<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
---------------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended Commission File
May 31, 1996 No. 1-10023
SUDBURY, INC.
A Delaware Corporation IRS Employer Identification
No. 34-1546292
30100 CHAGRIN BOULEVARD - SUITE 203
CLEVELAND, OHIO 44124
TELEPHONE (216) 464-7026
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, par value $.01
$10,000,000 8 3/5% Senior Subordinated Pay-In-Kind Notes due 1997
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. YES X NO
--- ---
As of August 2, 1996, 10,770,174 shares were outstanding. The
aggregate market value of the voting stock held by non-affiliates of the
registrant at August 2, 1996 was $91,424,172.
DOCUMENTS INCORPORATED BY REFERENCE
- -----------------------------------
Portions of the Registrant's Annual Report to Stockholders for the
fiscal year ended May 31, 1996 are deemed incorporated by reference in Parts II
and IV of this Form 10-K. Portions of the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held October 3, 1996 are deemed to be
incorporated by reference in Part III of this Form 10-K.
<PAGE> 2
PART I
------
ITEM 1. BUSINESS
--------
GENERAL INFORMATION
- -------------------
Sudbury, Inc. (the "Company") operates through its subsidiaries, which
are engaged in the manufacture and sale of a broad range of industrial products,
including iron, aluminum and zinc castings, coating applications, cranes and
truck bodies and precision machined components.
From 1983 through January 1988, the Company purchased 30 companies at
an aggregate cost of approximately $193 million. The acquisitions were financed
through a combination of secured bank borrowings, subordinated borrowings,
seller financing in the form of subordinated seller notes and the issuance of
common stock and preferred stock.
In late 1990, as a result of the Company's highly leveraged condition
arising from the aforementioned acquisitions and recessionary economic
conditions which began to effect the Company's performance, the Company was
unable to meet its debt repayment obligations. To remedy its poor financial
condition, on January 10, 1992 the Company filed a petition (relating to the
Company only and not to its operating subsidiaries) under Chapter 11 of the
United States Bankruptcy Code. At that time, the Company hired Jacques R. Sardas
as its new president and chief executive officer, effective January 13, 1992.
The Company was able to exit bankruptcy in less than eight months. Its
amended Plan of Reorganization (the "Plan") was confirmed by the United States
Bankruptcy Court, Northern District of Ohio ("Bankruptcy Court") by Order dated
August 18, 1992 and became effective on September 1, 1992 (the "Effective
Date"). Distributions under the Plan commenced on October 15, 1992.
The Plan implemented a restructuring of the Company by providing for a
new amortization schedule for the repayment of the indebtedness owed to its
secured lender banks, mainly through the sale of a substantial number of its
subsidiaries and a significant reduction of the Company's indebtedness to
subordinated debtholders and certain other unsecured creditors through the
conversion of debt into equity of the restructured Company.
In order to repay the indebtedness owed to the secured lender banks as
provided by the Plan, the Company implemented a business plan with an asset
disposition program involving the sale of a substantial number of its
subsidiaries which sales generated aggregate net cash proceeds of approximately
$37.6 million during fiscal years 1993 and 1994.
In May 1993, the Company successfully completed the refinancing of its
then existing bank debt which allowed the Company to retain six core businesses
and cease the previous asset sale process.
In December 1995, the Company sold its South Coast Terminals, Inc.
("South Coast") subsidiary for $18.6 million because in management's view the
business of South Coast was not complementary to the Company's other businesses
or the Company's long-term growth plans. See Note C -- Dispositions of the
financial statements.
- 2 -
<PAGE> 3
PRODUCTS, MARKETS AND SALES
- ---------------------------
The Company has one business segment--the manufacture of industrial
products. Ongoing operations in this segment include five businesses which are
described below.
The Company's largest group of products consists of products and
services sold to the automotive industry which are principally produced by the
Company's Wagner Castings Company ("Wagner") and Industrial Powder Coatings,
Inc. ("IPC") subsidiaries. Sales to the automotive industry represented 60%, 61%
and 59% of the Company's total sales from ongoing operations for the fiscal
years ended 1996, 1995 and 1994, respectively.
Wagner is the Company's largest automotive supplier and produces
ductile and malleable iron castings. Wagner sells its products both domestically
and in Europe, and is known as a producer of engineered critical safety castings
in the automotive industry. Wagner's product line includes steering knuckles,
suspension parts and transmission components. Wagner's castings range in size
from small pieces weighing less than one pound to castings weighing up to 40
pounds.
Ductile iron castings represent approximately 85% of Wagner's product
line, with the balance being principally malleable iron castings. Ductile iron
has similar properties to that of malleable iron, however, ductile is less
costly to produce because it does not require the additional process of heat
treatment that malleable iron does. As a result of this cost differential, the
market for malleable iron has been decreasing. To offset the decline in
malleable castings, the Company made a decision in fiscal 1995 to expand the
capacity at its ductile iron foundry and phase out the malleable process by
fiscal 1997. Wagner's current annual ductile iron capacity before expansion is
approximately 70,000 tons. The ductile iron expansion and modernization plan
will increase Wagner's annual ductile capacity by 14,000 tons, or 20%, and will
cost approximately $14 million ($12 million of which was expended in fiscal
1996). The new ductile line is planned to be in operation in the second quarter
of fiscal 1997. The Company has funded the $12 million capital investment and
expects to fund the remaining $2 million portion of the project through cash
generated from operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
IPC serves the automotive and appliance industries through the
application of coatings to metal parts, components and finished products. With
nine powder coating lines, the Company believes that IPC is one of the largest
independent powder coating job shops in the United States. Powder coatings are
used to enhance appearance and improve corrosion protection to parts. Powder
coating's use of a dry paint process gives it advantages over liquid painting
processes which give rise to certain environmental concerns surrounding the use
of solvents and the generation of air emissions. In fiscal 1995, IPC expanded
its powder coating technology and customer base through the construction of a
new leased building equipped with approximately $5 million in equipment to
powder coat steel blanks under a long-term contract (subject to certain
conditions) with General Electric Company for their new washing machine program.
This blank coating line was one of the first of its kind in the United States
and is designed to coat flat steel blanks before, rather than after, the forming
process and is capable of running at much higher line speeds with less labor
than a typical monorail powder coating line. The line began production in May
1995.
- 3 -
<PAGE> 4
IPC also has the capability of cathodic electrodeposition coating of
parts which is used primarily for anti-corrosion purposes. In fiscal 1996, IPC
expanded into Mexico by entering into a long-term contract (subject to certain
conditions) to apply electrodeposition coatings to Chrysler Ram pickup truck
frames. IPC invested approximately $4 million in equipment which has been
installed in the customer's facility in Monterrey, Mexico. The facility is in
the start-up stage with full production expected by the end of the first quarter
of fiscal 1997.
The Company's Iowa Mold Tooling Co., Inc. ("IMT") subsidiary designs
and manufactures hydraulic articulating and telescoping truck-mounted cranes,
tire handling equipment, air compressors, and service bodies including
lubrication, field service, utility and tire service bodies. IMT services, both
domestically and internationally, the following industries: construction,
utilities, tire service, railroad, forestry and municipalities.
The Company's remaining products come from its two smallest businesses:
Frisby P.M.C., Incorporated ("Frisby") and Cast-Matic Corporation
("Cast-Matic"). Frisby is a high-volume precision machining operation which
principally produces small diameter shafts, spindles and spindle assemblies for
the electric motor, electric hand tool and automotive markets. Cast-Matic
manufactures aluminum and zinc die castings which are used in a variety of
different industries including gas regulation, appliance, hardware and
automotive.
CYCLICALITY AND SEASONALITY
- ---------------------------
As a result of the Company's dependence on the automotive industry,
there is cyclicality and seasonality in the Company's sales and profits. The
cyclicality of the automotive industry affects the Company's sales and profits
during periods of slow economic growth or recession. The seasonality results in
the Company typically having higher sales and operating profits in its second
and fourth fiscal quarters.
RAW MATERIALS
- -------------
Raw materials are purchased from a number of different sources and the
loss of any particular supplier would not have a material effect on any of the
Company's businesses. Scrap steel is the principal raw material utilized at
Wagner in the production of ductile and malleable iron castings and is subject
to price fluctuations. Commitments with most of Wagner's major customers allow
Wagner to pass on the majority of increases or decreases in the cost of scrap
steel to these customers, however, these adjustments are generally passed along
three to six months subsequent to the time the change occurs.
WORKING CAPITAL
- ---------------
The seasonality of certain of the Company's businesses serving the
automotive market may result in significant fluctuations in working capital.
Terms for sales to automotive customers are typically 30-45 days. Additionally,
IMT maintains large inventories due to the variety of its products and customer
demands regarding lead times.
- 4 -
<PAGE> 5
MARKETING AND COMPETITION
- -------------------------
The Company's sales to the automotive industry, which are principally
through Wagner and IPC, are primarily made through their respective in-house
sales forces. A portion of Wagner's sales may also come through its sales
engineers who are capable of providing design and engineering work in the early
stages of production. Companies competing in the automotive industry compete on
the basis of pricing, quality, engineering and design capabilities and delivery.
The highly competitive nature of this market makes it very difficult for Wagner
and IPC to improve margins through increases in the selling prices of their
products.
Wagner competes with many other foundries in the castings market and
also competes with manufacturers of metal castings and steel forgings. As a
result of industry consolidation occurring over the past several years, there
has been a reduction in the number of smaller foundries and an increase in the
market share held by larger foundries. Some of the foundries that compete with
Wagner are larger and have greater financial resources than the Company.
The competition for IPC, one of the largest companies in the powder
coatings industry, is very fragmented. IPC competes with many smaller facilities
which are located close to the ultimate customer. Locating a coating facility
close to a customer has become increasingly important because of high
transportation costs relative to the cost of the coating. As discussed
previously, IPC has expanded its electrodeposition and powder coating technology
and customer base through new production facilities located in proximity to
particular customers. The Company anticipates future growth at IPC will require
substantial capital expenditures to equip additional facilities located near
strategic customers. The Company intends to fund these capital investments
through cash generated from operations and funds available under its $40 million
revolving credit facility ("Credit Facility"). See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
IMT's products are marketed through its (i) in-house sales force, (ii)
an organization of sales representatives and (iii) a worldwide distributor
network. IMT competes against numerous competitors, both domestically and
internationally, for its different products. The Company believes that IMT is
one of the leading producers of articulating cranes in North America; however,
it is a much smaller manufacturer in the market of truck service bodies. IMT
competes in its markets on the basis of product capabilities, quality and price.
Both Frisby and Cast-Matic market their own products to a variety of
customers through a combination of in-house sales forces and outside sales
representatives. Competition in both of their respective markets is based on a
company's engineering and design capabilities, quality and price. In addition,
competition in these markets is highly fragmented. The precise nature of the
products that Frisby sells and the competitive pressures from newer technologies
will continue to require Frisby to make capital expenditures to remain
competitive during the next several years. The Company intends to fund these
expected capital investments from cash generated from operations and funds
available under its Credit Facility. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources."
- 5 -
<PAGE> 6
SALES TO CERTAIN CUSTOMERS
- --------------------------
For the fiscal years ended 1996, 1995 and 1994, sales to Ford Motor
Company were approximately $42.8 million, $46.6 million and $34.6 million,
respectively; and sales to Chrysler Corporation were approximately $39.2
million, $36.3 million and $31.5 million, respectively. No other customers
accounted for more than 5% of sales for any such period.
BACKLOG
- -------
As of May 31, 1996, the Company had an order backlog of $69.0 million,
compared to $55.2 million at the end of fiscal 1995. The increase in backlog
occurred primarily at Wagner. Sales backlog levels at Wagner may vary depending
on the timing of its customers order releases. At May 31, 1995, Wagner's order
level was adversely impacted by the timing of certain automotive model
changeovers. Of the Company's backlog, orders of approximately $53.2 million
associated with the automotive and truck industries are subject to cancellation
without compensation, as is customary in the industry.
ENVIRONMENTAL MATTERS
- ---------------------
The Company's manufacturing facilities and production processes, like
those of industrial manufacturers generally, are subject to numerous laws and
regulations designed to protect the environment. Environmental requirements have
become more stringent, not only with respect to emissions and wastes from
ongoing operations, but also with respect to historic conditions and
discontinued operations. Several of the Company's subsidiaries' current and
historic business activities may give rise to cleanup requirements in the
future, both with respect to on-site and off-site activities or conditions. See
"Item 3 - Legal Proceedings" for a discussion of environmental proceedings
involving the Company's operating units. The ultimate costs of environmental
compliance cannot be predicted with precision due to many uncertainties, such
as whether cleanup action will be required and, if required, what cleanup
measures, techniques or standards will be imposed.
EMPLOYEES
- ---------
As of May 31, 1996, the Company employed 2,371 employees, of whom 1,299
were represented by unions.
- 6 -
<PAGE> 7
ITEM 2. PROPERTIES
----------
The Company's corporate headquarters are located in 3,000 square feet
of leased space in Pepper Pike, Ohio. The Company's operating units occupy a
total of approximately 1,745,000 square feet, with the majority devoted to
manufacturing, assembly and storage. Of the approximately 1,745,000 square feet
occupied, 1,277,000 square feet are owned and 468,000 square feet are leased.
The Company's manufacturing facilities are set forth in the table
below.
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION PRINCIPAL PRODUCTS SQUARE FOOTAGE STATUS
- -------- ------------------ -------------- ------
<S> <C> <C> <C>
ILLINOIS
- --------
Decatur Ductile iron castings 390,000 Owned
Decatur Inventory storage 110,000 Leased
Havana Ductile iron castings 210,000 Owned
Elk Grove Village High precision machined 105,000 Leased
components
IOWA
- ----
Garner Metal fabrication of 433,500 Owned
truck mounted cranes,
truck bodies and
compressors
KENTUCKY
- --------
Shelbyville Custom powder coating 40,000 Owned
Shelbyville Materials & inventory storage 9,150 Leased
Louisville Blank powder coating 97,000 Leased
MICHIGAN
- --------
Stevensville Precision aluminum and zinc 64,000 Owned
die castings; machining
OHIO
- ----
Norwalk Custom powder coating 40,000 Owned
Norwalk Custom powder coating 69,500 Owned
Norwalk Custom powder coating 30,000 Owned
Norwalk Custom powder & electro-
deposition coating 92,450 Leased
Norwalk Materials and inventory storage 22,280 Leased
CANADA
- ------
Orillia, Ontario Servicing of truck mounted 5,900 Leased
cranes, truck bodies and
compressors
MEXICO
- ------
Monterrey, Mexico Electrodeposition coating 25,800 Leased
</TABLE>
The Company believes that all of its facilities are reasonably
maintained and are generally adequate for their present purposes. Facilities are
believed to be sufficient to accommodate reasonable increases in business.
- 7 -
<PAGE> 8
ITEM 3. LEGAL PROCEEDINGS
-----------------
GENERAL
- -------
Other than routine litigation incident to its business and except as
noted below, the Company is not a party to any legal proceedings which could be
material to its results of operations, financial position or liquidity.
ENVIRONMENTAL MATTERS
- ---------------------
Several of the Company's operating units have been identified as
potentially responsible parties in legal proceedings or otherwise notified that
they may be liable for the cleanup of hazardous substances under federal
"Superfund" and other environmental protection legislation. The Company intends
to utilize all available legal defenses and remedies, including insurance owned
by the Company or its predecessors in interest, with respect to these sites and
any other site in which it may be involved in legal proceedings, to minimize the
Company's financial exposure to environmental liability.
On April 19, 1993, the Minnesota Pollution Control Agency (MPCA) issued
Metalcote Grease and Oil Company ("Metalcote"), a division of Western Capital
Corporation, a non-operating subsidiary of the Company, an order to investigate
and take other corrective action at property Metalcote owned in St. Paul,
Minnesota. The property was subsequently owned by Randolph Capital Corporation,
a subsidiary of Western Capital Corporation. Although Randolph Capital
Corporation is currently contesting its responsibility for environmental
conditions that allegedly exist at the property, Randolph Capital Corporation is
cooperating with the MPCA and has retained legal counsel and environmental
consultants to respond to the MPCA's order. Although additional investigation is
necessary and ongoing, Randolph Capital Corporation currently estimates that the
future costs to respond to the order will be at least $300,000. This estimate is
subject to reevaluation following completion of the current investigation.
During 1995, the Minnesota legislature passed legislation making a substantial
portion of these costs potentially eligible for reimbursement from the Minnesota
Petroleum Tank Release Cleanup Fund.
A release of petroleum products has also been identified and reported
to regulatory authorities at a second site in St. Paul, Minnesota previously
owned and operated by Metalcote, and a site in Philadelphia, Pennsylvania
previously owned and operated by Master Lubricants, both divisions of Western
Capital Corporation. Environmental consultants have been retained to investigate
and address the two reported petroleum releases. The preliminary investigation
at these sites has been completed and the Company is discussing with regulatory
agencies the corrective actions, if any, which may be needed at these sites.
There is no current estimate on the cost of further work, if any, at these
sites.
To date, Management believes that the resolution of other pending or
anticipated environmental proceedings and all claims in the aggregate (after
applicable reserves, see Note F -- Contingencies and Commitments of the
financial statements) are immaterial to the Company's financial position,
results of operations and liquidity taken as a whole. Although the Company
continues to assess the potential liability of its operating units for pending
and anticipated legal proceedings, the ultimate liability for such environmental
matters cannot be predicted with certainty.
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<PAGE> 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------
The following sets forth the name, age and recent business experience
of each person who is an executive officer of the Company. All executive
officers are elected by and serve at the pleasure of the Board of Directors.
<TABLE>
<CAPTION>
Principal occupation or
employment for the past
Name five years Age
- ---- ----------------------------------------------- ---
<S> <C> <C>
Jacques R. Sardas Director, President and Chief 65
Executive Officer since
January 13, 1992; Chairman of
the Board of Directors and
Treasurer since January 1993; Director and
Executive Vice President of Goodyear Tire and
Rubber Co., which develops and sells tires
domestically and abroad (1980-1991)
Mark E. Brody Vice President and Chief 34
Financial Officer since
October 1994; Vice President
of Finance (October 1992 -
October 1994); Controller
(September 1991 - October 1994);
Assistant Controller (April
1989-September 1991)
</TABLE>
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<PAGE> 10
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
-------------------------------------------------------------
MATTERS
-------
The Company's common shares are listed on the Nasdaq Stock Market. The
information required by this item appears under the caption "Market For
Registrant's Common Equity and Related Stockholder Matters" on page 28 of the
1996 Annual Report and is incorporated herein by reference thereto.
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The information required by this item appears under the caption
"Selected Financial Data" on page 1 of the 1996 Annual Report and is
incorporated herein by reference thereto.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The information required by this item appears under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 25 through 28 of the 1996 Annual Report and is incorporated
herein by reference thereto.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The information required by this item appears on pages 13 through 24 of
the 1996 Annual Report and is incorporated herein by reference thereto.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
----------------------------------------------------
Not Applicable
- 10 -
<PAGE> 11
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
-----------------------------------------------
The information required by this item appears under the caption
"Election of Directors" on pages 4 through 6 of the Company's definitive Proxy
Statement to be filed with the Securities and Exchange Commission within 120
days of the close of the Company's fiscal year ended May 31, 1996 and is
incorporated herein by reference thereto.
Information concerning executive officers of the Company is contained
in Part I of this report under the caption "Executive Officers of the
Registrant."
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The information required by this item is located on pages 7 through 14
of the Company's definitive Proxy Statement to be filed with the Securities and
Exchange Commission within 120 days of the close of the Company's fiscal year
ended May 31, 1996 and is incorporated herein by reference thereto.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The information required by this item appears under the caption
"Beneficial Ownership of Securities" on pages 2 and 3 of the Company's
definitive Proxy Statement to be filed with the Securities and Exchange
Commission within 120 days of the close of the Company's fiscal year ended May
31, 1996 and is incorporated herein by reference thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Not applicable.
- 11 -
<PAGE> 12
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(a)(1), (a)(2) and (d) Financial Statements and Financial Schedules.
---------------------------------------------
The financial statements and financial statement
schedules listed in accompanying index to financial
statements and financial schedules are filed as part of
this Annual Report on Form 10-K.
(a)(3) and (c) Exhibits.
---------
The exhibits listed on the accompanying index to exhibits are
filed as part of this Annual Report on Form 10-K.
(b) Reports on Form 8-K.
None.
- 12 -
<PAGE> 13
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
August 15, 1996 on its behalf by the undersigned, thereunto duly authorized.
SUDBURY, INC.
By: /S/Mark E. Brody
------------------------------------------
Mark E. Brody
Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
and the rules and regulations promulgated thereunder, this report has been
signed on behalf of the Registrant by the following persons, in their indicated
capacities, on August 15, 1996.
/S/Jacques R. Sardas
- -----------------------------
Jacques R. Sardas Director, Chairman, President and Chief
Executive Officer (Principal Executive
Officer)
/S/Mark E. Brody
- -----------------------------
Mark E. Brody Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
/S/Cloyd J. Abruzzo
- -----------------------------
Cloyd J. Abruzzo Director
/S/Jerry A. Cooper
- -----------------------------
Jerry A. Cooper Director
/S/Preston Heller, Jr.
- -----------------------------
Preston Heller, Jr. Director
/S/James A. Karman
- -----------------------------
James A. Karman Director
/S/David A. Preiser
- -----------------------------
David A. Preiser Director
/S/Thomas F. Slater
- -----------------------------
Thomas F. Slater Director
- 13 -
<PAGE> 14
SUDBURY, INC.
ANNUAL REPORT ON FORM 10-K
ITEMS 14 (a) (1), (2) (d) AND (3) (c)
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENT SCHEDULES
INDEX TO EXHIBITS
CERTAIN EXHIBITS
FISCAL YEAR ENDED MAY 31, 1996
- 14 -
<PAGE> 15
SUDBURY, INC.
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
(ITEM 14(a)(1) AND (2)(d))
<TABLE>
<CAPTION>
PAGE REFERENCE
------------------------------
FORM 10-K ANNUAL REPORT
--------- -------------
<S> <C> <C>
Data incorporated by reference from the 1996 Annual Report:
Consolidated Statements of Income -
Fiscal Years Ended May 31, 1996, 1995 and 1994 13
Consolidated Balance Sheets - May 31, 1996
and May 31, 1995 14
Consolidated Statements of Stockholders'
Equity - Fiscal Years Ended May 31, 1996, 1995
and 1994 15
Consolidated Statements of Cash Flows -
Fiscal Years Ended May 31, 1996, 1995 and 1994 16
Notes to Consolidated Financial Statements 17-24
Report of Independent Auditors 24
Consolidated Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts 16
Report of Independent Auditors 17
</TABLE>
All other schedules for the Company have been omitted because the required
information is not present or not present in amounts sufficient to require
submission of the schedule, or because the information required is included in
the financial statements, including the notes thereto.
The consolidated financial statements of the Company listed in the preceding
index, which are included in the 1996 Annual Report, are incorporated herein by
reference. With the exception of the pages listed in the above index and
information incorporated by reference elsewhere herein, the 1996 Annual Report
is not to be deemed filed as part of this report.
- 15 -
<PAGE> 16
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
SUDBURY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- ------------------------------------------------------------------------------------------------------------------------
ADDITIONS
BALANCE AT CHARGED TO CHARGED BALANCE AT
BEGINNING COSTS AND TO OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Fiscal year ended May 31, 1996:
Deferred tax asset valuation
allowance $6,463 $ (316) (2) $(3,069) (1) $3,078
Fiscal year ended May 31, 1995:
Deferred tax asset valuation
allowance $9,214 $ 215 $ (946) (2) $(2,020) (2) $6,463
Fiscal year ended May 31, 1994:
Deferred tax asset valuation
allowance $9,208 $ 6 (3) $9,214
<FN>
(1) Decrease in valuation allowance resulted primarily from utilization of net
operating and capital loss carryforwards.
(2) Valuation allowance was reduced as a result of an evaluation of future
realizability.
(3) Increase in valuation allowance resulted primarily from net operating and
capital losses which could not be realized.
</TABLE>
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<PAGE> 17
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements of Sudbury, Inc. as of May
31, 1996 and 1995, and for each of the three years in the period ended May 31,
1996 and have issued our report thereon dated July 12, 1996 [incorporated by
reference elsewhere in this Annual Report (Form 10-K)]. Our audits also included
the related consolidated financial statement schedule of Sudbury, Inc. listed in
item 14(a) of this Annual Report (Form 10-K). This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits.
In our opinion, the consolidated financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Cleveland, Ohio
July 12, 1996
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<PAGE> 18
SUDBURY, INC.
FORM 10-K
EXHIBIT INDEX
-------------
Item 14(a)(3) EXHIBITS: Exhibits identified in parenthesis below, on file with
the SEC, are incorporated herein by reference as exhibits hereto.
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<S> <C>
(2) Third Amended Plan of Reorganization as confirmed by the United States
Bankruptcy Court, Northern District of Ohio. (Exhibit (2) to Form
10-K for the fiscal year ended May 31, 1992.)
(2)(a) Agreement and Plan of Merger among South Coast Delaware, Inc., Sudbury,
Inc. And South Coast Terminals, Inc. Dated as of December 22, 1995.
(Exhibit (2) to Form 10-Q for the fiscal quarter ended November 30,
1995.)
(3)(a) By-Laws of Sudbury, Inc., as amended November 19, 1992. (Exhibit
(3)(a) to Form 10-K for the fiscal year ended May 31, 1993.)
(3)(b) Second Restated Certificate of Incorporation of Sudbury, Inc. (Exhibit
(3)(b) to Form 10-K for the fiscal year ended May 31, 1993.)
(4)(a) Credit Agreement by and among Sudbury, Inc. and National City Bank,
Star Bank, National Association and National City Bank, as Agent, dated
May 30, 1995. (Exhibit (4)(c) to Form 10-K for the fiscal year ended
May 31, 1995.)
(4)(b) First Amendment dated August 30, 1995 to Credit Agreement by and
among Sudbury, Inc. and National City Bank, Star Bank, National
Association and National City Bank, as Agent, dated May 30, 1995.
(Exhibit (4)(a) to Form 10-Q for the fiscal quarter ended August
31, 1995.)
(4)(c) Second Amendment dated May 31, 1996 to Credit Agreement by and among
Sudbury, Inc. and National City Bank, Star Bank, National Association
and National City Bank, as Agent, dated May 30, 1995.
(4)(d) Form of Participation Certificate Agreement entered into in
connection with Sudbury's Third Amended Plan of Reorganization.
(Exhibit (4)(r) to Form 10-K for the fiscal year ended May 31,
1992.)
(4)(e) Form of Indenture between Sudbury and IBJ Schroder Bank and Trust
Company, as Trustee for Sudbury's 8.6% $10 million Senior
Subordinated Pay-In-Kind Notes due 1997, distributed pursuant to
Sudbury's Third Amended Plan of Reorganization. (Exhibit T3C to the
Form T-3 filed on August 17, 1992.)
</TABLE>
- 18 -
<PAGE> 19
SUDBURY, INC.
FORM 10-K
EXHIBIT INDEX (CONTINUED)
-------------
<TABLE>
<CAPTION>
EXHIBIT NO.
- -----------
<S> <C>
(10)(a) 1990 Stock Option Plan. (Exhibit (10)(1) to Form 10-K for the fiscal
year ended May 31, 1990.)
(10)(b) Amended Employment Agreement dated January 13, 1992 between Sudbury and
Jacques R. Sardas. (Exhibit (10)(h) to Form 10-K for the fiscal year
ended May 31, 1992.)
(10)(c) Agreement and Plan of Merger dated November 7, 1989 among Sudbury,
Western, General Products Delaware Corporation, General Products
Angola Corporation and General Products Corporation. (Exhibit
(10)(b) to Current Report on Form 8-K for event occurring on
November 7, 1989.)
(10)(d) Asset Purchase Agreement dated November 7, 1989 among Sudbury,
Western and General Products Delaware Corporation. (Exhibit 10(a)
to the Current Report on Form 8-K filed for event occurring on
November 7, 1989.)
(10)(e) Settlement Agreement and Mutual Release dated July 29, 1994 between
Jacques R. Sardas and Sudbury, Inc. (Exhibit (10)(e) to Form 10-K for
the fiscal year ended May 31, 1994.)
(10)(f) Stock Option Agreement dated July 29, 1994 between Jacques R. Sardas
and Sudbury, Inc. (Exhibit (10)(f) to Form 10-K for the fiscal year
ended May 31, 1994.)
(10)(g) Summary Description of the Sudbury, Inc. Incentive Bonus Plan.
(10)(h) Directors' Deferral Plan adopted September 12, 1994. (Exhibit
(10)(h) to Form 10-K for the fiscal year ended May 31, 1995.)
(10)(i) First Amendment dated August 15, 1996 to Directors' Deferral Plan
adopted September 12, 1994.
(10)(j) 1995 Stock Option Plan. (Exhibit (10)(i) to Form 10-K for the fiscal
year ended May 31, 1995.)
(10)(k) Employment Agreement between Jacques R. Sardas and Sudbury, Inc. dated
July 28, 1995. (Exhibit (10)(j) to Form 10-K for the fiscal year ended
May 31, 1995.)
(10)(l) Non-Qualified Stock Option Agreement between Sudbury, Inc. and Jacques
R. Sardas dated July 28, 1995. (Exhibit (10)(k) to Form 10-K for the
fiscal year ended May 31, 1995.)
</TABLE>
- 19 -
<PAGE> 20
SUDBURY, INC.
FORM 10-K
EXHIBIT INDEX (CONTINUED)
-------------
<TABLE>
<S> <C>
(10)(m) Employment Agreement dated October 12, 1995 between Mark E. Brody and
Sudbury, Inc. (Exhibit (10) to Form 10-Q for the fiscal quarter ended
November 30, 1995.)
(11) Statement re: Computation of Per Share Earnings
(13) Selected portions of the 1996 Annual Report
(21) Subsidiaries of the Company
(23) Consent of Independent Auditors
(27) Financial Data Schedule
</TABLE>
The above exhibits are available to shareholders upon written request to:
Corporate Secretary
Sudbury, Inc.
30100 Chagrin Boulevard, Suite 203
Cleveland, Ohio 44124
- 20 -
<PAGE> 1
Exhibit (4)(c)
- --------------
SECOND AMENDMENT
TO
CREDIT AGREEMENT
This Second Amendment to Credit Agreement (this "Amendment"), dated as
of May 31 , 1996, is entered into by and among SUDBURY, INC. (Borrower),
NATIONAL CITY BANK and STAR BANK, NATIONAL ASSOCIATION (together "Banks") and
NATIONAL CITY BANK in its capacity as agent of the banks ("NCB-Agent") for the
purposes of the Credit Agreement referred to below and the Related Writings.
WITNESSETH:
WHEREAS, the parties have entered into a Credit Agreement dated May 30,
1995, as amended by a certain Amendment dated as of August 30, 1995 (as amended,
the "Credit Agreement"; all terms used in the Credit Agreement being used herein
with the same meaning), which sets forth the terms and conditions upon which
Borrower may obtain Revolving Loans and Subject LCs from time to time; and
WHEREAS, the parties desire to amend the fixed asset negative covenant
contained in the Credit Agreement; and
WHEREAS, the parties also wish to evidence the agreement of Borrower to
pay to NCB-Agent a $1,000 documentation fee in consideration of NCB-Agent's
preparation of this Amendment; and
NOW, THEREFORE, in consideration of the premises above and the mutual
covenants and agreements contained herein and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties agree as follows:
SECTION I - AMENDMENT TO CREDIT AGREEMENT
-----------------------------
Subsection 3D.05 of the Credit Agreement is hereby amended in its
entirety to read as follows:
"3D.05 FIXED ASSETS -- The Companies, viewed on a consolidated basis,
will not invest (net after trade-ins, if any) in fixed assets and
leasehold improvements (in each case, excluding capitalized interest)
more than Twenty-Four Million and 00/100 Dollars ($24,000,000) during
the fiscal year ending May 31, 1996 or more than Twenty Million and
00/100 Dollars ($20,000,000) during any fiscal year thereafter."
SECTION II - CONDITIONS PRECEDENT
--------------------
It is a condition precedent to the effectiveness of this Amendment
that, prior to or on the date hereof; the following items shall have been
delivered to NCB-Agent (in form and substance acceptable to NCB-Agent):
(A) an Acknowledgment of Receipt of a copy of and Consent and
Agreement to the terms of, this Amendment by each Company (other than
Borrower) with respect to a certain Continuing Guaranty of Payment
executed and delivered to NCB-Agent by such entities and dated May 30,
1995;
(B) a Certificate, dated as of the date hereof, of the secretary of
Borrower certifying (1) that Borrower's Certificate of Incorporation
and By-Laws have not been amended since the execution of
<PAGE> 2
the Credit Agreement (or certifying that true, correct and complete
copies of any amendments are attached), (2) that copies of resolutions
of the Board of Directors of Borrower are attached with respect to the
approval of this Amendment and of the matters contemplated hereby and
authorizing the execution, delivery and performance by Borrower of this
Amendment and (3) as to the incumbency and signatures of the officers
of Borrower signing this Amendment;
(C) a non-refundable documentation fee to NCB-Agent (for its own
account) in the amount of $1,000 in consideration of NCB-Agent's
preparation of this Amendment; and
(D) Such other documents as NCB-Agent may request to implement this
Amendment and the transactions contemplated hereby.
If NCB-Agent or Banks shall consummate the transactions contemplated hereby
prior to the fulfillment of any of the conditions precedent set forth above, the
consummation of such transactions shall constitute only an extension of time for
the fulfillment of such conditions and not a waiver thereof.
SECTION III - REPRESENTATIONS AND WARRANTIES
------------------------------
Borrower hereby represents and warrants to each of the other parties to
this Amendment that
(A) none of the representations and warranties made in the Credit
Agreement has ceased to be true and complete in any material respect as
of the date hereof; and
(B) as of the date hereof no "Default Under This Agreement" has
occurred and is continuing.
SECTION IV - ACKNOWLEDGMENTS CONCERNING OUTSTANDING LOANS
--------------------------------------------
Borrower acknowledges and agrees that, as of the date hereof; all of
Borrower's outstanding loan obligations to Banks are owed without any offset,
deduction, defense, claim or counterclaim of any nature whatsoever.
SECTION V - REFERENCES
----------
On and after the effective date of this Amendment, each reference in
the Credit Agreement to "this Agreement", "hereunder", "hereof', or words of
like import referring to the Credit Agreement, and each reference in the
Revolving Notes or other Related Writings to the "Credit Agreement", "thereof',
or words of like import referring to the Credit Agreement shall mean and refer
to the Credit Agreement as previously amended and as amended hereby. The Credit
Agreement, as previously amended and as amended by this Amendment, is and shall
continue to be in full force and effect and is hereby ratified and confirmed in
all respects. The execution, delivery and effectiveness of this Amendment shall
not operate as a waiver of any right, power or remedy of NCB-Agent or Banks
under the Credit Agreement or constitute a waiver of any provision of the Credit
Agreement except as specifically set forth herein.
SECTION VI - COUNTERPARTS AND GOVERNING LAW
------------------------------
This Amendment may be executed in any number of counterparts, each
counterpart to be executed by one or more of the parties but, when taken
together, all counterparts shall constitute one agreement. This Amendment, and
the respective rights and obligations of the parties hereto, shall be construed
in accordance with and governed by Ohio law.
2
<PAGE> 3
IN WITNESS WHEREOF, the Borrower, NCB-Agent and the banks have caused
this Amendment to be executed by their authorized officers as of the date and
year first above written.
NATIONAL CITY BANK, AGENT SUDBURY, INC.
By: /s/ Diane I. Rooney By: /s/ Mark E. Brody
---------------------------- -----------------------------
Printed Name: Diane I. Rooney Printed Name: Mark E. Brody
------------------ -------------------
Title: Vice President Title: Vice President
------------------------- --------------------------
NATIONAL CITY BANK
By: /s/ Diane I. Rooney And By: /s/ Jacques Sardas
---------------------------- ------------------------
Printed Name: Diane I. Rooney Printed Name: Jacques Sardas
------------------ -------------------
Title: Vice President Title: President & CEO
------------------------- --------------------------
STAR BANK, NATIONAL ASSOCIATION
By: /s/ John D. Barret
----------------------------
Printed Name: John Barrett
------------------
Title: Vice President
-------------------------
3
<PAGE> 4
ACKNOWLEDGMENT, CONSENT AND AGREEMENT
-------------------------------------
WITH RESPECT TO GUARANTY
------------------------
The undersigned hereby acknowledge receipt of a copy of a certain
Second Amendment to Credit Agreement (the "Amendment"), dated as of May 31,
1996, and entered into by and among Sudbury, Inc. ("Borrower"), National
City Bank and Star Bank, National Association (collectively the "Banks") and
National City Bank in its capacity as agent of the Banks ("NCB-Agent"). By
executing this Acknowledgment, Consent and Agreement, the undersigned agree to
remain bound by the terms and conditions of that certain Continuing Guaranty of
Payment executed and delivered to NCB-Agent by the undersigned and dated as of
May 30, 1995 (the "Guaranty"). The Guaranty was executed in connection with a
certain Credit Agreement by and among Borrower, Banks and NCB-Agent, which
Credit Agreement has been previously modified and is now being amended by the
Amendment. The undersigned further acknowledge that the liability of the
undersigned pursuant to the Guaranty shall continue and be unaffected by the
Amendment and shall extend, without limitation, to any and all obligations of
Borrower in connection with the matters referred to in the Amendment. The
undersigned expressly consent to Borrower's execution of the Amendment and agree
that Banks and NCB-Agent may rely on this Acknowledgment, Consent and Agreement
in modifying the financial accommodations to Borrower as contemplated and
evidenced by such document.
Address: 2800 Yasdick Drive CAST-MATIC CORPORATION
P.O. Box 251
Stevensville, MI 49127
Telecopy: (616) 429-1630 By: /s/ Mark E. Brody
----------------------------
Printed Name: Mark E. Brody
Title: Vice President & Treasurer
Date: May 31, 1996
Address: 1500 Chase Avenue FRISBY P.M.C., INCORPORATED
Elk Grove Village, IL 60007
Telecopy: (708) 439-6463
By: /s/ Mark E. Brody
----------------------------
Printed Name: Mark E. Brody
Title: Vice President & Treasurer
Date: May 31, 1996
Address: 202 Republic Street INDUSTRIAL POWDER COATINGS, INC.
P.O. Box 837
Norwalk, OH 44857
Telecopy: (419) 663-4206 By: /s/ Mark E. Brody
----------------------------
Printed Name: Mark E. Brody
Title: Vice President & Treasurer
Date: May 31, 1996
<PAGE> 5
Address: 500 Highway 18 West IOWA MOLD TOOLING CO., INC.
Garner, IA 50438
Telecopy: (515) 923-2424
By: /s/ Mark E. Brody
----------------------------
Printed Name: Mark E. Brody
Title: Vice President & Treasurer
Date: May 31, 1996
Address: 825 North Lowber Street WAGNER CASTINGS COMPANY
P.O. Box 1319
Decatur, IL 62525
Telecopy: (217)425-6662 By: /s/ Mark E. Brody
----------------------------
Printed Name: Mark E. Brody
Title: Vice President & Treasurer
Date: May 31, 1996
Address: 227 Wagner Avenue WAGNER HAVANA, INC.
Box 469
Havana, IL 62644
Telecopy: (309) 543-4499 By: /s/ Mark E. Brody
----------------------------
Printed Name: Mark E. Brody
Title: Vice President & Treasurer
Date: May 31, 1996
<PAGE> 1
Exhibit (10)(g)
- ---------------
SUMMARY DESCRIPTION OF THE SUDBURY, INC. INCENTIVE BONUS PLAN
Officers of Sudbury, Inc., including executive officers, are eligible to earn an
annual cash incentive bonus under the Sudbury, Inc., Incentive Bonus Plan. The
amount of such bonus is determined as a percentage of base salary ranging from a
minimum of 15% to a maximum of 45% as determined by the category to which an
individual participant is assigned for a plan year. The assignment of category
is based upon the subjective determination of each individual's level of
responsibility and accountability by the Compensation Committee of Sudbury,
Inc.'s Board of Directors ("Committee").
The annual incentive bonus is tied directly to the achievement of specific
financial objectives for Sudbury, Inc. and its subsidiaries (the "Company").
Each year, usually at its August meeting, the Committee sets minimum and maximum
target levels relating to the Company's return on equity. All awards require
Committee approval and are submitted by the Committee to the Company's Board of
Directors for the Board's final approval.
<PAGE> 1
Exhibit 10(i)
- -------------
AMENDMENT NO. 1
TO
SUDBURY, INC.
DIRECTORS' DEFERRAL PLAN
This Amendment No. 1 to the Sudbury, Inc. Directors' Deferral Plan (the "Plan")
is adopted on this 15th day of August, 1996 by the Board of Directors.
The Plan is hereby amended as follows:
1. Paragraph 3(e) is hereby amended to add "(i)" in front of the word
"Notwithstanding" and to add the following at the end of said
paragraph:
"(ii) Notwithstanding the provisions of Paragraph 3(d), a Member may
elect on one occasion to modify or amend an Election Agreement for a
prior Year to elect to have all or a portion of the amount attributable
to such Year's fees transferred into the Stock Account or the Cash
Account, as the case may be, if such Director's membership on the Board
has terminated, and he is not otherwise a reporting person under
Section 16 of the Exchange Act at the time of such modification or
amendment, and he files a new Election Agreement reflecting such
modification or amendment at least six months after the date of the
original Election Agreement and at least one year in advance of the
date such distributions were originally scheduled to commence."
2. The fourth sentence of Paragraph 5(a) is hereby amended by adding the
phrase "Subject to the provisions of Paragraph 3(e)(ii) hereof " at the
beginning of said sentence and changing "A" to lower case.
3. Capitalized terms not otherwise defined herein shall have the meaning
ascribed to them in the Plan.
4. This Amendment No. 1 to the Plan shall be effective as of August 15,
1996.
5. Except as set forth herein, the Plan shall remain in full force and
effect.
<PAGE> 1
EXHIBIT 11 - STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
SUDBURY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year Ended May 31,
---------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
(Amounts in thousands, except per share data)
PRIMARY
Average shares outstanding 10,518 10,376 10,071
Net effect of dilutive stock
options and other common
stock equivalents - based
on the treasury stock
method using average
market price 2,297 2,275 2,259
------- ------- -------
TOTAL 12,815 12,651 12,330
======= ======= =======
Net income $15,871 $13,572 $ 6,830
======= ======= =======
Per share amount $ 1.24 $ 1.07 $ .55
======= ======= =======
FULLY DILUTED
Average shares outstanding 10,518 10,376 10,071
Net effect of dilutive stock
options and other common
stock equivalents - based
on the treasury stock method
using the year-end
market price if higher than
average market price 2,365 2,294 2,411
------- ------- -------
TOTAL 12,883 12,670 12,482
======= ======= =======
Net income $15,871 $13,572 $ 6,830
======= ======= =======
Per share amount $ 1.23 $ 1.07 $ .55
======= ======= =======
</TABLE>
<PAGE> 1
EXHIBIT 13
- ----------
SELECTED FINANCIAL DATA (1)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
-------- -------- --------- --------- ---------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Net Sales:
Ongoing operations $302,239 $305,435 $ 250,329 $ 222,410 $ 198,197
Businesses held for sale 315 50,221 156,678
-------- -------- --------- --------- ---------
TOTAL 302,239 305,435 250,644 272,631 354,875
Special charges (2) (5,956) (586)
Reorganization items (3) (1,095) (46,315)
Gain on sale of subsidiary (4) 1,511
Income (loss) before
extraordinary gain 15,871 13,572 6,830 3,108 (56,410)
Extraordinary gain (5) 78,805
Net income (loss) 15,871 13,572 6,830 81,913 (56,410)
Net income per common share:
Fully diluted 1.23 1.07 .55 (6) (6)
Primary 1.24 1.07 .55 (6) (6)
Cash dividends per common
share -- -- -- -- --
Assets 132,352 129,637 114,200 116,456 162,233
Working capital (deficiency) 22,891 15,762 19,667 19,148 (27,583)
Short-term obligations 282 678 2,300 3,088 60,874
Long-term debt 10,113 17,978 29,961 45,984 23,931
Liabilities deferred pursuant
to Chapter 11 86,279
Serial preferred stock 7,563
Stockholders' equity (deficit) 62,612 44,552 29,410 16,808 (56,833)
<FN>
- ----------
(1) As discussed more fully in Note Q of the financial statements, the
Company emerged from Chapter 11 of the U.S. Bankruptcy Code on
September 1, 1992 and adopted Fresh Start reporting at that date.
Accordingly, financial data presented for periods subsequent to the
date of emergence are not comparable to prior periods.
(2) Refer to Note D of the financial statements for a further discussion of
1994 special charges. The 1993 special charges represent consulting and
other expenses incurred under the Company's restructuring program.
(3) Reorganization items represent charges recorded in conjunction with the
Company's restructuring program.
(4) As discussed more fully in Note C of the financial statements, the
Company sold its South Coast Terminals, Inc. subsidiary in December
1995.
(5) An extraordinary gain resulted from the forgiveness of prepetition
liabilities under the Company's amended Plan of Reorganization.
(6) Calculations of net income per share are not meaningful as a result of
the Company's reorganization described in Note Q of the financial
statements.
</TABLE>
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS - FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995:
SALES. The Company's net sales for fiscal 1996 decreased by 1% to $302.2 million
from $305.4 million in the prior year. Fiscal 1996 results included sales of
$13.5 million from South Coast Terminals, Inc. ("South Coast") prior to its
divestiture in December 1995. South Coast's fiscal 1995 sales were $23.5
million. After adjusting for the impact of the sale of South Coast, sales from
the Company's other five subsidiaries increased by $6.8 million or 2.4% in
fiscal 1996 over the prior year. This sales improvement came from a $29.5
million increase in net new business, $3.0 million of price increases and a
$25.7 million decrease in sales of existing products.
The Company's Industrial Powder Coatings, Inc. ("IPC") and Wagner Castings
Company ("Wagner") subsidiaries generated sales increases over the prior year.
IPC's sales growth resulted primarily from the production of its new blank
coating line facility in Louisville, Kentucky. The blank coating facility sales
were $13.5 million of which $10.5 million represented the pass through of steel
blank material cost. Partially offsetting this increase were reductions in IPC's
volume due to an automotive model changeover affecting its coil spring coating
business and a general slowing in automotive orders. At Wagner, $10.6 million of
net new business came from Wagner's presence on Ford Motor Company's North
American version of its "World Car" program and on other automotive vehicle
platforms. During fiscal 1996, the Company's sales to the automotive industry
were $181 million which is a 3% decrease from the prior year level of $186
million. The decrease resulted from the previously discussed volume declines at
IPC. The remaining companies' sales as a whole were down $6.7 million when
compared to the prior year period due principally to slowing in the liquid
propane gas regulator valve and electric hand tool markets.
GROSS PROFIT. Gross profit (net sales less costs of products sold) for fiscal
1996 decreased by $2.5 million to $48.5 million from $51.0 million. Gross profit
as a percentage of net sales was 16.1% for fiscal 1996 compared to 16.7% in the
prior year. The decrease in the margin rate resulted from both the sale of South
Coast, whose gross margins were higher than the average for the Company's other
subsidiaries and the impact of the pass through of $10.5 million of steel blank
material costs at IPC described previously. Partially offsetting these items
were favorable effects of cost and productivity improvements at the Company's
Wagner and Iowa Mold Tooling ("IMT") subsidiaries.
<PAGE> 3
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses as a
percentage of net sales decreased to 8.5% in fiscal 1996 from 9.3% in the prior
year. In terms of dollars, such expenses decreased from $28.3 million in the
prior year to $25.6 million in fiscal 1996. The decrease resulted primarily from
the impact of the sale of South Coast and lower expenses recorded for a
contractual bonus obligation. The sale of South Coast in December 1995 resulted
in $1.3 million less expense in fiscal 1996 when compared to the prior year. In
fiscal 1996 the Company recorded expense of $2.8 million related to the final
determination of a contractual bonus established in its 1992 employment
agreement with Jacques R. Sardas, Chairman, President and Chief Executive
Officer of the Company. As discussed in Note D to the consolidated financial
statements, the expense was based on the appraised value of the Company by an
independent investment banking firm. In the prior year, the Company recorded
expense of $3.4 million related to the contractual bonus.
INTEREST EXPENSE. Interest expense decreased by $1.5 million due to
significantly lower borrowing levels and reduced interest rates under the
Company's new revolving credit facility.
GAIN ON SALE OF SUBSIDIARY. The Company divested its South Coast subsidiary in
December 1995 and recorded a gain before income taxes of $1.5 million on the
transaction.
OTHER INCOME. Other income increased by $.8 million due principally to the
settlement of an environmental matter related to a business sold by the Company
in 1992 which resulted in the receipt of escrowed funds and insurance proceeds.
INCOME TAX EXPENSE. Income tax expense increased by $1.8 million from $6.4
million in the prior year (an effective tax rate of 32%) to $8.2 million in
fiscal 1996 (an effective tax rate of 34%). The fiscal 1996 effective tax rate
of 34% was less than the statutory rate of 35% principally due to the impact of
income tax benefits recognized in conjunction with the sale of South Coast. The
fiscal 1995 effective tax rate differed from the statutory tax rate due
principally to income tax benefits associated with the 1992 employment agreement
with Mr. Sardas and the utilization of net operating loss carryforwards. The
deferred tax asset valuation allowance was reduced by $.3 million and $2.1
million in fiscal 1996 and 1995, respectively, as a result of management's
evaluation of the future realization of certain deferred tax assets.
As of May 31, 1996, the Company had recognized a net deferred tax asset of $2.1
million which relates principally to net operating loss carry forwards and
future income tax benefits associated with the 1992 employment agreement with
Mr. Sardas. Valuation allowances have been established for those deferred tax
assets for which management believes there does not exist sufficient objective
evidence to support their recognition under generally accepted accounting
principles.
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS - FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994:
SALES. The Company's net sales for fiscal 1995 increased by 22% to $305.4
million from $250.6 million in fiscal 1994. This sales improvement of $54.8
million came from a $27.3 million increase in sales of existing products, $21.1
million of net new business and $6.4 million of price increases.
Each of the Company's subsidiaries experienced sales increases over fiscal 1994.
During fiscal 1995 the Company's sales to the automotive industry improved to
$186 million which is a 26% increase over the prior year level of $148 million.
The Company's Wagner and IPC subsidiaries accounted for most of this increase as
their volumes improved in line with the overall rise in demand which occurred
during fiscal 1995 in the domestic automotive industry. At Wagner, $10.8 million
of new business arose from the start-up of Ford Motor Company's North American
version of its "World Car" program which consists of the Ford Contour and
Mercury Mystique.
Sales at the Company's IMT subsidiary increased by $8.6 million over fiscal 1994
as a result of improvements in several of its construction related markets.
GROSS PROFIT. Gross profit (net sales less costs of products sold) for fiscal
1995 increased by $11.7 million to $51.0 million from $39.3 million in fiscal
1994. Gross profit as a percentage of net sales was 16.7% for fiscal 1995
compared to 15.7% in fiscal 1994. The increase in margin rate came from
increased sales volume, improved operating efficiencies and a $.9 million
favorable impact in scrap steel prices at Wagner as scrap steel prices did not
escalate as rapidly as they had in the prior year. Commitments with most of
Wagner's major customers allow Wagner to pass on the majority of increases or
decreases in the cost of scrap steel to these customers, however, these
adjustments are generally passed along three to six months subsequent to the
time the change occurs.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses as a
percentage of net sales decreased to 9.3% in fiscal 1995 from 9.6% in fiscal
1994 due principally to higher sales. In terms of dollars, such expenses
increased by $4.2 million due primarily to a $3.3 million increase in the
expense related to a contractual bonus accrued for Jacques R. Sardas, Chairman,
President and Chief Executive Officer of the Company under his 1992 employment
agreement as discussed in footnote D of the consolidated financial statements.
Also impacting the increase in selling and administrative expenses was an
increase in selling expenses associated with higher sales.
<PAGE> 5
SPECIAL CHARGES. Special charges of $6.0 million were recognized in fiscal 1994
in connection with the 1992 employment agreement with Mr. Sardas. These charges
include expenses of $4.7 million associated with stock options and a $1.3
million bonus accrual. The charge relating to the stock options was noncash and
no future charges will be required to account for these options.
INTEREST EXPENSE. Interest expense decreased by $.9 million due to reductions in
debt as a result of the Company's cash flow from operations. Partially
offsetting this reduction was an increase in the interest rate on the Company's
bank indebtedness due to increases in the base interest rates.
INCOME TAX EXPENSE. Income tax expense of $6.4 million in fiscal 1995 (an
effective tax rate of 32%) represented a significant increase over the income
tax benefit of $.2 million recorded in fiscal 1994. In fiscal 1995, the Company
fully utilized its net operating loss carryforwards generated subsequent to the
Company's emergence from Chapter 11 and therefore became subject to income taxes
on its earnings during the year. The effective tax rate of 32% is less than the
statutory rate of 35% due principally to the impacts of income tax benefits
associated with Mr. Sardas' 1992 employment agreement and the utilization of net
operating loss carryforwards. During fiscal 1995, the deferred tax asset
valuation allowance was reduced by $2.1 million as a result of management's
evaluation of the future realization of certain deferred tax assets. In fiscal
1994, the income tax benefit resulted from refunds received by the Company due
to the favorable resolution of certain state tax disputes.
As of May 31, 1995, the Company had recognized a net deferred tax asset of $3.8
million which relates principally to net operating loss carryforwards and future
income tax benefits associated with Mr. Sardas' 1992 employment agreement.
Valuation allowances have been established for those deferred tax assets for
which management believes there does not exist sufficient objective evidence to
support their recognition under generally accepted accounting principles.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1996 operating activities provided cash of $18.3 million compared
to $32.0 million in the prior fiscal year. The change resulted from an increase
in working capital which included the payment of a contractual bonus obligation
of $7.25 million to Mr. Sardas under his 1992 employment agreement. As discussed
in footnote D to the consolidated financial statements, the bonus payment made
in January 1996 was based on the appraised value of the Company by an
independent investment banking firm.
At May 31, 1996, long-term debt (including current maturities) was $10.4
million, a decrease of $8.3 million from May 31, 1995. Proceeds from the sale of
South Coast of $18.6 million were used to reduce certain long-term debt of South
Coast and the Company and to fund capital expenditures. Long-term debt
represents 14% of long-term debt plus stockholders' equity at May 31, 1996,
compared to 30% at the end of fiscal 1995.
<PAGE> 6
As of May 31, 1996, $1.3 million of the Company's $40 million revolving credit
facility ("Credit Facility") was utilized to secure the Company's irrevocable
letters of credit and the Company had $38.7 million of additional borrowing
capacity under the Credit Facility. The Credit Facility provides the Company the
ability to incur capital expenditures of up to $20 million per year for the
remaining two year term of the Credit Facility. Subject to certain conditions,
the Credit Facility also permits the Company to borrow to fund acquisitions.
Capital expenditures were $22.6 million in fiscal 1996 compared with $16.2
million in fiscal 1995. The increase in capital expenditures was mainly
attributable to the modernization project to expand ductile processing capacity
at Wagner and the purchase of electrodeposition coating equipment to be utilized
by IPC in Monterrey, Mexico.
The Company currently has capital expenditure commitments for fiscal 1997 of
$3.4 million, most of which relates to the completion of Wagner's modernization
project. The Company currently anticipates spending approximately $15 million
for capital expenditures in fiscal 1997.
The Company believes that funds available under the Credit Facility and funds
generated from operations will be sufficient to satisfy its anticipated
operating needs and capital improvements for fiscal 1997.
OTHER MATTERS. As approximately 60% of the Company's sales are dependent on the
automotive markets in the United States and Europe, related profits will be
dependent on sales of vehicles in these markets in the future.
The Company's current and previous businesses operate in a variety of locations
where environmental situations could exist based on current or past operations.
Certain operating and non-operating subsidiaries of the Company have been named
as potentially responsible parties liable for cleanup costs by the United States
Environmental Protection Agency, state regulatory authorities and private
parties with respect to several sites in various states, including Minnesota,
Ohio, Pennsylvania and Texas. The Company continues to evaluate the
environmental conditions and its potential liability at these sites.
The Company has initiated corrective action and/or preventive environmental
projects to ensure the safe and lawful operation of its facilities. For known
environmental conditions, the Company, with the assistance of environmental
engineers and consultants, has accrued $4.0 million to cover estimated future
environmental expenditures. While the ultimate result of both known and unknown
environmental conditions cannot be predicted with certainty, the Company does
not expect these matters to have a material adverse effect on its financial
condition, results of operations, or cash flows.
<PAGE> 7
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on the Nasdaq Stock Market ("Nasdaq") under
the symbol SUDS. During fiscal 1996, the high and low closing bid quotations as
reported on Nasdaq ranged from a high bid of $9.625 to a low bid of $6.375.
During fiscal 1995, the high and low closing bid quotations as reported on
Nasdaq ranged from a high bid of $7.375 to a low bid of $5.125.
The following table sets forth the high and low closing bid quotations as
reported on Nasdaq. The prices represent quotations between dealers without
retail mark-up, mark-down or commission and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
PERIOD HIGH LOW
- ------ ---- ---
<S> <C> <C>
YEAR ENDED MAY 31, 1996
- -----------------------
First quarter $8.50 $6.375
Second quarter 9.375 7.75
Third quarter 8.375 7.25
Fourth quarter 9.625 7.50
YEAR ENDED MAY 31, 1995
- -----------------------
First quarter $7.00 $6.125
Second quarter 7.375 6.25
Third quarter 6.75 5.125
Fourth quarter 7.125 5.75
</TABLE>
On August 2, 1996, there were approximately 1,200 record holders of the
Company's Common Stock.
The Company has never paid dividends on shares of Common Stock and does not
expect to pay dividends in the foreseeable future.
<PAGE> 8
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
SUDBURY, INC. AND SUBSIDIARIES
------------------------------
<TABLE>
<CAPTION>
Year Ended May 31,
-----------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
(Dollars in thousands, except per share amounts)
Net sales $ 302,239 $ 305,435 $ 250,644
Costs and expenses:
Costs of products sold 253,696 254,472 211,405
Selling and administrative expenses 25,599 28,333 24,109
Special charges 5,956
--------- --------- ---------
OPERATING INCOME 22,944 22,630 9,174
Interest expense - net (1,441) (2,974) (3,848)
Gain on sale of subsidiary 1,511
Settlement of preconfirmation liabilities 846
Other income 1,095 292 484
--------- --------- ---------
Income before income taxes 24,109 19,948 6,656
Income tax expense (benefit) 8,238 6,376 (174)
--------- --------- ---------
NET INCOME $ 15,871 $ 13,572 $ 6,830
========= ========= =========
Net income per Common share:
Primary $ 1.24 $ 1.07 $ .55
========= ========= =========
Fully diluted $ 1.23 $ 1.07 $ .55
========= ========= =========
Average Common shares and share equivalents outstanding:
Primary 12,815 12,651 12,330
========= ========= =========
Fully diluted 12,883 12,670 12,482
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 9
CONSOLIDATED BALANCE SHEETS
---------------------------
SUDBURY, INC. AND SUBSIDIARIES
------------------------------
(Dollars in thousands)
ASSETS
- ------
<TABLE>
<CAPTION>
May 31,
-------------------
1996 1995
-------- --------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 10,645 $ 3,548
Accounts receivable, less allowance
for doubtful accounts
(in 1996: $595; in 1995: $498) 38,299 41,800
Inventories 18,871 18,124
Deferred taxes 218 2,554
Other 3,680 4,722
-------- --------
TOTAL CURRENT ASSETS 71,713 70,748
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements 1,421 2,263
Buildings 8,466 17,334
Machinery and equipment 66,833 53,580
-------- --------
76,720 73,177
Less accumulated depreciation 21,247 18,931
-------- --------
NET PROPERTY, PLANT AND EQUIPMENT 55,473 54,246
OTHER ASSETS 5,166 4,643
-------- --------
$132,352 $129,637
======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 10
CONSOLIDATED BALANCE SHEETS--CONTINUED
--------------------------------------
SUDBURY, INC. AND SUBSIDIARIES
------------------------------
(Dollars in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
<TABLE>
<CAPTION>
May 31,
----------------------
1996 1995
--------- ---------
<S> <C> <C>
CURRENT LIABILITIES
Trade accounts payable $ 26,606 $ 25,891
Accrued compensation and employee benefits 8,018 14,286
Accrued income taxes 3,773 4,074
Other accrued expenses 10,143 10,057
Current maturities of long-term debt 282 678
--------- ---------
TOTAL CURRENT LIABILITIES 48,822 54,986
LONG-TERM DEBT 10,113 17,978
OTHER LONG-TERM LIABILITIES 10,805 12,121
STOCKHOLDERS' EQUITY
Common Stock--par value $0.01 per share;
authorized 20,000,000 shares; 10,616,361
(10,289,883 at May 31, 1995) shares
issued and outstanding 106 103
Additional paid-in capital 23,731 22,076
Retained earnings 39,081 23,210
Minimum pension liability adjustment - net (306) (837)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 62,612 44,552
--------- ---------
$ 132,352 $ 129,637
========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 11
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SUDBURY, INC. AND SUBSIDIARIES
------------------------------
For the Years Ended May 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
(Dollars and shares in thousands) MINIMUM
COMMON STOCK ADDITIONAL PENSION
-------------- PAID-IN RETAINED LIABILITY
AMOUNT SHARES CAPITAL EARNINGS ADJUSTMENT
------ ------ ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT MAY 31, 1993 $100 10,000 $13,900 $ 2,808 $ -0-
Net income for 1994 6,830
Stock options to Chief
Executive Officer (Note K) 5,547
Exercise of participation
certificates and stock
options 2 234 680
Tax benefits from exercise
of stock options 97
Adjustment for minimum
pension liability - net (554)
----- ------ ------- ------- -------
BALANCE AT MAY 31, 1994 102 10,234 20,224 9,638 (554)
Net income for 1995 13,572
Exercise of participation
certificates and stock
options and other - net 1 56 718
Tax benefits from exercise
of stock options 188
Utilization of net operating
loss carryforwards and recog-
nition of deferred tax asset 946
Adjustment for minimum
pension liability - net (283)
----- ------ ------- ------- -------
BALANCE AT MAY 31, 1995 103 10,290 22,076 23,210 (837)
Net income for 1996 15,871
Exercise of participation
certificates and stock
options and other - net 3 326 1,248
Tax benefits from exercise
of stock options 91
Utilization of net operating
loss carryforwards 316
Adjustment for minimum
pension liability - net 531
----- ------ ------- ------- -------
BALANCE AT MAY 31, 1996 $ 106 10,616 $23,731 $39,081 $ (306)
===== ====== ======= ======= =======
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE> 12
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
SUDBURY, INC. AND SUBSIDIARIES
------------------------------
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended May 31,
----------------------------------
1996 1995 1994
-------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 15,871 $ 13,572 $ 6,830
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 8,995 9,800 8,361
Gain and tax benefit on sale of
subsidiary (1,657)
Deferred taxes and other (713) (1,339) (351)
Special charges 5,956
Changes in operating assets and liabil-
ities net of effect of disposition (4,221) 9,999 1,041
-------- --------- ---------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 18,275 32,032 21,837
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (22,561) (16,232) (6,951)
Proceeds from sale of businesses 18,576 666
Proceeds from collection of notes
receivable 470 2,362
Other - net 328 230 (17)
-------- --------- ---------
NET CASH USED IN INVESTING
ACTIVITIES (3,657) (15,532) (3,940)
FINANCING ACTIVITIES:
Borrowings, refinancings and repayments:
Long-term borrowings 55,900 304,861 238,788
Reductions of debt (64,672) (318,777) (256,067)
Common stock issued 1,251 719 682
-------- --------- ---------
NET CASH USED IN FINANCING
ACTIVITIES (7,521) (13,197) (16,597)
-------- --------- ---------
INCREASE IN CASH AND
CASH EQUIVALENTS 7,097 3,303 1,300
Cash and cash equivalents at beginning
of period 3,548 245 (1,055)
-------- --------- ---------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 10,645 $ 3,548 $ 245
======== ========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE A -- NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS: Sudbury, Inc. and its subsidiaries (the "Company")
operates in one business segment - the manufacture of high-quality industrial
products. The Company primarily serves the automotive, appliance and
construction markets providing iron, aluminum and zinc castings; applications of
custom coatings; cranes, truck bodies and related equipment; and precision
machined components through its five operating subsidiaries. Over 90% of the
Company's sales are made within North America.
CONSOLIDATION: The consolidated financial statements include the accounts of the
Company. Significant intercompany balances and transactions have been
eliminated.
CASH: The Company considers liquid instruments with initial maturities of 90
days or less at date of purchase to be cash equivalents.
INVENTORIES: Inventories are stated at the lower of cost or market. Cost is
determined by the last-in, first-out method (LIFO) for approximately 68% and 80%
of the Company's inventories at May 31, 1996 and 1995, respectively, and by the
first-in, first-out (FIFO) method for all other inventories. The FIFO method
approximates the current cost.
PROPERTIES AND DEPRECIATION: Property, plant and equipment acquired subsequent
to September 1, 1992 are stated at cost. As discussed in Note Q, in conjunction
with the emergence from Chapter 11 bankruptcy proceedings, the Company
implemented Fresh Start reporting and, accordingly, all property, plant and
equipment owned on September 1, 1992 was restated to reflect reorganization
value, which approximated fair value in continued use. Depreciation and
amortization are provided using the straight-line method over the estimated
useful lives of the related assets. With minor exceptions straight-line
composite rates for depreciation of plant assets are as follows: buildings 20 to
40 years; machinery, equipment and fixtures 10 years. Interest costs of $280,000
and $171,000 were capitalized in fiscal 1996 and 1995, respectively.
ENVIRONMENTAL EXPENDITURES: Environmental expenditures that pertain to current
operations or relate to future revenues are expensed or capitalized consistent
with the Company's capitalization policy. Expenditures that result from the
remediation of an existing condition caused by past operations, that do not
contribute to current or future revenues, are expensed. Liabilities are
recognized for remedial activities when the cleanup is probable and the cost can
be reasonably estimated.
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE A -- NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
NET INCOME PER SHARE: For the fiscal years ended May 31, 1996, 1995 and 1994,
net income per common share was calculated by dividing net income applicable to
common stock by the average number of shares of common stock outstanding and
common stock equivalents. Common stock equivalents include shares issuable on
the exercise of stock options and Series A and B Participation Certificates,
less an amount equal to the number of shares which could be repurchased from
proceeds realized by the Company from the exercise of such securities. The
Company's Series C Participation Certificates have not been included in the
computation of common stock equivalents because such securities were not
exercisable as their current trigger price has not been attained.
INCOME TAXES: The Company accounts for income taxes using the liability method.
Deferred income tax assets and liabilities are determined based on the
difference between the financial statement and tax basis of assets and
liabilities measured by the enacted tax rates which will be in effect when these
differences reverse.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RECLASSIFICATIONS: Certain prior year amounts have been reclassified to conform
to the 1996 presentation.
NEW ACCOUNTING STANDARDS: In 1995, the Financial Accounting Standards Board
issued Statement No. 121 "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" ("SFAS 121") and Statement No. 123
"Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 121 requires that,
under certain circumstances, long-lived assets be reviewed for impairment and
any applicable impairment loss be recognized. SFAS 123 allows accounting for
employee stock options under either the fair value or the intrinsic value
method. The Company plans to continue to use the intrinsic value method. These
statements, which must be adopted by the Company no later than the first quarter
of fiscal 1997, are not expected to have a material effect on the financial
statements.
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE B -- INVENTORIES
The components of inventories at May 31 are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Raw materials and supplies $ 7,204 $ 7,474
Work in process 8,464 7,217
Finished products 3,599 3,875
------- -------
Total at FIFO 19,267 18,566
Less excess of FIFO cost over LIFO values 396 442
------- -------
$18,871 $18,124
======= =======
</TABLE>
NOTE C -- DISPOSITIONS
On December 29, 1995, the Company completed the sale of its South Coast
Terminals, Inc. ("South Coast") subsidiary. Proceeds from the sale of
$18,576,000 were used to reduce certain indebtedness of South Coast and the
Company. The Company recorded a pretax gain of $1,511,000 ($1,657,000 after
income taxes) on the sale of South Coast.
Unaudited pro forma consolidated results of operations of the Company, assuming
the sale of South Coast had occurred at June 1, 1995 and 1994, are summarized
below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Net sales $288,712 $281,951
Net income $ 13,559 $ 12,352
Net income per Common share $ 1.05 $ .97
</TABLE>
During fiscal 1994 the Company sold one business for net cash proceeds of
$666,000.
NOTE D -- CHARGES ASSOCIATED WITH EXECUTIVE EMPLOYMENT AGREEMENT
Recorded in the Company's operating results for the years presented under
selling and administrative expenses and special charges are charges recorded in
connection with the achievement of contractual performance targets established
in the January 1992 Employment Agreement ("1992 Employment Agreement") with
Jacques R. Sardas, Chairman, President and Chief Executive Officer of the
Company. The 1992 Employment Agreement, confirmed as part of the Company's
amended Plan of Reorganization (the "Plan") by the United States Bankruptcy
Court included the triggering of the exercisability of certain stock options and
the payment of a cash bonus in the event the fair value of the Company attains
certain values as determined by an independent investment banking firm.
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE D -- CHARGES ASSOCIATED WITH EXECUTIVE EMPLOYMENT AGREEMENT - continued
The original charges associated with the 1992 Employment Agreement occurred in
fiscal 1994 with $5,956,000 being recorded as special charges. The special
charges include a noncash charge of $4,650,000 which represents the estimated
value of 653,595 stock options granted to Mr. Sardas on September 1, 1992, which
were exercisable in increments after the fair value of the Company exceeded
value targets ranging from $15,000,000 to $35,000,000. The Company determined,
and an appraisal by an investment banking firm confirmed in accordance with
procedures specified in the 1992 Employment Agreement, that performance targets
established in the 1992 Employment Agreement had been met as of February 28,
1994 and therefore the options became exercisable.
The remaining $1,306,000 of the fiscal 1994 special charges represents expense
associated with the estimated cash bonus payable to Mr. Sardas at the end of the
1992 Employment Agreement in January 1996. The bonus amount equals 5% of the net
fair value of the Company in excess of $35,000,000 at the expiration of the 1992
Employment Agreement and was accrued over the term of the 1992 Employment
Agreement. Accruals for the bonus expense subsequent to the initial charge made
on February 28, 1994 have been included as part of the Company's selling and
administrative expenses. In the third quarter of fiscal 1996, the final
determination of the bonus amount was made through an appraisal of the net fair
value of the Company as provided by the 1992 Employment Agreement. As a result
of this appraisal, an additional accrual of $1,977,000 was made in the third
quarter of fiscal 1996 and a bonus payment to Mr. Sardas in the amount of
$7,250,000 was made. Total expenses related to the contractual bonus, including
appraisal costs and employment taxes, which were recorded in selling and
administrative expenses, were $2,795,000, $3,407,000 and $80,000 for fiscal
1996, 1995 and the fourth quarter of fiscal 1994, respectively.
NOTE E -- SETTLEMENT OF PRECONFIRMATION LIABILITIES
Two lawsuits which had been pending in United States Bankruptcy Court against
the Company and several of its former officers and directors were settled in
fiscal 1994. The lawsuits related to events which occurred prior to the
Company's entry into and emergence from bankruptcy. Under the Plan, the Company
had retained certain indemnification obligations with respect to the defendants
who were former officers or former directors of the Company. These obligations
were limited to $2,000,000. The lawsuits were settled using $765,000 of funds
which had been previously held in escrow, $616,000 of the Company's funds, and
funds contributed by co-defendants. The Company also resolved an
insurance-related bankruptcy claim in fiscal 1994. As a result of these
settlements, the Company recognized an $846,000 benefit as such settlements were
for less than the amounts reserved for such claims.
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE F -- CONTINGENCIES AND COMMITMENTS
The Company is party to a number of lawsuits and claims arising out of the
conduct of its business, including those relating to commercial transactions,
product liability and environmental, safety and health matters.
The Company, using historical trends, actuarially calculates the estimated
amount of its current exposure for product liability. The Company is insured for
amounts in excess of established aggregate annual deductibles which total
$2,500,000 and accrues for the estimated liability described above up to the
limits of the deductibles. Other claims and lawsuits are handled on a
case-by-case basis. Three subsidiaries of the Company are self-insured for
health care to an aggregate annual amount of $7,800,000 and workers'
compensation up to $400,000 per incident, above which third party insurance
applies.
All operating locations acquired by the Company since 1984 operate in a variety
of locations where environmental situations could exist based on current or past
operations. Certain operating and non-operating subsidiaries of the Company have
been named as potentially responsible parties liable for cleanup of known
environmental conditions. For known environmental situations, the Company, with
the assistance of environmental engineers and consultants, has accrued
$4,038,000 to cover estimated future environmental expenditures. The Company has
initiated corrective action and/or preventative environmental projects to ensure
the safe and lawful operation of its facilities. There could exist, however,
more extensive or unknown environmental situations at existing or previously
owned businesses for which the future cost is not known or accrued at May 31,
1996.
While the ultimate result of the above contingencies cannot be predicted with
certainty, management does not expect these matters to have a material adverse
effect on the consolidated financial position or results of operations of the
Company.
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE F -- CONTINGENCIES AND COMMITMENTS - continued
The Company has an employment agreement with Jacques R. Sardas, its Chairman,
President and Chief Executive Officer, which extends through January 1998. The
agreement provides that if Mr. Sardas' employment is terminated other than for
cause, or from Mr. Sardas' death or disability, the Company continues to be
obligated to pay Mr. Sardas the fair value of the common stock underlying the
1,764,706 options he was granted under his 1992 Employment Agreement ( the
"Option Stock"). At Mr. Sardas' election the Company is also obligated to
purchase the Option Stock at fair value in five separate approximately
semi-annual installments commencing February 7, 1996 through January 13, 1998.
Under the employment agreement, fair value is determined based on quoted prices
on the principal stock exchange on which the Company's Common Stock is traded.
Mr. Sardas generally may delay his right to sell any installment of the Option
Stock until the next succeeding purchase date. If at that next succeeding
purchase date Mr. Sardas does not tender such shares of Option Stock, the
Company's obligation to purchase the Option Stock with respect to such
installment will terminate. Mr. Sardas has not exercised his right to have the
Company purchase the Option Stock subject to the February 7, 1996 installment
date and the Company's obligation with respect such purchase has terminated. The
Company is the beneficiary of a key-man life insurance policy on Mr. Sardas'
life in the amount of $14,000,000. The proceeds of the policy would be used to
fulfill the Company's obligation in the event of Mr. Sardas' death.
At May 31, 1996, the Company has commitments to purchase $3,400,000 in machinery
and equipment.
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE G -- STATEMENTS OF CASH FLOWS INFORMATION
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Funds provided (used) by changes
in operating assets and
liabilities net of effect of
dispositions are as follows:
Accounts receivable $ 540 $(2,528) $(6,370)
Inventories (1,732) 468 1,261
Prepaid expenses and other 3,220 (702) 6,502
Trade accounts payable (304) 7,387 (1,161)
Accrued liabilities (5,945) 5,374 809
------- ------- -------
$(4,221) $ 9,999 $ 1,041
======= ======= =======
Cash payments (refunds):
Interest $ 1,116 $ 2,794 $ 3,635
Taxes 6,225 3,711 (154)
</TABLE>
NOTE H -- LONG-TERM DEBT
Long-term debt consisted of the following at May 31 (in thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Revolving Line of Credit $ 5,479
Subordinated Notes $ 9,027 8,461
PIK Notes 665 665
Industrial Revenue Bonds 450
Real estate mortgage notes 2,392
Other 703 1,209
------- -------
10,395 18,656
Less current maturities 282 678
------- -------
$10,113 $17,978
======= =======
</TABLE>
The Company has a secured $40,000,000 credit facility ("Revolving Line of
Credit") which expires on May 30, 1998. The Revolving Line of Credit provides a
$40,000,000 revolving credit commitment and an option to convert up to
$15,000,000 of the revolving credit commitment to a term loan. The Revolving
Line of Credit is secured by substantially all assets of the Company and its
subsidiaries. The Company's five subsidiaries are guarantors of the Revolving
Line of Credit. Covenants require the Company to maintain certain fixed charge,
interest coverage, net worth and leverage ratios.
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE H -- LONG-TERM DEBT - continued
As of May 31, 1996, $1,280,000 of the Revolving Line of Credit was utilized to
secure the Company's irrevocable letters of credit. These letters of credit were
issued primarily for insurance purposes. As of May 31, 1996, the Company had the
ability to borrow an additional $38,720,000 under the Revolving Line of Credit.
The Revolving Line of Credit bears interest at the prime rate or at the London
Interbank Offered Rate ("LIBOR"), plus a marginal rate based on the leverage and
fixed charge ratios of the Company ranging from 1/2% to 1 1/2% (.75% at May 31,
1996). The Revolving Line of Credit has unused facility fees of .25% and letter
of credit fees equal to the marginal rate on LIBOR loans payable on a quarterly
basis.
The Subordinated Notes due September 1, 1997 represent $9,831,000 principal
amount of 8 3/5% Senior Subordinated Pay-In-Kind Notes issued in accordance with
the Plan on September 1, 1992. Due to the below market interest rate for this
type of debt instrument at issuance, a discount of $2,526,000 was recorded
against this debt at the time of its issuance, making the effective rate 16%.
The discount is being amortized over the five year term of the indebtedness. At
May 31, 1996, the unamortized debt discount was $804,000. Interest is payable
semi-annually, however, prior to the refinancing of the Company's bank debt in
May 1993, the Subordinated Notes provided that interest payments would be made
through the issuance of additional promissory notes in the aggregate principal
of the amount of interest owed (the "PIK Notes"). The terms and conditions of
the PIK Notes are identical to the Subordinated Notes.
The future maturities of long-term debt outstanding at May 31, 1996 for the four
fiscal years ending May 31, 2001 are as follows: $10,859,000 in 1998, $21,000 in
1999, $22,000 in 2000 and $15,000 in 2001.
NOTE I -- OTHER LONG-TERM LIABILITIES
Amounts classified under the caption "Other Long-Term Liabilities" at May 31
consist of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Environmental reserves $ 2,954 $ 3,751
Accrued pension costs 3,111 4,175
Post-retirement benefit obligations 3,238 2,523
Reserves for self-insurance and other 1,502 1,672
------- -------
$10,805 $12,121
======= =======
</TABLE>
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE J -- PARTICIPATION CERTIFICATES
Under the provisions of the Plan, as of September 1, 1992, holders of the
Company's pre-reorganization Common Stock and Serial Preferred Stock were
granted Series A, Series B and Series C Participation Certificates. The Series A
Participation Certificates are rights to purchase 619,194 shares of Common Stock
and expire on September 1, 1996. The Series B Participation Certificates are
rights to purchase 651,784 shares of Common Stock and expire on September 1,
1999. The Series C Participation Certificates are rights to purchase 1,448,410
shares of Common Stock and expire on September 1, 2002. The Participation
Certificates are subject to adjustment for changes in the Company's
capitalization.
The Series A and B Participation Certificates have increasing exercise prices
and are as follows:
<TABLE>
<CAPTION>
Exercise Price
-----------------------
Series A Series B
-------- --------
<S> <C> <C>
September 1, 1995 - August 31, 1996 $3.27 $5.86
September 1, 1996 - August 31, 1997 N/A 6.04
September 1, 1997 - August 31, 1998 N/A 6.34
September 1, 1998 - August 31, 1999 N/A 6.66
</TABLE>
The Series C Participation Certificates are not exercisable by their holders
until the closing price or the average of the reported closing bid and asked
prices of the Common Stock has averaged a price equal to, or in excess of, the
specified price per share (the "Trigger Price") for 20 consecutive trading days.
Thereafter, the Series C Participation Certificates may be exercised at the
option of the holder at any time. The Trigger Price and related exercise price
increase each year and are as follows:
<TABLE>
<CAPTION>
Trigger Exercise
Price Price
------- --------
<S> <C> <C>
September 1, 1995 - August 31, 1996 $10.03 $5.015
September 1, 1996 - August 31, 1997 10.33 5.165
September 1, 1997 - August 31, 1998 10.85 5.425
September 1, 1998 - August 31, 1999 11.39 5.695
September 1, 1999 - August 31, 2000 11.96 5.980
September 1, 2000 - August 31, 2001 12.55 6.275
September 1, 2001 - August 31, 2002 13.18 6.590
</TABLE>
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE J -- PARTICIPATION CERTIFICATES - continued
Participation Certificate activity was as follows:
<TABLE>
<CAPTION>
Series A Series B Series C
-------- -------- ---------
<S> <C> <C>
Outstanding at May 31, 1993 619,194 651,784 1,448,410
Exercised (172,300) (11,632)
-------- ------- ---------
Outstanding at May 31, 1994 446,894 640,152 1,448,410
Exercised (33,766) (20,121)
-------- ------- ---------
Outstanding at May 31, 1995 413,128 620,031 1,448,410
Exercised (204,796) (55,182)
-------- ------- ---------
Outstanding at May 31, 1996 208,332 564,849 1,448,410
======== ======= =========
</TABLE>
NOTE K -- EMPLOYEE STOCK OPTIONS
Pursuant to the terms of the Company's 1992 Employment Agreement with Jacques R.
Sardas, Chairman, President and Chief Executive Officer of the Company,
effective September 1, 1992, Mr. Sardas was granted options for 1,764,706 shares
of Common Stock. All such options are currently exercisable, have an exercise
price of $.01 per share and a term of five years. As of May 31, 1996, none of
the 1,764,706 options had been exercised.
In fiscal year 1994, the Company reached an agreement with Mr. Sardas regarding
settlement of his claim that under his 1992 Employment Agreement and related
stock option agreement the Company was obligated to protect his 15% effective
ownership position in the Company's Common Stock from the dilution created as a
result of the issuance of the Series A, B and C Participation Certificates under
the Plan. Under this agreement, 479,893 stock options were issued to Mr. Sardas
to give him the equivalent of 15% of the total common shares reserved for
issuance under the Participation Certificates and these options. The option
prices range from $3.17 to $5.69 per share. All of these options are currently
exercisable. The Company recorded a charge of $897,000 in selling and
administrative expense in fiscal 1994 which represents the difference between
the option price and the fair value of the Common Stock.
The Company has long-term incentive plans under which employees may be granted
stock options. The 1990 Stock Option Plan allowed for the granting of up to
619,195 options for shares of the Company's Common Stock subject to adjustment
for changes in the Company's capitalization. These options are intended to
qualify as incentive or non-statutory stock options under the Internal Revenue
Code. The option price is the fair market value of the shares on the date of the
grant and the options are exercisable over periods ranging from one to ten years
after grant date. The 1990 Option Plan was terminated in 1995 and options
previously granted under this plan remain outstanding up to November 2004.
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE K -- EMPLOYEE STOCK OPTIONS - continued
The Company adopted the 1995 Stock Option Plan which allows for the granting of
up to 1,000,000 options. The characteristics of the 1995 Option Plan are similar
to the 1990 Stock Option Plan. Options may be granted under the 1995 Stock
Option Plan through June 2005.
Stock option activity under the 1990 and 1995 Stock Option Plans was as follows:
<TABLE>
<CAPTION>
Shares Option Prices
------ -------------
<S> <C> <C>
Outstanding at May 31, 1993 420,000 $1.75 to $3.75
Granted 110,000 $6.875
Exercised (50,000) $1.75
Cancelled (50,000) $3.75
-------
Outstanding at May 31, 1994 430,000 $1.75 to $6.875
Granted 115,000 $6.75
Exercised (160,000) $1.75 to $3.75
--------
Outstanding at May 31, 1995 385,000 $3.75 to $6.875
Granted 260,000 $7.625 to $8.25
Exercised (66,500) $3.75 to $6.875
Cancelled (20,000) $6.75 to $6.875
-------
Outstanding at May 31, 1996 558,500 $3.75 to $8.25
=======
</TABLE>
At May 31, 1996, there were a total of 2,581,432 options exercisable by
employees under the 1990 and 1995 Stock Option Plans and by Jacques R. Sardas at
prices ranging from $.01 to $7.625.
NOTE L -- INCOME TAXES
Components of income tax expense (benefit) are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ------
<S> <C> <C> <C>
Federal - current $ 5,041 $ 7,436 $ 1,511
- deferred 1,643 (1,600) (1,511)
State and local 1,554 540 (174)
------- -------- --------
Total income tax
expense (benefit) $ 8,238 $ 6,376 $ (174)
======= ======== ========
</TABLE>
The deferred tax expense (benefit) includes $316,000 and $2,113,000 in fiscal
1996 and 1995, respectively, for reductions in the opening valuation allowance
due to the future realizability of deferred tax assets.
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE L -- INCOME TAXES - continued
Reconciliations of the total income tax expense (benefit) from amounts computed
by applying the U.S. Federal income tax rate of 35% for fiscal 1996 and 1995 and
34% for fiscal 1994 to income before income tax expense are as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- ------
<S> <C> <C> <C>
Computed tax provision at
statutory Federal rate $ 8,438 $ 6,982 $ 2,263
Increase (decrease) in
taxes resulting from:
State taxes, net of
federal income taxes 1,010 351 (113)
Effect of temporary
differences and
reserves 1,117 2,449 (1,241)
Utilization of net
operating loss (316) (3,432) (1,373)
Utilization of capital loss (2,003)
Other items (8) 26 290
------- ------- -------
$ 8,238 $ 6,376 $ (174)
======= ======= =======
</TABLE>
As discussed in Note Q, the Company emerged from bankruptcy effective September
1, 1992. Upon emergence from bankruptcy, the Company experienced a change in
ownership for purposes of Section 382 of the Internal Revenue Code. Under
Section 382 an annual limitation of approximately $900,000 is placed upon the
utilization of the Company's existing net operating loss carryforwards as of
September 1, 1992. The Company has available as of May 31, 1996 for federal
income tax purposes, a net operating loss carryforward of approximately
$18,932,000 (of which only $10,125,000 can be utilized given the Section 382
limitations) which expires in 2008.
Significant components of the Company's deferred income tax assets and
liabilities at May 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- ------
<S> <C> <C>
Deferred income tax liabilities:
Book basis of fixed assets in
excess of tax basis $(3,765) $(5,189)
Other (2,702) (2,284)
------- -------
Total deferred tax liabilities (6,467) (7,473)
Deferred income tax assets:
Net operating loss carryforwards 3,544 3,859
Capital loss carryforwards 2,003
Other accruals and reserves 8,115 11,050
------- -------
Total deferred tax assets 11,659 16,912
Valuation allowance (3,078) (5,682)
------- -------
Net deferred tax asset $ 2,114 $ 3,757
======= =======
</TABLE>
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE L -- INCOME TAXES - continued
A valuation allowance is required when it is more likely than not that deferred
tax assets will not be realized. At May 31, 1996, the valuation allowance was
attributable to $2,599,000 of net operating loss carryforwards limited by the
reorganization as previously disclosed (which will be credited to stockholders'
equity when recognized), and $479,000 of other accruals and reserves.
NOTE M -- RETIREMENT PLANS
The Company maintains a defined benefit pension plan that covers the union
employees of a subsidiary. Benefits are determined by years of service. The
Company's policy is to fund at least the minimum amount required by federal
regulations. Pension plan assets consist primarily of common stocks, bonds and
government obligations.
The following sets forth the funded status and amounts recognized in the
consolidated balance sheets at May 31 (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Actuarial present value of:
Vested benefit obligation $23,101 $21,723
======= =======
Accumulated and projected benefit
obligation $23,932 $22,544
Plan assets at fair value 20,516 18,259
------- -------
Plan assets less than projected
benefits (3,416) (4,285)
Items not yet recognized:
Net loss 776 1,398
Net obligations existing at transition 1,002 1,160
Prior service cost 31 36
Additional minimum liability (1,504) (2,484)
------- -------
Net pension liability $(3,111) $(4,175)
======= =======
</TABLE>
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE M -- RETIREMENT PLANS - continued
The components of net periodic pension cost for the defined benefit plan are as
follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- ------
<S> <C> <C> <C>
Service cost $ 356 $ 369 $ 360
Interest cost on projected
benefit obligation 1,822 1,782 1,728
Actual return on plan assets (3,374) (822) (451)
Net amortization and deferral 1,838 (684) (1,002)
------- ------- -------
Net periodic pension cost $ 642 $ 645 $ 635
======= ======= =======
Assumptions for the plan were:
Discount rate - pension expense 8.25% 8% 8.25%
Expected long-term rate of return
on assets 9% 9% 9%
Discount rate - projected benefit
obligation 7.75% 8.25% 8%
</TABLE>
The cost for defined contribution plans was $1,229,000, $962,000 and $633,000 in
fiscal 1996, 1995 and 1994, respectively. The majority of such plans provide for
matching of employee contributions and for discretionary contributions. The
defined contribution plans cover hourly and salaried employees.
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE N -- POST-RETIREMENT MEDICAL PLAN
One of the Company's subsidiaries maintains an unfunded post-retirement welfare
plan which provides certain contributory and non-contributory health care and
life insurance benefits for employees who retired on or before December 31, 1991
and their dependents. Hourly retirees subsequent to December 31, 1991 are
eligible for life insurance coverage upon retirement at age 55 or later with at
least five years of service.
The following sets forth the plan's funded status at May 31 (in thousands):
Accumulated post-retirement benefit obligation (APBO):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Retirees $ 9,075 $10,220
Fully eligible active plan participants 449 420
Other active plan participants 315 316
------- -------
Total APBO 9,839 10,956
Unrecognized transition obligation (11,205) (11,894)
Unrecognized net gain 4,604 3,461
------- -------
Accrued balance sheet liability $ 3,238 $ 2,523
======= =======
</TABLE>
Net periodic post-retirement benefit cost included the following components (in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -----
<S> <C> <C> <C>
Service cost $ 15 $ 17 $ 16
Interest cost 866 1,035 1,031
Net amortization and
deferral 511 689 654
------- ------- -------
Total expense $ 1,392 $ 1,741 $ 1,701
======= ======= =======
</TABLE>
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE N -- POST-RETIREMENT MEDICAL PLAN - continued
The assumed annual rate of increase in the per capita cost of covered health
care benefits was 8.5% in 1996 (10.5% in 1995) and the rate is assumed to
decrease annually to 5.5% in the year 2000. The assumed annual rate of increase
in the per capita cost of covered dental care benefits was 7.0% in 1996 (8.5% in
1995) and the rate is assumed to decrease annually to 5.5% in the year 1998. The
per capita health care and dental benefit costs used to compute the APBO were
reduced in 1996 to reflect favorable claim experience. A one percentage point
increase in the assumed annual cost trend rates would have increased the APBO as
of May 31, 1996 by $543,000 and the net periodic post-retirement benefit cost
for 1997 by $42,000.
The weighted average annual discount rate used in determining the APBO was 7.75%
in 1996 and 8.25% in 1995.
NOTE O -- OPERATING LEASES
Rental expense under operating leases was $3,529,000 in 1996, $3,650,000 in 1995
and $3,406,000 in 1994. Leases are principally for rental of facilities and
contain renewal rights to extend the terms from five to fifteen years. At May
31, 1996, future minimum payments under non-cancelable operating leases with
initial or remaining terms of more than one year were as follows: 1997 -
$2,441,000; 1998 - $2,156,000; 1999 - $1,416,000; 2000 - $1,001,000; 2001 -
$700,000 and $1,085,000 thereafter.
NOTE P -- MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
Net sales to two customers with which the Company has long-standing customer
relationships amounted to $42,826,000 and $39,187,000 respectively in 1996,
($46,637,000 and $36,263,000 in 1995 and $34,573,000 and $31,466,000 in 1994).
At May 31, 1996 and 1995, accounts receivable from companies in the automotive
and truck industries were approximately 60% and 51%, respectively, of total
accounts receivable. Credit is extended based on an evaluation of the customer's
financial condition, and generally collateral is not required. Credit losses are
provided for in the financial statements and consistently have been within
management's expectation.
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE Q - PROCEEDINGS UNDER CHAPTER 11 AND RESTRUCTURING
On January 10, 1992, the Company filed a petition (relative only to Sudbury,
Inc. and not to its subsidiaries) under Chapter 11 of the United States
Bankruptcy Code. The Chapter 11 filing was made to implement an agreement in
principle which had been reached with the Company's major creditor groups
regarding a restructuring plan and the related sales of a substantial number of
its business units. The Plan was confirmed by the Bankruptcy Court and the
Company was reorganized and adopted Fresh Start reporting effective September 1,
1992.
The Plan implemented a restructuring of the Company by providing for a new
amortization schedule for the repayment of the indebtedness owed to its secured
lender banks and a significant reduction of the Company's indebtedness to
subordinated debtholders and certain other unsecured creditors through the
conversion of debt into equity of the restructured Company.
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUDBURY, INC. AND SUBSIDIARIES
NOTE R -- QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(In thousands, except share data)
<S> <C> <C> <C> <C>
1996:
- -----
Net sales $71,213 $76,560 $73,428 $81,038
Gross profit 11,021 13,215 10,557 13,750
Gain on sale of
subsidiary - Note C 1,511
Income before income taxes 4,235 6,424 5,144 8,306
Net income (1) 2,689 4,080 3,829 5,273
Net income per
Common share (2) $ .21 $ .32 $ .30 $ .41
======= ======= ======= =======
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(In thousands, except share data)
<S> <C> <C> <C> <C>
1995:
- -----
Net sales $67,720 $74,355 $76,247 $87,113
Gross profit 10,475 12,578 11,740 16,170
Income before income taxes 3,501 5,399 4,747 6,301
Net income (3) 2,219 3,425 3,015 4,913
Net income per Common
share (2) $ .18 $ .27 $ .24 $ .39
======= ======= ======= =======
<FN>
(1) Third quarter net income includes an after tax charge of $1,255,000 for
a contractual bonus obligation to the Company's Chairman, President and
Chief Executive Officer.
(2) The sum of the quarterly per Common share amounts does not equal the
annual amount reported. Common share amounts are computed independently
for each quarter and the full year based on respective weighted average
Common shares outstanding.
(3) Fourth quarter net income includes an after tax charge of $1,401,000
for a contractual bonus obligation to the Company's Chairman, President
and Chief Executive Officer.
</TABLE>
<PAGE> 31
REPORT OF INDEPENDENT AUDITORS
STOCKHOLDERS AND BOARD OF DIRECTORS
SUDBURY, INC.
We have audited the accompanying consolidated balance sheets of Sudbury, Inc.
and subsidiaries (the "Company") as of May 31, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended May 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Sudbury, Inc. and subsidiaries at May 31, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended May 31, 1996, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Cleveland, Ohio
July 12, 1996
<PAGE> 1
EXHIBIT 21
- ----------
<TABLE>
<CAPTION>
SUBSIDIARY STATE OF INCORPORATION
- ---------- ----------------------
<S> <C>
Western Capital Corporation Nebraska
Iowa Mold Tooling Co., Inc. Iowa
Industrial Powder Coatings, Inc. Ohio
Cast-Matic Corporation Michigan
Transnational Indemnity Company Vermont
Wagner Castings Company Delaware
Wagner Havana, Inc. Delaware
Frisby P.M.C., Incorporated Illinois
</TABLE>
- 53 -
<PAGE> 1
EXHIBIT 23
- ----------
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Sudbury, Inc. of our report dated July 12, 1996 included in the Annual Report
to Shareholders of Sudbury, Inc. for the year ended May 31, 1996.
We also consent to the incorporation by reference in the following Registration
Statements of our report dated July 12, 1996 with respect to the consolidated
financial statements and schedule of Sudbury, Inc. incorporated by reference and
included in this Annual Report (Form 10-K) for the year ended May 31, 1996:
Registration Statement Number 33-64059 on Form S-8 pertaining to the
Sudbury, Inc. 1995 Stock Option Plan;
Registration Statement Number 33-57463 on Form S-8 pertaining to the
Sudbury, Inc. Stock Option Agreement dated July 29, 1994 and the
Sudbury, Inc. Non-Statutory Stock Option Agreement dated September 1,
1992;
Registration Statement Number 33-72234 on Form S-8 pertaining to the
Sudbury, Inc. 1990 Stock Option Plan;
Registration Statement Number 33-52727 on Form S-8 pertaining to the
Sudbury Savings and Profit Sharing Plan.
ERNST & YOUNG LLP
Cleveland, Ohio
August 15, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-START> JUN-01-1995
<PERIOD-END> MAY-31-1996
<EXCHANGE-RATE> 1
<CASH> 10,645
<SECURITIES> 0
<RECEIVABLES> 38,299
<ALLOWANCES> 0
<INVENTORY> 18,871
<CURRENT-ASSETS> 71,713
<PP&E> 76,720
<DEPRECIATION> 21,247
<TOTAL-ASSETS> 132,352
<CURRENT-LIABILITIES> 48,822
<BONDS> 10,113
<COMMON> 0
0
106
<OTHER-SE> 62,506
<TOTAL-LIABILITY-AND-EQUITY> 132,352
<SALES> 302,239
<TOTAL-REVENUES> 302,239
<CGS> 253,696
<TOTAL-COSTS> 25,599
<OTHER-EXPENSES> (2,606)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,441
<INCOME-PRETAX> 24,109
<INCOME-TAX> 8,238
<INCOME-CONTINUING> 15,871
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,871
<EPS-PRIMARY> 1.24
<EPS-DILUTED> 1.23
</TABLE>
