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.
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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.
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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.
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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."
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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.
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ITEM 2.
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.
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.
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ITEM 3.
ITEM 3. LEGAL PROCEEDINGS -----------------
GENERAL - ------- Other than routine litigation incident to its business and except as noted below, the Company is not a party to any legal proceedings which could be material to its results of operations, financial position or liquidity.
ENVIRONMENTAL MATTERS - --------------------- Several of the Company's operating units have been identified as potentially responsible parties in legal proceedings or otherwise notified that they may be liable for the cleanup of hazardous substances under federal "Superfund" and other environmental protection legislation. The Company intends to utilize all available legal defenses and remedies, including insurance owned by the Company or its predecessors in interest, with respect to these sites and any other site in which it may be involved in legal proceedings, to minimize the Company's financial exposure to environmental liability.
On April 19, 1993, the Minnesota Pollution Control Agency (MPCA) issued Metalcote Grease and Oil Company ("Metalcote"), a division of Western Capital Corporation, a non-operating subsidiary of the Company, an order to investigate and take other corrective action at property Metalcote owned in St. Paul, Minnesota. The property was subsequently owned by Randolph Capital Corporation, a subsidiary of Western Capital Corporation. Although Randolph Capital Corporation is currently contesting its responsibility for environmental conditions that allegedly exist at the property, Randolph Capital Corporation is cooperating with the MPCA and has retained legal counsel and environmental consultants to respond to the MPCA's order. Although additional investigation is necessary and ongoing, Randolph Capital Corporation currently estimates that the future costs to respond to the order will be at least $300,000. This estimate is subject to reevaluation following completion of the current investigation. During 1995, the Minnesota legislature passed legislation making a substantial portion of these costs potentially eligible for reimbursement from the Minnesota Petroleum Tank Release Cleanup Fund.
A release of petroleum products has also been identified and reported to regulatory authorities at a second site in St. Paul, Minnesota previously owned and operated by Metalcote, and a site in Philadelphia, Pennsylvania previously owned and operated by Master Lubricants, both divisions of Western Capital Corporation. Environmental consultants have been retained to investigate and address the two reported petroleum releases. The preliminary investigation at these sites has been completed and the Company is discussing with regulatory agencies the corrective actions, if any, which may be needed at these sites. There is no current estimate on the cost of further work, if any, at these sites.
To date, Management believes that the resolution of other pending or anticipated environmental proceedings and all claims in the aggregate (after applicable reserves, see Note F -- Contingencies and Commitments of the financial statements) are immaterial to the Company's financial position, results of operations and liquidity taken as a whole. Although the Company continues to assess the potential liability of its operating units for pending and anticipated legal proceedings, the ultimate liability for such environmental matters cannot be predicted with certainty.
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ITEM 4.
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.
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PART II -------
ITEM 5.
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.
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.
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.
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.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ----------------------------------------------------
Not Applicable
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PART III --------
ITEM 10.
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.
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.
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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ----------------------------------------------
Not applicable.
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PART IV -------
ITEM 14.
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.
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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
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SUDBURY, INC.
ANNUAL REPORT ON FORM 10-K
ITEMS 14 (a) (1), (2) (d) AND (3) (c)
AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENT SCHEDULES
INDEX TO EXHIBITS
CERTAIN EXHIBITS
FISCAL YEAR ENDED MAY 31, 1996
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SUDBURY, INC.
AND FINANCIAL STATEMENT SCHEDULES
(ITEM 14(a)(1) AND (2)(d))
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.
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SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
SUDBURY, INC. AND SUBSIDIARIES
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REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements of Sudbury, Inc. as of May 31, 1996 and 1995, and for each of the three years in the period ended May 31, 1996 and have issued our report thereon dated July 12, 1996 [incorporated by reference elsewhere in this Annual Report (Form 10-K)]. Our audits also included the related consolidated financial statement schedule of Sudbury, Inc. listed in item 14(a) of this Annual Report (Form 10-K). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits.
In our opinion, the consolidated financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Cleveland, Ohio July 12, 1996
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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.
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SUDBURY, INC.
FORM 10-K
EXHIBIT INDEX (CONTINUED) -------------
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SUDBURY, INC.
FORM 10-K
EXHIBIT INDEX (CONTINUED) -------------
The above exhibits are available to shareholders upon written request to:
Corporate Secretary Sudbury, Inc. 30100 Chagrin Boulevard, Suite 203 Cleveland, Ohio 44124
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