Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
     
(Mark one)    
 
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the quarterly period ended June 30, 2007
or
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from          to          .
 
Commission file number: 001-32312
 
Novelis Inc.
(Exact name of registrant as specified in its charter)
 
 
     
Canada   98-0442987
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. employer
identification number)
     
3399 Peachtree Road NE, Suite 1500
Atlanta, Georgia
 
30326
(Address of principal executive offices)   (Zip Code)
 
Telephone: (404) 814-4200
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ     Accelerated filer o     Non-accelerated filer o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o      No þ
 
As of July 31, 2007, the registrant had 77,459,658 common shares outstanding.
 
 


 

 
TABLE OF CONTENTS
 
                 
  FINANCIAL INFORMATION    
  Financial Statements    
    Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (unaudited) May 16, 2007 Through June 30, 2007; April 1, 2007 Through May 15, 2007 and Three Months Ended June 30, 2006   2
    Condensed Consolidated Balance Sheets (unaudited) As of June 30, 2007 and March 31, 2007   3
    Condensed Consolidated Statements of Cash Flows (unaudited) May 16, 2007 Through June 30, 2007; April 1, 2007 Through May 15, 2007 and Three Months Ended June 30, 2006   4
    Condensed Consolidated Statement of Shareholder’s Equity (unaudited) April 1, 2007 Through May 15, 2007 and May 16, 2007 Through June 30, 2007   5
    Notes to the Condensed Consolidated Financial Statements (unaudited)   6
  Management’s Discussion and Analysis of Financial Condition and Results of Operations   52
  Quantitative and Qualitative Disclosures About Market Risk   80
  Controls and Procedures   84
             
  OTHER INFORMATION    
  Legal Proceedings   86
  Submission of Matters to a Vote of Security Holders   88
  Exhibits   89
 EX-31.1 SECTION 302 CERTIFICATION OF THE PEO
 EX-31.2 SECTION 302 CERTIFICATION OF THE PFO
 EX-32.1 SECTION 906 CERTIFICATION OF THE PEO
 EX-32.2 SECTION 906 CERTIFICATION OF THE PFO


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PART I. FINANCIAL INFORMATION
 
Item 1.   Financial Statements
 
Novelis Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS) (unaudited)
(in millions, except per share amounts)
 
                           
    May 16, 2007
      April 1, 2007
    Three Months
 
    Through
      Through
    Ended
 
    June 30, 2007       May 15, 2007     June 30, 2006  
    Successor       Predecessor     Predecessor  
Net sales
  $ 1,547       $ 1,281     $ 2,564  
                           
Cost of goods sold (exclusive of depreciation and amortization shown below)
    1,436         1,205       2,407  
Selling, general and administrative expenses
    42         95       98  
Depreciation and amortization
    53         28       59  
Research and development expenses
    13         6       10  
Interest expense and amortization of debt issuance costs — net
    25         26       49  
Gain on change in fair value of derivative instruments — net
    (14 )       (20 )     (41 )
Equity in net (income) loss of non-consolidated affiliates
    1         (1 )     (4 )
Sale transaction fees
    —         32       —  
Other (income) expenses — net
    11         4       (4 )
                           
      1,567         1,375       2,574  
                           
Loss before provision (benefit) for taxes on loss and minority interests’ share
    (20 )       (94 )     (10 )
Provision (benefit) for taxes on loss
    36         4       (20 )
                           
Income (loss) before minority interests’ share
    (56 )       (98 )     10  
Minority interests’ share
    2         1       (4 )
                           
Net income (loss)
    (54 )       (97 )     6  
                           
Other comprehensive income (loss) — net of tax
                         
Currency translation adjustment
    (2 )       35       57  
Change in fair value of effective portion of hedges — net
    1         (1 )     (34 )
Postretirement benefit plans
                         
Amortization of net actuarial loss
    —         (1 )     —  
Change in minimum pension liability
    —         —       (3 )
                           
Other comprehensive income (loss) — net of tax
    (1 )       33       20  
                           
Comprehensive income (loss)
  $ (55 )     $ (64 )   $ 26  
                           
Dividends per common share
  $ 0.00       $ 0.00     $ 0.09  
                           
 
The accompanying notes are an integral part of these condensed consolidated financial statements.


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Novelis Inc.
 
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(in millions, except number of shares)
 
                   
    June 30,
      March 31,
 
    2007       2007  
    Successor       Predecessor  
ASSETS
Current assets
                 
Cash and cash equivalents
  $ 186       $ 128  
Accounts receivable (net of allowances of $— 0 — as of June 30, 2007 and $29 as of March 31, 2007)
                 
— third parties
    1,428         1,350  
— related parties
    26         25  
Inventories
    1,504         1,483  
Prepaid expenses and other current assets
    41         39  
Current portion of fair value of derivative instruments
    71         92  
Deferred income tax assets
    42         19  
                   
Total current assets
    3,298         3,136  
Property, plant and equipment — net
    3,325         2,106  
Goodwill
    2,340         239  
Intangible assets — net
    863         20  
Investment in and advances to non-consolidated affiliates
    758         153  
Fair value of derivative instruments — net of current portion
    6         55  
Deferred income tax assets
    94         102  
Other long-term assets
                 
— third parties
    90         105  
— related parties
    49         54  
                   
Total assets
  $ 10,823       $ 5,970  
                   
 
LIABILITIES AND SHAREHOLDER’S EQUITY
Current liabilities
                 
Current portion of long-term debt
  $ 141       $ 143  
Short-term borrowings
    390         245  
Accounts payable
                 
— third parties
    1,564         1,614  
— related parties
    50         49  
Accrued expenses and other current liabilities
    767         480  
Deferred income tax liabilities
    67         73  
                   
Total current liabilities
    2,979         2,604  
Long-term debt — net of current portion
    2,328         2,157  
Deferred income tax liabilities
    786         103  
Accrued postretirement benefits
    434         427  
Other long-term liabilities
    705         352  
                   
      7,232         5,643  
                   
Commitments and contingencies
                 
                   
Minority interests in equity of consolidated affiliates
    149         152  
                   
Shareholder’s equity
                 
Common stock, no par value; unlimited number of shares authorized; 77,459,658 and 75,357,660 shares issued and outstanding as of June 30, 2007 and March 31, 2007, respectively
    —         —  
Additional paid-in capital
    3,497         428  
Accumulated deficit
    (54 )       (263 )
Accumulated other comprehensive income (loss)
    (1 )       10  
                   
Total shareholder’s equity
    3,442         175  
                   
Total liabilities and shareholder’s equity
  $ 10,823       $ 5,970  
                   
 
The accompanying notes are an integral part of these condensed consolidated financial statements.


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Novelis Inc.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) (in millions)
 
                           
    May 16, 2007
      April 1, 2007
    Three
 
    Through
      Through
    Months Ended
 
    June 30, 2007       May 15, 2007     June 30, 2006  
    Successor       Predecessor     Predecessor  
OPERATING ACTIVITIES
                         
Net income (loss)
  $ (54 )     $ (97 )   $ 6  
Adjustments to determine net cash used in operating activities:
                         
Depreciation and amortization
    53         28       59  
Gain on change in fair value of derivative instruments — net
    (14 )       (20 )     (41 )
Deferred income taxes
    23         (18 )     (31 )
Amortization of debt issuance costs
    —         1       2  
Write-off and amortization of fair value adjustments — net
    (6 )       —       —  
Provision for uncollectible accounts receivable
    —         —       1  
Equity in net (income) loss of non-consolidated affiliates
    1         (1 )     (4 )
Dividends from non-consolidated affiliates
    —         4       4  
Minority interests’ share
    (2 )       (1 )     4  
Share-based compensation
    —         —       1  
Changes in assets and liabilities (net of effects from acquisitions and divestitures):
                         
Accounts receivable
                         
— third parties
    (59 )       (21 )     (106 )
— related parties
    —         —       2  
Inventories
    70         (76 )     (104 )
Prepaid expenses and other current assets
    5         (7 )     (2 )
Other long-term assets
    (1 )       (1 )     1  
Accounts payable
                         
— third parties
    —         (62 )     129  
— related parties
    1         —       1  
Accrued expenses and other current liabilities
    (78 )       42       37  
Accrued postretirement benefits
    5         1       7  
Other long-term liabilities
    12         (2 )     (2 )
                           
Net cash used in operating activities
    (44 )       (230 )     (36 )
                           
INVESTING ACTIVITIES
                         
Capital expenditures
    (22 )       (17 )     (34 )
Proceeds from sales of assets
    1         —       1  
Changes to investment in and advances to non-consolidated affiliates
    1         1       1  
Proceeds from loans receivable — net — related parties
    4         —       9  
Net proceeds from settlement of derivative instruments
    29         18       86  
                           
Net cash provided by investing activities
    13         2       63  
                           
FINANCING ACTIVITIES
                         
Proceeds from issuance of common stock
    92         —       —  
Proceeds from issuance of debt
    —         150       20  
Principal repayments
    (46 )       (1 )     (97 )
Short-term borrowings — net
    83         60       28  
Dividends
                         
— common shareholders
    —         —       (7 )
— minority interests
    (1 )       (7 )     (1 )
Debt issuance costs
    (13 )       (2 )     (3 )
Proceeds from the exercise of stock options
    —         1       —  
                           
Net cash provided by (used in) financing activities
    115         201       (60 )
                           
Net increase (decrease) in cash and cash equivalents
    84         (27 )     (33 )
Effect of exchange rate changes on cash balances held in foreign currencies
    —         1       2  
Cash and cash equivalents — beginning of period
    102         128       124  
                           
Cash and cash equivalents — end of period
  $ 186       $ 102     $ 93  
                           
Supplemental disclosures of cash flow information:
                         
Interest paid
  $ 14       $ 13     $ 21  
Income taxes paid
    12         9       7  
Supplemental schedule of non-cash investing and financing activities related to the Acquisition of Novelis Common Stock (Note 2):
                         
Property, plant and equipment
  $ (1,244 )                  
Goodwill
    (2,097 )                  
Intangible assets
    (859 )                  
Investment in and advances to affiliates
    (610 )                  
Long-term debt
    66                    
Additional paid-in capital
    (422 )                  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.


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Novelis Inc.

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDER’S EQUITY (unaudited)
(in millions, except number of common shares)
 
                                                 
                            Accumulated
       
                Additional
          Other
       
    Common Stock     Paid-in
    Accumulated
    Comprehensive
       
    Shares     Amount     Capital     Deficit     Income (Loss)     Total  
 
Predecessor:
                                               
Balance as of March 31, 2007
    75,357,660     $ —     $ 428     $ (263 )   $ 10     $ 175  
Activity April 1, 2007 through May 15, 2007:
                                               
Net loss
    —       —       —       (97 )     —       (97 )
Issuance of common stock from the exercise of stock options
    57,876       —       1       —       —       1  
Conversion of share-based compensation plans from equity-based plans to liability-based plans
    —       —       (7 )     —       —       (7 )
Currency translation adjustment
    —       —       —       —       35       35  
Change in fair value of effective portion of hedges — net
    —       —       —       —       (1 )     (1 )
Postretirement benefit plans
                                               
Amortization of net actuarial loss
    —       —       —       —       (1 )     (1 )
                                                 
Balance as of May 15, 2007
    75,415,536     $ —     $ 422     $ (360 )   $ 43     $ 105  
                                                 
 
 
Successor:
                                               
Balance as of May 16, 2007
    75,415,536     $ —     $ 3,405     $ —     $ —     $ 3,405  
Activity May 16, 2007 through June 30, 2007:
                                               
Net loss
    —       —       —       (54 )     —       (54 )
Issuance of additional common stock
    2,044,122       —       92       —       —       92  
Currency translation adjustment
    —       —       —       —       (2 )     (2 )
Change in fair value of effective portion of hedges — net
    —       —       —       —       1       1  
                                                 
Balance as of June 30, 2007
    77,459,658     $ —     $ 3,497     $ (54 )   $ (1 )   $ 3,442  
                                                 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited)
 
1.   Business and Summary of Significant Accounting Policies
 
References herein to “Novelis”, the “Company”, “we”, “our”, or “us” refer to Novelis Inc. and its subsidiaries as both Predecessor and Successor unless the context specifically indicates otherwise. References herein to “Hindalco” refer to Hindalco Industries Limited. References herein to “Alcan” refer to Alcan, Inc.
 
Change in Fiscal Year End
 
On June 26, 2007, our board of directors approved the change of our fiscal year end to March 31 from December 31. On June 28, 2007, we filed a Transition Report on Form 10-Q for the three month period ended March 31, 2007 with the United States Securities and Exchange Commission (SEC) pursuant to Rule 13a-10 of the Securities Exchange Act of 1934 for transition period reporting. Accordingly, these condensed consolidated financial statements present our new fiscal year end of March 31 and the three months ended June 30, 2007 and 2006.
 
Description of Business and Basis of Presentation
 
Novelis Inc., formed in Canada on September 21, 2004, and its subsidiaries, is the world’s leading aluminum rolled products producer based on shipment volume. We produce aluminum sheet and light gauge products where the end-use destination of the products includes the construction and industrial, beverage and food cans, foil products and transportation markets. As of June 30, 2007, we had operations on four continents: North America; Europe; Asia and South America, through 33 operating plants and three research facilities in 11 countries. In addition to aluminum rolled products plants, our South American businesses include bauxite mining, alumina refining, primary aluminum smelting and power generation facilities that are integrated with our rolling plants in Brazil.
 
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and accompanying notes in our Annual Report on Form 10-K for the year ended December 31, 2006 filed with the SEC on March 1, 2007, as amended on April 30, 2007. The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to SEC Rule 10-01 of Regulation S-X. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures made are adequate to make the information not misleading.
 
Predecessor and Successor Reporting
 
Our acquisition by Hindalco (see Note 2 — Acquisition of Novelis Common Stock) was recorded in accordance with Staff Accounting Bulletin No. 103, Topic 5J, Push Down Basis of Accounting Required in Certain Limited Circumstances (SAB No. 103). In the accompanying June 30, 2007 condensed consolidated balance sheet, the consideration and related costs paid by Hindalco in connection with the acquisition have been “pushed down” to us and have been allocated to the assets acquired and liabilities assumed in accordance with Financial Accounting Standards Board (FASB) Statement No. 141, Business Combinations. Due to the impact of push down accounting, the condensed consolidated financial statements and certain note presentations separate the Company’s presentations into two distinct periods, the period up to, and including, the acquisition date (labeled “Predecessor”) and the period after that date (labeled “Successor”), to indicate the application of different bases of accounting between the periods presented. The accompanying condensed consolidated financial statements include a black line division which indicates that the Predecessor and Successor reporting entities shown are not comparable.


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)

The unaudited results of operations for the interim periods shown in these condensed consolidated financial statements, including the periods shown as Predecessor and Successor, are not necessarily indicative of operating results for the entire fiscal year. In the opinion of management, the accompanying unaudited condensed consolidated financial statements recognize all adjustments of a normal recurring nature considered necessary to fairly state our financial position as of June 30, 2007 and March 31, 2007; the results of our operations and cash flows for (1) the periods from May 16, 2007 through June 30, 2007 and from April 1, 2007 through May 15, 2007 and (2) the three months ended June 30, 2006; and changes in our shareholder’s equity for the periods from April 1, 2007 through May 15, 2007 and from May 16, 2007 through June 30, 2007.
 
Reclassifications and Revisions
 
Certain reclassifications of the prior period amounts and presentation have been made to conform to the presentation adopted for the current periods. The following reclassifications and presentation changes were made to the prior period condensed consolidated statement of operations to conform to the current period presentation: (a) the amounts previously presented in Restructuring charges — net and Impairment charges on long-lived assets were reclassified to Other (income) expenses — net and (b) Gain on change in fair value of derivative instruments — net and Sale transaction fees were reclassified from Other (income) expenses — net to separate line items. These reclassifications have no effect on total assets, total shareholder’s equity, net income (loss) or cash flows as previously presented.
 
As a result of the acquisition by Hindalco, and based on the way our President and Chief Operating Officer (our chief operating decision-maker) reviews the results of segment operations, we changed our segment performance measure to Segment Income, as defined in Note 18 — Segment and Major Customer Information.
 
Recently Issued Accounting Standards
 
In April 2007, the FASB issued Staff Position (FSP) No. FIN 39-1, Amendment of FASB Interpretation No. 39 (FSP FIN 39-1). FSP FIN 39-1 amends FASB Statement No. 39, Offsetting of Amounts Related to Certain Contracts, by permitting entities that enter into master netting arrangements as part of their derivative transactions to offset in their financial statements net derivative positions against the fair value of amounts (or amounts that approximate fair value) recognized for the right to reclaim cash collateral or the obligation to return cash collateral under those arrangements. FSP FIN 39-1 is effective for fiscal years beginning after November 15, 2007, with early adoption permitted. We have not yet commenced the potential impact, if any, of the adoption of FSP FIN 39-1 on our consolidated financial position, results of operations and cash flows.
 
In February 2007, the FASB issued FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which provides companies with an option to report selected financial assets and liabilities at fair value. The new statement establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities and requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of a company’s choice to use fair value on its earnings. The new statement also requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet. FASB Statement No. 159 does not eliminate disclosure requirements included in other accounting standards, including requirements for disclosures about fair value measurements included in FASB Statements No. 157, Fair Value Measurements, and No. 107, Disclosures about Fair Value of Financial Instruments. FASB Statement No. 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)

of that fiscal year and also elects to apply the provisions of FASB Statement No. 157. We have not yet commenced evaluating the potential impact, if any, of the adoption of FASB Statement No. 159 on our consolidated financial position, results of operations and cash flows.
 
In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value under GAAP and expands disclosures about fair value measurements. FASB Statement No. 157 applies to other accounting pronouncements that require or permit fair value measurements. The new guidance is effective for financial statements issued for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years. We are currently evaluating the potential impact, if any, of the adoption of FASB Statement No. 157 on our consolidated financial position, results of operations and cash flows.
 
We have determined that all other recently issued accounting pronouncements will not have a material impact on our consolidated financial position, results of operations or cash flows, or do not apply to our operations.
 
2.   Acquisition of Novelis Common Stock
 
On May 15, 2007, the Company was acquired by Hindalco through its indirect wholly-owned subsidiary AV Metals Inc. (Acquisition Sub) pursuant to a plan of arrangement (Arrangement) entered into on February 10, 2007 and approved by the Ontario Superior Court of Justice on May 14, 2007. As a result of the Arrangement, Acquisition Sub acquired all of the Company’s outstanding common shares at a price of $44.93 per share, and all outstanding stock options and other equity incentives were terminated in exchange for cash payments. The aggregate purchase price for the Company’s common shares was $3.4 billion and immediately following the Arrangement, the common shares of the Company were transferred from Acquisition Sub to its wholly-owned subsidiary AV Aluminum Inc. (AV Aluminum). Hindalco also assumed $2.8 billion of Novelis’ debt for a total transaction value of $6.2 billion.
 
On June 22, 2007, we issued 2,044,122 additional common shares to AV Aluminum for $44.93 per share resulting in an additional equity contribution of approximately $92 million. This contribution was equal in amount to certain payments made by Novelis related to change in control compensation to certain employees and directors, lender fees and other transaction costs incurred by the Company. As this transaction was approved by the Company and executed subsequent to the Arrangement, the $92 million is not included in the determination of total consideration.
 
Purchase Price Allocation and Goodwill
 
As a result of the Arrangement, the consideration and transaction costs paid by Hindalco in connection with the transaction have been “pushed down” to us and have been allocated to the assets acquired and liabilities assumed in accordance with FASB Statement No. 141. The following table summarizes total consideration paid under the Arrangement (in millions).
 
         
Purchase of all outstanding 75,415,536 shares at $44.93 per share
  $ 3,388  
Direct transaction costs incurred by Hindalco
    17  
         
Total consideration
  $ 3,405  
         
 
In accordance with FASB Statement No. 141, total consideration of $3,405 million has been initially allocated to the assets acquired and liabilities assumed based on our preliminary estimates of fair value, using methodologies and assumptions that we believe are reasonable. To estimate fair values, we considered a number of factors, including appraisals and the application of multiples to discounted cash flow estimates.


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Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)

There is considerable management judgment with respect to cash flow estimates and appropriate multiples used in determining fair value.
 
The following table shows the preliminary allocation of the total consideration to assets acquired and liabilities assumed as of the date of the Arrangement (in millions).
 
         
Assets acquired:
       
Current assets
  $ 3,210  
Property, plant and equipment
    3,350  
Goodwill
    2,341  
Intangible assets
    879  
Investment in and advances to non-consolidated affiliates
    762  
Fair value of derivative instruments — net of current portion
    3  
Deferred income tax assets
    117  
Other long-term assets
    110  
         
Total assets acquired
    10,772  
         
Liabilities assumed:
       
Accounts payable
    (1,612 )
Accrued expenses and other current liabilities
    (738 )
Long-term debt, including current portion and short-term borrowings
    (2,824 )
Deferred income tax liabilities, including current portion
    (874 )
Accrued postretirement benefits
    (430 )
Other long-term liabilities
    (736 )
Minority interests in equity of consolidated affiliates
    (153 )
         
Total liabilities assumed
    (7,367 )
         
Total consideration
  $ 3,405  
         
 
Intangible assets include (1) $124 million for a favorable energy supply contract in North America, recorded at its estimated fair value, (2) $15 million for other favorable supply contracts in Europe and (3) $9 million for the estimated value of acquired in-process research and development projects that had not yet reached technological feasibility. In accordance with FASB Statement No. 141, the $9 million of acquired in-process research and development was expensed upon acquisition and charged to Research and development expenses in the period from May 16, 2007 through June 30, 2007.
 
The preliminary allocation shown above includes a total of $685 million for the fair value of liabilities associated with unfavorable sales contracts ($371 million included in Other long-term liabilities and $314 million included in Accrued expenses and other liabilities). Of this amount, $655 million relates to unfavorable sales contracts in North America. These contracts include a ceiling over which metal purchase costs cannot contractually be passed through to certain customers, unless adjusted. Subsequent to the Arrangement, the fair value of these liabilities are credited to revenue over the remaining lives of the underlying contracts. The reduction of these liabilities does not affect our cash flows.
 
Certain amounts are subject to change as remaining information on the fair values is received and valuation analyses are finalized. Specifically, we continue to evaluate the valuation and useful lives of the acquired tangible and intangible assets, the allocation of fair value to our reporting units, and the income tax implications of the new basis of accounting triggered by the Arrangement. These final valuations and other


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Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)

studies will be performed by Hindalco and Novelis, and the final fair values and allocations may differ materially from our preliminary estimates shown above. We expect to complete our final allocation of the total consideration before March 31, 2008.
 
The goodwill resulting from the Arrangement reflects the value of our in-place workforce, deferred income taxes associated with the fair value adjustments and potential synergies. The majority of the push down adjustments, including goodwill, will not impact our cash flows and are not expected to be deductible for income tax purposes.
 
We incurred $32 million of transaction fees and expenses related to the Arrangement during the period from April 1, 2007 through May 15, 2007. These expenses are included in Sale transaction fees in our condensed consolidated statement of operations.
 
Unaudited Condensed Consolidated Pro Forma Results (Predecessor)
 
The unaudited condensed consolidated pro forma results of operations provided below for the period from April 1, 2007 through May 15, 2007 and the three months ended June 30, 2006 are presented as though the Arrangement had occurred at the beginning of the periods presented, after giving effect to purchase accounting adjustments related to depreciation and amortization of the revalued assets, interest expense, and other acquisition related adjustments in connection with the Arrangement. The pro forma results include estimates and assumptions that management believes are reasonable. However, pro forma results are not necessarily indicative of the results that would have occurred if the acquisition had been in effect on the dates indicated, or which may result in future periods. Pro forma results for the period from May 16, 2007 through June 30, 2007 are not presented since the Arrangement occurred at the beginning of that period.
 
                 
    April 1, 2007
    Three Months
 
    Through
    Ended
 
    May 15,
    June 30,
 
    2007     2006  
    Predecessor     Predecessor  
 
Net sales
  $ 1,327     $ 2,652  
Loss before provision for taxes and minority interests’ share
  $ (113 )   $ (19 )
Net loss
  $ (118 )   $ (4 )
 
3.   Restructuring Programs
 
We recognized restructuring costs of $1 million in each of the periods from April 1, 2007 through May 15, 2007 and May 16, 2007 through June 30, 2007, relating primarily to restructuring actions begun during 2006 in two of our European facilities.


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Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)

All restructuring provisions and recoveries are included in Other (income) expenses — net in the accompanying condensed consolidated statements of operations unless otherwise stated. The following table summarizes the activity in our restructuring liabilities (all of which relate to our Europe operating segment) for the periods from April 1, 2007 through May 15, 2007 and from May 16, 2007 to June 30, 2007 (in millions).
 
                         
    Europe  
          Other Exit
    Total
 
    Severance
    Related
    Restructuring
 
    Reserves     Reserves     Reserves  
 
Balance as of March 31, 2007
  $ 18     $ 18     $ 36  
April 1, 2007 through May 15, 2007 Activity (Predecessor):
                       
Provisions — net
    1       —       1  
Cash payments
    —       (1 )     (1 )
Adjustments — other
    —       1       1  
                         
Balance as of May 15, 2007
    19       18       37  
 
 
May 16, 2007 through June 30, 2007 Activity (Successor):
                       
Provisions — net
    1       —       1  
Cash payments
    (2 )     (1 )     (3 )
                         
Balance as of June 30, 2007
  $ 18     $ 17     $ 35  
                         
 
4.   Inventories
 
Inventories consist of the following (in millions).
 
                   
    June 30, 2007       March 31, 2007  
    Successor       Predecessor  
Finished goods
  $ 366       $ 369  
Work in process
    344         359  
Raw materials
    722         684  
Supplies
    73         120  
                   
      1,505         1,532  
Allowances
    (1 )       (49 )
                   
Inventories
  $ 1,504       $ 1,483  
                   


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)

5.  Property, Plant and Equipment
 
Property, plant and equipment — net, consists of the following (in millions).
 
                   
    June 30, 2007       March 31, 2007  
    Successor       Predecessor  
Land and property rights
  $ 251       $ 97  
Buildings
    691         895  
Machinery and equipment
    2,341         4,699  
                   
      3,283         5,691  
Accumulated depreciation and amortization
    (48 )       (3,674 )
                   
      3,235         2,017  
Construction in progress
    90         89  
                   
Property, plant and equipment — net
  $ 3,325       $ 2,106  
                   
 
6.   Goodwill and Intangible Assets
 
Goodwill
 
The following table summarizes the components of goodwill by operating segment (in millions).
 
                                                   
    Successor       Predecessor  
    Balance
          Balance
      Balance
          Balance
 
    as of
    Cumulative
    as of
      as of
    Cumulative
    as of
 
    May 16,
    Translation
    June 30,
      March 31,
    Translation
    May 15,
 
Operating Segment
  2007     Adjustment     2007       2007     Adjustment     2007  
North America
  $ 1,527     $ —     $ 1,527       $ —     $ —     $ —  
Europe
    389       (1 )     388         239       5       244  
Asia
    162       —       162         —       —       —  
South America
    263       —       263         —       —       —  
                                                   
    $ 2,341     $ (1 )   $ 2,340       $ 239     $ 5     $ 244  
                                                   


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Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)

Intangible Assets
 
The following table summarizes the components of intangible assets (in millions).
 
                                                               
    June 30, 2007
      March 31, 2007
    Successor       Predecessor
    Gross
          Net
    Weighted
      Gross
          Net
    Weighted
    Carrying
    Accumulated
    Carrying
    Average
      Carrying
    Accumulated
    Carrying
    Average
    Amount     Amortization     Amount     Life       Amount     Amortization     Amount     Life
Tradenames
  $ 81     $ —     $ 81       20 years       $ 14     $ (6 )   $ 8     15 years
Technology
    170       (1 )     169       15 years         20       (8 )     12     15 years
Customer relationships
    480       (3 )     477       20 years         —       —       —      
Favorable energy supply contract
    124       (2 )     122       9.5 years         —       —       —      
Other favorable contracts
    15       (1 )     14       3.3 years         —       —       —      
                                                               
    $ 870     $ (7 )   $ 863       17.2 years       $ 34     $ (14 )   $ 20     15 years
                                                               
                                                               
 
Our favorable energy supply contract and other favorable contracts are amortized over their estimated useful lives using methods that reflect the pattern in which the economic benefits are expected to be consumed. All other intangible assets are amortized using the straight-line method.
 
Amortization expense related to intangible assets was $7 million (including $3 million recorded in Cost of goods sold related to the favorable energy supply and other favorable contracts) and less than $1 million for the periods from May 16, 2007 through June 30, 2007 and April 1, 2007 through May 15, 2007, respectively, and $1 million for the three months ended June 30, 2006.
 
Estimated amortization expense related to intangible assets for each of the five succeeding fiscal years is as follows (in millions). Actual amounts may differ from these estimates due to such factors as customer turnover, raw material consumption patterns, impairments, additional intangible asset acquisitions and other events.
 
         
Fiscal Year Ending March 31,
     
 
2008 (remaining)
  $ 46  
2009
    59  
2010
    57  
2011
    53  
2012
    52  


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Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)

7.   Investment in and Advances to Non-Consolidated Affiliates and Related Party Transactions
 
The following table summarizes the ownership structure and our ownership percentage of the non-consolidated affiliates in which we have an investment as of June 30, 2007, and which we account for using the equity method. We have no material investments that we account for using the cost method.
 
             
        Ownership
 
Affiliate Name
  Ownership Structure   Percentage  
 
Aluminium Norf GmbH
  Corporation     50 %
Consorcio Candonga
  Unincorporated Joint Venture     50 %
EuroNorca Partners
  General Partnership     50 %
MiniMRF LLC
  Limited Liability Company     50 %
Deutsche Aluminium Verpackung Recycling GmbH
  Corporation     30 %
France Aluminium Recyclage S.A. 
  Public Limited Company     20 %
 
In November 2006, we sold the common and preferred shares of our 25% interest in Petrocoque S.A. Industria e Comercio (Petrocoque) to the other shareholders of Petrocoque. Prior to the sale, we accounted for Petrocoque using the equity method of accounting. Petrocoque’s combined results of operations for the three months ended June 30, 2006 are included in the table below.
 
As of June 30, 2007, EuroNorca Partners was inactive and is in the process of being dissolved. We expect to receive approximately $2 million once the liquidation proceedings have been finalized.
 
We do not control our non-consolidated affiliates, but have the ability to exercise significant influence over their operating and financial policies. The following tables summarize the combined results of operations of our equity method affiliates (on a 100% basis, in millions).
 
                           
    May 16, 2007
      April 1, 2007
    Three Months
 
    Through
      Through
    Ended
 
    June 30, 2007       May 15, 2007     June 30, 2006  
    Successor       Predecessor     Predecessor  
Net sales
  $ 85       $ 45     $ 144  
Costs, expenses and provisions for taxes on income
    81         43       137  
                           
Net income
  $ 4       $ 2     $ 7  
                           
 
Included in the accompanying condensed consolidated financial statements are transactions and balances arising from business we conduct with these non-consolidated affiliates, which we classify as related party transactions and balances. The following table describes the nature and amounts of significant transactions that we had with related parties (in millions).
 
                           
    May 16, 2007
      April 1, 2007
    Three Months
 
    Through
      Through
    Ended
 
    June 30, 2007       May 15, 2007     June 30, 2006  
    Successor       Predecessor     Predecessor  
Purchases of tolling services and electricity
                         
Aluminium Norf GmbH(A)
  $ 41       $ 21     $ 58  
Consorcio Candonga(B)
    2         1       4  
 
 
(A) We purchase tolling services (the conversion of customer-owned metal) from Aluminium Norf GmbH.
 
(B) We purchase electricity from Consorcio Candonga for our operations in South America.


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)

 
The following table describes the period-end account balances that we have with these non-consolidated affiliates, shown as related party balances in the accompanying condensed consolidated balance sheets (in millions). We have no other material related party balances.
 
                   
    June 30, 2007       March 31, 2007  
    Successor       Predecessor  
Accounts receivable(A)
  $ 26       $ 25  
Other long-term receivables(A)
    49         54  
Accounts payable(B)
    50         49  
 
 
(A) The balances represent current and non-current portions of a loan due from Aluminium Norf GmbH.
 
(B) We purchase tolling services from Aluminium Norf GmbH and electricity from Consorcio Candonga.
 
8.   Accrued Expenses and Other Current Liabilities
 
Accrued expenses and other current liabilities are comprised of the following (in millions).
 
                   
    June 30, 2007       March 31, 2007  
    Successor       Predecessor  
Accrued compensation and benefits
  $ 110       $ 138  
Accrued settlement of legal claim
    39         39  
Accrued interest payable
    50         24  
Accrued income taxes
    17         9  
Current portion of unfavorable sales contracts
    302         —  
Current portion of fair value of derivative instruments
    31         33  
Other current liabilities
    218         237  
                   
Accrued expenses and other current liabilities
  $ 767       $ 480  
                   


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)

9.   Long-Term Debt
 
Long-term debt consists of the following (in millions).
 
                                           
          June 30, 2007
      March 31, 2007
 
          Successor       Predecessor  
    Interest
          Unamortized
               
    Rates
          Fair Value
    Carrying
         
    (A)     Principal     Adjustments(B)     Value       Principal  
Novelis Inc.
                                         
Floating rate Term Loan B, due 2012
    7.61 %(C)   $ 252     $ —     $ 252       $ 259  
7.25% Senior Notes, due 2015
    7.25 %     1,400       73       1,473         1,400  
Novelis Corporation
                                         
Floating rate Term Loan B, due 2012
    7.59 %(C)     560       —       560         449  
Novelis Switzerland S.A.
                                         
Capital lease obligation, due 2020 (Swiss francs (CHF) 56 million)
    7.50 %     45       (4 )     41         46  
Capital lease obligation, due 2011 (CHF 4 million)
    2.49 %     3       —       3         4  
Novelis Korea Limited
                                         
Bank loan, due 2007
    4.55 %     70       (1 )     69         70  
Bank loan, due 2007 (Korean won (KRW) 40 billion)
    4.80 %     43       (1 )     42         42  
Bank loan, due 2007
(KRW 25 billion)
    4.45 %     27       (1 )     26         27  
Bank loans, due 2008 through 2011 (KRW 1 billion)
    3.97 %(D)     1       —       1         1  
Other
                                         
Other debt, due 2007 through 2012
    2.30 %(D)     2       —       2         2  
                                           
Total debt
            2,403       66       2,469         2,300  
Less: current portion
            (144 )     3       (141 )       (143 )
                                           
Long-term debt — net of current portion
          $ 2,259     $ 69     $ 2,328       $ 2,157  
                                           
 
 
(A) Interest rates are as of June 30, 2007 and exclude the effects of accretion/amortization of fair value adjustments as a result of the Arrangement.
 
(B) Debt was recorded at fair value as a result of the Arrangement (see Note 2 — Acquisition of Novelis Common Stock).
 
(C) The interest rate for the Floating rate Term Loan B includes an increased applicable margin in effect through March 31, 2008. The Floating rate Term Loan B was refinanced on July 6, 2007.
 
(D) Weighted average interest rate.
 
Senior Secured Credit Facilities
 
In connection with our spin-off from Alcan, we entered into senior secured credit facilities (Credit Facilities) providing for aggregate borrowings of up to $1.8 billion. The Credit Facilities consisted of (1) a $1.3 billion seven-year senior secured Term Loan B facility, bearing interest at London Interbank Offered Rate (LIBOR) plus 1.75% (which was subject to change based on certain leverage ratios), all of which was


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Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)

borrowed on January 10, 2005, and (2) a $500 million five-year multi-currency revolving credit and letters of credit facility.
 
The Credit Facilities included customary affirmative and negative covenants, as well as financial covenants relating to our maximum total leverage ratio, minimum interest coverage ratio, and minimum fixed charge coverage ratio. Substantially all of our assets were pledged as collateral under the Credit Facilities.
 
The terms of our Credit Facilities required that we deliver unaudited quarterly and audited annual financial statements to our lenders within specified periods of time. Due to delays in certain of our SEC filings for 2005 and 2006, we obtained a series of five waiver and consent agreements from the lenders under the facility to extend the various filing deadlines. Fees paid related to the five waiver and consent agreements totaled $6 million.
 
On October 16, 2006, we amended the financial covenants to our Credit Facilities. In particular, we amended our maximum total leverage, minimum interest coverage, and minimum fixed charge coverage ratios through the quarter ending March 31, 2008. The amended maximum total leverage, minimum interest coverage and minimum fixed charge coverage ratios for the period ended June 30, 2007 were 8.25 to 1; 1.40 to 1; and 0.70 to 1, respectively. For the quarter ended June 30, 2007, we were not in compliance with these covenants. However, due to the refinancing of the Credit Facilities on July 6, 2007 (discussed below), we continue to classify the debt outstanding under the Term Loan as long-term on our condensed consolidated balance sheet as of June 30, 2007.
 
We also amended and modified other provisions of the Credit Facilities to permit more efficient ordinary-course operations, including increasing the amounts of certain permitted investments and receivables securitizations, permitting nominal quarterly dividends, and the transfer of an intercompany loan to another subsidiary. In return for these amendments and modifications, we paid aggregate fees of approximately $3 million to lenders who consented to the amendments and modifications, and agreed to continue paying higher applicable margins on our Credit Facilities, and higher unused commitment fees on our existing revolving credit facilities that were instated with a prior waiver and consent agreement in May 2006. Commitment fees related to the unused portion of the $500 million revolving credit facility were 0.625% per annum.
 
On April 27, 2007, our lenders consented to a further amendment of our Credit Facilities. The amendment included permission to increase the Term Loan B facility by $150 million. We utilized the additional funds available under the Term Loan B facility to reduce the outstanding balance of our $500 million revolving credit facility. The additional borrowing capacity under the revolving credit facility was used to fund working capital requirements and certain costs associated with the Arrangement, including the cash settlement of share-based compensation arrangements and lender fees. Additionally, the amendment included a limited waiver of the change of control Event of Default (as defined in the senior secured credit facilities) which effectively extended the requirement to repay the Credit Facilities to July 11, 2007. We paid fees of approximately $2 million to lenders who consented to this amendment.
 
Since our inception and through June 30, 2007, we satisfied the 1% per annum principal amortization requirement through fiscal year 2010, as well as $560 million of the principal amortization requirement for 2011. As of June 30, 2007, we had $812 million outstanding under the Term Loan B facility. This balance was paid in full on July 6, 2007 with the refinancing of the Credit Facilities, as described below.
 
Total debt issuance costs of $43 million, including amendment fees and the waiver and consent agreements discussed above, had been recorded in Other long-term assets — third parties and were being amortized over the life of the related borrowing in Interest expense and amortization of debt issuance costs — net using the “effective interest amortization” method for the Term Loans and the straight-line method for the revolving credit and letters of credit facility. The unamortized amount of these costs was $26 million as of


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Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)

March 31, 2007. We incurred an additional $2 million in debt issuance costs as described above during the period from April 1, 2007 through May 15, 2007. As a result of the Arrangement and the recording of debt at fair value, the total amount of unamortized debt issuance costs of $28 million was reduced to zero as of May 15, 2007.
 
New Senior Secured Credit Facilities
 
On May 25, 2007, we entered into a Bank and Bridge Facilities Commitment with affiliates of UBS and ABN AMRO, to provide backstop assurance for the refinancing of our existing indebtedness following the Arrangement. The commitments from UBS and ABN AMRO, provided by the banks on a 50%-50% basis, consisted of a senior secured term loan of up to $1.06 billion; a senior secured asset-based revolving credit facility of up to $900 million and a commitment to issue up to $1.2 billion of unsecured senior notes, if necessary. The commitment contained terms and conditions customary for facilities of this nature.
 
In connection with these backstop commitments, we paid fees totaling $13 million which are included in Other long-term assets — third parties as of June 30, 2007. Of this amount, $5 million is related to the unsecured senior notes, which were not refinanced, and will be written off during the quarter ending September 30, 2007. The remaining $8 million in fees paid have been credited by the lenders towards fees associated with the new senior secured credit facilities (described below) and will be amortized over the lives of the related borrowings.
 
On July 6, 2007, we entered into new senior secured credit facilities with a syndicate of lenders led by affiliates of UBS and ABN AMRO (New Credit Facilities) providing for aggregate borrowings of up to $1.76 billion. The New Credit Facilities consist of (1) a $960 million seven-year Term Loan facility (Term Loan facility) and (2) an $800 million five year multi-currency asset-based revolving credit line and letter of credit facility (ABL facility).
 
Under the Term Loan facility, loans characterized as alternate base rate (ABR) borrowings bear interest annually at a rate equal to the alternate base rate (which is the greater of (a) the base rate in effect on a given day and (b) the federal funds effective rate in effect on a given day, plus 0.50%) plus the applicable margin and loans characterized as Eurocurrency borrowings bear interest at an annual rate equal to the adjusted LIBOR rate for the interest period in effect, plus the applicable margin.
 
Under the ABL facility, interest charged is dependent on the type of loan: (1) any swingline loan or any loan categorized as an ABR borrowing will bear interest at an annual rate equal to the alternate base rate (which is the greater of (a) the base rate in effect on a given day and (b) the federal funds effective rate in effect on a given day, plus 0.50%) plus the applicable margin; (2) Eurocurrency loans will bear interest at an annual rate equal to the adjusted LIBOR rate for the applicable interest period, plus the applicable margin; (3) loans designated as Canadian base rate borrowings will bear an annual interest rate equal to the Canadian base rate (CAPRIME) plus the applicable margin; (4) loans designated as bankers acceptances (BA) rate loans will bear interest at the average discount rate offered for bankers’ acceptances for the applicable BA interest period plus the applicable margin and (5) loans designated as Euro Interbank Offered Rate (EURIBOR) loans will bear interest annually at a rate equal to the adjusted EURIBOR rate for the applicable interest period, plus the applicable margin. Applicable margins under the ABL facility depend upon excess availability levels calculated on a quarterly basis. Interest rates generally reset every three months and interest is payable on a quarterly basis.
 
The proceeds from the Term Loan facility of $960 million, drawn in full at the time of closing, and the initial draw of $324 million under the ABL facility were used to pay off the Credit Facilities, pay for debt issuance costs of the New Credit Facilities and provide for additional working capital.


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)

Mandatory minimum principal amortization payments under the Term Loan facility are $2.4 million per calendar quarter beginning September 30, 2007. Additional mandatory prepayments are required to be made for certain collateral liquidations, asset sales, debt and preferred stock issuances, equity issuances, casualty events and excess cash flow (as defined in the New Credit Facilities). Any unpaid principal remaining is due in full on July 6, 2014.
 
Borrowings under the ABL facility are generally based on 85% of eligible accounts receivable and 75% to 85% of eligible inventories. Commitment fees of 0.25% to 0.375% are based on average daily amounts outstanding under the ABL facility during a fiscal quarter, payable quarterly.
 
The New Credit Facilities include customary affirmative and negative covenants. Under the ABL facility, if our excess availability, as defined under the borrowing, is less than 10% of the borrowing base, we are required to maintain a minimum fixed charge coverage ratio of 1 to 1. Substantially all of our assets are pledged as collateral under the New Credit Facilities.
 
We incurred debt issuance costs on our New Credit Facilities totaling $28 million, including the $8 million in fees previously paid in conjunction with the backstop commitment. These fees are included in Other long-term assets — third parties and will be amortized over the life of the related borrowing in Interest expense and amortization of debt issuance costs — net using the “effective interest amortization” method for the Term Loan facility and the straight-line method for the ABL facility.
 
7.25% Senior Notes
 
On February 3, 2005, we issued $1.4 billion aggregate principal amount of senior unsecured debt securities (Senior Notes). The Senior Notes were priced at par, bear interest at 7.25% and mature on February 15, 2015. Debt issuance costs totaling $28 million had been included in Other long-term assets — third parties and were being amortized over the life of the related borrowing in Interest expense and amortization of debt issuance costs — net using the “effective interest amortization” method. The unamortized amount of these costs was $24 million as of March 31, 2007. As a result of the Arrangement and the recording of debt at fair value, the total amount of unamortized debt issuance costs of $23 million was reduced to zero as of May 15, 2007.
 
As a result of the Arrangement, the Senior Notes were recorded at their fair value of $1.474 billion based on their market price of 105.25% of $1,000 face value per bond as of May 14, 2007. The incremental fair value of $74 million is being amortized to interest income over the remaining life of the Senior Notes in Interest expense and amortization of debt issuance costs — net using the “effective interest amortization” method. Due to the change in the market price of our Senior Notes from 105.25% as of May 14, 2007 to 102.75% as of June 30, 2007, the estimated fair value of this debt has decreased $35 million to $1.439 billion.
 
Under the indenture that governs the Senior Notes, we are subject to certain restrictive covenants applicable to incurring additional debt and providing additional guarantees, paying dividends beyond certain amounts and making other restricted payments, sales and transfers of assets, certain consolidations or mergers, and certain transactions with affiliates. We were in compliance with these covenants for the quarter ended June 30, 2007.
 
The indenture governing the Senior Notes and the related registration rights agreement required us to file a registration statement for the notes and exchange the original, privately placed notes for registered notes. Under the indenture and the related registration rights agreement, we were required to complete the exchange offer for the Senior Notes by November 11, 2005. We did not complete the exchange offer by that date and, as a result, we began to incur additional special interest at rates ranging from 0.25% to 1.00%. We filed a post-effective amendment to the registration statement on December 1, 2006 which was declared effective by


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)

the SEC on December 22, 2006. We ceased paying additional special interest effective January 5, 2007, upon completion of the exchange offer.
 
Tender Offer and Consent Solicitation for 7.25% Senior Notes
 
Pursuant to the terms of the indenture governing our Senior Notes, we were obligated, within 30 days of closing of the Arrangement, to make an offer to purchase the Senior Notes at a price equal to 101% of their principal amount, plus accrued and unpaid interest to the date the Senior Notes were purchased. Consequently, we commenced a tender offer on May 16, 2007, to repurchase all of the outstanding Senior Notes at the prescribed price. This offer expired on July 3, 2007 with holders of approximately $1 million of principal presenting their Senior Notes pursuant to the tender offer.
 
Korean Bank Loans
 
In November 2004, Novelis Korea Limited (Novelis Korea), formerly Alcan Taihan Aluminium Limited, entered into a Korean won (KRW) 40 billion ($40 million) floating rate long-term loan due November 2007. We immediately entered into an interest rate swap to fix the interest rate at 4.80%.
 
In December 2004, we entered into a $70 million floating rate long-term loan due December 2007. We immediately entered into an interest rate and cross currency swap for this loan through a 4.55% fixed rate KRW 73 billion loan.
 
Additionally, in December 2004 we entered into a KRW 25 billion ($25 million) floating rate loan due December 2007. We immediately entered into an interest rate swap to fix the interest rate at 4.45%.
 
In both the periods from May 16, 2007 through June 30, 2007 and from April 1, 2007 through May 15, 2007, interest rates on other Korean bank loans for $1 million (KRW 1 billion) ranged from 3.50% to 5.50%.
 
Other Agreements
 
In May 2007, we terminated a loan and a corresponding deposit-and-guarantee agreement for $80 million. We did not include the loan or deposit amounts in our condensed consolidated balance sheet as of March 31, 2007 as the agreement included a legal right of setoff and we had the intent and ability to setoff.
 
Interest Rate Swaps
 
In addition to interest rate swaps on certain Korean bank loans noted above, as of June 30, 2007, we have one outstanding interest rate swap to fix the 3-month LIBOR interest rate at an effective weighted average interest rate of 3.9% on $100 million of the floating rate Term Loan B debt expiring on February 3, 2008. We are still obligated to pay any applicable margin, as defined in our senior secured credit facilities, as amended, in addition to these interest rates. This interest swap was terminated on July 3, 2007 resulting in a gain of less than $1 million. As of June 30, 2007, 61% of our debt was fixed rate and 39% was variable rate.
 
Capital Lease Obligations
 
In December 2004, we entered into a fifteen-year capital lease obligation with Alcan for assets in Sierre, Switzerland, which has an interest rate of 7.5% and calls for fixed quarterly payments of CHF 1.7 million, which is equivalent to $1.4 million at the exchange rate as of June 30, 2007.
 
In September 2005, we entered into a six-year capital lease obligation for equipment in Switzerland which has an interest rate of 2.49% and calls for fixed monthly payments of CHF 0.1 million, which is equivalent to $0.1 million at the exchange rate as of June 30, 2007.


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)

Short Term Borrowings and Lines of Credit
 
As of June 30, 2007, our short-term borrowings were $390 million consisting of (1) $355 million of short-term loans under our $500 million revolving credit facility, (2) $25 million in short-term loans in Korea and (3) $10 million in bank overdrafts. As of June 30, 2007, $25 million of our $500 million revolving credit facility was utilized for letters of credit and we had no availability under this revolving credit facility. As discussed above, we refinanced our Credit Facilities on July 6, 2007, providing additional borrowing availability.
 
As of June 30, 2007, we had an additional $48 million under letters of credit in Korea not included in our revolving credit facility. The weighted average interest rate on our total short-term borrowings was 7.73% and 7.77% as of June 30, 2007 and March 31, 2007, respectively.
 
10.   Accumulated Other Comprehensive Income (Loss)
 
Other comprehensive income (loss) is comprised of the following (in millions).
 
                           
    May 16, 2007
      April 1, 2007
    Three Months
 
    Through
      Through
    Ended
 
    June 30, 2007       May 15, 2007     June 30, 2006  
    Successor       Predecessor     Predecessor  
Net change in foreign currency translation adjustments
  $ (13 )     $ 31     $ 57  
Net change in fair value of effective portion of hedges
    2         (1 )     (34 )
Postretirement benefit plans:
                         
Amortization of net actuarial loss
    —         (1 )     —  
Net change in minimum pension liability
    —         —       (3 )
                           
Net other comprehensive income adjustments, before income tax effect
    (11 )       29       20  
Income tax effect
    10         4       —  
                           
Other comprehensive income (loss)
  $ (1 )     $ 33     $ 20  
                           
 
Accumulated other comprehensive income (loss), net of income tax effects, is comprised of the following (in millions).
 
                   
    June 30, 2007       March 31, 2007  
    Successor       Predecessor  
Foreign currency translation adjustments
  $ (2 )     $ 144  
Fair value of effective portion of hedges — net
    1         (43 )
Net actuarial loss
    —         (82 )
Net prior service cost
    —         (8 )
Net transition obligation
    —         (1 )
                   
Accumulated other comprehensive income (loss)
  $ (1 )     $ 10  
                   
 
11.   Share-Based Compensation
 
Effect of Acquisition by Hindalco
 
As a result of the Arrangement (see Note 2 — Acquisition of Novelis Common Stock), all of our share-based compensation awards (except for our Recognition Awards) were accelerated to vest, cancelled and


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)

settled in cash using the $44.93 purchase price per common share paid by Hindalco in the transaction. We made aggregate cash payments (including applicable payroll-related taxes) totaling $72 million to plan participants following consummation of the Arrangement, as follows:
 
                 
    Shares/Units
    Cash Payments
 
    Settled     (In millions)  
 
Novelis 2006 Incentive Plan (stock options)
    825,850     $ 16  
Novelis 2006 Incentive Plan (stock appreciation rights)
    378,360       7  
Novelis Conversion Plan of 2005
    1,238,183       29  
Stock Price Appreciation Unit Plan
    299,873       7  
Deferred Share Unit Plan for Non-Executive Directors
    109,911       5  
Novelis Founders Performance Awards
    180,400       8  
                 
            $ 72  
                 
 
Compensation expense resulting from the accelerated vesting of plan awards, totaling $45 million is included in Selling, general and administrative expenses in our condensed consolidated statement of operations for the period from April 1, 2007 through May 15, 2007. We also recorded a $7 million reduction to our Additional paid-in capital during the period from April 1, 2007 through May 15, 2007 for the conversion of certain of our share-based compensation plans from equity-based plans to liability-based plans.
 
Our Recognition Awards plan remains in place as of June 30, 2007. However, the awards are now payable only in either, at the option of the executive, (i) Hindalco common shares (if offered by Hindalco) or (ii) cash.
 
2006 Stock Options
 
On October 26, 2006, our board of directors authorized a grant of an aggregate of 885,170 seven-year non-qualified stock options under the Novelis 2006 Incentive Plan (2006 Incentive Plan) at an exercise price of $25.53 to certain of our executive officers and key employees. These options were comprised of equal portions of premium and non-premium options. Both the premium and non-premium options were to vest ratably in 25% annual increments over a four year period measured from October 26, 2006, and could be exercised, in whole or in part, once vested. However, while the premium and non-premium options carry the same exercise price of $25.53, in no event could the premium options be exercised unless the fair market value per share, as defined in the 2006 Incentive Plan, on the business day preceding the exercise date equals or exceeds $28.59. As a result of the Arrangement, all of our stock options under the 2006 Incentive Plan were accelerated to vest, cancelled and settled in cash using the $44.93 purchase price per common share paid by Hindalco in the transaction.


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)

The table below shows the option activity (for both premium and non-premium options) under our 2006 Incentive Plan for the period from April 1, 2007 through May 15, 2007.
 
                                 
                Weighted
       
                Average
       
          Weighted
    Remaining
       
          Average
    Contractual
    Aggregate
 
    Number of
    Exercise
    Term
    Intrinsic
 
    Options     Price     (In Years)     Value  
 
Options outstanding as of March 31, 2007
    825,850     $ 25.53                  
Granted
    —       —                  
Exercised
    —       —                  
Forfeited/Cancelled
    —       —                  
Expired
    —       —                  
Settled as a result of the Arrangement
    (825,850 )   $ 25.53                  
                                 
Options outstanding as of May 15, 2007
    —     $ —       —     $ —  
                                 
Options exercisable as of May 15, 2007
    —     $ —       —     $ —  
                                 
 
Prior to the Arrangement, we used the Monte Carlo valuation model to determine the fair value of the premium options outstanding under the 2006 Incentive Plan. The Monte Carlo model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the award and calculates the fair market value of each award. Because our trading history was shorter than the expected life of the options, we used historical stock price volatility data from comparable companies to supplement our own historical volatility to determine expected volatility assumptions. The annual expected dividend yield was based on dividend payments of $0.01 per share per quarter. Risk-free interest rates were based on U.S. Treasury Strip yields, compounded daily, consistent with the expected lives of the options. The fair value of the premium options was being amortized over the requisite service period of each award, which was originally from one to four years, subject to acceleration in cases where the employee elects retirement or is retirement eligible after October 26, 2007.
 
Prior to the Arrangement, we used the Black-Scholes valuation model to determine the fair value of non-premium options issued. Because our trading history was shorter than the expected life of the options, we used historical stock price volatility data from comparable companies to supplement our own historical volatility to determine expected volatility assumptions. The annual expected dividend yield was based on dividend payments of $0.01 per share per quarter. Risk-free interest rates were based on U.S. Treasury Strip yields, compounded daily, consistent with the expected lives of the options. Because we did not have a sufficient history of option exercise or cancellation, we estimated the expected life of the options based on an extension of the “simplified method” as prescribed by SEC Staff Accounting Bulletin (SAB) No. 107, Share-Based Payment, which allows for the use of a mid-point between the earliest and latest dates that an award can be exercised.


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)

No premium or non-premium options under the 2006 Incentive Plan were granted during the period from April 1, 2007 through May 15, 2007. Prior to the Arrangement, the fair value of our premium and non-premium options was estimated using the following assumptions:
 
     
    April 1, 2007
    Through
    May 15, 2007
    Predecessor
 
Expected volatility
  42.20 to 46.40%
Weighted average volatility
  44.30%
Dividend yield
  0.16%
Risk-free interest rate
  4.68 to 4.71%
Expected life
  1.00 to 4.75 years
 
As a result of the Arrangement, 825,850 premium and non-premium options under the 2006 Incentive Plan were accelerated to vest and were settled in cash for approximately $16 million.
 
Novelis Conversion Plan of 2005
 
On January 5, 2005, our board of directors adopted the Novelis Conversion Plan of 2005 (the Conversion Plan) to allow for 1,372,663 Alcan stock options held by employees of Alcan who became our employees following our spin-off from Alcan to be replaced with options to purchase 2,723,914 of our common shares. As a result of the Arrangement, all of our stock options under the Conversion Plan were accelerated to vest, cancelled and settled in cash using the $44.93 purchase price per common share paid by Hindalco in the transaction.
 
The following table shows the option activity in our Conversion Plan for the period from April 1, 2007 through May 15, 2007.
 
                                 
                Weighted
       
                Average
       
          Weighted
    Remaining
       
          Average
    Contractual
    Aggregate
 
    Number of
    Exercise
    Term
    Intrinsic
 
    Options     Price     (In Years)     Value  
 
Options outstanding as of March 31, 2007
    1,296,952     $ 21.74                  
Granted
    —       —                  
Exercised
    (57,876 )   $ 20.00                  
Forfeited/Cancelled
    (893 )   $ 23.74                  
Expired
    —       —                  
Settled as a result of the Arrangement
    (1,238,183 )   $ 21.82                  
                                 
Options outstanding as of May 15, 2007
    —     $ —       —     $ —  
                                 
Options exercisable as of May 15, 2007
    —     $ —       —     $ —  
                                 
 
Prior to the Arrangement, we used the Black-Scholes valuation model to determine the fair value of the options outstanding. Because we had no trading history at the time of the valuation, we used historical stock price volatility data from comparable companies to determine expected volatility assumptions. The annual expected dividend yield was based on our then current and anticipated dividend payments. Risk-free interest rates were based on U.S. Treasury bond yields, compounded daily, consistent with the expected lives of the options. Because we did not have a sufficient history of option exercise or cancellation, we estimated the


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)

expected life of the options based on the lesser of the expected term of six years or the remaining life of the option.
 
No new options under the Conversion Plan were granted since its adoption in January 2005. The fair value of each option was estimated using the following assumptions:
 
     
    April 1, 2007
    Through
    May 15, 2007
    Predecessor
 
Expected volatility
  30.30%
Weighted-average volatility
  30.30%
Dividend yield
  1.56%
Risk-free interest rate
  2.88 to 3.73%
Expected life
  0.70 to 5.70 years
 
During the period from April 1, 2007 through May 15, 2007, there were 6,548 options that vested. As a result of the Arrangement, 563,651 options were accelerated to vest with a total fair value of approximately $4 million, and 1,238,183 options were settled in cash using the $44.93 per common share transaction price for approximately $29 million.
 
Under our Conversion Plan for the period from April 1, 2007 through May 15, 2007, the total intrinsic value of options exercised was approximately $1 million and cash received from options exercised was approximately $1 million. There were no options exercised during the three months ended June 30, 2006.
 
Recognition Awards
 
On September 25, 2006, we entered into Recognition Agreements and granted Recognition Awards to certain executive officers and other key employees (Executives) to retain and reward them for continued dedication towards corporate objectives. Under the terms of these agreements, Executives who remain continuously employed by us through the vesting dates of December 31, 2007 and December 31, 2008 are entitled to receive one-half of their total Recognition Awards on each vesting date.
 
On February 10, 2007, our board of directors adopted resolutions to amend the Recognition Awards with the Executives. As amended, if the Executive remains continuously employed by us through the vesting dates of December 31, 2007 and December 31, 2008, the Executive is entitled to the awards, payable at a value of $44.93 per share, in either, at the option of the Executive, (i) Hindalco common shares (if offered by Hindalco) or (ii) cash.
 
The number of Recognition Awards payable under the agreements varies by Executive. Currently, there are 145,800 shares subject to award. Prior to the Arrangement and in accordance with the provisions of FASB Statement No. 123 (Revised), Share-Based Payment, we valued these awards as of the issuance date and were recognizing their cost over the requisite service period of the Executives. As a result of the Arrangement, the Recognition Awards changed in classification from an equity-based to a liability-based plan using the $44.93 per common share transaction price as the per share value. This classification change resulted in additional share-based compensation expense of $1.3 million during the period from April 1, 2007 through May 15, 2007.
 
The table below shows the activity for our Recognition Awards for the periods from April 1, 2007 through May 15, 2007 and from May 16, 2007 through June 30, 2007.


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)

                         
          Weighted
       
    Number of
    Average
    Award
 
    Recognition
    Fair Value at
    Redemption
 
    Awards     Grant Date     Price  
 
Predecessor:
                       
Recognition Awards as of March 31, 2007
    145,800     $ 23.15          
Granted
    —                  
Vested
    —                  
Forfeited/Cancelled
    —                  
                         
Recognition Awards as of May 15, 2007
    145,800             $ 44.93  
 
 
                         
Successor:
                       
Granted
    —                  
Vested
    —                  
Forfeited/Cancelled
    —                  
                         
Recognition Awards as of June 30, 2007
    145,800             $ 44.93  
                         
 
As of June 30, 2007, there was approximately $1 million and $2 million of unamortized compensation expense related to each of the two vesting dates for the Recognition Awards, which is expected to be recognized over the next 0.5 years and 1.5 years, respectively.
 
Stock Appreciation Rights
 
On October 26, 2006, our board of directors authorized a grant of 381,090 Stock Appreciation Rights (SARs) under the 2006 Incentive Plan at an exercise price of $25.53 to certain of our executive officers and key employees. The terms of the SARs were identical in all material respects to those of the stock options issued under the 2006 Incentive Plan, except that the incremental increase in the value of the SARs was to be settled in cash rather than shares of Novelis’ common stock at the time of exercise. The SARs were comprised of two equal portions: premium and non-premium SARs. Both the premium and non-premium SARs vested ratably in 25% annual increments over the four-year period measured from October 26, 2006, and could be exercised, in whole or in part, once vested. However, while the premium and non-premium SARs carried the same exercise price of $25.53, in no event could the premium SARs be exercised unless the fair market value per share, as defined in the 2006 Incentive Plan, on the business day preceding the exercise date equals or exceeds $28.59. As a result of the Arrangement, all of our SARs under the 2006 Incentive Plan were accelerated to vest, cancelled and settled in cash using the $44.93 purchase price per common share paid by Hindalco in the transaction.

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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)

The table below shows the SARs activity (for both premium and non-premium SARs) under our 2006 Incentive Plan for the period from April 1, 2007 through May 15, 2007.
 
                                 
                Weighted
       
                Average
       
                Remaining
       
          Weighted
    Contractual
    Aggregate
 
    Number of
    Average
    Term
    Intrinsic
 
    SARs     Exercise Price     (In Years)     Value  
 
SARs outstanding as of March 31, 2007
    380,000     $ 25.53                  
Granted
    —       —                  
Exercised
    —       —                  
Forfeited/Cancelled
    (1,640 )   $ 25.53                  
Expired
    —       —                  
Settled as a result of the Arrangement
    (378,360 )   $ 25.53                  
                                 
SARs outstanding as of May 15, 2007
    —     $ —       —     $ —  
                                 
SARs exercisable as of May 15, 2007
    —     $ —       —     $ —  
                                 
 
Prior to the Arrangement, we used the Monte Carlo valuation model to determine the fair value of the premium SARs outstanding under the 2006 Incentive Plan. The Monte Carlo model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the award and calculates the fair market value of each award. Because our trading history was shorter than the expected life of the SARs, we used historical stock price volatility data from comparable companies to supplement our own historical volatility to determine expected volatility assumptions. No quarterly or annual dividend was expected. Risk-free interest rates were based on U.S. Treasury Strip yields, compounded daily, consistent with the expected remaining lives of the premium SARs. The fair value of the premium SARs was being amortized over the requisite remaining service period of each award, which was from 0.57 to 3.57 years as of March 31, 2007, subject to acceleration in cases where the employee elects retirement or is retirement eligible after October 26, 2007.
 
Prior to the Arrangement, we used the Black-Scholes valuation model to determine the fair value of the non-premium SARs outstanding. Because our trading history was shorter than the expected life of the SARs, we used historical stock price volatility data from comparable companies to supplement our own historical volatility to determine expected volatility assumptions. No quarterly or annual dividend was expected. Risk-free interest rates were based on U.S. Treasury Strip yields, compounded daily, consistent with the expected remaining lives of the SARs. Because we did not have a sufficient history of SAR exercise or cancellation, we estimated the expected remaining life of the SARs based on an extension of the “simplified method” as prescribed by SAB No. 107.
 
As a result of the Arrangement, 378,360 premium and non-premium SARs were accelerated to vest and were settled in cash for approximately $7 million.
 
Stock Price Appreciation Unit Plan
 
Prior to the spin-off, some Alcan employees who later transferred to Novelis held Alcan stock price appreciation units (SPAUs). These units entitled them to receive cash equal to the excess of the market value of an Alcan common share on the exercise date of a SPAU over the market value of an Alcan common share on its grant date. On January 6, 2005, these employees received 418,777 Novelis SPAUs to replace their 211,035 Alcan SPAUs at a weighted average exercise price of $22.04. All converted SPAUs that were vested at the spin-off date continued to be vested. Unvested SPAUs were to vest in four equal annual installments


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)

beginning on January 6, 2006, the first anniversary of the spin-off date. As a result of the Arrangement, all of our SPAU’s were accelerated to vest, cancelled and settled in cash using the $44.93 purchase price per common share paid by Hindalco in the transaction.
 
The table below shows the activity in our SPAU Plan for the period from April 1, 2007 through May 15, 2007.
 
                                 
                Weighted
       
                Average
       
                Remaining
       
          Weighted
    Contractual
    Aggregate
 
    Number of
    Average
    Term
    Intrinsic
 
    SPAUs     Exercise Price     (In Years)     Value  
 
SPAUs outstanding as of March 31, 2007
    300,617     $ 21.94                  
Granted
    —       —                  
Exercised
    —       —                  
Forfeited/Cancelled
    (744 )   $ 21.49                  
Expired
    —       —                  
Settled as a result of the Arrangement
    (299,873 )   $ 21.94                  
                                 
SPAUs outstanding as of May 15, 2007
    —     $ —       —     $ —  
                                 
SPAUs exercisable as of May 15, 2007
    —     $ —       —     $ —  
                                 
 
Prior to the Arrangement, we used the Black-Scholes valuation model to estimate the fair value of SPAUs granted to employees and to determine the fair value of the SPAUs outstanding. Because our trading history is shorter than the expected life of the SPAUs, we used historical stock price volatility data from comparable companies to supplement our own historical volatility to determine expected volatility assumptions. No quarterly or annual dividend was expected. Risk-free interest rates were based on U.S. Treasury spot rates consistent with the expected remaining lives of the SPAUs. Because we did not have a sufficient history of SPAU exercise or cancellation, we estimated the expected remaining life of the SPAUs based on an extension of the “simplified method” as prescribed by SAB No. 107. As a result of the Arrangement, the Recognition Awards were valued using the $44.93 per common share transaction price.
 
As a result of the Arrangement, 201,495 SPAUs were accelerated to vest and 299,873 SPAUs were settled in cash using the $44.93 per common share transaction price for approximately $7 million.
 
Deferred Share Unit Plan for Non-Executive Directors
 
On January 5, 2005, Novelis established the Deferred Share Unit Plan for Non-Executive Directors under which non-executive directors would receive 50% of their compensation payable in the form of directors’ deferred share units (DDSUs) and the other 50% in the form of either cash, additional DDSUs or a combination of these two (at the election of each non-executive director). The number of DDSUs was determined by dividing the quarterly amount payable, as elected, by the average closing prices of a common share on the Toronto Stock Exchange (TSX) (adjusted for the noon exchange rate) and New York Stock Exchange (NYSE) on the last five trading days of each quarter. Additional DDSUs representing the equivalent of dividends declared on common shares are credited to each holder of DDSUs. The number of DDSUs outstanding as of March 31, 2007 included DDSUs issued on April 1, 2007, as the required service was provided by the period-end.
 
The DDSUs were redeemable in cash and/or in shares of our common stock following the participant’s retirement from the board. The redemption amount was calculated by multiplying the accumulated balance of DDSUs by the average closing price of a common share on the TSX (adjusted for the noon exchange rate) and


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Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)

NYSE on the last five trading days prior to the redemption date. As a result of the Arrangement, all of our DDSUs were cancelled and settled in cash using the $44.93 purchase price per common share paid by Hindalco in the transaction.
 
The table below shows our DDSU activity for the period from April 1, 2007 through May 15, 2007.
 
                         
                Aggregate
 
    Number of
    Redemption
    Intrinsic
 
    DDSUs     Price     Value  
 
DDSUs outstanding as of March 31, 2007
    106,578     $ 44.09          
Granted
    3,333                  
Exercised (paid out)
    —                  
Forfeited
    —                  
Expired/Cancelled
    —                  
Settled as a result of the Arrangement
    (109,911 )   $ 44.93          
                         
DDSUs outstanding as of May 15, 2007
    —     $ —     $ —  
                         
 
As a result of the Arrangement, 109,911 DDSUs were settled in cash using the $44.93 per common share transaction price for approximately $5 million.
 
Novelis Founders Performance Awards
 
In March 2005 (and amended and restated in March 2006 and February 2007), Novelis established a plan to reward certain key executives with Performance Share Units (PSUs) if Novelis common share price improvement targets were achieved within specific time periods. There were three equal tranches of PSUs, and each had a specific share price improvement target. For the first tranche, the target share price of $23.57 applied for the period from March 24, 2005 to March 23, 2008. For the second tranche, the target share price of $25.31 applied for the period from March 24, 2006 to March 23, 2008. For the third tranche, the target share price of $27.28 applied for the period from March 24, 2007 to March 23, 2008. If awarded, a particular tranche was to be paid in cash on the later of six months from the date the specific common share price target is reached or twelve months after the start of the performance period, and will be based on the average of the daily common share closing prices on the NYSE for the last five trading days prior to the payment date.
 
The liability for the first tranche was accrued over its term, was valued on March 24, 2006, and was paid in April 2006 in the aggregate amount of approximately $3 million.
 
In February 2007, our board of directors recognized that the applicable share price threshold had been (or would likely be) met with respect to the second tranche and would probably be met for the third tranche, but in light of the insiders’ awareness of the possibility of a change in control transaction, they were subject to a trading blackout. Moreover, it was unlikely that a 15 day open trading window under the Novelis disclosure and insider trading policies would arise prior to the Arrangement. Accordingly, on February 10, 2007, our board of directors further amended the PSUs in order to provide that the applicable threshold for (a) the second tranche was to be met as of February 28, 2007 and (b) the third tranche was to be met as of March 26, 2007, for purposes of PSUs to be awarded.
 
As a result of the Arrangement, the second and third tranches (represented by 94,450 and 85,950 PSUs, respectively) were settled in cash using the $44.93 per common share transaction price for a total of approximately $8 million.


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)

Share-Based Compensation Expense
 
Total share-based compensation expense for the periods from April 1, 2007 through May 15, 2007 and from May 16, 2007 through June 30, 2007 and for the three months ended June 30, 2006 is presented in the table below (in millions). These amounts are included in Selling, general and administrative expenses in our condensed consolidated statements of operations.
 
                           
    May 16, 2007
      April 1, 2007
    Three Months
 
    Through
      Through
    Ended
 
    June 30, 2007       May 15, 2007     June 30, 2006  
    Successor       Predecessor     Predecessor  
Recognition Awards
  $ 0.4       $ 1.5     $ —  
Novelis 2006 Incentive Plan (stock options)
    n.a.         14.5       —  
Novelis 2006 Incentive Plan (stock appreciation rights)
    n.a.         5.6       —  
Novelis Conversion Plan of 2005
    n.a.         23.8       0.8  
Stock Price Appreciation Unit Plan
    n.a.         (0.5 )     0.3  
Total Shareholder Returns Performance Plan
    n.a.         —       0.4  
Deferred Share Unit Plan for Non-Executive Directors
    n.a.         0.2       0.4  
Novelis Founders Performance Awards
    n.a.         0.1       0.2  
                           
Total Share-Based Compensation Expense
  $ 0.4       $ 45.2     $ 2.1  
                           
 
 
n.a. — not applicable as plan was cancelled.
 
12.   Postretirement Benefit Plans
 
Components of net periodic benefit cost for all of our significant postretirement benefit plans are shown in the table below (in millions).
 
                                                     
    Pension Benefits     Other Postretirement Benefits  
            April 1, 2007
                        Three Months
 
    May 16, 2007
      Through
    Three Month
    May 16, 2007
      April 1, 2007
    Ended
 
    Through
      May 15,
    Ended
    Through
      Through
    June 30,
 
    June 30, 2007       2007     June 30, 2006     June 30, 2007       May 15, 2007     2006  
    Successor       Predecessor     Predecessor     Successor       Predecessor     Predecessor  
Service cost
  $ 6       $ 6     $ 10     $ 1       $ 1     $ 1  
Interest cost
    6         6       11       1         1       2  
Expected return on assets
    (5 )       (5 )     (10 )     —         —       —  
Amortization — actuarial losses
    —         —       2       —         —       —  
— prior service cost
    —         —       —       —         —       —  
                                                     
Net periodic benefit cost
  $ 7       $ 7     $ 13     $ 2       $ 2     $ 3  
                                                     
 
The expected long-term rate of return on plan assets is 7.5% in fiscal 2008.


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)

Employer Contributions to Plans
 
For pension plans, our policy is to fund an amount required to provide for contractual benefits attributed to service to date, and amortize unfunded actuarial liabilities typically over periods of 15 years or less. We also participate in savings plans in Canada and the U.S. as well as defined contribution pension plans in the U.S., U.K., Canada, Germany, Malaysia and Brazil. We contributed the following amounts to all plans, including the Alcan plans that cover our employees (in millions).
 
                           
                  Three Months
 
    May 16, 2007
      April 1, 2007
    Ended
 
    Through
      Through
    June 30,
 
    June 30, 2007       May 15, 2007     2006  
    Successor       Predecessor     Predecessor  
Funded pension plans
  $ 4       $ 4     $ 5  
Unfunded pension plans
    2         2       3  
Savings and defined contribution pension plans
    2         2       2  
                           
Total contributions
  $ 8       $ 8     $ 10  
                           
 
During the remainder of fiscal 2008, we expect to contribute an additional $29 million to our funded pension plans, $13 million to our unfunded pension plans and $9 million to our savings and defined contribution pension plans.
 
13.   Currency Losses (Gains)
 
The following currency losses (gains) are included in the accompanying condensed consolidated statements of operations (in millions).
 
                           
    May 16, 2007
      April 1, 2007
    Three Months
 
    Through
      Through
    Ended
 
    June 30, 2007       May 15, 2007     June 30, 2006  
    Successor       Predecessor     Predecessor  
Net loss (gain) on change in fair value of currency derivative instruments(A)
  $ (16 )     $ (10 )   $ 8  
Net loss (gain) on translation of monetary assets and liabilities(B)
    7         4       (5 )
                           
Net currency losses (gains)
  $ (9 )     $ (6 )   $ 3  
                           
 
 
(A) Included in Gain on change in fair value of derivative instruments — net.
 
(B) Included in Other (income) expenses — net.
 
The following currency gains (losses) are included in Accumulated other comprehensive income (loss) in the accompanying condensed consolidated balance sheets (net of tax effect and in millions).
 
                   
    May 16, 2007
      January 1, 2007
 
    Through
      Through
 
    June 30, 2007       March 31, 2007  
    Successor       Predecessor  
Cumulative currency translation adjustment — beginning of period
  $ —       $ 133  
Effect of changes in exchange rates
    (2 )       11  
                   
Cumulative currency translation adjustment — end of period
  $ (2 )     $ 144  
                   


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)

14.   Financial Instruments and Commodity Contracts
 
In conducting our business, we use various derivative and non-derivative instruments, including forward contracts, to manage the risks arising from fluctuations in exchange rates, interest rates, aluminum prices and energy prices. Such instruments are used for risk management purposes only. We may be exposed to losses in the future if the counterparties to the contracts fail to perform. We are satisfied that the risk of such non-performance is remote, due to our monitoring of credit exposures. Alcan is the principal counter-party to our aluminum forward contracts.
 
Certain contracts are designated as hedges of either net investment or cash flows. For these contracts we recognize the change in fair value of the ineffective portion of the hedge as a gain or loss in our current period results of operations. We include the change in fair value of the effective and interest portions of these hedges in Accumulated other comprehensive income (loss) within Shareholder’s equity in the accompanying condensed consolidated balance sheet.
 
Prior to Completion of the Arrangement
 
During the three months ended June 30, 2006 and the period from April 1, 2007 through May 15, 2007, we applied hedge accounting to certain of our cross-currency interest swaps with respect to intercompany loans to several European subsidiaries and forward exchange contracts. Our Euro and British pound (GBP) cross-currency interest swaps were designated as net investment hedges, while our Swiss franc (CHF) cross-currency interest rate swaps and our Brazilian real (BRL) forward foreign exchange contracts were designated as cash flow hedges. As of May 15, 2007, we had $712 million of cross-currency swaps (Euro 475 million, GBP 62 million and CHF 35 million) and $99 million of forward foreign exchange contracts (BRL 229 million). During the period from April 1, 2007 through May 15, 2007, we implemented cash flow hedge accounting for an electricity swap, which was embedded in a supply contract.
 
During the period from April 1, 2007 through May 15, 2007, the change in fair value of the effective and interest portions of our net investment hedges was a loss of $8 million and the change in fair value of the effective portion of our cash flow hedges was a gain of $7 million.
 
Impact of the Arrangement and Purchase Accounting
 
Concurrent with completion of the Arrangement on May 15, 2007, we dedesignated all hedging relationships. The cumulative change in fair value of effective and interest portions of these hedges, previously presented in Accumulated other comprehensive income (loss) within Shareholder’s equity on May 15, 2007, was incorporated in the new basis of accounting. As a result of purchase accounting, the fair value of all embedded derivative instruments was allocated to the fair value of their respective host contracts, reducing the fair value of embedded derivative instruments to zero.
 
Subsequent to Completion of the Arrangement
 
With exception of the electricity swap, noted above, which was redesignated as a cash flow hedge on June 1, 2007, hedge accounting was not applied to any of our financial instruments or commodity contracts after May 15, 2007 and subsequent changes in the fair value have been recognized in Gain on change in fair value of derivative instruments — net in our condensed consolidated statement of operations.
 
The period from May 16, 2007 through June 30, 2007, includes a gain of $2 million before tax for the change in fair value of the effective portion of our remaining cash flow hedge. As of June 30, 2007, the amount of effective net gains to be realized during the next twelve months is not significant. The maximum period over which we have hedged our exposure to cash flow variability is through November 2016.


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)

The fair values of our financial instruments and commodity contracts as of June 30, 2007 and March 31, 2007 were as follows (in millions).
 
                             
        As of June 30, 2007
 
        Successor  
                    Net Fair
 
    Maturity Dates   Assets     Liabilities     Value  
 
Foreign exchange forward contracts
  2007 through 2011   $ 25     $ (17 )   $ 8  
Interest rate swaps
  2007 through 2008     2       —       2  
Cross-currency swaps
  2007 through 2015     6       (95 )     (89 )
Aluminum forward contracts
  2007 through 2009     40       (6 )     34  
Electricity swap
  2016     3       —       3  
Embedded derivative instruments
  2007     1       (1 )     —  
Natural gas swaps
  2007     —       (1 )     (1 )
                             
Total fair value
        77       (120 )     (43 )
Less: current portion (A)
        71       (31 )     40  
                             
Noncurrent portion (A)
      $ 6     $ (89 )   $ (83 )
                             
 
                             
        As of March 31, 2007
 
        Predecessor  
                    Net Fair
 
    Maturity Dates   Assets     Liabilities     Value  
 
Foreign exchange forward contracts
  2007 through 2011   $ 16     $ (20 )   $ (4 )
Interest rate swaps
  2007 through 2008     2       —       2  
Cross-currency swaps
  2007 through 2015     6       (90 )     (84 )
Aluminum forward contracts
  2007 through 2009     60       (8 )     52  
Aluminum options
  2007     1       —       1  
Electricity swap
  2016     60       —       60  
Embedded derivative instruments
  2007     1       —       1  
Natural gas swaps
  2007     1       —       1  
                             
Total fair value
        147       (118 )     29  
Less: current portion (A)
        92       (33 )     59  
                             
Noncurrent portion (A)
      $ 55     $ (85 )   $ (30 )
                             
 
 
(A) The amounts of the current and long-term portions of fair values under assets are each presented in the accompanying condensed consolidated balance sheets. The amounts of the current and noncurrent portions of fair values under liabilities are included in Accrued expenses and other current liabilities and Other long-term liabilities, respectively, in the accompanying condensed consolidated balance sheets.


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Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)

 
15.   Other (Income) Expenses — Net
 
Other (income) expenses — net is comprised of the following (in millions).
 
                           
    May 16, 2007
      April 1, 2007
    Three Months
 
    Through
      Through
    Ended
 
    June 30, 2007       May 15, 2007     June 30, 2006  
    Successor       Predecessor     Predecessor  
Restructuring charges — net
  $ 1       $ 1     $ 2  
Exchange (gains) losses — net
    7         4       (5 )
Other — net
    3         (1 )     (1 )
                           
Other (income) expenses — net
  $ 11       $ 4     $ (4 )
                           
 
16.   Income Taxes
 
We provide for income taxes using the liability method in accordance with FASB Statement No. 109, Accounting for Income Taxes. In accordance with APB Opinion No. 28, Interim Financial Reporting, and FASB Interpretation No. 18, Accounting for Income Taxes in Interim Periods (FIN No. 18), the provision for taxes on income recognizes our estimate of the effective tax rate expected to be applicable for the full fiscal year, adjusted for the impact of any discrete events, which are reported in the period in which they occur. Each quarter, we re-evaluate our estimated tax expense for the year and make adjustments for changes in the estimated tax rate. Additionally, we evaluate the realizability of our deferred tax assets on a quarterly basis. Our evaluation considers all positive and negative evidence and factors, such as the scheduled reversal of temporary differences, historical and projected future taxable income or losses, and prudent and feasible tax planning strategies.
 
The provision (benefit) for taxes on loss for (1) the periods from May 16, 2007 through June 30, 2007 (Successor) and April 1, 2007 through May 15, 2007 (Predecessor) were based on the estimated effective tax rates applicable for the year ending March 31, 2008, after considering items specifically related to the interim period and (2) the three months ended June 30, 2006 was based on the estimated effective tax rates applicable for the year ended December 31, 2006, after considering items specifically related to the interim period.
 
A reconciliation of the Canadian statutory tax rates to our effective tax rates is as follows (in millions).
 
                           
                  Three Months
 
    May 16, 2007
      April 1, 2007
    Ended
 
    Through
      Through
    June 30,
 
    June 30, 2007       May 15, 2007     2006  
    Successor       Predecessor     Predecessor  
Pre-tax loss before equity in net income of non-consolidated affiliates and minority interests’ share
  $ (19 )     $ (95 )   $ (14 )
                           
Canadian statutory tax rate
    33 %       33 %     33 %
                           
Income taxes (benefit) at the Canadian statutory rate
  $ (6 )     $ (31 )   $ (4 )
Increase (decrease) in tax rate resulting from:
                         
Exchange translation items
    20         23       24  
Exchange remeasurement of deferred income taxes
    3         3       —  
Change in valuation allowances
    21         13       (3 )
Expense/income items with no tax effect — net
    (6 )       (9 )     (8 )
Tax rate differences on foreign earnings
    2         2       (29 )
Other — net
    2         3       —  
                           
Provision (benefit) for taxes on loss
  $ 36       $ 4     $ (20 )
                           
Effective tax rate
    (189 )%       (4 )%     143 %
                           


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Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)

Our effective tax rate differs from the Canadian statutory rate primarily due to three factors: (1) pre-tax foreign currency gains or losses with no tax effect and the tax effect of U.S. dollar denominated currency gains or losses with no pre-tax effect which is shown above as exchange translation items; (2) changes in valuation allowances primarily related to tax losses in certain jurisdictions where we believe it is more likely than not that we will not be able to utilize those losses and (3) differences between the Canadian statutory and foreign effective tax rates resulting from the application of an annual effective tax rate to profit and loss entities in different jurisdictions shown above as tax rate differences on foreign earnings.
 
Cash taxes paid for the periods from May 16, 2007 through June 30, 2007 and April 1, 2007 through May 15, 2007 were $12 million and $9 million, respectively. Cash taxes paid for the three months ended June 30, 2006 were $7 million.
 
Adoption of FASB Interpretation No. 48
 
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes. FASB Interpretation No. 48 clarifies the accounting for income taxes, by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FASB Interpretation No. 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. Upon adoption as of January 1, 2007, we increased our reserves for uncertain tax positions by $1 million. We recognized the increase as a cumulative effect adjustment to Shareholder’s equity, as an increase to our Accumulated deficit. Including this adjustment, reserves for uncertain tax positions totaled $45 million as of January 1, 2007. Of this total, $43 million represents the amount of unrecognized tax benefits that, if recognized, would affect the effective income tax rate in any future periods.
 
Tax authorities are currently examining certain prior years’ tax returns for 1999-2003. We are evaluating potential adjustments related to certain items and we anticipate that it is reasonably possible that settlement of the examination will result in a payment in the range of up to $5 million and a corresponding decrease in unrecognized tax benefits by March 31, 2008.
 
Separately, we are awaiting a court ruling regarding the utilization of certain operating losses. We anticipate that it is reasonably possible that this ruling will result in a $10 million decrease in unrecognized tax benefits by March 31, 2008 related to this matter. We have fully funded this contingent liability through a judicial deposit, which is included in Other long-term assets — third parties as of January 1, 2007.
 
With the exception of the ongoing tax examinations described above, we are no longer subject to any income tax examinations by any tax authorities for years before 2001. With few exceptions, tax returns for all jurisdictions for all tax years after 2000 are subject to examination by taxing authorities.
 
Our continuing practice and policy is to record potential interest and penalties related to unrecognized tax benefits in our Provision (benefit) for taxes on income (loss). As of March 31, 2007, we had $1 million accrued for potential interest on income taxes and no amounts accrued for potential penalties. For the periods from April 1, 2007 through May 15, 2007 and from May 16, 2007 through June 30, 2007, our Provision (benefit) for taxes on loss included a charge for an additional $0.3 million and $2 million of potential interest, respectively.


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)

17.   Commitments and Contingencies
 
Primary Supplier
 
Alcan is our primary supplier of prime and sheet ingot. Purchases from Alcan represented 35% and 44% of our total combined prime and sheet ingot purchases for the three months ended June 30, 2007 and 2006, respectively.
 
Legal Proceedings
 
Reynolds Boat Case.  As previously disclosed, we and Alcan were defendants in a case in the United States District Court for the Western District of Washington, in Tacoma, Washington, case number C04-0175RJB. Plaintiffs were Reynolds Metals Company, Alcoa, Inc. and National Union Fire Insurance Company of Pittsburgh PA. The case was tried before a jury beginning on May 1, 2006 under implied warranty theories, based on allegations that from 1998 to 2001 we and Alcan sold certain aluminum products that were ultimately used for marine applications and were unsuitable for such applications. The jury reached a verdict on May 22, 2006 against us and Alcan for approximately $60 million, and the court later awarded Reynolds and Alcoa approximately $16 million in prejudgment interest and court costs.
 
The case was settled during July 2006 as among us, Alcan, Reynolds, Alcoa and their insurers for $71 million. We contributed approximately $1 million toward the settlement, and the remaining $70 million was funded by our insurers. Although the settlement was substantially funded by our insurance carriers, certain of them have reserved the right to request a refund from us, after reviewing details of the plaintiffs’ damages to determine if they include costs of a nature not covered under the insurance contracts. Of the $70 million funded, $39 million is in dispute with and under further review by certain of our insurance carriers, who have until October 19, 2007 to complete their review, unless that review time is extended by mutual agreement. In the quarter ended September 30, 2006, we posted a letter of credit in the amount of approximately $10 million in favor of one of those insurance carriers, while we resolve the questions, if any, about the extent of coverage of the costs included in the settlement.
 
Since our fiscal 2005 Annual Report on Form 10-K was not filed until August 25, 2006, we recognized a liability for the full settlement amount of $71 million on December 31, 2005, included in Accrued expenses and other current liabilities on our consolidated balance sheet, with a corresponding charge against earnings. We also recognized an insurance receivable included in Prepaid expenses and other current assets on our consolidated balance sheet of $31 million, with a corresponding increase to earnings. Although $70 million of the settlement was funded by our insurers, we only recognized an insurance receivable to the extent that coverage was not in dispute. This resulted in a net charge of $40 million during the quarter ended December 31, 2005.
 
In July 2006, we contributed and paid $1 million to our insurers who subsequently paid the entire settlement amount of $71 million to the plaintiffs. Accordingly, during the quarter ended September 30, 2006 we reversed the previously recorded insurance receivable of $31 million and reduced our recorded liability by the same amount plus the $1 million contributed by us. The remaining liability of $39 million represents the amount of the settlement claim that was funded by our insurers but is still in dispute with and under further review by certain of our insurance carriers, who have yet to complete their review as described above. The $39 million liability is included in Accrued expenses and other current liabilities in our condensed consolidated balance sheets as of June 30, 2007 and March 31, 2007.
 
While the ultimate resolution of the nature and extent of any costs not covered under our insurance contracts cannot be determined with certainty or reasonably estimated at this time, if there is an adverse outcome with respect to insurance coverage, and we are required to reimburse our insurers, it could have a material impact on our cash flows in the period of resolution. Alternatively, the ultimate resolution could be


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)

favorable, such that insurance coverage is in excess of the net expense that we have recognized to date. This would result in our recording a non-cash gain in the period of resolution, and this non-cash gain could have a material impact on our results of operations during the period in which such a determination is made.
 
Coca-Cola Lawsuits.  A lawsuit was commenced against Novelis Corporation on February 15, 2007 by Coca-Cola Bottler’s Sales and Services Company LLC (CCBSS) in state court in Georgia. In addition, a lawsuit was commenced against Novelis Corporation and Alcan Corporation on April 3, 2007 by Coca-Cola Enterprises Inc, Enterprises Acquisition Company, Inc., The Coca-Cola Company and The Coca-Cola Trading Company, Inc (collectively CCE) in federal court in Georgia. Novelis intends to defend these claims vigorously.
 
CCBSS is a consortium of Coca-Cola bottlers across the United States, including Coca-Cola Enterprises Inc. CCBSS alleges that Novelis Corporation breached an aluminum can stock supply agreement between the parties, and seeks monetary damages in an amount to be determined at trial and a declaration of its rights under the agreement. The agreement includes a “most favored nations” provision regarding certain pricing matters. CCBSS alleges that Novelis Corporation breached the terms of the most favored nations provision. The dispute will likely turn on the facts that are presented to the court by the parties and the court’s finding as to how certain provisions of the agreement ought to be interpreted. If CCBSS were to prevail in this litigation, the amount of damages would likely be material. Novelis Corporation has moved to dismiss the complaint and has filed its answer.
 
The claim by CCE seeks monetary damages in an amount to be determined at trial for breach of a prior aluminum can stock supply agreement between CCE and Novelis Corporation, successor to the rights and obligations of Alcan Aluminum Corporation under the agreement. According to its terms, that agreement with CCE terminated in 2006. The CCE supply agreement included a “most favored nations” provision regarding certain pricing matters. CCE alleges that Novelis Corporation’s entry into a supply agreement with Anheuser-Busch, Inc. breached the “most favored nation” provision of the CCE supply agreement. If CCE were to prevail in this litigation, the amount of damages would likely be material. The dispute will likely turn on the facts that are presented to the court by the parties and the court’s finding as to how certain provisions of the supply agreement ought to be interpreted. Novelis Corporation has moved to dismiss the complaint and has not yet filed its answer. We have not recorded any reserves for these matters.
 
Anheuser-Busch Litigation.  On September 19, 2006, Novelis Corporation filed a lawsuit against Anheuser-Busch, Inc. in federal court in Ohio. Anheuser-Busch, Inc. subsequently filed suit against Novelis Corporation and the Company in federal court in Missouri. On January 3, 2007, Anheuser-Busch, Inc.’s suit was transferred to the Ohio federal court.
 
Novelis Corporation alleges that Anheuser-Busch, Inc. breached the existing multi-year aluminum can stock supply agreement between the parties, and we seek monetary damages and declaratory relief. Among other claims, we assert that since entering into the supply agreement, Anheuser-Busch, Inc. has breached its confidentiality obligations and there has been a structural change in market conditions that requires a change to the pricing provisions under the agreement.
 
In its complaint, Anheuser-Busch, Inc. has asked for a declaratory judgment that Anheuser-Busch, Inc. is not obligated to modify the supply agreement as requested by Novelis Corporation, and that Novelis Corporation must continue to perform under the existing supply agreement.
 
The Anheuser-Busch, Inc. litigation is currently at the discovery stage. Novelis Corporation has continued to perform under the supply agreement during the litigation.
 
ARCO Aluminum Complaint.  On May 24, 2007, Arco Aluminum Inc. (ARCO) filed a complaint against Novelis Corporation and Novelis Inc. in the United States District Court for the Western District of Kentucky.


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)

ARCO and Novelis are partners in a joint venture rolling mill located in Logan, Kentucky. In the complaint, ARCO seeks to resolve a perceived dispute over management and control of the joint venture following Hindalco’s acquisition of Novelis.
 
ARCO alleges that its consent was required in connection with Hindalco’s acquisition of Novelis. Failure to obtain consent, ARCO alleges, has put us in default of the joint venture agreements, thereby triggering certain provisions in those agreements. The provisions include a reversion of the production management at the joint venture to Logan Aluminum from Novelis, and a reduction of the board of directors of the entity that manages the joint venture from seven members (four appointed by Novelis and three appointed by ARCO) to six members (three appointed by each of Novelis and ARCO).
 
ARCO is seeking a court declaration that (1) Novelis and its affiliates are prohibited from exercising any managerial authority or control over the joint venture, (2) Novelis’ interest in the joint venture is limited to an economic interest only and (3) ARCO has authority to act on behalf of the joint venture. Or, alternatively, ARCO is seeking a reversion of the production management function to Logan Aluminum, and a change in the composition of the board of directors of the entity that manages the joint venture. Novelis filed its answer to the complaint on July 16, 2007.
 
On July 3, 2007, ARCO filed a motion for partial summary judgment with respect to one of the counts of its complaint relating to the claim that Novelis breached the joint venture agreement by not seeking ARCO’s consent. On July 30, 2007, Novelis filed a motion to hold ARCO’s motion for summary judgment in abeyance (pending further discovery), along with a jury demand. Those motions are pending. We intend to defend these proceedings vigorously.
 
Environmental Matters
 
Oswego North Ponds.  As previously disclosed, Oswego North Ponds is currently our largest known single environmental loss contingency. In the late 1960s and early 1970s, Novelis Corporation, (formerly known as Alcan Aluminum Corporation, or Alcancorp) used an oil containing polychlorinated biphenyls (PCBs) in its re-melt operations in Oswego, New York. At the time, Novelis Corporation utilized a once-through cooling water system that discharged through a series of constructed ponds and wetlands, collectively referred to as the North Ponds. In the early 1980s, low levels of PCBs were detected in the cooling water system discharge and Novelis Corporation performed several subsequent investigations. The PCB-containing hydraulic oil, Pydraul, which was eliminated from use by Novelis Corporation in the early 1970s, was identified as the source of contamination. In the mid-1980s, the Oswego North Ponds site was classified as an “inactive hazardous waste disposal site” and added to the New York State Registry. Novelis Corporation ceased discharge through the North Ponds in mid-2002.
 
In cooperation with the New York State Department of Environmental Conservation (NYSDEC) and the New York State Department of Health, Novelis Corporation entered into a consent decree in August 2000 to develop and implement a remedial program to address the PCB contamination at the Oswego North Ponds site. A remedial investigation report was submitted in January 2004. The current estimated cost associated with this remediation is in the range of $12 million to $26 million. Based upon the report and other factors, we accrued $19 million as our estimated cost. In addition, NYSDEC held a public hearing on the remediation plan on March 13, 2006 and a Consent Order for the implementation of the remediation plan was executed by NYSDEC and Novelis Corporation, effective January 1, 2007. We believe that our estimate of $19 million is reasonable, and that the remediation plan will be designed and implemented in 2008.


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)

Brazil Tax Matters
 
Primarily as a result of legal proceedings with Brazil’s Ministry of Treasury regarding certain taxes in South America, as of June 30, 2007 and March 31, 2007, we had cash deposits aggregating approximately $27 million and $25 million, respectively, in judicial depository accounts pending finalization of the related cases. The depository accounts are in the name of the Brazilian government and will be expended towards these legal proceedings or released to us, depending on the outcome of the legal cases. These deposits are included in Other long-term assets — third parties in our accompanying condensed consolidated balance sheets. In addition, we are involved in several disputes with Brazil’s Minister of Treasury about various forms of manufacturing taxes and social security contributions, for which we have made no judicial deposits but for which we have established reserves ranging from $11 million to $63 million as of June 30, 2007. In total, these reserves approximate $100 million as of June 30, 2007 and are included in Other long-term liabilities in our accompanying condensed consolidated balance sheets.
 
Guarantees of Indebtedness
 
We have issued guarantees on behalf of certain of our subsidiaries and non-consolidated affiliates, including:
 
  •  certain of our wholly-owned and majority-owned subsidiaries; and
 
  •  Aluminium Norf GmbH, which is a fifty percent (50%) owned joint venture that does not meet the requirements for consolidation under FASB Interpretation No. 46 (Revised), Consolidation of Variable Interest Entities.
 
In the case of our wholly-owned subsidiaries, the indebtedness guaranteed is for trade accounts payable to third parties. Some of the guarantees have annual terms while others have no expiration and have termination notice requirements. For our majority-owned subsidiaries, the indebtedness guaranteed is for short-term loan, overdraft and other debt facilities with financial institutions, some of which have various expiration dates through the end of calendar year ending December 31, 2007. Other of the guarantees have indefinite terms and expire upon written notice among the parties. Neither we nor any of our subsidiaries or non-consolidated affiliates holds any assets of any third parties as collateral to offset the potential settlement of these guarantees.
 
Since we consolidate wholly-owned and majority-owned subsidiaries in our financial statements, all outstanding liabilities associated with trade accounts payable and short-term debt facilities for these entities are already included in our condensed consolidated balance sheets.
 
The following table discloses information about our obligations under guarantees of indebtedness as of June 30, 2007 (in millions).
 
                 
    Maximum Potential
    Liability Carrying
 
Type of Entity
  Future Payment     Value  
 
Wholly-owned subsidiaries
  $ 76     $ 45  
Majority-owned subsidiaries
    3       —  
Aluminium Norf GmbH
    13       —  
 
18.   Segment and Major Customer Information
 
Due in part to the regional nature of supply and demand of aluminum rolled products and in order to best serve our customers, we manage our activities on the basis of geographical areas and are organized under four operating segments: North America; Europe; Asia and South America.


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)

As a result of the acquisition by Hindalco, and based on the way our President and Chief Operating Officer (our chief operating decision-maker) reviews the results of segment operations, we changed our segment performance measure to Segment Income, as defined below. As a result, certain prior period amounts have been reclassified to conform to the new segment performance measure.
 
We measure the profitability and financial performance of our operating segments, based on Segment Income, in accordance with FASB Statement No. 131, Disclosure About the Segments of an Enterprise and Related Information. Segment Income provides a measure of our underlying segment results that is in line with our portfolio approach to risk management. We define Segment Income as earnings before (a) interest expense and amortization of debt issuance costs — net; (b) unrealized gains (losses) on change in fair value of derivative instruments — net; (c) realized gains (losses) on corporate derivative instruments — net; (d) depreciation and amortization; (e) impairment charges on long-lived assets; (f) minority interests’ share; (g) adjustments to reconcile our proportional share of Segment Income from non-consolidated affiliates to income as determined on the equity method of accounting; (h) restructuring charges — net; (i) gains or losses on disposals of property, plant and equipment and businesses — net; (j) corporate selling, general and administrative expenses; (k) other corporate costs — net; (l) sale transaction fees; (m) litigation settlement — net of insurance recoveries; (n) provision or benefit for taxes on income (loss) and (o) cumulative effect of accounting change.
 
Net sales and expenses are measured in accordance with the policies and procedures described in Note 1 — Business and Summary of Significant Accounting Policies to our consolidated and combined financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2006.
 
We do not treat all derivative instruments as hedges under FASB Statement No. 133. Accordingly, changes in fair value are recognized immediately in earnings, which results in the recognition of fair value as a gain or loss in advance of the contract settlement. In the accompanying condensed consolidated statements of operations, change in fair value of derivative instruments not accounted for as hedges under FASB Statement No. 133 are recognized in net income (loss) in Gain on change in fair value of derivative instruments — net. These gains or losses may or may not result from cash settlement. For Segment Income purposes we only include the impact of the derivative gains or losses to the extent they are settled in cash (i.e., realized) during that period.
 
The tables below show selected segment financial information as of June 30, 2007 and 2006, for the periods from May 16, 2007 through June 30, 2007 and from April 1, 2007 through May 15, 2007 and for the three months ended June 30, 2006 (in millions). The Corporate and Other column in the tables below includes functions that are managed directly from our corporate office, which focuses on strategy development and oversees governance, policy, legal compliance, human resources and finance matters. It also includes consolidating and other elimination accounts.
 
Selected Segment Financial Information
 
                                                         
                            Adjustment to
             
                            Eliminate
             
    North
                South
    Proportional
    Corporate
       
Total Assets
  America     Europe     Asia     America     Consolidation     and Other     Total  
 
June 30, 2007 (Successor)
  $ 4,524     $ 3,696     $ 1,323     $ 1,321     $ (106 )   $ 65     $ 10,823  
 
 
March 31, 2007 (Predecessor)
  $ 1,566     $ 2,543     $ 1,110     $ 821     $ (114 )   $ 44     $ 5,970  
 


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)

                                                         
                            Adjustment to
             
                            Eliminate
             
Selected Operating Results
  North
                South
    Proportional
    Corporate
       
May 16, 2007 Through June 30, 2007
  America     Europe     Asia     America     Consolidation     and Other     Total  
 
(Successor)
                                                       
Net sales (to third parties)
  $ 574     $ 593     $ 246     $ 134     $ —     $ —     $ 1,547  
Intersegment sales
    1       —       3       16       —       (20 )     —  
Segment Income (Loss)
    23       43       (2 )     20       —       —       84  
Depreciation and amortization
    21       22       8       7       (5 )     —       53  
Capital expenditures
    5       12       4       3       (3 )     1       22  
 
 
 
                                                         
                            Adjustment to
             
                            Eliminate
             
Selected Operating Results
  North
                South
    Proportional
    Corporate
       
April 1, 2007 Through May 15, 2007
  America     Europe     Asia     America     Consolidation     and Other     Total  
 
(Predecessor)
                                                       
Net sales (to third parties)
  $ 446     $ 510     $ 216     $ 109     $ —     $ —     $ 1,281  
Intersegment sales
    —       —       1       7       —       (8 )     —  
Segment Income (Loss)
    (24 )     32       6       19       —       —       33  
Depreciation and amortization
    7       11       7       5       (3 )     1       28  
Capital expenditures
    4       6       5       2       (1 )     1       17  
 
                                                         
                            Adjustment to
             
                            Eliminate
             
Selected Operating Results
  North
                South
    Proportional
    Corporate
       
Three Months Ended June 30, 2006
  America     Europe     Asia     America     Consolidation     and Other     Total  
 
(Predecessor)
                                                       
Net sales (to third parties)
  $ 992     $ 922     $ 453     $ 201     $ (4 )   $ —     $ 2,564  
Intersegment sales
    1       —       5       11       —       (17 )     —  
Segment Income
    23       80       26       44       —       —       173  
Depreciation and amortization
    18       24       13       11       (8 )     1       59  
Capital expenditures
    10       9       8       8       (2 )     1       34  

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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)

The following table shows the reconciliation from Total Segment Income to Net income (loss) (in millions).
 
                           
    May 16, 2007
      April 1, 2007
    Three Months
 
    Through
      Through
    Ended
 
    June 30, 2007       May 15, 2007     June 30, 2006  
    Successor       Predecessor     Predecessor  
Total Segment Income
  $ 84       $ 33     $ 173  
Interest expense and amortization of debt issuance costs — net
    (25 )       (26 )     (49 )
Unrealized gains (losses) on change in fair value of derivative instruments — net (A)
    (15 )       5       (37 )
Realized gains (losses) on corporate derivative instruments — net
    8         (3 )     —  
Depreciation and amortization
    (53 )       (28 )     (59 )
Minority interests’ share
    2         1       (4 )
Adjustment to eliminate proportional consolidation (B)
    (9 )       (7 )     (9 )
Restructuring charges — net
    (1 )       (1 )     (2 )
Corporate selling, general and administrative expenses
    (8 )       (35 )     (29 )
Other corporate costs — net
    (1 )       —       2  
Sale transaction fees
    —         (32 )     —  
Benefit (provision) for taxes on loss
    (36 )       (4 )     20  
                           
Net income (loss)
  $ (54 )     $ (97 )   $ 6  
                           
 
 
(A) Unrealized gains (losses) on change in fair value of derivative instruments — net represents the portion of gains (losses) that were not settled in cash during the period. Realized and unrealized gains (losses) are shown in the table below and are included in the aggregate each period in Gain on change in fair value of derivative instruments — net on our condensed consolidated statements of operations.
 
                           
    May 16, 2007
      April 1, 2007
    Three Months
 
    Through
      Through
    Ended
 
    June 30, 2007       May 15, 2007     June 30, 2006  
    Successor       Predecessor     Predecessor  
Gains (losses) on change in fair value of derivative instruments — net:
                         
Realized and included in Segment Income
  $ 21       $ 18     $ 78  
Realized on corporate derivative instruments
    8         (3 )     —  
Unrealized
    (15 )       5       (37 )
                           
Gain on change in fair value of derivative instruments — net
  $ 14       $ 20     $ 41  
                           
 
 
(B) Our financial information for our segments (including Segment Income) includes the results of our non-consolidated affiliates on a proportionately consolidated basis, which is consistent with the way we manage our business segments. However, under GAAP, these non-consolidated affiliates are accounted for using the equity method of accounting. Therefore, in order to reconcile Total Segment Income to Net income (loss), the proportional Segment Income of these non-consolidated affiliates is removed from Total Segment Income, net of our share of their net after-tax results, which is reported as Equity in net (income) loss of non-consolidated affiliates on our condensed consolidated statements of operations. See Note 7 —


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)

Investment in and Advances to Non-Consolidated Affiliates and Related Party Transactions for further information about these non-consolidated affiliates.
 
Information about Major Customers
 
All of our operating segments had net sales to Rexam Plc (Rexam), our largest customer. Net sales to Rexam represented 15.8%, 11.2% and 12.9% of our total net sales for the (1) periods from May 16, 2007 through June 30, 2007 and from April 1, 2007 through May 15, 2007 and (2) the three months ended June 30, 2006, respectively.
 
19.   Supplemental Guarantor Information
 
In connection with the issuance of our Senior Notes, certain of our wholly-owned subsidiaries provided guarantees of the Senior Notes. These guarantees are full and unconditional as well as joint and several. The guarantor subsidiaries (the Guarantors) are comprised of the majority of our businesses in Canada, the U.S, the U.K, Brazil and Switzerland, as well as certain businesses in Germany. Certain Guarantors may be subject to restrictions on their ability to distribute earnings to Novelis Inc. (the Parent). The remaining subsidiaries (the Non-Guarantors) of the Parent are not guarantors of the Senior Notes.
 
The following information presents consolidating statements of operations, consolidating balance sheets and consolidating statements of cash flows of the Parent, the Guarantors, and the Non-Guarantors. Investments include investment in and advances to non-consolidated affiliates as well as investments in net assets of divisions included in the Parent, and have been presented using the equity method of accounting.


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Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)

Novelis Inc.
 
Consolidating Statement of Operations
(In millions)
 
                                         
    May 16, 2007 Through June 30, 2007 (Successor)  
                Non-
             
    Parent     Guarantors     Guarantors     Eliminations     Consolidated  
 
Net sales
  $ 245     $ 1,347     $ 419     $ (464 )   $ 1,547  
                                         
Cost of goods sold (exclusive of depreciation and amortization shown below)
    246       1,251       402       (463 )     1,436  
Selling, general and administrative expenses
    5       25       12       —       42  
Depreciation and amortization
    3       38       12       —       53  
Research and development expenses
    2       7       4       —       13  
Interest expense and amortization of debt issuance costs — net
    3       20       2       —       25  
Gain on change in fair value of derivative instruments — net
    (13 )     (4 )     3       —       (14 )
Equity in net loss of affiliates
    35       1       —       (35 )     1  
Other (income) expenses — net
    (4 )     14       1       —       11  
                                         
      277       1,352       436       (498 )     1,567  
                                         
Loss before provision for taxes on loss and minority interests’ share
    (32 )     (5 )     (17 )     34       (20 )
Provision for taxes on loss
    22       14       —       —       36  
                                         
Loss before minority interests’ share
    (54 )     (19 )     (17 )     34       (56 )
Minority interests’ share
    —       —       2       —       2  
                                         
Net loss
  $ (54 )   $ (19 )   $ (15 )   $ 34     $ (54 )
                                         


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Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)

Novelis Inc.
 
Consolidating Statement of Operations
(In millions)
 
                                         
    April 1, 2007 Through May 15, 2007 (Predecessor)  
                Non-
             
    Parent     Guarantors     Guarantors     Eliminations     Consolidated  
 
Net sales
  $ 129     $ 1,020     $ 359     $ (227 )   $ 1,281  
                                         
Cost of goods sold (exclusive of depreciation and amortization shown below)
    131       961       340       (227 )     1,205  
Selling, general and administrative expenses
    29       51       15       —       95  
Depreciation and amortization
    2       18       8       —       28  
Research and development expenses
    5       1       —       —       6  
Interest expense and amortization of debt issuance costs — net
    3       20       3       —       26  
(Gain) loss on change in fair value of derivative instruments — net
    (2 )     (19 )     1       —       (20 )
Equity in net (income) loss of affiliates
    29       (1 )     —       (29 )     (1 )
Sale transaction fees
    32       —       —       —       32  
Other (income) expenses — net
    (3 )     9       (2 )     —       4  
                                         
      226       1,040       365       (256 )     1,375  
                                         
Loss before provision for taxes on loss and minority interests’ share
    (97 )     (20 )     (6 )     29       (94 )
Provision for taxes on loss
    —       3       1       —       4  
                                         
Loss before minority interests’ share
    (97 )     (23 )     (7 )     29       (98 )
Minority interests’ share
    —       —       1       —       1  
                                         
Net loss
  $ (97 )   $ (23 )   $ (6 )   $ 29     $ (97 )
                                         


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Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)

Novelis Inc.
 
Consolidating Statement of Operations
(In millions)
 
                                         
    Three Months Ended June 30, 2006 (Predecessor)  
                Non-
             
    Parent     Guarantors     Guarantors     Eliminations     Consolidated  
 
Net sales
  $ 419     $ 2,173     $ 756     $ (784 )   $ 2,564  
                                         
Cost of goods sold (exclusive of depreciation and amortization shown below)
    405       2,074       709       (781 )     2,407  
Selling, general and administrative expenses
    21       60       17       —       98  
Depreciation and amortization
    3       39       17       —       59  
Research and development expenses
    7       3       —       —       10  
Interest expense and amortization of debt issuance costs — net
    10       35       4       —       49  
Gain on change in fair value of derivative instruments — net
    —       (42 )     1       —       (41 )
Equity in net income of affiliates
    (26 )     (4 )     —       26       (4 )
Other (income) expenses — net
    (8 )     7       (3 )     —       (4 )
                                         
      412       2,172       745       (755 )     2,574  
                                         
Income (loss) before provision (benefit) for taxes on income (loss) and minority interests’ share
    7       1       11       (29 )     (10 )
Provision (benefit) for taxes on income (loss)
    1       (7 )     (14 )     —       (20 )
                                         
Income before minority interests’ share
    6       8       25       (29 )     10  
Minority interests’ share
    —       —       (4 )     —       (4 )
                                         
Net income
  $ 6     $ 8     $ 21     $ (29 )   $ 6  
                                         


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Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)

Novelis Inc.
 
Consolidating Balance Sheet
(In millions)
 
                                         
    As of June 30, 2007 (Successor)  
                Non-
             
    Parent     Guarantors     Guarantors     Eliminations     Consolidated  
 
ASSETS
Current assets
                                       
Cash and cash equivalents
  $ 29     $ 141     $ 16     $ —     $ 186  
Accounts receivable — net of allowances
                                       
— third parties
    40       979       409       —       1,428  
— related parties
    395       443       26       (838 )     26  
Inventories
    60       1,047       398       (1 )     1,504  
Prepaid expenses and other current assets
    3       26       12       —       41  
Current portion of fair value of derivative instruments
    3       67       1       —       71  
Deferred income tax assets
    —       38       4       —       42  
                                         
Total current assets
    530       2,741       866       (839 )     3,298  
Property, plant and equipment — net
    113       2,419       793       —       3,325  
Goodwill
    —       1,977       363       —       2,340  
Intangible assets — net
    —       784       79       —       863  
Investments
    3,653       1,307       —       (4,202 )     758  
Fair value of derivative instruments — net of current portion
    —       6       —       —       6  
Deferred income tax assets
    1       57       36       —       94  
Other long-term assets
    1,317       146       132       (1,456 )     139  
                                         
Total assets
  $ 5,614     $ 9,437     $ 2,269     $ (6,497 )   $ 10,823  
                                         
 
LIABILITIES AND SHAREHOLDER’S EQUITY
Current liabilities
                                       
Current portion of long-term debt
  $ —     $ 3     $ 138     $ —     $ 141  
Short-term borrowings
                                       
— third parties
    35       323       32       —       390  
— related parties
    12       475       44       (531 )     —  
Accounts payable
                                       
— third parties
    125       951       488       —       1,564  
— related parties
    66       219       72       (307 )     50  
Accrued expenses and other current liabilities
    70       608       89       —       767  
Deferred income tax liabilities
    —       67       —       —       67  
                                         
Total current liabilities
    308       2,646       863       (838 )     2,979  
Long-term debt — net of current portion
                                       
— third parties
    1,724       602       2       —       2,328  
— related parties
    —       1,204       252       (1,456 )     —  
Deferred income tax liabilities
    1       731       54       —       786  
Accrued postretirement benefits
    21       299       114       —       434  
Other long-term liabilities
    118       567       20       —       705  
                                         
      2,172       6,049       1,305       (2,294 )     7,232  
                                         
Commitments and contingencies
                                       
                                         
Minority interests in equity of consolidated affiliates
    —       —       149       —       149  
                                         
Shareholder’s equity
                                       
Common stock
    —       —       —       —       —  
Additional paid-in capital
    3,497       —       —       —       3,497  
(Accumulated deficit)/retained earnings/owner’s net investment
    (54 )     3,352       852       (4,204 )     (54 )
Accumulated other comprehensive income (loss)
    (1 )     36       (37 )     1       (1 )
                                         
Total shareholder’s equity
    3,442       3,388       815       (4,203 )     3,442  
                                         
Total liabilities and shareholder’s equity
  $ 5,614     $ 9,437     $ 2,269     $ (6,497 )   $ 10,823  
                                         


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Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)

Novelis Inc.
 
Consolidating Balance Sheet
(In millions)
 
                                         
    As of March 31, 2007 (Predecessor)  
                Non-
             
    Parent     Guarantors     Guarantors     Eliminations     Consolidated  
 
ASSETS
Current assets
                                       
Cash and cash equivalents
  $ 6     $ 71     $ 51     $ —     $ 128  
Accounts receivable — net of allowances
                                       
— third parties
    36       903       411       —       1,350  
— related parties
    416       500       58       (949 )     25  
Inventories
    65       1,004       417       (3 )     1,483  
Prepaid expenses and other current assets
    3       26       10       —       39  
Current portion of fair value of derivative instruments
    —       88       4       —       92  
Deferred income tax assets
    3       12       4       —       19  
                                         
Total current assets
    529       2,604       955       (952 )     3,136  
Property, plant and equipment — net
    112       1,229       765       —       2,106  
Goodwill
    —       29       210       —       239  
Intangible assets — net
    —       18       2       —       20  
Investments
    362       153       —       (362 )     153  
Fair value of derivative instruments — net of current portion
    —       55       —       —       55  
Deferred income tax assets
    1       66       35       —       102  
Other long-term assets
    1,231       160       132       (1,364 )     159  
                                         
Total assets
  $ 2,235     $ 4,314     $ 2,099     $ (2,678 )   $ 5,970  
                                         
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
                                       
Current portion of long-term debt
  $ —     $ 3     $ 140     $ —     $ 143  
Short-term borrowings
                                       
— third parties
    —       241       4       —       245  
— related parties
    15       529       61       (605 )     —  
Accounts payable
                                       
— third parties
    116       938       560       —       1,614  
— related parties
    69       240       84       (344 )     49  
Accrued expenses and other current liabilities
    63       317       100       —       480  
Deferred income tax liabilities
    —       73       —       —       73  
                                         
Total current liabilities
    263       2,341       949       (949 )     2,604  
Long-term debt — net of current portion
                                       
— third parties
    1,659       496       2       —       2,157  
— related parties
    —       1,116       248       (1,364 )     —  
Deferred income tax liabilities
    —       89       14       —       103  
Accrued postretirement benefits
    19       293       115       —       427  
Other long-term liabilities
    119       214       19       —       352  
                                         
      2,060       4,549       1,347       (2,313 )     5,643  
                                         
Commitments and contingencies
                                       
                                         
Minority interests in equity of consolidated affiliates
    —       —       152       —       152  
                                         
Shareholders’ equity
                                       
Common stock
    —       —       —       —       —  
Additional paid-in capital
    428       —       —       —       428  
(Accumulated deficit)/retained earnings/owner’s net investment
    (263 )     (458 )     575       (117 )     (263 )
Accumulated other comprehensive income
    10       223       25       (248 )     10  
                                         
Total shareholders’ equity
    175       (235 )     600       (365 )     175  
                                         
Total liabilities and shareholders’ equity
  $ 2,235     $ 4,314     $ 2,099     $ (2,678 )   $ 5,970  
                                         


48


Table of Contents

 
Novelis Inc.
 
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (unaudited) — (Continued)

Novelis Inc.
 
Consolidating Statement of Cash Flows
(In millions)