<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
January 6, 1997
Intermet Corporation
-------------------------------------
(Exact name of registrant as specified in its charter)
Georgia 0-13787 58-1563873
- - ---------------------------- ------------- ------------------
(State or other jurisdiction (Commission (I. R .S. Employer
of incorporation) File Number) Identification No.)
5445 Corporate Drive, Suite 200, Troy, Michigan 48098
- - -------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (810) 952-2500
--------------
<PAGE> 2
This report amends the current report on Form 8-K of Intermet Corporation (the
"Company") filed on January 6, 1997, relating to the Company's acquisition of
Sudbury, Inc. This amendment should be read in conjunction with such filing.
The amendment provides certain historical financial data for Sudbury, Inc. and
pro forma financial information for the Company giving effect to the
acquisition of Sudbury, Inc.
Item 7. Financial Statements and Exhibits
(a) (1) Sudbury, Inc. - years ended May 31, 1996, 1995 and 1994
Statements of Income
Balance Sheets
Statements of Stockholders' Equity
Statements of Cash Flows
Notes to Financial Statements
Independent Auditors' Report
(a) (2) Sudbury, Inc. - Quarter ended August 31, 1996
Balance Sheet (Unaudited)
Statement of Income (Unaudited)
Statement of Cash Flows (Unaudited)
Notes to Financial Statements
(b) Intermet Corporation
Pro forma Condensed Consolidated Balance Sheet at
September 30, 1996 (Unaudited) Pro forma Condensed
Consolidated Statements of Operations for the Nine Months
Ended September 30, 1996 (Unaudited) Pro forma Condensed
Consolidated Statements of Operations for the year Ended
December 31, 1995 (Unaudited) Notes to Pro forma Condensed
Consolidated Financial Statements (Unaudited)
(c) Exhibit 23.1 Independent Auditors' Consent
1
<PAGE> 3
(a) (1) FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year Ended May 31,
-------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
(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
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 4
CONSOLIDATED BALANCE SHEETS
SUDBURY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
May 31,
------------------
(Dollars in thousands) 1996 1995
-------- --------
<S> <C> <C>
ASSETS
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
======== ========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 5
CONSOLIDATED BALANCE SHEETS--CONTINUED
SUDBURY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
May 31,
--------------------
(Dollars in thousands) 1996 1995
-------- --------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
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 3,731 22,076
Retained earnings 9,081 23,210
Minimum pension liability
adjustment - net (306) (837)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 62,612 44,552
-------- --------
$132,352 $129,637
======== ========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 6
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SUDBURY, INC. AND SUBSIDIARIES
For the Years Ended May 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
(Dollars and shares in thousands)
Minimum
Additional Pension
Paid-In Retained Liability
Amount Shares Capital Earnings Adjustment
------ ------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
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 recognition
of deferred tax asset 946
Adjustment for minimum pension (283)
liability - net ---- ------ ------- ------- -----
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 531
liability - net ---- ------ ------- ------- -----
BALANCE AT MAY 31, 1996 $106 10,616 $23,731 $39,081 $(306)
==== ====== ======= ======= =====
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 7
CONSOLIDATED STATEMENTS OF CASH FLOWS
SUDBURY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year Ended May 31,
-------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
(Dollars in thousands, except per share amounts)
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 liabilities 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
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 8
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.
7
<PAGE> 9
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.
8
<PAGE> 10
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):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
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
======= =======
</TABLE>
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):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Net sales $288,712 $281,951
Net income $ 13,559 $ 12,352
Net income per Common share $ 1.05 $ .97
</TABLE>
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.
9
<PAGE> 11
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
[B$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.
10
<PAGE> 12
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.
11
<PAGE> 13
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.
12
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE G -- STATEMENTS OF CASH FLOWS INFORMATION
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
(Dollars in thousands, except per share amounts)
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)
</TABLE>
NOTE H -- LONG-TERM DEBT
Long-term debt consisted of the following at May 31 (in thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
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
282 678
Less current maturities ------- -------
$10,113 $17,978
======= =======
</TABLE>
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.
13
<PAGE> 15
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
cal 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):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
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
======= =======
</TABLE>
14
<PAGE> 16
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:
<TABLE>
<CAPTION>
Exercise Price
------------------
Series A Series B
-------- --------
<S> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
Trigger Exercise
Price Price
------- --------
<S> <C> <C>
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
</TABLE>
15
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE J -- PARTICIPATION CERTIFICATES - continued
Participation Certificate activity was as follows:
<TABLE>
<CAPTION>
Series A Series B Series C
--------- -------- ---------
<S> <C> <C> <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
======== ======= =========
</TABLE>
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.
16
<PAGE> 18
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:
<TABLE>
<CAPTION>
Shares Option Prices
--------- ---------------
<S> <C> <C>
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
=======
</TABLE>
At May 31, 1996, there were a total of 2,581,432 options execisable 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):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- --------
<S> <C> <C> <C>
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)
====== ======= =======
</TABLE>
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.
17
<PAGE> 19
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):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
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)
======= ======= =======
</TABLE>
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):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
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
======= ========
</TABLE>
18
<PAGE> 20
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):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
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)
======= =======
</TABLE>
19
<PAGE> 21
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):
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
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%
</TABLE>
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.
20
<PAGE> 22
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):
<TABLE>
<CAPTION>
1996 1995
------- --------
<S> <C> <C>
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
======= ========
</TABLE>
Net periodic post-retirement benefit cost included
the following components (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
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
</TABLE> ====== ====== ========
21
<PAGE> 23
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.
22
<PAGE> 24
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.
23
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE R -- QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD QUARTER FOURTH
QUARTER QUARTER QUARTER
(In thousands, except share data)
<S> <C> <C> <C> <C>
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
======= ======= ======= =======
<CAPTION>
FIRST SECOND THIRD QUARTER FOURTH
QUARTER QUARTER QUARTER
(In thousands, except share data)
<S> <C> <C> <C> <C>
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
======= ======= ======= =======
</TABLE>
(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.
24
<PAGE> 26
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
25
<PAGE> 27
(A) (2) - FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
SUDBURY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
AUGUST 31, MAY 31,
1996 1996
(UNAUDITED) (AUDITED)
----------- --------
<S> <C> <C>
(Dollars in thousands)
CURRENT ASSETS
Cash and cash equivalents $ 1,996 $ 10,645
Accounts receivable, net of allowance 40,774 38,299
Inventories 22,217 18,871
Other 3,318 3,898
-------- --------
TOTAL CURRENT ASSETS 68,305 71,713
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements 1,430 1,421
Buildings 8,503 8,466
Machinery and equipment 69,998 66,833
-------- --------
79,931 76,720
Less accumulated depreciation 22,999 21,247
-------- --------
NET PROPERTY, PLANT AND EQUIPMENT 56,932 55,473
OTHER ASSETS 5,163 5,166
-------- --------
$130,400 $132,352
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
-26-
<PAGE> 28
CONDENSED CONSOLIDATED BALANCE SHEETS - (CONTINUED)
SUDBURY, INC. AND SUBSIDIARIES
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
AUGUST 31, MAY 31,
1996 1996
(UNAUDITED) (AUDITED)
-------- --------
<S> <C> <C>
(Dollars in thousands)
CURRENT LIABILITIES
Trade accounts payable $ 22,708 $ 26,606
Accrued compensation and employee benefits 6,769 8,018
Accrued income taxes 3,228 3,773
Other accrued expenses 9,994 10,143
Current maturities of long-term debt 288 282
-------- --------
TOTAL CURRENT LIABILITIES 42,987 48,822
LONG-TERM DEBT 10,192 10,113
OTHER LONG-TERM LIABILITIES 10,482 10,805
STOCKHOLDERS' EQUITY
Common Stock - par value $0.01 per share;
authorized 20,000,000 shares; 10,931,051
(10,616,361 at May 31, 1996) shares issued
and outstanding 109 106
Additional paid-in capital 25,081 23,731
Retained earnings 41,855 39,081
Minimum pension liability adjustment - net (306) (306)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 66,739 62,612
-------- --------
$130,400 $132,352
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
-27-
<PAGE> 29
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
SUDBURY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 31, AUGUST 31,
1996 1995
(In thousands, except per share amounts) (UNAUDITED) (UNAUDITED)
----------- -----------
<S> <C> <C>
Net sales $72,078 $71,213
Costs of products sold 62,191 60,192
------- -------
GROSS PROFIT 9,887 11,021
Selling and administrative expenses 5,455 6,403
------- -------
OPERATING INCOME 4,432 4,618
Interest expense-net (61) (460)
Other income (expense) (3) 77
------- -------
Income before income taxes 4,368 4,235
Income tax expense 1,594 1,546
------- -------
NET INCOME $ 2,774 $ 2,689
======= =======
Net income per common share:
Primary $ .21 $ .21
======= =======
Fully diluted $ .21 $ .21
======= =======
Average common shares and common share equivalents
outstanding:
Primary 12,999 12,752
======= =======
Fully diluted 13,136 12,854
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
-28-
<PAGE> 30
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SUDBURY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 31, AUGUST 31,
1996 1995
(Dollars in thousands) (UNAUDITED) (UNAUDITED)
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,774 $ 2,689
Items included not affecting cash:
Depreciation and amortization 1,964 2,387
Other (209) 230
Changes in operating assets and liabilities (11,082) (5,080)
------- -------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (6,553) 226
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (3,225) (2,457)
Proceeds from sale of property, plant, equipment and
other - net 7 153
------- -------
NET CASH USED IN INVESTING ACTIVITIES (3,218) (2,304)
FINANCING ACTIVITIES:
Borrowings, refinancings and repayments: 200 17,600
Long-term borrowings
Reductions of debt (266) (19,456)
Common stock issued 1,188 472
------- -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,122 (1,384)
------- -------
DECREASE IN CASH (8,649) (3,462)
Cash and cash equivalents at beginning of period 10,645 3,548
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,996 $ 86
</TABLE> ======= =======
See notes to condensed consolidated financial statements.
-29-
<PAGE> 31
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments of a normal recurring nature considered necessary for a fair
presentation have been included. Operating results for the three month period
ended August 31, 1996 are not necessarily indicative of the results that may be
expected for the fiscal year ending May 31, 1997. For further information,
refer to the consolidated financial statements and footnotes thereto included
in the Company's annual report on Form 10-K for the year ended May 31, 1996.
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 under the treasury stock method.
Effective August 30, 1996, the trigger price for the Company's 1,448,410 Series
C Participation Certificates was attained and these certificates became
exercisable. As the Series C Participation Certificates were triggered on
August 30, 1996, the weighted average impact on net income per common share at
August 31, 1996 from the inclusion of these securities was not material.
NOTE B - INVENTORIES
The components of inventories are summarized as follows (in thousands):
<TABLE>
<CAPTION>
AUGUST 31, MAY 31,
1996 1996
--------- -------
<S> <C> <C>
Raw materials and supplies $ 7,207 $ 7,204
Work in process 10,443 8,464
Finished products 4,958 3,599
--------- -------
Total at FIFO 22,608 19,267
Less excess of FIFO cost over LIFO values 391 396
--------- -------
$22,217 $18,871
========= =======
</TABLE>
NOTE C-- CONTINGENCIES
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.
-30-
<PAGE> 32
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE C -- CONTINGENCIES (continued)
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 situations, the Company,
with the assistance of environmental engineers and consultants, has accrued
amounts 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 August 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, results of operations,
or liquidity of the Company.
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 or July 13, 1996 installment dates and the Company's obligation with
respect to the February 7, 1996 installment date 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.
-31-
<PAGE> 33
(b) FINANCIAL STATEMENTS
Intermet Corporation Pro Forma Condensed Consolidated Balance Sheet
September 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
Intermet Sudbury
Historical Historical Pro-Forma
Sep. 30, 1996 Aug. 31, 1996 Adjustments Notes Pro-Forma
------------- ------------- ------------ ----- -----------
(In thousands)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 34,426 $ 1,996 $ 8,238 A $ 14,660
118,159 A
(148,159) A
Accounts receivable 69,858 40,774 110,632
Inventories 30,580 22,217 396 A 53,193
Other 3,929 3,318 10,503 A 17,750
-------------------------------------- ---------
Total current assets 138,793 68,305 (10,863) 196,235
Property, plant and equipment 348,902 79,931 (1,116) A 427,717
Less:
Foreign industrial development
grants, net of amortization (5,001) (5,001)
Accumulated depreciation (205,097) (22,999) 22,999 A (205,097)
------------------------------------- ---------
Net property plant and equipment 138,804 56,932 21,883 217,619
Goodwill 87,220 A 87,220
Other noncurrent assets 17,210 5,163 10,295 A 32,668
-------------------------------------- ----------
$ 294,807 $130,400 $ 108,535 $ 533,742
====================================== ==========
</TABLE>
-32-
<PAGE> 34
Intermet Corporation Pro Forma Condensed Consolidated Balance Sheet
September 30, 1996 (Unaudited)
LIABILITIES AND SHAREHOLDERS EQUITY
<TABLE>
<CAPTION>
Intermet Sudbury
Historical Historical Pro-Forma
Sep. 30, 1996 Aug. 31, 1996 Adjustments Notes Pro-Forma
------------- ------------- ----------- ------ -----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Current liabilities:
Accounts payable $ 32,366 $ 22,708 $ 55,074
Iccome taxes 17,343 3,228 20,571
Accrued liabilities 37,150 16,763 $ 40,188 A 94,101
Notes payable 217 217
Long-term debt due in one year 1,881 288 2,169
------------------------------------ --------
Total current liabilities 88,957 42,987 40,188 172,132
Noncurrent liabilities:
Long-term debt due after one
year 31,631 10,192 118,827 A 160,650
Retirement benefits 45,572 45,572
Other noncurrent liabilities 2,987 10,482 16,259 A 29,728
------------------------------------ -------
Total noncurrent liabilities 80,190 20,674 135,086 235,950
Minority interest 2,837 2,837
Shareholders' equity:
Common stock 2,513 109 (109) A 2,513
Capital in excess of par value 57,029 25,081 (25,081) A 57,029
Retained earnings 62,530 41,855 (41,855) A 62,530
Accumulated translation adj. 2,464 2,464
Minimum pension liability adj. (1,636) (306) 306 A (1,636)
Unearned restricted stock (77) (77)
------------------------------------ ----------
Total shareholders' equity 122,823 66,739 (66,739) 122,823
------------------------------------ ----------
$294,807 $130,400 $108,535 $533,742
==================================== ==========
Balance check - - - -
</TABLE>
-33-
<PAGE> 35
Intermet Corporation
Pro Forma Condensed Consolidated Statement of Operations Nine Months Ended
September 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
Intermet Sudbury
Historical Historical
Nine Months Nine Months
Ended Ended Pro-Forma
Sep. 30, 1996 Aug. 31, 1996 Adjustments Notes Pro-Forma
------------- ------------- ----------- ----- -----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Net sales $408,219 $226,544 $634,763
Cost of sales 346,335 192,350 $ 1,113 B 539,798
------------------------------------ --------
Gross margin 61,884 34,194 (1,113) 94,965
SG&A 15,206 18,375 1,549 C 35,130
------------------------------------ --------
Operating income 46,678 15,819 (2,662) 59,835
Interest expense - net (1,285) (536) (7,783) D (9,604)
Extraordinary items 1,511 1,511
Other (expense) income (33) 1,026 993
------------------------------------ --------
Pretax income 45,360 17,820 (10,445) 52,735
Income tax (18,950) (5,942) 3,247 E (21,645)
------------------------------------ --------
Net income $ 26,410 $ 11,878 $ (7,198) $ 31,090
==================================== ========
Earnings per share $ 1.04 $ 1.22
======== ========
Weighted avg. shares 25,472 25,472
</TABLE>
-34-
<PAGE> 36
Intermet Corporation
Pro Forma Condensed Consolidated Statement of Operations For the Year Ended
December 31, 1995 (Unaudited)
<TABLE>
<CAPTION>
Historical Historical
Year Year
Ended Ended Pro-Forma
Dec. 31, 1995 Nov. 30, 1995 Adjustments Notes Pro-Forma
------------- ------------- ----------- ----- -----------
<S> <C> <C> <C> <C> <C>
Net sales $541,749 $311,133 $852,882
Cost of sales 457,337 258,987 1,306 B 717,630
------------------------------------ --------
Gross margin 84,412 52,146 (1,306) 135,252
SG&A 31,597 28,366 2,065 C 62,028
------------------------------------ --------
Operating income 52,815 23,780 (3,371) 73,224
Interest expense - net (6,079) (2,381) (10,323) D (18,783)
Extraordinary items - -
Other (expense) income (1,216) 306 (910)
------------------------------------ --------
Pretax income 45,520 21,705 (13,694) 53,531
Income tax (20,125) (7,010) 4,224 E (22,891)
------------------------------------ --------
Net income $ 25,395 $ 14,695 $ (9,450) $ 30,640
==================================== ========
Earnings per share $ 1.02 $ 1.23
======== ========
Weighted avg. shares 24,893 24,893
</TABLE>
-35-
<PAGE> 37
Intermet Corporation
Notes to Pro forma Condensed Consolidated Financial Statements (Unaudited)
I. Basis of presentation
The unaudited pro forma consolidated balance sheet at September 30, 1996
reflects the acquisition of Sudbury, Inc. as if the acquisition occurred on
that date.
The unaudited pro forma statement of operations for the nine months ended
September 30, 1996 and the year ended December 31, 1995 reflects the above
described acquisition as if it had occurred at the beginning of each period
presented.
Management believes that the unaudited pro forma consolidated financial
statements provide a reasonable basis for presenting all of the significant
effects of the completed acquisition and that the pro forma adjustments are
properly applied in the unaudited pro forma consolidated statements.
Pro forma operating results presented herein are not necessarily indicative of
results of operations in the period following acquisition.
Sudbury, Inc. fiscal year end is May 31. Sudbury, Inc. historical amounts
included in the pro forma financial statements are based on Sudbury, Inc.
fiscal periods and, as such, include its balance sheet as of August 31, 1996
and its statement of operation for the nine months ended August 31, 1996 and
the statement of operations for the 12 months ended November 30, 1995.
Revenues and net income for Sudbury, Inc. for the month of September, 1996 were
$26,468,000 and $989,000, respectively.
-36-
<PAGE> 38
Intermet Corporation
Notes to Pro forma Condensed Consolidated Financial Statements (continued)
(Unaudited)
Pro Forma Adjustments:
A) Adjustments to apply purchase accounting and adjust certain assets to
fair value.
<TABLE>
<CAPTION>
Dr (Cr)
(in thousands)
<S> <C>
Cash received from participation certificates
and stock options 8,238
Proceeds from long-term debt 118,159
Payment for shares of Sudbury stock and
acquisition costs (148,159)
Inventory (LIFO reserve adjustment) 396
Deferred taxes and other current assets 10,503
Property, plant and equipment, net (adjustment 21,883
to fair market value)
Goodwill 87,220
Deferred taxes and other non-current assets 10,295
Accrued liabilities (accrue acquisition costs) (40,188)
Long-term debt borrowings (118,159)
Long-term debt, other adjustments (668)
Other non-current liabilities (deferred taxes (16,259)
and FAS 106 adjustment)
Common stock elimination 109
Additional paid-in capital elimination 25,081
Retained earnings elimination 41,855
Minimum pension liability adjustment (306)
</TABLE>
B) Eliminate amortization of FAS 106 and adjust depreciation for fixed asset
adjustment to fair market value
C) Amortization of the acquisition goodwill
D) Adjustment to interest expense for debt incurred at acquisition
E) Impact on provision for income taxes for pro forma adjustments
-37-
<PAGE> 39
(C) EXHIBIT 23.1 - CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements of
Intermet Corporation (Form S-8 Nos. 33-57665, 33-58354, 33-58352 and 33-59011)
pertaining to 50,000 shares of Intermet Corporation common stock, the Intermet
Corporation Directors Stock Option Plan, the Intermet Corporation Key
Individual Stock Option Plan and the Intermet Corporation Executive Stock
Option and Incentive Award Plan, respectively, of our report dated July 12,
1996 with respect to the consolidated financial statements of Sudbury, Inc. and
subsidiaries included in the Current Report (Form 8-K and related 8-K/A) with
respect to an event dated December 20, 1996.
/s/ ERNST & YOUNG
Detroit, Michigan
February 21, 1997
-38-
<PAGE> 40
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERMET CORPORATION
By: /s/ Doretha J. Christoph
------------------------
Doretha J. Christoph
Vice President- Finance
and Chief Financial Officer
Dated: February 24, 1997
-39-
