,687 | ) |
| Cash dividends on common stock                        |   |                    |       |                            |       |                            |       |                   |       | (4,955                                            | )          |                |       |        |       | (4,955 | ) |
| Treasury stock adjustment                             |   |                    |       |                            |       |                            |       |                   |       |                                              |       |                |       | 13          |       | 13 |   |
| Stock compensation expense                            |   |                    |       |                            |       | 1,480                           |       |                   |       |                                              |       |                |       |        |       | 1,480 |   |
|                                                  |   |                    |       |                            |       |                            |       |                   |       |                                              |       |                |       |        |       |   |   |
| November 30, 2001 balance                             |   | 3,873,007               |       | 13,017                          |       | 19,457                          |       | —                 |       | 247,406                                           |       | (26,974             | )          | (48,659     | )          | 204,247 |   |
|                                                  |   |                    |       |                            |       |                            |       |                   |       |                                              |       |                |       |        |       |   |   |
| Net income — 2002                                |   |                    |       |                            |       |                            |       |                   |       | 28,059                                            |       |                |       |        |       | 28,059 |   |
| Exercise of stock options                             |   | 32,655                  |       | 81                              |       | 1,146                           |       |                   |       |                                              |       |                |       |        |       | 1,227 |   |
| Foreign currency translation adjustment               |   |                    |       |                            |       |                            |       |                   |       |                                              |       | 7,182               |       |        |       | 7,182 |   |
| Minimum pension liability adjustment, net  of tax     |   |                    |       |                            |       |                            |       |                   |       |                                              |       | (25,171             | )          |        |       | (25,171 | ) |
| Comprehensive income from joint venture               |   |                    |       |                            |       |                            |       |                   |       |                                              |       | 15                  |       |        |       | 15 |   |
| Cash dividends on common stock                        |   |                    |       |                            |       |                            |       |                   |       | (5,016                                            | )          |                |       |        |       | (5,016 | ) |
| Stock compensation expense                            |   |                    |       |                            |       | 713                             |       |                   |       |                                              |       |                |       |        |       | 713 |   |
| Issuance of restricted stock                          |   | 40,000                  |       | 100                             |       | 2,634                           |       | (2,734                 | )          |                                              |       |                |       |        |       | — |   |
| Amortization of restricted stock                      |   |                    |       |                            |       |                            |       | 570                    |       |                                              |       |                |       |        |       | 570 |   |
|                                                  |   |                    |       |                            |       |                            |       |                   |       |                                              |       |                |       |        |       |   |   |
| **November 30, 2002  balance**                        |   | **3,945,662**           | ** ** | **13,198**                      | ** ** | **23,950**                      | ** ** | **(2,164**             | **)**      | **270,449**                                       | ** ** | **(44,948**         | **)**      | **(48,659** | **)**      | **211,826** |   |
|                                                  |   |                    |       |                            |       |                            |       |                   |       |                                              |       |                |       |        |       |   |   |
| **Net income — 2003**                            |   |                    | ** ** |                            | ** ** |                            | ** ** |                   | ** ** | **29,900**                                        | ** ** |                | ** ** |        | ** ** | **29,900** | ** ** |
| **Stock dividends**                                   |   | **3,945,662**           | ** ** | **13,224**                      | ** ** | **(13,224**                     | **)**      |                   | ** ** |                                              | ** ** |                | ** ** |        | ** ** | **—** | ** ** |
| **Exercise of stock  options**                        |   | **323,239**             | ** ** | **764**                         | ** ** | **5,722**                       | ** ** |                   | ** ** |                                              | ** ** |                | ** ** | **136**     | ** ** | **6,622** | ** ** |
| **Foreign currency  translation adjustment**          |   |                    |       |                            |       |                            | ** ** |                   | ** ** |                                              | ** ** | **14,847**          | ** ** |        | ** ** | **14,847** | ** ** |
| **Minimum pension  liability adjustment, net of tax** |   |                    |       |                            |       |                            | ** ** |                   | ** ** |                                              | ** ** | **(2,399**          | **)**      |        | ** ** | **(2,399** | **)** |
| **Comprehensive  income from joint venture**          |   |                    |       |                            |       |                            | ** ** |                   | ** ** |                                              | ** ** | **732**             | ** ** |        | ** ** | **732** | ** ** |
| **Cash dividends on  common stock**                   |   |                    |       |                            |       |                            | ** ** |                   | ** ** | **(6,094**                                        | **)**      |                | ** ** |        | ** ** | **(6,094** | **)** |
| **Stock compensation  expense**                       |   |                    |       |                            |       | **(5**                          | **)**      |                   | ** ** |                                              | ** ** |                | ** ** |        | ** ** | **(5** | **)** |
| **Amortization of  restricted stock**                 |   |                    | ** ** |                            |       |                            | ** ** | **683**                | ** ** |                                              | ** ** |                | ** ** |        | ** ** | **683** | ** ** |
| **November 30, 2003  balance**                        |   | **8,214,563**           | ** ** | **$**                           | **27,186** | ** **                      | **$**      | **16,443**             | ** ** | **$**                                             | **(1,481** | **)**               | **$**      | **294,255** | ** ** | **$** | **(31,768** | **)** | **$** | **(48,523** | **)** | **$** | **256,112** | ** ** |
|                                                       |        |                         |            |                                 |            |                                 |            |                        |            |                                                   |            |                     |            |             |            |  |  |  |  |  |  |  |  |  |  |  |

 

**CONSOLIDATED STATEMENTS OF COMPREHENSIVEINCOM****E**

 
|                                              |   | **Year ended  November 30,** |       |
|---------------------------------------------------|--------|------------------------------|------------|
| **(In thousands)**                                |   | **2003**                     |       | **2002** |   | **2001** |   |
| Net income                                        |   | **$**                        | **29,900** | ** ** | $ | 28,059 |   | $ | 27,741 |   |
| Foreign currency translation adjustment           |   | **14,847**                   | ** ** | 7,182 |   | 95 |   |
| Minimum pension liability adjustment, net  of tax |   | **(2,399**                   | **)**      | (25,171 | ) | — |   |
| Comprehensive income (loss) from joint  venture   |   | **732**                      | ** ** | 15 |   | (2,687 | ) |
| Comprehensive income                              |   | **$**                        | **43,080** | ** ** | $ | 10,085 |   | $ | 25,149 |   |

 

***The accompanying notesare an integral part of these consolidated financial statements.***

 

34

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**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

 
|                                                                               |   | **Year ended  November 30,** |       |
|------------------------------------------------------------------------------------|--------|------------------------------|------------|
| **(In thousands)**                                                                 |   | **2003**                     |       | **2002** |   | **2001** |   |
|                                                                               |   |                         |       |   |   |   |   |
| **OPERATING  ACTIVITIES**                                                          |   |                         | ** ** |   | ** ** |   | ** ** |
| Net income                                                                         |   | **$**                        | **29,900** | ** ** | $ | 28,059 |   | $ | 27,741 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |   |                         | ** ** |   |   |   |   |
| Depreciation                                                                       |   | **18,093**                   | ** ** | 18,032 |   | 17,820 |   |
| Amortization                                                                       |   | **278**                      | ** ** | 540 |   | 813 |   |
| (Benefit) provision for deferred income  taxes                                     |   | **(4,654**                   | **)**      | 5,960 |   | 8,865 |   |
| Net earnings and distributions from joint  ventures                                |   | **609**                      | ** ** | (132 | ) | 306 |   |
| (Gain) loss from sale of investment,  property,                               |   |                         | ** ** |   |   |   |   |
| plant and equipment                                                                |   | **(2,385**                   | **)**      | (71 | ) | 56 |   |
| Stock compensation expense                                                         |   | **678**                      | ** ** | 1,283 |   | 1,480 |   |
| Other, net                                                                         |   | **401**                      | ** ** | — |   | — |   |
| Changes in operating assets and  liabilities:                                      |   |                         | ** ** |   |   |   |   |
| Receivables                                                                        |   | **(16,457**                  | **)**      | 8,194 |   | 3,905 |   |
| Inventories                                                                        |   | **125**                      | ** ** | 6,249 |   | (10,312 | ) |
| Prepaid expenses and other current assets                                          |   | **(1,973**                   | **)**      | 105 |   | (352 | ) |
| Other assets                                                                       |   | **(14,113**                  | **)**      | (1,635 | ) | (8,103 | ) |
| Trade payables                                                                     |   | **(1,343**                   | **)**      | (2,147 | ) | 5,573 |   |
| Accrued liabilities and income taxes  payable                                      |   | **12,963**                   | ** ** | (3,134 | ) | (22,029 | ) |
| Other long-term liabilities                                                        |   | **21,104**                   | ** ** | (6,669 | ) | 1,969 |   |
|                                                                               |   |                         | ** ** |   |   |   |   |
| Net cash provided by operating activities                                          |   | **43,226**                   | ** ** | 54,634 |   | 27,732 |   |
|                                                                               |   |                         | ** ** |   |   |   |   |
| **INVESTING  ACTIVITIES**                                                          |   |                         | ** ** |   |   |   |   |
| Proceeds from sale of investment, property,  plant and equipment                   |   | **3,224**                    | ** ** | 504 |   | 867 |   |
| Additions to property, plant and equipment                                         |   | **(17,107**                  | **)**      | (14,514 | ) | (19,297 | ) |
|                                                                               |   |                         | ** ** |   |   |   |   |
| Net cash used in investing activities                                              |   | **(13,883**                  | **)**      | (14,010 | ) | (18,430 | ) |
|                                                                               |   |                         | ** ** |   |   |   |   |
| **FINANCING  ACTIVITIES**                                                          |   |                         | ** ** |   |   |   |   |
| Net change in short-term borrowings                                                |   | **(1,752**                   | **)**      | (3,298 | ) | (954 | ) |
| Issuance of debt                                                                   |   | **61,416**                   | ** ** | 4,123 |   | 11,808 |   |
| Repayment of debt                                                                  |   | **(78,456**                  | **)**      | (38,918 | ) | (15,492 | ) |
| Debt issuance costs                                                                |   | **(1,581**                   | **)**      | — |   | — |   |
| Dividends on common stock                                                          |   | **(6,094**                   | **)**      | (5,016 | ) | (4,955 | ) |
| Issuance of common stock                                                           |   | **6,486**                    | ** ** | 1,227 |   | 130 |   |
| Change in treasury stock                                                           |   | **136**                      | ** ** | — |   | 13 |   |
|                                                                               |   |                         |       |   |   |   |   |
| Net cash used in financing activities                                              |   | **(19,845**                  | **)**      | (41,882 | ) | (9,450 | ) |
|                                                                               |   |                         | ** ** |   |   |   |   |
| Effect of exchange rate changes on cash and  cash equivalents                      |   | **532**                      | ** ** | 303 |   | (51 | ) |
|                                                                               |   |                         | ** ** |   |   |   |   |
| Net change in cash and cash equivalents                                            |   | **10,030**                   | ** ** | (955 | ) | (199 | ) |
| Cash and cash equivalents at beginning of  year                                    |   | **10,360**                   | ** ** | 11,315 |   | 11,514 |   |
|                                                                               |   |                         | ** ** |   |   |   |   |
| Cash and cash equivalents at end of year                                           |   | **$**                        | **20,390** | ** ** | $ | 10,360 |   | $ | 11,315 |   |

 

***The accompanyingnotes are an integral part of these consolidated financial statements.***

 

35

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**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1 ****Summary of Significant AccountingPolicies**

 

***Principles ofConsolidation***

Theconsolidated financial statements include the accounts of Ameron InternationalCorporation and all wholly-owned subsidiaries (“Ameron” or the “Company”). Allmaterial intercompany accounts and transactions have been eliminated.

 

***Reclassifications***

Certainprior year balances have been reclassified to conform with the current yearpresentation.

 

***Use of Estimates***

Thepreparation of financial statements in conformity with generally acceptedaccounting principles requires management to make certain estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities and the reported amounts of revenuesand expenses. Significant estimates include revenue and costs recorded underpercentage of completion accounting, assumptions related to benefit plans,goodwill, and reserves associated with management incentives, receivables,inventories, income taxes, self insurance and environmental and legalcontingencies. Actual results could differ from those estimates.

 

***Revenue Recognition***

Revenuefor the Performance Coatings & Finishes, Fiberglass-Composite Pipe andInfrastructure Products segments is recognized when risk of ownership and titlepass, primarily at the time goods are shipped, provided that an agreementexists between the customer and the Company, the price is fixed or determinableand collection is reasonably assured. In limited circumstances within thePerformance Coatings & Finishes Group, revenue recognition associated withshipment of coatings for marine dry dockings is delayed until product returnsare processed. Revenue is recognized for the Water Transmission Group primarilyunder the percentage-of-completion method, typically based on completed unitsof production, since products manufactured under enforceable and bindingconstruction contracts typically are designed for specific applications, arenot interchangeable between projects, and are not manufactured for stock. Insome cases, if products are manufactured for stock or are not related tospecific construction contracts, revenue is recognized under the same criteriaused by the other three segments. Revenue under the percentage-of-completion method is subject to agreater level of estimation, which affects the timing of revenue recognition,costs and profits. Estimates are reviewed on a consistent basis and areadjusted periodically to reflect current expectations.

 

***Research and Development Costs***

Researchand development costs, which relate primarily to the development, design andtesting of products, are expensed as incurred. Such costs, which are includedin selling, general and administrative expenses, were approximately $5,653,000 in2003, $4,356,000 in 2002, and $5,550,000 in 2001.

 

***Environmental Clean-up Costs***

TheCompany expenses environmental clean-up costs related to existing conditionsresulting from past or current operations. The Company determines its liabilityon a site-by-site basis and records a liability at the time when assessmentsand/or remediation are probable and can be reasonably estimated. 

 

***Income Taxes***

Deferredincome tax assets and liabilities are computed for differences between thefinancial statement and income tax bases of assets and liabilities. Suchdeferred income tax asset and liability computations are based on enacted taxlaws and rates applicable to periods in which the differences are expected toreverse. Valuation allowances are established to reduce deferred income taxassets to the amounts expected to be realized.

 

***Net Income Per Share***

Basicnet income per share is computed on the basis of the weighted average number ofcommon shares outstanding during the periods presented. Diluted net income per shareis computed on the basis of the weighted average number of common sharesoutstanding plus the effect of outstanding stock options and restricted stock,using the treasury stock method.

 

***Cash and Cash Equivalents***

Cashequivalents represent liquid investments with maturities of three months orless when purchased.

 

***Inventory Valuation***

Inventoriesare stated at the lower of cost or market with cost determined principally onthe first-in, first-out (FIFO) method. Certain steel inventories used by theWater Transmission Group are valued using the last-in, first-out (LIFO) method.Reserves are established for excess, obsolete and rework inventories based onage, estimates of salability and forecasted future demand.

 

***Joint Ventures***

Investmentsin unconsolidated joint ventures or affiliates (“joint ventures”) over whichthe Company has significant influence are accounted for under the equity methodof accounting, whereby the investment is carried at the cost of acquisition,plus the Company’s equity in undistributed earnings or losses sinceacquisition. Investments in joint ventures over which the Company does not havethe ability to exert significant influence over the investee’s operating andfinancing activities are accounted for under the cost method of accounting. TheCompany’s investment in TAMCO is accounted for under the equity method.Investments in Ameron Saudi Arabia, Ltd., Bondstrand, Ltd. and Oasis-Ameron,Ltd. are accounted for under the cost method due to management’s currentassessment of the Company’s influence over these joint ventures.

 

***Property, Plant and Equipment***

Itemscapitalized as property, plant and equipment, including improvements toexisting facilities, are recorded at cost. Construction in progress representscapital expenditures incurred for assets not yet placed in service. Capitalizedinterest was not material for the periods presented.

 

Depreciationis computed principally using the straight-line method based on estimateduseful lives of the assets. Leasehold improvements are amortized over theshorter of the life of the improvement or the term of the lease. Useful livesare as follows:

 
|                       |   | **Useful  Lives in Years** |   |
|----------------------------|--------|----------------------------|--------|
| Buildings                  |   | 10-40                      |   |
| Machinery and equipment    |   |                       |   |
| Autos, trucks and trailers |   | 2-15                       |   |
| Cranes and tractors        |   | 7-10                       |   |
| Manufacturing equipment    |   | 3-15                       |   |
| Other                      |   | 2-20                       |   |

 

36

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***Goodwill and Intangible Assets***

 

Intangibleassets are amortized on a straight-line basis over periods ranging from threeto 15 years.

 

Thecost of an acquired business is allocated to the net assets acquired based onthe estimated fair values at the date of acquisition. The excess of the cost ofan acquired business over the aggregate fair value is recorded as goodwill.Goodwill is not amortized, but instead tested for impairment at least annually.Such tests require managment to make estimates about future cash flows andother factors to determine the fair value of the respective assets. Prior to2003, goodwill was amortized using the straight-line method over periodsranging up to 40 years.

 

TheCompany reviews the recoverability of intangible and other long-lived assetsfor impairment whenever events or changes in circumstances indicate that thecarrying value of such assets may not be recoverable. If the estimated future,undiscounted cash flows from the use of an asset are less than its carryingvalue, a write-down is recorded to reduce the related asset to estimated fairvalue.

 

***Self Insurance***

TheCompany typically utilizes third party insurance subject to varying retentionlevels or self insurance. The Company is self insured for a portion of thelosses and liabilities primarily associated with workers’ compensation claimsand general, product and vehicle liability. Losses are accrued based upon theCompany’s estimates of the aggregate liability for claims incurred usinghistorical experience and certain actuarial assumptions followed in theinsurance industry. The estimate of self insurance liability includes anestimate of incurred but not reported claims, based on data compiled fromhistorical experience.

 

***Foreign Currency Translation***

Thefunctional currencies for the Company’s foreign operations are the applicablelocal currencies. The translation from the applicable foreign currencies toU.S. dollars is performed for balance sheet accounts using current exchangerates in effect at the balance sheet date and for revenue and expense accountsusing a weighted-average exchange rate during the period. The resultingtranslation adjustments are recorded in accumulated other comprehensive loss.The Company advances funds to certain foreign subsidiaries that are notexpected to be repaid in the foreseeable future. Translation adjustmentsarising from these advances are also included in accumulated othercomprehensive loss. Gains or losses resulting from foreign currencytransactions are included in other income.

 

***Derivative Financial Instruments and RiskManagement***

TheCompany operates internationally, giving rise to exposure to market risks fromchanges in foreign exchange rates. Derivative financial instruments, primarilyforeign exchange contracts, are used by the Company to reduce those risks. TheCompany does not hold or issue financial or derivative financial instrumentsfor trading or speculative purposes. As of November 30, 2003 and 2002 theCompany had foreign currency forward contracts with an aggregate face value ofapproximately $9,367,000 and $6,623,000, respectively.

 

***Fair Value of Financial Instruments***

Thefair value of financial instruments, other than long-term debt, approximatesthe carrying value because of the short-term nature of such instruments.

 

***Concentration of Credit Risk***

Financialinstruments that subject the Company to credit risk consist primarily of cashequivalents, trade accounts receivable, and forward foreign exchange contracts.Credit risk with respect to trade accounts receivable is generally distributedover a large number of entities comprising the Company’s customer base and isgeographically dispersed. The Company performs ongoing credit evaluations ofits customers, maintains an allowance for potential credit losses and, incertain instances, maintains credit insurance. The Company actively evaluatesthe creditworthiness of the financial institutions with which it conductsbusiness.

 

***Stock-Based Compensation***

TheCompany recognizes compensation expense associated with stock-based awardsunder the recognition and measurement principles of Accounting Principles Board(“APB”) No. 25, “Accounting for Stock Issued to Employees”, and related interpretations.Accordingly, compensation cost is measured by the excess of the quoted marketprice of the stock over the option price on the grant date. No compensationexpense associated with a stock-based award is recorded if the stock optionexercise price equals the market price of the Company’s stock on the date ofthe grant.

 

InDecember 2002, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 148, “Accounting forStock-Based Compensation-Transition and Disclosures.” SFAS No. 148 amends SFASNo. 123, “Accounting for Stock-Based Compensation,” and provides alternativemethods of transition for a voluntary change to the fair-value-based method ofaccounting for stock-based employee compensation. SFAS No. 148 also amends thedisclosure requirements of SFAS No. 123 to include pro forma presentation ofnet income and earnings per share as if the Company recorded compensationexpense based on the fair value of stock-based awards. The Company has adoptedthe disclosure-only provisions of SFAS No. 123. (See Note 12.)

 

***Accounting Changes***

EffectiveDecember 1, 2002, the Company adopted SFAS No. 142, “Goodwill and OtherIntangible Assets.” In accordance with SFAS No. 142, goodwill is no longeramortized, but instead tested for impairment at least annually. Prior to 2003,goodwill was amortized using the straight-line method over its estimated periodof benefit.

 

Effective December 1, 2002, the Company adopted SFAS No. 143,“Accounting for Asset Retirement Obligations.” The standard applies to legalobligations associated with the retirement of long-lived assets that resultfrom the acquisition, construction, development and/or normal use of theassets. The statement requires that the fair value of the liability for anasset retirement obligation be recorded when incurred if a reasonable estimateof fair value can be made. The fair value of the liability is added to thecarrying amount of the associated asset and this additional carrying amount isdepreciated over the life of the asset. If the liability is settled for anamount other than the recorded balance, either a gain or loss will berecognized at settlement. The adoption of SFAS No. 143 did not have a materialimpact on the Company’s consolidated financial statements.

 

37

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Effective December 1, 2002, the Company adopted SFAS No. 144,“Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 addresses financialaccounting and reporting for the impairment or disposal of long-lived assets,provides guidance on implementation issues related to SFAS No. 121, “Accountingfor the Impairment of Long-Lived Assets and for Long-Lived Assets to beDisposed Of,” and addresses the accounting for a segment of a businessaccounted for as a discontinued operation. The adoption of SFAS No. 144 did nothave a material impact on the Company’s consolidated financial statements.

 

Effective December 1, 2002, the Company adopted SFAS No. 145,“Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB StatementNo. 13, and Technical Corrections.” SFAS No. 145 rescinds both SFAS No. 4,“Reporting Gains and Losses from Extinguishment of Debt” and SFAS No. 64,“Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.” In sodoing, SFAS No. 145 eliminates the requirement that gains and losses from theextinguishment of debt be aggregated, and, if material, classified as anextraordinary item, net of the related income tax effect, unless the criteriain APB Opinion No. 30, “Reporting the Results of Operations-Reporting theEffects of Disposal of a Segment of a Business, and Extraordinary, Unusual andInfrequently Occurring Events and Transactions” are met. SFAS No. 145 amendsSFAS No. 13, “Accounting for Leases,” to require that certain leasemodifications that have economic effects similar to sale-leaseback transactionsare accounted for in the same manner as sale-leaseback transactions. Theadoption of SFAS No. 145 did not have a material impact on the Company’s consolidatedfinancial statements.

 

The Company adopted SFAS No. 146, “Accounting for Exit or DisposalActivities,” during the quarter ended February 28, 2003.  SFAS No. 146 addresses issues regarding therecognition, measurement and reporting of costs that are associated with exitand disposal activities, including restructuring activities that are currentlyaccounted for pursuant to the guidance that the Emerging Issues Task Force hasset forth in Issue No. 94-3, “Liability Recognition for Certain Employee TerminationBenefits and Other Costs to Exit an Activity (including Certain Costs Incurredin a Restructuring).” The provisions of SFAS No. 146 are effective for exit ordisposal activities that are initiated after December 31, 2002. The adoption ofSFAS No. 146 did not have a material impact on the Company’s consolidatedfinancial statements.

 

In November 2002, the FASB issued FASB Interpretation (“FIN”) No. 45,“Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others.” FIN No. 45 elaborates on thedisclosures to be made by a guarantor about its obligations under certainguarantees. FIN No. 45 also clarifies that a guarantor is required torecognize, at the inception of a guarantee, a liability for the fair value ofthe obligation undertaken in issuing the guarantee. FIN No. 45 specificallyidentifies certain obligations that are excluded from the provisions related torecognizing a liability at inception; however, these guarantees are subject tothe disclosure requirements of FIN No. 45. The initial recognition andmeasurement provisions of FIN No. 45 are applicable on a prospective basis toguarantees issued or modified after December 31, 2002. The Company’s disclosureof guarantees is included in Note 7, herein. The adoption of the recognitionand measurement provisions of FIN No. 45 did not have a material impact on theCompany’s consolidated financial statements.

 

***New Accounting Pronouncements***

 

FIN No. 46, “Consolidation of Variable Interest Entities” was issued inJanuary 2003 and revised in December 2003. FIN clarifies the application ofAccounting Research Bulletin No. 51, “Consolidated Financial Statements,” andaddresses consolidation by business enterprises of variable interest entities.FIN No. 46 requires existing unconsolidated variable interest entities to beconsolidated by their primary beneficiaries if the entities do not effectivelydisperse risk among the parties involved. FIN No. 46 also enhances thedisclosure requirements related to variable interest entities. This statementis effective for the Company for variable interest entities in the quarterending May 31, 2004. The adoption of FIN No. 46 is not expected to have amaterial impact on the Company’s consolidated financial statements.

 

InApril 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 onDerivative Instruments and Hedging Activities.” SFAS No. 149 amends andclarifies financial accounting and reporting for derivative instruments underSFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.”SFAS No. 149 requires that contracts with comparable characteristics beaccounted for similarly. In particular, SFAS No. 149 (1) clarifies under whatcircumstances a contract with an initial net investment meets thecharacteristic of a derivative discussed in paragraph 6(b) of Statement No.133, (2) clarifies when a derivative contains a financing component, (3) amendsthe definition of an underlying to conform it to language used in FIN No. 45, “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others,” and (4) amends certain other existingpronouncements. SFAS No. 149 will result in more consistent reporting ofcontracts as either derivatives or hybrid instruments. SFAS No. 149 iseffective prospectively for contracts entered into or modified after June 30,2003, except in certain circumstances, and for hedging relationships designatedafter June 30, 2003. The adoption of SFAS No. 149 did not have a materialimpact on the Company’s consolidated financial statements.

 

OnMay 15, 2003, the FASB issued SFAS No. 150, “Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity,” which waseffective May 31, 2003 for all new and modified financial instruments. SFAS No.150 changes the accounting for certain financial instruments that, underprevious guidance, issuers could account for as equity. SFAS No. 150 requiresthat those instruments be classified as liabilities (or assets in somecircumstances). The adoption of SFAS No. 150 did not have a material impact onthe Company’s consolidated financial statements.

 

***Supplemental Cash Flow Information***

 
| **(In thousands)** |   | **2003**   |       | **2002**   |   | **2001** |   |
|--------------------|--------|------------|------------|------------|--------|----------|--------|
| Interest paid      |   | **$**      | **4,997**  | ** ** | $      | 6,996    |   | $ | 10,810 |   |
|               |   |       | ** ** |       |   |     |   |
| Income taxes paid  |   | **10,268** | ** ** | 8,457      |   | 15,939   |   |
|                    |        |            |            |            |        |          |        |  |  |  |

 

38

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**NOTE 2  Other Income**

 

Otherincome was as follows for the years ended November 30:

 
| **(In thousands)**                                    |   | **2003**  |       | **2002**   |   | **2001** |   |
|-------------------------------------------------------|--------|-----------|------------|------------|--------|----------|--------|
| Income from joint ventures- cost method               |   | **$**     | **6,311**  | ** ** | $      | 5,900    |   | $ | 6,250 |   |
| Royalties, fees and other income                      |   | **2,866** | ** ** | 2,962      |   | 4,437    |   |
| Gain on sale of investment                            |   | **2,477** | ** ** | —     |   | —   |   |
| Foreign currency loss                                 |   | **(269**  | **)**      | (539       | )      | (927     | )      |
| Gain (loss) on sale of property, plant and  equipment |   | **(92**   | **)**      | 71         |   | (56      | )      |
| Miscellaneous                                         |   | **(441**  | **)**      | 1,373      |   | 565      |   |
|                                                  |   | **$**     | **10,852** |       | $      | 9,767    |   | $ | 10,269 |   |

 

**NOTE 3  Receivables**

 

Receivableswere as follows at November 30:

 
| **(In thousands)** |   | **2003**   |        | **2002**   |   |
|--------------------|--------|------------|-------------|------------|--------|
| Trade              |   | **$**      | **153,041** | ** ** | $      | 127,874 |   |
| Joint ventures     |   | **2,461**  | ** **  | 2,653      |   |
| Other              |   | **8,295**  | ** **  | 7,408      |   |
| Allowances         |   | **(8,168** | **)**       | (6,652     | )      |
|               |   | **$**      | **155,629** |       | $      | 131,283 |   |

 

TheCompany’s provision for bad debts was $3,071,000 in 2003, $1,300,000 in 2002,and $1,738,000 in 2001. Trade receivables included unbilled receivables relatedto the percentage-of-completion method of revenue recognition of $25,371,000and $11,928,000 at November 30, 2003 and 2002, respectively.

 

**NOTE 4  Inventories**

 

Inventorieswere as follows at November 30:

 
| **(In thousands)**     |   | **2003**   |       | **2002**   |   |
|------------------------|--------|------------|------------|------------|--------|
| Finished products      |   | **$**      | **52,821** | ** ** | $      | 52,359 |   |
| Materials and supplies |   | **22,037** | ** ** | 20,373     |   |
| Products in process    |   | **16,513** | ** ** | 15,288     |   |
|                   |   | **$**      | **91,371** |       | $      | 88,020 |   |

 

Certainsteel inventories are valued using the last-in, first-out  method. These items comprised 13.3% and 2.7%of consolidated inventories at November 30, 2003 and 2002, respectively. Ifsuch inventories had been valued using the first-in, first-out method, totalinventories would have increased by $630,000 and $1,164,000 at November 30,2003 and 2002, respectively.

 

**NOTE 5  Joint Ventures**

 

Investments,advances and equity in undistributed earnings of joint ventures were as followsat November 30:

 
| **(In thousands)**            |   | **2003**  |       | **2002** |   |
|-------------------------------|--------|-----------|------------|----------|--------|
| Investment—equity method |   | **$**     | **13,064** |     | $      | 12,940 |   |
| Investments—cost method  |   | **5,479** |       | 5,987    |   |
|                          |   | **$**     | **18,543** |     | $      | 18,927 |   |

 

TheCompany’s ownership of joint ventures is summarized below:

 
| **Products**    |   | **Joint  Ventures**        |   | **Ownership  Interest** |   |
|-----------------|--------|----------------------------|--------|-------------------------|--------|
| Coatings        |   | Oasis-Ameron, Ltd.         |   | 40                      | %      |
| Fiberglass pipe |   | Bondstrand,  Ltd.          |   | 40                      | %      |
| Concrete pipe   |   | Ameron  Saudi Arabia, Ltd. |   | 30                      | %      |
| Steel products  |   | TAMCO                      |   | 50                      | %      |

 

Investments in joint ventures and the amount of undistributed earningswere as follows:

 
| **(In thousands)**                                                 |   | **Coatings** |       | **Fiberglass  Pipe** |       | **Concrete  Pipe** |       | **Steel  Products** |       | **Total**  |       |
|--------------------------------------------------------------------|--------|--------------|------------|----------------------|------------|--------------------|------------|---------------------|------------|------------|------------|
| **Cost**                                                           |   | **$**        | **1,695**  | ** **           | **$**      | **3,784**          | ** ** | **$**               | **—** | ** ** | **$**      | **8,482** | ** ** | **$** | **13,961** | ** ** |
| **Comprehensive loss  from joint venture**                         |   | **—**   | ** ** | **—**           | ** ** | **—**         | ** ** | **(1,941**          | **)**      | **(1,941** | **)**      |
| **Accumulated equity  in undistributed earnings, net of reserves** |   | **—**   | ** ** | **—**           | ** ** | **—**         | ** ** | **6,523**           | ** ** | **6,523**  | ** ** |
|                                                               |   |         | ** ** |                 | ** ** |               | ** ** |                | ** ** |       | ** ** |
| **Investment,  November 30, 2003**                                 |   | **$**        | **1,695**  | ** **           | **$**      | **3,784**          | ** ** | **$**               | **—** | ** ** | **$**      | **13,064** | ** ** | **$** | **18,543** | ** ** |
|                                                               |   |         |       |                 |       |               |       |                |       |       |       |   |   |   |   |   |
| **Dividends received  in 2003**                                    |   | **$**        | **636**    | ** **           | **$**      | **3,042**          | ** ** | **$**               | **2,633**  | ** ** | **$**      | **1,276** | ** ** | **$** | **7,587** | ** ** |
|                                                               |   |         |       |                 |       |               |       |                |       |       |       |
| Cost                                                               |   | $            | 2,203      |                 | $          | 3,784              |       | $                   | —     |       | $          | 8,482 |   | $ | 14,469 |   |
| Comprehensive loss from joint venture                              |   | —       |       | —               |       | —             |       | (2,672              | )          | (2,672     | )          |
| Accumulated equity in undistributed  earnings, net of reserves     |   | —       |       | —               |       | —             |       | 7,130               |       | 7,130      |       |
|                                                               |   |         |       |                 |       |               |       |                |       |       |       |
| Investment, November 30, 2002                                      |   | $            | 2,203      |                 | $          | 3,784              |       | $                   | —     |       | $          | 12,940 |   | $ | 18,927 |   |
|                                                               |   |         |       |                 |       |               |       |                |       |       |       |   |   |   |   |   |
| Dividends received in 2002                                         |   | $            | 327        |                 | $          | 2,263              |       | $                   | 3,310      |       | $          | 3,465 |   | $ | 9,365 |   |

 

In2003, the Company sold its 25% ownership of Amercoat Mexicana for a pretax gainof $2,477,000. Income from Amercoat Mexicana totaled $312,000, $327,000 and$535,000 in the years ended November 30, 2003, 2002 and 2001, respectively.

 

TheCompany provides for income taxes on the undistributed earnings of its jointventures to the extent such earnings are included in the consolidatedstatements of income.

 

Theinvestment in TAMCO was recorded based on audited financial statements as ofNovember 30, 2003. Condensed financial data of TAMCO, an investment which isaccounted for under the equity method, were as follows:

 

FinancialCondition

 
| **(In thousands)**        |   | **2003**   |       | **2002**   |   |
|---------------------------|--------|------------|------------|------------|--------|
| Current assets            |   | **$**      | **39,412** | ** ** | $      | 39,344 |   |
| Noncurrent assets         |   | **30,862** | ** ** | 36,943     |   |
|                      |   | **$**      | **70,274** |       | $      | 76,287 |   |
|                      |   |       |       |       |   |
| Current liabilities       |   | **$**      | **17,598** | ** ** | $      | 20,351 |   |
| Noncurrent liabilities    |   | **10,808** | ** ** | 14,312     |   |
| Stockholders’ equity |   | **41,868** | ** ** | 41,624     |   |
|                      |   | **$**      | **70,274** |       | $      | 76,287 |   |

 

Results of Operations

 
| **(In thousands)** |   | **2003**  |        | **2002**   |   | **2001** |   |
|--------------------|--------|-----------|-------------|------------|--------|----------|--------|
| Net sales          |   | **$**     | **163,277** | ** ** | $      | 130,893  |   | $ | 120,822 |   |
| Gross profit       |   | **8,658** | ** **  | 21,924     |   | 20,142   |   |
| Net income         |   | **1,333** | ** **  | 6,745      |   | 4,907    |   |
|                    |        |           |             |            |        |          |        |  |  |  |

 

In2001, TAMCO entered into a swap agreement intended to hedge expected cash flowsrelated to the purchase of natural gas used in its manufacturing process. TheCompany recognized $1,941,000 and $2,672,000 in accumulated other comprehensiveloss at November 30, 2003 and 2002, respectively, which represents itsproportionate share of amounts recognized by TAMCO to record the fair value ofthe swap agreement.

 

Salesto joint ventures totaled $4,004,000 in 2003, $4,848,000 in 2002, and$7,747,000 in 2001.

 

39

----

 

**NOTE 6  Other Assets**

 

Otherassets were as follows at November 30:

 
| **(In thousands)**                         |   | **2003**   |       | **2002**   |   |
|--------------------------------------------|--------|------------|------------|------------|--------|
|                                       |   |       | ** ** |       |   |
| Cash surrender value of insurance policies |   | **$**      | **29,312** | ** ** | $      | 26,415 |   |
| Pension related assets                     |   | **15,134** | ** ** | 5,515      |   |
| Other                                      |   | **4,134**  | ** ** | 968        |   |
|                                       |   | **$**      | **48,580** |       | $      | 32,898 |   |

 

**NOTE 7  Accrued Liabilities**

 

Accruedliabilities were as follows at November 30:

 
| **(In thousands)**                         |   | **2003**   |       | **2002**   |   |
|--------------------------------------------|--------|------------|------------|------------|--------|
| Compensation and benefits                  |   | **$**      | **19,909** | ** ** | $      | 18,907 |   |
| Self insurance reserves                    |   | **14,988** | ** ** | 14,222     |   |
| Reserves for pending claims and litigation |   | **4,547**  | ** ** | 1,051      |   |
| Product warranties and guarantees          |   | **3,770**  | ** ** | 4,257      |   |
| Taxes (other than income taxes)            |   | **3,196**  | ** ** | 2,450      |   |
| Interest                                   |   | **1,937**  | ** ** | 826        |   |
| Commissions and royalties                  |   | **1,490**  | ** ** | 1,250      |   |
| Advances from customers                    |   | **1,254**  | ** ** | 464        |   |
| Other                                      |   | **2,000**  | ** ** | 2,567      |   |
|                                       |   | **$**      | **53,091** |       | $      | 45,994 |   |

 

The Company’s product warranty accrual reflects management’s estimate ofprobable liability associated with product warranties.  Management establishes product warrantyaccruals based on historical experience and other currently availableinformation. Changes in the product warranty accrual for the year endedNovember 30, 2003 were as follows (in thousands):

 
| Balance,  beginning of period                                |   | $      | 4,257  |   |
|--------------------------------------------------------------|--------|--------|--------|--------|
|                                                         |   |   |   |
| Payments made                                                |   | (3,158 | )      |
|                                                         |   |   |   |
| Change in liability for warranties issued during  the period |   | 2,671  |   |
|                                                         |   |   |   |
| Balance, end of period                                       |   | $      | 3,770  |   |

 

**NOTE 8  Other Long-Term Liabilities**

 

Otherlong-term liabilities were as follows at November 30:

 
| **(In thousands)**              |   | **2003**  |       | **2002** |   |
|---------------------------------|--------|-----------|------------|----------|--------|
|                            |   |      |       |     |   |
| Accrued pension cost            |   | **$**     | **63,320** |     | $      | 39,128 |   |
| Compensation and benefits       |   | **5,289** |       | 4,422    |   |
| Deferred income tax liabilities |   | **3,931** |       | 662      |   |
| Other                           |   | **292**   |       | 424      |   |
|                            |   | **$**     | **72,832** |     | $      | 44,636 |   |

 

**NOTE 9  Income Taxes**

 

Theprovision for income taxes included the following for the years ended November30:

 
| **(In thousands)** |   | **2003**   |       | **2002**   |   | **2001** |   |
|--------------------|--------|------------|------------|------------|--------|----------|--------|
| Current            |   |       | ** ** |       |   |     |   |
| Federal            |   | **$**      | **11,139** | ** ** | $      | 4,587    |   | $ | 67 |   |
| Foreign            |   | **5,445**  | ** ** | 3,508      |   | 2,402    |   |
| State              |   | **2,140**  | ** ** | 399        |   | (484     | )      |
|               |   | **18,724** |       | 8,494      |   | 1,985    |   |
|               |   |       | ** ** |       |   |     |   |
| Deferred           |   |       | ** ** |       |   |     |   |
| Federal            |   | **(4,015** | **)**      | 5,104      |   | 7,436    |   |
| Foreign            |   | **20**     | ** ** | (99        | )      | 36       |   |
| State              |   | **(659**   | **)**      | 955        |   | 1,393    |   |
|               |   | **(4,654** | **)**      | 5,960      |   | 8,865    |   |
|               |   | **$**      | **14,070** |       | $      | 14,454   |   | $ | 10,850 |   |

 

Deferredincome tax assets and (liabilities) consisted of the following as of November30:

 
| **(In thousands)**                                       |   | **2003**    |       | **2002**   |   |
|----------------------------------------------------------|--------|-------------|------------|------------|--------|
| Noncurrent deferred income taxes                         |   |        | ** ** |       |   |
| Net operating loss carry-overs                           |   | **$**       | **13,035** | ** ** | $      | 11,293 |   |
| Prepaid pension benefit costs                            |   | **13,251**  | ** ** | 10,415     |   |
| Employee benefits                                        |   | **5,834**   | ** ** | 4,382      |   |
| Investments                                              |   | **3,280**   | ** ** | 3,220      |   |
| Valuation allowances                                     |   | **(14,035** | **)**      | (12,101    | )      |
| Property, plant and equipment                            |   | **(17,412** | **)**      | (17,572    | )      |
| Other                                                    |   | **(1,140**  | **)**      | (299       | )      |
| Net noncurrent deferred income tax assets  (liabilities) |   | **2,813**   | ** ** | (662       | )      |
|                                                     |   |        | ** ** |       |   |
| Current deferred income taxes                            |   |        | ** ** |       |   |
| Self-insurance/claims reserves                           |   | **11,558**  | ** ** | 10,377     |   |
| Inventories                                              |   | **4,667**   | ** ** | 4,784      |   |
| Employee benefits                                        |   | **3,037**   | ** ** | 2,554      |   |
| Accounts receivable                                      |   | **1,921**   | ** ** | 1,722      |   |
| Valuation allowances                                     |   | **(1,713**  | **)**      | (1,359     | )      |
| Other                                                    |   | **(229**    | **)**      | (1,550     | )      |
|                                                     |   |        | ** ** |       |   |
| Net current deferred income tax assets                   |   | **19,241**  | ** ** | 16,528     |   |
|                                                     |   |        | ** ** |       |   |
| Net deferred income tax assets                           |   | **$**       | **22,054** | ** ** | $      | 15,866 |   |

 

Asof November 30, 2003, the Company had foreign net operating loss carry-overs ofapproximately $38,600,000. The valuation allowance for deferred income taxassets, which relates primarily to foreign net operating loss carry-overs andnet deductible temporary differences, increased by $2,288,000 in 2003 and by$4,092,000 in 2002.

 

40

----

 

Thetax provision represents effective tax rates of 32%, 34% and 28% of incomebefore income taxes for the years ended November 30, 2003, 2002 and 2001,respectively.  A reconciliation ofincome taxes provided at the effective income tax rate and the amount  computed at the federal statutory income taxrate of  35% is as follows for the yearsended November 30:

 
| **(In thousands)**                       |   | **2003**   |       | **2002**   |   | **2001** |   |
|------------------------------------------|--------|------------|------------|------------|--------|----------|--------|
|                                     |   |       | ** ** |       |   |     |   |
| Domestic pretax income                   |   | **$**      | **25,799** | ** ** | $      | 37,708   |   | $ | 39,146 |   |
| Foreign pretax income                    |   | **18,171** | ** ** | 4,805      |   | (555     | )      |
|                                     |   | **$**      | **43,970** |       | $      | 42,513   |   | $ | 38,591 |   |
| Taxes at federal statutory rate          |   | **$**      | **15,390** | ** ** | $      | 14,880   |   | $ | 13,507 |   |
| State taxes (net of federal tax benefit) |   | **980**    | ** ** | 1,335      |   | 1,701    |   |
| Foreign losses with no federal benefit   |   | **317**    | ** ** | 3,306      |   | 3,669    |   |
| Foreign income taxed at lower rates      |   | **(2,089** | **)**      | (2,414     | )      | (1,575   | )      |
| Foreign tax credit                       |   | **(1,485** | **)**      | (1,432     | )      | (2,004   | )      |
| Foreign branch and withholding taxes     |   | **1,114**  | ** ** | 833        |   | 999      |   |
| Equity in earnings of joint venture      |   | **(187**   | **)**      | (996       | )      | (638     | )      |
| Percentage depletion                     |   | **(375**   | **)**      | (364       | )      | (382     | )      |
| Research and development credits         |   | **(584**   | **)**      | (598       | )      | (4,008   | )      |
| Other, net                               |   | **989**    | ** ** | (96        | )      | (419     | )      |
|                                     |   | **$**      | **14,070** |       | $      | 14,454   |   | $ | 10,850 |   |

 

In2001, the U.S. Internal Revenue Service (“IRS”) completed the examination ofthe Company’s 1993  through 1995 federalincome tax returns and issued an assessment. The Company agreed with the IRS regarding the assessment. The assessmentwas not material to the Company’s financial statements and was paid in 2002.

 

The1996 through 1998 federal income tax returns are currently under examination bythe IRS. No assessments have been issued to date. Although it cannot predictwith certainty the ultimate outcome of this examination, the Company believesit has adequately provided for any potential liabilities that may result.

 

In2001, the Company filed federal and state income tax claims for research anddevelopment credits for tax years 1990 through 2000.  The claims are currently under IRS examination.

 

AppropriateU.S. and foreign income taxes have been provided for earnings of foreignsubsidiary companies that are expected to be remitted in the near future. Thecumulative amount of undistributed earnings of foreign subsidiaries that Ameronintends to permanently invest and upon which no deferred U.S. income taxes havebeen provided is $ 65,756,000 at November 30, 2003. The additional U.S. incometax on the unremitted foreign earnings, if repatriated, would be offset inwhole or in part by foreign tax credits.

 

**NOTE 10  DEBT**

 

Short-termborrowings consisted of loans payable under bank credit lines.  There were no short-term borrowingsoutstanding at November 30, 2003 and $1,009,000 as of November 30, 2002.  At November 30, 2003, the equivalent of $11,775,000was available under these short-term credit lines. The effective interest rateon the outstanding loans at November 30, 2002 was 5.90%.

 

Domestically,as of November 30, 2003, the Company maintained a $100,000,000 revolving creditfacility with six banks (the “Revolver”). At November 30, 2003, $18,215,000 was utilized for standby letters ofcredit under the Revolver; therefore, $81,785,000 was available.  Under the Revolver, the Company may, at itsoption, borrow at floating interest rates based on specified margins over moneymarket rates, at anytime until January 2006, when all borrowings under theRevolver must be repaid.

 

Foreignsubsidiaries also maintain unsecured revolving credit facilities and short-termfacilities with banks. Foreign subsidiaries may borrow in various currencies,at interest rates based upon specified margins over money market rates. Theequivalent of $5,000,000 may be borrowed at any time through March 2005 underone facility. Other short-term lines permit borrowings up to $9,300,000. AtNovember 30, 2003, $3,677,000 was borrowed under these facilities.

 

Borrowingsunder certain bank facilities by the Company and its foreign subsidiaries aresupported by the Revolver and, accordingly, have been classified as long-termdebt and are considered payable when the Revolver is due.

 

Long-termdebt consisted of the following as of November 30:

 
| **(In thousands)**                                                  |   | **2003**   |       | **2002**   |       |
|---------------------------------------------------------------------|--------|------------|------------|------------|------------|
| Fixed-rate notes:                                                   |   |       | ** ** |       |       |
| 7.92%, payable in annual principal installments of  $8,333          |   | **$**      | **25,000** | ** ** | $          | 33,333 |   |
| 5.36%, payable in annual principal installments of  $10,000         |   | **50,000** | ** ** | —     |       |
| Variable-rate industrial development bonds,                         |   |       | ** ** |       |       |
| payable in 2016  (1.20% at November 30, 2003)                       |   | **7,200**  | ** ** | 7,200      |       |
| payable in 2021  (1.35% at November 30, 2003)                       |   | **8,500**  | ** ** | 8,500      |       |
| Variable-rate bank                                                  |   |       | ** ** |       |       |
| revolving credit facilities - domestic                              |   | **—** | ** ** | 58,000     |       |
| Variable-rate bank                                                  |   |       | ** ** |       |       |
| revolving credit facilities - foreign  (4.75% at November 30, 2003) |   | **3,677**  | ** ** | 4,123      |       |
|                                                                |   | **94,377** |       | 111,156    | ** ** |
| Less current portion                                                |   | **(8,333** | **)**      | (8,333     | )          |
|                                                                |   | **$**      | **86,044** |       | $          | 102,823 | ** ** |

 

Futurematurities of long-term debt were as follows as of November 30, 2003:

 
| **(In thousands)** |   | **Years  ending  November 30,** | ** ** | **Amount** | ** ** |
|--------------------|--------|---------------------------------|------------|------------|------------|
|               |   | 2004                            |       | $          | 8,333      |   |
|               |   | 2005                            |       | 18,333     |       |
|               |   | 2006                            |       | 22,011     |       |
|               |   | 2007                            |       | 10,000     |       |
|               |   | 2008                            |       | 10,000     |       |
|               |   | Thereafter                      |       | 25,700     |       |
|               |   |                            |       | $          | 94,377     |   |

 

Thelending agreements contain various restrictive covenants, including therequirement to maintain specified amounts of net worth and restrictions on cashdividends, borrowings, liens, investments and guarantees, and meet certainfinancial ratios. Under the most restrictive provisions of the Company’slending agreements, approximately $20,091,000 of retained earnings were notrestricted as of November 30, 2003, as to the declaration of cash dividends orthe repurchase of Company stock. At November 30, 2003, the Company was incompliance with all covenants.

 

41

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TheRevolver, the 5.36% term notes and the 7.92% term notes are collateralized bysubstantially all of the Company’s assets. The industrial revenue bonds aresupported by standby letters of credit that are issued under the Revolver.  Certain note agreements contain provisionsregarding the Company’s ability to grant security interests or liens inassociation with other debt instruments. If the Company grants such a securityinterest or lien, then such notes will be collateralized equally and ratably aslong as such other debt shall be collateralized.

 

Interestincome and expense were as follows for the years ended November 30:

 
| **(In thousands)**    |   | **2003** |      | **2002**   |   | **2001** |   |
|-----------------------|--------|----------|-----------|------------|--------|----------|--------|
| Interest expense      |   | **$**    | **6,793** | ** ** | $      | 7,024    |   | $ | 10,471 |   |
| Interest income       |   | **(148** | **)**     | (188       | )      | (258     | )      |
| Interest expense, net |   | **$**    | **6,645** | ** ** | $      | 6,836    |   | $ | 10,213 |   |

 

Thefollowing disclosure of the estimated fair value of the Company’s debt is madein accordance with the requirements of SFAS 107, “Disclosures about Fair Valueof Financial Instruments.” The estimated fair-value amounts have beendetermined by the Company using available market information and appropriatevaluation methodologies. Considerable judgment is required to develop theestimated fair value, thus the estimates provided herein are not necessarilyindicative of the amounts that could be realized in a current market exchange.

 
| **(In thousands)**                |   | **Carrying  Amount** | ** ** | **Fair  Value** | ** ** |
|-----------------------------------|--------|----------------------|------------|-----------------|------------|
| **November 30, 2003**             |   |                 | ** ** |            | ** ** |
| **Fixed-rate, long-term debt**    |   | **$**                | **75,000** | ** **      | **$**      | **77,453** | ** ** |
| **Variable-rate, long-term debt** |   | **19,377**           | ** ** | **19,377**      | ** ** |
|                              |   |                 |       |            |       |
| November 30, 2002                 |   |                 |       |            |       |
| Short-term borrowings             |   | 1,009                |       | 1,009           |       |
| Fixed-rate, long-term debt        |   | 33,333               |       | 35,577          |       |
| Variable-rate, long-term debt     |   | 77,823               |       | 77,823          |       |
|                                   |        |                      |            |                 |            |  |  |

 

Theestimated fair value of the Company’s variable-rate debt approximates thecarrying value of the debt since the variable interest rates are market-based,and the Company believes such debt could be refinanced on materially similarterms. The estimated fair value of the Company’s fixed-rate, long-term debt isbased on U.S. government notes at November 30, 2003 plus an estimated spreadfor similar securities with similar remaining maturities.

 

**NOTE 11  LEASE COMMITMENTS**

 

TheCompany leases facilities and equipment under non-cancelable operating leases.Rental expense under long-term operating leases of real property, vehicles andother equipment was $4,773,000 in 2003, $5,071,000 in 2002 and $5,687,000 in2001. Future rental commitments were as follows as of November 30, 2003:

 
| **(In thousands)** |   | **Years  ending  November 30,** | ** ** | **Amount** | ** ** |
|--------------------|--------|---------------------------------|------------|------------|------------|
|               |   | 2004                            |       | $          | 4,694      |   |
|               |   | 2005                            |       | 3,901      |       |
|               |   | 2006                            |       | 2,484      |       |
|               |   | 2007                            |       | 2,088      |       |
|               |   | 2008                            |       | 2,059      |       |
|               |   | Thereafter                      |       | 21,737     |       |
|               |   |                            |       | $          | 36,963     |   |

** **

Futurerental commitments for leases are not reduced by minimum non-cancelablesublease rentals aggregating $2,741,000 at November 30, 2003.

 

**NOTE 12  INCENTIVE STOCK COMPENSATION PLANS**

 

TheCompany has adopted the disclosure only provisions of SFAS No. 123, “Accountingfor Stock-Based Compensation.”

 

In2001, the 2001 Stock Incentive Plan (“2001 Plan”) was approved by thestockholders of the Company. The 2001 Plan serves as the successor to both the1992 Incentive Stock Compensation Plan and the 1994 Non-Employee Director StockOption Plan and supercedes those plans.Under the terms of the 2001 Plan,380,000 new shares of common stock were made available for awards both tonon-employee directors and to key employees of the Company.  Awards to key employees may include, but arenot limited to, stock options, restricted stock, performance shares andperformance unit awards; however, no more than 80,000 of such shares were madeavailable for issuance as either restricted stock, performance stock,performance shares or performance units. Restrictions may limit the sale, transfer, voting rights and dividendson these shares. At November 30, 2003, 60,000 restricted shares wereoutstanding. With respect to non-employee directors, on the first business dayfollowing the date of the annual meeting of stockholders of the Company, eachnon-employee director receives an option to purchase 3,000 shares of commonstock.

 

AtNovember 30, 2003, the Company had 838,119 non-qualified stock optionsoutstanding with terms of from 10 to 15 years from the date of grant, and234,000 shares available for future grants under the 2001 plan. The exerciseprice for such outstanding stock options is generally the fair market value ofthe Company’s stock on the date of the original grant. Such options vest inequal annual installments over four years. Certain options have a cashlessexercise feature

 

SFASNo. 123 requires pro forma information regarding net income and earnings pershare as if compensation cost for stock options had been determined based onthe fair value of the options on the grant date. The Company estimates the fairvalue of stock options at the grant date by using the Black Scholes optionpricing model with the following weighted-average assumptions used for grantsin 2001, 2002 and 2003, respectively: dividend yields of 3.47%, 2.01% and2.21%; an expected volatility of 25.5%, 35.08% and 36.92%; risk-free rates of4.90%, 4.84% and 2.93%; and an expected life of five years for all years.

 

Underthe accounting provisions of SFAS No. 123, the Company’s net income andearnings per share would have been as indicated below for the years endedNovember 30:

 
| **(In thousands, except per share data)**                                                   |   | **2003** |       | **2002**   |   | **2001** |   |
|---------------------------------------------------------------------------------------------|--------|----------|------------|------------|--------|----------|--------|
| Reported net income                                                                         |   | **$**    | **29,900** | ** ** | $      | 28,059   |   | $ | 27,741 |   |
| Add: Stock-based employee compensation expense  included in reported net income, net of tax |   | **461**  | ** ** | 847        |   | 1,066    |   |
| Deduct: Stock-based employee compensation expense  determined under SFAS No.123, net of tax |   | **(832** | **)**      | (925       | )      | (1,287   | )      |
| Pro forma net income                                                                        |   | **$**    | **29,529** | ** ** | $      | 27,981   |   | $ | 27,520 |   |
| Earning per share (basic)                                                                   |   |     | ** ** |       |   |     |   |
| As reported                                                                                 |   | **$**    | **3.77**   | ** ** | $      | 3.61     |   | $ | 3.58 |   |
| Pro forma                                                                                   |   | **3.73** | ** ** | 3.60       |   | 3.55     |   |
| Earning per share (diluted)                                                                 |   |     | ** ** |       |   |     |   |
| As reported                                                                                 |   | **3.67** | ** ** | 3.49       |   | 3.45     |   |
| Pro forma                                                                                   |   | **3.62** | ** ** | 3.47       |   | 3.42     |   |

 

42

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A summary of the Company’s stock options as ofNovember 30, 2001, 2002 and 2003, and changes during the years then ended,follows:

 
|                                                            |   | **Number of  Options** |       | **Weighted-Average  Exercise Price** | ** ** |
|-----------------------------------------------------------------|--------|------------------------|------------|--------------------------------------|------------|
| Outstanding at November 30, 2000                                |   | 1,007,818              |       | $                                    | 20.95      |   |
| Granted                                                         |   | 205,000                |       | 20.55                                |       |
| Exercised                                                       |   | (7,300                 | )          | 17.75                                |       |
| Forfeited                                                       |   | (11,000                | )          | 25.14                                |       |
| Outstanding at November 30, 2001                                |   | 1,194,518              |       | 20.86                                |       |
| Options exercisable at November 30, 2001                        |   | 770,018                |       | 20.98                                |       |
| Weighted-average fair value of options  granted during 2001     |   |                   |       | 4.35                                 |       |
|                                                            |   |                   |       |                                 |       |
| Outstanding at November 30, 2001                                |   | 1,194,518              |       | 20.86                                |       |
| Granted                                                         |   | 21,000                 |       | 35.28                                |       |
| Exercised                                                       |   | (65,310                | )          | 18.80                                |       |
| Outstanding at November 30, 2002                                |   | 1,150,208              |       | 21.24                                |       |
| Options exercisable at November 30, 2002                        |   | 863,708                |       | 21.29                                |       |
| Weighted-average fair value of options  granted during 2002     |   |                   |       | 11.31                                |       |
|                                                            |   |                   |       |                                 |       |
| **Outstanding at November 30, 2002**                            |   | **1,150,208**          | ** ** | **21.24**                            |       |
| **Granted**                                                     |   | **24,000**             | ** ** | **27.95**                            |       |
| **Exercised**                                                   |   | **(323,239**           | **)**      | **19.41**                            |       |
| **Forfeited**                                                   |   | **(12,850**            | **)**      | **20.54**                            |       |
| **Outstanding at November 30, 2003**                            |   | **838,119**            | ** ** | **22.15**                            |       |
| **Options exercisable at November 30, 2003**                    |   | **665,119**            | ** ** | **22.02**                            |       |
| **Weighted-average fair value of options  granted during 2003** |   |                   | ** ** | **8.31**                             |       |
|                                                                 |        |                        |            |                                      |            |  |

 

The following summarizes information aboutstock options outstanding as of November 30, 2003:

 
| **Range  of  Exercise Prices** |   | **Options  Outstanding** |   | **Weighted Average  Remaining  Contractual Life  (in years)** |   | **Weighted  Average  Exercise Price** |   |
|--------------------------------|--------|--------------------------|--------|---------------------------------------------------------------|--------|---------------------------------------|--------|
| $15.00 to $25.00               |   |                     |   |                                                          |   |                                  |   |
| 25.00 to   35.00     |   | 652,119                  |   | 8.14                                                          |   | $                                     | 20.13  |   |
| 35.00 to   45.00     |   | 165,000                  |   | 9.24                                                          |   | 28.43                                 |   |
| 15.00 to   45.00     |   | 21,000                   |   | 8.30                                                          |   | 35.28                                 |   |
|                           |   | 838,119                  |   | 8.37                                                          |   | 22.15                                 |   |
|                                |        |                          |        |                                                               |        |                                       |        |  |

 
| **Range of  Exercise Prices** |   | **Options  Exercisable** |   | **Weighted  Average  Exercise Price** |   |
|-------------------------------|--------|--------------------------|--------|---------------------------------------|--------|
| $15.00 to  $25.00             |   | 518,869                  |   | $                                     | 20.12  |   |
| 25.00 to   35.00    |   | 141,000                  |   | 28.51                                 |   |
| 35.00 to   45.00    |   | 5,250                    |   | 35.28                                 |   |
| 15.00 to   45.00    |   | 665,119                  |   | 22.02                                 |   |
|                               |        |                          |        |                                       |        |  |

 

**NOTE 13 Goodwill and Other Intangible Assets**

 

In July 2001, the FASB issued SFAS No. 142,“Goodwill and Other Intangible Assets.” SFAS No. 142 requires that goodwill andintangible assets with indefinite useful lives no longer be amortized butinstead tested for impairment at least annually. SFAS No. 142 also requiresthat intangible assets with definite useful lives be amortized over theirrespective estimated useful lives to their estimated residual values. TheCompany adopted SFAS No. 142 effective December 1, 2002.

 

During 2003, the Company completed therequired transitional goodwill and intangible asset impairment tests. Noimpairment losses were identified as a result of these tests. The changes inthe carrying amount of goodwill by business segment were as follows:

 
| **(In thousands)**                  |   | **November  30, 2002** |   | **Foreign  Currency  Translation  Adjustments** |   | **November  30, 2003** |       |
|-------------------------------------|--------|------------------------|--------|-------------------------------------------------|--------|------------------------|------------|
| Business Segment:                   |   |                   |   |                                            |   |                   | ** ** |
| Performance Coatings & Finishes |   | $                      | 10,701 |                                            | $      | 772                    |       | **$** | **11,473** | ** ** |
| Fiberglass-Composite Pipe           |   | 1,440                  |   | —                                          |   | **1,440**              | ** ** |
| Water Transmission                  |   | —                 |   | —                                          |   | **—**             | ** ** |
| Infrastructure Products             |   | 201                    |   | —                                          |   | **201**                | ** ** |
| Total                               |   | $                      | 12,342 |                                            | $      | 772                    |       | **$** | **13,114** | ** ** |

 

The Company’s intangible assets and relatedaccumulated amortization consisted of the following at November 30:

 
|                   |   | **2003**                      | ** ** | **2002**                      | ** ** |
|------------------------|--------|-------------------------------|------------|-------------------------------|------------|
| **(In thousands)**     |   | **Gross  Intangible  Assets** | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Intangible  Assets** | ** ** | **Accumulated  Amortization** | ** ** |
|                   |   |                          | ** ** |                          | ** ** |   |   |   |   |
| Trademarks             |   | **$**                         | **2,076**  | ** **                    | **$**      | **(1,975** | **)** | $ | 1,961 |   | $ | (1,804 | ) |
| Non-Compete Agreements |   | **2,105**                     | ** ** | **(1,794**                    | **)**      | 2,105 |   | (1,591 | ) |
| Patents                |   | **212**                       | ** ** | **(212**                      | **)**      | 212 |   | (212 | ) |
| Leasehold Interests    |   | **1,930**                     | ** ** | **(1,930**                    | **)**      | 1,930 |   | (1,930 | ) |
| Total                  |   | **$**                         | **6,323**  | ** **                    | **$**      | **(5,911** | **)** | $ | 6,208 |   | $ | (5,537 | ) |

 

Amortization expense related tointangible assets for the fiscal years ended November 30, 2003, 2002, and 2001were $278,000, $540,000, and $813,000, respectively. At November 30, 2003,estimated future amortization expense for each of the years in the four-yearperiod ending November 30, 2007 was as follows: $209,000 for 2004, $169,000 for2005, $29,000 for 2006, and $5,000 for 2007.

 

43

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The following is a summary ofnet income and earnings per share for the years ended November 30, 2003, 2002and 2001, as adjusted to remove the amortization of goodwill.

 
| **(In thousands, except per share data)** |   | **2003**   |       | **2002** |   | **2001** |   |
|-------------------------------------------|--------|------------|------------|----------|--------|----------|--------|
| Reported net income                       |   | **$**      | **29,900** |     | $      | 28,059   |   | $ | 27,741 |   |
| Add: Goodwill amortization, net of tax    |   | **—** |       | 168      |   | 242      |   |
| Pro forma net income                      |   | **$**      | **29,900** |     | $      | 28,227   |   | $ | 27,983 |   |
|                                      |   |       |       |     |   |     |   |   |   |   |
| Basic net income per share                |   |       |       |     |   |     |   |
| As reported                               |   | **$**      | **3.77**   |     | $      | 3.61     |   | $ | 3.58 |   |
| Pro forma                                 |   | **3.77**   |       | 3.63     |   | 3.61     |   |
|                                      |   |       |       |     |   |     |   |
| Diluted net income per share              |   |       |       |     |   |     |   |
| As reported                               |   | **3.67**   |       | 3.49     |   | 3.45     |   |
| Pro forma                                 |   | **3.67**   |       | 3.51     |   | 3.48     |   |

 

**NOTE14  COMMITMENTS AND CONTINGENCIES**

 

The Company is one of numerous defendants invarious asbestos-related personal injury lawsuits. These cases generally seekunspecified damages for asbestos-related diseases based on alleged exposure toproducts previously manufactured by the Company and others, and at this timethe Company is generally not aware of the extent of injuries allegedly sufferedby the individuals or the facts supporting the claim that injuries were causedby the Company’s products. Based upon the information available to it at thistime, the Company is not in a position to evaluate its potential exposure, ifany, as a result of such claims. Hence, no amounts have been accrued for losscontingencies related to these lawsuits in accordance with SFAS No. 5,“Accounting for Contingencies.” The Company continues to vigorously defend allsuch lawsuits. As of November 30, 2003, the Company was a defendant inasbestos-related cases involving 17,447 claimants, compared to 8,382 claimantsas of November 30, 2002. The Company is not in a position to estimate thenumber of additional claims that may be filed against it in the future. For thefiscal year ended November 30, 2003, there were new claims involving 9,279claimants, dismissals and/or settlements involving 211 claimants and judgmentsinvolving 3 claimants. Net costs and expenses incurred by the Company for thefiscal year ended November 30, 2003 in connection with asbestos-related claimswere less than $600,000.

 

The Company is one of numerous defendants invarious silica-related personal injury lawsuits. These cases generally seekunspecified damages for silica-related diseases based on alleged exposure toproducts previously manufactured by the Company and others, and at this timethe Company is not aware of the extent of injuries allegedly suffered by theindividuals or the facts supporting the claim that injuries were caused by theCompany’s products. Based upon the information available to it at this time,the Company is not in a position to evaluate its potential exposure, if any, asa result of such claims. Hence, no amounts have been accrued for losscontingencies related to these lawsuits in accordance with SFAS No. 5. TheCompany continues to vigorously defend all such lawsuits. As of November 30,2003, the Company was a defendant in silica-related cases involving 6,847claimants, compared to 48 claimants as of November 30, 2002. The Company is notin a position to estimate the number of additional claims that may be filedagainst it in the future. For the fiscal year ended November 30, 2003, therewere new claims involving 6,880 claimants, dismissals and/or settlementsinvolving 81 claimants and no judgments. Net costs and expenses incurred by theCompany for the fiscal year ended November 30, 2003 in connection withsilica-related claims were about $300,000.

 

In addition, certain other claims, suits andcomplaints that arise in the ordinary course of business, have been filed orare pending against the Company. Management believes that these matters areeither adequately reserved, covered by insurance, or would not have a materialeffect on the Company’s financial position or its results of operations ifdisposed of unfavorably.

 

The Company is subject to federal, state andlocal laws and regulations concerning the environment and is currentlyparticipating in administrative proceedings at several sites under these laws.While the Company finds it difficult to estimate with any certainty the totalcost of remediation at the several sites, on the basis of currently availableinformation and reserves provided, the Company believes that the outcome of suchenvironmental regulatory proceedings will not have a material effect on theCompany’s financial position or its results of operations.

 

**NOTE 15 Employee Benefit Plans**

 

The Company has a qualified, defined benefit,noncontributory pension plan for certain U.S. employees not covered by unionpension plans. The Company’s subsidiary in the Netherlands provides definedretirement benefits to its employees. The Company has a supplementalnon-qualified, non-funded retirement plan (“SERP”) for certain U.S. executives.The Company also provides health and life insurance to a limited number ofeligible retirees and eligible survivors of retirees.

 

Benefits paid to participants are based uponage, years of credited service and average compensation or negotiated benefitrates. For purposes of the qualified pension plan, compensation is base  monthly salary, exclusive of overtime,severance, bonuses, commissions or deferral amounts. The U.S. Internal RevenueCode limits the amount per year on which benefits are based and the aggregateamount of the annual pension which may be paid by an employer from a plan whichis qualified under the Internal Revenue Code for U.S. federal income tax  purposes. The SERP provides for supplementalpayments to be made to certain eligible executives in amounts sufficient tomaintain total benefits upon retirement had there been no such Internal RevenueCode limitations, and, among other features, expands annual compensation toinclude bonuses and deferred compensation, calculated based upon the highestfive of the last ten years of earnings prior to retirement. Such supplementalpayments are typically made in the form of straight-life annuities paid overthe life of retired executives, however, future payments can be accelerated atany time, including in-service lump-sum payments, subject to certainreductions.

 

Assets of the Company’s U.S. defined benefitplan are invested in a directed trust. Assets in the trust are invested indomestic and foreign equity securities of corporations (including $3,686,000 ofthe Company’s common stock at November 30, 2003), U.S. government obligations,derivative securities, corporate bonds and money market funds. The Dutchsubsidiary contracts with a third-party insurance company to pay benefits toretirees.

 

44

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The following sets forth the change in benefitobligations, change in plan assets, funded status and amounts recognized in thebalance sheet as of November 30, 2003 and 2002 for the Company’s U.S. definedbenefit retirement plans and postretirement health care and life insurancebenefits:

 
| **(In thousands)**                             |   | **U.S.  Pension Benefits** |        | **U.S.  Postretirement  Health Care** |   |
|------------------------------------------------|--------|----------------------------|-------------|---------------------------------------|--------|
|                                           |   | **2003**                   |        | **2002**                              |   | **2003** |   | **2002** |   |
| **Change in Benefit Obligation**               |   |                       |        |                                  |   |   |   |   |   |
|                                           |   |                       |        |                                  |   |   |   |   |   |
| Projected benefit obligation-beginning of year |   | **$**                      | **158,708** | ** **                            | $      | 146,174 |   | **$** | **2,903** | ** ** | $ | 2,765 |   |
| Service cost                                   |   | **2,851**                  | ** **  | 2,506                                 |   | **105** | ** ** | 98 |   |
| Interest cost                                  |   | **10,648**                 | ** **  | 10,353                                |   | **191** | ** ** | 192 |   |
| Benefit adjustments                            |   | **2,191**                  | ** **  | 393                                   |   | **—** | ** ** | — |   |
| Foreign currency translation adjustment        |   | **—**                 | ** **  | —                                |   | **—** | ** ** | — |   |
| Actuarial loss (gain)                          |   | **16,988**                 | ** **  | 9,127                                 |   | **501** | ** ** | (5 | ) |
| Participant contributions                      |   | **—**                 | ** **  | —                                |   | **—** | ** ** | — |   |
| Benefit payments                               |   | **(10,106**                | **)**       | (9,845                                | )      | **(220** | **)** | (147 | ) |
| Projected benefit obligation-end of year       |   | **$**                      | **181,280** | ** **                            | $      | 158,708 |   | **$** | **3,480** | ** ** | $ | 2,903 |   |
| **Change in Plan Assets**                      |   |                       | ** **  |                                  |   |   | ** ** |   |   |
| Plan assets at fair value-beginning of year    |   | **$**                      | **113,738** | ** **                            | $      | 135,171 |   | **$** | **354** | ** ** | $ | 338 |   |
| Actual return on plan assets                   |   | **19,287**                 | ** **  | (11,834                               | )      | **13** | ** ** | 19 |   |
| Employer contributions                         |   | **248**                    | ** **  | 246                                   |   | **201** | ** ** | 144 |   |
| Participant contributions                      |   | **—**                 | ** **  | —                                |   | **—** | ** ** | — |   |
| Foreign currency translation adjustment        |   | **—**                 | ** **  | —                                |   | **—** | ** ** | — |   |
| Benefit payments                               |   | **(10,106**                | **)**       | (9,845                                | )      | **(220** | **)** | (147 | ) |
| Plan assets at fair value-end of year          |   | **$**                      | **123,167** | ** **                            | $      | 113,738 |   | **$** | **348** | ** ** | $ | 354 |   |
| **Funded Status**                              |   |                       | ** **  |                                  |   |   | ** ** |   |   |
| Funded Status                                  |   | **$**                      | **(58,113** | **)**                                 | $      | (44,970 | ) | **$** | **(3,132** | **)** | $ | (2,549 | ) |
| Unrecognized actuarial loss                    |   | **52,923**                 | ** **  | 51,081                                |   | **868** | ** ** | 374 |   |
| Unrecognized transition obligation             |   | **—**                 | ** **  | —                                |   | **700** | ** ** | 785 |   |
| Unrecognized prior service cost                |   | **2,805**                  | ** **  | 1,540                                 |   | **(120** | **)** | (134 | ) |
| Net amount recognized                          |   | **$**                      | **(2,385**  | **)**                                 | $      | 7,651 |   | **$** | **(1,684** | **)** | $ | (1,524 | ) |
| **Balance Sheet Amounts**                      |   |                       | ** **  |                                  |   |   | ** ** |   |   |
| Prepaid cost                                   |   | **$**                      | **—**  | ** **                            | $      | — |   | **$** | **49** | ** ** | $ | 35 |   |
| Accrued cost                                   |   | **(50,387**                | **)**       | (34,855                               | )      | **(1,733** | **)** | (1,559 | ) |
| Intangible asset                               |   | **2,805**                  | ** **  | 1,242                                 |   | **—** | ** ** | — |   |
| Accumulated other comprehensive loss, pretax   |   | **45,197**                 | ** **  | 41,264                                |   | **—** | ** ** | — |   |
| Net amount recognized                          |   | **$**                      | **(2,385**  | **)**                                 | $      | 7,651 |   | **$** | **(1,684** | **)** | $ | (1,524 | ) |

 

The projected benefit obligation, accumulatedbenefit obligation, and fair value of plan assets for the pension plans withaccumulated benefit obligations in excess of plan assets were $181,280,000,$173,554,000, and $123,167,000, respectively, as of November 30, 2003, and$158,708,000, $148,593,000, and $113,738,000, respectively, as of November 30,2002.

 

The Company’s policy is to make pension plancontributions to the extent such contributions are mandatory, actuariallydetermined and tax deductible. The Company expects to contribute $3,547,000 tothe U.S. pension plans in 2004.

 

45

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Net periodic benefit costs for the Company’sdefined benefit retirement plans and postretirement health care and lifeinsurance benefits for 2003, 2002 and 2001 included the following components:

 
| **(****In thousands****)**                                      |   | **U.S.  Pension Benefits** |       | **U.S.  Postretirement Health Care** |   |
|-----------------------------------------------------------------|--------|----------------------------|------------|--------------------------------------|--------|
|                                                            |   | **2003**                   |       | **2002**                             |   | **2001** |   | **2003** |   | **2002** |   | **2001** |   |
| Service cost                                                    |   | **$**                      | **2,851**  | ** **                           | $      | 2,506 |   | $ | 2,289 |   | **$** | **105** | ** ** | $ | 98 |   | $ | 93 |   |
| Interest cost                                                   |   | **10,648**                 | ** ** | 10,353                               |   | 10,168 |   | **191** | ** ** | 192 |   | 184 |   |
| Expected return on plan assets                                  |   | **(9,521**                 | **)**      | (12,711                              | )      | (15,343 | ) | **(33** | **)** | (33 | ) | — |   |
| Amortization of unrecognized prior service  cost                |   | **925**                    | ** ** | 520                                  |   | 382 |   | **(14** | **)** | (14 | ) | — |   |
| Amortization of unrecognized net transition  (asset) obligation |   | **—**                 | ** ** | (35                                  | )      | (115 | ) | **71** | ** ** | 71 |   | 71 |   |
| Amortization of accumulated loss (gain)                         |   | **5,379**                  | ** ** | 671                                  |   | (971 | ) | **21** | ** ** | 25 |   | 15 |   |
| Net periodic cost (benefit)                                     |   | **$**                      | **10,282** | ** **                           | $      | 1,304 |   | $ | (3,590 | ) | **$** | **341** | ** ** | $ | 339 |   | $ | 363 |   |

 

The following table provides theweighted-average assumptions used to compute the actuarial present value ofprojected benefit obligations:

 
|                                              |   | **U.S.  Pension Benefits** | ** ** | **U.S.  Postretirement Health Care** | ** ** |
|---------------------------------------------------|--------|----------------------------|------------|--------------------------------------|------------|
|                                              |   | **2003**                   |       | **2002**                             | ** ** | **2001** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| Weighted-average discount rate                    |   | **6.00**                   | **%**      | 6.75                                 | %          | 7.25 | % | **6.00** | **%** | 6.75 | % | 7.25 | % |
| Expected long-term rate of return on plan  assets |   | **8.75**                   | **%**      | 9.75                                 | %          | 9.75 | % | **N/A** | ** ** | N/A |   | N/A |   |
| Rate of increase in compensation levels           |   | **3.50**                   | **%**      | 4.25                                 | %          | 4.75 | % | **3.50** | **%** | 4.25 | % | 4.75 | % |

 

The assumed health care cost trend wasincreased from 9% to 10% in 2003; it is assumed that the rate will declinegradually to 5% by 2008 and beyond. The effect of a one-percentage-point changein the assumed health care cost trend would have altered the amounts of thebenefit obligation and the sum of the service cost and interest cost componentsof postretirement benefit expense for 2003, as follows:

 
| **(****In thousands****)**                                                       |   | **Increase** |   | **Decrease** |   |
|----------------------------------------------------------------------------------|--------|--------------|--------|--------------|--------|
| Effect on total of service and interest cost components of net  periodic expense |   | $            | 16     |         | $      | (18 | ) |
| Effect on postretirement benefit obligation                                      |   | 111          |   | (96          | )      |
|                                                                                  |        |              |        |              |        |  |  |

 

For the Dutch pension plan, the projectedbenefit obligation and plan assets at November 30, 2003 were $32,239,000 and$23,433,000, respectively. A net accrued pension liability of $651,000 wasrecorded as of November 30, 2003. The projected benefit obligation and planassets at November 30, 2002 were $24,428,000 and $18,123,000, respectively.

 

Approximately 19% of the Company’s employeesare covered by union-sponsored, collectively-bargained, multi-employer pensionplans.  Related to these plans, theCompany contributed and charged to expense $2,340,000, $2,242,000 and$4,009,000 in 2003, 2002 and 2001, respectively. These contributions aredetermined in accordance with the provisions of negotiated labor contracts andgenerally are based on the number of hours worked. The Company has no intentionof withdrawing from any of these plans, nor is there any intention to terminatesuch plans.

 

The Company has a deferred compensation planproviding eligible executives with the opportunity to participate in anunfunded, deferred compensation program. Under the program, participants maydefer base compensation and bonuses and earn interest on their deferredamounts.  The program is not qualifiedunder Section 401 of the U.S. Internal Revenue Code. The total of participantdeferrals and earnings thereon was $2,025,000 at November 30, 2003 and$2,331,000 at November 30, 2002.  Theparticipant deferrals earn interest at a rate based on the rate on U.S.government obligations. The interest expense related to this plan was $133,000in 2003, $302,000 in 2002 and $667,000 in 2001.

 

The Company has a life insurance plan whichprovides eligible executives with life insurance protection equal to threetimes base salary. Upon retirement, the executive is provided with lifeinsurance protection equal to final base salary. Benefits may be paid as a lumpsum or as an annual income to the identified survivor over ten years. Theexpense related to this plan was $264,000 in 2003, $148,000 in 2002 and$230,000 in 2001.

 

In connection with the SERP and the above twoplans, whole life insurance policies are purchased on the related participants.At November 30, 2003, the cash surrender value of these policies was$29,312,000; and at November 30, 2002 the cash surrender value of thesepolicies was $26,415,000, net of loans of $1,000,000. The Company is the soleowner of such policies.

 

The Company has severance agreements withcertain key employees that could provide benefits upon termination of up to 3.5times total annual compensation of such employees.

 

The Company provides to certain employees asavings plan under Section 401(k) of the U.S. Internal Revenue Code. Thesavings plan allows for deferral of income up to a certain percentage throughcontributions to the plan, within certain restrictions. Company matchingcontributions are in the form of cash. In 2003, 2002 and 2001, the Companyrecorded expense for matching contributions of $880,000, $602,000 and $883,000,respectively.

 

46

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**NOTE 16 ****CapitalStock**

 

The Company is incorporated in Delaware. Thearticles of incorporation authorize 12,000,000 shares of $2.50 par value commonstock, 1,000,000 shares of $1.00 par value preferred stock and 100,000 sharesof $1.00 par value series A junior participating cumulative preferred stock.The preferred stock may be issued in series, with the rights and preferences ofeach series to be established by the Board of Directors. As of November 30,2003, no shares of preferred stock or series A junior participating cumulativepreferred stock were outstanding.

 

On March 26, 2003 the Company’s Board ofDirectors declared a two-for-one stock split in the form of a stock dividend ofone additional common share for every outstanding common share held bystockholders of record on May 1, 2003, payable May 27, 2003. Theweighted-average number of shares and per share information presented hereinreflect the Company’s shares and earnings and dividends per share on apost-split basis.

 

As of November 30, 2003, 8,214,563 shares ofcommon stock were issued and outstanding, including 60,000 restricted shareswhich were granted on January 23, 2002. Restrictions limit the sale andtransfer on these shares. On each anniversary of the grant date, 20,000 of theshares become unrestricted.

 

The Company has a Stockholders’ Rights Plan,which, among other things, entitles stockholders to purchase common stock at asignificant discount if a party acquires 15% or more of the Company’s commonstock or announces a tender offer for at least 15% of the Company’s commonstock outstanding.

 

**NOTE 17 ****Quarterly Financial Data (unaudited)**

 

Summarized quarterly financial data for theyears ended November 30, 2003 and 2002, follow:

 
| **(****In thousands,  except per share data)** |   | **First  Quarter** |        | **Second  Quarter** |       | **Third  Quarter** |       | **Fourth  Quarter** |        |
|------------------------------------------------|--------|--------------------|-------------|---------------------|------------|--------------------|------------|---------------------|-------------|
| **2003**                                       |   |               | ** **  |                | ** ** |               | ** ** |                | ** **  |
| **Sales**                                      |   | **$**              | **130,621** | ** **          | **$**      | **147,844**        | ** ** | **$**               | **155,174** | ** ** | **$** | **167,856** | ** ** |
| **Gross profit**                               |   | **32,665**         | ** **  | **40,317**          | ** ** | **42,444**         | ** ** | **51,062**          | ** **  |
| **Net income**                                 |   | **2,175**          | ** **  | **7,825**           | ** ** | **7,711**          | ** ** | **12,189**          | ** **  |
| **Diluted net income per share**               |   | **.27**            | ** **  | **.97**             | ** ** | **.94**            | ** ** | **1.47**            | ** **  |
| **Stock price per share-high**                 |   | **30.99**          | ** **  | **35.53**           | ** ** | **35.35**          | ** ** | **34.93**           | ** **  |
| **Stock price per share-low**                  |   | **24.89**          | ** **  | **25.05**           | ** ** | **30.00**          | ** ** | **28.49**           | ** **  |
| **Dividends per share**                        |   | **.16**            | ** **  | **.20**             | ** ** | **.20**            | ** ** | **.20**             | ** **  |
|                                           |   |               |        |                |       |               |       |                |        |
| 2002                                           |   |               |        |                |       |               |       |                |        |
| Sales                                          |   | $                  | 120,702     |                | $          | 138,099            |       | $                   | 138,813     |   | $ | 141,859 |   |
| Gross profit                                   |   | 30,439             |        | 35,564              |       | 36,553             |       | 39,327              |        |
| Net income                                     |   | 1,771              |        | 7,562               |       | 8,711              |       | 10,015              |        |
| Diluted net income per share                   |   | .21                |        | .91                 |       | 1.06               |       | 1.27                |        |
| Stock price per share-high                     |   | 35.79              |        | 38.74               |       | 36.45              |       | 28.51               |        |
| Stock price per share-low                      |   | 31.30              |        | 33.53               |       | 24.63              |       | 22.26               |        |
| Dividends per share                            |   | .16                |        | .16                 |       | .16                |       | .16                 |        |

 

The Company traditionally experiences lowersales during the first fiscal quarter because of seasonal patterns associatedwith weather and contractor schedules.

 

**NOTE 18 Segment Information**

 

The Company adopted SFAS No. 131, “Disclosureabout Segments of an Enterprise and Related Information.” SFAS No. 131 requiresdisclosure of certain information about operating segments, geographic areas inwhich the Company operates, major customers, and products and services. Inaccordance with SFAS No. 131, the Company has determined it has four operatingsegments. The Performance Coatings & Finishes Group manufactures andmarkets high-performance industrial and marine coatings. TheFiberglass-Composite Pipe Group manufactures and markets filament-wound andmolded composite fiberglass pipe, tubing, fittings and well screens. The WaterTransmission Group manufactures and supplies concrete and steel pressure pipe,concrete non-pressure pipe, protective linings for pipe, and fabricatedproducts. The Infrastructure Products Group manufactures and sells ready-mixconcrete, sand and aggregates, concrete pipe and culverts, and concrete andsteel lighting and traffic poles. Each of these segments has a dedicatedmanagement team and is managed separately, primarily because of differences inproducts.

 

The markets served by the Performance Coatings& Finishes Group and the Fiberglass-Composite Pipe Group are worldwide inscope. The Water Transmission Group serves primarily the western United States.The Infrastructure Products Group’s quarry and ready-mix business operatesexclusively in Hawaii, and poles are sold throughout the U.S. Sales for exportor to any individual customer did not exceed 10% of consolidated sales in 2003,2002, or 2001.

 

In accordance with SFAS No. 131, the followingtable presents information related to each operating segment included in, andin a manner consistent with, internal management reports. The Company allocatescertain selling, general and administrative expenses to operating segmentsutilizing assumptions believed to be appropriate in the circumstances.

 

Inter-segment sales were not significant.Income from reportable segments is exclusive of certain unallocated income andexpenses, interest expense and income taxes. Total assets by segment are thoseassets that are used exclusively by such segment.  Unallocated assets are principally cash, corporate property andequipment, and investments. Long-lived assets consist of all long-term assets,excluding investments and deferred tax assets.

 

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|                                        |       | **SEGMENT INFORMATION**                  |        |
|---------------------------------------------|------------|------------------------------------------|-------------|
| **(In thousands)**                          |       | **Performance  Coatings & Finishes** |        | **Fiberglass-  Composite Pipe** |   | **Water  Transmission** |   | **Infrastructure  Products** |   | **Other** |   | **Eliminations** |   | **Total** |   |
| **2003**                                    |       |                                     |        |   |   |   |   |   |   |   |   |   |   |   |   |
| **Sales**                                   |       | **$**                                    | **190,280** | ** ** | **$** | **114,613** | ** ** | **$** | **165,497** | ** ** | **$** | **130,493** | ** ** | **$** | **—** | ** ** | **$** | **(388** | **)** | **$** | **600,495** | ** ** |
| **Income before interest and income taxes** |       | **9,383**                                | ** **  | **21,881** | ** ** | **26,634** | ** ** | **15,509** | ** ** | **(22,792** | **)** | **—** | ** ** | **50,615** | ** ** |
| **Equity in earnings of joint venture**     |       | **—**                               | ** **  | **—** | ** ** | **—** | ** ** | **—** | ** ** | **667** | ** ** | **—** | ** ** | **667** | ** ** |
| **Income from joint ventures-cost method**  |       | **636**                                  | ** **  | **3,042** | ** ** | **2,633** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **6,311** | ** ** |
| **Investments in joint ventures**           |       |                                     |        |   |   |   |   |   |   |   |   |   |   |   |   |
| **Equity method**                           |       | **—**                               | ** **  | **—** | ** ** | **—** | ** ** | **—** | ** ** | **13,064** | ** ** | **—** | ** ** | **13,064** | ** ** |
| **Cost method**                             | ** ** | **1,695**                                | ** **  | **3,784** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **5,479** |   |
| **Long-lived assets**                       |       | **54,921**                               | ** **  | **26,141** | ** ** | **39,470** | ** ** | **40,323** | ** ** | **51,837** | ** ** | **—** | ** ** | **212,692** | ** ** |
| **Total assets**                            |       | **164,399**                              | ** **  | **147,326** | ** ** | **125,501** | ** ** | **70,202** | ** ** | **184,839** | ** ** | **(158,775** | **)** | **533,492** | ** ** |
| **Capital expenditures**                    |       | **5,901**                                | ** **  | **2,542** | ** ** | **2,656** | ** ** | **5,041** | ** ** | **967** | ** ** | **—** | ** ** | **17,107** | ** ** |
| **Depreciation and amortization**           |       | **5,206**                                | ** **  | **3,940** | ** ** | **4,124** | ** ** | **4,382** | ** ** | **719** | ** ** | **—** | ** ** | **18,371** | ** ** |
| 2002                                        |       |                                     |        |   |   |   |   |   |   |   |   |   |   |   |   |
| Sales                                       |       | $                                        | 183,311     |   | $ | 88,393 |   | $ | 145,024 |   | $ | 123,610 |   | $ | — |   | $ | (865 | ) | $ | 539,473 |   |
| Income before interest and income taxes     |       | 9,122                                    |        | 10,862 |   | 27,347 |   | 17,019 |   | (15,001 | ) | — |   | 49,349 |   |
| Equity in earnings of joint venture         |       | —                                   |        | — |   | — |   | — |   | 3,597 |   | — |   | 3,597 |   |
| Income from joint ventures-cost method      |       | 327                                      |        | 2,263 |   | 3,310 |   | — |   | — |   | — |   | 5,900 |   |
| Investments in joint ventures               |       |                                     |        |   |   |   |   |   |   |   |   |   |   |   |   |
| Equity method                               |       | —                                   |        | — |   | — |   | — |   | 12,940 |   | — |   | 12,940 |   |
| Cost method                                 |       | 2,203                                    |        | 3,784 |   | — |   | — |   | — |   | — |   | 5,987 |   |
| Long-lived assets                           |       | 49,314                                   |        | 28,338 |   | 40,966 |   | 39,694 |   | 32,841 |   | — |   | 191,153 |   |
| Total assets                                |       | 138,616                                  |        | 138,712 |   | 115,078 |   | 68,272 |   | 140,233 |   | (137,969 | ) | 462,942 |   |
| Capital expenditures                        |       | 3,697                                    |        | 1,642 |   | 4,331 |   | 3,696 |   | 1,148 |   | — |   | 14,514 |   |
| Depreciation and amortization               |       | 5,224                                    |        | 4,002 |   | 4,160 |   | 4,367 |   | 819 |   | — |   | 18,572 |   |
| 2001                                        |       |                                     |        |   |   |   |   |   |   |   |   |   |   |   |   |
| Sales                                       |       | $                                        | 188,759     |   | $ | 106,872 |   | $ | 143,226 |   | $ | 113,824 |   | $ | — |   | $ | (1,285 | ) | $ | 551,396 |   |
| Income before interest and income taxes     |       | 9,831                                    |        | 12,125 |   | 29,011 |   | 13,089 |   | (15,252 | ) | — |   | 48,804 |   |
| Equity in earnings of joint venture         |       | —                                   |        | — |   | — |   | — |   | 2,279 |   | — |   | 2,279 |   |
| Income from joint ventures-cost method      |       | 855                                      |        | 2,070 |   | 3,325 |   | — |   | — |   | — |   | 6,250 |   |
| Investments in joint ventures               |       |                                     |        |   |   |   |   |   |   |   |   |   |   |   |   |
| Equity method                               |       | —                                   |        | — |   | — |   | — |   | 12,793 |   | — |   | 12,793 |   |
| Cost method                                 |       | 2,203                                    |        | 3,784 |   | — |   | — |   | — |   | — |   | 5,987 |   |
| Long-lived assets                           |       | 45,240                                   |        | 28,140 |   | 41,146 |   | 40,474 |   | 45,592 |   | — |   | 200,592 |   |
| Total assets                                |       | 133,332                                  |        | 133,267 |   | 123,175 |   | 65,518 |   | 168,697 |   | (138,909 | ) | 485,080 |   |
| Capital expenditures                        |       | 3,037                                    |        | 5,013 |   | 2,047 |   | 8,596 |   | 604 |   | — |   | 19,297 |   |
| Depreciation and amortization               |       | 5,448                                    |        | 3,774 |   | 4,210 |   | 4,298 |   | 903 |   | — |   | 18,633 | . |

 
|                            |   | **GEOGRAPHIC  AREAS** |        |
|---------------------------------|--------|-----------------------|-------------|
| **(In thousands)**              |   | **United  States**    |        | **Europe** |   | **Asia** |   | **Other** |   | **Eliminations** |   | **Total** |   |
| **2003**                        |   |                  | ** **  |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Sales to external customers** |   | **$**                 | **422,091** | ** ** | **$** | **92,104** | ** ** | **$** | **51,228** | ** ** | **$** | **35,072** | ** ** | **$** | **—** | ** ** | **$** | **600,495** | ** ** |
| **Long-lived assets**           |   | **156,676**           | ** **  | **31,001** | ** ** | **10,692** | ** ** | **14,323** | ** ** | **—** | ** ** | **212,692** | ** ** |
| **Total assets**                |   | **464,548**           | ** **  | **106,637** | ** ** | **80,826** | ** ** | **40,256** | ** ** | **(158,775** | **)** | **533,492** | ** ** |
| 2002                            |   |                  |        |   |   |   |   |   |   |   |   |   |   |
| Sales to external customers     |   | $                     | 396,668     |   | $ | 77,429 |   | $ | 34,309 |   | $ | 31,067 |   | $ | — |   | $ | 539,473 |   |
| Long-lived assets               |   | 136,712               |        | 31,690 |   | 10,715 |   | 12,036 |   | — |   | 191,153 |   |
| Total assets                    |   | 415,709               |        | 88,547 |   | 69,358 |   | 27,297 |   | (137,969 | ) | 462,942 |   |
| 2001                            |   |                  |        |   |   |   |   |   |   |   |   |   |   |
| Sales to external customers     |   | $                     | 413,112     |   | $ | 80,277 |   | $ | 28,451 |   | $ | 29,556 |   | $ | — |   | $ | 551,396 |   |
| Long-lived assets               |   | 151,290               |        | 26,617 |   | 10,986 |   | 11,699 |   | — |   | 200,592 |   |
| Total assets                    |   | 456,171               |        | 81,148 |   | 59,196 |   | 27,474 |   | (138,909 | ) | 485,080 |   |

 

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**REPORT OFINDEPENDENT AUDITORS**

 

**Tothe Board of Directors and Stockholders of Ameron International Corporation:**

 

In our opinion, theaccompanying consolidated balance sheet and the related consolidated statementsof income, of stockholders’ equity, of comprehensive income, and of cash flows present fairly, in all materialrespects, the financial position of Ameron International Corporation and itssubsidiaries at November 30, 2003, and the results of their operations andtheir cash flows for the year then ended in conformity with accountingprinciples generally accepted in the United States of America. These financialstatements are the responsibility of the Company’s management; ourresponsibility is to express an opinion on these financial statements based onour audit.  We conducted our audit ofthese statements in accordance with auditing standards generally accepted inthe United States of America, which require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management,and evaluating the overall financial statement presentation. We believe thatour audit provides a reasonable basis for our opinion.

 

As discussed in Note 1 to theconsolidated financial statements, the Company changed its method of accountingfor goodwill effective December 1, 2002.

 
| /s/  PricewaterhouseCoopers LLP |   |
|---------------------------------|--------|

 

Los Angeles, California

February 4, 2004 

 

**MANAGEMENT’S LETTER**

 

We have prepared theaccompanying consolidated financial statements and related financialinformation of Ameron International Corporation and subsidiaries in conformitywith accounting principles generally accepted in the United States of America.Management is responsible for the integrity of the financial information includedin this Annual Report. In preparing the financial statements, management makesestimates as necessary based upon currently available information and judgmentsof current conditions and circumstances.

 

Ameron maintains a system ofinternal controls supported by documentation to provide reasonable assurancethat assets are safeguarded and the accounting records reflect the authorizedtransactions of the Company. We believe the Company’s system provides thisappropriate balance in accordance with established policies and procedures asimplemented by qualified personnel.

 

The independent auditors,PricewaterhouseCoopers LLP, appointed by the Board of Directors, areresponsible for expressing their opinion as to whether the consolidatedfinancial statements present fairly, in all material respects, the financialposition, operating results and cash flows of the Company. In this process,they consider the system of internal control, in order to determine theirauditing procedures for the purpose of expressing an opinion on the financialstatements. Their opinion appears on this page.

 

The Audit Committee of theBoard of Directors is composed of four directors who are not officers oremployees of the Company. They meet periodically with management,PricewaterhouseCoopers LLP and the internal auditors to review the audit scopeand results, discuss internal controls and financial reporting subjects, andreview management actions on these matters. PricewaterhouseCoopers LLP and theinternal auditors have full and free access to the members of the AuditCommittee.

 

 
| /s/ James S. Marlen                                             |   |                                            | /s/ Gary Wagner |   |
|-----------------------------------------------------------------|--------|-------------------------------------------------|-----------------|--------|
|                                                            |   |                                            |
| **JAMES S.  MARLEN**                                            |   | **GARY  WAGNER**                                |
| Chairman of  the Board, President & Chief Executive Officer |   | Senior Vice  President, Chief Financial Officer |

 

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