-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TZj2Ni3t8D++PaenZR20eYyLJpVTsOvlFUOYE9izW5wGvY8j2IyuUYk1cZUCf0Q/ pHcycoilZsee7WHn3umEvA== 0000950152-96-004230.txt : 19960819 0000950152-96-004230.hdr.sgml : 19960819 ACCESSION NUMBER: 0000950152-96-004230 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19960531 FILED AS OF DATE: 19960816 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUDBURY INC CENTRAL INDEX KEY: 0000811801 STANDARD INDUSTRIAL CLASSIFICATION: IRON & STEEL FOUNDRIES [3320] IRS NUMBER: 341546292 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-10023 FILM NUMBER: 96616811 BUSINESS ADDRESS: STREET 1: 30100 CHAGRIN BLVD STREET 2: STE 203 CITY: CLEVELAND STATE: OH ZIP: 44124 BUSINESS PHONE: 2164647026 MAIL ADDRESS: STREET 1: 30100 CHAGRIN BLVD STREET 2: SUITE 203 CITY: CLEVLAND STATE: OH ZIP: 44124 FORMER COMPANY: FORMER CONFORMED NAME: NEW HOLDING CO /DE/ DATE OF NAME CHANGE: 19870615 10-K 1 SUDBURY, INC. 10-K 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. 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 - 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 - 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 - 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 - 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 - 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.
APPROXIMATE LOCATION PRINCIPAL PRODUCTS SQUARE FOOTAGE STATUS - -------- ------------------ -------------- ------ 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
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 - 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. - 8 - 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.
Principal occupation or employment for the past Name five years Age - ---- ----------------------------------------------- --- 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)
- 9 - 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 - 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 - 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 - 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 - 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 - 15 SUDBURY, INC. INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES (ITEM 14(a)(1) AND (2)(d))
PAGE REFERENCE ------------------------------ FORM 10-K ANNUAL REPORT --------- ------------- 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
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 - 16 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS SUDBURY, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------ 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) 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 (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.
- 16 - 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 - 17 - 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.
EXHIBIT NO. - ----------- (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.)
- 18 - 19 SUDBURY, INC. FORM 10-K EXHIBIT INDEX (CONTINUED) -------------
EXHIBIT NO. - ----------- (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.)
- 19 - 20 SUDBURY, INC. FORM 10-K EXHIBIT INDEX (CONTINUED) ------------- (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
The above exhibits are available to shareholders upon written request to: Corporate Secretary Sudbury, Inc. 30100 Chagrin Boulevard, Suite 203 Cleveland, Ohio 44124 - 20 - EX-4.C 2 EXHIBIT 4(C) 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 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 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 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 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 EX-10.G 3 EXHIBIT 10.(G) 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. EX-10.I 4 EXHIBIT 10(I) 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. EX-11 5 EXHIBIT 11 1 EXHIBIT 11 - STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS SUDBURY, INC. AND SUBSIDIARIES
Year Ended May 31, --------------------------- 1996 1995 1994 ------- ------- ------- (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 ======= ======= =======
EX-13 6 EXHIBIT 13 1 EXHIBIT 13 - ---------- SELECTED FINANCIAL DATA (1)
1996 1995 1994 1993 1992 -------- -------- --------- --------- --------- (Dollars in thousands, except per share amounts) Net Sales: Ongoing operations $302,239 $305,435 $ 250,329 $ 222,410 $ 198,197 Businesses held for sale 315 50,221 156,678 -------- -------- --------- --------- --------- TOTAL 302,239 305,435 250,644 272,631 354,875 Special charges (2) (5,956) (586) Reorganization items (3) (1,095) (46,315) Gain on sale of subsidiary (4) 1,511 Income (loss) before extraordinary gain 15,871 13,572 6,830 3,108 (56,410) Extraordinary gain (5) 78,805 Net income (loss) 15,871 13,572 6,830 81,913 (56,410) Net income per common share: Fully diluted 1.23 1.07 .55 (6) (6) Primary 1.24 1.07 .55 (6) (6) Cash dividends per common share -- -- -- -- -- Assets 132,352 129,637 114,200 116,456 162,233 Working capital (deficiency) 22,891 15,762 19,667 19,148 (27,583) Short-term obligations 282 678 2,300 3,088 60,874 Long-term debt 10,113 17,978 29,961 45,984 23,931 Liabilities deferred pursuant to Chapter 11 86,279 Serial preferred stock 7,563 Stockholders' equity (deficit) 62,612 44,552 29,410 16,808 (56,833) - ---------- (1) As discussed more fully in Note Q of the financial statements, the Company emerged from Chapter 11 of the U.S. Bankruptcy Code on September 1, 1992 and adopted Fresh Start reporting at that date. Accordingly, financial data presented for periods subsequent to the date of emergence are not comparable to prior periods. (2) Refer to Note D of the financial statements for a further discussion of 1994 special charges. The 1993 special charges represent consulting and other expenses incurred under the Company's restructuring program. (3) Reorganization items represent charges recorded in conjunction with the Company's restructuring program. (4) As discussed more fully in Note C of the financial statements, the Company sold its South Coast Terminals, Inc. subsidiary in December 1995. (5) An extraordinary gain resulted from the forgiveness of prepetition liabilities under the Company's amended Plan of Reorganization. (6) Calculations of net income per share are not meaningful as a result of the Company's reorganization described in Note Q of the financial statements.
2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995: SALES. The Company's net sales for fiscal 1996 decreased by 1% to $302.2 million from $305.4 million in the prior year. Fiscal 1996 results included sales of $13.5 million from South Coast Terminals, Inc. ("South Coast") prior to its divestiture in December 1995. South Coast's fiscal 1995 sales were $23.5 million. After adjusting for the impact of the sale of South Coast, sales from the Company's other five subsidiaries increased by $6.8 million or 2.4% in fiscal 1996 over the prior year. This sales improvement came from a $29.5 million increase in net new business, $3.0 million of price increases and a $25.7 million decrease in sales of existing products. The Company's Industrial Powder Coatings, Inc. ("IPC") and Wagner Castings Company ("Wagner") subsidiaries generated sales increases over the prior year. IPC's sales growth resulted primarily from the production of its new blank coating line facility in Louisville, Kentucky. The blank coating facility sales were $13.5 million of which $10.5 million represented the pass through of steel blank material cost. Partially offsetting this increase were reductions in IPC's volume due to an automotive model changeover affecting its coil spring coating business and a general slowing in automotive orders. At Wagner, $10.6 million of net new business came from Wagner's presence on Ford Motor Company's North American version of its "World Car" program and on other automotive vehicle platforms. During fiscal 1996, the Company's sales to the automotive industry were $181 million which is a 3% decrease from the prior year level of $186 million. The decrease resulted from the previously discussed volume declines at IPC. The remaining companies' sales as a whole were down $6.7 million when compared to the prior year period due principally to slowing in the liquid propane gas regulator valve and electric hand tool markets. GROSS PROFIT. Gross profit (net sales less costs of products sold) for fiscal 1996 decreased by $2.5 million to $48.5 million from $51.0 million. Gross profit as a percentage of net sales was 16.1% for fiscal 1996 compared to 16.7% in the prior year. The decrease in the margin rate resulted from both the sale of South Coast, whose gross margins were higher than the average for the Company's other subsidiaries and the impact of the pass through of $10.5 million of steel blank material costs at IPC described previously. Partially offsetting these items were favorable effects of cost and productivity improvements at the Company's Wagner and Iowa Mold Tooling ("IMT") subsidiaries. 3 SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses as a percentage of net sales decreased to 8.5% in fiscal 1996 from 9.3% in the prior year. In terms of dollars, such expenses decreased from $28.3 million in the prior year to $25.6 million in fiscal 1996. The decrease resulted primarily from the impact of the sale of South Coast and lower expenses recorded for a contractual bonus obligation. The sale of South Coast in December 1995 resulted in $1.3 million less expense in fiscal 1996 when compared to the prior year. In fiscal 1996 the Company recorded expense of $2.8 million related to the final determination of a contractual bonus established in its 1992 employment agreement with Jacques R. Sardas, Chairman, President and Chief Executive Officer of the Company. As discussed in Note D to the consolidated financial statements, the expense was based on the appraised value of the Company by an independent investment banking firm. In the prior year, the Company recorded expense of $3.4 million related to the contractual bonus. INTEREST EXPENSE. Interest expense decreased by $1.5 million due to significantly lower borrowing levels and reduced interest rates under the Company's new revolving credit facility. GAIN ON SALE OF SUBSIDIARY. The Company divested its South Coast subsidiary in December 1995 and recorded a gain before income taxes of $1.5 million on the transaction. OTHER INCOME. Other income increased by $.8 million due principally to the settlement of an environmental matter related to a business sold by the Company in 1992 which resulted in the receipt of escrowed funds and insurance proceeds. INCOME TAX EXPENSE. Income tax expense increased by $1.8 million from $6.4 million in the prior year (an effective tax rate of 32%) to $8.2 million in fiscal 1996 (an effective tax rate of 34%). The fiscal 1996 effective tax rate of 34% was less than the statutory rate of 35% principally due to the impact of income tax benefits recognized in conjunction with the sale of South Coast. The fiscal 1995 effective tax rate differed from the statutory tax rate due principally to income tax benefits associated with the 1992 employment agreement with Mr. Sardas and the utilization of net operating loss carryforwards. The deferred tax asset valuation allowance was reduced by $.3 million and $2.1 million in fiscal 1996 and 1995, respectively, as a result of management's evaluation of the future realization of certain deferred tax assets. As of May 31, 1996, the Company had recognized a net deferred tax asset of $2.1 million which relates principally to net operating loss carry forwards and future income tax benefits associated with the 1992 employment agreement with Mr. Sardas. Valuation allowances have been established for those deferred tax assets for which management believes there does not exist sufficient objective evidence to support their recognition under generally accepted accounting principles. 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994: SALES. The Company's net sales for fiscal 1995 increased by 22% to $305.4 million from $250.6 million in fiscal 1994. This sales improvement of $54.8 million came from a $27.3 million increase in sales of existing products, $21.1 million of net new business and $6.4 million of price increases. Each of the Company's subsidiaries experienced sales increases over fiscal 1994. During fiscal 1995 the Company's sales to the automotive industry improved to $186 million which is a 26% increase over the prior year level of $148 million. The Company's Wagner and IPC subsidiaries accounted for most of this increase as their volumes improved in line with the overall rise in demand which occurred during fiscal 1995 in the domestic automotive industry. At Wagner, $10.8 million of new business arose from the start-up of Ford Motor Company's North American version of its "World Car" program which consists of the Ford Contour and Mercury Mystique. Sales at the Company's IMT subsidiary increased by $8.6 million over fiscal 1994 as a result of improvements in several of its construction related markets. GROSS PROFIT. Gross profit (net sales less costs of products sold) for fiscal 1995 increased by $11.7 million to $51.0 million from $39.3 million in fiscal 1994. Gross profit as a percentage of net sales was 16.7% for fiscal 1995 compared to 15.7% in fiscal 1994. The increase in margin rate came from increased sales volume, improved operating efficiencies and a $.9 million favorable impact in scrap steel prices at Wagner as scrap steel prices did not escalate as rapidly as they had in the prior year. Commitments with most of Wagner's major customers allow Wagner to pass on the majority of increases or decreases in the cost of scrap steel to these customers, however, these adjustments are generally passed along three to six months subsequent to the time the change occurs. SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses as a percentage of net sales decreased to 9.3% in fiscal 1995 from 9.6% in fiscal 1994 due principally to higher sales. In terms of dollars, such expenses increased by $4.2 million due primarily to a $3.3 million increase in the expense related to a contractual bonus accrued for Jacques R. Sardas, Chairman, President and Chief Executive Officer of the Company under his 1992 employment agreement as discussed in footnote D of the consolidated financial statements. Also impacting the increase in selling and administrative expenses was an increase in selling expenses associated with higher sales. 5 SPECIAL CHARGES. Special charges of $6.0 million were recognized in fiscal 1994 in connection with the 1992 employment agreement with Mr. Sardas. These charges include expenses of $4.7 million associated with stock options and a $1.3 million bonus accrual. The charge relating to the stock options was noncash and no future charges will be required to account for these options. INTEREST EXPENSE. Interest expense decreased by $.9 million due to reductions in debt as a result of the Company's cash flow from operations. Partially offsetting this reduction was an increase in the interest rate on the Company's bank indebtedness due to increases in the base interest rates. INCOME TAX EXPENSE. Income tax expense of $6.4 million in fiscal 1995 (an effective tax rate of 32%) represented a significant increase over the income tax benefit of $.2 million recorded in fiscal 1994. In fiscal 1995, the Company fully utilized its net operating loss carryforwards generated subsequent to the Company's emergence from Chapter 11 and therefore became subject to income taxes on its earnings during the year. The effective tax rate of 32% is less than the statutory rate of 35% due principally to the impacts of income tax benefits associated with Mr. Sardas' 1992 employment agreement and the utilization of net operating loss carryforwards. During fiscal 1995, the deferred tax asset valuation allowance was reduced by $2.1 million as a result of management's evaluation of the future realization of certain deferred tax assets. In fiscal 1994, the income tax benefit resulted from refunds received by the Company due to the favorable resolution of certain state tax disputes. As of May 31, 1995, the Company had recognized a net deferred tax asset of $3.8 million which relates principally to net operating loss carryforwards and future income tax benefits associated with Mr. Sardas' 1992 employment agreement. Valuation allowances have been established for those deferred tax assets for which management believes there does not exist sufficient objective evidence to support their recognition under generally accepted accounting principles. LIQUIDITY AND CAPITAL RESOURCES During fiscal 1996 operating activities provided cash of $18.3 million compared to $32.0 million in the prior fiscal year. The change resulted from an increase in working capital which included the payment of a contractual bonus obligation of $7.25 million to Mr. Sardas under his 1992 employment agreement. As discussed in footnote D to the consolidated financial statements, the bonus payment made in January 1996 was based on the appraised value of the Company by an independent investment banking firm. At May 31, 1996, long-term debt (including current maturities) was $10.4 million, a decrease of $8.3 million from May 31, 1995. Proceeds from the sale of South Coast of $18.6 million were used to reduce certain long-term debt of South Coast and the Company and to fund capital expenditures. Long-term debt represents 14% of long-term debt plus stockholders' equity at May 31, 1996, compared to 30% at the end of fiscal 1995. 6 As of May 31, 1996, $1.3 million of the Company's $40 million revolving credit facility ("Credit Facility") was utilized to secure the Company's irrevocable letters of credit and the Company had $38.7 million of additional borrowing capacity under the Credit Facility. The Credit Facility provides the Company the ability to incur capital expenditures of up to $20 million per year for the remaining two year term of the Credit Facility. Subject to certain conditions, the Credit Facility also permits the Company to borrow to fund acquisitions. Capital expenditures were $22.6 million in fiscal 1996 compared with $16.2 million in fiscal 1995. The increase in capital expenditures was mainly attributable to the modernization project to expand ductile processing capacity at Wagner and the purchase of electrodeposition coating equipment to be utilized by IPC in Monterrey, Mexico. The Company currently has capital expenditure commitments for fiscal 1997 of $3.4 million, most of which relates to the completion of Wagner's modernization project. The Company currently anticipates spending approximately $15 million for capital expenditures in fiscal 1997. The Company believes that funds available under the Credit Facility and funds generated from operations will be sufficient to satisfy its anticipated operating needs and capital improvements for fiscal 1997. OTHER MATTERS. As approximately 60% of the Company's sales are dependent on the automotive markets in the United States and Europe, related profits will be dependent on sales of vehicles in these markets in the future. The Company's current and previous businesses operate in a variety of locations where environmental situations could exist based on current or past operations. Certain operating and non-operating subsidiaries of the Company have been named as potentially responsible parties liable for cleanup costs by the United States Environmental Protection Agency, state regulatory authorities and private parties with respect to several sites in various states, including Minnesota, Ohio, Pennsylvania and Texas. The Company continues to evaluate the environmental conditions and its potential liability at these sites. The Company has initiated corrective action and/or preventive environmental projects to ensure the safe and lawful operation of its facilities. For known environmental conditions, the Company, with the assistance of environmental engineers and consultants, has accrued $4.0 million to cover estimated future environmental expenditures. While the ultimate result of both known and unknown environmental conditions cannot be predicted with certainty, the Company does not expect these matters to have a material adverse effect on its financial condition, results of operations, or cash flows. 7 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is listed on the Nasdaq Stock Market ("Nasdaq") under the symbol SUDS. During fiscal 1996, the high and low closing bid quotations as reported on Nasdaq ranged from a high bid of $9.625 to a low bid of $6.375. During fiscal 1995, the high and low closing bid quotations as reported on Nasdaq ranged from a high bid of $7.375 to a low bid of $5.125. The following table sets forth the high and low closing bid quotations as reported on Nasdaq. The prices represent quotations between dealers without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
PERIOD HIGH LOW - ------ ---- --- YEAR ENDED MAY 31, 1996 - ----------------------- First quarter $8.50 $6.375 Second quarter 9.375 7.75 Third quarter 8.375 7.25 Fourth quarter 9.625 7.50 YEAR ENDED MAY 31, 1995 - ----------------------- First quarter $7.00 $6.125 Second quarter 7.375 6.25 Third quarter 6.75 5.125 Fourth quarter 7.125 5.75
On August 2, 1996, there were approximately 1,200 record holders of the Company's Common Stock. The Company has never paid dividends on shares of Common Stock and does not expect to pay dividends in the foreseeable future. 8 CONSOLIDATED STATEMENTS OF INCOME --------------------------------- SUDBURY, INC. AND SUBSIDIARIES ------------------------------
Year Ended May 31, ----------------------------------- 1996 1995 1994 --------- --------- --------- (Dollars in thousands, except per share amounts) Net sales $ 302,239 $ 305,435 $ 250,644 Costs and expenses: Costs of products sold 253,696 254,472 211,405 Selling and administrative expenses 25,599 28,333 24,109 Special charges 5,956 --------- --------- --------- OPERATING INCOME 22,944 22,630 9,174 Interest expense - net (1,441) (2,974) (3,848) Gain on sale of subsidiary 1,511 Settlement of preconfirmation liabilities 846 Other income 1,095 292 484 --------- --------- --------- Income before income taxes 24,109 19,948 6,656 Income tax expense (benefit) 8,238 6,376 (174) --------- --------- --------- NET INCOME $ 15,871 $ 13,572 $ 6,830 ========= ========= ========= Net income per Common share: Primary $ 1.24 $ 1.07 $ .55 ========= ========= ========= Fully diluted $ 1.23 $ 1.07 $ .55 ========= ========= ========= Average Common shares and share equivalents outstanding: Primary 12,815 12,651 12,330 ========= ========= ========= Fully diluted 12,883 12,670 12,482 ========= ========= =========
See notes to consolidated financial statements. 9 CONSOLIDATED BALANCE SHEETS --------------------------- SUDBURY, INC. AND SUBSIDIARIES ------------------------------ (Dollars in thousands) ASSETS - ------
May 31, ------------------- 1996 1995 -------- -------- CURRENT ASSETS Cash and cash equivalents $ 10,645 $ 3,548 Accounts receivable, less allowance for doubtful accounts (in 1996: $595; in 1995: $498) 38,299 41,800 Inventories 18,871 18,124 Deferred taxes 218 2,554 Other 3,680 4,722 -------- -------- TOTAL CURRENT ASSETS 71,713 70,748 PROPERTY, PLANT AND EQUIPMENT Land and land improvements 1,421 2,263 Buildings 8,466 17,334 Machinery and equipment 66,833 53,580 -------- -------- 76,720 73,177 Less accumulated depreciation 21,247 18,931 -------- -------- NET PROPERTY, PLANT AND EQUIPMENT 55,473 54,246 OTHER ASSETS 5,166 4,643 -------- -------- $132,352 $129,637 ======== ========
See notes to consolidated financial statements. 10 CONSOLIDATED BALANCE SHEETS--CONTINUED -------------------------------------- SUDBURY, INC. AND SUBSIDIARIES ------------------------------ (Dollars in thousands) LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------
May 31, ---------------------- 1996 1995 --------- --------- CURRENT LIABILITIES Trade accounts payable $ 26,606 $ 25,891 Accrued compensation and employee benefits 8,018 14,286 Accrued income taxes 3,773 4,074 Other accrued expenses 10,143 10,057 Current maturities of long-term debt 282 678 --------- --------- TOTAL CURRENT LIABILITIES 48,822 54,986 LONG-TERM DEBT 10,113 17,978 OTHER LONG-TERM LIABILITIES 10,805 12,121 STOCKHOLDERS' EQUITY Common Stock--par value $0.01 per share; authorized 20,000,000 shares; 10,616,361 (10,289,883 at May 31, 1995) shares issued and outstanding 106 103 Additional paid-in capital 23,731 22,076 Retained earnings 39,081 23,210 Minimum pension liability adjustment - net (306) (837) --------- --------- TOTAL STOCKHOLDERS' EQUITY 62,612 44,552 --------- --------- $ 132,352 $ 129,637 ========= =========
See notes to consolidated financial statements. 11 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY SUDBURY, INC. AND SUBSIDIARIES ------------------------------ For the Years Ended May 31, 1996, 1995 and 1994
(Dollars and shares in thousands) MINIMUM COMMON STOCK ADDITIONAL PENSION -------------- PAID-IN RETAINED LIABILITY AMOUNT SHARES CAPITAL EARNINGS ADJUSTMENT ------ ------ ------- -------- ---------- BALANCE AT MAY 31, 1993 $100 10,000 $13,900 $ 2,808 $ -0- Net income for 1994 6,830 Stock options to Chief Executive Officer (Note K) 5,547 Exercise of participation certificates and stock options 2 234 680 Tax benefits from exercise of stock options 97 Adjustment for minimum pension liability - net (554) ----- ------ ------- ------- ------- BALANCE AT MAY 31, 1994 102 10,234 20,224 9,638 (554) Net income for 1995 13,572 Exercise of participation certificates and stock options and other - net 1 56 718 Tax benefits from exercise of stock options 188 Utilization of net operating loss carryforwards and recog- nition of deferred tax asset 946 Adjustment for minimum pension liability - net (283) ----- ------ ------- ------- ------- BALANCE AT MAY 31, 1995 103 10,290 22,076 23,210 (837) Net income for 1996 15,871 Exercise of participation certificates and stock options and other - net 3 326 1,248 Tax benefits from exercise of stock options 91 Utilization of net operating loss carryforwards 316 Adjustment for minimum pension liability - net 531 ----- ------ ------- ------- ------- BALANCE AT MAY 31, 1996 $ 106 10,616 $23,731 $39,081 $ (306) ===== ====== ======= ======= =======
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 12 CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- SUDBURY, INC. AND SUBSIDIARIES ------------------------------ (Dollars in thousands)
Year Ended May 31, ---------------------------------- 1996 1995 1994 -------- --------- --------- OPERATING ACTIVITIES: Net income $ 15,871 $ 13,572 $ 6,830 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,995 9,800 8,361 Gain and tax benefit on sale of subsidiary (1,657) Deferred taxes and other (713) (1,339) (351) Special charges 5,956 Changes in operating assets and liabil- ities net of effect of disposition (4,221) 9,999 1,041 -------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 18,275 32,032 21,837 INVESTING ACTIVITIES: Purchases of property, plant and equipment (22,561) (16,232) (6,951) Proceeds from sale of businesses 18,576 666 Proceeds from collection of notes receivable 470 2,362 Other - net 328 230 (17) -------- --------- --------- NET CASH USED IN INVESTING ACTIVITIES (3,657) (15,532) (3,940) FINANCING ACTIVITIES: Borrowings, refinancings and repayments: Long-term borrowings 55,900 304,861 238,788 Reductions of debt (64,672) (318,777) (256,067) Common stock issued 1,251 719 682 -------- --------- --------- NET CASH USED IN FINANCING ACTIVITIES (7,521) (13,197) (16,597) -------- --------- --------- INCREASE IN CASH AND CASH EQUIVALENTS 7,097 3,303 1,300 Cash and cash equivalents at beginning of period 3,548 245 (1,055) -------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,645 $ 3,548 $ 245 ======== ========= =========
See notes to consolidated financial statements. 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUDBURY, INC. AND SUBSIDIARIES NOTE A -- NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS: Sudbury, Inc. and its subsidiaries (the "Company") operates in one business segment - the manufacture of high-quality industrial products. The Company primarily serves the automotive, appliance and construction markets providing iron, aluminum and zinc castings; applications of custom coatings; cranes, truck bodies and related equipment; and precision machined components through its five operating subsidiaries. Over 90% of the Company's sales are made within North America. CONSOLIDATION: The consolidated financial statements include the accounts of the Company. Significant intercompany balances and transactions have been eliminated. CASH: The Company considers liquid instruments with initial maturities of 90 days or less at date of purchase to be cash equivalents. INVENTORIES: Inventories are stated at the lower of cost or market. Cost is determined by the last-in, first-out method (LIFO) for approximately 68% and 80% of the Company's inventories at May 31, 1996 and 1995, respectively, and by the first-in, first-out (FIFO) method for all other inventories. The FIFO method approximates the current cost. PROPERTIES AND DEPRECIATION: Property, plant and equipment acquired subsequent to September 1, 1992 are stated at cost. As discussed in Note Q, in conjunction with the emergence from Chapter 11 bankruptcy proceedings, the Company implemented Fresh Start reporting and, accordingly, all property, plant and equipment owned on September 1, 1992 was restated to reflect reorganization value, which approximated fair value in continued use. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the related assets. With minor exceptions straight-line composite rates for depreciation of plant assets are as follows: buildings 20 to 40 years; machinery, equipment and fixtures 10 years. Interest costs of $280,000 and $171,000 were capitalized in fiscal 1996 and 1995, respectively. ENVIRONMENTAL EXPENDITURES: Environmental expenditures that pertain to current operations or relate to future revenues are expensed or capitalized consistent with the Company's capitalization policy. Expenditures that result from the remediation of an existing condition caused by past operations, that do not contribute to current or future revenues, are expensed. Liabilities are recognized for remedial activities when the cleanup is probable and the cost can be reasonably estimated. 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUDBURY, INC. AND SUBSIDIARIES NOTE A -- NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED NET INCOME PER SHARE: For the fiscal years ended May 31, 1996, 1995 and 1994, net income per common share was calculated by dividing net income applicable to common stock by the average number of shares of common stock outstanding and common stock equivalents. Common stock equivalents include shares issuable on the exercise of stock options and Series A and B Participation Certificates, less an amount equal to the number of shares which could be repurchased from proceeds realized by the Company from the exercise of such securities. The Company's Series C Participation Certificates have not been included in the computation of common stock equivalents because such securities were not exercisable as their current trigger price has not been attained. INCOME TAXES: The Company accounts for income taxes using the liability method. Deferred income tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities measured by the enacted tax rates which will be in effect when these differences reverse. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. RECLASSIFICATIONS: Certain prior year amounts have been reclassified to conform to the 1996 presentation. NEW ACCOUNTING STANDARDS: In 1995, the Financial Accounting Standards Board issued Statement No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121") and Statement No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 121 requires that, under certain circumstances, long-lived assets be reviewed for impairment and any applicable impairment loss be recognized. SFAS 123 allows accounting for employee stock options under either the fair value or the intrinsic value method. The Company plans to continue to use the intrinsic value method. These statements, which must be adopted by the Company no later than the first quarter of fiscal 1997, are not expected to have a material effect on the financial statements. 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUDBURY, INC. AND SUBSIDIARIES NOTE B -- INVENTORIES The components of inventories at May 31 are summarized as follows (in thousands):
1996 1995 ------- ------- Raw materials and supplies $ 7,204 $ 7,474 Work in process 8,464 7,217 Finished products 3,599 3,875 ------- ------- Total at FIFO 19,267 18,566 Less excess of FIFO cost over LIFO values 396 442 ------- ------- $18,871 $18,124 ======= =======
NOTE C -- DISPOSITIONS On December 29, 1995, the Company completed the sale of its South Coast Terminals, Inc. ("South Coast") subsidiary. Proceeds from the sale of $18,576,000 were used to reduce certain indebtedness of South Coast and the Company. The Company recorded a pretax gain of $1,511,000 ($1,657,000 after income taxes) on the sale of South Coast. Unaudited pro forma consolidated results of operations of the Company, assuming the sale of South Coast had occurred at June 1, 1995 and 1994, are summarized below (in thousands, except per share amounts):
1996 1995 -------- -------- Net sales $288,712 $281,951 Net income $ 13,559 $ 12,352 Net income per Common share $ 1.05 $ .97
During fiscal 1994 the Company sold one business for net cash proceeds of $666,000. NOTE D -- CHARGES ASSOCIATED WITH EXECUTIVE EMPLOYMENT AGREEMENT Recorded in the Company's operating results for the years presented under selling and administrative expenses and special charges are charges recorded in connection with the achievement of contractual performance targets established in the January 1992 Employment Agreement ("1992 Employment Agreement") with Jacques R. Sardas, Chairman, President and Chief Executive Officer of the Company. The 1992 Employment Agreement, confirmed as part of the Company's amended Plan of Reorganization (the "Plan") by the United States Bankruptcy Court included the triggering of the exercisability of certain stock options and the payment of a cash bonus in the event the fair value of the Company attains certain values as determined by an independent investment banking firm. 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUDBURY, INC. AND SUBSIDIARIES NOTE D -- CHARGES ASSOCIATED WITH EXECUTIVE EMPLOYMENT AGREEMENT - continued The original charges associated with the 1992 Employment Agreement occurred in fiscal 1994 with $5,956,000 being recorded as special charges. The special charges include a noncash charge of $4,650,000 which represents the estimated value of 653,595 stock options granted to Mr. Sardas on September 1, 1992, which were exercisable in increments after the fair value of the Company exceeded value targets ranging from $15,000,000 to $35,000,000. The Company determined, and an appraisal by an investment banking firm confirmed in accordance with procedures specified in the 1992 Employment Agreement, that performance targets established in the 1992 Employment Agreement had been met as of February 28, 1994 and therefore the options became exercisable. The remaining $1,306,000 of the fiscal 1994 special charges represents expense associated with the estimated cash bonus payable to Mr. Sardas at the end of the 1992 Employment Agreement in January 1996. The bonus amount equals 5% of the net fair value of the Company in excess of $35,000,000 at the expiration of the 1992 Employment Agreement and was accrued over the term of the 1992 Employment Agreement. Accruals for the bonus expense subsequent to the initial charge made on February 28, 1994 have been included as part of the Company's selling and administrative expenses. In the third quarter of fiscal 1996, the final determination of the bonus amount was made through an appraisal of the net fair value of the Company as provided by the 1992 Employment Agreement. As a result of this appraisal, an additional accrual of $1,977,000 was made in the third quarter of fiscal 1996 and a bonus payment to Mr. Sardas in the amount of $7,250,000 was made. Total expenses related to the contractual bonus, including appraisal costs and employment taxes, which were recorded in selling and administrative expenses, were $2,795,000, $3,407,000 and $80,000 for fiscal 1996, 1995 and the fourth quarter of fiscal 1994, respectively. NOTE E -- SETTLEMENT OF PRECONFIRMATION LIABILITIES Two lawsuits which had been pending in United States Bankruptcy Court against the Company and several of its former officers and directors were settled in fiscal 1994. The lawsuits related to events which occurred prior to the Company's entry into and emergence from bankruptcy. Under the Plan, the Company had retained certain indemnification obligations with respect to the defendants who were former officers or former directors of the Company. These obligations were limited to $2,000,000. The lawsuits were settled using $765,000 of funds which had been previously held in escrow, $616,000 of the Company's funds, and funds contributed by co-defendants. The Company also resolved an insurance-related bankruptcy claim in fiscal 1994. As a result of these settlements, the Company recognized an $846,000 benefit as such settlements were for less than the amounts reserved for such claims. 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUDBURY, INC. AND SUBSIDIARIES NOTE F -- CONTINGENCIES AND COMMITMENTS The Company is party to a number of lawsuits and claims arising out of the conduct of its business, including those relating to commercial transactions, product liability and environmental, safety and health matters. The Company, using historical trends, actuarially calculates the estimated amount of its current exposure for product liability. The Company is insured for amounts in excess of established aggregate annual deductibles which total $2,500,000 and accrues for the estimated liability described above up to the limits of the deductibles. Other claims and lawsuits are handled on a case-by-case basis. Three subsidiaries of the Company are self-insured for health care to an aggregate annual amount of $7,800,000 and workers' compensation up to $400,000 per incident, above which third party insurance applies. All operating locations acquired by the Company since 1984 operate in a variety of locations where environmental situations could exist based on current or past operations. Certain operating and non-operating subsidiaries of the Company have been named as potentially responsible parties liable for cleanup of known environmental conditions. For known environmental situations, the Company, with the assistance of environmental engineers and consultants, has accrued $4,038,000 to cover estimated future environmental expenditures. The Company has initiated corrective action and/or preventative environmental projects to ensure the safe and lawful operation of its facilities. There could exist, however, more extensive or unknown environmental situations at existing or previously owned businesses for which the future cost is not known or accrued at May 31, 1996. While the ultimate result of the above contingencies cannot be predicted with certainty, management does not expect these matters to have a material adverse effect on the consolidated financial position or results of operations of the Company. 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUDBURY, INC. AND SUBSIDIARIES NOTE F -- CONTINGENCIES AND COMMITMENTS - continued The Company has an employment agreement with Jacques R. Sardas, its Chairman, President and Chief Executive Officer, which extends through January 1998. The agreement provides that if Mr. Sardas' employment is terminated other than for cause, or from Mr. Sardas' death or disability, the Company continues to be obligated to pay Mr. Sardas the fair value of the common stock underlying the 1,764,706 options he was granted under his 1992 Employment Agreement ( the "Option Stock"). At Mr. Sardas' election the Company is also obligated to purchase the Option Stock at fair value in five separate approximately semi-annual installments commencing February 7, 1996 through January 13, 1998. Under the employment agreement, fair value is determined based on quoted prices on the principal stock exchange on which the Company's Common Stock is traded. Mr. Sardas generally may delay his right to sell any installment of the Option Stock until the next succeeding purchase date. If at that next succeeding purchase date Mr. Sardas does not tender such shares of Option Stock, the Company's obligation to purchase the Option Stock with respect to such installment will terminate. Mr. Sardas has not exercised his right to have the Company purchase the Option Stock subject to the February 7, 1996 installment date and the Company's obligation with respect such purchase has terminated. The Company is the beneficiary of a key-man life insurance policy on Mr. Sardas' life in the amount of $14,000,000. The proceeds of the policy would be used to fulfill the Company's obligation in the event of Mr. Sardas' death. At May 31, 1996, the Company has commitments to purchase $3,400,000 in machinery and equipment. 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUDBURY, INC. AND SUBSIDIARIES NOTE G -- STATEMENTS OF CASH FLOWS INFORMATION
(Dollars in thousands) 1996 1995 1994 ------- ------- ------- Funds provided (used) by changes in operating assets and liabilities net of effect of dispositions are as follows: Accounts receivable $ 540 $(2,528) $(6,370) Inventories (1,732) 468 1,261 Prepaid expenses and other 3,220 (702) 6,502 Trade accounts payable (304) 7,387 (1,161) Accrued liabilities (5,945) 5,374 809 ------- ------- ------- $(4,221) $ 9,999 $ 1,041 ======= ======= ======= Cash payments (refunds): Interest $ 1,116 $ 2,794 $ 3,635 Taxes 6,225 3,711 (154)
NOTE H -- LONG-TERM DEBT Long-term debt consisted of the following at May 31 (in thousands):
1996 1995 ------- ------- Revolving Line of Credit $ 5,479 Subordinated Notes $ 9,027 8,461 PIK Notes 665 665 Industrial Revenue Bonds 450 Real estate mortgage notes 2,392 Other 703 1,209 ------- ------- 10,395 18,656 Less current maturities 282 678 ------- ------- $10,113 $17,978 ======= =======
The Company has a secured $40,000,000 credit facility ("Revolving Line of Credit") which expires on May 30, 1998. The Revolving Line of Credit provides a $40,000,000 revolving credit commitment and an option to convert up to $15,000,000 of the revolving credit commitment to a term loan. The Revolving Line of Credit is secured by substantially all assets of the Company and its subsidiaries. The Company's five subsidiaries are guarantors of the Revolving Line of Credit. Covenants require the Company to maintain certain fixed charge, interest coverage, net worth and leverage ratios. 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUDBURY, INC. AND SUBSIDIARIES NOTE H -- LONG-TERM DEBT - continued As of May 31, 1996, $1,280,000 of the Revolving Line of Credit was utilized to secure the Company's irrevocable letters of credit. These letters of credit were issued primarily for insurance purposes. As of May 31, 1996, the Company had the ability to borrow an additional $38,720,000 under the Revolving Line of Credit. The Revolving Line of Credit bears interest at the prime rate or at the London Interbank Offered Rate ("LIBOR"), plus a marginal rate based on the leverage and fixed charge ratios of the Company ranging from 1/2% to 1 1/2% (.75% at May 31, 1996). The Revolving Line of Credit has unused facility fees of .25% and letter of credit fees equal to the marginal rate on LIBOR loans payable on a quarterly basis. The Subordinated Notes due September 1, 1997 represent $9,831,000 principal amount of 8 3/5% Senior Subordinated Pay-In-Kind Notes issued in accordance with the Plan on September 1, 1992. Due to the below market interest rate for this type of debt instrument at issuance, a discount of $2,526,000 was recorded against this debt at the time of its issuance, making the effective rate 16%. The discount is being amortized over the five year term of the indebtedness. At May 31, 1996, the unamortized debt discount was $804,000. Interest is payable semi-annually, however, prior to the refinancing of the Company's bank debt in May 1993, the Subordinated Notes provided that interest payments would be made through the issuance of additional promissory notes in the aggregate principal of the amount of interest owed (the "PIK Notes"). The terms and conditions of the PIK Notes are identical to the Subordinated Notes. The future maturities of long-term debt outstanding at May 31, 1996 for the four fiscal years ending May 31, 2001 are as follows: $10,859,000 in 1998, $21,000 in 1999, $22,000 in 2000 and $15,000 in 2001. NOTE I -- OTHER LONG-TERM LIABILITIES Amounts classified under the caption "Other Long-Term Liabilities" at May 31 consist of the following (in thousands):
1996 1995 ------- ------- Environmental reserves $ 2,954 $ 3,751 Accrued pension costs 3,111 4,175 Post-retirement benefit obligations 3,238 2,523 Reserves for self-insurance and other 1,502 1,672 ------- ------- $10,805 $12,121 ======= =======
21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUDBURY, INC. AND SUBSIDIARIES NOTE J -- PARTICIPATION CERTIFICATES Under the provisions of the Plan, as of September 1, 1992, holders of the Company's pre-reorganization Common Stock and Serial Preferred Stock were granted Series A, Series B and Series C Participation Certificates. The Series A Participation Certificates are rights to purchase 619,194 shares of Common Stock and expire on September 1, 1996. The Series B Participation Certificates are rights to purchase 651,784 shares of Common Stock and expire on September 1, 1999. The Series C Participation Certificates are rights to purchase 1,448,410 shares of Common Stock and expire on September 1, 2002. The Participation Certificates are subject to adjustment for changes in the Company's capitalization. The Series A and B Participation Certificates have increasing exercise prices and are as follows:
Exercise Price ----------------------- Series A Series B -------- -------- September 1, 1995 - August 31, 1996 $3.27 $5.86 September 1, 1996 - August 31, 1997 N/A 6.04 September 1, 1997 - August 31, 1998 N/A 6.34 September 1, 1998 - August 31, 1999 N/A 6.66
The Series C Participation Certificates are not exercisable by their holders until the closing price or the average of the reported closing bid and asked prices of the Common Stock has averaged a price equal to, or in excess of, the specified price per share (the "Trigger Price") for 20 consecutive trading days. Thereafter, the Series C Participation Certificates may be exercised at the option of the holder at any time. The Trigger Price and related exercise price increase each year and are as follows:
Trigger Exercise Price Price ------- -------- September 1, 1995 - August 31, 1996 $10.03 $5.015 September 1, 1996 - August 31, 1997 10.33 5.165 September 1, 1997 - August 31, 1998 10.85 5.425 September 1, 1998 - August 31, 1999 11.39 5.695 September 1, 1999 - August 31, 2000 11.96 5.980 September 1, 2000 - August 31, 2001 12.55 6.275 September 1, 2001 - August 31, 2002 13.18 6.590
22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUDBURY, INC. AND SUBSIDIARIES NOTE J -- PARTICIPATION CERTIFICATES - continued Participation Certificate activity was as follows:
Series A Series B Series C -------- -------- --------- Outstanding at May 31, 1993 619,194 651,784 1,448,410 Exercised (172,300) (11,632) -------- ------- --------- Outstanding at May 31, 1994 446,894 640,152 1,448,410 Exercised (33,766) (20,121) -------- ------- --------- Outstanding at May 31, 1995 413,128 620,031 1,448,410 Exercised (204,796) (55,182) -------- ------- --------- Outstanding at May 31, 1996 208,332 564,849 1,448,410 ======== ======= =========
NOTE K -- EMPLOYEE STOCK OPTIONS Pursuant to the terms of the Company's 1992 Employment Agreement with Jacques R. Sardas, Chairman, President and Chief Executive Officer of the Company, effective September 1, 1992, Mr. Sardas was granted options for 1,764,706 shares of Common Stock. All such options are currently exercisable, have an exercise price of $.01 per share and a term of five years. As of May 31, 1996, none of the 1,764,706 options had been exercised. In fiscal year 1994, the Company reached an agreement with Mr. Sardas regarding settlement of his claim that under his 1992 Employment Agreement and related stock option agreement the Company was obligated to protect his 15% effective ownership position in the Company's Common Stock from the dilution created as a result of the issuance of the Series A, B and C Participation Certificates under the Plan. Under this agreement, 479,893 stock options were issued to Mr. Sardas to give him the equivalent of 15% of the total common shares reserved for issuance under the Participation Certificates and these options. The option prices range from $3.17 to $5.69 per share. All of these options are currently exercisable. The Company recorded a charge of $897,000 in selling and administrative expense in fiscal 1994 which represents the difference between the option price and the fair value of the Common Stock. The Company has long-term incentive plans under which employees may be granted stock options. The 1990 Stock Option Plan allowed for the granting of up to 619,195 options for shares of the Company's Common Stock subject to adjustment for changes in the Company's capitalization. These options are intended to qualify as incentive or non-statutory stock options under the Internal Revenue Code. The option price is the fair market value of the shares on the date of the grant and the options are exercisable over periods ranging from one to ten years after grant date. The 1990 Option Plan was terminated in 1995 and options previously granted under this plan remain outstanding up to November 2004. 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUDBURY, INC. AND SUBSIDIARIES NOTE K -- EMPLOYEE STOCK OPTIONS - continued The Company adopted the 1995 Stock Option Plan which allows for the granting of up to 1,000,000 options. The characteristics of the 1995 Option Plan are similar to the 1990 Stock Option Plan. Options may be granted under the 1995 Stock Option Plan through June 2005. Stock option activity under the 1990 and 1995 Stock Option Plans was as follows:
Shares Option Prices ------ ------------- Outstanding at May 31, 1993 420,000 $1.75 to $3.75 Granted 110,000 $6.875 Exercised (50,000) $1.75 Cancelled (50,000) $3.75 ------- Outstanding at May 31, 1994 430,000 $1.75 to $6.875 Granted 115,000 $6.75 Exercised (160,000) $1.75 to $3.75 -------- Outstanding at May 31, 1995 385,000 $3.75 to $6.875 Granted 260,000 $7.625 to $8.25 Exercised (66,500) $3.75 to $6.875 Cancelled (20,000) $6.75 to $6.875 ------- Outstanding at May 31, 1996 558,500 $3.75 to $8.25 =======
At May 31, 1996, there were a total of 2,581,432 options exercisable by employees under the 1990 and 1995 Stock Option Plans and by Jacques R. Sardas at prices ranging from $.01 to $7.625. NOTE L -- INCOME TAXES Components of income tax expense (benefit) are as follows (in thousands):
1996 1995 1994 --------- --------- ------ Federal - current $ 5,041 $ 7,436 $ 1,511 - deferred 1,643 (1,600) (1,511) State and local 1,554 540 (174) ------- -------- -------- Total income tax expense (benefit) $ 8,238 $ 6,376 $ (174) ======= ======== ========
The deferred tax expense (benefit) includes $316,000 and $2,113,000 in fiscal 1996 and 1995, respectively, for reductions in the opening valuation allowance due to the future realizability of deferred tax assets. 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUDBURY, INC. AND SUBSIDIARIES NOTE L -- INCOME TAXES - continued Reconciliations of the total income tax expense (benefit) from amounts computed by applying the U.S. Federal income tax rate of 35% for fiscal 1996 and 1995 and 34% for fiscal 1994 to income before income tax expense are as follows (in thousands):
1996 1995 1994 -------- -------- ------ Computed tax provision at statutory Federal rate $ 8,438 $ 6,982 $ 2,263 Increase (decrease) in taxes resulting from: State taxes, net of federal income taxes 1,010 351 (113) Effect of temporary differences and reserves 1,117 2,449 (1,241) Utilization of net operating loss (316) (3,432) (1,373) Utilization of capital loss (2,003) Other items (8) 26 290 ------- ------- ------- $ 8,238 $ 6,376 $ (174) ======= ======= =======
As discussed in Note Q, the Company emerged from bankruptcy effective September 1, 1992. Upon emergence from bankruptcy, the Company experienced a change in ownership for purposes of Section 382 of the Internal Revenue Code. Under Section 382 an annual limitation of approximately $900,000 is placed upon the utilization of the Company's existing net operating loss carryforwards as of September 1, 1992. The Company has available as of May 31, 1996 for federal income tax purposes, a net operating loss carryforward of approximately $18,932,000 (of which only $10,125,000 can be utilized given the Section 382 limitations) which expires in 2008. Significant components of the Company's deferred income tax assets and liabilities at May 31 are as follows (in thousands):
1996 1995 -------- ------ Deferred income tax liabilities: Book basis of fixed assets in excess of tax basis $(3,765) $(5,189) Other (2,702) (2,284) ------- ------- Total deferred tax liabilities (6,467) (7,473) Deferred income tax assets: Net operating loss carryforwards 3,544 3,859 Capital loss carryforwards 2,003 Other accruals and reserves 8,115 11,050 ------- ------- Total deferred tax assets 11,659 16,912 Valuation allowance (3,078) (5,682) ------- ------- Net deferred tax asset $ 2,114 $ 3,757 ======= =======
25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUDBURY, INC. AND SUBSIDIARIES NOTE L -- INCOME TAXES - continued A valuation allowance is required when it is more likely than not that deferred tax assets will not be realized. At May 31, 1996, the valuation allowance was attributable to $2,599,000 of net operating loss carryforwards limited by the reorganization as previously disclosed (which will be credited to stockholders' equity when recognized), and $479,000 of other accruals and reserves. NOTE M -- RETIREMENT PLANS The Company maintains a defined benefit pension plan that covers the union employees of a subsidiary. Benefits are determined by years of service. The Company's policy is to fund at least the minimum amount required by federal regulations. Pension plan assets consist primarily of common stocks, bonds and government obligations. The following sets forth the funded status and amounts recognized in the consolidated balance sheets at May 31 (in thousands):
1996 1995 -------- ------- Actuarial present value of: Vested benefit obligation $23,101 $21,723 ======= ======= Accumulated and projected benefit obligation $23,932 $22,544 Plan assets at fair value 20,516 18,259 ------- ------- Plan assets less than projected benefits (3,416) (4,285) Items not yet recognized: Net loss 776 1,398 Net obligations existing at transition 1,002 1,160 Prior service cost 31 36 Additional minimum liability (1,504) (2,484) ------- ------- Net pension liability $(3,111) $(4,175) ======= =======
26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUDBURY, INC. AND SUBSIDIARIES NOTE M -- RETIREMENT PLANS - continued The components of net periodic pension cost for the defined benefit plan are as follows (in thousands):
1996 1995 1994 -------- -------- ------ Service cost $ 356 $ 369 $ 360 Interest cost on projected benefit obligation 1,822 1,782 1,728 Actual return on plan assets (3,374) (822) (451) Net amortization and deferral 1,838 (684) (1,002) ------- ------- ------- Net periodic pension cost $ 642 $ 645 $ 635 ======= ======= ======= Assumptions for the plan were: Discount rate - pension expense 8.25% 8% 8.25% Expected long-term rate of return on assets 9% 9% 9% Discount rate - projected benefit obligation 7.75% 8.25% 8%
The cost for defined contribution plans was $1,229,000, $962,000 and $633,000 in fiscal 1996, 1995 and 1994, respectively. The majority of such plans provide for matching of employee contributions and for discretionary contributions. The defined contribution plans cover hourly and salaried employees. 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUDBURY, INC. AND SUBSIDIARIES NOTE N -- POST-RETIREMENT MEDICAL PLAN One of the Company's subsidiaries maintains an unfunded post-retirement welfare plan which provides certain contributory and non-contributory health care and life insurance benefits for employees who retired on or before December 31, 1991 and their dependents. Hourly retirees subsequent to December 31, 1991 are eligible for life insurance coverage upon retirement at age 55 or later with at least five years of service. The following sets forth the plan's funded status at May 31 (in thousands): Accumulated post-retirement benefit obligation (APBO):
1996 1995 ------- ------- Retirees $ 9,075 $10,220 Fully eligible active plan participants 449 420 Other active plan participants 315 316 ------- ------- Total APBO 9,839 10,956 Unrecognized transition obligation (11,205) (11,894) Unrecognized net gain 4,604 3,461 ------- ------- Accrued balance sheet liability $ 3,238 $ 2,523 ======= =======
Net periodic post-retirement benefit cost included the following components (in thousands):
1996 1995 1994 ------- ------- ----- Service cost $ 15 $ 17 $ 16 Interest cost 866 1,035 1,031 Net amortization and deferral 511 689 654 ------- ------- ------- Total expense $ 1,392 $ 1,741 $ 1,701 ======= ======= =======
28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUDBURY, INC. AND SUBSIDIARIES NOTE N -- POST-RETIREMENT MEDICAL PLAN - continued The assumed annual rate of increase in the per capita cost of covered health care benefits was 8.5% in 1996 (10.5% in 1995) and the rate is assumed to decrease annually to 5.5% in the year 2000. The assumed annual rate of increase in the per capita cost of covered dental care benefits was 7.0% in 1996 (8.5% in 1995) and the rate is assumed to decrease annually to 5.5% in the year 1998. The per capita health care and dental benefit costs used to compute the APBO were reduced in 1996 to reflect favorable claim experience. A one percentage point increase in the assumed annual cost trend rates would have increased the APBO as of May 31, 1996 by $543,000 and the net periodic post-retirement benefit cost for 1997 by $42,000. The weighted average annual discount rate used in determining the APBO was 7.75% in 1996 and 8.25% in 1995. NOTE O -- OPERATING LEASES Rental expense under operating leases was $3,529,000 in 1996, $3,650,000 in 1995 and $3,406,000 in 1994. Leases are principally for rental of facilities and contain renewal rights to extend the terms from five to fifteen years. At May 31, 1996, future minimum payments under non-cancelable operating leases with initial or remaining terms of more than one year were as follows: 1997 - $2,441,000; 1998 - $2,156,000; 1999 - $1,416,000; 2000 - $1,001,000; 2001 - $700,000 and $1,085,000 thereafter. NOTE P -- MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK Net sales to two customers with which the Company has long-standing customer relationships amounted to $42,826,000 and $39,187,000 respectively in 1996, ($46,637,000 and $36,263,000 in 1995 and $34,573,000 and $31,466,000 in 1994). At May 31, 1996 and 1995, accounts receivable from companies in the automotive and truck industries were approximately 60% and 51%, respectively, of total accounts receivable. Credit is extended based on an evaluation of the customer's financial condition, and generally collateral is not required. Credit losses are provided for in the financial statements and consistently have been within management's expectation. 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUDBURY, INC. AND SUBSIDIARIES NOTE Q - PROCEEDINGS UNDER CHAPTER 11 AND RESTRUCTURING On January 10, 1992, the Company filed a petition (relative only to Sudbury, Inc. and not to its subsidiaries) under Chapter 11 of the United States Bankruptcy Code. The Chapter 11 filing was made to implement an agreement in principle which had been reached with the Company's major creditor groups regarding a restructuring plan and the related sales of a substantial number of its business units. The Plan was confirmed by the Bankruptcy Court and the Company was reorganized and adopted Fresh Start reporting effective September 1, 1992. The Plan implemented a restructuring of the Company by providing for a new amortization schedule for the repayment of the indebtedness owed to its secured lender banks and a significant reduction of the Company's indebtedness to subordinated debtholders and certain other unsecured creditors through the conversion of debt into equity of the restructured Company. 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUDBURY, INC. AND SUBSIDIARIES NOTE R -- QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- (In thousands, except share data) 1996: - ----- Net sales $71,213 $76,560 $73,428 $81,038 Gross profit 11,021 13,215 10,557 13,750 Gain on sale of subsidiary - Note C 1,511 Income before income taxes 4,235 6,424 5,144 8,306 Net income (1) 2,689 4,080 3,829 5,273 Net income per Common share (2) $ .21 $ .32 $ .30 $ .41 ======= ======= ======= ======= FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- (In thousands, except share data) 1995: - ----- Net sales $67,720 $74,355 $76,247 $87,113 Gross profit 10,475 12,578 11,740 16,170 Income before income taxes 3,501 5,399 4,747 6,301 Net income (3) 2,219 3,425 3,015 4,913 Net income per Common share (2) $ .18 $ .27 $ .24 $ .39 ======= ======= ======= ======= (1) Third quarter net income includes an after tax charge of $1,255,000 for a contractual bonus obligation to the Company's Chairman, President and Chief Executive Officer. (2) The sum of the quarterly per Common share amounts does not equal the annual amount reported. Common share amounts are computed independently for each quarter and the full year based on respective weighted average Common shares outstanding. (3) Fourth quarter net income includes an after tax charge of $1,401,000 for a contractual bonus obligation to the Company's Chairman, President and Chief Executive Officer.
31 REPORT OF INDEPENDENT AUDITORS STOCKHOLDERS AND BOARD OF DIRECTORS SUDBURY, INC. We have audited the accompanying consolidated balance sheets of Sudbury, Inc. and subsidiaries (the "Company") as of May 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended May 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sudbury, Inc. and subsidiaries at May 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended May 31, 1996, in conformity with generally accepted accounting principles. Ernst & Young LLP Cleveland, Ohio July 12, 1996 EX-21 7 EXHIBIT 21 1 EXHIBIT 21 - ----------
SUBSIDIARY STATE OF INCORPORATION - ---------- ---------------------- 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
- 53 - EX-23 8 EXHIBIT 23 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 EX-27 9 EXHIBIT 27
5 1,000 US DOLLARS YEAR MAY-31-1996 JUN-01-1995 MAY-31-1996 1 10,645 0 38,299 0 18,871 71,713 76,720 21,247 132,352 48,822 10,113 0 0 106 62,506 132,352 302,239 302,239 253,696 25,599 (2,606) 0 1,441 24,109 8,238 15,871 0 0 0 15,871 1.24 1.23
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