**INTERNATIONAL**

 

**  ALUMINUM**

 

** CORPORATION**

 

 

 

 

 

 

 

 

 

 

 

**2002 Annual Report**

 

 

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**COMPANYPROFILE**

 

**INTERNATIONALALUMINUM CORPORATION** is an integrated building products manufacturer ofdiversified lines of quality aluminum and vinyl products.  The Company is headquartered in MontereyPark, California and has approximately 1,500 employees.  Operations are conducted through thirteenNorth American subsidiaries.  TheCompany’s primary internet website is located at www.intlalum.com .

 

 

 

 

 

**PRODUCTS BYSEGMENT**

 

**COMMERCIAL**— Curtainwalls,window walls, slope glazed systems, storefront framing, entrance doors andframes, commercial operable windows, interior officefronts, office partitionsand interior doors and frames for the commercial building and tenantimprovement markets.  Productinformation is available at www.usalum.com and www.racointeriors.com.

 

**RESIDENTIAL**— Extensivelines of windows and patio doors manufactured from vinyl and aluminum andaluminum wardrobe mirror doors for the residential building and remodelingmarkets.  Product information isavailable at www.intlwindow.com.

 

**ALUMINUMEXTRUSION**— Mill finish, anodized, painted and fabricatedaluminum extrusions.  Productinformation is available at www.intlextrusion.com.

 

 

**CONTENTS**

 
| Financial  Highlights                                                                        |   |
|----------------------------------------------------------------------------------------------|--------|
| Letter to Shareholders                                                                       |   |
| Selected  Financial Data                                                                     |   |
| Management’s  Discussion and Analysis of Financial

Condition and Results of Operations |   |
| Quarterly  Financial Data                                                                    |   |
| Report of Independent  Accountants                                                           |   |
| Consolidated Financial  Statements                                                           |   |
| Notes to  Consolidated Financial Statements                                                  |   |
| Corporate  Information                                                                       |   |
| Subsidiaries  by Segment                                                                     |   |

 

 

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**FINANCIAL HIGHLIGHTS**

Fiscal Years Ended June 30,2002, 2001 and 2000

 
|                                                      |   | **2002**    |        | **2001**    |   | **2000**    |   |
|-----------------------------------------------------------|--------|-------------|-------------|-------------|--------|-------------|--------|
| **Operating Results:**                                    |   |        |        |        |   |        |   |
| Net sales                                                 |   | $           | 193,728,000 |        | $      | 209,909,000 |   | $ | 214,652,000 |   |
|                                                      |   |        |        |        |   |        |   |
| Income from continuing operations                         |   | $           | 1,017,000   |        | $      | 4,915,000   |   | $ | 1,187,000 |   |
| Income (loss) from discontinued operations                |   | (1,065,000  | )           | (281,000    | )      | 392,000     |   |
| Cumulative effect of accounting change                    |   | (7,935,000  | )           | —      |   | —      |   |
| Net income (loss)                                         |   | $           | (7,983,000  | )           | $      | 4,634,000   |   | $ | 1,579,000 |   |
|                                                      |   |        |        |        |   |        |   |
| **Financial Data:**                                       |   |        |        |        |   |        |   |
|                                                      |   |        |        |        |   |        |   |
| Net cash provided by operating activities                 |   | $           | 11,778,000  |        | $      | 23,151,000  |   | $ | 1,861,000 |   |
| Capital expenditures including acquisitions               |   | 11,783,000  |        | 7,749,000   |   | 10,253,000  |   |
|                                                      |   |        |        |        |   |        |   |
| Working capital                                           |   | 58,057,000  |        | 66,097,000  |   | 63,586,000  |   |
| Long-term debt                                            |   | —      |        | —      |   | —      |   |
| Shareholders’ equity                                 |   | 110,805,000 |        | 123,755,000 |   | 124,326,000 |   |
|                                                      |   |        |        |        |   |        |   |
| **Per Share Data:**                                       |   |        |        |        |   |        |   |
|                                                      |   |        |        |        |   |        |   |
| Continuing operations — Diluted                      |   | $           | .24         |        | $      | 1.16        |   | $ | .28 |   |
| Income (loss) from discontinued operations — Diluted |   | (.25        | )           | (.07        | )      | .09         |   |
| Cumulative effect of accounting change — Diluted     |   | (1.87       | )           | —      |   | —      |   |
| Net income (loss) — Diluted                          |   | $           | (1.88       | )           | $      | 1.09        |   | $ | .37 |   |
|                                                      |   |        |        |        |   |        |   |
| Dividends declared                                        |   | 1.20        |        | 1.20        |   | 1.20        |   |
|                                                      |   |        |        |        |   |        |   |
| Book value at yearend                                     |   | 26.10       |        | 29.15       |   | 29.29       |   |
| Market price at yearend                                   |   | 20.50       |        | 21.15       |   | 17.25       |   |

 

 

1

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**TO OUR SHAREHOLDERS:**

 

Incomefrom continuing operations plummeted to $1,017,000 or $.24 per share for theyear, down sharply from the $4,915,000 or $1.16 per share of income fromcontinuing operations for fiscal 2001. Sales revenues declined 7.7% to$193,728,000 for the year.  Othersignificant items effecting net income for all sources for the year were:

•      A $1,065,000 or $.25 per share loss fromdiscontinued operations

       resulting from the closure of MaestroProducts, our residential wood

       window and door operation.

•      A negative $7,935,000  or $1.87 per share cumulative effect of achange

       in accounting to reflect the write-downof impaired goodwill as a result of

       the required adoption of  SFAS 142 (see note 12 to the accompanying

       financial statements).

 

Thenet loss for the year, including the loss from discontinued operations andgoodwill impairment, was $7,983,000 or $1.88 per share versus net income of $4,634,000or $1.09 per share for fiscal 2001.

 

Thehigh level of optimism with which we entered fiscal 2002 was quickly shatteredby two completely unrelated events, each of which occurred on consecutive daysin early September of 2001:

•     On September 10, 2001, our South Gate,California Residential Products

       subsidiary was hit with anunanticipated labor strike which officially ended

       in mid-March 2002 but from which we arestill feeling the after-effects.

•     The tragic terrorist attacks of September11th which continue to this day

       to have a dampening effect on thenation’s economic recovery.

 

## *Residential Products*

 

Netsales for this product segment declined 15.8% with a predominant portionattributable to the above mentioned labor strike at our South Gate, Californiafacility.  Overnight we found ourselvesin the unenviable position of locating and training an entire workforce whileat the same time attempting to maintain our high quality, service and deliverystandards.   Although we experienced aperiod where some customers found it necessary to temporarily shift toalternative suppliers, we are extremely appreciative of the loyalty of themajority of our dealer network who stuck with us through this very tryingperiod.  At mid-year we received noticethat due to quality and delivery problems, we were permanently losing theaccount of a large home improvement retailer, supplied by all our residentiallocations on a regional basis, which had theretofore accounted for 12% ofsegment sales.  We have redirected ourmarketing focus to expand and better serve our dealer network and will nolonger pursue the high volume, low margin, high maintenance cost big-boxretailers.

 

Afteroperating Maestro Products for a number of years with less than satisfactoryresults and with declining sales volume, we made the decision in December 2001to cease operations in order to minimize losses.   This will allow us to concentrate our efforts on our corealuminum and vinyl product lines. Several new product offerings are planned for fiscal 2003.  Aggressive marketing programs wereintroduced during the year and custom designed user friendly quote preparationand order processing software programs were released to our dealers late in theyear.

 

 

2

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*CommercialProducts*

 

Sales for thisproduct segment declined 5.2% from fiscal 2001.  Operating income declined 6.5% to $10,862,000 from fiscal 2001’soperating income of $11,616,000. Following the September 2001 terrorist attacks the population’sseemingly greater confidence in national security plus low mortgage ratessparked a revival in housing demand. The same cannot be said for the commercial sector as the less-than-robusteconomy continued to cause commercial entities to defer large cash outlays onprojects not deemed as vital.  Late inthe second quarter of fiscal 2002, United States Aluminum of Canada — Ontariomoved to a newly constructed 70,000 square foot facility located in Guelph,Ontario, a suburb of greater Toronto. This full line facility, including fabrication, fill and debridge, and astate-of-the-art horizontal paint line greatly expands our presence in theToronto marketplace as well as enhancing our service capabilities in the upperMidwest and Northeastern U.S. markets. In April 2002 a new horizontal paint line was put into service at ourVernon, California facility.  In-housepainting results in lower costs and significantly improves our competitiveposition on painted orders.

 

During the year we successfully completed thetesting of a new storefront system designed to meet the rigid code requirementsfor the high wind-zone and hurricane prone Gulf states.  This new product offering has been well accepted by the market and plans are toexpand this offering to include a curtainwall system.  Late in the year United States Aluminum-Texas introduced the 7200and 7400 Series commercial window lines. The 7200, which has been highly successful in western Canada, isdesigned for standard commercial applications whereas the 7400 Series highperformance window meets the design specifications called out in majorinstitutional applications.  The designphase of a unitized curtainwall system has been completed and the requiredextrusion dies are nearing completion. Testing is scheduled for mid-October with product availability scheduledfor mid-November.

 

*ExtrudedProducts*

 

The Extruded Products Group continued to beimpacted by both soft demand and depressed pricing.  Net tonnage shipped remained relatively flat as compared tofiscal 2001 while sales revenues declined approximately 4% for the year.  Much needed capital expenditure projectswere completed in FY 2002.  At ourAlhambra facility the primary anodizing line was completely refurbished and anadditional extrusion press was overhauled during the year.  Our Texas facility added oil filtrationsystems on all its extrusion presses, implemented a water reduction dischargesystem and made significant improvements to its anodizing line.  In an attempt to minimize the impact of highenergy costs at the Alhambra facility, we have modified production hours sothat selective manufacturing processes are only operated during off-peakbilling periods.  With no end to thesoft market in sight, we will seek added business from existing accounts aswell as aggressively pursuing new business. At the same time, we will explore every avenue available to continue toreduce expenses.

 

*FinancialCondition*

 

Our financial condition continues to beexcellent.  We finished the year with nodebt and a working capital ratio of 4.6 to 1, up from the 4.4 to 1 at which weclosed fiscal 2001.  With the completionof an extensive three year capital expenditure program, expenditures for fiscal2003 are projected at $5,000,000, down significantly from the $12,000,000expended during the 2002 year.

 

 
| Cornelius  C. Vanderstar |   | David  C. Treinen        |
|--------------------------|--------|--------------------------|
| Chairman  of the Board   |   | President                |
| Chief  Executive Officer |   | Chief  Operating Officer |
|                     |   |                     |
| September 6, 2002        |   |                     |

 

 

3

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**SELECTED FINANCIAL DATA**

 
|                           |   | **Year Ended  June 30** |        |
|--------------------------------|--------|-------------------------|-------------|
|                           |   | **2002**                |        | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
| **Sales by segment**           |   |                    | ** **  |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Commercial                     |   | $                       | 108,510,000 |   | $ | 114,436,000 |   | $ | 112,522,000 |   | $ | 124,839,000 |   | $ | 112,179,000 |   |
| Residential                    |   | 46,651,000              |        | 55,388,000 |   | 55,444,000 |   | 47,680,000 |   | 44,707,000 |   |
| Aluminum Extrusion             |   | 38,567,000              |        | 40,085,000 |   | 46,686,000 |   | 56,417,000 |   | 51,021,000 |   |
| Total net sales                |   | $                       | 193,728,000 |   | $ | 209,909,000 |   | $ | 214,652,000 |   | $ | 228,936,000 |   | $ | 207,907,000 |   |
|                           |   |                    |        |   |   |   |   |   |   |   |   |
| **Earnings**                   |   |                    |        |   |   |   |   |   |   |   |   |
| Gross profit                   |   | $                       | 33,811,000  |   | $ | 39,985,000 |   | $ | 39,304,000 |   | $ | 52,873,000 |   | $ | 49,818,000 |   |
|                           |   |                    |        |   |   |   |   |   |   |   |   |
| Continuing operations          |   | $                       | 1,017,000   |   | $ | 4,915,000 |   | $ | 1,187,000 |   | $ | 10,476,000 |   | $ | 11,467,000 |   |
| Income (loss) from disc. ops.  |   | (1,065,000              | )           | (281,000 | ) | 392,000 |   | (137,000 | ) | 655,000 |   |
| Cum. effect of acctg. change   |   | (7,935,000              | )           | — |   | — |   | — |   | — |   |
| Net income (loss)              |   | $                       | (7,983,000  | ) | $ | 4,634,000 |   | $ | 1,579,000 |   | $ | 10,339,000 |   | $ | 12,122,000 |   |
|                           |   |                    |        |   |   |   |   |   |   |   |   |
| Per share:                     |   |                    |        |   |   |   |   |   |   |   |   |
| Net income (loss)—Diluted |   | $                       | (1.88       | ) | $ | 1.09 |   | $ | .37 |   | $ | 2.41 |   | $ | 2.82 |   |
| Dividends declared             |   | 1.20                    |        | 1.20 |   | 1.20 |   | 1.20 |   | 1.15 |   |
|                           |   |                    |        |   |   |   |   |   |   |   |   |
| **Financial Data at Yearend**  |   |                    |        |   |   |   |   |   |   |   |   |
| Working capital                |   | $                       | 58,057,000  |   | $ | 66,097,000 |   | $ | 63,586,000 |   | $ | 69,030,000 |   | $ | 72,170,000 |   |
| Total assets                   |   | 132,724,000             |        | 148,070,000 |   | 154,585,000 |   | 153,693,000 |   | 147,298,000 |   |
| Long-term debt                 |   | —                  |        | — |   | — |   | — |   | — |   |
| Shareholders’ equity      |   | 110,805,000             |        | 123,755,000 |   | 124,326,000 |   | 128,701,000 |   | 123,449,000 |   |

 

 

4

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**MANAGEMENT’SDISCUSSION AND ANALYSIS OF**

**FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

# **Significant Changes in Results of Operations**

 

**2002 vs.2001**

Net sales for fiscal 2002 decreased by$16,181,000 or 7.7% from fiscal 2001.  The economic slowdown has been felt to varying degrees at all ofour operating groups.  Included is an$8,737,000 or 15.8% decrease by the Residential Products Group.  A prolonged trade union strike at our SouthGate, California facility limited our ability to maintain normal deliveryschedules to our customers in the territory serviced from this location.  This led directly to the loss of a largehome improvement chain that was supplied on a regional basis and at mid-yearhad accounted for 12% of residential group sales.  Strike related service, quality, and delivery problems alsoresulted in some customers temporarily shifting to alternative suppliers duringthe heart of the strike.  The striketerminated in March with an unconditional offer to return to work.  Sales for the Commercial Products Groupdeclined $5,926,000 or 5.2%.  Most allof the North American marketing areas experienced declines as the softening inthe commercial construction industry continued to take its toll.  Sales for the Aluminum Extrusion Groupdecreased $1,518,000 or 3.8% when compared to last year as they experiencedcontinued pressure on volume and prices. Although overall group sales were down, demand strengthened during thelast half of the year in the area served by our Texas facility.

 

Gross profit decreased to 17.5% of salesin 2002 as compared to 19.0% in 2001. Several factors contributed to this decline.  Due to the aforementioned strike, the Residential Products Groupincurred higher costs due to production inefficiencies resulting from thehiring and training of replacement personnel. In addition, higher labor and overhead costs, including significantlyincreased utility costs, were incurred at our California extrusion facility astheir decline in overall volume increased unit cost of production.  An increase in overall labor costs alsoreflects a significant swing from last year’s recovery to additional expensethis year for current year workers’ compensation claims.

 

Selling, general and administrativeexpenses increased to 16.8% of sales in fiscal 2002 as compared to 15.4% infiscal 2001.  The increase reflectsadditional expense for retrospective workers’ compensation adjustments forprior year claims and strike related high security and legal costs. Partiallyoffsetting these costs was a reduction in employment related costs and thediscontinuance of goodwill amortization (see Note 12).

 

Net interest expense decreased comparedto the prior year reflecting lower utilization of our domestic line of credit.

 

The effective tax rate decreased to 23.0% infiscal 2002 compared to 34.8% last year. This decline reflects available tax credits offsetting a lower incomebase.

 

 

5

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**2001 vs.2000**

Net sales for fiscal 2001 decreased by$4,743,000 or 2.2% from net sales of fiscal 2000.  Included is a $6,601,000 or 14.1% decrease by the AluminumExtrusion Group, which continues its marketing efforts to regain customerconfidence, which had been eroded as a result of last year’s severe operationalproblems.  Partially offsetting thedecrease is a $1,914,000 or 1.7% increase in commercial products largelyreflecting the full year contribution of our Ontario, Canada facility purchasedin March 2000.  Sales of residentialproducts were flat compared to the prior year. Contributing to this was the closure of the Home Base stores, a largechain of big box stores, to which we provided product to approximately 80stores in their Western region.  Throughincreased marketing efforts most of this volume had been replaced by yearend.

 

Gross profit increased to 19.0% of salesin 2001 as compared to 18.3% in 2000. Contributing to the increase are reduced costs at our extrusionoperations reflecting the continuing recovery from the prior year’s severe operationalproblems.  As a group they achieved an18% increase in shipments per man-hour in spite of an 8.7% decrease in totalpounds shipped during the year. Somewhat offsetting these savings were higher production costs incurredby our Residential Group. 

 

Selling, general and administrativeexpenses decreased by $4,702,000 or 12.7% from the prior year.  The decreased expenses are primarilyattributable to lower employment costs directly related to the aforementioned decreasein sales coupled with the prior year containing nonrecurring costs associatedwith realigning operating group management teams.

 

The decrease in net interest expenserelates to increased funds available for investment during the year.  Prior year net interest expense reflectedcredit line utilization, repaid during the September 2000 quarter, to fundheavy capital expenditures and increases in raw material inventories.

 

 

6

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**Liquidityand Capital Resources**

Working capital at June 30, 2002 was$58,057,000 compared to $66,097,000 at June 30, 2001 and $63,586,000 atJune 30, 2000.  The ratio ofcurrent assets to current liabilities was 4.6 at the end of 2002 compared to4.4 at the end of 2001 and 3.5 at the end of 2000.  The Company continues to be in excellent position to meet itsshort-term operating and discretionary cash requirements.  Funds in excess of current operatingrequirements are invested in short-term interest-bearing instruments.

 

Capital expenditures for property, plant andequipment of approximately $11,783,000 in 2002, $7,749,000 in 2001 and$9,031,000 in 2000 were financed through internal cash flow, cash reserves andutilization of the lines of credit. Cash flows include proceeds for sales of excess facilities of $1,655,000in fiscal 2002 and $3,060,000 in fiscal 2001. Additional cash flows include the fiscal year 2000 expenditure of$1,222,000 for an acquisition and the receipt of $3,921,000 from the sale ofoperating assets of the glass segment (see Note 8). The Company projects netcapital expenditures of $5,000,000 for fiscal 2003.  These expenditures are for expansion of production capacity aswell as normal recurring capitalized replacement items.  The Company anticipates financing theseexpenditures through internal cash flow, cash reserves and the utilization ofits line of credit.

 

The Company had $20,000,000 in availablecredit at the end of 2002 under a short-term borrowing arrangement with adomestic bank.

 

The Company’s financial condition remainsstrong.  The Company believes that itscash, other liquid assets, operating cash flows and borrowing capacity, takentogether, provide more than adequate resources to fund ongoing operatingrequirements and future capital expenditures related to the expansion ofexisting businesses.

 

 

7

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**CriticalAccounting Policies**

The summary of Accounting Policies within theNotes to the Consolidated Financial Statements includes the significantpolicies and procedures used in the preparation of the Company’s consolidatedfinancial statements.  The following isa discussion of each of the Company’s critical accounting policies:

 

## ***Revenue Recognition***

Sales are recognized when products areshipped or when services are provided assuming no significant Companyobligations remain and the collection of related receivables is probable.  Revenue recognition on product sales is notsubject to significant estimates, as the Company has not experiencedsignificant product returns.

 

## ***Valuation of Receivables***

The Company maintains allowances for doubtful****accounts for estimated losses resultingfrom the****inability of itscustomers to make required****payments.  The Company performs ongoing credit****evaluations of its customers.  If the financial****condition of the Company’s customers were to****deteriorate, resulting in an impairment oftheir****ability to make payments,additional allowances may****berequired.  Changes in the creditworthiness of****customers, generaleconomic conditions and other****factorsmay impact the level of future write-offs.

 

### ***Valuation of Inventory***

The Company periodically reviews inventoryitems and overall stocking levels to ensure that adequate reserves exist forinventory deemed obsolete or excessive. In making this determination, the Company considers historical stockinglevels, recent sales of similar items and anticipated demand for theseitems.  Changes in factors such ascustomer demand, new product offerings and other matters could affect the levelof inventory obsolescence in the future.

 

 

8

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**Current andPending Accounting Changes**

In May 2002, the Financial Accounting StandardsBoard (FASB) issued Statement No. 145 (SFAS 145) “Rescission of SFAS Nos. 4, 44and 64, Amendment of SFAS No. 13, and Technical Corrections”.  SFAS 145 revises the accounting for earlyextinguishment of debt.  Managementbelieves that SFAS 145 will not have a material effect on the Company’s consolidatedfinancial position or results of operations.

 

In June 2002, the Financial Accounting StandardsBoard (FASB) issued Statement No. 146 (SFAS 146) “Accounting for CostsAssociated with Exit or Disposal Activities”. SFAS 146 revises the accounting for exit or disposal activitiesrequiring that costs associated with these activities be initially measured atfair value and recognized when the liability is incurred.  In periods subsequent to the initialmeasurement, adjustments to the liability are recorded in the period of changeand charged to the same line items in the statement of income used when therelated costs were initially recognized. The provisions of SFAS No. 146 are required to be applied prospectivelyto exit or disposal activities initiated after December 31, 2002.

 

 

**Forward-LookingInformation**

This annual report contains forward-lookingstatements with respect to the financial condition, results of operations andbusiness of the Company.  Such items aresubject to certain risks and uncertainties that could cause actual results todiffer materially from those set forth in such statements. Readers arecautioned not to place undue reliance on these forward-looking statements,which speak only as of the date the statement was made.  The Company undertakes no obligation topublicly update or revise any forward-looking statements, whether as a resultof new information, future events or otherwise.

 

 

9

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**QUARTERLY FINANCIAL DATA****(UNAUDITED)**

For the years ended June 30,2002 and 2001

 
|                                         |   | **First  Quarter** |       | **Second  Quarter** |   | **Third  Quarter** |   | **Fourth  Quarter** |       |
|----------------------------------------------|--------|--------------------|------------|---------------------|--------|--------------------|--------|---------------------|------------|
|                                         |   |               |       |                |   |
| **2002**                                     |   |               |       |                |   |               |   |                |       |
| Net sales                                    |   | $                  | 53,264,000 |                | $      | 47,302,000         |   | $                   | 46,473,000 |   | $ | 46,689,000 |   |
| Gross profit                                 |   | 9,673,000          |       | 7,554,000           |   | 8,209,000          |   | 8,375,000           |       |
| Income from continuing operations            |   | 1,108,000          |       | (722,000            | )      | 392,000            |   | 239,000             |       |
| Net income (loss)                            |   | (7,003,000         | )          | (1,611,000          | )      | 392,000            |   | 239,000             |       |
| Earnings per share — Basic and Diluted: |   |               |       |                |   |               |   |                |       |
| Continuing operations                        |   | .26                |       | (.17                | )      | .09                |   | .06                 |       |
| Net income (loss)                            |   | (1.65              | )          | (.38                | )      | .09                |   | .06                 |       |
| Dividends declared                           |   | .30                |       | .30                 |   | .30                |   | .30                 |       |
| Stock price — High                      |   | 26.68              |       | 25.15               |   | 23.85              |   | 22.07               |       |
| Stock price — Low                       |   | 21.05              |       | 21.20               |   | 15.50              |   | 18.50               |       |
|                                         |   |               |       |                |   |               |   |                |       |
| **2001**                                     |   |               |       |                |   |               |   |                |       |
| Net sales                                    |   | $                  | 54,132,000 |                | $      | 52,673,000         |   | $                   | 49,658,000 |   | $ | 53,446,000 |   |
| Gross profit                                 |   | 10,269,000         |       | 10,510,000          |   | 8,076,000          |   | 11,130,000          |       |
| Income from continuing operations            |   | 1,667,000          |       | 1,721,000           |   | (106,000           | )      | 1,633,000           |       |
| Net income (loss)                            |   | 1,533,000          |       | 1,733,000           |   | (216,000           | )      | 1,584,000           |       |
| Earnings per share — Basic and Diluted: |   |               |       |                |   |               |   |                |       |
| Continuing operations                        |   | .39                |       | .41                 |   | (.02               | )      | .38                 |       |
| Net income (loss)                            |   | .36                |       | .41                 |   | (.05               | )      | .37                 |       |
| Dividends declared                           |   | .30                |       | .30                 |   | .30                |   | .30                 |       |
| Stock price — High                      |   | 18.44              |       | 21.19               |   | 19.94              |   | 22.48               |       |
| Stock price — Low                       |   | 16.69              |       | 14.81               |   | 18.00              |   | 17.99               |       |

 

 

10

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**REPORT OFINDEPENDENT ACCOUNTANTS**

 

 

To the Board of Directors and Shareholders of

International Aluminum Corporation

 

In our opinion, the accompanying consolidatedbalance sheets and the related consolidated statements of income, cash flowsand shareholders’ equity present fairly, in all material respects, thefinancial position of International Aluminum Corporation and its subsidiariesat June 30, 2002 and 2001, and the results of their operations and their cashflows for each of the three years in the period ended June 30, 2002, inconformity with accounting principles generally accepted in the United Statesof America.  These financial statementsare the responsibility of the Company’s management; our responsibility is toexpress an opinion on these financial statements based on our audits.  We conducted our audits of these statementsin accordance with auditing standards generally accepted in the United Statesof America, which require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

 

 

 

PricewaterhouseCoopers LLP

Los Angeles, California

August 21, 2002

 

 

11

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**CONSOLIDATEDSTATEMENTS OF INCOME**

For the years ended June 30,2002, 2001 and 2000

 
|                                                  |   | **2002**    |        | **2001**    |   | **2000**    |   |
|-------------------------------------------------------|--------|-------------|-------------|-------------|--------|-------------|--------|
| Net sales                                             |   | $           | 193,728,000 |        | $      | 209,909,000 |   | $ | 214,652,000 |   |
| Cost of sales                                         |   | 159,917,000 |        | 169,924,000 |   | 175,348,000 |   |
| Gross profit                                          |   | 33,811,000  |        | 39,985,000  |   | 39,304,000  |   |
| Selling, general and administrative expenses          |   | 32,464,000  |        | 32,355,000  |   | 37,057,000  |   |
| Income from operations                                |   | 1,347,000   |        | 7,630,000   |   | 2,247,000   |   |
| Interest income                                       |   | 44,000      |        | 71,000      |   | 3,000       |   |
| Interest expense                                      |   | (69,000     | )           | (155,000    | )      | (428,000    | )      |
| Income from continuing operations before income taxes |   | 1,322,000   |        | 7,546,000   |   | 1,822,000   |   |
| Provision for income taxes                            |   | 305,000     |        | 2,631,000   |   | 635,000     |   |
| Income from continuing operations                     |   | 1,017,000   |        | 4,915,000   |   | 1,187,000   |   |
| Income (loss) from discontinued operations            |   | (1,065,000  | )           | (281,000    | )      | 15,000      |   |
| Gain on disposition of discontinued operations        |   | —      |        | —      |   | 377,000     |   |
| Cumulative effect of accounting change                |   | (7,935,000  | )           | —      |   | —      |   |
| Net income (loss)                                     |   | $           | (7,983,000  | )           | $      | 4,634,000   |   | $ | 1,579,000 |   |
|                                                  |   |        |        |        |   |        |   |
| Earnings per share — Basic and Diluted:          |   |        |        |        |   |        |   |
| Continuing operations                                 |   | $           | .24         |        | $      | 1.16        |   | $ | .28 |   |
| Discontinued operations                               |   | (.25        | )           | (.07        | )      | .09         |   |
| Cumulative effect of accounting change                |   | (1.87       | )           | —      |   | —      |   |
| Total                                                 |   | $           | (1.88       | )           | $      | 1.09        |   | $ | .37 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

 

12

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**CONSOLIDATEDBALANCE SHEETS**

June 30, 2002 and 2001

 

 
| **Assets**                                                                    |   | **2002**    |        | **2001**    |   |
|-------------------------------------------------------------------------------|--------|-------------|-------------|-------------|--------|
| Current assets:                                                               |   |        |        |        |   |
| Cash and cash equivalents                                                     |   | $           | 3,495,000   |        | $      | 5,915,000 |   |
| Accounts receivable, less reserve of $1,092,000 in 2002  and $775,000 in 2001 |   | 31,811,000  |        | 37,711,000  |   |
| Inventories                                                                   |   | 33,401,000  |        | 37,731,000  |   |
| Prepaid expenses and deposits                                                 |   | 3,665,000   |        | 2,597,000   |   |
| Future income tax benefits                                                    |   | 1,675,000   |        | 1,406,000   |   |
| Total current assets                                                          |   | 74,047,000  |        | 85,360,000  |   |
|                                                                          |   |        |        |        |   |
| Property, plant and equipment, at cost                                        |   | 122,759,000 |        | 114,693,000 |   |
| Accumulated depreciation                                                      |   | (65,466,000 | )           | (61,145,000 | )      |
| Net property, plant and equipment                                             |   | 57,293,000  |        | 53,548,000  |   |
|                                                                          |   |        |        |        |   |
| Other assets:                                                                 |   |        |        |        |   |
| Costs in excess of net assets of purchased businesses                         |   | 1,030,000   |        | 8,966,000   |   |
| Other                                                                         |   | 354,000     |        | 196,000     |   |
| Total other assets                                                            |   | 1,384,000   |        | 9,162,000   |   |
|                                                                          |   | $           | 132,724,000 |        | $      | 148,070,000 |   |
|                                                                          |   |        |        |        |   |
| **Liabilities and Shareholders’ Equity**                                 |   |        |        |        |   |
|                                                                          |   |        |        |        |   |
| Current liabilities:                                                          |   |        |        |        |   |
| Accounts payable                                                              |   | $           | 6,575,000   |        | $      | 9,235,000 |   |
| Accrued liabilities                                                           |   | 8,295,000   |        | 9,347,000   |   |
| Advances payable to banks                                                     |   | 1,034,000   |        | 165,000     |   |
| Income taxes payable                                                          |   | 86,000      |        | 516,000     |   |
| Total current liabilities                                                     |   | 15,990,000  |        | 19,263,000  |   |
|                                                                          |   |        |        |        |   |
| Deferred income taxes                                                         |   | 5,929,000   |        | 5,052,000   |   |
| Total liabilities                                                             |   | 21,919,000  |        | 24,315,000  |   |
|                                                                          |   |        |        |        |   |
| Commitments (Note 4)                                                          |   |        |        |        |   |
|                                                                          |   |        |        |        |   |
| Shareholders’ equity:                                                    |   |        |        |        |   |
| Common stock                                                                  |   | 4,765,000   |        | 4,765,000   |   |
| Paid-in capital                                                               |   | 4,123,000   |        | 4,123,000   |   |
| Retained earnings                                                             |   | 101,941,000 |        | 115,018,000 |   |
| Accumulated other comprehensive income                                        |   | (24,000     | )           | (151,000    | )      |
| Total shareholders’ equity                                               |   | 110,805,000 |        | 123,755,000 |   |
|                                                                          |   | $           | 132,724,000 |        | $      | 148,070,000 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

 

13

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# **CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

For the years ended June 30,2002, 2001 and 2000

 
|                                                |   | **2002**    |       | **2001**    |   | **2000**   |   |
|-----------------------------------------------------|--------|-------------|------------|-------------|--------|------------|--------|
| Cash flows from operating activities:               |   |        |       |        |   |       |   |
| Net income (loss)                                   |   | $           | (7,983,000 | )           | $      | 4,634,000  |   | $ | 1,579,000 |   |
| Adjustments for noncash transactions:               |   |        |       |        |   |       |   |
| Depreciation and amortization                       |   | 6,987,000   |       | 7,507,000   |   | 7,156,000  |   |
| Change in deferred income taxes                     |   | 608,000     |       | 174,000     |   | 559,000    |   |
| Gain on disposition of businesses                   |   | —      |       | —      |   | (587,000   | )      |
| Gain on sale of fixed assets                        |   | (631,000    | )          | (390,000    | )      | —     |   |
| Cumulative effect of accounting change              |   | 7,935,000   |       | —      |   | —     |   |
| Changes in assets and liabilities:                  |   |        |       |        |   |       |   |
| Receivables                                         |   | 5,900,000   |       | 2,260,000   |   | (2,051,000 | )      |
| Inventories                                         |   | 4,330,000   |       | 5,653,000   |   | (2,679,000 | )      |
| Prepaid expenses and other                          |   | (1,226,000  | )          | 419,000     |   | 1,519,000  |   |
| Accounts payable                                    |   | (2,660,000  | )          | 2,732,000   |   | (1,244,000 | )      |
| Accrued liabilities                                 |   | (1,052,000  | )          | (105,000    | )      | (2,547,000 | )      |
| Income taxes payable                                |   | (430,000    | )          | 267,000     |   | 156,000    |   |
| Net cash provided by operating activities           |   | 11,778,000  |       | 23,151,000  |   | 1,861,000  |   |
|                                                |   |        |       |        |   |       |   |
| Cash flows from investing activities:               |   |        |       |        |   |       |   |
| Capital expenditures                                |   | (11,783,000 | )          | (7,749,000  | )      | (9,031,000 | )      |
| Proceeds from sales of capital assets               |   | 1,810,000   |       | 3,234,000   |   | 381,000    |   |
| Acquisition of businesses                           |   | —      |       | —      |   | (1,222,000 | )      |
| Disposition of businesses                           |   | —      |       | —      |   | 3,921,000  |   |
| Net cash used in investing activities               |   | (9,973,000  | )          | (4,515,000  | )      | (5,951,000 | )      |
|                                                |   |        |       |        |   |       |   |
| Cash flows from financing activities:               |   |        |       |        |   |       |   |
| Dividends paid to shareholders                      |   | (5,094,000  | )          | (5,094,000  | )      | (5,122,000 | )      |
| Net borrowings under lines of credit                |   | 869,000     |       | (9,305,000  | )      | 9,396,000  |   |
| Common stock repurchased                            |   | —      |       | —      |   | (775,000   | )      |
| Net cash provided by (used in) financing activities |   | (4,225,000  | )          | (14,399,000 | )      | 3,499,000  |   |
|                                                |   |        |       |        |   |       |   |
| Net change in cash and cash equivalents             |   | (2,420,000  | )          | 4,237,000   |   | (591,000   | )      |
| Cash and cash equivalents at beginning of year      |   | 5,915,000   |       | 1,678,000   |   | 2,269,000  |   |
| Cash and cash equivalents at end of year            |   | $           | 3,495,000  |        | $      | 5,915,000  |   | $ | 1,678,000 |   |
|                                                |   |        |       |        |   |       |   |
| Supplemental cash flow information:                 |   |        |       |        |   |       |   |
| Interest payments                                   |   | $           | 67,000     |        | $      | 242,000    |   | $ | 513,000 |   |
| Income tax payments                                 |   | $           | 1,011,000  |        | $      | 1,841,000  |   | $ | 2,129,000 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

 

14

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**CONSOLIDATEDSTATEMENTS OF SHAREHOLDERS’ EQUITY**

For the years ended June 30,2002, 2001 and 2000

 
|                       |   |              |   |        |      |         |   |         |   | **Accumulated  Other  Comprehensive** |        |        |   |
|----------------------------|--------|-------------------|--------|-------------|-----------|--------------|--------|--------------|--------|---------------------------------------|-------------|-------------|--------|
|                       |   |              |   |        |      |         |   |         |   |                                  |        |        |
|                       |   | **Common  Stock** |   | **Paid-in** |      | **Retained** |   |         |   |                                  |
|                       |   | **Shares**        |   | **Amount**  |      | **Capital**  |   | **Earnings** |   | **Income**                            |        | **Total**   |   |
| Balance, June 30, 1999     |   | 4,291,794         |   | $           | 4,765,000 |         | $      | 4,123,000    |   | $                                     | 119,796,000 |        | $      | 17,000 |   | $ | 128,701,000 |   |
|                       |   |              |   |        |      |         |   |         |   |                                  |        |        |   |
| Net income                 |   |              |   |        |      |         |   | 1,579,000    |   |                                  |        | 1,579,000   |   |
| Translation adjustment     |   |              |   |        |      |         |   |         |   | (57,000                               | )           | (57,000     | )      |
| Total comprehensive income |   |              |   |        |      |         |   |         |   |                                  |        | 1,522,000   |   |
| Repurchase of stock        |   | (47,000           | )      |        |      |         |   | (775,000     | )      |                                  |        | (775,000    | )      |
| Cash dividends             |   |              |   |        |      |         |   | (5,122,000   | )      |                                  |        | (5,122,000  | )      |
| Balance, June 30, 2000     |   | 4,244,794         |   | 4,765,000   |      | 4,123,000    |   | 115,478,000  |   | (40,000                               | )           | 124,326,000 |   |
|                       |   |              |   |        |      |         |   |         |   |                                  |        |        |   |
| Net income                 |   |              |   |        |      |         |   | 4,634,000    |   |                                  |        | 4,634,000   |   |
| Translation adjustment     |   |              |   |        |      |         |   |         |   | (111,000                              | )           | (111,000    | )      |
| Total comprehensive income |   |              |   |        |      |         |   |         |   |                                  |        | 4,523,000   |   |
| Cash dividends             |   |              |   |        |      |         |   | (5,094,000   | )      |                                  |        | (5,094,000  | )      |
| Balance, June 30, 2001     |   | 4,244,794         |   | 4,765,000   |      | 4,123,000    |   | 115,018,000  |   | (151,000                              | )           | 123,755,000 |   |
|                       |   |              |   |        |      |         |   |         |   |                                  |        |        |   |
| Net income (loss)          |   |              |   |        |      |         |   | (7,983,000   | )      |                                  |        | (7,983,000  | )      |
| Translation adjustment     |   |              |   |        |      |         |   |         |   | 127,000                               |        | 127,000     |   |
| Total comprehensive income |   |              |   |        |      |         |   |         |   |                                  |        | (7,856,000  | )      |
| Cash dividends             |   |              |   |        |      |         |   | (5,094,000   | )      |                                  |        | (5,094,000  | )      |
| Balance, June 30, 2002     |   | 4,244,794         |   | $           | 4,765,000 |         | $      | 4,123,000    |   | $                                     | 101,941,000 |        | $      | (24,000 | ) | $ | 110,805,000 |   |
|                            |        |                   |        |             |           |              |        |              |        |                                       |             |             |        |  |  |  |  |  |  |  |  |  |

 

See accompanying notes to consolidatedfinancial statements.

 

 

15

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**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

 

 

**Note 1.  Significant Accounting Policies andProcedures**

 

**Descriptionof Business and Principles of Consolidation**

 

International Aluminum Corporation (theCompany) is an integrated building products manufacturer of diversified linesof quality aluminum and vinyl products. The consolidated financial statements include the accounts of theCompany and its domestic and foreign subsidiaries.  All significant intercompany transactions and accounts have beeneliminated in consolidation.  Certainreclassifications of prior year information were made to conform to the currentpresentation.

 

# **Revenue Recognition**

 

Sales are recognized when products are shippedor services are provided assuming no significant Company obligations remain andthe collection of related receivables is probable.

 

**Estimatesand Assumptions**

 

The preparation of the consolidated financialstatements in conformity with generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the amounts reportedin the financial statements and accompanying notes.  Actual results could differ from those estimates.

 

**Cash andCash Equivalents**

 

Cash and cash equivalents include cash on handand marketable securities with original maturities of three months or less.

 

**ForeignCurrency Translation**

 

Assets and liabilities of the Company’sforeign subsidiaries are translated into U.S. dollars at year-end exchangerates and revenues and expenses are translated at average rates prevailingduring the year.  Local currency isconsidered to be the functional currency. Translation adjustments are deferred into accumulated othercomprehensive income, a separate component of shareholders’ equity.  Foreign currency transaction gains andlosses are included in results of operations as incurred.

 

**Depreciationand Amortization**

 

Depreciation and amortization are providedover the estimated useful lives of the assets (up to 40 years for buildings and3 to 20 years for machinery and equipment) or the remaining terms of theleases, whichever is shorter, using the straight-line method for financialreporting purposes and accelerated methods for tax purposes.

 

The excess of the purchase price over theunderlying book value of the companies acquired is classified as “Costs inexcess of net assets of purchased businesses”. Upon adoption of FAS No. 142 in fiscal 2002, the amortization of thesecosts was discontinued.  At June 30,2002 the related amount of $1,745,000 had accumulated amortization of$715,000.  At June 30, 2001 the relatedamount of $12,655,000 had accumulated amortization of $3,689,000.

 

 

16

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**InvestmentTax Credits**

 

Investment tax credits are accounted forin the period earned in accordance with the flow-through method.

 

 

 

**Long-LivedAssets**

 

Whenever events indicate that the carryingvalues of long-lived assets including any related goodwill may not berecoverable, the Company evaluates the carrying values of such assets usingfuture undiscounted cash flows. Management believes that, as of June 30, 2002, the carrying values ofsuch assets are appropriate.

 

# **Shipping and Handling Fees and Costs**

 

Shipping and handling charges incurred by theCompany are included in Cost of Sales and shipping charges billed to customersare included in Net Sales.

 

**Note 2.  Balance Sheet Components**

 
| **Inventories,  at the Lower of FIFO Cost or Market** |   | **2002**  |       | **2001**  |   |
|-------------------------------------------------------|--------|-----------|------------|-----------|--------|
| Raw materials                                         |   | $         | 28,576,000 |      | $      | 32,153,000 |   |
| Work in process                                       |   | 560,000   |       | 1,332,000 |   |
| Finished goods                                        |   | 4,265,000 |       | 4,246,000 |   |
|                                                  |   | $         | 33,401,000 |      | $      | 37,731,000 |   |

 
| **Property, Plant and Equipment, at Cost** |   | **2002**   |        | **2001**   |   |
|--------------------------------------------|--------|------------|-------------|------------|--------|
| Land                                       |   | $          | 7,665,000   |       | $      | 7,738,000 |   |
| Buildings and improvements                 |   | 29,900,000 |        | 29,149,000 |   |
| Machinery and equipment                    |   | 84,636,000 |        | 76,463,000 |   |
| Construction in process                    |   | 558,000    |        | 1,343,000  |   |
|                                       |   | $          | 122,759,000 |       | $      | 114,693,000 |   |

 
| **Accrued Liabilities**        |   | **2002**  |      | **2001**  |   |
|--------------------------------|--------|-----------|-----------|-----------|--------|
| Wages and compensated absences |   | $         | 4,064,000 |      | $      | 4,246,000 |   |
| Taxes, other than income taxes |   | 1,447,000 |      | 1,678,000 |   |
| Dividends                      |   | 1,273,000 |      | 1,273,000 |   |
| Other                          |   | 1,511,000 |      | 2,150,000 |   |
|                           |   | $         | 8,295,000 |      | $      | 9,347,000 |   |

 

**Note 3.  Short-Term Debt and Lines of Credit**

 

The Company has a loan agreement with adomestic bank providing for a $20,000,000 unsecured short-term line of credit.There were no amounts outstanding under the agreement at June 30, 2002 or June30, 2001.  Additionally the Company’s foreignsubsidiaries have loan agreements with foreign banks providing for $1,600,000in secured short-term lines of credit, at the prevailing Canadian primeinterest rate.There was $1,034,000 outstanding under the foreign agreements atJune 30, 2002 and $165,000 outstanding at June 30, 2001.

 

**Note 4.  Commitments**

 

The Company is committed under real propertylease agreements expiring at various dates to 2006.  Certain of the leases have renewal options for periods up to fiveyears and others provide for rent revisions at various 

 

17

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dates. Under the leases the Company is obligated to pay property taxes,insurance and maintenance.  All facilityleases are classified as operating leases.

 

Real property rental expense was $1,000,000 in2002, $1,065,000 in 2001 and $1,125,000 in 2000.  Real property rental commitments are $891,000 in 2003, $615,000in 2004, $328,000 in 2005 and $250,000 in 2006.

 

**Note 5.  Capital Stock**

 

The Company has 500,000 shares of preferredstock authorized, with a $10 par value, of which none is outstanding.  There are 10,000,000 shares of common stockauthorized, $1 par value, of which there were 4,244,794 shares outstanding atJune 30, 2002 and 2001.

 

**Note 6.  Stock Options**

 

The Company granted stock options for thepurchase of common stock to certain executive and managerial employees underthe Company’s 1991 Stock Option Plan, whose expired granting authority has beentransferred to the successor plan, the 2001 Stock Option Plan.  Options have an exercise price equal to themarket price of the stock on the date of grant, a term of ten years andgenerally become exercisable over a five-year period.  The Company applies APB Opinion 25 and related Interpretations inaccounting for the plan, accordingly, no compensation cost has been recognizedfor those stock options. There would have been no material change in reportednet income and earnings per share had compensation cost been determined basedon the fair value at the grant dates as prescribed by SFAS 123, “Accounting forStock-Based Compensation”.  Thetransactions for shares under options for the three years ended June 30, 2002were:

 
|                                        |   | **Outstanding**       |   | **Exercisable**                      |   |
|---------------------------------------------|--------|-----------------------|--------|--------------------------------------|--------|
|                                        |   | **Number Of  Shares** |   | **Weighted-Average  Exercise Price** |   | **Number Of  Shares** |   | **Weighted-Average  Exercise Price** |   |
|                                        |   |                  |   |                                 |   |
| Outstanding, June 30, 1999                  |   | 215,200               |   | $                                    | 28.87  |   | 105,720 |   | $ | 28.35 |   |
| Forfeited                                   |   | (67,500               | )      | 29.11                                |   |   |   |   |   |
| Outstanding, June 30, 2000                  |   | 147,700               |   | 28.76                                |   | 103,300 |   | 28.43 |   |
| Forfeited                                   |   | (27,200               | )      | 29.64                                |   |   |   |   |   |
| Outstanding, June 30, 2001                  |   | 120,500               |   | 28.56                                |   | 111,100 |   | 28.36 |   |
| Forfeited                                   |   | (12,500               | )      | 28.71                                |   |   |   |   |   |
| Outstanding, June 30, 2002                  |   | 108,000               |   | 28.54                                |   | 103,800 |   | 28.45 |   |
|                                        |   |                  |   |                                 |   |   |   |   |   |
| Stock Option Summary at June 30, 2002:      |   |                  |   |                                 |   |   |   |   |   |
| $ 28.00-$31.56  (Life: 3.4-5.6  years) |   | 108,000               |   | 28.54                                |   | 103,800 |   | 28.45 |   |
| Available for future grants                 |   | 389,700               |   |                                 |   |   |   |   |   |
|                                             |        |                       |        |                                      |        |  |  |  |  |  |  |

 

**Note 7.  Earnings Per Share**

 

Basic earnings per share is computed bydividing net income by the weighted average number of shares of common stockoutstanding.  Diluted earnings per shareis computed by dividing net income by the weighted average common andpotentially dilutive common equivalent shares outstanding determined asfollows:

 
|                                                           |   | **2002**  |   | **2001**  |   | **2000**  |   |
|----------------------------------------------------------------|--------|-----------|--------|-----------|--------|-----------|--------|
| Weighted average shares outstanding used to compute basic EPS  |   | 4,244,794 |   | 4,244,794 |   | 4,277,332 |   |
| Incremental shares issuable upon the exercise of stock options |   | —    |   | —    |   | —    |   |
| Shares used to compute diluted EPS                             |   | 4,244,794 |   | 4,244,794 |   | 4,277,332 |   |

 

Incremental shares issuable upon the assumedexercise of outstanding stock options are computed using the average marketprice during the related period.

 

 

18

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**Note 8.  Acquisitions and Divestitures**

 

During the second quarter of the current year,the Company announced the closure of Maestro Products, its wood window and doorsubsidiary, which was a component of the Residential Products segment.  In accordance with the adoption of SFAS No.144, Maestro Products is accounted for as a discontinued operation, therefore,amounts in the income statements and related notes for all periods shown havebeen restated to reflect discontinued operations accounting.  Included in Maestro Products results for thecurrent year are $1,175,000 of charges related to the write down of various assets,primarily inventory.

 

During fiscal 2000, the Company sold most allof the operating assets of its Glass segment, excluding land and buildings, forcash in the amount of $3,921,000.  Theland and buildings were leased to the buyer. The Glass segment is accounted for as a discontinued operation,accordingly amounts in the income statements and related notes for all periodsshown have been restated to reflect discontinued operations accounting.

 

Summarized results of the discontinuedbusinesses are shown separately as discontinued operations in the accompanyingincome statements.  Results of thediscontinued operations, in thousands of dollars, are as follows:

 
|                                                                            |   | **2002** |   | **2001** |   | **2000** |   |
|---------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Net sales                                                                       |   | $        | 1,398  |     | $      | 2,896    |   | $ | 12,283 |   |
|                                                                            |   |     |   |     |   |     |   |
| Income (loss) before income taxes                                               |   | $        | (1,770 | )        | $      | (432     | )      | $ | 20 |   |
| Income tax provision (benefit)                                                  |   | (705     | )      | (151     | )      | 5        |   |
| Income (loss) from discontinued operations                                      |   | (1,065   | )      | (281     | )      | 15       |   |
| Gain on disposition of discontinued operations,  net of $210 income tax expense |   | —   |   | —   |   | 377      |   |
|                                                                            |   |     |   |     |   |     |   |
| Net income (loss) from discontinued operations                                  |   | $        | (1,065 | )        | $      | (281     | )      | $ | 392 |   |
|                                                                            |   |     |   |     |   |     |   |
| Earnings per share:                                                             |   |     |   |     |   |     |   |
| Discontinued operations                                                         |   | $        | (.25   | )        | $      | (.07     | )      | $ | — |   |
| Gain on disposition of discontinued operations                                  |   | —   |   | —   |   | .09      |   |

 

Also during fiscal 2000, the Company formed awholly owned subsidiary named United States Aluminum of Canada-Ontario, Ltd., amember of the Commercial Products Group. In March 2000, the new subsidiary completed the $1,222,000 cash purchaseof selected assets and liabilities of a Toronto, Ontario commercial storefrontand curtain wall company.  The $502,000excess of the purchase price over the estimated fair value of the net assetswas allocated to goodwill.  Proformainformation has not been presented, as it is not materially different fromhistorical results.

 

 

19

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**Note 9.Income Taxes**

 

The components of income before United Statesand foreign income taxes are:

 
|     |   | **2002** |       | **2001** |   | **2000**  |   |
|----------|--------|----------|------------|----------|--------|-----------|--------|
| Domestic |   | $        | (8,365,000 | )        | $      | 6,495,000 |   | $ | 1,768,000 |   |
| Foreign  |   | (18,000  | )          | 619,000  |   | 661,000   |   |
|     |   | $        | (8,383,000 | )        | $      | 7,114,000 |   | $ | 2,429,000 |   |

 

The provision for income taxes is comprised ofthe following:

 
|            |   | **2002**    |     | **2001**  |   | **2000**  |   |
|-----------------|--------|-------------|----------|-----------|--------|-----------|--------|
| Current —  |   |        |     |      |   |      |   |
| Federal         |   | $           | (945,000 | )         | $      | 1,857,000 |   | $ | 197,000 |   |
| State           |   | (337,000    | )        | 191,000   |   | (157,000  | )      |
| Foreign         |   | 274,000     |     | 258,000   |   | 251,000   |   |
|            |   | (1,008,000) |     | 2,306,000 |   | 291,000   |   |
| Deferred — |   |        |     |      |   |      |   |
| Federal         |   | 918,000     |     | 200,000   |   | 524,000   |   |
| State           |   | 19,000      |     | (2,000    | )      | 35,000    |   |
| Foreign         |   | (329,000    | )        | (24,000   | )      | —    |   |
|            |   | 608,000     |     | 174,000   |   | 559,000   |   |
|            |   | $           | (400,000 | )         | $      | 2,480,000 |   | $ | 850,000 |   |

 

A reconciliation between the provisions forincome taxes, computed by applying the Federal statutory rate to income beforetaxes, and the book provisions for income taxes follows:

 
|                                                  |   | **2002**  |       | **2001** |   | **2000**  |   |
|-------------------------------------------------------|--------|-----------|------------|----------|--------|-----------|--------|
| Taxes on book income at statutory rate                |   | $         | (2,850,000 | )        | $      | 2,419,000 |   | $ | 826,000 |   |
| Increases (decreases) resulting from:                 |   |      |       |     |   |      |   |
| State income taxes, net of Federal income tax benefit |   | (210,000  | )          | 125,000  |   | (81,000   | )      |
| Nondeductible goodwill                                |   | 2,698,000 |       | 22,000   |   | 143,000   |   |
| Federal tax credits                                   |   | 13,000    |       | (94,000  | )      | (116,000  | )      |
| Other                                                 |   | (51,000   | )          | 8,000    |   | 78,000    |   |
| Provision for income taxes                            |   | $         | (400,000   | )        | $      | 2,480,000 |   | $ | 850,000 |   |

 

Deferred income taxes result from temporarydifferences in the recognition of income and expenses for tax and financialstatement purposes.  The tax effects ofthe significant temporary differences that comprise the deferred tax assets andliabilities at yearend are as follows:

 
|                          |   | **2002** |      | **2001** |   |
|-------------------------------|--------|----------|-----------|----------|--------|
| Accounts receivable           |   | $        | 396,000   |     | $      | 279,000 |   |
| Inventory                     |   | 346,000  |      | 389,000  |   |
| Accrued liabilities           |   | 885,000  |      | 855,000  |   |
| Other                         |   | 48,000   |      | (117,000 | )      |
| Net deferred tax asset        |   | $        | 1,675,000 |     | $      | 1,406,000 |   |
|                          |   |     |      |     |   |
| Property, plant and equipment |   | $        | 5,757,000 |     | $      | 4,866,000 |   |
| Other                         |   | 172,000  |      | 186,000  |   |
| Net deferred tax liability    |   | $        | 5,929,000 |     | $      | 5,052,000 |   |

 

No provision for U.S. taxes has been made forundistributed earnings of the foreign subsidiaries since it is expected thatthe major portion of such earnings will continue to be reinvested for anindefinite period.

 

 

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**Note10.  Segment Information**

 

The Company’s operations are organized andmanaged by product type.  The Companycurrently operates in three segments of the building products industry:  Commercial Products, Residential Productsand Aluminum Extrusions.  See the frontcover for a description of the products of each segment and the back cover fora listing of the subsidiaries of each segment.

 

The Company uses a portion of its aluminumextrusion production in its Commercial and Residential segments.  Transfers are made at market prices.  Accounting policies for the segments are thesame as those described in Note 1. The Company evaluates performance based onoperating income or loss before any allocation of corporate overhead, interestor taxes.

 

The following is significant financialinformation by operating segment, reconciling to the Company’s totals.

 
|               |   | **Sales** |    | **Operating  Income** |   |
|--------------------|--------|-----------|---------|-----------------------|--------|
| (In thousands)     |   | **2002**  |    | **2001**              |   | **2000** |   | **2002** |   | **2001** |   | **2000** |   |
| Commercial         |   | $         | 108,945 |                  | $      | 114,822 |   | $ | 112,587 |   | $ | 10,862 |   | $ | 11,616 |   | $ | 8,618 |   |
| Residential        |   | 47,240    |    | 56,005                |   | 55,875 |   | (446 | ) | 3,647 |   | 3,875 |   |
| Aluminum Extrusion |   | 85,946    |    | 91,860                |   | 100,148 |   | (2,181 | ) | 677 |   | (3,583 | ) |
| Total segments     |   | 242,131   |    | 262,687               |   | 268,610 |   | 8,235 |   | 15,940 |   | 8,910 |   |
| Eliminations       |   | (48,403   | )       | (52,778               | )      | (53,958 | ) | 693 |   | (184 | ) | 893 |   |
| Corporate          |   | —    |    | —                |   | — |   | (7,581 | ) | (8,126 | ) | (7,556 | ) |
| Total              |   | $         | 193,728 |                  | $      | 209,909 |   | $ | 214,652 |   | $ | 1,347 |   | $ | 7,630 |   | $ | 2,247 |   |

 
|               |   | **Capital  Expenditures** |   | **Depreciation  and Amortization** |   |
|--------------------|--------|---------------------------|--------|------------------------------------|--------|
| (In thousands)     |   | **2002**                  |   | **2001**                           |   | **2000** |   | **2002** |   | **2001** |   | **2000** |   |
| Commercial         |   | $                         | 6,347  |                               | $      | 2,075 |   | $ | 825 |   | $ | 1,861 |   | $ | 2,172 |   | $ | 2,096 |   |
| Residential        |   | 949                       |   | 2,739                              |   | 3,760 |   | 2,126 |   | 2,262 |   | 2,005 |   |
| Aluminum Extrusion |   | 4,031                     |   | 2,585                              |   | 4,188 |   | 2,483 |   | 2,323 |   | 2,241 |   |
| Total segments     |   | 11,327                    |   | 7,399                              |   | 8,773 |   | 6,470 |   | 6,757 |   | 6,342 |   |
| Corporate          |   | 456                       |   | 350                                |   | 258 |   | 517 |   | 750 |   | 814 |   |
| Total              |   | $                         | 11,783 |                               | $      | 7,749 |   | $ | 9,031 |   | $ | 6,987 |   | $ | 7,507 |   | $ | 7,156 |   |

 
|               |   | **Total Assets** |
|--------------------|--------|------------------|
| (In thousands)     |   | **2002**         |   | **2001** |
| Commercial         |   | $                | 63,537 |   | $ | 66,994 |
| Residential        |   | 28,776           |   | 32,405 |
| Aluminum Extrusion |   | 34,915           |   | 38,032 |
| Total segments     |   | 127,228          |   | 137,431 |
| Corporate          |   | 5,496            |   | 10,639 |
| Total              |   | $                | 132,724 |   | $ | 148,070 |

 

 

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**Note 11.  Current and Pending Accounting Changes**

 

In May 2002, the Financial Accounting StandardsBoard (FASB) issued Statement No. 145 (SFAS 145) “Rescission of SFAS Nos. 4, 44and 64, Amendment of SFAS No. 13, and Technical Corrections”.  SFAS 145 revises the accounting for earlyextinguishment of debt.  Managementbelieves that SFAS 145 will not have a material effect on the Company’sconsolidated financial position or results of operations.

 

In June 2002, the Financial Accounting StandardsBoard (FASB) issued Statement No. 146 (SFAS 146) “Accounting for CostsAssociated with Exit or Disposal Activities”. SFAS 146 revises the accounting for exit or disposal activitiesrequiring that costs associated with these activities be initially measured atfair value and recognized when the liability is incurred.  In periods subsequent to the initialmeasurement, adjustments to the liability are recorded in the period of changeand charged to the same line items in the statement of income used when therelated costs were initially recognized. The provisions of SFAS No. 146 are required to be applied prospectivelyto exit or disposal activities initiated after December 31, 2002.

 

**Note12. ****Change inAccounting**

 

The Company adopted SFAS No. 142,“Goodwill and Other Intangible Assets” effective July 1, 2001 and as a resulthas not amortized goodwill for the twelve months ended June 30, 2002.  Excluding goodwill amortization for fiscalyears 2001 and 2000 would have increased reported net income to $5,190,000 or$1.22 per basic and diluted share, and to $2,063,000 or $.48 per basic anddiluted share, respectively.  SFAS No.142 also requires that existing goodwill be reviewed for impairment using arevised methodology.  The Company hascompleted the transitional goodwill impairment test and determined that anon-cash transition charge was required. As a result, the Company recorded a charge of $7,935,000 to reducegoodwill related to a reporting unit within the Commercial Products Group.  The transition charge is reflected as acumulative effect of an accounting change effective July 1, 2001 and previouslyreported results for the quarter ended September 30, 2001 have beenretroactively adjusted.

 

 

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**CORPORATE INFORMATION**

 
| **DIRECTORS**                                   |   | **OFFICERS**                               |
|-------------------------------------------------|--------|--------------------------------------------|
|                                            |   |                                       |
| Cornelius C. Vanderstar                         |   | David C. Treinen                           |
| Chairman of the Board                           |   | President; Secretary                       |
| Chief Executive Officer                         |   | Chief Operating Officer                    |
|                                            |   |                                       |
| David C. Treinen                                |   | Ronald L. Rudy                             |
|                                            |   | Senior Vice President —  Operations   |
| Ronald L. Rudy                                  |   |                                       |
|                                            |   | Mitchell K. Fogelman                       |
| David M. Antonini                               |   | Senior Vice President — Finance       |
| Partner in White, Nelson  & Co. LLP         |   |                                       |
|                                            |   | Stanley M. Kutch                           |
| John P. Cunningham                              |   | Vice President —  Information Systems |
| Retired President of                            |   |                                       |
| International Aluminum Corporation              |   | Susan L. Leone                             |
|                                            |   | Vice President — Human  Resources     |
| Alexander L. Dean                               |   |                                       |
| President of David Brooks  Company              |   |                                       |
|                                            |   |                                       |
| Joel F. McIntyre                                |   |                                       |
| Attorney At Law                                 |   |                                       |
|                                            |   |                                       |
| **STOCK  TRANSFER AGENT AND REGISTRAR**         |   | **ELECTRONIC  TRANSFER OF DIVIDENDS**      |
|                                            |   |                                       |
| Continental Stock Transfer  & Trust Company |   | For information and forms,  write to:      |
| 17 Battery Place                                |   | Corporate Secretary                        |
| New York, NY  10004                        |   | International Aluminum  Corporation        |
| (212) 509-4000                                  |   | P. O. Box 6                                |
| Internet at  www.continentalstock.com           |   | Monterey Park, CA  91754              |
|                                            |   |                                       |
| **STOCK EXCHANGE  LISTINGS**                    |   | **ANNUAL  SHAREHOLDERS MEETING**           |
|                                            |   |                                       |
| The Company’s common stock  (trading       |   | 2 p.m., Thursday, October  31, 2002        |
| symbol: IAL) is listed on  the New York         |   | International Aluminum  Corporation        |
| Stock Exchange                                  |   | 767 Monterey Pass Road                     |
|                                            |   | Monterey Park, CA  91754              |

 

 

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# **SUBSIDIARIESBY SEGMENT**

 
| **COMMERCIAL**                                                |   | **RESIDENTIAL**                            |
|---------------------------------------------------------------|--------|--------------------------------------------|
|                                                          |   |                                       |
| *Douglas R. Ellerbrock*                                       |   | *George L. Hall*                           |
| *Executive Vice President*                                    |   | *Executive Vice President*                 |
| *Commercial Products Group*                                   |   | *Residential Products Group*               |
|                                                          |   |                                       |
| **Exterior  Products**                                        |   | International Window  Corporation          |
|                                                          |   | South Gate, California                     |
| United States Aluminum  Corporation                           |   |                                       |
| Vernon, California                                            |   | International  Window-Northern California  |
|                                                          |   | Hayward, California                        |
| United States Aluminum  Corporation-Illinois                  |   |                                       |
| Bedford Park, Illinois                                        |   | International  Window-Arizona, Inc.        |
| Boston, Massachusetts                                         |   | Phoenix, Arizona                           |
| Detroit, Michigan                                             |   |                                       |
|                                                          |   | International  Window-Colorado, Inc.       |
| United States Aluminum  Corporation-Texas                     |   | Denver, Colorado                           |
| Waxahachie, Texas                                             |   |                                       |
| Denver, Colorado                                              |   |                                       |
| St. Louis, Missouri                                           |   |                                       |
| Dallas, Texas                                                 |   |                                       |
| Houston, Texas                                                |   |                                       |
|                                                          |   |                                       |
| United States Aluminum  Corporation-Carolina                  |   |                                       |
| Rock Hill, South Carolina                                     |   |                                       |
| Atlanta, Georgia                                              |   |                                       |
| Baltimore, Maryland                                           |   |                                       |
|                                                          |   |                                       |
| United States Aluminum Of  Canada—British Columbia, Ltd. |   |                                       |
| Langley, British Columbia, Canada                             |   |                                       |
|                                                          |   | **ALUMINUM  EXTRUSION**                    |
| United States Aluminum Of  Canada—Ontario, Ltd.          |   |                                       |
| Guelph, Ontario, Canada                                       |   | *Robert Dunn*                              |
|                                                          |   | *Executive Vice President*                 |
|                                                          |   | *Aluminum Extrusion Group*                 |
| **Interior Products**                                         |   |                                       |
|                                                          |   | International Extrusion  Corporation       |
| Raco Interior Products,  Inc.                                 |   | Alhambra, California                       |
| Houston, Texas                                                |   |                                       |
| Waxahachie, Texas                                             |   | International Extrusion  Corporation-Texas |
| Dallas, Texas                                                 |   | Waxahachie, Texas                          |
|                                                          |   |                                       |

 

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| International Aluminum  Corporation |   |   |
|-------------------------------------|--------|--------|
| 767 Monterey Pass Road              |   |   |
| Monterey Park, California  91754    |   |   |
| Tel:   (323) 264-1670     |   |   |
| Fax:   (323) 266-3838     |   |   |
| Web:  www.intlalum.com         |   |   |

 

 

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