1
EXHIBIT (13)
- - -----------
SELECTED FINANCIAL DATA
1994 (A) 1993 (A) 1992 (A) 1991 1990
-------- -------- -------- -------- --------
(Dollars in thousands, except per share amounts)
Net Sales:
Ongoing operations $250,329 $222,410 $198,197 $206,872 $221,222
Businesses held for sale 315 50,221 156,678 174,678 234,907
-------- -------- -------- -------- --------
TOTAL 250,644 272,631 354,875 381,550 456,129
Special charges (B) (5,956) (1,681) (46,315) (51,851)
Gain on formation of joint
venture (C) 16,298
Income (loss) from continu-
ing operations before
extraordinary gain 6,830 3,108 (56,410) (64,088) 1,044
Extraordinary gain (D) 78,805
Income (loss) from
continuing operations 6,830 81,913 (56,410) (64,088) 1,044
Income (loss) from continu-
ing operations per share:
Primary and fully diluted .55 (E) (E) (E) (E)
Cash dividends per common
share
Assets 114,200 116,456 162,233 237,071 315,465
Working capital (deficiency) 19,667 19,148 (27,583) (119,123) 44,350
Short-term obligations 2,300 3,088 60,874 155,014 16,038
Long-term debt 29,961 45,984 23,931 8,405 74,759
Liabilities deferred pursuant
to Chapter 11 86,279
Convertible subordinated
debentures 46,000
Subordinated notes with warrants 25,000
Serial preferred stock 7,563 7,563 9,225
Stockholders' equity (deficit) 29,410 16,808 (56,833) (423) 63,359
- - ------------------------
<FN>
(A) As discussed more fully in Note B -- Proceedings Under Chapter 11 and
Restructuring of the financial statements, the income statement amounts
presented for 1994 and 1993 and the balance sheet amounts for 1993 and
1992 are not comparable to those of the prior periods as a result of the
Company's reorganization.
(B) Refer to Note D -- Special Charges of the financial statements for a
further discussion of these charges.
(C) In December 1989 the Company recognized a gain as a result of the sale of
65% of its interest in its General Products business.
(D) Refer to Note B -- Proceedings Under Chapter 11 and Restructuring of the
financial statements for further discussion of this gain.
(E) Calculations of net income (loss) per share are not meaningful as a
result of the Company's reorganization described in Note B -- Proceedings Under
Chapter 11 and Restructuring of the financial statements.
- 1 -
2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS - FISCAL YEAR 1994 COMPARED TO FISCAL YEAR 1993:
SALES. The Company's net sales from ongoing operations for fiscal 1994
increased by 13% to $250.3 million from $222.4 million in the prior year. This
sales improvement came from a $14.1 million increase in sales of existing
products, $9.5 million of net new business and $4.3 million of price increases.
During the year the Company's sales to the automotive industry improved to $148
million which is a 19% increase over the prior year level of $124 million. The
Company's Wagner Castings Company ("Wagner") and Industrial Powder Coatings,
Inc. ("IPC") subsidiaries accounted for most of this increase as their volumes
improved in line with the overall rise in demand which occurred over the past
year in the domestic automotive industry. In addition, sales at Wagner
increased by $6.8 million due to a full year's production of a new program
which was started in fiscal year 1993 with Ford Motor Company of Europe and
other indirect suppliers to Ford for Ford's "World Car" program.
Sales at the Company's Iowa Mold Tooling Company ("IMT") subsidiary increased
by $4.6 million over the prior year as a result of increases in several of its
construction related markets.
Sales of businesses held for sale decreased to $.3 million in fiscal 1994 from
$50.2 million in the prior fiscal year due to the sale of 15 of the Company's
businesses during fiscal 1993.
NET INCOME. The net income for the year of $6.8 million compares to income
before extraordinary gain in the prior year of $3.1 million. Principal
variations between the current period net income compared to the prior year are
discussed below.
Operating income from ongoing operations before special charges increased by
$4.7 million (45%), principally as a result of the $27.9 million increase in
sales described above. Operating margins were negatively impacted by $1.1
million in fiscal 1994 due to significant price increases in scrap steel which
is the principal raw material used by Wagner. Commitments with most of
Wagner's major customers allow Wagner to pass on the majority of increases or
decreases in the cost of scrap steel to those customers, however, these
adjustments are generally passed along three to six months subsequent to the
time the change occurs. During the latter part of fiscal 1994 and the early
part of fiscal 1995, the cost of scrap steel stabilized, and as such, Wagner is
not currently incurring significant additional costs, but there can be no
assurance that this will continue. Also negatively impacting fiscal 1994's
results was a charge of $.9 million recorded in selling and administrative
expenses as a result of the Company's agreement to issue Jacques R. Sardas,
Chairman, President and Chief Executive Officer of the Company, 479,893 stock
options with exercise prices ranging from $3.17 to $5.69 per share, as
described in Note K -- Stockholders'
- 2 -
3
Equity of the financial statements. These options were issued in settlement of
Mr. Sardas' claim that under his employment agreement and related stock option
agreement the Company was obligated to protect his 15% effective ownership
position in the Company's Common Stock from the dilution created as a result of
the issuance of the Series A, B and C Participation Certificates.
Operating income of businesses held for sale before special charges decreased
by $1.1 million to a level of zero reflecting the impact of their sale in the
prior fiscal year.
Special charges increased by $4.3 million during the current fiscal year to a
level of $6.0 million as a result of expenses recognized in connection with the
January 1992 employment agreement with Mr. Sardas. This agreement was
confirmed as part of the Company's Plan of Reorganization. These charges
include expenses of $4.7 million associated with stock options and a $1.3
million cash bonus accrual which are both subject to the achievement of certain
performance targets described in Note D -- Special Charges of the financial
statements. The charge relating to the stock options was noncash and because
these options are currently exercisable, no future charges will be required to
account for these options. Expense for Mr. Sardas' cash bonus, which is
payable in January 1996, is being accrued over the period of the employment
agreement and may vary with changes in the market value of the Company's Common
Stock. Special charges of $1.7 million in the prior fiscal year related to
consulting and other expenses incurred under the Company's restructuring
program.
Interest expense decreased by $1.8 million due to reductions in debt (a) caused
by the Company's asset sale program, (b) due to cash flow from increased
profitability, and (c) in connection with the Company's existing credit
facility which provides the Company with a revolving line of credit. The
Company's previous credit facility did not include a revolving line of credit
and cash balances could not be applied against debt.
The Company favorably settled two lawsuits and resolved a preconfirmation
liability resulting in income of $.8 million in the current fiscal year as
described in Note E -- Settlement of Preconfirmation Liabilities of the
financial statements. Other income of $.5 million in the current fiscal year
principally related to the receipt of miscellaneous contingent proceeds and
escrows relating to previous asset sales.
An income tax benefit of $.2 million resulted from refunds received by the
Company due to the favorable resolution of certain state tax disputes. The
Company recorded a deferred tax asset of $1.4 million in fiscal 1994 which
principally related to the Company's $7.1 million net operating loss
carryforward generated after emergence from bankruptcy described in Note L --
Income Taxes of the financial statements which the Company believes will be
utilized through the generation of taxable income in future years.
As approximately 60% of the Company's sales are dependent on the automotive
markets in the United States and Europe, related profits will be dependent on
sales of vehicles in these markets during fiscal year 1995. The Company
experienced strong sales from the automotive market during the current fiscal
year.
- 3 -
4
RESULTS OF OPERATIONS - FISCAL YEAR 1993 COMPARED TO FISCAL YEAR 1992:
SALES. The Company's net sales from ongoing operations for fiscal 1993
increased to $222.4 million from $198.2 million in the prior year. This 12%
increase was principally caused by increased sales at the Company's automotive
and truck related businesses.
During fiscal 1993, the Company's net sales to the automotive industry
increased by $26.9 million over the prior year. This increase was principally
due to increased volume on existing parts as a result of the general
improvement in the automotive industry over the past year and from a new
program started by Wagner with Ford Motor Company in Europe and other indirect
suppliers to Ford for Ford's "World Car" program which accounted for $8.0
million of new business. As a result of the large increase in sales during the
year, Wagner's Decatur, Illinois facility experienced continued orders in
excess of capacity. To better meet its production requirements, Wagner
re-opened its Havana, Illinois facility in March 1993, which facility had been
closed for approximately two years.
Sales of businesses held for sale decreased to $50.2 million in fiscal 1993
from $156.7 million in the prior fiscal year which reflected the impact of the
sale of most of these businesses during the 1993 fiscal year.
NET INCOME. The net income for the 1993 fiscal year before extraordinary gain
was $3.1 million compared to a net loss of $56.4 million in the prior fiscal
year. This improvement was primarily due to (a) increases in operating profits
of $7.5 million and $1.7 million for ongoing operations and businesses held for
sale, respectively; (b) a decrease in interest expense of $5.9 million and (c)
decreases in special charges of $44.6 million.
During fiscal 1993, all six of the Company's businesses operated profitably.
Several of the Company's businesses had improved operating results due to (a)
increases in sales discussed previously, (b) gross margin improvements arising
from manufacturing efficiency improvements and cost reductions which were
achieved in the 1993 fiscal year, and (c) changes in product mix. Fiscal 1993
results were negatively impacted by a $.9 million charge relating to
postretirement benefits under Financial Accounting Standards No. 106. IMT was
also impacted negatively in fiscal 1992 as a result of a labor strike which
lasted approximately one month. Fiscal 1992's results also reflect a $.5
million benefit from the settlement and termination of one of the Company's
defined benefit pension plans.
Also contributing to the improvement in operating profits from ongoing
operations was a reduction in the Corporate office expenses of $2.7 million
which was due principally to administrative expense reductions in line with the
down-sizing of the Company and the impact in the prior year of operational and
other related consulting expenses which were incurred as a result of the
Company's financial difficulties.
The interest expense decrease of $5.9 million was principally due to the
reduction of unsecured debt as a result of the Plan and reductions in debt
caused by the Company's asset sale program.
- 4 -
5
Special charges in fiscal 1993 of $1.7 million represented expenses incurred in
connection with the Company's restructuring process while the prior year's
special charges of $46.3 million included (a) $36.5 million for reserves for
loss on sales of businesses, (b) $4.2 million for the write-off of certain
deferred costs and (c) $5.6 million in restructuring expenses.
LIQUIDITY AND CAPITAL RESOURCES
- - -------------------------------
The Company's financial position improved significantly during fiscal 1994 as
its operating activities provided cash of $17.1 million compared to $6.8
million in the prior fiscal year. This improvement came principally from
higher profitability before the current year's noncash special charges.
Operating cash flows were applied primarily to reduce outstanding indebtedness
and to fund capital expenditures.
Long-term debt at May 31, 1994 was $32.3 million, a decrease of $16.8 million
from May 31, 1993. Long-term debt represents 52% of long-term debt plus
stockholders' equity at May 31, 1994, compared to 74% at the end of fiscal
1993.
The Company has an asset-based $48,000,000 credit facility ("Credit Facility")
which expires in May 1996. The Credit Facility provides the Company with a
$33.8 million revolving line of credit, an $11.2 million term loan and a $3.0
million capital expenditure facility. As of May 31, 1994, the Company had
borrowed $9.7 million under its revolving line of credit and had $21.6 million
of additional borrowing capacity based on the asset-based advance rate formulas
contained in the Credit Facility agreement. The Company had not borrowed under
the capital expenditure facility as of May 31, 1994. This facility provides
the Company funds for 75% of the cost of eligible capital expenditures.
The Credit Facility is structured in a form whereby each of the Company's six
operating subsidiaries is a borrower and the Company is the guarantor. The
Credit Facility limits the amounts that each of the six operating subsidiaries
can distribute to the parent or loan to each other. Under an amendment to the
Credit Facility the limit on capital expenditures was increased to $15.3
million for fiscal 1995. The Credit Facility does not allow the Company to pay
dividends to its stockholders.
Capital expenditures for ongoing operations were $7.0 million in fiscal 1994
compared with $3.0 million in fiscal 1993. The increase in capital
expenditures was mainly attributable to facility improvements and expansions in
an effort to improve capacity and quality at the Company's businesses and to
comply with certain environmental regulatory requirements. The Company
currently has capital expenditure commitments for fiscal 1995 of $4.8 million.
Most of these commitments relate to equipment which will be purchased to
facilitate a new plant which the Company's IPC subsidiary will start up in
fiscal 1995. This facility will powder coat steel blanks under a seven year
agreement (subject to certain conditions) with a major appliance manufacturer
and is expected to begin full production in early fiscal 1996.
As a result of IPC's new facility and major capital expenditure programs at the
Company's Wagner Castings Company subsidiary which are mainly targeted to
improving capacity, quality and cost, the Company expects to substantially
increase capital expenditure levels in fiscal 1995.
- 5 -
6
As a result of the Company's profitability, it expects to start paying federal
income taxes in fiscal 1995 as it will have utilized all of its net operating
loss carryforwards which were generated subsequent to emergence from Chapter
11.
The Company received $2.4 million during fiscal year 1994 from the collection
of notes receivable related to subsidiaries which were sold in fiscal 1993.
These funds were used by the Company to reduce bank debt under its Credit
Facility.
The Company believes that funds available under the Credit Facility and funds
generated from operations will be sufficient to satisfy its anticipated
operating needs and capital improvements for fiscal 1995.
OTHER MATTERS. The Company's current and previous businesses operate in a
variety of locations and industries where environmental situations could exist
based on current or past operations. Certain operating and non-operating
subsidiaries of the Company have been named as potentially responsible parties
("PRPs") liable for cleanup costs by the United States Environmental Protection
Agency ("EPA"), state regulatory authorities and private parties with respect
to several sites in various states, including Minnesota, Ohio, Pennsylvania and
Texas. The Company continues to evaluate the environmental conditions and its
potential liability at these sites.
The Company has initiated corrective action and/or preventive environmental
projects to ensure the safe and lawful operation of its facilities. In fiscal
year 1994, capital expenditures of $1.6 million were made for projects to limit
hazardous substances and pollution at the Company's South Coast Terminals, Inc.
and Wagner Castings Company subsidiaries. For known environmental conditions,
the Company, with the assistance of environmental engineers and consultants,
has accrued $5,263,000 to cover estimated future environmental expenditures.
While the ultimate result of both known and unknown environmental conditions
cannot be predicted with certainty, the Company does not expect these matters
to have a material adverse effect on its financial condition or results of
operations.
At May 31, 1994, the Company reduced the discount rate used to measure the
obligations for pension and postretirement welfare plans at one subsidiary from
8.25% to 8.0% in recognition of lower prevailing long-term interest rates. The
combined effect of this discount rate and other assumption changes on fiscal
year 1995 pension and other postretirement benefit expenses is not expected to
be material.
At May 31, 1994, the pension liability of one of the Company's subsidiaries was
remeasured as described in Note M -- Retirement Plans of the financial
statements. As a result, the minimum pension liability was adjusted from $.8
million at May 31, 1993 to $2.2 million at May 31, 1994; the related intangible
asset was adjusted from $.8 million to $1.4 million; and stockholders' equity
was reduced by $.6 million. The adjustment in the minimum pension liability at
May 31, 1994 resulted mainly from an increase in pension fund liabilities due
to the previously discussed decrease in the discount rate and a lower than
expected rate of return on plan assets during the current period.
- 6 -
7
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
From October, 1984 to January, 1992, the Company's Common Stock was listed on
the NASDAQ National Market System of the National Association of Securities
Dealers, Inc. ("NASDAQ") under the symbol "SUDS." Subsequent to January, 1992,
the Common Stock had been traded in the over-the-counter market in the
National Daily Quotation Bureau Pink Sheets ("Pink Sheets") and in April, 1993
began trading via the OTC Bulletin Board ("Bulletin Board") under the symbol
"SUBY." On September 28, 1993, the Company's Common Stock was re-listed on
NASDAQ under the symbol "SUDS."
Notwithstanding the eligibility for trading in the Pink Sheets or the Bulletin
Board, during the first quarter of the 1994 fiscal year there was limited
trading activity and thus, there was no established public trading market for
the Company's Common Stock until its listing on NASDAQ on September 28, 1993.
During the 1993 fiscal year, the high and low closing bid quotations as
reported in the Pink Sheets or the Bulletin Board ranged from a high bid of
$4.75 to a low bid of $.06*. During the 1994 fiscal year, the high and low
closing bid quotations as reported on NASDAQ or the Bulletin Board ranged from
a high bid of $8.00 to a low bid of $4.375. The following table sets forth the
high and low closing bid quotations as reported either on NASDAQ, the Pink
Sheets or the Bulletin Board. The prices represent quotations between dealers
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
PERIOD HIGH LOW
- - ------ ------ ------
YEAR ENDED MAY 31, 1994
- - -----------------------
First quarter $4.75 $4.375
Second quarter 7.25 5.375
Third quarter 8.00 5.50
Fourth quarter 7.50 6.875
YEAR ENDED MAY 31, 1993
- - -----------------------
First quarter* $ .06 $ .06
Second quarter 1.50 .94
Third quarter 2.00 1.50
Fourth quarter 4.75 2.13
- - ------------------------
<FN>
* The prices quoted for this period makes no adjustment to reflect the 46-for-1
reverse split effective September 1, 1992, which took place in connection with
the Company's emergence from Chapter 11 of the United States Bankruptcy Code.
See Note B -- Proceedings Under Chapter 11 and Restructuring of the financial
statements.
On August 9, 1994, there were approximately 1,225 record holders of the
Company's Common Stock.
The Company has never paid dividends on shares of Common Stock and does not
expect to pay dividends in the foreseeable future. Pursuant to the provisions
of the Company's Credit Facility, the Company is not permitted to pay cash
dividends to its stockholders.
- 7 -
8
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
SUDBURY, INC. AND SUBSIDIARIES
------------------------------
For the Fiscal Year Ended May 31, 1994, the Nine Months Ended May 31, 1993
(Successor), the Three Months Ended August 31, 1992 (Predecessor), and the
Fiscal Year Ended May 31, 1992 (See Note B)
(Dollars in thousands, except per share amounts)
Successor Predecessor
--------------------------- --------------------------
Nine || Three
Year Months || Months Year
Ended Ended || Ended Ended
May 31, May 31, || Aug.31, May 31,
1994 1993 || 1992 1992
-------- -------- || -------- --------
||
Net sales: ||
Ongoing operations $250,329 $170,310 || $ 52,100 $198,197
Businesses held for sale 315 19,328 || 30,893 156,678
-------- -------- || -------- --------
Total 250,644 189,638 || 82,993 354,875
||
Costs and expenses: ||
Costs of products sold: ||
Ongoing operations 211,254 145,770 || 44,394 171,272
Businesses held for sale 151 16,646 || 26,679 137,705
-------- -------- || -------- --------
Total 211,405 162,416 || 71,073 308,977
||
Selling and administrative ||
expenses: ||
Ongoing operations 23,945 16,365 || 5,426 23,975
Businesses held for sale 164 2,039 || 3,755 19,610
-------- -------- || -------- --------
Total 24,109 18,404 || 9,181 43,585
||
Special charges 5,956 586 || 1,095 46,315
-------- -------- || -------- --------
||
OPERATING INCOME (LOSS) 9,174 8,232 || 1,644 (44,002)
||
Interest expense - net (3,848) (4,111) || (1,520) (11,550)
Settlement of preconfirmation ||
liabilities 846 ||
Other income (expense) 484 (1,023) || 226 (640)
-------- -------- || -------- --------
||
Income (loss) before ||
income taxes 6,656 3,098 || 350 (56,192)
Income tax expense (benefit) (174) 290 || 50 218
-------- -------- || -------- --------
||
INCOME (LOSS) BEFORE ||
EXTRAORDINARY GAIN 6,830 2,808 || 300 (56,410)
||
Extraordinary gain - ||
forgiveness of ||
prepetition liabilities || 78,805
-------- -------- || -------- --------
||
NET INCOME (LOSS) $ 6,830 $ 2,808 || $ 79,105 $(56,410)
======== ======== || ======== ========
||
Net income per share: ||
Primary $ .55 $ .24 || N/A N/A
======== ======== || ======== ========
Fully diluted $ .55 $ .23 || N/A N/A
======== ======== || ======== ========
<FN>
See notes to consolidated financial statements.
- 8 -
9
CONSOLIDATED BALANCE SHEETS
---------------------------
SUDBURY, INC. AND SUBSIDIARIES
------------------------------
MAY 31, 1994 AND 1993
(Dollars in thousands)
ASSETS
- - ------
1994 1993
-------- --------
CURRENT ASSETS
Cash and cash equivalents $ 1,885 $ 5,284
Accounts receivable, less allowance
for doubtful accounts (in 1994: $412,
in 1993: $705) 39,272 32,902
Inventories 18,592 19,853
Net assets of businesses held for sale 500
Prepaid expenses and other 2,380 4,183
-------- --------
TOTAL CURRENT ASSETS 62,129 62,722
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements 2,191 2,222
Buildings 17,163 15,421
Machinery and equipment 38,534 33,830
-------- --------
57,888 51,473
Less accumulated depreciation 11,450 4,991
-------- --------
NET PROPERTY, PLANT AND EQUIPMENT 46,438 46,482
OTHER ASSETS
Notes receivable 408 2,770
Net assets of businesses held for sale 2,000 2,000
Intangible pension asset 1,359 758
Other assets 1,866 1,724
-------- --------
TOTAL OTHER ASSETS 5,633 7,252
-------- --------
$114,200 $116,456
======== ========
<FN>
See notes to consolidated financial statements.
- 9 -
10
CONSOLIDATED BALANCE SHEETS--CONTINUED
--------------------------------------
SUDBURY, INC. AND SUBSIDIARIES
------------------------------
MAY 31, 1994 AND 1993
(Dollars in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
- - ------------------------------------
1994 1993
--------- -----------
CURRENT LIABILITIES
Trade accounts payable $ 18,504 $ 19,665
Accrued compensation and employee benefits 10,000 8,845
Other accrued expenses 11,658 11,976
Current maturities of long-term debt 2,300 3,088
-------- --------
TOTAL CURRENT LIABILITIES 42,462 43,574
LONG-TERM DEBT 29,961 45,984
OTHER LONG-TERM LIABILITIES 12,367 9,540
DEFERRED INCOME TAXES 550
STOCKHOLDERS' EQUITY
Common Stock--par value $0.01 per share;
authorized 20,000,000 shares; 10,233,932
(10,000,000 at May 31, 1993) shares
issuable and deemed outstanding 102 100
Additional paid-in capital 20,224 13,900
Retained earnings 9,638 2,808
Minimum pension liability adjustment - net (554)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 29,410 16,808
-------- --------
$114,200 $116,456
======== ========
<FN>
See notes to consolidated financial statements.
- 10 -
11
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
SUDBURY, INC. AND SUBSIDIARIES
------------------------------
For the Fiscal Year Ended May 31, 1994, the Nine Months Ended May 31, 1993
(Successor), the Three Months Ended August 31, 1992 (Predecessor),
and the Fiscal Year Ended May 31, 1992
(Dollars and shares in thousands)
PREDECESSOR SUCCESSOR PREDECESSOR MINIMUM
SERIAL COMMON STOCK COMMON STOCK ADDITIONAL RETAINED PENSION
PREFERRED -------------- -------------- PAID-IN (DEFICIT) LIABILITY
STOCK AMOUNT SHARES AMOUNT SHARES CAPITAL EARNINGS ADJUSTMENT
----------- ------ ------ ------ ------ --------- ---------- ----------
BALANCE AT MAY 31, 1991 $ 7,563 $-0- -0- $131 13,107 $57,509 $ (65,626) $ -0-
Net loss for 1992 (56,410)
------- ---- ------- ---- ------- ------- --------- ------
BALANCE AT MAY 31, 1992 7,563 -0- -0- 131 13,107 57,509 (122,036) -0-
Net income for three
months ended August 31,
1992 (Predecessor) 79,105
Effects of reorganiza-
tion (Note B):
Fresh Start adjustments (8,272)
Elimination of accumu-
lated deficit (42,931) 42,931
Cancellation of predeces-
sor shares and issu-
ance of new shares (7,563) 100 10,000 (131) (13,107) 7,594
------- ---- ------- ---- ------- ------- --------- ------
BALANCE AT AUGUST 31, 1992 -0- 100 10,000 -0- -0- 13,900 -0- -0-
Net income for nine
months ended May 31,
1993 (Successor) 2,808
------- ---- ------- ---- ------- ------- --------- ------
BALANCE AT MAY 31, 1993 -0- 100 10,000 -0- -0- 13,900 2,808 -0-
Net income for 1994 6,830
Stock options to Chief
Executive Officer
(Note K) 5,547
Exercise of participation
certificates and stock
options 2 234 680
Tax benefits from exercise
of stock options 97
Adjustment for minimum
pension liability - net (554)
------- ---- ------- ---- ------- ------- --------- ------
BALANCE AT MAY 31, 1994 $ -0- $102 10,234 $-0- -0- $20,224 $ 9,638 $ (554)
======= ==== ======= ==== ======= ======= ========= ======
<FN>
See notes to consolidated financial statements.
- 11 -
12
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
SUDBURY, INC. AND SUBSIDIARIES
------------------------------
For the Fiscal Year Ended May 31, 1994, the Nine Months Ended May 31, 1993
(Successor), the Three Months Ended August 31, 1992 (Predecessor), and the
Fiscal Year Ended May 31, 1992 (See Note B)
Successor Predecessor
------------------------ || -------------------------
Nine || Three
Year Months || Months Year
(Dollars in thousands) Ended Ended || Ended Ended
May 31, May 31, || Aug.31, May 31,
1994 1993 || 1992 1992
------- -------- || -------- --------
||
OPERATING ACTIVITIES: ||
Income (loss) before extra- ||
ordinary gain $ 6,830 $ 2,808 || $ 300 $(56,410)
Items included not affecting cash: ||
Depreciation and amortization: ||
Ongoing operations 8,314 5,220 || 1,829 7,346
Businesses held for sale 47 1,079 || 1,137 6,521
Deferred taxes and other (351) 26 || (53) (29)
Special charges 5,956 || 40,740
Changes in operating assets and liabilities: ||
Ongoing operations (3,630) (4,176) || (327) 2,056
Businesses held for sale (28) (713) || (366) 4,623
------- -------- || -------- --------
NET CASH PROVIDED BY ||
OPERATING ACTIVITIES 17,138 4,244 || 2,520 4,847
||
INVESTING ACTIVITIES: ||
Purchases of property, plant and equipment: ||
Ongoing operations (6,951) (2,225) || (781) (2,445)
Businesses held for sale (38) || (162) (2,078)
Proceeds from sale of businesses 666 23,889 || 10,687 2,303
Proceeds from collection of notes ||
receivable 2,362 545 ||
Contingent payments to former ||
owners of acquired businesses (188) || (678) (1,052)
Proceeds from sale of property, ||
plant, equipment and other - net 171 65 || 15 429
-------- -------- || ------- --------
NET CASH (USED IN) PROVIDED BY ||
INVESTING ACTIVITIES (3,940) 22,236 || 9,081 (2,843)
||
FINANCING ACTIVITIES: ||
Borrowings, refinancings and repayments: ||
Short and long-term borrowings 238,788 35,045 || 21 782
Reductions of debt (256,067) (67,055) || (13,194) (3,511)
Common stock issued 682 ||
-------- -------- || ------- --------
NET CASH USED IN FINANCING ||
ACTIVITIES (16,597) (32,010) || (13,173) (2,729)
-------- -------- || ------- --------
||
DECREASE IN CASH AND ||
CASH EQUIVALENTS (3,399) (5,530) || (1,572) (725)
||
Cash and cash equivalents at ||
beginning of period 5,284 10,814 || 12,386 13,111
-------- -------- || ------- --------
||
CASH AND CASH EQUIVALENTS ||
AT END OF PERIOD $ 1,885 $ 5,284 || $10,814 $ 12,386
======== ======== || ======= ========
<FN>
See notes to consolidated financial statements.
- 12 -
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE A -- SUMMARY OF ACCOUNTING POLICIES
CONSOLIDATION: The consolidated financial statements include the accounts of
Sudbury, Inc. and its subsidiaries (the "Company"). Significant intercompany
balances and transactions have been eliminated.
CASH: The Company considers liquid instruments with a maturity of 90 days or
less at date of purchase to be cash equivalents. As of May 31, 1994 and May
31, 1993, $1,640,000 and $1,503,000 of cash balances, respectively, reflected
restricted funds set aside to pay prospective property and casualty insurance
claims at the Company's captive insurance company. At May 31, 1993, $4,836,000
of the cash balance was restricted and was used to reduce bank debt subsequent
to the end of the fiscal year.
INVENTORIES: Inventories are stated at the lower of cost or market. Cost is
determined by the last-in, first-out method (LIFO) for approximately 85% and
82% of the Company's inventories at May 31, 1994 and 1993, respectively, and by
the first-in, first-out (FIFO) method for all other inventories. The FIFO
method would approximate the current cost.
PROPERTIES AND DEPRECIATION: Property, plant and equipment are stated at cost.
As discussed in Note B, in conjunction with the emergence from Chapter 11
bankruptcy proceedings, the Company implemented Fresh Start reporting and,
accordingly, all property, plant and equipment was restated to reflect
reorganization value, which approximates fair value in continued use.
Depreciation and amortization are provided using the straight-line method over
the estimated useful lives of the related assets. With minor exceptions
straight-line composite rates for depreciation of plant assets are as follows:
buildings 20 to 40 years; machinery, equipment and fixtures 10 years.
ENVIRONMENTAL EXPENDITURES: Environmental expenditures that pertain to current
operations or relate to future revenues are expensed or capitalized consistent
with the Company's capitalization policy. Expenditures that result from the
remediation of an existing condition caused by past operations, that do not
contribute to current or future revenues, are expensed. Liabilities are
recognized for remedial activities when the cleanup is probable and the cost
can be reasonably estimated.
NET INCOME PER SHARE: For the fiscal year ended May 31, 1994 and nine months
ended May 31, 1993, primary and fully diluted net income per share were
calculated by dividing net income applicable to common stock by the average
common stock outstanding and common stock equivalents. As a result of the
changes in ownership and capital structure from the Company's amended Plan of
Reorganization, primary and fully diluted net income per share calculations are
not relevant for the three months ended August 31, 1992 and for fiscal year
1992.
- 13 -
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE A -- SUMMARY OF ACCOUNTING POLICIES - CONTINUED
INCOME TAXES: The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes" ("SFAS No. 109"). Under SFAS No. 109, the deferred income tax
liability is determined based on the difference between the financial
statement and tax basis of assets and liabilities measured by the enacted tax
rates which will be in effect when these differences reverse. Prior to
September 1, 1992, the Company accounted for income taxes under the provisions
of Statement of Financial Accounting Standards No. 96 "Accounting for Income
Taxes" ("SFAS No.96").
RECLASSIFICATIONS: Certain prior years' amounts have been reclassified to
conform to the 1994 presentation.
NOTE B - PROCEEDINGS UNDER CHAPTER 11 AND RESTRUCTURING
On January 10, 1992, the Company filed a petition (relative only to Sudbury,
Inc. and not to its subsidiaries) under Chapter 11 of the United States
Bankruptcy Code. The Chapter 11 filing was made to implement an agreement in
principle which had been reached with the Company's major creditor groups
regarding a restructuring plan and the related sales of a substantial number of
its business units.
The Company's amended Plan of Reorganization (the "Plan") was confirmed by the
Bankruptcy Court by Order dated August 18, 1992 and became effective on
September 1, 1992 (the "Effective Date"). Distributions under the Plan
commenced on October 15, 1992.
The Plan implemented a restructuring of the Company by providing for a new
amortization schedule for the repayment of the indebtedness owed to its secured
lender banks and a significant reduction of the Company's indebtedness to
subordinated debtholders and certain other unsecured creditors through the
conversion of debt into equity of the restructured Company.
In order to repay the indebtedness owed to the secured lender banks as provided
by the Plan, the Company implemented a business plan with an asset disposition
program involving the sale of a substantial number of its subsidiaries which
sales generated aggregate net cash proceeds of approximately $37.6 million.
In May 1993, the Company successfully completed the refinancing of its existing
bank debt by obtaining a three-year asset-based $48,000,000 Credit Facility
("Credit Facility") with a new secured lender group. This new Credit Facility
allowed the Company to retain six core businesses and cease the previous asset
sale process except for the Company's 35% investment in General Products
Delaware Corporation which is included in net assets of businesses held for
sale.
- 14 -
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE B -- PROCEEDINGS UNDER CHAPTER 11 AND RESTRUCTURING - CONTINUED
As a result of the Company's emergence from Chapter 11, certain amounts
presented on the statements of operations for the year ended May 31, 1994 and
the nine month period ended May 31, 1993, principally for interest expense, and
on the statements of cash flows for the year ended May 31, 1994 and the nine
months ended May 31, 1993 are not comparable to the prior periods and therefore
a solid double line has been placed between the amounts. Also, net income per
share amounts for the Company prior to its emergence from Chapter 11 are not
presented as a result of the reorganization.
In implementing the Plan, the Company adopted "Fresh Start" reporting on
September 1, 1992 pursuant to the Statement of Position 90-7 of the American
Institute of Certified Public Accountants, entitled "Financial Reporting By
Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7") which caused
material changes in the amounts and classifications reported in the
consolidated historical financial statements.
The following financial information represents the effects of implementing the
Plan and applying Fresh Start reporting under SOP 90-7 on the Company's
historical consolidated balance sheet at August 31, 1992 (in thousands):
Adjustments
-------------------------------- As
ASSETS Historical Plan (A) Fresh Start (B) Adjusted
- - ------ ---------- -------- --------------- --------
Current assets $ 64,517 $ $ 1,249 $ 65,766
Property, plant and
equipment, net 48,568 176 48,744
Intangibles, net 7,636 (7,636) 0
Net assets of businesses
held for sale 22,439 22,439
Other assets 3,757 3,757
-------- -------- -------- --------
$146,917 $ -0- $ (6,211) $140,706
======== ======== ======== ========
LIABILITIES AND
- - ---------------
STOCKHOLDERS' EQUITY (DEFICIT)
------------------------------
Current liabilities $ 85,844 $ $ 1,607 (C) $ 87,451
Deferred income taxes 1,394 (844)(D) 550
Other long-term liabilities 6,659 1,000 (C) 7,659
Long-term debt 23,274 298 (C) 23,572
New notes, net of original
issue discount 7,474 7,474
Liabilities deferred pursuant
to proceedings under
Chapter 11 86,279 (86,279) 0
Stockholders'(deficit) equity (56,533) 78,805 (8,272) 14,000
-------- --------- -------- --------
$146,917 $ -0- $ (6,211) $140,706
======== ========= ======== ========
- 15 -
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE B -- PROCEEDINGS UNDER CHAPTER 11 AND RESTRUCTURING - CONTINUED
NOTES:
(A) Reflects the conversion of certain unsecured obligations to equity in
accordance with the Plan and the issuance of $10 million face amount of
new subordinated debt which has been discounted to fair market value.
(B) Reflects the impact of recording assets and liabilities at fair value
under SOP 90-7 assuming a reorganization value of the Company of $14
million at the Effective Date. In determining the reorganization value
of the Company, the value for the retained subsidiaries was calculated
by considering a number of factors customarily utilized in such
valuation methodologies, which was then reduced by actual and estimated
liabilities of the Company. For the companies held for sale, the value
was derived from the anticipated net realizable value of those
companies based primarily on offers which have been received for those
assets, which proceeds would be used to reduce a like amount of secured
bank debt.
(C) Represents a $2,000,000 reserve established for limited indemnification
obligations to certain of the Company's present and former officers and
directors which were provided for under the Plan. The remainder of
this accrual of $905,000 principally represents other contractual
liabilities which arose under the Plan.
(D) To record the impact of SFAS No. 109 which the Company was required to
adopt under Fresh Start reporting on the Effective Date.
The impact of the Plan resulted in an extraordinary gain from forgiveness of
prepetition liabilities in the amount of $78,805,000 which is reflected in the
Company's statement of operations for the three month period ended August 31,
1992. The gain from forgiveness of prepetition liabilities qualifies for
exemption from federal income tax under Section 108(a)(1) of the Internal
Revenue Code relating to the discharge of indebtedness in Chapter 11 cases.
Consequently, the Company has not recognized taxable income related to debt
forgiveness.
- 16 -
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE C -- INVENTORIES
The components of inventories are summarized as follows (in thousands):
1994 1993
------- -------
Raw materials and supplies $ 8,315 $ 7,619
Work in process 6,995 8,275
Finished products 3,664 4,202
------- -------
Total at FIFO 18,974 20,096
Less excess of FIFO cost over LIFO values 382 243
------- -------
$18,592 $19,853
======= =======
NOTE D -- SPECIAL CHARGES
Special charges of $5,956,000 in fiscal 1994 relate to accruals recorded in
connection with the achievement of certain performance targets established in
the January 1992 employment agreement ("Agreement") with Jacques R. Sardas,
Chairman, President and Chief Executive Officer of the Company. The Agreement
was confirmed as part of the Plan. The special charges include a noncash
charge of $4,650,000 which represents the estimated value of 653,595 stock
options granted to Mr. Sardas on September 1, 1992, which are exercisable in
increments after the fair value of the Company exceeds value targets ranging
from $15,000,000 to $35,000,000. The Company determined, and an appraisal by
an investment banking firm confirmed in accordance with procedures specified in
the Agreement, that performance targets established in the Agreement had been
met as of February 28, 1994 and therefore the options became exercisable. The
remaining $1,306,000 of the special charges represents expense associated with
the estimated cash bonus payable to Mr. Sardas at the end of the Agreement in
January 1996. The charge is based on the cash bonus to which Mr. Sardas is
entitled under the Agreement. The bonus amount equals 5% of the net fair value
of the Company in excess of $35,000,000 at the expiration of the Agreement and
is being amortized over the term of the Agreement. Amortization of the bonus
expense subsequent to the initial charge made on February 28, 1994 has been
included as part of the Company's selling and administrative expenses.
Special charges of $586,000 recorded for the nine months ended May 31, 1993 and
$1,095,000 for the three months ended August 31, 1992 represent consulting and
other expenses incurred under the Company's restructuring program.
Included in the Company's operations for fiscal 1992 were special charges of
$46,315,000 which included (a) $36,500,000 for reserves for potential losses on
sales of businesses which were anticipated to be sold, (b) $2,444,000 for the
write-off of costs capitalized previously under SFAS No. 96 as they related
principally to assets anticipated to be sold, (c) $1,796,000 for the write-off
of deferred financing costs on the Company's bank and subordinated debt which
were deemed to have no ongoing value given the Company's Chapter 11 filing, and
(d) $5,575,000 for consulting and other expenses incurred under the Company's
restructuring program.
- 17 -
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE E -- SETTLEMENT OF PRECONFIRMATION LIABILITIES
Two lawsuits which had been pending in United States Bankruptcy Court against
the Company and several of its former officers and directors were settled in
February 1994. The lawsuits related to events which occurred prior to the
Company's entry into and emergence from bankruptcy. Under the Plan, the
Company had retained certain indemnification obligations with respect to the
defendants who were former officers or former directors of the Company. These
obligations were limited to $2 million. The lawsuits were settled using
$765,000 of funds which had been previously held in escrow, $616,000 of the
Company's funds, and funds contributed by co-defendants. The Company also
resolved an insurance-related bankruptcy claim in February 1994. As a result
of these aforementioned settlements, the Company recognized an $846,000 benefit
as such settlements were for less than the amounts reserved for such claims.
NOTE F -- CONTINGENCIES AND COMMITMENTS
The Company is party to a number of lawsuits and claims arising out of the
conduct of its business, including those relating to commercial transactions,
product liability and environmental, safety and health matters.
The Company, using historical trends, actuarially calculates the estimated
amount of its current exposure for product liability. The Company is insured
for amounts in excess of established deductibles and accrues for the estimated
liability described above up to the limits of the deductibles. Other claims
and lawsuits are handled on a case-by-case basis. The Company is also
self-insured for health care and workers' compensation up to predetermined
amounts, above which third party insurance applies.
All operating locations acquired by the Company since 1984 operate in a variety
of locations and industries where environmental situations could exist based on
current or past operations. Certain operating and non-operating subsidiaries
of the Company have been named as potentially responsible parties ("PRPs")
liable for cleanup of known environmental conditions. For known environmental
situations, the Company, with the assistance of environmental engineers and
consultants, has accrued $5,263,000 to cover estimated future environmental
expenditures. During fiscal 1994, the EPA agreed in principle to accept
$500,000 in settlement of its pending claims at one such site, which was within
the amount previously accrued by the Company. The Company has initiated
corrective action and/or preventative environmental projects to ensure the safe
and lawful operation of its facilities. There could exist, however, more
extensive or unknown environmental situations at existing or previously owned
businesses for which the future cost is not known or accrued at May 31, 1994.
- 18 -
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE F -- CONTINGENCIES AND COMMITMENTS - CONTINUED
While the ultimate result of the above contingencies cannot be predicted with
certainty, management does not expect these matters to have a material adverse
effect on the consolidated financial position or results of operations of the
Company.
Under the terms of the January 1992 employment agreement with Jacques R.
Sardas, Chairman, President and Chief Executive Officer of the Company, if Mr.
Sardas' employment is terminated for cause, or from Mr. Sardas' death,
disability or voluntary resignation before the end of his employment
agreement in January 1996, the Company is obligated to pay to Mr. Sardas in
cancellation of his currently exercisable 1,764,706 stock options the appraised
value of the shares underlying the options, less the exercise price thereof.
In addition, the Company would also be obligated to pay to Mr. Sardas the cash
bonus described in Note D, which is based on 5% of the net fair value of the
Company in excess of $35,000,000. Based on the closing price of the Company's
Common Stock on May 31, 1994, the obligation for the options and bonus would
total $14,489,000 in the aggregate. The Company is the beneficiary of a
key-man life insurance policy in the amount of $14,000,000. The proceeds of
this policy would be used to fulfill the Company's obligation in the event of
Mr. Sardas' death.
At May 31, 1994, the Company has commitments to purchase $4,833,000 in
machinery and equipment.
NOTE G -- DISPOSITIONS
During fiscal 1994 the Company sold one business for net cash proceeds of
$666,000. During fiscal 1993 the Company sold 14 of its businesses for
aggregate net cash proceeds of $34,576,000 and promissory notes for $2,770,000
which were subject to offsets for contingent liabilities. The Company sold
certain businesses during fiscal 1992 for aggregate net cash proceeds of
$2,303,000.
- 19 -
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE H -- STATEMENTS OF CASH FLOWS INFORMATION
Successor Predecessor
------------------------- -------------------------
Nine Three
Year Months Months Year
Ended Ended Ended Ended
May 31, May 31, Aug.31, May 31,
1994 1993 1992 1992
--------- -------- -------- --------
(In thousands)
Funds (used) provided by changes
in operating assets and
liabilities of ongoing
operations are as follows:
Accounts receivable $(6,370) $(5,663) || $ 1,953 $ (3,859)
Inventories 1,261 (1,666) || (1,374) 5,062
Prepaid expenses and other 1,803 (1,115) || 984 758
Trade accounts payable (1,161) 5,035 || 1,491 589
Accrued expenses 837 (767) || (3,381) (494)
------- ------- || ------- --------
$(3,630) $(4,176) || $ (327) $ 2,056
======= ======= || ======= ========
||
Cash payments (refunds): ||
Interest 3,635 3,708 || 2,090 7,264
Taxes (154) 200 || 19 173
||
Non-cash transactions ||
excluded from the statements ||
of cash flows: ||
Capital leases 139 1,132 ||
Notes receivable 2,770 ||
||
NOTE I -- LONG-TERM DEBT
Long-term debt consisted of the following at May 31 (in thousands):
1994 1993
---------- ---------
Revolving Line of Credit $ 9,689 $22,629
Bank Term Loans 9,053 11,200
Subordinated Notes 8,149 7,738
PIK Notes 665 665
Industrial Revenue Bonds 550 1,780
Real estate mortgage notes 2,649 2,885
Capitalized leases 1,079 1,276
Assumed debt and other 427 899
------- -------
32,261 49,072
Less current maturities 2,300 3,088
------- -------
$29,961 $45,984
======= =======
- 20 -
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE I -- LONG-TERM DEBT - CONTINUED
The Credit Facility, which expires in May 1996, provides a $33,800,000
Revolving Line of Credit, an $11,200,000 Bank Term Loan and a $3,000,000
capital expenditure facility. The Credit Facility is secured by substantially
all of the assets of the Company. The Company's Credit Facility is set up in
the form whereby each of the six operating subsidiaries is a borrower and the
Company is a guarantor. Covenants require the Company, and each of its six
subsidiaries to maintain certain fixed charge, working capital, debt and net
worth ratios. The Credit Facility also places limits on the amounts that each
of the six operating subsidiaries can distribute or loan to the parent. At May
31, 1994, restricted net assets of the six operating subsidiaries were
$43,900,000. The Company is not permitted to pay dividends to its stockholders
pursuant to the terms of the Credit Facility.
As of May 31, 1994, $2,479,000 of the Revolving Line of Credit was utilized to
secure the Company's irrevocable letters of credit. These letters of credit
were issued primarily for insurance purposes. As of May 31, 1994 the Company
had the ability to borrow an additional $21,632,000 under the Revolving Line of
Credit. The Revolving Line of Credit bears interest at the prime rate plus 1
1/2% and has unused line fees of .25% and letter of credit fees of 1 1/2% all
payable on a monthly basis. As a result of the Company's financial performance
in fiscal 1994, effective September 1, 1994, the Revolving Line of Credit
interest rate will be reduced by .25% to the prime rate plus 1 1/4%. In
addition, if certain financial targets are achieved by the Company, the
interest rate has the potential to be reduced by another .25% in fiscal 1996.
The Bank Term Loan is payable on a monthly basis based on a seven year
amortization and bears interest at the rate of prime plus 1 3/4%.
As of May 31, 1994, the Company did not have any borrowings under the
$3,000,000 capital expenditure facility portion of the Credit Facility. Under
this portion of the Credit Facility, borrowings are permitted in $500,000
increments of an amount representing 75% of the cost of qualifying capital
expenditures. The capital expenditure facility bears interest at rates ranging
from prime plus 1 1/2% to prime plus 1 3/4%.
The Subordinated Notes represent $10,000,000 principal amount of five year,
8 3/5% Senior Subordinated Pay-In-Kind Notes issued in accordance with the
Plan. Due to the below market interest rate for this type of debt instrument
at issuance, a discount of $2,526,000 was recorded against this debt, making
the effective rate 16%, and is being amortized over the five year term of the
indebtedness. At May 31, 1994 the unamortized debt discount was $1,851,000.
Interest is payable semi-annually, however, prior to the refinancing of the
bank debt in May of 1993, the Subordinated Notes provided that interest
payments would be made through the issuance of additional promissory notes in
the aggregate principal of the amount of interest owed (the "PIK Notes"). The
terms and conditions of the PIK Notes are identical to the Subordinated Notes.
- 21 -
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE I -- LONG-TERM DEBT - CONTINUED
The Industrial Revenue Bonds as of May 31, 1994 represent debt used for
construction and expansion and are payable quarterly through December 1999 with
an interest rate of 7.45%.
Real estate mortgage notes are payable to a former owner of a subsidiary. The
notes bear interest at 8.5% and are payable monthly through June 2002.
Capitalized leases represent capital equipment acquired with monthly payments
through June 1998.
The future maturities of long-term debt outstanding at May 31, 1994 for the
four fiscal years ending May 1999 and thereafter are as follows: $17,818,000
in 1996, $713,000 in 1997, $11,497,000 in 1998, $524,000 in 1999 and $1,260,000
thereafter.
In 1993, contractual interest expense amounted to $7,422,000 which is
$1,689,000 in excess of reported interest expense. Contractual interest
expense for 1992 amounted to $13,783,000 which is $2,138,000 in excess of the
reported interest expense.
NOTE J -- OTHER LONG-TERM LIABILITIES
Amounts classified under the caption "Other Long-Term Liabilities" as of May 31
consist of the following (in thousands):
1994 1993
--------- ---------
Environmental reserves $ 3,984 $4,478
Accrued pension costs 3,674 1,915
Post-retirement benefit obligations 1,679 937
Reserves for self-insurance and other 1,645 2,210
Accrued compensation 1,385
------- ------
$12,367 $9,540
======= ======
- 22 -
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE K -- STOCKHOLDERS' EQUITY
PREDECESSOR SERIAL PREFERRED STOCK: Pursuant to the terms of the Plan
described in Note B, effective September 1, 1992, holders of 94,535 shares of
the then outstanding Serial Preferred Stock of the Company exchanged these
shares for 294,118 shares of Common Stock of the Company and 1,359,694
Participation Certificates (described below).
COMMON STOCK: The Plan provided for the issuance of 10,000,000 shares (all of
which are deemed outstanding) of Common Stock of the Company to former
creditors, common and preferred stockholders and employees in the Sudbury
Savings and Profit Sharing Plan. As of May 31, 1994, 9,632,000 shares had been
issued to these constituents. The amount, if any, of the distribution of the
remaining Common Stock will be dependent upon the final resolution of pending
or disputed claims against the Company.
PREDECESSOR COMMON STOCK: Pursuant to the terms of the Plan, effective
September 1, 1992, holders of the 13,106,796 shares of then outstanding common
stock of the Company exchanged these shares for 294,118 shares of Common Stock
of the Company and 1,359,694 Participation Certificates (described below).
PARTICIPATION CERTIFICATES: Under the provisions of the Plan, as of September
1, 1992, holders of the Company's Predecessor Common Stock and Predecessor
Serial Preferred Stock were granted Series A, Series B and Series C
Participation Certificates. The Series A Participation Certificates are rights
to purchase 619,194 shares of Common Stock and expire on September 1, 1996.
The Series B Participation Certificates are rights to purchase 651,784 shares
of Common Stock and expire on September 1, 1999. The Series C Participation
Certificates are rights to purchase 1,448,410 shares of Common Stock and expire
on September 1, 2002. The Participation Certificates are subject to adjustment
for changes in the Company's capitalization.
The Series A and B Participation Certificates have increasing exercise prices
and are as follows:
Exercise Price
-----------------------------
Series A Series B
-------- --------
September 1, 1992 - August 31, 1993 $2.99 $5.37
September 1, 1993 - August 31, 1994 3.08 5.53
September 1, 1994 - August 31, 1995 3.17 5.69
September 1, 1995 - August 31, 1996 3.27 5.86
September 1, 1996 - August 31, 1997 N/A 6.04
September 1, 1997 - August 31, 1998 N/A 6.34
September 1, 1998 - August 31, 1999 N/A 6.66
- 23 -
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE K -- STOCKHOLDERS' EQUITY - CONTINUED
The Series C Participation Certificates are not exercisable by their holders
until the closing price or the average of the reported closing bid and asked
prices of the Common Stock has averaged over the specified price per share (the
"Trigger Price") for 20 consecutive days. Thereafter, the Series C
Participation Certificates may be exercised at the option of the holder at any
time. The Trigger Price and related exercise price increase each year and are
as follows:
Trigger Exercise
Price Price
------- --------
September 1, 1992 - August 31, 1993 $ 9.18 $4.590
September 1, 1993 - August 31, 1994 9.46 4.730
September 1, 1994 - August 31, 1995 9.74 4.870
September 1, 1995 - August 31, 1996 10.03 5.015
September 1, 1996 - August 31, 1997 10.33 5.165
September 1, 1997 - August 31, 1998 10.85 5.425
September 1, 1998 - August 31, 1999 11.39 5.695
September 1, 1999 - August 31, 2000 11.96 5.980
September 1, 2000 - August 31, 2001 12.55 6.275
September 1, 2001 - August 31, 2002 13.18 6.590
Participation Certificate activity was as follows:
Series A Series B Series C
-------- -------- --------
Outstanding at May 31, 1993 619,194 651,784 1,448,410
Exercised (172,300) (11,632)
-------- ------- ---------
Outstanding at May 31, 1994 446,894 640,152 1,448,410
======= ======= =========
EMPLOYEE STOCK OPTIONS: Under the terms of the Company's January 1992
employment agreement ("Agreement") with Jacques R. Sardas, the Chairman,
President and Chief Executive Officer of the Company, effective September 1,
1992, Mr. Sardas was granted options for 1,764,706 shares of Common Stock. All
such options have an exercise price of $.01 per share and a term of five years.
Of these options, 1,111,111 were exercisable as of March 1, 1993 and the
remaining 653,595 options were to be exercisable in 130,718 share increments
after the fair value of the Company exceeded value targets ranging from
$15,000,000 to $35,000,000. The Company had determined, and an appraisal by an
investment banking firm confirmed in accordance with procedures specified in
the Agreement, that the performance targets had been met and, therefore, all
remaining options were exercisable. As a result, in fiscal 1994 the Company
recorded a $4,650,000 special charge for the value of the 653,595 options. As
of May 31, 1994, none of the 1,764,706 options had been exercised.
- 24 -
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE K -- STOCKHOLDERS' EQUITY - CONTINUED
In May 1994, the Company reached an agreement in principle with Mr. Sardas
regarding settlement of his claim that under his employment agreement and
related stock option agreement the Company was obligated to protect his 15%
effective ownership position in the Company's Common Stock from the dilution
created as a result of the issuance of the Series A, B and C Participation
Certificates under the Plan. Under this agreement, 479,893 stock options were
issued to Mr. Sardas to give him the equivalent of 15% of the total common
shares reserved for issuance under the Participation Certificates and these
options. The option prices range from $3.17 to $5.69 per share. Of these
options, 224,291 are exercisable upon issuance and the remaining 255,602
options are exercisable in January 1996. The Company recorded a charge of
$897,000 in selling and administrative expense for fiscal 1994 which represents
the difference between the option price and the fair value of the Common Stock.
The Plan provided for the continuation of the 1990 Stock Option Plan (under
which no options had previously been issued) and allows for the granting of up
to 619,195 options for shares of the Company's Common Stock subject to
adjustment for changes in the Company's capitalization. These options are
intended to qualify as incentive or non-statutory stock options under the
Internal Revenue Code. The option price is the fair market value of the shares
on the date of the grant and the options are exercisable over periods ranging
from one to five years after grant date. Options may be granted through April
2000.
Stock option activity under the 1990 Stock Option Plan was as follows:
Shares Option Prices
------- --------------
Outstanding at September 1, 1992 -0-
Granted 420,000 $1.75 to $3.75
-------
Outstanding at May 31, 1993 420,000 $1.75 to $3.75
Granted 110,000 $6.875
Exercised (50,000) $1.75
Cancelled (50,000) $3.75
-------
Outstanding at May 31, 1994 430,000 $1.75 to $6.875
=======
At May 31, 1994, there were a total of 2,034,706 options exercisable by
employees under the 1990 Stock Option Plan and by Jacques R. Sardas at prices
ranging from $.01 to $3.75.
- 25 -
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE L -- INCOME TAXES
Components of income tax (benefit) expense are as follows (in thousands):
Successor Predecessor
-------------------- --------------------------
Nine || Three
Year Months || Months Year
Ended Ended || Ended Ended
May 31, May 31, || Aug.31, May 31,
1994 1993 || 1992 1992
-------- -------- || -------- --------
||
Federal - current $ 1,511 ||
- deferred (1,511) ||
State and local (174) $ 290 || $ 50 $ 218
-------- -------- || -------- --------
||
Total income tax ||
(benefit) expense $ (174) $ 290 || $ 50 $ 218
========= ======== || ======== ========
Reconciliations of the total income tax (benefit) expense from amounts computed
by applying the U.S. Federal income tax rate of 34% to income (loss) before
income tax expense are as follows (in thousands):
Successor Predecessor
-------------------- --------------------------
Nine || Three
Year Months || Months Year
Ended Ended || Ended Ended
May 31, May 31, || Aug.31, May 31,
1994 1993 || 1992 1992
-------- -------- || -------- --------
||
Computed tax provision at ||
statutory Federal rate $ 2,263 $ 1,053 || $ 119 $(19,105)
Increase (decrease) in ||
taxes resulting from: ||
State taxes, net of ||
federal income taxes (113) 191 || 33 144
Effect of Fresh Start ||
reporting and ||
business combinations 473 || 176 236
Effect of temporary ||
differences (1,241) (1,427) || (570) 15,082
Unrecognized net ||
operating loss || 286 3,985
Utilization of net ||
operating loss (1,373) ||
Other items 290 || 6 (124)
------- ------- || -------- --------
$ (174) $ 290 || $ 50 $ 218
======= ======= || ======== ========
- 26 -
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE L -- INCOME TAXES - CONTINUED
Significant components of the Company's deferred income tax assets and
liabilities at May 31, 1994 are as follows (in thousands):
Deferred income tax liabilities:
Book basis of fixed assets in
excess of tax basis $(6,259)
Other (2,505)
-------
Total deferred tax liabilities $(8,764)
Deferred income tax assets:
Net operating loss carryforwards $ 7,011
Capital loss carryforwards 2,784
Other accruals and reserves 9,538
-------
Total deferred tax assets 19,333
Valuation allowance (9,214)
-------
Net deferred tax asset $ 1,355
=======
SFAS No. 109 requires the establishment of a valuation allowance when it is
more likely than not that deferred tax assets will not be realized. During the
year ended May 31, 1994, the valuation allowance increased by $6,000.
As discussed in Note B, the Company filed a Plan of Reorganization with the
United States Bankruptcy Court. Upon confirmation of the Plan on September 1,
1992, the Company experienced a change in ownership for purposes of Section 382
of the Internal Revenue Code. Under Section 382 an annual limitation of
approximately $900,000 is placed upon the Company's existing net operating loss
and capital loss carryforwards as of September 1, 1992. At August 31, 1992 the
Company has a net operating loss carryforward of approximately $24,300,000 and
an alternative minimum tax loss carryforward of $8,969,000, both of which
expire in the years 2006 through 2008. In addition, the Company has a capital
loss carryforward of $5,045,000 which expires in the years 1996 through 1998.
In addition to the above items the Company has available as of May 31, 1994 for
federal income tax purposes, a net operating loss carryforward of approximately
$7,430,000 and an alternative minimum tax loss carryforward of approximately
$11,854,000, both of which will expire in the year 2008. The Company also has
a capital loss carryforward of approximately $7,953,000 which will expire in
1998. These loss carryforwards relate to the period subsequent to emerging
from bankruptcy and are not subject to limitation under Section 382.
- 27 -
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE M -- RETIREMENT PLANS
The Company maintains a defined benefit pension plan that covers the union
employees of a subsidiary. Benefits are determined by years of service. The
Company's funding policy is consistent with the requirements of federal laws
and regulations. Pension plan assets consist primarily of common stocks, bonds
and government obligations.
The following sets forth the funded status and amounts recognized in the
consolidated balance sheets (in thousands):
1994 1993
------------ ------------
ACCUMULATED ACCUMULATED
BENEFITS BENEFITS
EXCEED PLAN EXCEED PLAN
ASSETS ASSETS
----------- -----------
Actuarial present value of benefit
obligations:
Vested $21,600 $20,602
Accumulated 799 770
------- -------
Projected 22,399 21,372
Plan assets at fair value 18,640 19,457
------- -------
Plan assets less than projected
benefits (3,759) (1,915)
Items not yet recognized:
Net loss (gain) 937 (764)
Net obligations existing at transition 1,319 1,477
Prior service cost 40 45
Adjustment required to recognize
minimum liability (2,211) (758)
------- -------
Net pension liability $(3,674) $(1,915)
======= =======
- 28 -
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE M -- RETIREMENT PLANS - CONTINUED
The provisions of Statement of Financial Accounting Standards No. 87,
"Employers' Accounting for Pensions" ("SFAS No. 87") require the Company to
record a minimum pension liability relating to unfunded pension obligations
and, to the extent possible, establish an offsetting intangible asset. Because
the intangible asset recognized may not exceed the amount of unrecognized prior
service cost, the balance of the liability at the end of the period is reported
as a separate reduction to stockholders' equity, net of tax benefits. At May
31, 1994, this minimum pension liability was remeasured, as required by SFAS
No. 87. As a result, the minimum pension liability was adjusted from $758,000
at May 31, 1993 to $2,211,000 at May 31, 1994; the related intangible asset was
adjusted from $758,000 to $1,359,000; and stockholders' equity was reduced by
$554,000 (net of applicable deferred income taxes of $298,000). The adjustment
in the minimum pension liability at May 31, 1994 resulted mainly from an
increase in pension fund liabilities due to a decrease in the discount rate and
a lower than expected rate of return on plan assets during the current period.
The components of net periodic pension cost for the defined benefit plan are as
follows (in thousands):
1994 1993 1992
-------- -------- --------
Service cost $ 360 $ 325 $ 415
Interest cost on projected
benefit obligation 1,728 1,726 1,648
Actual return on plan assets (451) (1,888) (1,923)
Net amortization and deferral (1,002) 529 717
------- ------- -------
Net periodic pension cost $ 635 $ 692 $ 857
======= ======= =======
Assumptions for the plan were:
Discount rate - pension expense 8.25% 8.75% 9%
Expected long-term rate of return
on assets 9% 9% 9%
Discount rate - projected benefit
obligation 8% 8.25% 9%
The cost for defined contribution plans was $633,000 in fiscal year 1994. The
majority of such plans provide for matching of employee contributions and for
discretionary contributions. The defined contribution plans cover hourly and
salaried employees.
- 29 -
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE N -- POSTRETIREMENT MEDICAL PLAN
One of the Company's subsidiaries maintains an unfunded postretirement welfare
plan which provides certain contributory and non-contributory health care and
life insurance benefits for employees who retired on or before December 31,
1991 and their dependents. Future hourly retirees are eligible for life
insurance coverage upon retirement at age 55 or later with at least five years
of service.
In fiscal 1993 the Company adopted Statement of Financial Accounting Standards
No. 106, "Employers' Accounting for Postretirement Benefits Other than
Pensions" ("SFAS No. 106"). The Company elected delayed recognition of the
transition obligation, which will be amortized over a 20 year period. SFAS No.
106 requires companies to recognize the estimated future costs of providing
health and other post-retirement benefits on an accrual basis. These benefits
have previously been recognized as incurred.
The following sets forth the plan's funded status (in thousands):
Accumulated postretirement benefit obligation (APBO):
May 31, May 31,
1994 1993
------- -------
Retirees $12,762 $12,407
Fully eligible active plan participants 313 304
Other active plan participants 324 315
------- -------
Total APBO 13,399 13,026
Unrecognized transition obligation (11,720) (12,089)
------- -------
Accrued balance sheet liability $ 1,679 $ 937
======= =======
Net periodic postretirement benefit cost included
the following components:
1994 1993
------- -------
Service cost $ 16 $ 19
Interest cost 1,031 1,222
Amortization of transition obligation 654 779
------- -------
Total expense $ 1,701 $ 2,020
======= =======
- 30 -
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE N -- POSTRETIREMENT MEDICAL PLAN - CONTINUED
The assumed annual rate of increase in the per capita cost of covered health
care benefits was 11.75% in 1994 (13% in 1993) and the rate is assumed to
decrease by 1% annually to 5.75% in the year 2000. The assumed annual rate of
increase in the per capita cost of covered dental care benefits was 9.75% in
1994 (11% in 1993) and the rate is assumed to decrease by 1% annually to 5.75%
in the year 1998. A one percentage point increase in the assumed annual cost
trend rates would have increased the APBO as of May 31, 1994 by $1,603,000 and
the aggregate service and interest cost components of the net periodic
postretirement benefit cost for 1994 by $137,000.
The weighted average annual discount rate used in determining the APBO was 8.0%
in 1994 and 8.25% in 1993.
NOTE O -- OPERATING LEASES
Rental expense under operating leases was $3,406,000 in 1994 ($3,069,000 in
1993 and $2,867,000 in 1992) for ongoing operations and $1,104,000 in 1993 and
$2,852,000 in 1992 for businesses held for sale. Leases are principally for
rental of facilities and contain renewal rights to extend the terms from five
to fifteen years. At May 31, 1994, future minimum payments under
non-cancelable operating leases with initial or remaining terms of more than
one year were as follows: 1995 - $1,764,000; 1996 - $1,436,000; 1997 -
$1,014,000; 1998 - $858,000; 1999 - $466,000 and $1,397,000 thereafter.
NOTE P -- BUSINESS SEGMENT INFORMATION
The Company operates in one business segment - the manufacture of industrial
products.
Net sales to two customers with which the Company has long-standing customer
relationships amounted to $35 million and $31 million, respectively, in 1994
($26 million and $24 million in 1993 and $24 million and $23 million in 1992).
At May 31, 1994 and 1993, accounts receivable from companies in the automotive
and truck industries were approximately 56% and 52%, respectively, of total
accounts receivable. Credit is extended based on an evaluation of the
customer's financial condition, and generally collateral is not required.
Credit losses are provided for in the financial statements and consistently
have been within management's expectation.
- 31 -
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE Q -- QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
1994: (In thousands, except share data)
- - ----
Net sales:
Ongoing operations $54,444 $60,584 $60,765 $74,536
Businesses held for sale 315
------- ------- ------- -------
Total net sales $54,759 $60,584 $60,765 $74,536
======= ======= ======= =======
Gross profit:
Ongoing operations $ 7,243 $ 9,076 $ 9,038 $13,718
Businesses held for sale 164
------- ------- ------- -------
Total gross profit $ 7,407 $ 9,076 $ 9,038 $13,718
======= ======= ======= =======
Special charges - Note D 5,956
Settlement of precon-
firmation liabilities 846
Net income (loss) $ 1,082 $ 3,232 $(2,653) $ 5,169
Net income (loss) per share:
Primary $ .09 $ .26 $ (.21) $ .41
======= ======= ======== =======
Fully diluted $ .09 $ .26 $ (.21) $ .41
======= ======= ======== =======
Predecessor Successor
----------- -----------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
1993: (In thousands, except share data)
- - ---- ||
||
Net sales: ||
Ongoing operations $52,100 || $55,255 $52,242 $62,813
Businesses held for sale 30,893 || 16,667 2,046 615
------- || ------- ------- -------
Total net sales $82,993 || $71,922 $54,288 $63,428
======= || ======= ======= =======
Gross profit: ||
Ongoing operations $ 7,706 || $ 8,519 $ 6,776 $ 9,245
Businesses held for sale 4,214 || 2,468 359 (145)
------- || ------- ------- -------
Total gross profit $11,920 || $10,987 $ 7,135 $ 9,100
======= || ======= ======= =======
||
Special charges - Note D 1,095 || 494 146 (54)
Extraordinary gain - ||
forgiveness of ||
prepetition liabilities 78,805 ||
Net income (loss) $79,105 || $ 1,164 $ (205) $ 1,849
Net income (loss) per ||
share: ||
Primary $ (A) || $ .10 $ (.02) $ .16
======= || ======= ======== =======
Fully diluted $ (A) || $ .10 $ (.02) $ .15
======= || ======= ======== =======
<FN>
(A) Per share amounts are irrelevant due to reorganization.
- 32 -
33
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
Sudbury, Inc.
We have audited the accompanying consolidated balance sheets of Sudbury, Inc.
and subsidiaries (the "Company") as of May 31, 1994 and 1993, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the year ended May 31, 1994, the nine-months ended May 31, 1993, the
three-months ended August 31, 1992 and the year ended May 31, 1992. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Sudbury, Inc. and subsidiaries at May 31, 1994 and 1993, and the consolidated
results of their operations and their cash flows for the year ended May 31,
1994, the nine months ended May 31, 1993, the three months ended August 31,
1992 and the year ended May 31, 1992, in conformity with generally accepted
accounting principles.
As discussed in the notes to the consolidated financial statements, effective
September 1, 1992, the Company changed its method of accounting for income
taxes and post-retirement benefits other than pensions.
Ernst & Young LLP
Cleveland, Ohio
July 18, 1994
- 33 -