1
EXHIBIT 13
- ----------
SELECTED FINANCIAL DATA (1)
1996 1995 1994 1993 1992
-------- -------- --------- --------- ---------
(Dollars in thousands, except per share amounts)
Net Sales:
Ongoing operations $302,239 $305,435 $ 250,329 $ 222,410 $ 198,197
Businesses held for sale 315 50,221 156,678
-------- -------- --------- --------- ---------
TOTAL 302,239 305,435 250,644 272,631 354,875
Special charges (2) (5,956) (586)
Reorganization items (3) (1,095) (46,315)
Gain on sale of subsidiary (4) 1,511
Income (loss) before
extraordinary gain 15,871 13,572 6,830 3,108 (56,410)
Extraordinary gain (5) 78,805
Net income (loss) 15,871 13,572 6,830 81,913 (56,410)
Net income per common share:
Fully diluted 1.23 1.07 .55 (6) (6)
Primary 1.24 1.07 .55 (6) (6)
Cash dividends per common
share -- -- -- -- --
Assets 132,352 129,637 114,200 116,456 162,233
Working capital (deficiency) 22,891 15,762 19,667 19,148 (27,583)
Short-term obligations 282 678 2,300 3,088 60,874
Long-term debt 10,113 17,978 29,961 45,984 23,931
Liabilities deferred pursuant
to Chapter 11 86,279
Serial preferred stock 7,563
Stockholders' equity (deficit) 62,612 44,552 29,410 16,808 (56,833)
<FN>
- ----------
(1) As discussed more fully in Note Q of the financial statements, the
Company emerged from Chapter 11 of the U.S. Bankruptcy Code on
September 1, 1992 and adopted Fresh Start reporting at that date.
Accordingly, financial data presented for periods subsequent to the
date of emergence are not comparable to prior periods.
(2) Refer to Note D of the financial statements for a further discussion of
1994 special charges. The 1993 special charges represent consulting and
other expenses incurred under the Company's restructuring program.
(3) Reorganization items represent charges recorded in conjunction with the
Company's restructuring program.
(4) As discussed more fully in Note C of the financial statements, the
Company sold its South Coast Terminals, Inc. subsidiary in December
1995.
(5) An extraordinary gain resulted from the forgiveness of prepetition
liabilities under the Company's amended Plan of Reorganization.
(6) Calculations of net income per share are not meaningful as a result of
the Company's reorganization described in Note Q of the financial
statements.
2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS - FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995:
SALES. The Company's net sales for fiscal 1996 decreased by 1% to $302.2 million
from $305.4 million in the prior year. Fiscal 1996 results included sales of
$13.5 million from South Coast Terminals, Inc. ("South Coast") prior to its
divestiture in December 1995. South Coast's fiscal 1995 sales were $23.5
million. After adjusting for the impact of the sale of South Coast, sales from
the Company's other five subsidiaries increased by $6.8 million or 2.4% in
fiscal 1996 over the prior year. This sales improvement came from a $29.5
million increase in net new business, $3.0 million of price increases and a
$25.7 million decrease in sales of existing products.
The Company's Industrial Powder Coatings, Inc. ("IPC") and Wagner Castings
Company ("Wagner") subsidiaries generated sales increases over the prior year.
IPC's sales growth resulted primarily from the production of its new blank
coating line facility in Louisville, Kentucky. The blank coating facility sales
were $13.5 million of which $10.5 million represented the pass through of steel
blank material cost. Partially offsetting this increase were reductions in IPC's
volume due to an automotive model changeover affecting its coil spring coating
business and a general slowing in automotive orders. At Wagner, $10.6 million of
net new business came from Wagner's presence on Ford Motor Company's North
American version of its "World Car" program and on other automotive vehicle
platforms. During fiscal 1996, the Company's sales to the automotive industry
were $181 million which is a 3% decrease from the prior year level of $186
million. The decrease resulted from the previously discussed volume declines at
IPC. The remaining companies' sales as a whole were down $6.7 million when
compared to the prior year period due principally to slowing in the liquid
propane gas regulator valve and electric hand tool markets.
GROSS PROFIT. Gross profit (net sales less costs of products sold) for fiscal
1996 decreased by $2.5 million to $48.5 million from $51.0 million. Gross profit
as a percentage of net sales was 16.1% for fiscal 1996 compared to 16.7% in the
prior year. The decrease in the margin rate resulted from both the sale of South
Coast, whose gross margins were higher than the average for the Company's other
subsidiaries and the impact of the pass through of $10.5 million of steel blank
material costs at IPC described previously. Partially offsetting these items
were favorable effects of cost and productivity improvements at the Company's
Wagner and Iowa Mold Tooling ("IMT") subsidiaries.
3
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses as a
percentage of net sales decreased to 8.5% in fiscal 1996 from 9.3% in the prior
year. In terms of dollars, such expenses decreased from $28.3 million in the
prior year to $25.6 million in fiscal 1996. The decrease resulted primarily from
the impact of the sale of South Coast and lower expenses recorded for a
contractual bonus obligation. The sale of South Coast in December 1995 resulted
in $1.3 million less expense in fiscal 1996 when compared to the prior year. In
fiscal 1996 the Company recorded expense of $2.8 million related to the final
determination of a contractual bonus established in its 1992 employment
agreement with Jacques R. Sardas, Chairman, President and Chief Executive
Officer of the Company. As discussed in Note D to the consolidated financial
statements, the expense was based on the appraised value of the Company by an
independent investment banking firm. In the prior year, the Company recorded
expense of $3.4 million related to the contractual bonus.
INTEREST EXPENSE. Interest expense decreased by $1.5 million due to
significantly lower borrowing levels and reduced interest rates under the
Company's new revolving credit facility.
GAIN ON SALE OF SUBSIDIARY. The Company divested its South Coast subsidiary in
December 1995 and recorded a gain before income taxes of $1.5 million on the
transaction.
OTHER INCOME. Other income increased by $.8 million due principally to the
settlement of an environmental matter related to a business sold by the Company
in 1992 which resulted in the receipt of escrowed funds and insurance proceeds.
INCOME TAX EXPENSE. Income tax expense increased by $1.8 million from $6.4
million in the prior year (an effective tax rate of 32%) to $8.2 million in
fiscal 1996 (an effective tax rate of 34%). The fiscal 1996 effective tax rate
of 34% was less than the statutory rate of 35% principally due to the impact of
income tax benefits recognized in conjunction with the sale of South Coast. The
fiscal 1995 effective tax rate differed from the statutory tax rate due
principally to income tax benefits associated with the 1992 employment agreement
with Mr. Sardas and the utilization of net operating loss carryforwards. The
deferred tax asset valuation allowance was reduced by $.3 million and $2.1
million in fiscal 1996 and 1995, respectively, as a result of management's
evaluation of the future realization of certain deferred tax assets.
As of May 31, 1996, the Company had recognized a net deferred tax asset of $2.1
million which relates principally to net operating loss carry forwards and
future income tax benefits associated with the 1992 employment agreement with
Mr. Sardas. Valuation allowances have been established for those deferred tax
assets for which management believes there does not exist sufficient objective
evidence to support their recognition under generally accepted accounting
principles.
4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS - FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994:
SALES. The Company's net sales for fiscal 1995 increased by 22% to $305.4
million from $250.6 million in fiscal 1994. This sales improvement of $54.8
million came from a $27.3 million increase in sales of existing products, $21.1
million of net new business and $6.4 million of price increases.
Each of the Company's subsidiaries experienced sales increases over fiscal 1994.
During fiscal 1995 the Company's sales to the automotive industry improved to
$186 million which is a 26% increase over the prior year level of $148 million.
The Company's Wagner and IPC subsidiaries accounted for most of this increase as
their volumes improved in line with the overall rise in demand which occurred
during fiscal 1995 in the domestic automotive industry. At Wagner, $10.8 million
of new business arose from the start-up of Ford Motor Company's North American
version of its "World Car" program which consists of the Ford Contour and
Mercury Mystique.
Sales at the Company's IMT subsidiary increased by $8.6 million over fiscal 1994
as a result of improvements in several of its construction related markets.
GROSS PROFIT. Gross profit (net sales less costs of products sold) for fiscal
1995 increased by $11.7 million to $51.0 million from $39.3 million in fiscal
1994. Gross profit as a percentage of net sales was 16.7% for fiscal 1995
compared to 15.7% in fiscal 1994. The increase in margin rate came from
increased sales volume, improved operating efficiencies and a $.9 million
favorable impact in scrap steel prices at Wagner as scrap steel prices did not
escalate as rapidly as they had in the prior year. 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 these customers, however, these
adjustments are generally passed along three to six months subsequent to the
time the change occurs.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses as a
percentage of net sales decreased to 9.3% in fiscal 1995 from 9.6% in fiscal
1994 due principally to higher sales. In terms of dollars, such expenses
increased by $4.2 million due primarily to a $3.3 million increase in the
expense related to a contractual bonus accrued for Jacques R. Sardas, Chairman,
President and Chief Executive Officer of the Company under his 1992 employment
agreement as discussed in footnote D of the consolidated financial statements.
Also impacting the increase in selling and administrative expenses was an
increase in selling expenses associated with higher sales.
5
SPECIAL CHARGES. Special charges of $6.0 million were recognized in fiscal 1994
in connection with the 1992 employment agreement with Mr. Sardas. These charges
include expenses of $4.7 million associated with stock options and a $1.3
million bonus accrual. The charge relating to the stock options was noncash and
no future charges will be required to account for these options.
INTEREST EXPENSE. Interest expense decreased by $.9 million due to reductions in
debt as a result of the Company's cash flow from operations. Partially
offsetting this reduction was an increase in the interest rate on the Company's
bank indebtedness due to increases in the base interest rates.
INCOME TAX EXPENSE. Income tax expense of $6.4 million in fiscal 1995 (an
effective tax rate of 32%) represented a significant increase over the income
tax benefit of $.2 million recorded in fiscal 1994. In fiscal 1995, the Company
fully utilized its net operating loss carryforwards generated subsequent to the
Company's emergence from Chapter 11 and therefore became subject to income taxes
on its earnings during the year. The effective tax rate of 32% is less than the
statutory rate of 35% due principally to the impacts of income tax benefits
associated with Mr. Sardas' 1992 employment agreement and the utilization of net
operating loss carryforwards. During fiscal 1995, the deferred tax asset
valuation allowance was reduced by $2.1 million as a result of management's
evaluation of the future realization of certain deferred tax assets. In fiscal
1994, the income tax benefit resulted from refunds received by the Company due
to the favorable resolution of certain state tax disputes.
As of May 31, 1995, the Company had recognized a net deferred tax asset of $3.8
million which relates principally to net operating loss carryforwards and future
income tax benefits associated with Mr. Sardas' 1992 employment agreement.
Valuation allowances have been established for those deferred tax assets for
which management believes there does not exist sufficient objective evidence to
support their recognition under generally accepted accounting principles.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1996 operating activities provided cash of $18.3 million compared
to $32.0 million in the prior fiscal year. The change resulted from an increase
in working capital which included the payment of a contractual bonus obligation
of $7.25 million to Mr. Sardas under his 1992 employment agreement. As discussed
in footnote D to the consolidated financial statements, the bonus payment made
in January 1996 was based on the appraised value of the Company by an
independent investment banking firm.
At May 31, 1996, long-term debt (including current maturities) was $10.4
million, a decrease of $8.3 million from May 31, 1995. Proceeds from the sale of
South Coast of $18.6 million were used to reduce certain long-term debt of South
Coast and the Company and to fund capital expenditures. Long-term debt
represents 14% of long-term debt plus stockholders' equity at May 31, 1996,
compared to 30% at the end of fiscal 1995.
6
As of May 31, 1996, $1.3 million of the Company's $40 million revolving credit
facility ("Credit Facility") was utilized to secure the Company's irrevocable
letters of credit and the Company had $38.7 million of additional borrowing
capacity under the Credit Facility. The Credit Facility provides the Company the
ability to incur capital expenditures of up to $20 million per year for the
remaining two year term of the Credit Facility. Subject to certain conditions,
the Credit Facility also permits the Company to borrow to fund acquisitions.
Capital expenditures were $22.6 million in fiscal 1996 compared with $16.2
million in fiscal 1995. The increase in capital expenditures was mainly
attributable to the modernization project to expand ductile processing capacity
at Wagner and the purchase of electrodeposition coating equipment to be utilized
by IPC in Monterrey, Mexico.
The Company currently has capital expenditure commitments for fiscal 1997 of
$3.4 million, most of which relates to the completion of Wagner's modernization
project. The Company currently anticipates spending approximately $15 million
for capital expenditures in fiscal 1997.
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 1997.
OTHER MATTERS. 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 in the future.
The Company's current and previous businesses operate in a variety of locations
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 liable for cleanup costs by the United States
Environmental Protection Agency, 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. For known
environmental conditions, the Company, with the assistance of environmental
engineers and consultants, has accrued $4.0 million 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, results of operations, or cash flows.
7
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on the Nasdaq Stock Market ("Nasdaq") under
the symbol SUDS. During fiscal 1996, the high and low closing bid quotations as
reported on Nasdaq ranged from a high bid of $9.625 to a low bid of $6.375.
During fiscal 1995, the high and low closing bid quotations as reported on
Nasdaq ranged from a high bid of $7.375 to a low bid of $5.125.
The following table sets forth the high and low closing bid quotations as
reported on Nasdaq. 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, 1996
- -----------------------
First quarter $8.50 $6.375
Second quarter 9.375 7.75
Third quarter 8.375 7.25
Fourth quarter 9.625 7.50
YEAR ENDED MAY 31, 1995
- -----------------------
First quarter $7.00 $6.125
Second quarter 7.375 6.25
Third quarter 6.75 5.125
Fourth quarter 7.125 5.75
On August 2, 1996, there were approximately 1,200 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.
8
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
SUDBURY, INC. AND SUBSIDIARIES
------------------------------
Year Ended May 31,
-----------------------------------
1996 1995 1994
--------- --------- ---------
(Dollars in thousands, except per share amounts)
Net sales $ 302,239 $ 305,435 $ 250,644
Costs and expenses:
Costs of products sold 253,696 254,472 211,405
Selling and administrative expenses 25,599 28,333 24,109
Special charges 5,956
--------- --------- ---------
OPERATING INCOME 22,944 22,630 9,174
Interest expense - net (1,441) (2,974) (3,848)
Gain on sale of subsidiary 1,511
Settlement of preconfirmation liabilities 846
Other income 1,095 292 484
--------- --------- ---------
Income before income taxes 24,109 19,948 6,656
Income tax expense (benefit) 8,238 6,376 (174)
--------- --------- ---------
NET INCOME $ 15,871 $ 13,572 $ 6,830
========= ========= =========
Net income per Common share:
Primary $ 1.24 $ 1.07 $ .55
========= ========= =========
Fully diluted $ 1.23 $ 1.07 $ .55
========= ========= =========
Average Common shares and share equivalents outstanding:
Primary 12,815 12,651 12,330
========= ========= =========
Fully diluted 12,883 12,670 12,482
========= ========= =========
See notes to consolidated financial statements.
9
CONSOLIDATED BALANCE SHEETS
---------------------------
SUDBURY, INC. AND SUBSIDIARIES
------------------------------
(Dollars in thousands)
ASSETS
- ------
May 31,
-------------------
1996 1995
-------- --------
CURRENT ASSETS
Cash and cash equivalents $ 10,645 $ 3,548
Accounts receivable, less allowance
for doubtful accounts
(in 1996: $595; in 1995: $498) 38,299 41,800
Inventories 18,871 18,124
Deferred taxes 218 2,554
Other 3,680 4,722
-------- --------
TOTAL CURRENT ASSETS 71,713 70,748
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements 1,421 2,263
Buildings 8,466 17,334
Machinery and equipment 66,833 53,580
-------- --------
76,720 73,177
Less accumulated depreciation 21,247 18,931
-------- --------
NET PROPERTY, PLANT AND EQUIPMENT 55,473 54,246
OTHER ASSETS 5,166 4,643
-------- --------
$132,352 $129,637
======== ========
See notes to consolidated financial statements.
10
CONSOLIDATED BALANCE SHEETS--CONTINUED
--------------------------------------
SUDBURY, INC. AND SUBSIDIARIES
------------------------------
(Dollars in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
May 31,
----------------------
1996 1995
--------- ---------
CURRENT LIABILITIES
Trade accounts payable $ 26,606 $ 25,891
Accrued compensation and employee benefits 8,018 14,286
Accrued income taxes 3,773 4,074
Other accrued expenses 10,143 10,057
Current maturities of long-term debt 282 678
--------- ---------
TOTAL CURRENT LIABILITIES 48,822 54,986
LONG-TERM DEBT 10,113 17,978
OTHER LONG-TERM LIABILITIES 10,805 12,121
STOCKHOLDERS' EQUITY
Common Stock--par value $0.01 per share;
authorized 20,000,000 shares; 10,616,361
(10,289,883 at May 31, 1995) shares
issued and outstanding 106 103
Additional paid-in capital 23,731 22,076
Retained earnings 39,081 23,210
Minimum pension liability adjustment - net (306) (837)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 62,612 44,552
--------- ---------
$ 132,352 $ 129,637
========= =========
See notes to consolidated financial statements.
11
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SUDBURY, INC. AND SUBSIDIARIES
------------------------------
For the Years Ended May 31, 1996, 1995 and 1994
(Dollars and shares in thousands) MINIMUM
COMMON STOCK ADDITIONAL PENSION
-------------- PAID-IN RETAINED LIABILITY
AMOUNT SHARES CAPITAL EARNINGS ADJUSTMENT
------ ------ ------- -------- ----------
BALANCE AT MAY 31, 1993 $100 10,000 $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 102 10,234 20,224 9,638 (554)
Net income for 1995 13,572
Exercise of participation
certificates and stock
options and other - net 1 56 718
Tax benefits from exercise
of stock options 188
Utilization of net operating
loss carryforwards and recog-
nition of deferred tax asset 946
Adjustment for minimum
pension liability - net (283)
----- ------ ------- ------- -------
BALANCE AT MAY 31, 1995 103 10,290 22,076 23,210 (837)
Net income for 1996 15,871
Exercise of participation
certificates and stock
options and other - net 3 326 1,248
Tax benefits from exercise
of stock options 91
Utilization of net operating
loss carryforwards 316
Adjustment for minimum
pension liability - net 531
----- ------ ------- ------- -------
BALANCE AT MAY 31, 1996 $ 106 10,616 $23,731 $39,081 $ (306)
===== ====== ======= ======= =======
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
12
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
SUDBURY, INC. AND SUBSIDIARIES
------------------------------
(Dollars in thousands)
Year Ended May 31,
----------------------------------
1996 1995 1994
-------- --------- ---------
OPERATING ACTIVITIES:
Net income $ 15,871 $ 13,572 $ 6,830
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 8,995 9,800 8,361
Gain and tax benefit on sale of
subsidiary (1,657)
Deferred taxes and other (713) (1,339) (351)
Special charges 5,956
Changes in operating assets and liabil-
ities net of effect of disposition (4,221) 9,999 1,041
-------- --------- ---------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 18,275 32,032 21,837
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (22,561) (16,232) (6,951)
Proceeds from sale of businesses 18,576 666
Proceeds from collection of notes
receivable 470 2,362
Other - net 328 230 (17)
-------- --------- ---------
NET CASH USED IN INVESTING
ACTIVITIES (3,657) (15,532) (3,940)
FINANCING ACTIVITIES:
Borrowings, refinancings and repayments:
Long-term borrowings 55,900 304,861 238,788
Reductions of debt (64,672) (318,777) (256,067)
Common stock issued 1,251 719 682
-------- --------- ---------
NET CASH USED IN FINANCING
ACTIVITIES (7,521) (13,197) (16,597)
-------- --------- ---------
INCREASE IN CASH AND
CASH EQUIVALENTS 7,097 3,303 1,300
Cash and cash equivalents at beginning
of period 3,548 245 (1,055)
-------- --------- ---------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 10,645 $ 3,548 $ 245
======== ========= =========
See notes to consolidated financial statements.
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE A -- NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS: Sudbury, Inc. and its subsidiaries (the "Company")
operates in one business segment - the manufacture of high-quality industrial
products. The Company primarily serves the automotive, appliance and
construction markets providing iron, aluminum and zinc castings; applications of
custom coatings; cranes, truck bodies and related equipment; and precision
machined components through its five operating subsidiaries. Over 90% of the
Company's sales are made within North America.
CONSOLIDATION: The consolidated financial statements include the accounts of the
Company. Significant intercompany balances and transactions have been
eliminated.
CASH: The Company considers liquid instruments with initial maturities of 90
days or less at date of purchase to be cash equivalents.
INVENTORIES: Inventories are stated at the lower of cost or market. Cost is
determined by the last-in, first-out method (LIFO) for approximately 68% and 80%
of the Company's inventories at May 31, 1996 and 1995, respectively, and by the
first-in, first-out (FIFO) method for all other inventories. The FIFO method
approximates the current cost.
PROPERTIES AND DEPRECIATION: Property, plant and equipment acquired subsequent
to September 1, 1992 are stated at cost. As discussed in Note Q, in conjunction
with the emergence from Chapter 11 bankruptcy proceedings, the Company
implemented Fresh Start reporting and, accordingly, all property, plant and
equipment owned on September 1, 1992 was restated to reflect reorganization
value, which approximated 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. Interest costs of $280,000
and $171,000 were capitalized in fiscal 1996 and 1995, respectively.
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.
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE A -- NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
NET INCOME PER SHARE: For the fiscal years ended May 31, 1996, 1995 and 1994,
net income per common share was calculated by dividing net income applicable to
common stock by the average number of shares of common stock outstanding and
common stock equivalents. Common stock equivalents include shares issuable on
the exercise of stock options and Series A and B Participation Certificates,
less an amount equal to the number of shares which could be repurchased from
proceeds realized by the Company from the exercise of such securities. The
Company's Series C Participation Certificates have not been included in the
computation of common stock equivalents because such securities were not
exercisable as their current trigger price has not been attained.
INCOME TAXES: The Company accounts for income taxes using the liability method.
Deferred income tax assets and liabilities are 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.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RECLASSIFICATIONS: Certain prior year amounts have been reclassified to conform
to the 1996 presentation.
NEW ACCOUNTING STANDARDS: In 1995, the Financial Accounting Standards Board
issued Statement No. 121 "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" ("SFAS 121") and Statement No. 123
"Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 121 requires that,
under certain circumstances, long-lived assets be reviewed for impairment and
any applicable impairment loss be recognized. SFAS 123 allows accounting for
employee stock options under either the fair value or the intrinsic value
method. The Company plans to continue to use the intrinsic value method. These
statements, which must be adopted by the Company no later than the first quarter
of fiscal 1997, are not expected to have a material effect on the financial
statements.
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE B -- INVENTORIES
The components of inventories at May 31 are summarized as follows (in
thousands):
1996 1995
------- -------
Raw materials and supplies $ 7,204 $ 7,474
Work in process 8,464 7,217
Finished products 3,599 3,875
------- -------
Total at FIFO 19,267 18,566
Less excess of FIFO cost over LIFO values 396 442
------- -------
$18,871 $18,124
======= =======
NOTE C -- DISPOSITIONS
On December 29, 1995, the Company completed the sale of its South Coast
Terminals, Inc. ("South Coast") subsidiary. Proceeds from the sale of
$18,576,000 were used to reduce certain indebtedness of South Coast and the
Company. The Company recorded a pretax gain of $1,511,000 ($1,657,000 after
income taxes) on the sale of South Coast.
Unaudited pro forma consolidated results of operations of the Company, assuming
the sale of South Coast had occurred at June 1, 1995 and 1994, are summarized
below (in thousands, except per share amounts):
1996 1995
-------- --------
Net sales $288,712 $281,951
Net income $ 13,559 $ 12,352
Net income per Common share $ 1.05 $ .97
During fiscal 1994 the Company sold one business for net cash proceeds of
$666,000.
NOTE D -- CHARGES ASSOCIATED WITH EXECUTIVE EMPLOYMENT AGREEMENT
Recorded in the Company's operating results for the years presented under
selling and administrative expenses and special charges are charges recorded in
connection with the achievement of contractual performance targets established
in the January 1992 Employment Agreement ("1992 Employment Agreement") with
Jacques R. Sardas, Chairman, President and Chief Executive Officer of the
Company. The 1992 Employment Agreement, confirmed as part of the Company's
amended Plan of Reorganization (the "Plan") by the United States Bankruptcy
Court included the triggering of the exercisability of certain stock options and
the payment of a cash bonus in the event the fair value of the Company attains
certain values as determined by an independent investment banking firm.
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE D -- CHARGES ASSOCIATED WITH EXECUTIVE EMPLOYMENT AGREEMENT - continued
The original charges associated with the 1992 Employment Agreement occurred in
fiscal 1994 with $5,956,000 being recorded as special charges. 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
were exercisable in increments after the fair value of the Company exceeded
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 1992 Employment Agreement, that performance targets
established in the 1992 Employment Agreement had been met as of February 28,
1994 and therefore the options became exercisable.
The remaining $1,306,000 of the fiscal 1994 special charges represents expense
associated with the estimated cash bonus payable to Mr. Sardas at the end of the
1992 Employment Agreement in January 1996. The bonus amount equals 5% of the net
fair value of the Company in excess of $35,000,000 at the expiration of the 1992
Employment Agreement and was accrued over the term of the 1992 Employment
Agreement. Accruals for the bonus expense subsequent to the initial charge made
on February 28, 1994 have been included as part of the Company's selling and
administrative expenses. In the third quarter of fiscal 1996, the final
determination of the bonus amount was made through an appraisal of the net fair
value of the Company as provided by the 1992 Employment Agreement. As a result
of this appraisal, an additional accrual of $1,977,000 was made in the third
quarter of fiscal 1996 and a bonus payment to Mr. Sardas in the amount of
$7,250,000 was made. Total expenses related to the contractual bonus, including
appraisal costs and employment taxes, which were recorded in selling and
administrative expenses, were $2,795,000, $3,407,000 and $80,000 for fiscal
1996, 1995 and the fourth quarter of fiscal 1994, respectively.
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
fiscal 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 $2,000,000. 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 fiscal 1994. As a result of these
settlements, the Company recognized an $846,000 benefit as such settlements were
for less than the amounts reserved for such claims.
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
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 aggregate annual deductibles which total
$2,500,000 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. Three subsidiaries of the Company are self-insured for
health care to an aggregate annual amount of $7,800,000 and workers'
compensation up to $400,000 per incident, above which third party insurance
applies.
All operating locations acquired by the Company since 1984 operate in a variety
of locations 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 liable for cleanup of known
environmental conditions. For known environmental situations, the Company, with
the assistance of environmental engineers and consultants, has accrued
$4,038,000 to cover estimated future environmental expenditures. 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,
1996.
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.
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE F -- CONTINGENCIES AND COMMITMENTS - continued
The Company has an employment agreement with Jacques R. Sardas, its Chairman,
President and Chief Executive Officer, which extends through January 1998. The
agreement provides that if Mr. Sardas' employment is terminated other than for
cause, or from Mr. Sardas' death or disability, the Company continues to be
obligated to pay Mr. Sardas the fair value of the common stock underlying the
1,764,706 options he was granted under his 1992 Employment Agreement ( the
"Option Stock"). At Mr. Sardas' election the Company is also obligated to
purchase the Option Stock at fair value in five separate approximately
semi-annual installments commencing February 7, 1996 through January 13, 1998.
Under the employment agreement, fair value is determined based on quoted prices
on the principal stock exchange on which the Company's Common Stock is traded.
Mr. Sardas generally may delay his right to sell any installment of the Option
Stock until the next succeeding purchase date. If at that next succeeding
purchase date Mr. Sardas does not tender such shares of Option Stock, the
Company's obligation to purchase the Option Stock with respect to such
installment will terminate. Mr. Sardas has not exercised his right to have the
Company purchase the Option Stock subject to the February 7, 1996 installment
date and the Company's obligation with respect such purchase has terminated. The
Company is the beneficiary of a key-man life insurance policy on Mr. Sardas'
life in the amount of $14,000,000. The proceeds of the policy would be used to
fulfill the Company's obligation in the event of Mr. Sardas' death.
At May 31, 1996, the Company has commitments to purchase $3,400,000 in machinery
and equipment.
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE G -- STATEMENTS OF CASH FLOWS INFORMATION
(Dollars in thousands) 1996 1995 1994
------- ------- -------
Funds provided (used) by changes
in operating assets and
liabilities net of effect of
dispositions are as follows:
Accounts receivable $ 540 $(2,528) $(6,370)
Inventories (1,732) 468 1,261
Prepaid expenses and other 3,220 (702) 6,502
Trade accounts payable (304) 7,387 (1,161)
Accrued liabilities (5,945) 5,374 809
------- ------- -------
$(4,221) $ 9,999 $ 1,041
======= ======= =======
Cash payments (refunds):
Interest $ 1,116 $ 2,794 $ 3,635
Taxes 6,225 3,711 (154)
NOTE H -- LONG-TERM DEBT
Long-term debt consisted of the following at May 31 (in thousands):
1996 1995
------- -------
Revolving Line of Credit $ 5,479
Subordinated Notes $ 9,027 8,461
PIK Notes 665 665
Industrial Revenue Bonds 450
Real estate mortgage notes 2,392
Other 703 1,209
------- -------
10,395 18,656
Less current maturities 282 678
------- -------
$10,113 $17,978
======= =======
The Company has a secured $40,000,000 credit facility ("Revolving Line of
Credit") which expires on May 30, 1998. The Revolving Line of Credit provides a
$40,000,000 revolving credit commitment and an option to convert up to
$15,000,000 of the revolving credit commitment to a term loan. The Revolving
Line of Credit is secured by substantially all assets of the Company and its
subsidiaries. The Company's five subsidiaries are guarantors of the Revolving
Line of Credit. Covenants require the Company to maintain certain fixed charge,
interest coverage, net worth and leverage ratios.
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE H -- LONG-TERM DEBT - continued
As of May 31, 1996, $1,280,000 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, 1996, the Company had the
ability to borrow an additional $38,720,000 under the Revolving Line of Credit.
The Revolving Line of Credit bears interest at the prime rate or at the London
Interbank Offered Rate ("LIBOR"), plus a marginal rate based on the leverage and
fixed charge ratios of the Company ranging from 1/2% to 1 1/2% (.75% at May 31,
1996). The Revolving Line of Credit has unused facility fees of .25% and letter
of credit fees equal to the marginal rate on LIBOR loans payable on a quarterly
basis.
The Subordinated Notes due September 1, 1997 represent $9,831,000 principal
amount of 8 3/5% Senior Subordinated Pay-In-Kind Notes issued in accordance with
the Plan on September 1, 1992. 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 at the time of its issuance, making the effective rate 16%.
The discount is being amortized over the five year term of the indebtedness. At
May 31, 1996, the unamortized debt discount was $804,000. Interest is payable
semi-annually, however, prior to the refinancing of the Company's bank debt in
May 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.
The future maturities of long-term debt outstanding at May 31, 1996 for the four
fiscal years ending May 31, 2001 are as follows: $10,859,000 in 1998, $21,000 in
1999, $22,000 in 2000 and $15,000 in 2001.
NOTE I -- OTHER LONG-TERM LIABILITIES
Amounts classified under the caption "Other Long-Term Liabilities" at May 31
consist of the following (in thousands):
1996 1995
------- -------
Environmental reserves $ 2,954 $ 3,751
Accrued pension costs 3,111 4,175
Post-retirement benefit obligations 3,238 2,523
Reserves for self-insurance and other 1,502 1,672
------- -------
$10,805 $12,121
======= =======
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE J -- PARTICIPATION CERTIFICATES
Under the provisions of the Plan, as of September 1, 1992, holders of the
Company's pre-reorganization Common Stock and 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, 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
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 a price equal to, or in excess of, the
specified price per share (the "Trigger Price") for 20 consecutive trading 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, 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
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE J -- PARTICIPATION CERTIFICATES - continued
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
Exercised (33,766) (20,121)
-------- ------- ---------
Outstanding at May 31, 1995 413,128 620,031 1,448,410
Exercised (204,796) (55,182)
-------- ------- ---------
Outstanding at May 31, 1996 208,332 564,849 1,448,410
======== ======= =========
NOTE K -- EMPLOYEE STOCK OPTIONS
Pursuant to the terms of the Company's 1992 Employment Agreement with Jacques R.
Sardas, 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 are currently exercisable, have an exercise
price of $.01 per share and a term of five years. As of May 31, 1996, none of
the 1,764,706 options had been exercised.
In fiscal year 1994, the Company reached an agreement with Mr. Sardas regarding
settlement of his claim that under his 1992 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. All of these options are currently
exercisable. The Company recorded a charge of $897,000 in selling and
administrative expense in fiscal 1994 which represents the difference between
the option price and the fair value of the Common Stock.
The Company has long-term incentive plans under which employees may be granted
stock options. The 1990 Stock Option Plan allowed 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 ten years
after grant date. The 1990 Option Plan was terminated in 1995 and options
previously granted under this plan remain outstanding up to November 2004.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE K -- EMPLOYEE STOCK OPTIONS - continued
The Company adopted the 1995 Stock Option Plan which allows for the granting of
up to 1,000,000 options. The characteristics of the 1995 Option Plan are similar
to the 1990 Stock Option Plan. Options may be granted under the 1995 Stock
Option Plan through June 2005.
Stock option activity under the 1990 and 1995 Stock Option Plans was as follows:
Shares Option Prices
------ -------------
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
Granted 115,000 $6.75
Exercised (160,000) $1.75 to $3.75
--------
Outstanding at May 31, 1995 385,000 $3.75 to $6.875
Granted 260,000 $7.625 to $8.25
Exercised (66,500) $3.75 to $6.875
Cancelled (20,000) $6.75 to $6.875
-------
Outstanding at May 31, 1996 558,500 $3.75 to $8.25
=======
At May 31, 1996, there were a total of 2,581,432 options exercisable by
employees under the 1990 and 1995 Stock Option Plans and by Jacques R. Sardas at
prices ranging from $.01 to $7.625.
NOTE L -- INCOME TAXES
Components of income tax expense (benefit) are as follows (in thousands):
1996 1995 1994
--------- --------- ------
Federal - current $ 5,041 $ 7,436 $ 1,511
- deferred 1,643 (1,600) (1,511)
State and local 1,554 540 (174)
------- -------- --------
Total income tax
expense (benefit) $ 8,238 $ 6,376 $ (174)
======= ======== ========
The deferred tax expense (benefit) includes $316,000 and $2,113,000 in fiscal
1996 and 1995, respectively, for reductions in the opening valuation allowance
due to the future realizability of deferred tax assets.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE L -- INCOME TAXES - continued
Reconciliations of the total income tax expense (benefit) from amounts computed
by applying the U.S. Federal income tax rate of 35% for fiscal 1996 and 1995 and
34% for fiscal 1994 to income before income tax expense are as follows (in
thousands):
1996 1995 1994
-------- -------- ------
Computed tax provision at
statutory Federal rate $ 8,438 $ 6,982 $ 2,263
Increase (decrease) in
taxes resulting from:
State taxes, net of
federal income taxes 1,010 351 (113)
Effect of temporary
differences and
reserves 1,117 2,449 (1,241)
Utilization of net
operating loss (316) (3,432) (1,373)
Utilization of capital loss (2,003)
Other items (8) 26 290
------- ------- -------
$ 8,238 $ 6,376 $ (174)
======= ======= =======
As discussed in Note Q, the Company emerged from bankruptcy effective September
1, 1992. Upon emergence from bankruptcy, 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
utilization of the Company's existing net operating loss carryforwards as of
September 1, 1992. The Company has available as of May 31, 1996 for federal
income tax purposes, a net operating loss carryforward of approximately
$18,932,000 (of which only $10,125,000 can be utilized given the Section 382
limitations) which expires in 2008.
Significant components of the Company's deferred income tax assets and
liabilities at May 31 are as follows (in thousands):
1996 1995
-------- ------
Deferred income tax liabilities:
Book basis of fixed assets in
excess of tax basis $(3,765) $(5,189)
Other (2,702) (2,284)
------- -------
Total deferred tax liabilities (6,467) (7,473)
Deferred income tax assets:
Net operating loss carryforwards 3,544 3,859
Capital loss carryforwards 2,003
Other accruals and reserves 8,115 11,050
------- -------
Total deferred tax assets 11,659 16,912
Valuation allowance (3,078) (5,682)
------- -------
Net deferred tax asset $ 2,114 $ 3,757
======= =======
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE L -- INCOME TAXES - continued
A valuation allowance is required when it is more likely than not that deferred
tax assets will not be realized. At May 31, 1996, the valuation allowance was
attributable to $2,599,000 of net operating loss carryforwards limited by the
reorganization as previously disclosed (which will be credited to stockholders'
equity when recognized), and $479,000 of other accruals and reserves.
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 policy is to fund at least the minimum amount required by federal
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 at May 31 (in thousands):
1996 1995
-------- -------
Actuarial present value of:
Vested benefit obligation $23,101 $21,723
======= =======
Accumulated and projected benefit
obligation $23,932 $22,544
Plan assets at fair value 20,516 18,259
------- -------
Plan assets less than projected
benefits (3,416) (4,285)
Items not yet recognized:
Net loss 776 1,398
Net obligations existing at transition 1,002 1,160
Prior service cost 31 36
Additional minimum liability (1,504) (2,484)
------- -------
Net pension liability $(3,111) $(4,175)
======= =======
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE M -- RETIREMENT PLANS - continued
The components of net periodic pension cost for the defined benefit plan are as
follows (in thousands):
1996 1995 1994
-------- -------- ------
Service cost $ 356 $ 369 $ 360
Interest cost on projected
benefit obligation 1,822 1,782 1,728
Actual return on plan assets (3,374) (822) (451)
Net amortization and deferral 1,838 (684) (1,002)
------- ------- -------
Net periodic pension cost $ 642 $ 645 $ 635
======= ======= =======
Assumptions for the plan were:
Discount rate - pension expense 8.25% 8% 8.25%
Expected long-term rate of return
on assets 9% 9% 9%
Discount rate - projected benefit
obligation 7.75% 8.25% 8%
The cost for defined contribution plans was $1,229,000, $962,000 and $633,000 in
fiscal 1996, 1995 and 1994, respectively. The majority of such plans provide for
matching of employee contributions and for discretionary contributions. The
defined contribution plans cover hourly and salaried employees.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE N -- POST-RETIREMENT MEDICAL PLAN
One of the Company's subsidiaries maintains an unfunded post-retirement 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. Hourly retirees subsequent to December 31, 1991 are
eligible for life insurance coverage upon retirement at age 55 or later with at
least five years of service.
The following sets forth the plan's funded status at May 31 (in thousands):
Accumulated post-retirement benefit obligation (APBO):
1996 1995
------- -------
Retirees $ 9,075 $10,220
Fully eligible active plan participants 449 420
Other active plan participants 315 316
------- -------
Total APBO 9,839 10,956
Unrecognized transition obligation (11,205) (11,894)
Unrecognized net gain 4,604 3,461
------- -------
Accrued balance sheet liability $ 3,238 $ 2,523
======= =======
Net periodic post-retirement benefit cost included the following components (in
thousands):
1996 1995 1994
------- ------- -----
Service cost $ 15 $ 17 $ 16
Interest cost 866 1,035 1,031
Net amortization and
deferral 511 689 654
------- ------- -------
Total expense $ 1,392 $ 1,741 $ 1,701
======= ======= =======
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE N -- POST-RETIREMENT MEDICAL PLAN - continued
The assumed annual rate of increase in the per capita cost of covered health
care benefits was 8.5% in 1996 (10.5% in 1995) and the rate is assumed to
decrease annually to 5.5% in the year 2000. The assumed annual rate of increase
in the per capita cost of covered dental care benefits was 7.0% in 1996 (8.5% in
1995) and the rate is assumed to decrease annually to 5.5% in the year 1998. The
per capita health care and dental benefit costs used to compute the APBO were
reduced in 1996 to reflect favorable claim experience. A one percentage point
increase in the assumed annual cost trend rates would have increased the APBO as
of May 31, 1996 by $543,000 and the net periodic post-retirement benefit cost
for 1997 by $42,000.
The weighted average annual discount rate used in determining the APBO was 7.75%
in 1996 and 8.25% in 1995.
NOTE O -- OPERATING LEASES
Rental expense under operating leases was $3,529,000 in 1996, $3,650,000 in 1995
and $3,406,000 in 1994. Leases are principally for rental of facilities and
contain renewal rights to extend the terms from five to fifteen years. At May
31, 1996, future minimum payments under non-cancelable operating leases with
initial or remaining terms of more than one year were as follows: 1997 -
$2,441,000; 1998 - $2,156,000; 1999 - $1,416,000; 2000 - $1,001,000; 2001 -
$700,000 and $1,085,000 thereafter.
NOTE P -- MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
Net sales to two customers with which the Company has long-standing customer
relationships amounted to $42,826,000 and $39,187,000 respectively in 1996,
($46,637,000 and $36,263,000 in 1995 and $34,573,000 and $31,466,000 in 1994).
At May 31, 1996 and 1995, accounts receivable from companies in the automotive
and truck industries were approximately 60% and 51%, 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.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE Q - 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 Plan was confirmed by the Bankruptcy Court and the
Company was reorganized and adopted Fresh Start reporting effective September 1,
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.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE R -- QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(In thousands, except share data)
1996:
- -----
Net sales $71,213 $76,560 $73,428 $81,038
Gross profit 11,021 13,215 10,557 13,750
Gain on sale of
subsidiary - Note C 1,511
Income before income taxes 4,235 6,424 5,144 8,306
Net income (1) 2,689 4,080 3,829 5,273
Net income per
Common share (2) $ .21 $ .32 $ .30 $ .41
======= ======= ======= =======
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(In thousands, except share data)
1995:
- -----
Net sales $67,720 $74,355 $76,247 $87,113
Gross profit 10,475 12,578 11,740 16,170
Income before income taxes 3,501 5,399 4,747 6,301
Net income (3) 2,219 3,425 3,015 4,913
Net income per Common
share (2) $ .18 $ .27 $ .24 $ .39
======= ======= ======= =======
<FN>
(1) Third quarter net income includes an after tax charge of $1,255,000 for
a contractual bonus obligation to the Company's Chairman, President and
Chief Executive Officer.
(2) The sum of the quarterly per Common share amounts does not equal the
annual amount reported. Common share amounts are computed independently
for each quarter and the full year based on respective weighted average
Common shares outstanding.
(3) Fourth quarter net income includes an after tax charge of $1,401,000
for a contractual bonus obligation to the Company's Chairman, President
and Chief Executive Officer.
31
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, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended May 31, 1996. 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, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended May 31, 1996, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Cleveland, Ohio
July 12, 1996