consolidations, equity interests, joint venture, …...interest full consolidation with non...

Grant Prideco copyright 1981 – 2011 Barry M Frohlinger, Inc. 1

Consolidations, Equity Interests,

Joint Venture,

Minority Interests and

Legal Entities Versus Reporting Entities

Objective:

• The objectives of this case exercise are to practice the accounting issues of Legal Entities, Consolidations and Equity

Income and Non Controlling [Minority] Interests and to undertand various intercompany ownership percentages

• This exercise has short readings followed by case application and questions for:

o Grant PrideCo o Kimberly Clark o GE o Amerada Hess o Verizon o Sudbury

Assignment:

• Read pages 2 – 8. • Complete questions 1, 2, 3, 4, 5, 6 on page 9 and read pages 10 - 18. • Read page 19. • Complete Questions 1 – 3 on pages 21 – 22 and review the Kimberly-Clark financials on pages

23 – 31. • Complete the GE exercise on page 32, you must review pages 32 – 40 • Read pages 45 – 47 • Read Verizon on page 48 • Try to complete the Sudbury question on page 53, you must read Footnote B • Answer question 1 on page 58 for Sudbury

Barry M Frohlinger


There are six possible ways to account for the investment by one company in the common stock of another, depending on the ownership percentage of the voting stock

Percentage owned Name Key Accounting Issue Simple financial investment,

almost 0% interest in issuers equity

Marketable securities or Equity Investments

Equity Securities are Marked to Market

Less than 20% Cost Method Dividend Income 20 – 50% Equity Method, Affiliate Equity Income 50% Equity Method, Joint Venture Equity Income More than 50%, less than 100% Consolidation, NonControlling

Interest Full Consolidation with Non

Controlling Interest 100% Consolidation, Wholly-Owned

Subsidiary Full Consolidation

When the firm has a simple financial investment,

Trading Security Available for Sale Balance Sheet Mark-to-market Mark-to-market Gain/Loss Through the income statement Through OCI Dividends Other Income, Cash Flow and

Accrual Accounting should be the same

Other Income

Consolidation takes place when the parent owns more than 50% of the voting common stock of

the subsidiary. The purpose behind consolidation is to report as one economic unit the financial position and operating performance of a parent and its majority-owned subsidiaries. It presents the group as a single company instead of as separate companies.

Consolidated financial statements are a reporting mechanism for accounting purposes, ignoring

legal distinctions. A consolidation is negated, even if more than 50% of voting common stock is owned by the parent, in the following cases:

• Parent is not in actual control of subsidiary, such as when the subsidiary is in receivership

(arising from bankruptcy or receivership) or in a politically unstable foreign region. When control is temporary, consolidation is negated.

• Parent has sold or agreed to sell the subsidiary shortly after year-end. In this case, the subsidiary

is a temporary investment. Majority-owned subsidiaries not consolidated because of the existence of one of the preceding

exceptions should be accounted for under the equity method. • Note: Unincorporated joint ventures and partnerships that are directly controlled

(majority control) must be consolidated. The companies that make up the consolidated group retain their individual legal identities.

Adjustments and eliminations are only for financial statement presentation; they are never posted on the books of either the parent or the subsidiary.


Legal structure: As an illustration the legal structure of four corporate entities is portrayed below. Co. X owns 100% of the common stock of C1 Corp. 80% of the common stock of C2 Corp.; and 30% of the common stock of C3 Corp. Each of the companies has only one type of stock outstanding and there are no other significant stockholders in either Corp. C2 or Corp. C3.

Reporting entities: 1. Co. X is called the “parent” (investor) and C1 Corp. and C2 Corp. are “subsidiaries”. Corp. C3 has

no commonly used title which clearly distinguishes it from the subsidiaries (the textbook term would be “50% or less owned company”). Any one of the four companies could refer to any other one as an ”affiliate”.

2. Each of the four corporations will maintain separate accounting records based on its own

operations (e.g., C1 Corp.’s accounting records are not affected by the fact that it has only one stockholder).

3. For public reporting, consolidated statements would be presented for Co. X + C1 Corp. + C2 Corp. as if the three separate legal entities were one entity. C3 Corp. would be shown as a one-line consolidation (both balance sheet and income

statement) called the “equity method”.

Company X

C1 Corporation [100% owned]




Reporting entities: [continued] 4. Line-of-business reporting—some public disclosure is given (revenue, operating earnings, assets,

depreciation and amortization and capital spending) by line of business. More detailed information is available for internal use. One can more easily visualize the results by assuming that each line of business has its own separate accounting system (frequently these are called “divisions”). The following illustration portrays the separate accounting divisions where each type of “P” denotes a particular product line. (Note: these are not separate legal entities!)

Statements for internal use would be prepared for each “P” and probably combined statements

for each line of business (e.g., one set of statements would show the two P1’s combined; one set of statements would show the two P2’s combined, and one set of statements would show the results of P3, P4 and P5 seperately). Line-of-business reporting creates substantial problems of splitting joint assets, liabilities and expenses.

Company X

P1 P2


P1 P3


P2 P4


P5


Statements requested by financial analyst: The financial analyst could request as much of the following as she/he needs for the analysis assuming that she/he is able to convince the customer of these needs (since only the consolidated statements would normally be available publicly). 1. Consolidated Co. X plus subsidiaries C1 and C2 (C3 would be a one-line consolidation). 2. Co. X statements only (all three invested companies, C1, C2 and C3 would be one-line

consolidations). 3. Separate statements for one or more of the invested companies (C1, C2 or C3). 4. Consolidating statements (which would provide everything in 1, 2 and 3 above except separate

statements for C3 and would also show the elimination entries). 5. Sometimes partial consolidations (e.g., Co. X plus C2) or combining statements (e.g., only C1 and

C2) may be useful. For example if C1 is a foreign subsidiary, the analyst may ask for a partial consolidation excluding C1 with separate statements for C1. Also loan covenants (or loan collateral) frequently cover only selected companies and a partial consolidation or combined statements are necessary.

More complex legal structures: We could add numerous legal entities to our initial chart. The basic public reports would still be the consolidated statements (Co. X plus all subsidiaries more than 50% owned) with parent company (Co. X) statements also given for some SEC reporting. However, the financial analyst would be faced with numerous possible combinations of reporting and he would need to define his requirements precisely.

Joint ventures – A joint venture is an entity that is owned, operated and jointly managed by a common group of investors.

A key feature of the joint venture is that the joint ventures are jointly controlled by the investor firms. Joint control is the sharing of power between investors; no single investor unilaterally controls joint ventures. Joint consent is required for major operating and financial policy decisions.

Under U.S. GAAP, ownership in a joint venture where the venturer does not own more than 50 percent and have a significant influence over the operating activities of the joint venture is to be accounted for using the equity method. Under US GAAP, profit after tax of joint-ventures is included on a single line within the income statement and in the investment is reflected in a single asset line in the balance sheet.


Review the financial statements in order to see an Accounting Illustration of Consolidations and Joint Ventures Parent 100% owned Sub 50% owned JV Consolidated Revenues 0 1,000 1,300 1,000 Cost of Sales 0 (600) (900) (600) Selling and Admin 0 (300) (280) (300) Interest Expense 0 (50) (82) (50) Tax Expense 0 (15) (28) (15) Net Earnings 0 35 10 35 Equity Income 40 0 0 5 Net Income 40 35 10 40 Cash 0 20 10 20 Acc Rec 0 200 290 200 Inventory 0 100 150 100 PPE, net 0 500 1300 500 Investments 270 0 0 110 Total Assets 270 820 1750 930 Short Term Debt 0 100 200 100 Acc Payables 0 40 30 40 Accruals 0 20 20 20 Long Term Debt 0 500 1280 500 Equity 270 160 220 270 Total Financing 270 820 1750 930 Operating Profit 0 100 120 OP Margin NM 10.0% 9.2% Interest 0 (50) (82) Interest Coverage NM 2.0 1.5 Assets, for ROA 800 1740 ROA NM 12.5% 6.9%


Parent Sub 90% owned Consolidated Revenue - 10,000 10,000 CGSold - (6,000) (6,000) SGA - (3,000) (3,000) Interest Expense - (300) (300) Tax Expense - (250) (250) Net Income - 450 450 Minority Interest - - (45) Equity Income 405 - - Net Earnings 405 450 405 Remember the following: Equity Income is leveraged, after tax Minority Interest is a financing cost


PROPER TREATMENT OF Joint Ventures IN ANALYSIS A financial analyst must know how to treat joint ventures. For profitability analysis, the numerator and denominator of each ratio must be consistent. In income

statements, the revenues and expenses of the joint venture are netted as one number, after interest and after tax. The investors share [up to 50%] of the joint venture earnings are then included in the income statement.

Three typical profitability ratios must be carefully calculated:

profit margin ratios (% of sales) => without inclusion of joint venture earnings

return on assets => without inclusion of joint venture earnings nor the investment

from the balance sheet

return on equity => with joint venture earnings

For cash flow analysis, the change in the invesment account in the balance sheet is shown as an adjustment to net income in the operating section of the statement of cash flows and consists of the difference between joint venture earnings and distributions received during the year.


Illustration of Consolidating Statements Grant PrideCo.

Required: Review the financial information and the brief writeup regarding Grant Prideco. 1. Draw the organizational chart for Grant Prideco.

2. Review the financial information for Grant Prideco, XL, Inc.

3. Why is total stockholders' equity the same for consolidated and the parent?

4. Why is net income the same for consolidated and the parent company? Be specific and show amounts.

5. Explain why the Consolidated Income Statement reports NO “EQUITY IN SUBSIDIARIES, net of tax” while the Parent Company reports the “EQUITY IN SUBSIDIARIES, net of tax ” of $ 595,690.

6. Explain why the consolidated earnings [$ 477,900] is less than the earnings of the sum of the two subsidiaries.

7. Which legal entities have the debt?

8. Neither Grant Prideco XL, Inc. nor Grant Prideco TCA, Inc. guarantee the debt of Grant Prideco Inc. Make a guess of the debt rating of each of these three legal entities.

9. Now assume that both Grant Prideco XL, Inc. and Grant Prideco TCA, Inc. guarantee the debt of Grant Prideco Inc. Make a guess of the debt rating of each of these three legal entities.


The parent Grant Prideco, Inc. is a holding company which means that it holds investments in subsidiaries which are the operating companies, and it has no operating assets such as inventories nor operating revenues such as sales.

Grant PrideCo is the world leader in drill stem technology development and drill pipe manufacturing, sales and service; a global leader in drill bit technology and specialty tools, manufacturing, sales and service; and a provider of an integrated package of large-bore tubular products and services.

The Company’s drill stem and drill bit products are used to drill oil and gas wells while

large-bore tubular products and services are primarily used in completing offshore oil and gas wells. Customers include oil and gas drilling contractors; oil and gas companies; and other oilfield service companies. The firm primarily operates through two business segments: (1) Drilling Products and Services and (2) ReedHycalog.

Drilling Products and Services Segment

The Drilling Products and Services segment manufactures and sells a variety of drill

stem products used for the drilling of oil and gas wells. The principal products sold by this segment are: (1) drill pipe, (2) drill collars and heavyweight drill pipe and (3) drill stem accessories.

The drill stem products wear out through a combination of friction and metal fatigue

and are utilized by customers for a three to five year period assuming regular use. Demand for drill stem products is impacted primarily by changes in drilling activity and worldwide rig activity. However, since drill stem products are not consumables and represent a capital investment, demand for these products also is significantly impacted by the level of inventory held by customers and the perceptions as to future activity and their near-term need for new drill stem products. As a result, even in periods of rising or strong drilling activity, customers may elect to defer purchases until their own inventory reaches levels at which additional purchases are necessary to sustain their existing drilling activities.

Drill Pipe

Drill pipe is the principal tool, other than the rig, required for the drilling of an oil or gas

well. Its primary purpose is to connect the above-surface drilling rig to the drill bit. A drilling rig will typically have an inventory of 10,000 to 30,000 feet of drill pipe depending on the size and service requirements of the rig. When a drilling rig is operating, motors mounted on the rig rotate the drill pipe and drill bit. In addition to connecting the drilling rig to the drill bit, drill pipe provides a mechanism to steer the drill bit and serves as a conduit for drilling fluids and cuttings. Drill pipe is a capital good that can be used for the drilling of multiple wells. Once a well is completed, the drill pipe may be used again in drilling another well until the drill pipe becomes damaged or wears out.

Drill Collars

Drill collars are used in the drilling process to place weight on the drill bit for better

control and penetration. Drill collars are located directly above the drill bit and are manufactured from a solid steel bar to provide necessary weight.


ReedHycalog Segment

The ReedHycalog segment is a leading global designer, manufacturer and distributor

of drill bits, hole-opening or hole enlarging tools, coring services and other related technology to the oil and gas industry. All of the products and services are generally sold directly to the upstream oil and gas operators and, to a lesser extent, drilling contractors on turnkey and footage contracts. Competition is based on technical performance, price and service.

The drill bit market consists of two product types: fixed-cutter bits and roller-cone bits. We manufacture and sell both product types on a global basis.

Drilling through subsurface strata to locate oil and gas requires a drill bit to be run on

drill pipe or conveyed with coiled tubing and rotated by surface rig equipment or downhole motors and turbines. Selecting the optimal bit for a particular application represents one of the many challenges faced by oil and gas companies and drilling contractors in planning a well. Similar to the drill stem market, the primary market driver is worldwide drilling activity or, more specifically, total footage drilled. In addition, demand is a function of well depth and complexity with demand for fixed-cutter bits tied more strongly to offshore, directional or horizontal drilling.

Drill bits constitute a very small percentage of total well costs, but are a critical

component of well-construction economics. The time required to drill a well is directly related to a drill bit’s rate of penetration and footage drilled prior to becoming dull and requiring replacement. On a cost-per-foot basis, selecting the appropriate drill bit significantly reduces drilling costs by decreasing drilling time and the number of trips required in and out of a well. Both roller-cone and fixed cutter bits can be used for shallow, land rig operations where bit costs or bit rental rates are a more significant portion of overall costs. Higher performance roller-cone or fixed-cutter bits with better rates of penetration and longer lives offer the most economic choice for offshore and deep wells where rig rates and trip costs are high.

Other Business Data

Research and Engineering

Grant Prideco maintains an active research and engineering program. The program

improves existing products and processes, develops new products and processes and improves engineering standards and practices that serve the changing needs of its customers. Expenditures for research and engineering activities totaled $38.2 million, $33.6 million and $23.7 million in 2008, 2007 and 2006, respectively.

Backlog

As of December 31, 2008, Grant PrideCo had a product backlog of $783 million, of

which $779 million is expected to complete during 2009. The firm had a product backlog as of December 31, 2007 and 2006, of $1,158 million and $732 million, respectively. The decrease in product backlog primarily reflects a lower level of new land rigs entering the North American market as compared to last year coupled with capacity additions geared towards reducing customer lead times.


Legal Structure

The Grant Prideco organization consists of the following legal entities. The parent

company is Grant PrideCo, Inc.; the two subsidiaries are, Grant Prideco XL, Inc. and Grant Prideco TCA, Inc. Grant Prideco XL, Inc. has numerous equity investments in affiliates, the most significant is a 50% unconsolidated joint venture, Grant Prideco Jiangsu (GPJ). Grant Prideco TCA, Inc. owns three subsidiaries:

% Ownership Tianjin Grant TPCO (TGP) 60 % H-Tech 54 % Tianjin Grant Prideco (GPT) 85 %

Grant Prideco XL, Inc.

Grant Prideco XL, Inc.

STATEMENT OF OPERATIONS Year Ended Dec 31, 2008

Revenues $1,364,328

Cost of sales $823,273

Selling, general and administrative $235,558

Other operating items $5,844

Equity Income in Unconsolidated Affiliates $123,983

Operating Income $423,636

Interest Expense $1,864

Other Income, Net $30,884

Income Before Income Taxes $456,384

Income Tax Provision $(121,126)

Net Income $335,258


Grant Prideco XL, Inc. BALANCE SHEET As of Dec 31, 2008 Current Assets:

Cash and cash equivalents $82,319

Accounts receivable, net $249,221

Inventories $310,379

Current deferred tax assets $37,664

Assets held for sale $182,059

Other current assets $566,787

$1,428,429

Property, Plant and Equipment, Net $177,492

Goodwill $187,041

Investment In Unconsolidated Affiliates $254,844

Other Assets $46,036

$2,093,842

Current Liabilities:

Short-term borrowings $490

Accounts payable $77,029

Deferred revenues $19,095

Income taxes payable $165,833

Liabilities held for sale $15,792

Other current liabilities $59,940

$338,179

Long-Term Debt $18,766

Deferred Tax Liabilities $28,736

Other Long-Term Liabilities $28,372

Stockholders' Equity $1,679,789

$2,093,842


Grant Prideco XL, Inc. STATEMENTS OF CASH FLOWS (In thousands) Year Ended Dec 31, 2008 Cash Flows From Operating Activities: Net income $335,258 Adjustments to reconcile net income to net cash flow Depreciation and amortization $43,255 Deferred income tax $2,433 Equity income in affiliates, net $(123,983) Stock-based compensation expense $12,144 Deferred compensation expense $1,344 Change in operating assets and liabilities, net Accounts receivable $(45,677) Inventories $(39,033) Other current assets $455 Other assets $1,005 Accounts payable $2,001 Income taxes payable $16,755 Other current liabilities $(19,043) Other, net $4,321 Net cash provided by operating activities $191,235 Cash Flows From Investing Activities: Acquisition of businesses $(3,394) Capital expenditures $(89,432) Proceeds from sale of fixed assets $5,688 Net cash used in investing activities $(87,138) Cash Flows From Financing Activities: Borrowings (repayments) on credit facility, net $- Repayments on debt $- Issuance of debt $15,600 Dividends paid $(147,700) Net cash used in financing activities $(132,100) Effect of Exchange Rate Changes on Cash $733 Net Increase (Decrease) in Cash $(27,270) Cash at Beginning of Year $109,589 Cash at End of Year $82,319

Barry M Frohlinger, Inc. copyright 1981 - 2011 www.learnfrombarry.com page 15

Grant Prideco, Inc.

GRANT PRIDECO INC.

STATEMENT OF OPERATIONS

Year Ended December 31, 2008

Grant Prideco, Inc.

Grant Prideco,

Inc. Grant Prideco XL,

Inc. Grant Prideco TCA,

Inc. Eliminations Consolidated

Revenues $- $1,364,328 $929,638 $(353,677) $1,940,289

Cost of sales $- $823,273 $487,390 $(346,703) $963,960

Selling, general and administrative $229 $235,558 $110,289 $(6,974) $339,102

Other operating items $- $5,844 $602 $- $6,446 Equity Income in Unconsolidated Affiliates $- $123,983 $- $- $123,983

Equity in Subsidiaries, Net of Taxes $595,690 $- $- $(595,690) $-

Operating Income (Loss) $595,461 $423,636 $331,357 $(595,690) $754,764

Interest Expense $(95,619) $1,864 $(447) $- $(94,202)

Other Income (Expense), Net $4,753 $30,884 $(7,278) $- $28,359

Income Before Income Taxes $504,595 $456,384 $323,632 $(595,690) $688,921

Income Tax Provision $(26,695) $(121,126) $(53,267) $- $(201,088)

Minority Interests $- $- $(9,933) $- $(9,933)

Net Income $477,900 $335,258 $260,432 $(595,690) $477,900


GRANT PRIDECO INC. BALANCE SHEET At Dec 31, 2008

Grant Prideco, Inc. Grant Prideco XL, Inc.

Grant Prideco TCA, Inc. Eliminations Consolidated

Current Assets:

Cash and cash equivalents $100 $82,319 $78,669 $- $161,088

Accounts receivable, net $- $249,221 $166,304 $- $415,525

Inventories $- $310,379 $217,649 $- $528,028

Current deferred tax assets $101 $37,664 $3,240 $- $41,005

Assets held for sale $- $182,059 $4,499 $- $186,558

Other current assets $- $566,787 $24,715 $(546,308) $45,194

Total Current Assets $201 $1,428,429 $495,076 $(546,308) $1,377,398

Property, Plant and Equipment, Net $- $177,492 $151,990 $- $329,482

Goodwill $- $187,041 $271,717 $- $458,758

Investment In and Advances to Subsidiaries $2,298,891 $- $- $(2,298,891) $-

Investment In Unconsolidated Affiliate $- $254,844 $- $- $254,844

Other Assets $5,331 $46,036 $55,739 $- $107,106

Total Assets $2,304,423 $2,093,842 $974,522 $(2,845,199) $2,527,588

Current Liabilities:

Short-term borrowings $- $490 $- $- $490

Accounts payable $146 $77,029 $50,361 $- $127,536

Deferred revenues $- $19,095 $1,798 $- $20,893

Income taxes payable $(87,263) $165,833 $(655) $- $77,915

Other liabilities $343,317 $- $202,991 $(546,308) $-

Liabilities held for sale $- $15,792 $685 $16,477

Other current liabilities $4,189 $59,940 $34,562 $- $98,691

Total Current Liabilities $260,389 $338,179 $289,742 $(546,308) $342,002

Long-Term Debt $1,474,585 $18,766 $2,350 $- $1,495,701

Deferred Tax Liabilities $2,370 $28,736 $41,599 $- $72,705

Other Long-Term Liabilities $- $28,372 $852 $- $29,224

Minority Interests $- $- $20,877 $- $20,877

Stockholders' Equity $567,079 $1,679,789 $619,102 $(2,298,891) $567,079

$2,304,423 $2,093,842 $974,522 $(2,845,199) $2,527,588


GRANT PRIDECO, INC. (In thousands) CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31, 2008 Grant Prideco, Inc. Grant Prideco XL, Inc. Grant Prideco TCA, Inc. Eliminations Consolidated

Net income $477,900 $335,258 $260,432 $(595,690) $477,900

Adjustments to net income to ops cash flow

Depreciation and amortization $1,355 $43,255 $14,176 - $58,786

Deferred income tax $1,455 $2,433 $2,455 $669 $7,012

Equity income in unconsolidated affiliates, net $(237,240) $(123,983) - $381,502 $20,279

Stock-based compensation expense $23 $12,144 $1,319 - $13,486

Deferred compensation expense - $1,344 $1,076 - $2,420

Minority interests in consolidated subsidiaries - - $1,704 - $1,704

Change in operating assets and liabilities, net

Accounts receivable - $(45,677) $(24,437) $(28,000) $(98,114)

Inventories - $(39,033) $(3,668) $(66,354) $(109,055)

Other current assets - $455 $(5,599) - $(5,144)

Other assets - $1,005 $(1,005) $(15,417) $(15,417)

Accounts payable - $2,001 $4,420 - $6,421

Income taxes payable $3,577 $16,755 $10,440 $(35,160) $(4,388)

Other current liabilities - $(19,043) $1,086 - $(17,957)

Other, net - $4,321 $1,893 - $6,214

Net cash provided by operating activities $247,070 $191,235 $264,292 $(358,450) $344,147

Acquisition of businesses, net of cash acquired - $(3,394) - - $(3,394)

Capital expenditures - $(89,432) $(34,080) - $(123,512)

Proceeds from sale of fixed assets - $5,688 $4,907 - $10,595

Net cash used in investing activities $- $(87,138) $(29,173) $- $(116,311)

Borrowings (repayments) on credit facility, net $(34,600) - - - $(34,600)

Repayments on debt $(34,681) - - - $(34,681)

Issuance of debt - $15,600 - - $15,600

Repurchases of common stock $(167,890) - - - $(167,890)

Dividends paid $(39,033) $(147,700) $(210,750) $358,450 $(39,033)

Net cash used in financing activities $(276,204) $(132,100) $(210,750) $358,450 $(260,604)

Effect of Exchange Rate Changes on Cash - $733 $38 - $771

Net Increase (Decrease) in Cash $(29,134) $(27,270) $24,407 - $(31,997)

Cash at Beginning of Year $29,234 $109,589 $54,262 - $193,085

Cash at End of Year $100 $82,319 $78,669 - $161,088


Solution Notes 3. This is the direct consequence of the use of the equity method for accounting for the investment on the parent's books. Each

subsidiary’s equity is eliminated against the parent's investment account to avoid double counting [of subsidiary profits]. Remember that equity [normally a credit balance] must be the same as assets [debit balance] net of liabilities [credit balance]. The net asset is already included in the balance sheet of the parent firm as a net balance, it is merely replaced in the consolidation with the gross amounts.

4. This is a direct consequence of the use of the equity method for accounting for the investment on the parent's books. To be

specific, in consolidation, the one net line “equity in earnings” [as shown on the parent company income statement] is replaced by all [gross] of the individual revenues and expenses of the subsidiary. Therefore, net income is not affected.

5. “Equity in income” represents the company's proportionate share of the earnings of an investment accounted for under the

equity method, included because the owner has significant influence over the other's decisions (usually over 20% ownership). “Non Controlling [Minority] interest” represents the ownership by other investors in a consolidated subsidiary that is less than

100% owned by the parent.

ˆprofit margin should exclude both amounts. ˆrate of return on total assets should exclude the equity in earnings [and the balance sheet should remove the investment

account from the assets] and should not have the minority interest deducted (remember that minority interest is an after tax amount)

ˆrate of return on common equity should include both the equity in earnings and the minority interest deduction.


PROPER TREATMENT OF Equity Income IN ANALYSIS A financial analyst must know how to treat equity investments. For profitability analysis, the numerator and denominator of each ratio must be

consistent. In income statements, the revenues and expenses of the investment are netted as one number, after tax. The investors share of earnings are then included in the income statement.


KIMBERLY-CLARK

Barry M Frohlinger


The 2006 Annual Report to Shareholders for Kimberly-Clark is attached. All dollar amounts below are in millions. A. Consolidated Statements

1. The Company is required to present consolidated financial statements in its annual report and Form 10-K. Subsidiaries that are owned more than 50 percent must be consolidated (with very few exceptions). The company discloses its consolidation policy in the first paragraph of Note 1.

a. What are the major intercompany accounts that probably appear in the parent company’s

balance sheet and income statement but have been eliminated in the consolidated financial statements?

b. If the parent company had liquidated all of its wholly-owned subsidiaries and moved the

assets and liabilities onto the parent’s books at yearend 2005, how would the 2006 consolidated balance sheet and income statements have been changed? Describe in words.

B. Minority Interests in Consolidated Subsidiaries

1. Kimberly-Clark shows a "Minority Owners' Interests in Subsidiaries" of $236.5 in its 2006 balance sheet. During 2006, $31.0 of earnings were subtracted in the income statement and added to the minority interests balance sheet account. The remaining increase is explained in the third paragraph of Note 12 ("Other 2006 acquisitions"). Potential decreases in the account (which did not occur for the company during 2006) would be (i) dividends paid to minority shareholders and (ii) purchase of shares owned by minority shareholders. From a financial analyst’s viewpoint, does the company’s minority owners’ interests seem to be more like a liability or more like equity?

2. In the cash flow statement1 the deduction for minority interests of $31.0 is included in line

1 as a debit and is then removed on line 8 as a credit. Cash outflows will be shown only when dividends are paid to the minority shareholders.

1 You should number the lines in Kimberly-Clark's cash flow statement from 1 to 27. You can also reference line 9

(Changes in operating working capital) to Note 15 of the financial statements.


C. Investments in Equity Companies (Unconsolidated)

1. Kimberly-Clark shows investments in equity companies (20% to 50% owned companies) of $413.4 in its 2006 balance sheet. During 2006, $113.3 of earnings applicable to these companies were added in the income statement and added to the investment balance sheet account. Should a financial analyst calculate the return on sales for 2006 with the $113.3 included or excluded in the earnings figure? Why?

2. Kimberly-Clark received $55.7 in cash dividends from these companies. These dividends,

which were subtracted from the investment account are included in the cash flow statement as follows:

Line 1 Net income includes 113.3 credit Line 7 Equity companies earnings' in excess of dividends paid (57.6) debit Line 12 Cash provided by operations includes 55.7 credit Line 27 Increase (decrease) in cash includes 55.7 debit

end


Kimberly-Clark Corporation was incorporated in Delaware in 1928 DESCRIPTION OF THE CORPORATION. The Corporation is principally engaged in the manufacturing and marketing throughout the world of a wide range of products for personal, business and industrial uses. Most of these products are made from natural and synthetic fibers using advanced technologies in absorbency, fibers and nonwovens.


KIMBERLY-CLARK CORPORATION AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (DOLLAR AMOUNTS IN MILLIONS) Year Ended December 30 -------------------------------------------------- 2006 2005 2004 2003 2002 -------------------------------------------------- Consolidated Companies ---------------------- Income before taxes (a) ........ $104.4 $1,147.9 $492.4 $671.4 $645.4 Interest expense ............... 245.5 270.5 249.5 255.8 285.6 Interest factor in rent expense. 36.1 41.9 42.7 46.2 41.4 Amortization of capitalized interest 9.7 9.2 8.1 8.2 8.0 Equity Affiliates ------------------ Share of 50%-owned: Income before income taxes ... 40.6 48.0 35.0 38.0 29.6 Interest expense.............. 18.5 15.3 13.7 10.6 16.2 Interest factor in rent expense .8 .7 .8 .6 .7 Amortization of capitalized interest.................. .7 .6 .6 .3 .2 Distributed income of less than 50%-owned .................... 25.1 41.4 41.4 56.2 43.4 -------- --------- -------- --------- -------- Earnings ......................... $481.4 $1,575.5 $884.2 $1,087.3 $1,070.5 ====== ======== ====== ======== ======== Consolidated Companies ----------------------- Interest expense ............... $245.5 $270.5 $249.5 $255.8 $285.6 Capitalized interest ........... 8.8 20.6 28.4 20.9 19.7 Interest factor in rent expense 36.1 41.9 42.7 46.2 41.4 Equity Affiliates ------------------ Share of 50%-owned: Interest and capitalized interest.................. 18.9 15.4 13.8 15.5 18.2 Interest factor in rent expense .................. .8 .7 .8 .6 .7 -------- -------- -------- --------- --------- Fixed charges .................... $310.1 $349.1 $335.2 $339.0 $365.6 ====== ====== ====== ====== ====== Ratio of earnings to fixed charges(a) ................ 1.55 4.51 2.64 3.21 2.93 ======== ======== ======== ======== ======== (a) The ratio of earnings to fixed charges includes a pretax restructuring charge of $1,440.0 million in 2006, $378.9 million in 2004, $250.0 million in 2003 and $267.6 million in 2002. Excluding this charge the ratio of earnings to fixed charges was 6.20 in 2006, 3.77 in 2004, 3.94 in 2003 and 3.66 in 2002.


CONSOLIDATED INCOME STATEMENT Kimberly-Clark Corporation and Subsidiaries Year Ended December 31 ------------------------------------ 2006 2005 2004 (Millions of dollars except per share amounts) Note 2 -------------------------------------------------------------------------------------------------------- NET SALES ...................................................... $13,788.6 $ 11,979.2 $11,646.8 Cost of products sold ......................................... 8,828.1 7,793.7 7,540.1 --------- ----------- ----------- GROSS PROFIT ................................................... 4,960.5 4,185.5 4,106.7 Advertising, promotion and selling expenses .................. 2,496.5 2,144.0 2,211.3 Research expense ............................................. 207.2 208.8 208.7 General expense .............................................. 603.8 555.6 573.3 Restructuring and other unusual charges ...................... 1,440.0 - 378.9 --------- ----------- ------------ OPERATING PROFIT ............................................... 213.0 1,277.1 734.5 Interest expense ............................................. (245.5) (270.5) (249.5) Other income (expense), net .................................. 136.9 141.3 7.4 --------- ----------- ------------ INCOME BEFORE INCOME TAXES ..................................... 104.4 1,147.9 492.4 Provision for income taxes ................................... 153.5 464.9 255.0 --------- ----------- ------------ INCOME (LOSS) BEFORE EQUITY INTERESTS .......................... (49.1) 683.0 237.4 Share of net income of equity companies ...................... 113.3 110.5 76.1 Minority owners' share of subsidiaries' net income ........... (31.0) (27.0) (26.3) --------- ----------- ------------ INCOME FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY LOSS ............................................. 33.2 766.5 287.2 Income (loss) of discontinued operation, net of income taxes . - 48.4 (46.6) --------- ----------- ------------ INCOME BEFORE EXTRAORDINARY LOSS ............................... 33.2 814.9 240.6 Extraordinary loss, net of income taxes ...................... - (61.1) (9.6) --------- ----------- ------------ NET INCOME ..................................................... $ 33.2 $ 753.8 $ 231.0 ========= =========== =========

NOTES: In 2005, the sale of S.D. Warren Company, a former printing and publishing papers subsidiary, was completed. S. D. Warren Company's results have been segregated and reported as discontinued operations for all periods presented.


CONSOLIDATED BALANCE SHEET Kimberly-Clark Corporation and Subsidiaries December 31 ----------------------- 2006 2005 (Millions of Dollars) ASSETS Note 2 ----------------------------------------------------------------------------------------------------- CURRENT ASSETS Cash and cash equivalents .............................................. $ 221.6 $ 1,137.8 Accounts receivable .................................................... 1,678.0 1,468.1 Inventories ............................................................ 1,426.1 1,258.4 Deferred income tax benefits ........................................... 335.3 254.4 Prepaid expenses and other ............................................. 152.8 99.0 ----------- ----------- TOTAL CURRENT ASSETS ................................................... 3,813.8 4,217.7 ----------- ----------- PROPERTY Land and timberlands ................................................... 289.1 283.8 Buildings .............................................................. 1,728.6 1,743.5 Machinery and equipment ................................................ 8,601.1 9,130.1 Construction in progress ............................................... 301.1 441.8 ----------- ----------- 10,919.9 11,599.2 Less accumulated depreciation .......................................... 4,866.6 4,724.4 ----------- ----------- NET PROPERTY ......................................................... 6,053.3 6,874.8 INVESTMENTS IN EQUITY COMPANIES .......................................... 413.4 555.3 ASSETS HELD FOR SALE...................................................... 330.2 - GOODWILL, DEFERRED CHARGES AND OTHER ASSETS .............................. 828.5 907.9 ----------- ----------- $ 11,439.2 $ 12,555.7 =========== =========== See Notes to Financial Statements.


December 31 ----------------------- 2006 2005 LIABILITIES AND STOCKHOLDERS' EQUITY Note 2 ---------------------------------------------------------------------------------------------------- CURRENT LIABILITIES Debt payable within one year ........................................... $ 817.8 $ 1,567.5 Trade accounts payable ................................................. 888.3 785.8 Other payables ......................................................... 215.3 201.5 Accrued expenses ....................................................... 1,555.3 1,147.8 Accrued income taxes ................................................... 320.7 417.0 Dividends payable ...................................................... 72.2 70.5 ----------- ---------- TOTAL CURRENT LIABILITIES ............................................ 3,869.6 4,190.1 ----------- ----------- LONG-TERM DEBT ........................................................... 1,984.7 2,085.4 ----------- ----------- NONCURRENT EMPLOYEE BENEFIT AND OTHER OBLIGATIONS ........................ 974.9 1,044.7 ----------- ----------- DEFERRED INCOME TAXES .................................................... 723.1 932.1 ----------- ----------- MINORITY OWNERS' INTERESTS IN SUBSIDIARIES ............................... 236.5 168.5 ----------- ----------- STOCKHOLDERS' EQUITY Preferred stock of a subsidiary, redeemed in 2006 ...................... - 7.1 Common stock - $1.25 par value - authorized 600.0 million shares, issued 282.3 million at December 31, 2006; authorized 300.0 million shares, issued 280.5 million at December 31, 2005 .................... 352.9 350.7 Additional paid-in capital ............................................. 419.0 384.8 Common stock held in treasury, at cost - 1.5 million and 2.4 million shares at December 31, 2006 and 2005, respectively ................... (74.9) (88.0) Unrealized currency translation adjustments ............................ (640.5) (565.0) Retained earnings ...................................................... 3,593.9 4,045.3 ----------- ---------- TOTAL STOCKHOLDERS' EQUITY ........................................... 3,650.4 4,134.9 ----------- ---------- $ 11,439.2 $ 12,555.7 =========== ==========


CONSOLIDATED CASH FLOW STATEMENT Kimberly-Clark Corporation and Subsidiaries Year Ended December 31 ------------------------------------- 2006 2005 2004 (Millions of dollars) Note 2 ----------------------------------------------------------------------------------------------------- OPERATIONS Net income .................................................. $ 33.2 $ 753.8 $ 231.0 Restructuring and other unusual charges, net of cash expended ................................................. 1,353.8 - 378.9 Depreciation ................................................ 581.7 635.9 596.1 Extraordinary loss on early extinguishment of debt (net of income taxes) ..................................... - 61.1 9.6 Deferred income tax benefit ................................. (330.0) (78.6) (57.8) Gains on asset sales ........................................ (118.5) (107.9) - Equity companies' earnings in excess of dividends paid ...... (57.6) (60.5) (20.5) Minority owners' share of subsidiaries' net income .......... 31.0 27.0 26.3 Changes in operating working capital ........................ (527.9) (215.9) (61.2) Pension funding in excess of expense ........................ (89.0) (101.0) (43.9) Other ....................................................... 54.9 (.2) 31.8 --------- --------- ---------- CASH PROVIDED BY OPERATIONS ............................. 931.6 913.7 1,090.3 --------- --------- ---------- INVESTING Capital spending ............................................ (817.6) (857.3) (1,107.5) Acquisitions of businesses .................................. (76.1) (118.0) - Proceeds from disposition of property and businesses ........ 336.1 1,936.4 33.8 Other ....................................................... 3.8 (2.4) (125.5) --------- --------- ----------- CASH PROVIDED BY (USED FOR) INVESTING ................... (553.8) 958.7 (1,199.2) --------- --------- ---------- FINANCING Cash dividends paid ......................................... (348.2) (341.8) (332.9) Changes in debt payable within one year ..................... (25.2) (111.9) 250.2 Increases in long-term debt ................................. 80.7 226.6 439.2 Decreases in long-term debt ................................. (944.0) (586.7) (244.7) Premiums paid on early extinguishment of debt .......... - (59.3) - Proceeds from exercise of stock options ..................... 121.4 53.4 7.1 Acquisition of common stock for the treasury ................ (137.8) (52.2) (.8) Other ....................................................... (40.9) (31.1) (23.6) --------- --------- ---------- CASH PROVIDED BY (USED FOR) FINANCING ................... (1,294.0) (903.0) 94.5 --------- --------- ---------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .............. $ (916.2) $ 969.4 $ (14.4) ========= ========= ========== See Notes to Financial Statements.


NOTES TO FINANCIAL STATEMENTS NOTE 1. ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements include the accounts of Kimberly-Clark Corporation and all subsidiaries which are more than 50 percent owned and controlled. Investments in significant nonconsolidated companies which are at least 20 percent owned are stated at cost plus equity in undistributed net income. These latter companies are referred to as equity companies. NOTE 2. BUSINESS COMBINATION Effective December 12, 2000, the Corporation issued 120 million shares of its common stock for all of the outstanding common stock of Scott, a worldwide producer of sanitary tissue products. NOTE 3. RESTRUCTURING AND OTHER UNUSUAL CHARGES In the fourth quarter of 2006, the Corporation recorded a one time-pretax charge of $1,440.0 million ($1,070.9 million after income taxes and minority interests, or $3.83 per share) for the estimated costs for restructuring. NOTE 4. INCOME TAXES An analysis of the provision (benefit) for income taxes follows: Year Ended December 31 ----------------------------- (Millions of dollars) 2006 2005 2004 ---------------------------------------------------------------------------------------------------- ...................................................... Current income taxes: United States ....................................................... $280.3 $429.0 $184.0 State ............................................................... 43.7 44.6 44.3 Other countries ..................................................... 159.5 62.6 68.0 ------ ------ ------ Total ............................................................. 483.5 536.2 296.3 ------ ------ ------ Deferred income taxes: United States ....................................................... (133.2) (74.2) (39.3) State ............................................................... (48.2) (6.6) 2.8 Other countries ..................................................... (148.6) 2.2 (21.3) ------ ------ ------ Total ............................................................. (330.0) (78.6) (57.8) ------ ------ ------ Total provision for income taxes....................................... 153.5 457.6 238.5 Less income taxes related to: Discontinued operation ............................................... - 28.5 (11.3) Extraordinary loss .................................................. - (35.8) (5.2) ------ ------ ------ Total provision for income taxes - continuing operations .......... $153.5 $464.9 $255.0 ====== ====== ======


Income (loss) before income taxes is included in the financial statements as follows: (Millions of dollars) 2006 2005 2004 ---------------------------------------------------------------------------------------------------- Continuing Operations: United States ................................................. $ 42.5 $ 976.0 $ 477.2 Other countries ............................................... 61.9 171.9 15.2 -------- --------- ------- $ 104.4 $ 1,147.9 $ 492.4 ======== ========= ======= Discontinued Operation: United States ................................................. $ - $ 71.6 $ (53.7) Other countries ............................................... - 5.3 (4.2) -------- --------- ------- $ - $ 76.9 $ (57.9) ======== ========= ======= Extraordinary Loss - United States .............................. $ - $ (96.9) $ (14.8) ======== ========= =======

Deferred income tax assets (liabilities) as of December 31, 2006 and 2005 are comprised of the following: (Millions of dollars) 2006 2005 ----------------------------------------------------------------------------------------------------------------------- Current deferred income tax assets attributable to: Advertising and promotion accruals .................................................... $ 32.8 $ 31.1 Pension, postretirement and other employee benefits .................................. 64.9 92.2 Other accrued liabilities, including restructuring and other unusual charges .............................................................. 250.0 105.0 Other ................................................................................ 39.3 48.0 Valuation allowances ................................................................. (51.7) (21.9) ---------- ---------- Net current deferred income tax asset .............................................. $ 335.3 $ 254.4 ========== ========== Noncurrent deferred income tax assets (liabilities) attributable to: Accumulated depreciation ............................................................. $ (950.2) $ (1,181.3) Operating loss carryforwards ......................................................... 289.6 337.6 Other postretirement benefits ........................................................ 298.0 285.7 Installment sales .................................................................... (137.9) (137.9) Other ................................................................................ (13.6) (31.5) Valuation allowances ................................................................. (209.0) (204.7) ---------- ---------- Net noncurrent deferred income tax liability ....................................... $ (723.1) $ (932.1) =========== ==========


NOTE 5. POSTRETIREMENT AND OTHER BENEFITS The Corporation and its subsidiaries have defined-benefit retirement plans covering substantially all full-time employees. NOTE 6. DEBT The major issues of long-term debt outstanding were: December 31 --------------------- (Millions of dollars) 2006 2005 ----------------------------------------------------------------------------------------------------- Kimberly-Clark Corporation 7 7/8% Debentures due 2023 ................................................ $ 199.7 $ 199.7 8 5/8% Notes due 2012 ..................................................... 199.6 199.6 9 3/4% Notes due 2006 ..................................................... - 100.1 9 1/8% Notes due 2008 ..................................................... 100.0 100.0 9% Notes due 2011 ......................................................... 99.8 99.8 6 7/8% Debentures due 2020 ................................................ 99.7 99.7 9 1/2% Sinking Fund Debentures due 2024 ................................... 49.9 49.9 6 1/8% to 9.67% Industrial Development Revenue Bonds maturing to 2029 ..... 97.9 98.0 Other ..................................................................... 3.4 3.4 --------- ---------- 850.0 950.2 Subsidiaries 7% Debentures due 2023 .................................................... 200.0 200.0 5.375% Swiss Franc Bonds (swapped into U.S. dollars - effective interest rate of 11.1%) due 2011 ................................................. 100.0 100.0 7.2% to 7.4% British Pound Notes due 2009 and 2013 ........................ 186.3 187.2 8.3% to 13% Debentures maturing to 2028 ................................... 165.3 168.5 Industrial Development Revenue Bonds at variable rates (average rate for December 2000 - 4.5%) due 2018, 2023 and 2024 ....................... 250.0 250.0 5.7% to 6 3/8% Industrial Development Revenue Bonds maturing to 2013 ...... 76.8 82.2 Bank loans and other financings in various currencies at fixed rates (average rate at December 31, 2006 - 8.7%) maturing to 2014 ............. 93.8 75.2 Bank loans and other financings in various currencies at variable rates (average rate at December 31, 2006 - 7.3%) maturing to 2013 ............. 162.4 240.3 Bank loans, notes, debentures retired in January 2006 ..................... - 686.2 --------- ---------- 2,084.6 2,939.8 Less current portion ........................................................ 99.9 854.4 --------- ---------- Total ..................................................................... $ 1,984.7 $ 2,085.4 ========= ==========

NOTE 12. OTHER ACQUISITIONS AND DISPOSITIONS OF BUSINESSES MIDWEST EXPRESS AIRLINES In 2006, the Corporation sold 80 percent of its investment in Midwest Express and Astral. SPECIALTY PRODUCTS BUSINESSES On November 30, 2006, the Corporation spun off its tobacco-related business operations. OTHER 2006 ACQUISITIONS In the first quarter of 2006, the Corporation increased its ownership of Carlton Paper Corporation Limited in South Africa to more than 50 percent and Kimberly-Clark Argentina S.A. to 51 percent. As a result, these entities are now consolidated in the financial statements. The aggregate cost of these investments was approximately $43.0 million.


GE .

General GE is one of the largest and most diversified industrial corporations in the world. GE’s services include product services and through General Electric Capital Services, Inc., they offer a broad array of financial and other services including consumer financing, commercial and industrial financing, real estate financing, asset management and leasing, mortgage services, consumer savings and insurance services, and specialty insurance and reinsurance. Questions: [1] Why is the consolidated revenue for fiscal 2003 of $134,187 more than the revenue of GE of $78,841 but less than the revenue of GE of $78,841 Plus the revenue of GECS of $64,279? [2] Calculate EBITDA for GE consolidated and GE [parent]. [3] How is GECS reflected in the following Statement of Cash Flows:

o GE Consolidated o GE Parent Only

[4] Describe the impact to the consolidated financial statements due to the adoption of FIN 46.


GE 2003 ANNUAL REPORT

INDEPENDENT AUDITORS' REPORT

To Shareowners and Board of Directors of General Electric Company We have audited the accompanying statement of financial position of General Electric Company and consolidated affiliates ("GE") as of December 31, 2003 and 2002, and the related statements of earnings, changes in shareowners' equity and cash flows for each of the years in the three-year period ended December 31, 2003. These consolidated financial statements are the responsibility of GE management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 aforementioned financial statements present fairly, in all material respects, the financial position of General Electric Company and consolidated affiliates at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. As discussed in note 1 to the consolidated financial statements, GE in 2003 changed its methods of accounting for variable interest entities and asset retirement obligations, in 2002 changed its methods of accounting for goodwill and other intangible assets and for stock-based compensation, and in 2001 changed its methods of accounting for derivative instruments and hedging activities and impairment of certain beneficial interests in securitized assets. Our audits were made for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The accompanying consolidating information is presented for purposes of additional analysis of the consolidated financial statements rather than to present the financial position, results of operations and cash flows of the individual entities. The consolidating information has been subjected to the auditing procedures applied in the audits of the consolidated financial statements and, in our opinion, is fairly stated in all material respects in relation to the consolidated financial statements taken as a whole. /s/ KPMG LLP KPMG LLP Stamford, Connecticut February 6, 2004


GE 2003 ANNUAL REPORT STATEMENT OF EARNINGS General Electric Company

and consolidated affiliates

For the years ended December 31 (In millions; per-share amounts in dollars) 2003 2002 2001 REVENUES Sales of goods $ 49,963 $ 55,096 $ 52,677 Sales of services 22,391 21,138 18,722 Other income (note 2) 602 1,013 234 Earnings of GECS before accounting changes — — — GECS revenues from services (note 3) 60,536 54,963 54,783 Consolidated, liquidating securitization entities (note 29) 695 — — Total revenues 134,187 132,210 126,416 COSTS AND EXPENSES (note 4) Cost of goods sold 37,189 38,833 35,678 Cost of services sold 14,017 14,023 13,419 Interest and other financial charges 10,432 10,216 11,062 Insurance losses and policyholder and annuity benefits 16,369 17,608 15,062 Provision for losses on financing receivables (note 13) 3,752 3,084 2,481 Other costs and expenses 31,727 29,229 28,665 Minority interest in net earnings of consolidated affiliates 290 326 348 Consolidated, liquidating securitization entities (note 29) 507 — — Total costs and expenses 114,283 113,319 106,715 EARNINGS BEFORE INCOME TAXES AND ACCOUNTING CHANGES

19,904 18,891 19,701

Provision for income taxes (note 7) (4,315 ) (3,758 ) (5,573 ) EARNINGS BEFORE ACCOUNTING CHANGES 15,589 15,133 14,128 Cumulative effect of accounting changes (note 1) (587 ) (1,015 ) (444 ) NET EARNINGS $ 15,002 $ 14,118 $ 13,684 PER-SHARE AMOUNTS (note 8) Per-share amounts before accounting changes Diluted earnings per share $ 1.55 $ 1.51 $ 1.41 Basic earnings per share $ 1.56 $ 1.52 $ 1.42 Per-share amounts after accounting changes Diluted earnings per share $ 1.49 $ 1.41 $ 1.37 Basic earnings per share $ 1.50 $ 1.42 $ 1.38


GE 2003 ANNUAL REPORT GE GECS For the years ended December 31 (In millions; per-share amounts in dollars) 2003 2002 2001 2003 2002 2001 REVENUES Sales of goods $ 47,767 $ 51,957 $ 49,057 $ 2,228 $ 3,296 $ 3,627 Sales of services 22,675 21,360 18,961 — — — Other income (note 2) 645 1,106 433 — — — Earnings of GECS before accounting changes 7,754 4,626 5,586 — — — GECS revenues from services (note 3) — — — 61,356 55,403 55,229 Consolidated, liquidating securitization entities (note 29) — — — 695 — — Total revenues 78,841 79,049 74,037 64,279 58,699 58,856 COSTS AND EXPENSES (note 4) Cost of goods sold 35,102 35,951 32,419 2,119 3,039 3,266 Cost of services sold 14,301 14,245 13,658 — — — Interest and other financial charges 941 569 817 9,869 9,935 10,598 Insurance losses and policyholder and annuity benefits — — — 16,369 17,608 15,062 Provision for losses on financing receivables (note 13) — — — 3,752 3,084 2,481 Other costs and expenses 9,870 9,131 8,637 22,342 20,343 20,320 Minority interest in net earnings of consolidated affiliates 181 183 185 109 143 163 Consolidated, liquidating securitization entities (note 29) — — — 507 — — Total costs and expenses 60,395 60,079 55,716 55,067 54,152 51,890 EARNINGS BEFORE INCOME TAXES AND ACCOUNTING CHANGES

18,446 18,970 18,321 9,212 4,547 6,966

Provision for income taxes (note 7) (2,857 ) (3,837 ) (4,193 ) (1,458 ) 79 (1,380 ) EARNINGS BEFORE ACCOUNTING CHANGES 15,589 15,133 14,128 7,754 4,626 5,586 Cumulative effect of accounting changes (note 1) (587 ) (1,015 ) (444 ) (339 ) (1,015 ) (169 ) NET EARNINGS $ 15,002 $ 14,118 $ 13,684 $ 7,415 $ 3,611 $ 5,417


GE 2003 ANNUAL REPORT STATEMENT OF FINANCIAL POSITION General Electric Company


At December 31 (In millions) 2003 2002 ASSETS Cash and equivalents $ 12,664 $ 8,910 Investment securities (note 9) 120,724 116,862 Current receivables (note 10) 10,732 10,681 Inventories (note 11) 8,752 9,247 Financing receivables (investments in time sales, loans and financing leases)— net (notes 12 and 13) 226,029 198,060 Insurance receivables—net (note 14) 27,053 31,585 Other GECS receivables 9,545 11,432 Property, plant and equipment (including equipment leased to others)— net (note 15) 53,382 49,073 Investment in GECS — — Intangible assets —net (note 16) 55,025 46,180 Consolidated, liquidating securitization entities (note 29) 26,463 — All other assets (note 17) 97,114 93,214 TOTAL ASSETS $ 647,483 $ 575,244 LIABILITIES AND EQUITY Short-term borrowings (note 18) $ 134,917 $ 138,775 Accounts payable, principally trade accounts 19,824 18,874 Progress collections and price adjustments accrued 4,433 6,706 Dividends payable 2,013 1,895 All other current costs and expenses accrued 15,343 15,577 Long-term borrowings (note 18) 170,004 140,632 Insurance liabilities, reserves and annuity benefits (note 19) 136,264 135,853 Consolidated, liquidating securitization entities (note 29) 25,721 — All other liabilities (note 20) 41,357 35,236 Deferred income taxes (note 21) 12,647 12,517 Total liabilities 562,523 506,065 Minority interest in equity of consolidated affiliates (note 22) 5,780 5,473 Common stock (10,063,120,000 and 9,969,894,000 shares outstanding at year-end 2003 and 2002, respectively) 669 669 Accumulated gains/(losses)—net Investment securities 1,620 1,071 Currency translation adjustments 2,987 (2,136 ) Derivatives qualifying as hedges (1,792 ) (2,112 ) Other capital 17,497 17,288 Retained earnings 82,796 75,553 Less common stock held in treasury (24,597 ) (26,627 ) Total shareowners’ equity (notes 24 and 25) 79,180 63,706 TOTAL LIABILITIES AND EQUITY $ 647,483 $ 575,244


GE 2003 ANNUAL REPORT GE GECS At December 31 (In millions) 2003 2002 2003 2002 ASSETS Cash and equivalents $ 1,670 $ 1,079 $ 11,273 $ 7,918 Investment securities (note 9) 380 332 120,344 116,530 Current receivables (note 10) 10,973 10,973 — — Inventories (note 11) 8,555 9,039 197 208 Financing receivables (investments in time sales, loans and financing leases)— net (notes 12 and 13) — — 226,029 198,060 Insurance receivables—net (note 14) — — 27,053 31,585 Other GECS receivables — — 11,901 12,984 Property, plant and equipment (including equipment leased to others)— net (note 15) 14,566 13,743 38,816 35,330 Investment in GECS 45,308 36,929 — — Intangible assets —net (note 16) 30,204 23,049 24,821 23,131 Consolidated, liquidating securitization entities (note 29) — — 26,463 — All other assets (note 17) 30,448 30,167 67,629 64,082 TOTAL ASSETS $ 142,104 $ 125,311 $ 554,526 $ 489,828 LIABILITIES AND EQUITY Short-term borrowings (note 18) $ 2,555 $ 8,786 $ 132,988 $ 130,126 Accounts payable, principally trade accounts 8,753 8,095 13,440 12,608 Progress collections and price adjustments accrued 4,433 6,706 — — Dividends payable 2,013 1,895 — — All other current costs and expenses accrued 15,343 15,577 — — Long-term borrowings (note 18) 8,388 970 162,540 140,836 Insurance liabilities, reserves and annuity benefits (note 19) — — 136,264 135,853 Consolidated, liquidating securitization entities (note 29) — — 25,721 — All other liabilities (note 20) 18,449 16,621 22,828 18,441 Deferred income taxes (note 21) 1,911 1,927 10,736 10,590 Total liabilities 61,845 60,577 504,517 448,454 Minority interest in equity of consolidated affiliates (note 22) 1,079 1,028 4,701 4,445 Common stock (10,063,120,000 and 9,969,894,000 shares outstanding at year-end 2003 and 2002, respectively) 669 669 1 1 Accumulated gains/(losses)—net Investment securities 1,620 1,071 1,823 1,191 Currency translation adjustments 2,987 (2,136 ) 2,639 (782 ) Derivatives qualifying as hedges (1,792 ) (2,112 ) (1,727 ) (2,076 ) Other capital 17,497 17,288 12,268 12,271 Retained earnings 82,796 75,553 30,304 26,324 Less common stock held in treasury (24,597 ) (26,627 ) — — Total shareowners’ equity (notes 24 and 25) 79,180 63,706 45,308 36,929 TOTAL LIABILITIES AND EQUITY $ 142,104 $ 125,311 $ 554,526 $ 489,828


GE 2003 ANNUAL REPORT STATEMENT OF CASH FLOWS General Electric Company


For the years ended December 31 (In millions) 2003 2002 2001 CASH FLOWS — OPERATING ACTIVITIES Net earnings $ 15,002 $ 14,118 $ 13,684 Adjustments to reconcile net earnings to cash provided from operating activities Cumulative effect of accounting changes 587 1,015 444 Depreciation and amortization of property, plant and equipment 6,956 6,511 5,873 Amortization of goodwill — — 1,252 Earnings (before accounting changes) retained by GECS — — — Deferred income taxes 1,127 2,414 1,426 Decrease (increase) in GE current receivables 534 (409 ) 197 Decrease (increase) in inventories 874 (87 ) (485 ) Increase (decrease) in accounts payable 802 227 4,676 Increase (decrease) in GE progress collections (2,268 ) (5,062 ) 3,446 Increase in insurance liabilities and reserves 1,679 9,454 8,194 Provision for losses on financing receivables 3,752 3,084 2,481 All other operating activities 1,244 (1,264 ) (8,296 ) CASH FROM OPERATING ACTIVITIES 30,289 30,001 32,892 CASH FLOWS — INVESTING ACTIVITIES Additions to property, plant and equipment (9,767 ) (14,056 ) (16,394 ) Dispositions of property, plant and equipment 4,945 6,357 7,591 Net increase in GECS financing receivables (14,273 ) (18,082 ) (13,837 ) Payments for principal businesses purchased (14,407 ) (21,570 ) (12,429 ) Investment in GECS — — — All other investing activities 10,599 (15,111 ) (5,742 ) CASH USED FOR INVESTING ACTIVITIES (22,903 ) (62,462 ) (40,811 ) CASH FLOWS — FINANCING ACTIVITIES Net increase (decrease) in borrowings (maturities of 90 days or less) (11,107 ) (17,347 ) 20,482 Newly issued debt (maturities longer than 90 days) 67,545 95,008 32,071 Repayments and other reductions (maturities longer than 90 days) (43,155 ) (40,454 ) (37,001 ) Net dispositions (purchases) of GE shares for treasury 726 (985 ) (2,435 ) Dividends paid to shareowners (7,643 ) (7,157 ) (6,358 ) All other financing activities (9,998 ) 3,873 2,047 CASH FROM (USED FOR) FINANCING ACTIVITIES (3,632 ) 32,938 8,806 INCREASE (DECREASE) IN CASH AND EQUIVALENTS DURING YEAR 3,754 477 887


GE 2003 ANNUAL REPORT GE GECS For the years ended December 31 (In millions) 2003 2002 2001 2003 2002 2001 CASH FLOWS — OPERATING ACTIVITIES Net earnings $ 15,002 $ 14,118 $ 13,684 $ 7,415 $ 3,611 $ 5,417 Adjustments to reconcile net earnings to cash provided from operating activities Cumulative effect of accounting changes 587 1,015 444 339 1,015 169 Depreciation and amortization of property, plant and equipment 2,277 2,199 1,919 4,679 4,312 3,954 Amortization of goodwill — — 545 — — 707 Earnings (before accounting changes) retained by GECS (4,319 ) (2,661 ) (3,625 ) — — — Deferred income taxes 389 1,005 564 738 1,409 862 Decrease (increase) in GE current receivables 585 (486 ) 207 — — — Decrease (increase) in inventories 909 (149 ) (881 ) (35 ) 62 396 Increase (decrease) in accounts payable 676 708 364 666 (880 ) 4,804 Increase (decrease) in GE progress collections (2,268 ) (5,062 ) 3,446 — — — Increase in insurance liabilities and reserves — — — 1,679 9,454 8,194 Provision for losses on financing receivables — — — 3,752 3,084 2,481 All other operating activities (913 ) (590 ) 530 2,215 (556 ) (8,688 ) CASH FROM OPERATING ACTIVITIES 12,925 10,097 17,197 21,448 21,511 18,296 CASH FLOWS — INVESTING ACTIVITIES Additions to property, plant and equipment (2,158 ) (2,386 ) (2,876 ) (7,609 ) (11,670 ) (13,518 ) Dispositions of property, plant and equipment — — — 4,945 6,357 7,591 Net increase in GECS financing receivables — — — (14,273 ) (18,082 ) (13,837 ) Payments for principal businesses purchased (3,870 ) (8,952 ) (1,436 ) (10,537 ) (12,618 ) (10,993 ) Investment in GECS — (6,300 ) (3,043 ) — — — All other investing activities 236 203 1,508 9,788 (15,234 ) (7,741 ) CASH USED FOR INVESTING ACTIVITIES (5,792 ) (17,435 ) (5,847 ) (17,686 ) (51,247 ) (38,498 ) CASH FLOWS — FINANCING ACTIVITIES Net increase (decrease) in borrowings (maturities of 90 days or less) (6,704 ) 7,924 327 (4,035 ) (34,687 ) 23,634 Newly issued debt (maturities longer than 90 days) 7,356 66 1,303 59,939 96,044 30,752 Repayments and other reductions (maturities longer than 90 days) (277 ) (1,229 ) (950 ) (42,878 ) (39,225 ) (36,051 ) Net dispositions (purchases) of GE shares for treasury 726 (985 ) (2,435 ) — — — Dividends paid to shareowners (7,643 ) (7,157 ) (6,358 ) (3,435 ) (1,965 ) (1,961 ) All other financing activities — — — (9,998 ) 10,173 5,090 CASH FROM (USED FOR) FINANCING ACTIVITIES (6,542 ) (1,381 ) (8,113 ) (407 ) 30,340 21,464 INCREASE (DECREASE) IN CASH AND EQUIVALENTS DURING YEAR

591 (8,719 ) 3,237 3,355 604 1,262

Cash and equivalents at beginning of year 1,079 9,798 6,561 7,918 7,314 6,052 Cash and equivalents at end of year $ 1,670 $ 1,079 $ 9,798 $ 11,273 $ 7,918 $ 7,314 SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION

Cash paid during the year for interest $ (248 ) $ (155 ) $ (358 ) $ (10,313 ) $ (9,499 ) $ (10,767 ) Cash recovered (paid) during the year for income taxes (2,685 ) (2,331 ) (1,616 ) 1,146 1,383 129


GE 2003 ANNUAL REPORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation Our financial statements consolidate all of our affiliates–companies that we control and in which we hold a majority voting interest. In 2003, we added certain non-affiliates that we do not control to our consolidated financial statements because of new accounting requirements that require consolidation of entities based on holding qualifying residual interests. Associated companies are companies that we do not control but over which we have significant influence, most often because we hold a shareholder voting position of 20% to 50%. Results of associated companies are presented on a "one-line" basis. Financial statement presentation We have reclassified certain prior-year amounts to conform to this year's presentation. Financial data and related measurements are presented in the following categories:

• GE This represents the adding together of all affiliates other than General Electric Capital Services, Inc. (GECS), whose operations are

presented on a one-line basis. • GECS This affiliate owns all of the common stock of General Electric Capital Corporation (GE Capital) and GE Global Insurance Holding

Corporation (GE Global Insurance Holding), the parent of Employers Reinsurance Corporation (ERC). GE Capital, GE Global Insurance Holding and their respective affiliates are consolidated in the GECS columns and constitute its business.

• CONSOLIDATED This represents the adding together of GE and GECS. Effects of transactions between related companies are eliminated. Transactions between GE and GECS are immaterial and consist primarily of GECS services for material procurement and trade receivables management, aircraft engines and medical equipment manufactured by GE that are leased by GECS to others, buildings and equipment leased by GE from GECS, and GE investments in GECS commercial paper.


AMERADA HESS CORPORATION

Amerada Hess has an investment in HOVENSA L.L.C., a 50% joint venture with Petroleos de Venezuela, S.A. (PDVSA). HOVENSA owns and operates a refinery in the Virgin Islands. The Corporation accounts for its investment in HOVENSA using the equity method.

AMERADA HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES STATEMENT OF CONSOLIDATED INCOME

For the Years Ended December 31 2004 2003 2002 (Millions of dollars, except per share data) REVENUES AND NON-OPERATING INCOME Sales (excluding excise taxes) and other operating revenues $ 16,733 $ 14,311 $ 11,551 Non-operating income (expense) Gain on asset sales 55 39 143 Equity in income (loss) of HOVENSA L.L.C. 244 117 (47 ) Other 94 13 85 Total revenues and non-operating income 17,126 14,480 11,732 COSTS AND EXPENSES Cost of products sold 11,971 9,947 7,226 Production expenses 825 796 736 Marketing expenses 737 709 703

Exploration expenses, including dry holes and lease impairment 287 369 316

Other operating expenses 195 192 165 General and administrative expenses 342 340 253 Interest expense 241 293 256 Depreciation, depletion and amortization 970 1,053 1,118 Asset impairments — — 1,024 Total costs and expenses 15,568 13,699 11,797

Income (loss) from continuing operations before income taxes 1,558 781 (65 )

Provision for income taxes 588 314 180 Income (loss) from continuing operations 970 467 (245 ) Discontinued operations Net gain from asset sales — 116 — Income from operations 7 53 27 Cumulative effect of change in accounting principle — 7 — NET INCOME (LOSS) $ 977 $ 643 $ (218 ) Less preferred stock dividends 48 5 — NET INCOME (LOSS) APPLICABLE TO COMMON SHAREHOLDERS $ 929 $ 638 $ (218 )


AMERADA HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED BALANCE SHEET

At December 31 2004 2003 (Millions of dollars; thousands of shares)

ASSETS CURRENT ASSETS Cash and cash equivalents $ 877 $ 518 Accounts receivable Trade 2,185 1,717 Other 182 185 Inventories 596 579 Other current assets 495 187 INVESTMENTS AND ADVANCES HOVENSA L.L.C. 1,116 960 Other 138 135 PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment — net 8,505 7,978 NOTES RECEIVABLE 212 302 GOODWILL 977 977 DEFERRED INCOME TAXES 834 306 OTHER ASSETS 195 139 TOTAL ASSETS $ 16,312 $ 13,983

LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES Accounts payable $ 3,280 $ 1,542 Accrued liabilities 920 855 Taxes payable 447 199 Current maturities of long-term debt 50 73 Total current liabilities 4,697 2,669 LONG-TERM DEBT 3,785 3,868 DEFERRED LIABILITIES AND CREDITS Deferred income taxes 1,184 1,144 Asset retirement obligations 511 462 Other 538 500 Total deferred liabilities and credits 2,233 2,106 STOCKHOLDERS’ EQUITY Total stockholders’ equity 5,597 5,340 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 16,312 $ 13,983


AMERADA HESS CORPORATION AND CONSOLIDATED SUBSIDIARIES STATEMENT OF CONSOLIDATED CASH FLOWS

For the Years Ended December 31 2004 2003 2002 (Millions of dollars) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 977 $ 643 $ (218 )

Adjustments to reconcile net income (loss) to net cash provided by operating activities

Depreciation, depletion and amortization 970 1,053 1,118 Asset impairments — — 1,024 Exploratory dry hole costs 81 162 157 Lease impairment 77 65 41 Pre-tax gain on asset sales (55 ) (245 ) (117 ) Provision (benefit) for deferred income taxes (211 ) 107 (258 ) Undistributed earnings of HOVENSA L.L.C. (156 ) (117 ) 47 Non-cash effect of discontinued operations (7 ) 46 280 Changes in other operating assets and liabilities (Increase) decrease in accounts receivable (519 ) 47 (104 ) (Increase) decrease in inventories (16 ) (107 ) 51

Increase (decrease) in accounts payable and accrued liabilities 783 18 (217 )

Increase (decrease) in taxes payable 131 (39 ) 50 Changes in prepaid expenses and other (152 ) (52 ) 111 Net cash provided by operating activities 1,903 1,581 1,965 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures Total capital expenditures (1,521 ) (1,358 ) (1,534 ) Proceeds from asset sales 57 545 412 Payment received on notes receivable 90 61 48 Other 3 (25 ) (22 ) Net cash used in investing activities (1,371 ) (777 ) (1,096 ) CASH FLOWS FROM FINANCING ACTIVITIES Decrease in debt with maturities of 90 days or less — (2 ) (581 ) Debt with maturities of greater than 90 days Borrowings 25 — 637 Repayments (131 ) (1,026 ) (686 ) Proceeds from issuance of preferred stock — 653 — Cash dividends paid (157 ) (108 ) (107 ) Stock options exercised 90 — 28 Net cash used in financing activities (173 ) (483 ) (709 ) NET INCREASE IN CASH AND CASH EQUIVALENTS 359 321 160


HOVENSA L.L.C.

2004 2003 2002 (Millions of dollars) Summarized Balance Sheet At December 31 Cash and cash equivalents $ 518 $ 341 $ 11 Other current assets 675 541 509 Net fixed assets 1,843 1,818 1,895 Other assets 36 37 40 Current liabilities (606 ) (441 ) (335 ) Long-term debt (252 ) (392 ) (467 ) Deferred liabilities and credits (48 ) (56 ) (45 ) Partners’ equity $ 2,166 $ 1,848 $ 1,608 Summarized Income Statement For the years ended December 31 Total revenues $ 7,776 $ 5,451 $ 3,783 Costs and expenses (7,282 ) (5,212 ) (3,872 ) Net income (loss) $ 494 $ 239 $ (89 ) Amerada Hess Corporation’s share $ 244 $ 117 $ (47 )


Illustration of Minority Interests The objectives of this exercise are to:

• Understand the role of Minority [Non Controlling] Interest in Analysis • Practice the distinction between legal and accounting entities • Practice the Journal Entries and T Accounts for Minority Interest

Barry M Frohlinger


Minority Interest occurs only in consolidation and that minority interest is the share of ownership of a subsidiary NOT owned by the group. Minority Interest on the balance sheet represents the share of equity [net assets] of subsidiaries not owned by the parent. Minority Interest on the Income Statement represents the share of profit of the subsidiaries not owned by the parent.

The journal entries for Minority Interest are:

When the subsidiary has profits:

Dr. Minority Interest [IS] XXX Cr. Minority Interest [BS] XXX

When the subsidiary has losses:

Dr. Minority Interest [BS] XXX Cr. Minority Interest [IS] XXX

When distributions are made to minority investors: Dr. Minority Interest [BS] YYY Cr. Cash YYY

The Minority T-Account is:

Minority Interest [Non Controlling Interest]

Open Share of

losses Share of

earnings

Dividends Close


A financial analyst must know how to treat minority interest. For capital structure analysis, minority interest can generally be treated as equity (because it has no

claims on future cash flow unless management declares a dividend). Mechanically, minority interest on the balance sheet works like a shareholders’ equity account (combining the stock and earnings retained in the business into one account).

For profitability analysis, the numerator and denominator of each ratio must be consistent. In

consolidated statements, the assets, liabilities, revenues and expenses include 100% of the subsidiary. On the other hand, net income and stockholders’ equity include only the majority share (80% here) of the subsidiary. Therefore, typical profitability ratios would be calculated as follows;

profit margin ratios (% of sales) => without deduction for minority interest

return on assets => without deduction for minority interest

return on equity => with deduction for minority interest

For cash flow analysis, minority interest in consolidated subsidiaries is similar to undistributed equity in earnings of unconsolidated subsidiaries. The change in the minority interest balance sheet account is shown as an adjustment to net income in the operating section of the statement of cash flows and consists of two parts: • the minority’s share of earnings which should be removed to arrive at “potential cash from

operations” • the minority’s share of dividends paid which, if significant, the analyst should adjust by moving to

financing activities.


Verizon Communications Inc., was formed on June 30, 2000, with the merger of Bell Atlantic Corp. and GTE Corp. GTE and Bell Atlantic had each evolved and grown through years of mergers, acquisitions and divestitures. Each had proven track records in successfully integrating business operations.

Outside the 50 states, GTE operated wireless networks serving approximately 6.7 million customers with 34.8 million potential wireless customers through subsidiaries in Argentina, Canada and the Dominican Republic, and affiliates in Canada, Puerto Rico, Venezuela and Taiwan. Bell Atlantic was even larger than GTE. Its Domestic Telecom unit served 43 million access lines, including 22 million households and more than 2 million business customers. Its Global Wireless unit managed one of the world's largest and most successful wireless companies, with 7.7 million Bell Atlantic Mobile customers in the United States, and international wireless investments in Latin America, Europe and the Pacific Rim.

The merger closed nearly two years after announcement, following review and approvals by Bell Atlantic and GTE shareowners, 27 state regulatory commissions and the Federal Communications Commission (FCC), and clearance from the U.S. Department of Justice (DOJ) and various international agencies.

In the meantime, on Sept. 21, 1999, Bell Atlantic and London-based Vodafone AirTouch Plc (now Vodafone Group Plc) announced that they had agreed to create a new wireless business -- with a national footprint, a single brand and a common digital technology -- composed of Bell Atlantic's and Vodafone's U.S. wireless assets (Bell Atlantic Mobile, AirTouch Cellular, PrimeCo Personal Communications and AirTouch Paging).

This wireless joint venture received regulatory approval in six months. The new "Verizon" brand was launched on April 3, 2000, and the wireless joint venture began operations as Verizon Wireless on April 4. GTE's wireless operations became part of Verizon Wireless -- creating the nation's largest wireless company -- when the Bell Atlantic - GTE merger closed nearly three months later. Verizon then became the majority owner (55 percent) of Verizon Wireless, with management control of the joint venture.


Consolidated Statements of Income Verizon Communications Inc. and Subsidiaries –

(dollars in millions, except per share amounts) Years Ended December 31, 2010 2009 2008 Operating Revenues $ 106,565 $ 107,808 $ 97,354 Operating Expenses

Cost of services and sales 44,149 44,579 38,615 Selling, general and administrative expense 31,366 30,717 41,517 Depreciation and amortization expense 16,405 16,534 14,610

Total Operating Expenses 91,920 91,830 94,742 Operating Income 14,645 15,978 2,612 Equity in earnings of unconsolidated businesses 508 553 567 Other income and (expense), net 54 91 283 Interest expense (2,523 ) (3,102 ) (1,819) Income Before (Provision) Benefit for Income Taxes 12,684 13,520 1,643 (Provision) benefit for income taxes (2,467 ) (1,919 ) 2,319 Net Income $ 10,217 $ 11,601 $ 3,962 Net income attributable to noncontrolling interest $ 7,668 $ 6,707 $ 6,155 Net income (loss) attributable to Verizon 2,549 4,894 (2,193) Net Income $ 10,217 $ 11,601 $ 3,962


Consolidated Balance Sheets Verizon Communications Inc. and Subsidiaries (dollars in millions, except per share amounts) At December 31, 2010 2009 Assets Current assets

Cash and cash equivalents $ 6,668 $ 2,009 Short-term investments 545 490 Accounts receivable, net of allowances of $876 and $976 11,781 12,573 Inventories 1,131 1,426 Prepaid expenses and other 2,223 5,247

Total current assets 22,348 21,745 Plant, property and equipment 211,655 229,743

Less accumulated depreciation 123,944 137,758

87,711 91,985 Investments in unconsolidated businesses 3,497 3,118 Wireless licenses 72,996 72,067 Goodwill 21,988 22,472 Other intangible assets, net 5,830 6,764 Other assets 5,635 8,756 Total assets $ 220,005 $ 226,907 Liabilities and Equity Current liabilities

Debt maturing within one year $ 7,542 $ 7,205 Accounts payable and accrued liabilities 15,702 15,223 Other 7,353 6,708

Total current liabilities 30,597 29,136 Long-term debt 45,252 55,051 Employee benefit obligations 28,164 32,622 Deferred income taxes 22,818 19,190 Other liabilities 6,262 6,765 Equity

Series preferred stock ($.10 par value; none issued) – – Common stock ($.10 par value; 2,967,610,119 shares issued

in both periods) 297 297 Contributed capital 37,922 40,108 Reinvested earnings 4,368 7,260 Accumulated other comprehensive income (loss) 1,049 (1,372) Common stock in treasury, at cost (5,267 ) (5,000) Deferred compensation - employee stock ownership plans 200 89 Noncontrolling interest 48,343 42,761

Total equity 86,912 84,143 Total liabilities and equity $ 220,005 $ 226,907


Consolidated Statements of Cash Flows Verizon Communications Inc. and Subsidiaries (dollars in millions) Years Ended December 31, 2010 2009 2008 Cash Flows from Operating Activities Net Income $ 10,217 $ 11,601 $ 3,962 Adjustments to reconcile net income to net cash provided by operating

activities: Depreciation and amortization expense 16,405 16,534 14,610 Employee retirement benefits 3,988 2,964 16,077 Deferred income taxes 3,233 2,093 (3,468) Provision for uncollectible accounts 1,246 1,306 1,085 Equity in earnings of unconsolidated businesses, net of

dividends received 2 389 212 Changes in current assets and liabilities, net of effects from

acquisition/disposition of businesses: Accounts receivable (859 ) (1,393 ) (1,085) Inventories 299 235 (188) Other assets (313 ) (102 ) (59) Accounts payable and accrued liabilites 1,075 (1,251 ) (1,701)

Other, net (1,930 ) (986 ) (1,993) Net cash provided by operating activities 33,363 31,390 27,452 Cash Flows from Investing Activities Capital expenditures (including capitalized software) (16,458 ) (16,872 ) (17,133) Acquisitions of licenses, investments and businesses, net of cash acquired (1,438 ) (5,958 ) (15,904) Proceeds from dispositions 2,594 – – Net change in short-term investments (3 ) 84 1,677 Other, net 251 (410 ) (114) Net cash used in investing activities (15,054 ) (23,156 ) (31,474) Cash Flows from Financing Activities Proceeds from long-term borrowings – 12,040 21,598 Repayments of long-term borrowings and capital lease obligations (8,136 ) (19,260 ) (4,146) Increase (decrease) in short-term obligations, excluding current maturities (1,097 ) (1,652 ) 2,389 Dividends paid (5,412 ) (5,271 ) (4,994) Proceeds from access line spin-off 3,083 – – Proceeds from sale of common stock – – 16 Purchase of common stock for treasury – – (1,368) Other, net (2,088 ) (1,864 ) (844) Net cash provided by (used in) financing activities (13,650 ) (16,007 ) 12,651 Increase (decrease) in cash and cash equivalents 4,659 (7,773 ) 8,629 Cash and cash equivalents, beginning of year 2,009 9,782 1,153 Cash and cash equivalents, end of year $ 6,668 $ 2,009 $ 9,782

See Notes to Consolidated Financial Statements


Consolidated Statements of Changes in Equity Verizon Communications Inc. and Subsidiaries (dollars in millions, except per share amounts, and shares in thousands) Years Ended December 31, 2010 2009 2008 Amount Shares Amount Shares Amount Reinvested Earnings Balance at beginning of year 7,260 7,676 14,931 Net income attributable to Verizon 2,549 4,894 (2,193) Dividends declared (5,441 ) (5,310 ) (5,062) Balance at end of year 4,368 7,260 7,676 Accumulated Other

Comprehensive Income (Loss) Balance at beginning of year (1,372 ) (1,912 ) (4,484) Spin-off of local exchange businesses

and related landline activities 23 – 27 Benefit plan accounting changes – – 2,930 Foreign currency translation (171 ) 78 (231) Unrealized gains (losses) on

marketable securities 29 87 (97) Unrealized gains (losses) on cash

flow hedges 89 87 (40) Defined benefit pension and

postretirement plans 2,451 288 (17) Other comprehensive income (loss) 2,398 540 (385) Balance at end of year 1,049 (1,372 ) (1,912) Noncontrolling Interest Balance at beginning of year 42,761 37,199 32,266 Net income attributable to

noncontrolling interest 7,668 6,707 6,155 Other comprehensive income (loss) (35 ) 103 (30) Total comprehensive income 7,633 6,810 6,125 Distributions and other (2,051 ) (1,248 ) (1,192) Balance at end of year 48,343 42,761 37,199 Total Equity $ 86,912 $ 84,143 $ 78,791 Comprehensive Income Net income $ 10,217 $ 11,601 $ 3,962 Other comprehensive income (loss) 2,363 643 (415) Total Comprehensive Income $ 12,580 $ 12,244 $ 3,547 Comprehensive income attributable

to noncontrolling interest $ 7,633 $ 6,810 $ 6,125 Comprehensive income (loss)

attributable to Verizon 4,947 5,434 (2,578) Total Comprehensive Income $ 12,580 $ 12,244 $ 3,547


SUDBURY The attached financial statements of Sudbury, Inc. provide an interesting illustration of minority interests. Remember that Minority Interest occurs only in consolidation and that minority interest is the share of ownership of a subsidiary NOT owned by the group. For Sudbury, notice that the fiscal year ends in May and that amounts (below also) are in thousands of dollars. UNDERSTANDING THE LEGAL RELATIONSHIPS Note B describes the reorganization. See if you can complete the following diagram of the legal

relationships before and after the reorganization on May 27, 2002. Enter the names of the legal entities in the appropriate boxes and show the percentages of ownership.

Before After

*

| ______ _______|_____ ______ | % | % | %

*Old name was ____________________________ A completed diagram is shown on the page after the next page. [check only after you fill in the

amounts above].


The acquisition of the 20% minority interest in Western by the issuance of 2.8 million shares of

Sudbury common stock can be illustrated by a journal entry using the information in the statement of stockholders’ equity.

Minority interest 2287 [plug] Common stock 28 [per State. of SE] Additional Paid-in Capital 2259 [per State. of SE] The plug to the minority interest account can be verified by a transaction analysis of the account:

Minority Interest 1,444 Beg. Purchase 2,287 843 Net Income 0 End

Beg. and End. balances per balance sheet Purchase by Sudbury (see journal entry above) Net Income (per income statement)


Sudbury’s legal structure can be described as follows.

Before After

Industrial* Sudbury

| ______ _______|_____ _____ |80% |100% |100% Western Industrial Western

*Old name was Sudbury Holdings, Inc. Description: The reorganization caused the following to occur (besides the name change):

Ÿ shareholders of Industrial (before) became shareholders of Sudbury (after) Ÿ Industrial became a wholly-owned subsidiary of Sudbury Ÿ Western became a subsidiary of Sudbury

Concurrently, Sudbury acquired the 20% minority interest in Western. PROBLEMS IN ACCOUNTING FOR VALUATION OF MINORITY INTERESTS The purchase of the 20% minority interest was obviously recorded at the book value of the minority

interest ($2,287). A financial analyst would be interested in knowing the market value of the transaction. Sudbury’s common stock traded during the fiscal fourth quarter on the NASDAQ at a range of $11.125 to $13.625. Therefore, the market value of the transaction (2.8 million shares) was $31 to $38 million. Expanding the book and market amounts for 20% of Western to 100% would indicate that the assets and liabilities of Western are recorded at a net book value of about $11 million [2.287 X 5] whereas the market value (based on the purchase price) is at least $155 million [$31 X 5].

The financial analyst might wish to pursue this information further. Possibly, consolidated assets (and

net worth) are substantially understated compared to market values. Or, possibly, Sudbury had to pay in excess of book value to acquire the remaining 20% of Western plus the option held by the minority shareholders to increase their 20% interest by an additional 60%. Or, maybe a combination of both reasons.


PROPER TREATMENT OF MINORITY INTERESTS IN ANALYSIS A financial analyst must know how to treat minority interest. For capital structure analysis, minority interest can generally be treated as equity (because it has no

claims on future cash flow unless management declares a dividend). Mechanically, minority interest on the balance sheet works like a shareholders’ equity account (combining the stock and earnings retained in the business into one account). However, as this situation indicates, a financial analyst must always be alert to the possibility that management will decide to acquire the minority interest and know that the purchase price will be a market price (not book value). Sudbury’s transaction was noncash, but many acquisitions of minority interest are cash transactions. When the analyst expects minority interest to be acquired, it should be treated as a liability and adjusted (or footnoted) at estimated market value.

For leverage analysis, the minority interest (if material) should have its own line. For profitability analysis, the numerator and denominator of each ratio must be consistent. In

consolidated statements, the assets, liabilities, revenues and expenses include 100% of the subsidiary. On the other hand, net income and stockholders’ equity include only the majority share (80% here) of the subsidiary. Therefore, typical profitability ratios would be calculated as follows;

profit margin ratios (% of sales) => without deduction for minority interest

return on assets => without deduction for minority interest

return on equity => with deduction for minority interest

For cash flow analysis, minority interest in consolidated subsidiaries is similar to undistributed equity in earnings of unconsolidated subsidiaries. The change in the minority interest balance sheet account is shown as an adjustment to net income in the operating section of the statement of cash flows and consists of two parts: • the minority’s share of earnings which should be removed to arrive at “potential cash from

operations” • the minority’s share of dividends paid which, if significant, the analyst should adjust by moving to

financing activities.


The financial analyst must consider how the acquisition of the minority interest affected the

comparability for profitability analysis. There is no effect on comparability in the income statement except for the bottom line (net income). All of the revenue and expense amounts have always included 100% of Western (with the 20% minority interest subtracted net on one line at the bottom of the income statement).

The various profit margin ratios based solely upon the income statement information would be

consistent.

Return on assets is not affected because both the numerator and denominator are unchanged by the acquisition. Return on equity will not be comparable. As a result of the acquisition, (i) the numerator will increase (no longer a deduction for minority interest) and (ii) the denominator will increase (because of the 2.8 million shares issued.


Quesiton #1 Answer the following regarding legal entities and credit availability: The footnote disclosure [Notes D and E] for Sudbury reports credit facilities and loans available to

Industrial and Western. • Who are the borrowers in each of the facilities? • What recourse does each lender have to other legal entities within the consolidated

company?


Question 2: Complete the Following Table:

SUDBURY INDUSTRIAL WESTERN CONSOLIDATED 2002 2001 2002 2001 2002 2001 2002 2001 NET OPERATING ASSETS

INVESTMENT ACCOUNT

TOTAL ASSETS

LIABILITIES

MINORITY INTEREST

OWNER'S EQUITY


Question 2: Solution Notes:

SUDBURY INDUSTRIAL WESTERN CONSOLIDATED 2002 2001 2002 2001 2002 2001 2002 2001 NET OPERATING ASSETS

0 Didn’t exist

? 62,568 ? 94,135 281,967 156,703

INVESTMENT ACCOUNT

60,005 Didn’t exist

0 5,765 0 0 0 0

TOTAL ASSETS


? 68,333 ? 94,135 281,967 156,703

LIABILITIES

Didn’t exist

? 31,222 ? 86,926 221,962 118,148

MINORITY INTEREST

Does not exist

Didn’t exist

0 0 0 0 0 1,444

OWNER'S EQUITY


48,410 37,111 11,595 [2] 7,209 [1] 60,005 37,111

end


Sudbury, Inc. and Subsidiaries Balance Sheet

May 30, 2002, 2001, 2000 (in thousands, except per share amounts) 2002 2001 ASSETS Cash and Cash Equivalents 2,937 4,321 Accounts Receivable 62,939 38,948 Inventory Finished products and work in progress 27,791 13,882 Raw materials and supplies 27,962 16,688 55,753 30,570 Prepaid Expenses and Other 4,238 3,230

Total Current Assets 125,867 77,069

Property, Plant and Equipment Land and Land Improvements 4,351 2,306 Buildings 35,434 18,676 Machinery and Equipment 76,915 31,305

Net Fixed Assets 116,700 52,287 Less Accumulated Depreciation 11,519 4,609

105,181 47,678 Other Assets Intangibles Arising from Business Acquisitions net of Accumulated Amortization of $4,038 and $1,946, respectively 43,713 29,328 Deferred Financing Costs 1,841 1,980 Deferred Charges and Other 5,365 646

Total Other Assets 50,919 31,954 TOTAL ASSETS 281,967 156,701


Sudbury, Inc. and Subsidiaries

2002 2001 LIABILITIES/STOCKHOLDERS EQ. Current Liabilities Trade Accounts Payable 32,048 21,893 Accrued Compensation 5,660 2,760 Purchase-related earn-outs (Note C) 3,754 3,153 Accrued Interest 2,182 1,351 Income Taxes 4,059 712 Other Accrued Expenses 9,364 5,196 Current Maturities of Long-term Debt 7,274 3,606

Total Current Liabilities 64,341 38,671 Long-Term Liabilities Deferred Income Taxes (Note J) 5,849 Long-Term Debt (Note D) 105,772 33,475 7-1/2% Convertible Suburdinated Debentures (Note E) 46,000 46,000 Minority Interest (Note B) 1,444

Total Long-Term Liabilities 157,621 80,919 Total Liabilities 221,962 119,590

STOCKHOLDERS' EQUITY (Notes B, F and G) Serial Preferred Stock - par value $0.01 per share; 9,545 authorized 5,000,000 shares; outstanding 116,564 shares and -0- shares, respectively (liquidation value $12,122,656) Common Stock - par value $0.01 per share; authorized 114 86 30,000,000 shares; outstanding - 11,413,108 shares and 8,513,699 shares, respectively Additional paid-in Capital 44,973 42,533 Retained Earnings 5,373 (5,508)

Total stockholders' equity 60,005 37,111 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 281,967 156,701


Sudbury, Inc. and Subsidiaries Income Statement

May 30, 2002, 2001, 2000 (in thousands, except per share amounts) 2002 2001 2000 Net Sales 343,910 205,878 118,305 Costs and Expenses Cost of Products Sold 274,124 163,463 97,102 Selling and Administrative Expenses 38,054 24,471 11,463 Interest Expense 10,082 5,890 4,743 Gross Profit 322,260 193,824 113,308 Inncome Before Income Taxes, Minority Interest and Extraordinary Credit 21,650 12,054 4,997 Income Taxes - Note J 10,512 6,715 2,783 Income before Minority Interest and Extraordinary Credit 11,138 5,339 2,214 Minority Interest in Net Income of Western 843 662 579 Income Before Extraordinary Credit 10,295 4,677 1,635 Extraordinary Credit - Utilization of Net Operating Loss Carryforward (Note J) 963 5,351 2,324 NET INCOME (LOSS) 11,258 10,028 3,959 Per Share Amounts:* Primary: Income Eefore Extraordinary Credit $ 1.20 $ 0.56 $ 0.42 Extraordinary Credit 0.11 0.64 0.59

Net Income $ 1.31 $ 1.20 $ 1.01



Consolidated Statements of Cash Flows

2002 2001 2000 Cash Provided From (Used For): Operations: Income before extraordinary credit $ 10,295 $ 4,677 $ 1,635 Items not affecting cash and equivalents: Depreciation 6,910 3,075 1,258 Amortization of intangibles 2,231 1,083 680 Extraordinary credit 963 5,351 2,324 Deferred income taxes 5,849 0 Minority interest 843 662 579

Total from operations before extraordinary credit 27,091 14,848 6,476 Certain operating working capital items: Accounts receivable (6,244) (8,011) (1,184) Inventories (8,164) (2,694) (780) Prepaid expenses and other 582 (416) (212) Trade accounts payable 2,143 3,602 1,252 Accrued expenses 5,447 1,379 1,405 Cash Provided by Operating Activities 20,855 8,708 6,957 Acquisitions and other: Businesses purchased, less cash acquired of $6,659, $1,290, and $7,509, respectively Accounts receivable (17,747) (12,493) (4,717) Inventories (17,019) (13,120) (3,694) Prepaid expenses and other (1,590) (1,880) (445) Trade accounts payable 8,012 6,633 2,821 Accrued expenses 6,400 3,460 1,611 Property, plant and equipment (37,972) (16,683) (7,924) Intangible assets (13,427) (14,537) (6,947) Deferred charges and other (717) (537) Debt assumed 17,869 10,589 2,118 Acquisition notes issued 6,688 9,951 2,550 Serial preferred stock issued 9,545 (39,958) (28,617) (14,627) Property, plant and equipment additions (26,411) (13,733) (3,415) Deferred charges and other (7,006) 1,312 (561) Preferred stock dividends (377)

Cash Used for Investing Activities (73,752) (41,038) (18,603)


2002 2001 2000 Financing Transactions: Sale of common stock 22,249 Use of stock proceeds to reduce debt: Acquisition notes (4,714) Investor notes (7,737) Notes payable to bank (9,798) Borrowings, refinancings and repayments: Short and long-term bank borrowings, net of refinanced bank debt in 2001 paid by proceeds of $61,218 from bank group 79,136 45,823 10,475 Reduction of debt (27,728) (9,675) (2,167) Sale of debentures 46,000 Use of debenture proceeds to reduce bank debt (44,500) Investor notes 3,321 Financing costs (1,980) Exercise of stock options 105 81 43

Cash Provided from Financing Transactions 51,513 35,749 11,672 (Decrease) Increase in Cash and Equivalents $ (1,384) $ 3,419 $ 26



Consolidated Statements of Stockholders Equity Fiscal Year Ended May 2002

Serial Additional Retained Preferred Common Paid-In Earnings Stock Stock Capital (Deficit) Total

Balance at May 26 1999 $ 37 $ 20,209 $ (19,495) $ 751 Exercise of stock options for 37,000 shares 1 42 43 Net income for 2000 3,959 3,959

Balance at May 25, 2000 38 20,251 (15,536) 4,753 Sale of 4,698,345 shares in private placement, net of $68,000 of costs 47 22,202 22,249 Exercise of stock options for 48,500 shares 1 80 81 Net income for 2001 10,028 10,028

Balance at May 31, 2001 86 42,533 (5,508) 37,111 Issuance of 116,546 shares for acquisitions $ 9,545 9,545 Issuance of 2,800,000 shares in Reorganization - Note B 28 2,259 2,287 Exercise of stock options for $54,400 shares 105 105 Amortization of deferred compensation - Note I 76 76 Preferred Stock dividends - Note F (377) (377) Net income for 2002 11,258 11,258

Balance at May 30, 2002 $9,545 $114 $44,973 $5,373 $60,005


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - SUDBURY, INC. AND SUBSIDIARIES

A. Summary of Accounting Policies Consolidation The consolidated financial statements include the accounts of Sudbury, Inc. and its subsidiaries, (The "Company"). Significant intercompany balances and transactions have been eliminated. Income per Share Primary income per share computations have been calculated on the basis of 8,605,000 shares in 2002 (8,360,000 in 2001 and 3,937,000 in 2000), which represent the weighted average number of shares outstanding and, in 2000, the common stock equivalents of dilutive employee stock options. Primary income per share gives effect to Preferred Stock dividends of $377,000 in 2002 (none in 2001 and 2000). Fiscal year Fiscal years are designated by the calendar year in which the fiscal year ends. Accordingly, fiscal years 2002 and 2000 represent 52 weeks ended May 30, 2002 and May 25, 2000, respectively and fiscal year 2001 represents 53 weeks ended May, 31, 2001. B. Reorganization Effective May 27, 2002, pursuant to an Amended Agreement and Plan of Reorganization ("Plan") approved by the stockholders of both Sudbury Holdings, Inc. (whose name changed to Sudbury Industrial, Inc., ("Industrial") and its 80% owned subsidiary, Western Capital Corporation ("Western"), a reorganization was effected whereby Industrial and Western both became direct subsidiaries of a new holding company, Sudbury, Inc. ("Sudbury"). Under the Plan, each share of Industrial's Preferred and Common Stock was converted into one share of Sudbury's Preferred and Common Stock, respectively. In addition, 2.8 million shares of Sudbury Common Stock were exchanged for the 20% minority interest in Western and the options outstanding to acquire an additional 60% of Western. The following table summarizes the financial statements of Western that are included in the accounts of the consolidated financial statements of the Company (in thousands):


C. Acquisitions Acquisitions have been accounted for using the purchase method of accounting. The results of operations of the acquired companies have been included since the respective dates of their acquisition. During 2002 and 2001, Sudbury and its subsidiaries acquired several businesses for an aggregate purchase price of $62,850,000 and $39,858,000 respectively, paid in cash, term notes, convertible notes and convertible Preferred Stock. Businesses acquired consisted principally of manufacturers of industrial products.

20027

2001 20005

Income statements:

Revenues 155,805 $ 146,803 $ 118,369 $ Costs and expenses (146,329) (140,414) (112,643)

Income before income taxes 9,476 6,389 5,726

Income taxes (5,090) (3,081) (2,831)

NET INCOME 4,386 3,308 2,895

INDUSTRIAL'S EQUITY IN WESTERN'S

NET INCOME (80% on avg.) 3,543 $ 2,646 $ 2,316 $

May 31,

2001

Balance Sheet:

Current assets 44,163 $ Fixed assets, net 30,660

Intangibles and other assets 19,312

Current liabilities (28,887)

Liability to industrial, due on demand (20,288) Long-term debt and other (22,651)

Long-term debt payable to industrial (15,100)

NET ASSETS 7,209 $ INDUSTRIAL'S EQUITY IN WESTERN'S

NET INCOME (80% on avg.) 5,765 $


Unaudited pro forma results of operations are presented below assuming the businesses acquired during 2002 and 2001 had all been acquired at the beginning of 2001.

The above pro forma unaudited results of operations are not necessarily indicative of the combined earnings as they may be in the future or as they might have been for the periods indicated had the acquisitions of the businesses been consummated at the beginning of 2001. Certain of the purchase agreements include clauses for contingent payments to the former owners based on annual results of operations of the acquired entities for periods generally up to five years from the date of acquisition. Such payments representing additional purchase price aggregated $4,531,000 for 2002 ($3,305,000 for 2001 and $1,073,000 for 2000), and are recorded as an addition to intangible assets (except $1,487,000 and $601,000 in 2002 and 2001, respectively which were recorded to property). Such amounts were recorded at the end of the fiscal year in which they were earned and are amortized commencing with the succeeding fiscal year.

2002 2001

6

Revenues 406,012 $ 383,981 $

Income before extraordinary credit 11,354 7,954

Net Income 11,354 14,268

Per share amounts

Primary:

Income before extraordinary credit 1.47 0.87

Net income 1.47 1.62

Fully diluted

Income before extraordinary credit 0.89 0.66

Net income 0.89 1.26


D. Long-Term Debt Borrowings under the revolving credit facilities and other long-term debt consisted of the following:

In April, 2001, Industrial and Western executed separate Revolving Credit and Term Loan Agreements with a group of commercial banks under which Industrial and Western respectively had $30 million and $45 million of borrowing capacity. A significant portion of the proceeds of each of the agreements was used to refinance then existing long-term debt outstanding under a $35 million facilities, which was then cancelled, and short-term bank notes. In May, 2002, Industrial renegotiated its Revolving Credit and Term Loan Agreement which increased its borrowing capacity to $45 million. A significant portion of the proceeds from the increased borrowing capacity was used to retire demand notes executed during the year. The revolving credit portions of the facilities bear interest at prime plus 1.0% and mature in March, 2004, at which the Industrial and Western can elect to convert the revolving credit portions into term loans. A commitment fee of .75% per annum on the unused amount of the revolving credit facility is required. Term loans bear interest at prime plus 1% and repayments thereon commence on June 30, 2004 and mature on March 31, 2009. Borrowings are secured by substantially all of Industrial's and Western's tangible assets including the capital stock of their subsidiaries.

30-May 31-May

20026

2001

Western:

$45 million facility with bank group 43,000 $ 23,500 $

Acquisition notes 2,820 3,694

Industrual revenue bonds 4,362

Other 1,318 1,059

TOTAL WESTERN 51,500 28,253

Industrial:

$45 million facility with bank group 38,000 7,768

Acquisition notes 6,554

Convertible acquisition notes 5,350

Real estate mortgage notes 3,944

Assumed debt and other 7,698 1,060

TOTAL INDUSTRIAL 61,546 8,828

TOTAL, BOTH COMPANIES 113,046 37,081

LESS CURRENT MATURITIES 7,274 3,606

TOTAL 105,772 $ 33,475 $


Under the Agreements, Industrial and Western are subject to restrictions relating to maintenance of net worth, interest coverage, working capital and debt levels. Industrial is also subject to restrictions concerning cash dividends and future acquisitions. Dividends in any year are limited to ten percent of consolidated net income of the preceding fiscal year. Industrial acquisitions to be financed by stock, cash from the proceeds of the debentures (see Note E), or through a combination of stock, cash and acquisition notes do not require approval by the bank group, provided that such acquisition notes do not exceed 35% of the cost of each individual acquisition. Western is required to obtain the bank group's consent for acquisitions. As a result of the May, 2002 reorganization, Sudbury executed a Guaranty Agreement whereby it guaranteed obligations of Industrial and Western under their respective Revolving Credit and Term Loan Agreements. In addition, Sudbury is subject to restrictions concerning cash dividends and future acquisitions. Dividends in any year are limited to ten percent of consolidated net income of the preceding fiscal year. Sudbury is required to obtain the bank group's consent for acquisitions. Acquisition notes are payable to former owners of acquired businesses. At May 30, 2002, $898,000 ($1,276,000 at May 31, 2001) of these notes were subordinate to bank debt. Annual repayments are due through November, 2006. The notes bear interest at rates ranging from 7% to 10-1/2%. In November, 2001 the banks, which are parties to the Revolving Credit and Term Loan Agreement, purchases $5 million of Western Industrial Revenue Bonds, the proceeds of which were utilized to refinance costs incurred to construct a plant for a subsidiary. The Bonds bear interest at prime plus 3/4% and require quarterly payments through June, 2011. Convertible acquisition notes are payable to a former owner of an acquired business. The notes bear interest at 8-1/2% and are payable monthly through June, 2002. The Company is contingently liable for $4,500,000 in irrevocable letters of credit issued primarily to an insurance company in the event actual claims incurred exceed deposit premiums pursuant to a retrospective insurance agreement. The future maturities of long-term debt outstanding at May 30, 2002 for the five fiscal years ending in May, 2007, and thereafter are as follows: $7,274,000 in 2003, $6,582,000 in 2004, $13,627,000 in 2005, $12,342,000 in 2006, $14,478,000 in 2007 and $58,743,000 thereafter.


E. 7-1/2% Convertible Subordinated Debentures In May, 2001, Industrial issued $46 million principal amount of 7-1/2% convertible subordinated debentures due April, 2011. Pursuant to the May 27, 2002 Supplemental Indenture, executed in conjunction with the Reorganization, Sudbury and Industrial became jointly and severally liable for the debenture obligations. The debentures are convertible into 4 million shares of Sudbury Common Stock and are subject to mandatory sinking fund requirements of five percent each year, commencing April, 2011, calculated to retire 75% of the issue prior to maturity. The debentures are unsecured obligations subordinated to bank debt, secured acquisition notes and equipment costs. F. Serial Preferred Stock Each series of Serial Preferred Stock has been issued with a cumulative annual dividend of $6.00 per share and has been recorded at the fair value of the shares on the date of their issuance as determined by the Company. Each share is entitled to one vote and is convertible into Common Stock at any time at rates varying from 10 to 11.76 shares. The Company, at its option, may redeem all or any of the Preferred Stock at a scheduled amount ranging from $104.00 to $100.00 per share commending two years after its issuance. G. Sale of Common Stock On June 6, 2000, Industrial sold 4,698,345 shares of its Common Stock in a private placement for $22,249,000, net of costs. Industrial loaned the proceeds to Western, who repaid an equivalent amount of debt. Of the proceeds, $11,765,000 was lent to be repaid over a period of six years and $10,552,000 was lent on a demand basis and was repaid by Western prior to May 31, 2001 as needed by Industrial to fund its acquisitions.

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