-----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, STASOgdoY6Kxd6y8xFtaXiYzcEb8h6JNjAh7cqvOoSQoMbl/XHgH7TehiNz0+S4C AVhJ1gp8P0e4J160b0Xc9Q== /in/edgar/work/20000814/0000950116-00-001966/0000950116-00-001966.txt : 20000921 0000950116-00-001966.hdr.sgml : 20000921 ACCESSION NUMBER: 0000950116-00-001966 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUNSOURCE INC CENTRAL INDEX KEY: 0001029831 STANDARD INDUSTRIAL CLASSIFICATION: [5080 ] IRS NUMBER: 232874736 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13293 FILM NUMBER: 700623 BUSINESS ADDRESS: STREET 1: 3000 ONE LOAN SQ CITY: PHILADELPHIA STATE: PA ZIP: 19103 BUSINESS PHONE: 2156653650 MAIL ADDRESS: STREET 1: 2600 ONE LOAN SQUARE CITY: PHILADELPHIA STATE: PA ZIP: 19103 10-Q 1 0001.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 Commission file number 1-13293 SunSource Inc. ---------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 23-2874736 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3000 One Logan Square Philadelphia, Pennsylvania 19103 - ---------------------------------------- ------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (215) 282-1290 Securities registered pursuant to Section 12(b) of the Act: Title of Class Name of Each Exchange on Which Registered -------------- ----------------------------------------- Common Stock, New York Stock Exchange par value $.01 per share Preferred Share Purchase Rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ---- On August 14, 2000 there were 6,865,678 Common Shares outstanding. Page 1 of 27 SUNSOURCE INC. AND SUBSIDIARIES INDEX PART I. FINANCIAL INFORMATION PAGE(S) Item 1. Consolidated Financial Statements Consolidated Balance Sheets as of June 30, 2000 (Unaudited), December 31, 1999 and June 30, 1999 (Unaudited) 3 Consolidated Statements of Operations for the Three Months ended June 30, 2000 and 1999 (Unaudited) 4 Consolidated Statements of Operations for the Six Months ended June 30, 2000 and 1999 (Unaudited) 5 Consolidated Statements of Cash Flows for the Three Months ended June 30, 2000 and 1999 (Unaudited) 6 Consolidated Statements of Cash Flows for the Six Months ended June 30, 2000 and 1999 (Unaudited) 7 Consolidated Statement of Changes in Stockholders' Equity for the Six Months ended June 30, 2000 (Unaudited) 8 Notes to Consolidated Financial Statements (Unaudited) 9-15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 16-25 PART II. OTHER INFORMATION 26 SIGNATURES 27 Page 2 of 27 SUNSOURCE INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in thousands)
June 30, June 30, 2000 December 31, 1999 ASSETS (Unaudited) 1999 (Unaudited) ------------ ------------ ------------- Current assets: Cash and cash equivalents $ 2,002 $ 5,186 $ 2,884 Accounts receivable, net 65,053 65,141 86,169 Inventories 82,838 92,691 106,319 Deferred income taxes 10,476 10,218 14,726 Net assets held for sale - 35,249 55,802 Income taxes receivable 9,423 8,561 2,500 Other current assets 3,186 5,226 3,883 ------------ ------------ ------------- Total current assets 172,978 222,272 272,283 Property and equipment, net 59,738 17,282 18,828 Goodwill and other intangibles 80,561 52,404 54,484 Deferred financing fees 4,694 3,493 420 Deferred income taxes 3,755 5,865 4,435 Cash surrender value of life insurance policies 12,411 14,190 12,891 Other assets 9,274 7,511 567 ------------ ------------ ------------- Total assets $343,411 $323,017 $ 363,908 ============ ============ ============= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable $ 44,579 $ 44,358 $49,325 Notes payable 127 376 269 Current portion of capitalized lease obligations 930 923 276 Current portion of subordinated notes 2,400 - - Current portion of senior debt 5,000 3,750 - Dividends / distributions payable - 1,019 - Deferred income tax liability 1,373 929 929 Accrued expenses: Salaries and wages 3,962 5,343 4,986 Income and other taxes 2,629 3,299 3,671 Accrued liabilities on discontinued operation 2,781 2,703 - Other accrued expenses 20,851 23,961 24,287 ------------ ------------ ------------- Total current liabilities 84,632 86,661 83,743 Long term subordinated notes 11,267 - - Long term senior debt 12,500 17,750 60,000 Bank revolving credit 76,900 102,791 79,000 Capitalized lease obligations 1,018 1,509 423 Deferred compensation 12,498 14,173 13,177 Other liabilities 2,186 2,148 851 ------------ ------------ ------------- Total liabilities 201,001 225,032 237,194 ------------ ------------ ------------- Guaranteed preferred beneficial interests in the Company's junior subordinated debentures 115,024 115,200 115,376 ------------ ------------ ------------- Commitments and contingencies Stockholders' equity (deficit): Preferred stock, $.01 par, 1,000,000 shares authorized, none issued - - - Common stock, $.01 par, 20,000,000 shares authorized, 7,339,384 issued and 6,860,284 outstanding at June 30, 2000, 7,228,556 issued and 6,749,456 outstanding at December 31, 1999 and 7,221,259 issued and 6,742,159 outstanding at June 30, 1999 73 72 72 Additional paid-in capital 21,854 21,342 21,287 Retained earnings (accumulated deficit) 18,241 (25,297) 3,274 Unearned compensation (542) (283) (322) Accumulated other comprehensive income (3,535) (4,344) (4,268) Treasury stock, at cost, 479,100 shares (8,705) (8,705) (8,705) ------------ ------------ ------------- Total stockholders' equity (deficit) 27,386 (17,215) 11,338 ------------ ------------ ------------- Total liabilities and stockholders' equity (deficit) $343,411 $323,017 $ 363,908 ============ ============ =============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Page 3 of 27 SUNSOURCE INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) FOR THE THREE MONTHS ENDED, (dollars in thousands, except for share amounts)
June 30, June 30, 2000 1999 ----------- ----------- Net sales $ 127,511 $ 148,252 Cost of sales 76,998 88,292 Cost of sales - Inventory write-down related to restructuring (Note 1) -- 2,130 ----------- ----------- Gross profit 50,513 57,830 ----------- ----------- Operating expenses: Selling, general and administrative expenses 41,968 58,970 Depreciation 2,585 1,246 Amortization 968 458 ----------- ----------- Total operating expenses 45,521 60,674 ----------- ----------- Restructuring charges and asset write-downs (Note 1) -- 8,118 Other income 248 6 ----------- ----------- Income (loss) from operations 5,240 (10,956) Interest expense, net 3,060 2,316 Distributions on guaranteed preferred beneficial interests 3,058 3,058 Equity in earnings of affiliate (Note 2) 505 -- ----------- ----------- Loss before provision (benefit) for income taxes (373) (16,330) Provision (benefit) for income taxes 134 (6,461) ----------- ----------- Loss before discontinued operations (507) (9,869) ----------- ----------- Discontinued operations (Note 1) Income from operations of discontinued Harding segment of $272, less income tax provision of $108 -- 164 Loss on disposal of discontinued Harding segment of $1,200, less income tax benefit of $721 (479) -- ----------- ----------- Income(loss) from discontinued operations (479) 164 ----------- ----------- Net loss $ (986) $ (9,705) =========== =========== Basic and diluted loss per common share: Loss before discontinued operations $ (0.07) $ (1.46) Income from operations of discontinued Harding segment, net of income tax provision -- 0.02 Loss on disposal of discontinued Harding segment, net of income tax benefit (0.07) -- ----------- ----------- Net loss $ (0.14) $ (1.44) =========== =========== Weighted average number of outstanding common shares 6,860,036 6,742,159
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Page 4 of 27 SUNSOURCE INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) FOR THE SIX MONTHS ENDED, (dollars in thousands, except for share amounts)
June 30, June 30, 2000 1999 ----------- ----------- Net sales $ 250,140 $ 293,102 Cost of sales 149,845 171,585 Cost of sales - Inventory write-down related to restructuring (Note 1) -- 2,130 ----------- ----------- Gross profit 100,295 119,387 ----------- ----------- Operating expenses: Selling, general and administrative expenses 87,592 111,925 Depreciation 3,609 2,466 Amortization 1,375 913 ----------- ----------- Total operating expenses 92,576 115,304 ----------- ----------- Restructuring charges and asset write-downs (Note 1) -- 8,118 Other income 339 185 ----------- ----------- Income (loss) from operations 8,058 (3,850) Interest expense, net 5,466 4,357 Distributions on guaranteed preferred beneficial interests 6,116 6,116 Gain on contribution of subsidiaries (Note 2) 49,115 -- Equity in earnings of affiliate (Note 2) 954 -- ----------- ----------- Income (loss) before provision (benefit) for income taxes 46,545 (14,323) Provision (benefit) for income taxes 5,364 (5,627) ----------- ----------- Income (loss) before discontinued operations 41,181 (8,696) ----------- ----------- Discontinued operations (Note 1) Loss from operations of discontinued Harding segment of $174, less income tax benefit of $70 -- (104) Loss on disposal of discontinued Harding segment of $4,572, less income tax benefit of $6,929 2,357 -- ----------- ----------- Income(loss) from discontinued operations 2,357 (104) ----------- ----------- Net income (loss) $ 43,538 $ (8,800) =========== =========== Basic and diluted income (loss) per common share: Income (loss) before discontinued operations $ 6.02 $ (1.29) Loss from operations of discontinued Harding segment, net of income tax benefit -- (0.01) Loss on disposal of discontinued Harding segment, net of income tax benefit 0.34 -- ----------- ----------- Net income (loss) $ 6.36 $ (1.30) =========== =========== Weighted average number of outstanding common shares 6,843,599 6,748,389
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Page 5 of 27 SUNSOURCE INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) FOR THE THREE MONTHS ENDED, (dollars in thousands)
June 30, 2000 June 30, 1999 ------------- ------------- Cash flows from operating activities: Net loss $ (986) $ (9,705) Adjustments to reconcile net loss to net cash provided by (used for) operating activities: Depreciation and amortization 3,553 1,704 Restructuring charges and asset write-downs -- 10,248 Loss (income) from discontinued Harding segment before taxes 1,200 (272) Equity in earnings of affiliate (505) -- Deferred income tax benefit -- (3,985) Changes in current operating items: Decrease in accounts receivable 698 1,451 Decrease in inventories 3,900 844 Increase in income taxes receivable (737) (2,500) Decrease in other current assets 2,125 1,369 Decrease in accounts payable (6,834) (4,843) Increase in other accrued liabilities 1,266 3,249 Other items, net (9) 200 -------- -------- Net cash provided by (used for) operating activities 3,671 (2,240) -------- -------- Cash flows from investing activities: Proceeds from sale of discontinued operation 31,446 -- Costs associated with sale of discontinued operation (1,127) -- Payment for acquired business (87,000) -- Proceeds from sale of property and equipment 942 -- Decrease (increase) in net assets held for sale 559 (1,320) Capital expenditures (2,978) (1,434) Other, net 600 (347) -------- -------- Net cash used for investing activities (57,558) (3,101) -------- -------- Cash flows from financing activities: Borrowings under bank credit agreements, net 65,835 7,420 Repayment of subordinated notes (9,600) -- Repayments under other credit facilities, net (126) (265) Principal payments under capitalized lease obligations (230) (94) Dividends / distributions to investors -- (674) Other financing activities (1,632) -- -------- -------- Net cash provided by financing activities 54,247 6,387 -------- -------- Net increase in cash and cash equivalents 360 1,046 Cash and cash equivalents at beginning of period 1,642 1,838 -------- -------- Cash and cash equivalents at end of period $ 2,002 $ 2,884 ======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Page 6 of 27 SUNSOURCE INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) FOR THE SIX MONTHS ENDED, (dollars in thousands)
June 30, 2000 June 30, 1999 ------------- ------------- Cash flows from operating activities: Net income (loss) $ 43,538 $ (8,800) Adjustments to reconcile net income (loss) to net cash used for operating activities: Depreciation and amortization 4,984 3,379 Restructuring charges and asset write-downs -- 10,248 Loss from discontinued Harding segment before taxes 4,572 174 Gain on contribution from subsidiaries (49,115) -- Equity in earnings of affiliate (954) -- Deferred income tax benefit -- (5,837) Changes in current operating items: Increase in accounts receivable (8,264) (8,930) Decrease (increase) in inventories 4,787 (6,259) Increase in income taxes receivable (226) (2,500) Decrease in other current assets 1,956 818 Decrease in accounts payable (1,899) (2,646) Decrease in other accrued liabilities (4,950) (2,318) Other items, net (930) 51 --------- --------- Net cash used for operating activities (6,501) (22,620) --------- --------- Cash flows from investing activities: Proceeds from contribution of subsidiaries 105,000 -- Costs associated with contribution of subsidiaries (655) -- Proceeds from sale of discontinued operation 31,446 -- Costs associated with sale of discontinued operation (1,127) -- Payment for acquired business (87,000) -- Proceeds from sale of property and equipment 1,068 138 Decrease (increase) in net assets held for sale 436 (13,976) Capital expenditures (3,569) (3,344) Investment in life insurance policies -- (1,300) Other, net (426) (342) --------- --------- Net cash provided by (used for) investing activities 45,173 (18,824) --------- --------- Cash flows from financing activities: Borrowings (repayments) under bank credit agreements, net (29,891) 44,000 Repayment of subordinated notes (9,600) -- Repayments under other credit facilities, net (249) (527) Principal payments under capitalized lease obligations (484) (143) Purchase of treasury stock at cost -- (325) Dividends / distributions to investors -- (1,350) Other financing activities (1,632) -- --------- --------- Net cash (used for) provided by financing activities (41,856) 41,655 --------- --------- Net (decrease) increase in cash and cash equivalents (3,184) 211 Cash and cash equivalents at beginning of period 5,186 2,673 --------- --------- Cash and cash equivalents at end of period $ 2,002 $ 2,884 ========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Page 7 of 27 SUNSOURCE INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 2000 (Unaudited) (dollars in thousands)
(Accumulated Accumulated Total Additional Deficit) Other Stockholders' Common Paid-in Retained Unearned Comprehensive Treasury (Deficit) Stock Capital Earnings Compensation Income (1) Stock Equity -------- ----------------------- ------------ ------------- ---------- ------------- Beginning Balance - December 31, 1999 $ 72 $ 21,342 $(25,297) $ (283) $ (4,344) $ (8,705) $ (17,215) Net income 43,538 43,538 Change in cumulative foreign translation adjustment (686) (686) ------------ Comprehensive income 42,852 ------------ Issuance of 10,828 shares of common stock to certain non-employee directors 48 48 Grant of restricted stock 1 464 (465) - Amortization of stock option discount 40 40 Amortization of vested portion of restricted stock 166 166 Contribution of subsidiaries 1,495 1,495 ------- ---------- ----------- ----------- ---------- -------- ----------- Ending Balance - June 30, 2000 $ 73 $ 21,854 $ 18,241 $ (542) $ (3,535) $ (8,705) $ 27,386 ======= ========== =========== =========== ========== ======== ===========
(1) Cumulative foreign translation adjustment represents the only item of other comprehensive income. SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Page 8 of 27 SUNSOURCE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) 1. Basis of Presentation: The accompanying financial statements include the consolidated accounts of SunSource Inc. (the "Company" or "SunSource") and its wholly-owned subsidiaries including SunSource Technology Services Company, Inc. ("STS"), The Hillman Group, Inc. ("Hillman"), Harding Glass, Inc. ("Harding") and SunSource Capital Trust (the "Trust"). All significant intercompany balances and transactions have been eliminated. The Company is one of the leading providers of value-added services and products to retail and industrial markets in North America. The accompanying consolidated financial statements and related notes are unaudited; however, in management's opinion all adjustments (consisting of normal recurring accruals) considered necessary for the fair presentation of financial position, income and cash flows for the periods shown have been reflected. Results for the interim period are not necessarily indicative of those to be expected for the full year. Certain information in note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles has been condensed or omitted pursuant to Form 10-Q requirements although the Company believes that disclosures are adequate to make the information presented not misleading. It is suggested that these financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company's report on Form 10-K for the year ended December 31, 1999. Discontinued Operations: In December 1999, the Company's Board of Directors approved management's plan to dispose of the Company's Harding business. Accordingly, Harding has been accounted for as a discontinued operation and its results of operations were segregated from results of the Company's ongoing businesses including restatement of the prior periods presented. On April 13, 2000, the Company consummated the sale of Harding on which it had signed a letter of intent in January 2000. See Note 2, Contribution of Subsidiaries/Acquisitions/Divestitures. For the year ended December 31, 1999, the Company recorded an after-tax loss of $2,188 from Harding's operations and an estimated loss on its expected disposal of $23,834 unadjusted for any potential future tax benefits. For the three months ended March 31, 2000, the Company recorded an additional loss on disposal of the discontinued Harding segment of $3,372, less an income tax benefit of $6,208. For the period of April 1 through April 12, 2000, the Company recorded an additional loss on disposal of the discontinued Harding segment of $1,200 less an income tax benefit of $721. Through June 30, 2000, the Company has recorded a loss on disposal of the discontinued Harding segment of $21,477 in the aggregate, net of tax benefits. Page 9 of 27 SUNSOURCE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued (dollars in thousands) 1. Basis of Presentation (continued): Following is summary financial information for the Company's discontinued Harding operations:
1/1/00 Three Months Through Year Ended Ended 4/12/00 12/31/99 6/30/99 - ------------------------------------------------------------------------------------------------ Net Sales $ 27,966 $ 118,282 $ 59,816 - ------------------------------------------------------------------------------------------------ Income (loss) from discontinued operations: Before income taxes $ -- $ (3,268) $ (174) Income tax benefit -- 1,080 70 Net -- (2,188) (104) Loss on disposal (4,572) (23,834) -- Income tax benefit on disposal 6,929 -- -- - ------------------------------------------------------------------ ----------------------------- Total income (loss) from discontinued operations $ 2,357 $ (26,022) $ (104) ================================================================================================
As of June 30, 2000, the Company had $2,781 in accrued liabilities reserved for the loss on disposal of the Harding segment. 1999 Restructuring Charges and Asset Write-downs On June 29, 1999, the Board of Directors of SunSource Inc. approved the Company's restructuring plan to reposition Technology Services and Kar Products, write-down key machines at the Hillman division, and realign corporate overhead expenses. As a result of this plan, the Company recorded a restructuring charge of $4,818, a key machine write-down of $3,300 and an inventory write-down related to restructuring of $2,130. Included in these charges and write-downs was $5,392 related to Technology Services, $1,020 related to Kar Products, $3,300 related to Hillman, and $536 related to Corporate Headquarters. The Technology Services charge of $5,392 included termination benefits of $2,744, an inventory write-down of $2,130, other exit costs of $415 and a write-down of unamortized leasehold improvements of $103. The termination benefits of $2,744 covered approximately 94 employees. The other exit costs and write-down of unamortized leasehold improvements were related to lease buyouts and losses on the sale of owned facilities as a result of Technology Services' facilities consolidation. The inventory write-down of $2,130 was the result of a reduction in vendor lines resulting principally from the facility consolidation process. The Kar Products charge of $1,020 was comprised solely of termination benefits for about 10 employees. The Hillman charge of $3,300 was primarily the result of Hillman's inability to recover key machines from retailers. The $3,300 charge represented the total net book value of key machines that had been capitalized as of June 30, 1999. The Corporate Headquarters component of the restructuring charge aggregated $536 comprised of other exit costs of $434 and termination benefits of $102 for two employees. The other exit costs included lease termination costs of $101 and unamortized leasehold improvements of $333 on certain assets. Page 10 of 27 SUNSOURCE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued (dollars in thousands) 1. Basis of Presentation (continued): The Company completed the restructuring plan within six months. As of June 30, 2000, other accrued liabilities and other non-current liabilities include $861 and $64, respectively, of remaining reserves related to the restructuring charge. These reserves are primarily associated with termination benefits. Inventories Inventories consisting predominantly of finished goods are valued at the lower of cost or market, cost being determined principally on the first-in, first-out method. 2. Contribution of Subsidiaries/Acquisitions/Divestitures: On March 2, 2000, the Company contributed the interests in its Kar Products, Inc. and A & H Bolt & Nut Company Limited operations (collectively, the "Kar" business) to a newly-formed partnership affiliated with Glencoe Capital, L.L.C. ("Glencoe"). Glencoe contributed cash equity to the new partnership, G-C Sun Holdings L.P. ("G-C"). The Company received $105,000 in cash proceeds from the transaction through repayment of assumed debt by G-C. Affiliates of Glencoe hold a 51% controlling interest with the remaining 49% interest held by SunSource. The Company accounts for its investment in the partnership under the equity method and recorded a pre-tax gain on the transaction of approximately $49,115 in the first quarter of 2000. Sales from Kar aggregated $22,122 from January 1, 2000 to March 2, 2000, and $124,724 for the year ended December 31, 1999. On April 7, 2000, the Company acquired Axxess Technologies, Inc. ("Axxess") of Tempe, Arizona through a stock merger transaction. Axxess is a manufacturer of key duplication and identification systems. The transaction was structured as a purchase of 100% of the stock of the privately held company and repayment of outstanding Axxess debt in exchange for $87,000 in cash and $23,000 in subordinated notes. In connection with the sale of Harding on April 13, 2000, the Company repaid $9,600 of these subordinated notes leaving a balance of $13,400 comprised as follows: 1) a $2,400 15% note due April 7, 2001 and 2) an $11,000 note which is payable in seven equal quarterly installments commencing the earlier of i) the first calendar quarter after payment in full of the Term Loan extended by the Company's senior lenders or ii) March 31, 2004. Interest on the $11,000 subordinated note ranges from prime plus 1% to prime plus 5% with a maximum rate at any time of 15%. The aggregate consideration for the transaction was $111,537, including $87,000 in cash, $23,000 in subordinated notes and transaction costs of $1,537, plus the assumption of certain liabilities aggregating $14,192. Axxess recorded goodwill and other intangible assets of $49,758 related to this acquisition. Axxess sales aggregated $41,159 for the six months ended June 30, 2000, and $82,132 for the year ended December 31, 1999. Axxess' results of operations are included in the results of Hillman from the date of acquisition. On April 13, 2000, the Company sold substantially all of the assets of Harding for a cash purchase price of $31,446 plus the assumption by the buyer of certain liabilities aggregating $12,506, subject to certain post-closing adjustments. Page 11 of 27 SUNSOURCE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued (dollars in thousands) 2. Contribution of Subsidiaries/Acquisitions/Divestitures (continued): The following disclosures indicate the Company's estimate of financial results had the Axxess acquisition been consummated on January 1, 1999: Pro forma ----------------- Six Months Ended 6/30/00 6/30/99 ------- ------- Net sales $269,048 $333,480 Income (loss) before discontinued operations 41,720 (10,046) Net income (loss) 44,077 (10,150) Basic and diluted earnings per share: Before discontinued operations $6.10 ($1.49) Net income (loss) $6.44 ($1.50) 3. Lines of Credit and Long-Term Debt: On December 15, 1999, the Company refinanced its $60,000 senior notes and $90,000 bank revolving credit with $155,000 in senior credit facilities (the "Credit Agreement") consisting of $130,000 in revolving bank credit (the "Revolver") and a $25,000 term loan (the "Term Loan"). The Credit Agreement has a five-year term whose revolver availability is based on the Company's receivables and inventory balances (the "Borrowing Base") evaluated on a monthly basis. On April 7, 2000, the Company amended the Credit Agreement to reduce the Revolver to $115,000. As of June 30, 2000, the Company's Borrowing Base was $90,750 consisting of receivables and inventory balances totaling $97,955 less letter of credit commitments outstanding of $7,205. As of June 30, 2000, the Company had $13,850 available under the Revolver. The Company had $96,348 of outstanding debt at June 30, 2000, consisting of bank revolver borrowings of $76,900, outstanding Term Loan of $17,500 and capital lease obligations of $1,948. The Company and its domestic and foreign corporate subsidiaries are borrowers and guarantors ("Credit Parties") under the Credit Agreement. Each credit party assigned, pledged and granted a security interest in and to all its assets as collateral. Accounts payable includes $7,487 representing checks issued and outstanding as of June 30, 2000, for which funds would have been drawn against the Company's revolving credit facility if they had been presented on that date. 4. Contingencies: On February 27, 1996, a lawsuit was filed against the Company by the buyer of its Dorman Products division for alleged misrepresentation of certain facts by the Company upon which the buyer allegedly based its offer to purchase Dorman. The complaint seeks damages of approximately $21,000. Certain other legal proceedings are pending which are either in the ordinary course of business or incidental to the Company's business. Those legal proceedings incidental to the business of the Company are generally not covered by insurance or other indemnity. In the opinion of management, the ultimate resolution of the pending litigation matters will not have a material effect on the consolidated financial position, operations or cash flows of the Company. Page 12 of 27 SUNSOURCE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued (dollars in thousands) 5. Stockholders' Equity: Earnings per Share The Company accounts for earnings per share in accordance with Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share". SFAS 128 requires the presentation of basic and diluted earnings per share for companies with complex capital structures. Under the Company's Equity Compensation Plan, 929,500 options to purchase shares of the Company's common stock having a potentially dilutive effect on earnings per share remain outstanding to certain executives and key employees. Currently, due to market conditions, the shares granted under the plan do not have a material dilutive effect on earnings per share for the six months ended June 30, 2000. Common Shares Issued to Certain Non-Employee Directors Under the Company's Stock Compensation Plan for Non-Employee Directors, certain non-employee directors were issued 10,828 Common Shares in the first six months of 2000, which results in a compensation charge of $48. Stock Options On April 27, 1999, a grant of 150,000 non-qualified stock options was made to attract and retain a new Chief Executive Officer, (the "CEO Grant"). On January 26, 2000, the Compensation Committee of the Board of Directors amended the CEO Grant by reducing the number of shares from 150,000 to 50,000 and issued a grant of 100,000 shares of restricted stock. One-third of the restricted shares will vest six months from the date of grant. Vesting of the remaining two-thirds of the restricted shares will be based on achievement of certain performance goals. In the event that all or some of the performance goals are not achieved within a three-year period from the date of grant, the then remaining shares will vest on the third anniversary from their date of grant. In May 2000, the Compensation Committee of the Board of Directors granted the following stock options under the Company's 1998 Equity Compensation Plan: (1) 293,500 incentive stock options at fair market value. (2) 22,500 non-qualified stock options at 85% of fair market value. Common Stock Dividend On June 30, 1999, the Board of Directors of the Company suspended indefinitely the quarterly cash dividend of $.10 per common share. 6. Segment Information: The Company has three reportable segments which are Hillman, Technology Services and Integrated Supply-Mexico operating as SunSource Integrated Services de Mexico, S.A. DE C.V. The three segments are disaggregated based on the products and services provided, markets served, marketing strategies and delivery methods. The Company measures segment profitability and allocates corporate resources based on each segment's Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") which is defined as income from operations before depreciation and amortization. The Company also measures the segments on performance of their tangible asset base. Following is a tabulation of segment information for the three and six months ended June 30, 2000 and 1999. Corporate information is included to reconcile segment data to the consolidated financial statements. Page 13 of 27 SUNSOURCE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued (dollars in thousands) 6. Segment Information (continued):
For the Three Months Ended, For the Six Months Ended, June 30, 2000 June 30, 1999 June 30, 2000 June 30,1999 ------------- ------------- ------------- ------------ Gross Sales Hillman Group $ 62,800 $ 41,261 $ 98,385 $ 77,180 Technology Services 61,657 66,055 121,791 135,370 Integrated Supply - Mexico 3,654 3,110 7,881 5,883 -------- -------- -------- -------- Consolidated sales- business segments 128,111 110,426 228,057 218,433 ======== ======== ======== ======== Elimination of Intersegment Sales Hillman Group 79 - 79 - Technology Services 521 369 1,008 685 Integrated Supply - Mexico - - - - -------- -------- -------- -------- Consolidated elimination of intersegment sales 600 369 1,087 685 ======== ======== ======== ======== Net Sales Hillman Group 62,721 41,261 98,306 77,180 Technology Services 61,136 65,686 120,783 134,685 Integrated Supply - Mexico 3,654 3,110 7,881 5,883 -------- -------- -------- -------- Consolidated net sales - business segments $127,511 $110,057 $226,970 $217,748 ======== ======== ======== ======== EBITDA Hillman Group $ 10,258 $ 4,517 $ 13,762 $ 7,848 Technology Services 207 (5,894) 17 (4,193) Integrated Supply - Mexico 23 101 183 118 -------- -------- -------- -------- EBITDA - business segments $ 10,488 $ (1,276) $ 13,962 $ 3,773 ======== ======== ======== ======== Reconciliation of Segment Profit to Income (loss) Before Income Taxes EBITDA - Business segments $ 10,488 $ (1,276) $ 13,962 $ 3,773 Equity in earnings of affiliate 505 - 954 - Corporate expenses (1,695) (2,850) (3,743) (4,869) EBITDA from contributed subsidiaries, sold business, and terminated contracts - 5,122 2,823 10,873 Restructuring charges and asset write-downs - (10,248) - (10,248) -------- -------- -------- -------- Consolidated EBITDA 9,298 (9,252) 13,996 (471) Depreciation (2,585) (1,246) (3,609) (2,466) Amortization (968) (458) (1,375) (913) Interest expense, net (3,060) (2,316) (5,466) (4,357) Distributions on guaranteed preferred beneficial interests (3,058) (3,058) (6,116) (6,116) Gain on contribution of subsidiaries - - 49,115 - -------- -------- -------- -------- Income(loss) before income taxes $ (373) $(16,330) $ 46,545 $(14,323) ======== ======== ======== ========
Page 14 of 27 SUNSOURCE INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued (dollars in thousands) 6. Segment Information (continued): The following supplemental table of segment tangible assets for ongoing operations is presented due to the increase in segment tangible assets during the six months ended June 30, 2000, which represents primarily the acquisition of Axxess which is included with the Hillman Group.
$ % 6/30/00 12/31/99 INC(DEC) INC(DEC) --------------- -------------- --------------- --------------- Hillman Group $ 133,704 $ 56,963 $ 76,741 134.7% Technology Services 79,621 81,812 (2,191) (2.7)% Integrated Supply-Mexico 5,262 5,763 (501) (8.7)% --------------- -------------- --------------- Total $ 218,587 $ 144,538 $ 74,049 51.2% =============== ============== ===============
Page 15 of 27 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------ The following discussion provides information which management believes is relevant to an assessment and understanding of the Company's operations and financial condition. This discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere herein. General SunSource Inc. (the "Company" or "SunSource") is one of the largest providers of value-added services and products to retail and industrial markets in North America. The Company is organized into three business segments which are SunSource Technology Services Company, Inc. ("Technology Services" or "STS"), The Hillman Group, Inc.("Hillman"), and Integrated Supply, operating as SunSource Integrated Services de Mexico, S.A. DE C.V. Also, the Company has an investment in an affiliate, G-C Sun Holdings, L.P., operating as Kar Products. Technology Services offers a full range of technology-based products and services to small, medium and large manufacturers. The Hillman Group provides small hardware and related items, keys and identification items such as tags, letters, numbers and signs, and merchandising services to retail outlets, primarily hardware stores, home centers, mass merchants and lumberyards. Integrated Supply provides major industrial manufacturing customers with comprehensive inventory management services for their maintenance, repair and operating supplies ("MRO"). Kar Products offers personalized inventory management systems of MRO products to industrial manufacturing customers and maintenance and repair facilities. Restructuring Charges and Asset Write-downs In the second quarter of 1999, the Company recorded $10.2 million of non-recurring restructuring charges and asset write-downs which were incurred to reposition Technology Services and Kar Products, write-down impaired assets, and realign corporate overhead expenses. Included in these charges and write-downs were $5.4 million related to Technology Services, $1.0 million related to Kar Products, $3.3 million related to Hillman, and $0.5 million related to Corporate Headquarters. The Company completed the restructuring plan within six months. Acquisitions/Divestitures On March 2, 2000, the Company contributed the interests in its Kar Products, Inc. and A & H Bolt & Nut Company Limited operations (collectively, the "Kar" business) to a newly-formed partnership affiliated with Glencoe Capital, L.L.C. ("Glencoe"). Glencoe contributed cash equity to the new partnership, G-C Sun Holdings L.P. ("G-C"). The Company received $105 million in cash proceeds from the transaction through repayment of assumed debt by G-C. Affiliates of Glencoe hold a 51% controlling interest with the remaining 49% interest held by SunSource. The Company accounts for its investment in the partnership under the equity method and recorded a pre-tax gain on the transaction of approximately $49.1 million in the first quarter of 2000. On April 7, 2000, the Company acquired Axxess Technologies, Inc. ("Axxess") of Tempe, Arizona through a stock merger transaction. Axxess is a manufacturer of key duplication and identification systems. The transaction was structured as a purchase of 100% of the stock of the privately held company and repayment of outstanding Axxess debt in exchange for $87 million in cash and $23 million in subordinated notes. Axxess' sales aggregated $41.2 million for the six months Page 16 of 27 ended June 30, 2000, and $82.1 million for the year ended December 31, 1999. Axxess' results of operations are included in the results of Hillman from the date of acquisition. On April 13, 2000, the Company completed the sale of its Harding Glass, Inc. ("Harding") subsidiary to VVP America which was previously announced in January 2000 with the signing of a letter of intent. The Company sold substantially all of the assets of Harding for a cash purchase price of $31.4 million plus the assumption by the buyer of certain liabilities aggregating $12.5 million, subject to certain post-closing adjustments. Proceeds from the sale of Harding were used to repay the Company's outstanding debt. Harding sales aggregated $28.0 million from January 1, 2000 through April 12, 2000, and $118.3 million for the year ended December 31, 1999. In December 1999, the Board of Directors approved a plan to dispose of the Company's Harding business. Since December 1999, Harding has been accounted for as a discontinued operation and, accordingly, its results of operations were segregated from results of the Company's ongoing businesses including restatement of prior periods presented. In 1999, the Company recorded a loss of $2.2 million after-tax from Harding's operations and an estimated loss on its expected disposal of $23.8 million or $3.53 per common share unadjusted for any potential future tax benefits. For the six months ended June 30, 2000, the Company recorded an additional loss on disposal of the discontinued Harding segment of $4.5 million, less an income tax benefit of $6.9 million, resulting in income from discontinued operations of $2.4 million or $.34 per common share. Through June 30, 2000, the Company has recorded a loss on the discontinued Harding segment of $21.5 million in the aggregate or $3.14 per common share, net of tax benefits. Page 17 of 27
Results of Operations Segment Sales and Profitability for the Three and Six Months Ended June 30, 2000 - ------------------------------------------------------------------------------------------------------ (dollars in thousands) FOR THE THREE MONTHS ENDED, --------------------------------------------------------------- June 30, 2000 June 30, 1999 ------------------------------- ------------------------------ % OF % OF Sales AMOUNT TOTAL AMOUNT TOTAL ---------------- ------------- --------------- ------------- Hillman Group (a) $ 62,721 49.2% $ 41,261 37.5% Technology Services (b) 61,136 47.9% 65,686 59.7% Integrated Supply - Mexico 3,654 2.9% 3,110 2.8% -------- ------- --------- ------- Consolidated net sales - ongoing operations 127,511 100.0% 110,057 100.0% Expediter Segment (c) - 31,835 Integrated Supply - sold business and terminated contracts (d) - 6,360 -------- --------- Consolidated Net Sales $127,511 $ 148,252 ======== ========== % OF % OF Gross Profit SALES SALES ------- ------ Hillman Group (a) $ 35,193 56.1% $ 21,707 52.6% Technology Services (b) 14,580 23.8% 13,432 20.4% Integrated Supply - Mexico 740 20.3% 756 24.3% -------- --------- Consolidated gross profit - ongoing operations 50,513 39.6% 35,895 32.6% Expediter Segment (c) - 21,956 Integrated Supply - sold business and terminated contracts (d) - 2,109 -------- --------- Consolidated Gross Profit before inventory write-down 50,513 59,960 Inventory write-down - (2,130) -------- --------- Consolidated Gross Profit $ 50,513 $ 57,830 ======== ========= EBITDA from ongoing operations (f) Hillman Group (a) $ 10,258 16.4% $ 4,517 10.9% Technology Services (b) 207 0.3% (5,894) (9.0%) Equity in Earnings of Expediter Segment (e) 505 - Integrated Supply - Mexico 23 0.6% 101 3.2% Corporate expenses (1,695) (1.3%) (2,850) (1.9%) -------- --------- Consolidated EBITDA - ongoing operations 9,298 7.3% (4,126) (3.7%) Expediter Segment (c) - 4,701 Integrated Supply - sold business and terminated contracts (d) - 421 -------- --------- Consolidated EBITDA before restructuring charges 9,298 996 Restructuring charges - (10,248) -------- --------- Consolidated EBITDA $ 9,298 $ (9,252) ======== =========
Results of Operations Segment Sales and Profitability for the Three and Six Months Ended June 30, 2000 - ------------------------------------------------------------------------------------------------------------ (dollars in thousands) FOR THE SIX MONTHS ENDED, ---------------------------------------------------------------------- June 30, 2000 June 30, 1999 -------------------------------- ------------------------------------ % OF % OF Sales AMOUNT TOTAL AMOUNT TOTAL ----------------- ------------- ----------------- ----------------- Hillman Group (a) $ 98,306 43.3% $ 77,180 35.4% Technology Services (b) 120,783 53.2% 134,685 61.9% Integrated Supply - Mexico 7,881 3.5% 5,883 2.7% -------- -------- -------- -------- Consolidated net sales - ongoing operations 226,970 100.0% 217,748 100.0% Expediter Segment (c) 22,122 63,068 Integrated Supply - sold business and terminated contracts (d) 1,048 12,286 -------- -------- Consolidated Net Sales $250,140 $293,102 ======== ======== % OF % OF Gross Profit SALES SALES ------ ----- Hillman Group (a) $ 54,421 55.4% $ 40,705 52.7% Technology Services (b) 29,134 24.1% 31,670 23.5% Integrated Supply - Mexico 1,688 21.4% 1,368 23.3% -------- -------- Consolidated gross profit - ongoing operations 85,243 37.6% 73,743 33.9% Expediter Segment (c) 15,052 43,775 Integrated Supply - sold business and terminated contracts (d) - 3,999 -------- -------- Consolidated Gross Profit before inventory write-down 100,295 121,517 Inventory write-down - (2,130) -------- -------- Consolidated Gross Profit $100,295 $119,387 ======== ======== EBITDA from ongoing operations (f) Hillman Group (a) $ 13,762 14.0% $ 7,848 10.2% Technology Services (b) 17 0.0% (4,193) (3.1%) Equity in Earnings of Expediter Segment (e) 954 - Integrated Supply - Mexico 183 2.3% 118 2.0% Corporate expenses (3,743) (1.5%) (4,869) (1.7%) -------- -------- Consolidated EBITDA - ongoing operations 11,173 4.9% (1,096) (0.5%) Expediter Segment (c) 2,823 10,169 Integrated Supply - sold business and terminated contracts (d) - 704 -------- -------- Consolidated EBITDA before restructuring charges 13,996 9,777 Restructuring charges - (10,248) -------- -------- Consolidated EBITDA $ 13,996 $ (471) ======== ========
(a) Includes sales, gross profit and EBITDA from Axxess Technologies, Inc. which was acquired on April 7, 2000 through a stock merger transaction. (b) Includes remaining Integrated Supply business in the U.S. as a result of customer relationships with the Technology Services Group. (c) Represents sales, gross profit and EBITDA from the Company's Kar Products, Inc. and A & H Bolt & Nut Company Limited business (collectively, the "Expediter Segment") which was contributed on March 2, 2000 to a newly formed partnership affiliated with Glencoe Capital L.L.C. (d) Represents sales, gross profit and EBITDA from the OEM Fastener Business, which was sold on July 1, 1999 and contracts terminated in 1999 and 2000. (e) Represents Equity in Earnings from the Contributed Expediter Segment since March 2, 2000. (f) "EBITDA" (earnings before interest, taxes, depreciation and amortization) is defined as income (loss) from ongoing operations before depreciation and amortization. Page 18 of 27 Three Months Ended June 30, 2000 and 1999 Net sales from ongoing operations increased $17.5 million or 15.9% in the second quarter of 2000 to $127.5 million from $110.0 million in 1999. Sales variances by business segment are as follows: Sales Increase (Decrease) ------------------------- Amount % ------ --- (In thousands) Hillman Group $ 21,460 52.0 % Technology Services (4,550) (6.9)% Integrated Supply - Mexico 544 17.5 % --------- Total Company - Ongoing Operations $ 17,454 15.9 % ========= Hillman's sales increased $21.5 million or 52.0% in the second quarter of 2000 to $62.7 million from $41.2 million in the second quarter of 1999 primarily as a result of the acquisition of Axxess. Technology Services' sales decreased $4.6 million or 6.9% in the second quarter of 2000 to $61.1 million from $65.7 million in 1999 as a result primarily of the restructuring of its sales force in early 1999. Integrated Supply-Mexico sales increased $0.5 million in the second quarter of 2000 from $3.1 million in the same period of 1999 as a result of the addition of a new contract since June 30, 1999. The Company's sales backlog on a consolidated basis from ongoing operations was $52.8 million as of June 30, 2000, compared with $50.6 million at December 31, 1999, representing an increase of 4.3%. The Company's consolidated gross margin from ongoing operations was 39.6% in the second quarter of 2000 compared with 34.9% in the second quarter of 1999 before the inventory write-down related to restructuring of $2.1 million and other inventory charges related to integration of the Technology Services divisions of $2.5 million. On a comparable basis, excluding Axxess, the consolidated gross margin from ongoing operations was 35.6% for the three months ended June 30, 2000. Hillman's gross margin improved 3.5% in the comparison period as a result of higher margin sales of keys and identification items related to the acquisition of Axxess. Technology Services' gross margin was 23.8% in the second quarter of 2000 compared with 24.3% before the aforementioned charges in the second quarter of 1999 primarily as a result of a change in sales mix. The Integrated Supply-Mexico segment's gross margin decreased 4.0% in the second quarter of 2000 resulting mainly from increased activity from lower margin customer contracts. The Company's selling, general and administrative expenses ("S,G&A") from ongoing operations on a comparable basis (excluding Axxess, restructuring charges of $8.1 million and non-recurring charges related to integration of the Technology Services business of $1.9 million)decreased $3.6 million from $38.1 million in the second quarter of 1999 to $34.5 million in the second quarter of 2000. Selling expenses on a comparable basis, excluding Axxess, decreased $1.5 million primarily as a result of reduced sales commissions at the existing Hillman business and cost savings at STS associated with the June 1999 restructuring plan. Warehouse and delivery expenses on a comparable basis, excluding Axxess, increased $0.5 million as a result primarily of facility reorganization costs at STS. General and administrative expenses on a comparable basis, excluding Axxess, decreased by $2.6 million as a result of headcount reductions associated with the June 1999 restructuring plan at STS and reduced corporate overhead expenses. Page 19 of 27 Total S,G&A expenses from ongoing operations on a comparable basis excluding Axxess as a percentage of sales compared with the second quarter 1999 are as follows: Three Months ended June 30, As of a % of Sales 2000 1999 ------------------ ---- ---- Selling Expenses 17.2% 18.0% Warehouse and Delivery Expenses 7.4% 6.7% General and Administrative Expenses 7.8% 9.9% ----- ----- Total S,G&A Expenses 32.4% 34.6% ====== ===== EBITDA from ongoing operations after corporate expenses for the second quarter of 2000 was $9.3 million compared with $0.3 million excluding restructuring charges of $10.2 million, and other non-recurring charges related to the integration of STS of $4.4 million. The Company's consolidated operating profit margin (EBITDA as a percentage of sales) after corporate expenses increased to 7.3% in the second quarter of 2000 compared with 0.3% in the second quarter of 1999 (excluding the non-recurring charges noted above). Hillman's operating profit margin increased to 16.4% in the second quarter of 2000 compared with 10.9% primarily as a result of the acquisition of Axxess and operational efficiencies. STS' operating profit margin increased to 0.3% compared with an operating loss of 2.2% before the aforementioned charges in the second quarter of 1999 as a result of cost savings associated with the June 1999 restructuring plan. Integrated Supply-Mexico segment's operating profit margin decreased to 0.6% from 3.2% as a result of deceased profit margins associated with new customer contracts. Depreciation expense for ongoing operations increased $1.7 million to $2.6 million in the second quarter of 2000 from $0.9 million in the same quarter of 1999 primarily as a result of the acquisition of Axxess. Amortization expenses for ongoing operations increased $0.7 million to $1.0 million as a result of the acquisition of Axxess. Interest expense, net increased $0.7 million in the second quarter of 2000 from $2.3 million in the second quarter of 1999 due primarily to the acquisition of Axxess, an increase in interest rates since the second quarter of 1999 and amortization of deferred financing fees related to the Company's December 1999 debt refinancing. The Company pays interest to the Trust on the Junior Subordinated Debentures underlying the Trust Preferred Securities at the rate of 11.6% per annum on their face amount of $105.4 million, or $12.2 million per annum in the aggregate. The Trust distributes an equivalent amount to the holders of the Trust Preferred Securities. For the three months ended June 30, 2000 and 1999, the Company paid $3.1 million in interest on the Junior Subordinated Debentures, equivalent to the amounts distributed by the Trust on the Trust Preferred Securities. The Company is subject to federal, state and local income taxes on its domestic operations and foreign income taxes on its Canadian and Mexican operations as accounted for in accordance with Statement of Financial Accounting Standard ("SFAS") 109, "Accounting for Income Taxes". Deferred income taxes represent differences between the financial statement and tax bases of assets and liabilities as classified on the Company's balance sheet. The Company recorded a provision for income taxes of $0.1 million on a loss before provision for income taxes of $0.4 million in the second quarter of 2000 primarily as a result of non-deductible items related to the acquisition of Axxess. The effective income tax rate in the 1999 comparison period was 39.6%. Page 20 of 27 Six Months Ended June 30, 2000 and 1999 Net sales from ongoing operations increased $9.2 million or 4.2% in the first six months of 2000 to $226.9 million from $217.7 million in 1999. Sales variances by business segment are as follows: Sales Increase (Decrease) ------------------------- Amount % ------ --- (In thousands) Hillman Group $ 21,126 27.4 % Technology Services (13,902) (10.3)% Integrated Supply - Mexico 1,998 34.0 % --------- Total Company - Ongoing Operations $ 9,222 4.2 % ========= Hillman's sales increased $21.1 million or 27.4% in the first half of 2000 to $98.3 million from $77.2 million in the first half of 1999 primarily due to the acquisition of Axxess. Technology Services' sales decreased $13.9 million or 10.3% in the first six months of 2000 to $120.8 million from $134.7 million in 1999 as a result primarily of the restructuring of its sales force in early 1999. Integrated Supply-Mexico sales increased $2.0 million in the first half of 2000 from $5.9 million in the same period of 1999 as a result of the addition of one new contract since June 30, 1999. The Company's consolidated gross margin from ongoing operations was 37.6% in the first half of 2000 compared with 35.2% in the first half of 1999 before the inventory write-down related to restructuring of $2.1 million and charges related to integration of the Technology Services divisions of $2.8 million. On a comparable basis, excluding Axxess, the consolidated gross margin from ongoing operations was 35.2% for the six months ended June 30, 2000. Hillman's gross margin increased 2.7% in the comparison period as a result of higher margin sales of keys, and identification items related to the acquisition of Axxess. Technology Services' gross margin was 24.1% in the first half of 2000 compared with 25.6% in the first half of 1999 before the aforementioned charges primarily as a result of a change in sales mix. The Integrated Supply - Mexico segment's gross margin decreased 1.9% in the first half of 2000 resulting mainly from increased activity from lower-margin customer contracts. The Company's S,G&A expenses from ongoing operations on a comparable basis (excluding Axxess, restructuring charges of $8.1 million and non-recurring charges related to integration of the Technology Services business of $2.6 million) decreased $4.5 million from $72.3 million to $67.8 million for the six months ended June 30, 2000. Selling expenses on a comparable basis, excluding Axxess, decreased by $2.2 million primarily as a result of cost savings at STS associated with the June 1999 restructuring plan. Warehouse and delivery expenses increased $1.0 million as a result primarily of facility reorganization costs at STS. General and administrative expenses on a comparable basis excluding Axxess decreased by $3.3 million as a result of headcount reductions associated with the June 1999 restructuring plan at STS and reduced corporate overhead expenses. Total S,G&A expenses from ongoing operations on a comparable basis excluding Axxess as a percentage of sales compared with the first half 1999 are as follows: Six Months ended June 30, As of a % of Sales 2000 1999 ------------------ ---- ---- Selling Expenses 17.5% 17.5% Warehouse and Delivery Expenses 7.5% 6.6% General and Administrative Expenses 8.0% 9.1% ----- ----- Total S,G&A Expenses 33.0% 33.2% ====== ===== Page 21 of 27 EBITDA from ongoing operations after corporate expenses for the first six months of 2000 was $11.2 million compared with $4.4 million excluding restructuring charges of $10.2 million and the aforementioned charges related to the integration of STS of $5.4 million. The Company's consolidated operating profit margin (EBITDA as a percentage of sales) after corporate expenses increased to 4.9% in the first half of 2000 compared with 2.0% in the first half of 1999, excluding the aforementioned non- recurring charges. Hillman's operating profit margin increased to 14.0% in the first half of 2000 compared with 10.2% in the first half of 1999 primarily as a result of the acquisition of Axxess and operational efficiencies. STS' operating profit margin was breakeven in the first six months of 2000 compared with 0.9% before the aforementioned charges in the first half of 1999 resulting from integration and consolidation activities in the STS operation. Integrated Supply- Mexico segment's operating profit margin increased to 2.3% from 2.0% as a result of increased sales from a new account. Depreciation expense for ongoing operations increased $1.6 million to $3.4 million in the first half of 2000 from $1.8 million in the same period of 1999 primarily as a result of the acquisition of Axxess. Amortization expenses for ongoing operations increased $0.7 million to $1.3 million as a result of the acquisition of Axxess. Interest expense, net increased $1.1 million in the first half of 2000 from $4.4 million in the first half of 1999 due primarily to the acquisition of Axxess, an increase in interest rates since the first half of 1999 and amortization of deferred financing fees related to the Company's December 1999 debt refinancing. For the six months ended June 30, 2000 and 1999, the Company paid $6.1 million in interest on the Junior Subordinated Debentures, equivalent to the amounts distributed by the Trust on the Trust Preferred Securities. The Company's effective income tax rate was 11.5% in the first half of 2000 due primarily to a significant portion of the gain from the contribution of Kar being non-taxable as a result of the Company's remaining 49% ownership in G-C, offset by non-deductible items related to the acquisition of Axxess. For the first half of 1999, the Company recorded a benefit for income taxes of $5.6 million or 39.3% of the pre-tax loss of $14.3 million. Liquidity and Capital Resources The Company's cash position of $2.0 million as of June 30, 2000, decreased $3.2 million from the balance at December 31, 1999. Cash was provided during this period primarily from proceeds from the Kar and Harding transactions previously discussed ($105.0 million and $31.4 million, respectively). Cash was used during this period predominantly for the acquisition of Axxess Technologies ($87.0 million), repayments under the bank credit agreement ($29.9 million), repayment of a portion of the subordinated notes issued in conjunction with the Acquisition of Axxess ($9.6 million), working capital investments in operations ($6.5 million), capital expenditures ($3.6 million), and other disbursements, net ($3.0 million). The Company's net interest coverage ratio from continuing operations for the first six months ended June 30, 2000 including Kar for the first two months of the year declined to .78X (earnings before interest, distributions on trust preferred securities and income taxes, excluding non-recurring events, over net interest expense and distributions on trust preferred securities), from 1.23X in the 1999 comparison period as a result of reduced earnings and increased interest expense. Page 22 of 27 The Company's working capital position of $88.3 million at June 30, 2000, represents a decrease of $47.3 million from the December 31, 1999 level of $135.6 million as a result of the Kar and Harding transactions, offset by the Axxess acquisition and working capital reinvestments. The Company's current ratio decreased to 2.04x at June 30, 2000 from 2.56x at December 31, 1999. On March 2, 2000, SunSource contributed the interests in the Company's Kar Products subsidiary including its Canadian operation, to a newly formed partnership affiliated with Glencoe as previously mentioned. The Company received $105 million in cash proceeds from the transaction which were used to reduce the bank revolver borrowings. The Company also recorded a pre-tax gain of $49.1 million which has restored the Company's stockholders' equity to a significant positive position of $27.4 million at June 30, 2000, or $3.99 per common share, from its deficit balance of $17.2 million at December 31, 1999. In addition, SunSource's remaining investment in Kar of 49% allows the Company to participate in the capital appreciation of Kar in the future with Glencoe. On April 7, 2000, the Company completed the acquisition of Axxess for a purchase price of $110.0 million composed of $87.0 million in cash and $23.0 million in subordinated notes. In connection with the sale of Harding on April 13, 2000, the Company repaid $9.6 million of these subordinated notes leaving a balance of $13.4 million, as follows: 1) a $2.4 million 15% note due April 7, 2001 and 2) an $11.0 million note which is payable in seven equal quarterly installments commencing the earlier of i) the first calendar quarter after payment in full of the term loan provided by the Company's senior lenders (the "Term Loan") or ii) March 31, 2004. Interest on the $11.0 million subordinated note ranges from prime plus 1% to prime plus 5% with a maximum rate at any time of 15%. Interest is payable upon maturity of the subordinated notes. The Company further strengthened its financial position upon consummation of the sale of the Harding Glass business on April 13, 2000. The Company sold substantially all of the assets of Harding for a cash purchase price of approximately $31.4 million plus the assumption of certain liabilities aggregating $12.5 million by the buyer, subject to certain post-closing adjustments. Proceeds from the sale of Harding were used by the Company as follows: 1) a repayment of bank revolver borrowings of $15.8 million (representing primarily Harding's collateral in the borrowing base), 2) a principal repayment of the Term Loan of $4.0 million, 3) a repayment of certain Axxess subordinated notes in the amount of $9.6 million, and 4) a cash reserve of $2.0 million to support the issuance of a stand by letter of credit in the same amount provided to the purchaser of Harding. As of June 30, 2000, the Company had $13.9 million available under its senior secured credit facilities. The Company had approximately $96.3 million of outstanding debt at June 30, 2000, consisting of a $17.5 million senior secured term loan currently at 9.5%, bank revolver borrowings totaling $76.9 million at an effective interest rate of 9.5%, and capitalized lease obligations of $1.9 million at various interest rates. As of June 30, 2000, the Company's senior debt (including distributions payable) as a percentage of its consolidated capitalization (total debt, trust preferred securities and stockholders' equity) was approximately 38.2% compared with 56.6% at December 31, 1999 and 52.4% as of June 30, 1999. The Company's consolidated capitalization (including distributions payable) as of June 30, 2000, was approximately $252.6 million compared to $225.7 million at December 31, 1999 and $266.4 million at June 30, 1999. On December 15, 1999, the Company refinanced its $90 million bank revolver and $60 million senior notes with $155 million in senior secured credit facilities. As a result of the Kar transaction on March 2, 2000 and the acquisition of Axxess on April 7, 2000, the Company reduced the revolving credit portion of the facility from $130 million to $115 million. The senior secured credit facilities expire on December 14, 2004 and provide SunSource with adequate funds for working capital and other corporate requirements. Page 23 of 27 The Company has spent $3.0 million and $3.6 million, respectively, for capital expenditures for the three and six months ended June 30, 2000, primarily for warehouse improvements, machinery and equipment, and computer hardware and software. The Company expects to spend an additional $5.7 million by December 31, 2000, for a total of $9.3 million in 2000 including $4.6 million for Axxess. The total anticipated spending of $9.3 million in 2000 represents an increase of $4.5 million compared to total year 1999 as a result of the acquisition of Axxess. On June 30, 1999, the Board of Directors of the Company suspended indefinitely the quarterly cash dividend of $.10 per common share. On August 6, 1998, the Company's Board of Directors authorized $15.0 million for management to repurchase up to 10% of the Company's outstanding common shares through open market transactions and private block trades dependent upon market conditions. The Company subsequently suspended the repurchase program on March 16, 1999. The Company has acquired and placed into treasury 479,100 common shares through June 30, 2000, at an average cost of $18.17 per common share. The Company has deferred tax assets aggregating $14.2 million as of June 30, 2000, as determined in accordance with SFAS 109. Management believes that the Company's deferred tax assets will be realized through the reversal of existing temporary differences between the financial statement and tax bases, as well as through future taxable income. Year 2000 Issue All of the Company's operating segments successfully met the Year 2000 compliance requirement for proprietary and purchased software, and machinery and equipment utilized in the daily business process. In addition, the Company's suppliers or customers did not experience any material Year 2000 compliance-related problems of which the Company is aware. All operating divisions continued to monitor their non-critical processing software to ensure that all non-critical programs have been successfully executed through the second quarter of 2000. The Company's established Year 2000 compliance budget of $1.7 million, funded from operating cash flows, was adequate. In addition, the Company has not incurred any significant expenses related to the Year 2000 compliance issue during the first half of 2000. Inflation Inflation in recent years has had a modest impact on the operations of the Company. Continued inflation, over a period of years at higher than current rates, would result in significant increases in inventory costs and operating expenses. However, such higher cost of sales and operating expenses can generally be offset by increases in selling prices, although the ability of the Company's operating divisions to raise prices is dependent on competitive market conditions. Page 24 of 27 Forward Looking Statements Certain disclosures related to acquisitions and divestitures, refinancing and capital expenditures contained in this report involve risks and uncertainties and may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We have based these forward-looking statements on our current expectations, assumptions and projections about future events. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements. Actual results could differ materially from those currently anticipated as a result of a number of factors, including the risks and uncertainties discussed under captions "Risk Factors" - Restructuring, Risks Associated with Acquisitions and the New York Stock Exchange Listing set forth in Item 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 1999. Given these uncertainties, current or prospective investors are cautioned not to place undue reliance on any such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "could," "would," "expect," "plan," "anticipate," "believe," "estimate," "continue" or the negative of such terms or other similar expressions. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements included in this Report. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Report might not occur. Page 25 of 27 PART II OTHER INFORMATION Items 1 - 5 - None Item 6 - Exhibits and Reports on Form 8-K A Current Report on Form 8-K was filed on March 17, 2000 reporting a disposition under Item 2 of Form 8-K. A Current Report on Form 8-K was filed on April 24, 2000 reporting an acquisition and a disposition under Item 2 of Form 8-K. A Current Report on Amendment No. 1 to Form 8-K originally filed on April 24, 2000 was filed on May 11, 2000, under Item 7 of Form 8-A including the December 31, 1999 audited financial statements of Axxess Technologies, Inc. Page 26 of 27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SUNSOURCE INC. /s/ Joseph M. Corvino /s/ Edward L. Tofani - -------------------------- --------------------------- Joseph M. Corvino Edward L. Tofani Vice President - Finance Controller (Chief Financial Officer) (Chief Accounting Officer) DATE: August 14, 2000 Page 27 of 27 EX-27 2 0002.txt FINANCIAL DATA SCHEDULE
5 GOES HERE 1,000 U.S. DOLLARS 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 1 2,002 0 68,151 3,098 82,838 172,978 80,664 20,926 343,411 84,632 13,667 115,024 0 73 27,386 343,411 250,140 250,140 149,845 92,567 (339) 300 5,466 46,545 5,364 41,181 2,357 0 0 43,538 6.36 6.36 Bonds represents current and long-term portion of subordinated notes Represents Guaranteed Preferrred Beneficial interests in the corporation's Junior Subordinated Debt
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