SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): April 7, 2000
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SUNSOURCE INC.
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(Exact Name of Registrant Specified in Charter)
Delaware 1-13293 23-2874736
----------------- --------------------- --------------
(State or Other (Commission File (I.R.S. Employer
Jurisdiction of Number) Identification No.)
Incorporation)
3000 One Logan Square
Philadelphia, PA 19103
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (215) 282-1290
--------------
-------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Business Acquired. The following financial
statements are being filed pursuant to this Amendment No. 1 to Current Report on
Form 8K originally filed on April 24, 2000:
Report of Independent Auditors
The Board of Directors and Shareholders
Axxess Technologies, Inc.
We have audited the accompanying balance sheets of Axxess Technologies, Inc. as
of December 31, 1999 and 1998, and the related statements of operations,
shareholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Axxess Technologies, Inc. at
December 31, 1999 and 1998, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
February 18, 2000 except for Note 12
as to which the date is April 7, 2000
F-1
Axxess Technologies, Inc.
Balance Sheets
December 31
1999 1998
------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 1,829,144 $ 310,512
Accounts receivable, trade, less allowance of $532,000 in 1999 and
$1,030,000 in 1998 8,426,315 12,321,995
Inventories 13,888,656 16,885,123
Refundable income taxes - 700,000
Deferred tax assets 1,087,542 1,061,999
Prepaid expenses and other 679,572 1,845,100
------------------------------------
Total current assets 25,911,229 33,124,729
Property and equipment, net 52,023,981 47,946,073
Other assets 1,002,349 1,187,446
------------------------------------
Total assets $78,937,559 $82,258,248
====================================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 7,605,181 $11,093,281
Accrued expenses 3,674,524 2,300,135
Accrued buy-back - 150,000
Current portion of long-term debt 50,000,000 -
------------------------------------
Total current liabilities 61,279,705 13,543,416
Deferred tax liability 976,474 1,363,435
Deferred rent 405,682 237,950
Long-term debt, less current portion - 49,000,000
Shareholders' equity
Series A Preferred Shares, $0.01 par value:
Authorized shares - 100,000
Issued and outstanding shares - 6,068 (liquidation preference
$19,587,000) 61 61
Series B Preferred Shares, $0.01 par value:
Authorized shares - 100,000
Issued and outstanding shares -9,617 (liquidation preference $15,506,000) 96 96
Common Shares, $0.01 par value
Authorized shares - 2,000,000
Issued and outstanding shares - 1,201,960 in 1999 and 1998 12,019 12,019
Additional paid-in capital 26,659,786 26,659,786
Accumulated deficit (10,396,264) (8,558,515)
------------------------------------
Total shareholders' equity 16,275,693 18,113,447
------------------------------------
Total liabilities and shareholders' equity $78,937,559 $82,258,248
====================================
See accompanying notes.
F-2
Axxess Technologies, Inc.
Statements of Operations
Year Ended December 31
1999 1998
-----------------------------------------
Revenue:
Net sales $82,131,776 $94,328,498
Costs and expenses:
Cost of goods sold 46,778,695 52,856,499
Sales and marketing 21,068,535 21,373,574
General and administrative 10,011,722 8,241,780
Research and development 807,541 868,580
Buy-back 75,370 56,486
-----------------------------------------
78,741,863 83,396,919
-----------------------------------------
Income from operations 3,389,913 10,931,579
Other income (expense):
Other income 507,435 14,782
Interest expense (6,500,271) (3,667,452)
-----------------------------------------
Income (loss) before income taxes (2,602,923) 7,278,909
Income taxes (benefit) expense (765,174) 1,770,000
-----------------------------------------
Net (loss) income $ (1,837,749) $ 5,508,909
=========================================
See accompanying notes.
F-3
Axxess Technologies, Inc.
Statements of Shareholders' Equity
Series A Preferred Series B Preferred
Shares Shares Common Shares
-------------------- -------------------- --------------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
Balance at December 31, 1997 6,068 $ 61 9,617 $ 96 1,162,960 $11,629
Cash proceeds from exercise of
common share options - - - - 39,000 390
Net income - - - - - -
------- ------- ------- ------- ----------- ----------
Balance at December 31, 1998 6,068 61 9,617 96 1,201,960 12,019
Net loss - - - - - -
------- ------- ------- ------- ----------- ----------
Balance at December 31, 1999 6,068 $ 61 9,617 $ 96 1,201,960 $12,019
======= ======= ======== ======= =========== ==========
(RESTUBBED TABLE)
Additional Total
Paid-In Accumulated Shareholders'
Capital Deficit Equity
------- ------- ------
Balance at December 31, 1997 $26,656,276 $(14,067,424) $12,600,638
Cash proceeds from exercise of
common share options 3,510 - 3,900
Net income - 5,508,909 5,508,909
------------- --------------- --------------
Balance at December 31, 1998 26,659,786 (8,558,515) 18,113,447
Net loss - (1,837,749) (1,837,749)
------------- --------------- --------------
Balance at December 31, 1999 $26,659,786 $(10,396,264) $16,275,698
============= =============== ==============
See accompanying notes.
F-4
Axxess Technologies, Inc.
Statements of Cash Flows
Year Ended December 31
1999 1998
--------------------------------------
Operating activities
Net (loss) income $ (1,837,749) $ 5,508,909
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation and amortization 11,536,862 9,208,213
Provision for doubtful accounts (497,908) 27,000
Provision for inventory (61,784) -
Amortization of debt issuance costs 1,027,803 -
Gain on disposal of property and equipment (319,827) (114,467)
Deferred tax benefit (412,504) 1,010,436
Changes in operating assets and liabilities:
Accounts receivable 4,393,588 (717,582)
Inventories 2,213,712 (4,905,863)
Refundable income taxes 700,000 (700,000)
Prepaid expenses and other 600,707 (1,236,905)
Accounts payable (3,488,100) 5,104,715
Accrued expenses 1,374,389 (4,740,655)
Accrued buy-back (150,000) (2,710,000)
Deferred rent 167,732 237,950
--------------------------------------
Net cash provided by operating activities 15,246,921 5,971,751
Investing activities
Additions to property and equipment (15,337,873) (28,473,647)
Proceeds from the sale of property and equipment 894,584 -
Proceeds from sale of portion of acquired business - 13,073,806
--------------------------------------
Net cash used in investing activities (14,443,289) (15,399,841)
Financing activities
Proceeds from issuance of common shares - 3,900
Proceeds from long-term debt 11,000,000 31,200,000
Payments on long-term debt (10,000,000) (21,200,000)
Debt issuance costs (285,000) (446,419)
--------------------------------------
Net cash provided by financing activities 715,000 9,557,481
--------------------------------------
Net increase in cash and cash equivalents 1,518,632 129,391
Cash and cash equivalents at beginning of year 310,512 181,121
--------------------------------------
Cash and cash equivalents at end of year $ 1,829,144 $ 310,512
======================================
See accompanying notes.
F-5
Axxess Technologies, Inc.
Notes to Financial Statements
December 31, 1999
1. Accounting Policies
Organization and Description of Business
Axxess Technologies, Inc. (the Company) was incorporated in April 1993 under the
laws of the state of Delaware. The Company is engaged in the manufacture of
precision key duplication centers (pkdc), conventional key cutting machines,
engraving machines capable of engraving identification tags as well as letters,
numbers and signs (LNS). The machines are placed in customers' facilities,
primarily mass merchants, home centers and large grocery and drug chains. The
Company derives its revenues from the sale of the metal keys and tags utilized
in the machines and distributes key related accessories, letters, numbers and
signs to those same customers.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Acquisition Expense
Included in other assets is $561,344 related to payments made by the Company
with respect to certain ongoing expenses for legal and other services related to
the possible sale of the Company disclosed in footnote 12. The Company will be
reimbursed for these costs by the respective shareholders.
Inventories
Inventories consist primarily of raw materials of metal and plastic keys and the
components used in the packaging of metal keys, and raw materials and finished
goods consisting of consumer products, letters, numbers and signs. Inventories
are carried at the lower of cost or market using the first-in, first-out (FIFO)
method.
Property and Equipment
Property and equipment is stated at cost. Depreciation for the pkdc systems is
computed based upon the estimated life of the machine considering the volume of
keys processed through the machine, ranging generally from three to seven years.
Depreciation on the engraving machines, machinery and equipment and computer
equipment, is computed by the straight-line method over the estimated useful
lives of the assets which range from two to seven years.
F-6
Axxess Technologies, Inc.
Notes to Financial Statements (Continued)
1. Accounting Policies (continued)
Revenue Recognition
Sales are recorded as revenue upon shipment to customers. Allowances are
recorded at the time of sale for estimated discounts and returns.
Cost of Goods Sold
Cost of goods sold includes depreciation and cost of repair and maintenance of
pkdc, conventional key cutting machines and engraving machines.
Research and Development Costs
Research and development costs represent costs of researching, developing and
manufacturing prototype molds, keys, pkdcs, engraving machines and other
potential new products and are expensed as incurred.
Buy-Back
Consistent with industry practices, the Company purchases from new customers
their existing metal key and LNS inventory. The Company records the buy-back as
expense and establishes the related liability at the time the buy-back
commitment is made.
Income Taxes
The Company accounts for income taxes under Statement of Financial Accounting
Standard (SFAS) No. 109 - "Accounting for Income Taxes."
Comprehensive Income (Loss)
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" (Statement 130). Statement 130 establishes new rules for
reporting and display of comprehensive income and its components. Comprehensive
income (loss) is the same as net income (loss) for all periods presented.
F-7
Axxess Technologies, Inc.
Notes to Financial Statements (Continued)
1. Accounting Policies (continued)
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentration of
credit risk consist primarily of trade receivables. In the normal course of
business, the Company provides credit terms to its customers. Accordingly, the
Company performs ongoing credit evaluations of its customers and maintains
allowances for possible losses which, when realized, have been within the range
of management's expectations.
The Company's customer base consists primarily of companies in the United
States. Although the Company is directly affected by the financial and
operational well-being of the companies in the retail and mass merchant
industry, management does not believe significant credit risk exists at present.
Fair Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheets for cash and
cash equivalents, accounts receivable, accounts payable and accrued liabilities
approximate fair value because of the immediate or short-term maturity of these
financial instruments. The fair value of long-term debt is determined using
current applicable interest rates as of the balance sheet date and approximates
the carrying value of such debt because the underlying instruments are at
variable rates which are repriced frequently.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Reclassification
Certain reclassifications have been made to the 1998 financial statements to
conform with the 1999 presentation.
F-8
Axxess Technologies, Inc.
Notes to Financial Statements (Continued)
2. Inventories
Inventories consisted of the following:
December 31
1999 1998
-------------------------------------
Metal keys $ 4,994,576 $ 7,092,680
Letters, numbers, and signs 4,251,947 4,928,807
Consumer products 1,954,249 2,073,912
Tags 1,722,501 1,838,260
Code cutter machines 718,664 1,016,610
Quick scribe products 296,456 -
Plastic keys 131,914 187,012
Plastic machines 161,492 152,768
-------------------------------------
14,231,798 17,290,049
Less valuation reserve 343,142 404,926
-------------------------------------
$13,888,656 $16,885,123
=====================================
3. Property and Equipment
Property and equipment consisted of the following:
December 31
1999 1998
-------------------------------------
pkdc machines and cassettes $27,912,422 $21,619,160
Engraving machines 27,086,294 22,276,833
Production and shop equipment 5,941,544 4,877,150
Quickscribe machines 1,069,627 -
Cole machines 873,336 -
Computer equipment 3,089,067 2,456,430
Furniture and fixtures 1,528,170 1,496,072
Leasehold improvements 4,907,722 4,821,631
-------------------------------------
72,408,182 57,547,276
Less accumulated depreciation 20,384,201 9,601,203
-------------------------------------
$52,023,981 $47,946,073
=====================================
F-9
Axxess Technologies, Inc.
Notes to Financial Statements (Continued)
4. Long-Term Debt
Long-term debt consisted of the following:
December 31
1999 1998
-------------------------------------
$55,000,000 revolving line of credit bearing performance-priced interest of
prime (or, if higher, the federal funds rate plus 50 basis points) plus 0.25
percent up to 1.00 percent or LIBOR plus 1.50 percent up to 2.25
percent. $50,000,000 $49,000,000
-------------------------------------
50,000,000 49,000,000
Less current portion 50,000,000 -
-------------------------------------
$ - $49,000,000
=====================================
The Company's revolving line of credit contains covenants that place various
restrictions, among other things, on financial ratios, business acquisitions,
and transactions with related parties. As of December 31, 1999, the Company was
not in compliance with certain of these covenants. The entire balance of the
revolving line of credit is classified as current on the balance sheet as of
December 31, 1999. The average interest rate being charged during forbearance at
December 31, 1999 was 12.5 percent.
The revolving line of credit and the term facility are collateralized and
cross-collateralized by accounts receivable, inventories, property and equipment
and intangibles. Interest capitalized was approximately $77,000 and $170,000
during the years ended December 31, 1999 and 1998, respectively.
5. Capital Shares
Holders of the Series A and Series B Preferred Shares, collectively the
"Preferred Shares" are entitled to receive when, as, and if declared by the
Board of Directors, cash dividends which are cumulative and cumulate quarterly
at the rate of 9 percent of the liquidation value per share. The Company may be
required to pay such dividends to the extent funds are legally available on and
after August 15, 1997. The Series A and Series B Preferred Shares' liquidation
value is defined as $2,000 per share and $1,000 per share, respectively, plus
all cumulative and unpaid dividends through the date of liquidation. Cumulative
unpaid dividends on the shares at December 31, 1999 amount to approximately
$13,340,000.
Each issued and outstanding share of Series A Preferred Shares is entitled to
one vote. Series B Preferred Shares have no voting rights.
F-10
Axxess Technologies, Inc.
Notes to Financial Statements (Continued)
5. Capital Shares (continued)
The Preferred Stock may be redeemed, in whole, by the Company at any time upon
the approval of the Company's Board of Directors and the holders of two-thirds
of the then issued and outstanding shares of the Series A and Series B Preferred
Shares voting together as a class at a price, not to exceed liquidation value
per share, and on the terms approved by such holders.
The Company also has the option to convert all or a portion of the Series A and
Series B Preferred Shares into one or more term notes payable. The principal
amount will be equal to the liquidation value of the Series A and Series B
Preferred Shares converted plus cumulative and unpaid dividends. These notes
would bear interest at 9 percent, payable quarterly, until five years from the
date of conversion when all remaining principal and unpaid interest is due and
payable.
6. Stock Option Plan
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued To Employees" (APB 25) and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
During August 1994, the Company adopted a stock option plan, which after its
1996 amendment, authorizes the issuance of up to 346,155 common shares, expiring
ten years from the date of grant and which generally vest ratably over four
years from the date of grant or earlier at the discretion of the Board of
Directors. Options granted are based on management's estimate of the fair value
of the common shares on the date of grant.
Pro forma information regarding net income and earnings per share is required by
FASB Statement No. 123, and would be determined as if the Company had accounted
for its employee stock options under an option pricing method allowed by that
Statement. There were no options granted in 1998 or 1999 except for options
granted to purchase 3,000 common shares at $20.00 per share issued outside of
the Plan agreement to an employee. Options granted prior to 1998 are not
material for pro forma disclosure.
F-11
Axxess Technologies, Inc.
Notes to Financial Statements (Continued)
6. Stock Option Plan (continued)
A summary of the Company's stock option activity for the years ended December
31, 1999 and 1998 follows:
Weighted-
Average
Exercise
Shares Price/Share
------------------------------------
Outstanding at December 31, 1997 88,820 $ .10
Granted - -
Canceled - -
Exercised (39,000) .10
-----------------
Outstanding at December 31, 1998 49,820 .10
Granted - -
Canceled - -
Exercised - -
-----------------
Outstanding at December 31, 1999 49,820 .10
=================
Exercisable December 31, 1999 40,945
=================
The weighted-average remaining contractual life of options outstanding at
December 31, 1999 was approximately one year.
7. Income Taxes
The provision (benefit) for income taxes is comprised of the following for the
years ended December 31:
1999 1998
------------------------------------
Current:
Federal (446,339) $ 681,000
State 93,670 79,000
------------------------------------
(352,669) 760,000
Deferred:
Federal (301,384) 852,000
State (111,121) 158,000
------------------------------------
(412,505) 1,010,000
------------------------------------
$ (765,174) $ 1,770,000
====================================
F-12
Axxess Technologies, Inc.
Notes to Financial Statements (Continued)
7. Income Taxes (continued)
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:
December 31
1999 1998
----------------------------------------------------------------------
Current Long-Term Current Long-Term
----------------------------------------------------------------------
Deferred tax liabilities:
Book over tax basis in assets $ - $(2,893,416) $ - $(2,175,000)
----------------------------------------------------------------------
Total deferred tax liabilities - (2,893,416) - (2,175,000)
Deferred tax assets:
Accrued expenses 553,911 98,932 832,000 -
Inventory reserves 130,202 - 156,000 -
Tax in excess of book basis of fixed assets
acquired - 109,978 - 120,000
Deferred revenue 23,145 - 18,000 -
Accounts receivable allowance 218,280 - 10,000 -
Minimum tax credits - 467,230 - 468,000
General business credits - 133,758 - 224,000
Net operating loss carryforwards - 1,107,044 - -
Other, net 162,004 - 46,000 -
----------------------------------------------------------------------
Total deferred tax assets 1,087,542 1,916,942 1,062,000 812,000
----------------------------------------------------------------------
Net deferred tax assets (liability) $1,087,542 $(976,474) $1,062,000 $(1,363,000)
======================================================================
The Company has net operating losses for federal income taxes of $2,700,000
which begin expiring in 2019 and losses available for future state income taxes
of $4,400,000 which begin expiring in 2004.
F-13
Axxess Technologies, Inc.
Notes to Financial Statements (Continued)
7. Income Taxes (continued)
The Company has settled an IRS exam with respect to its years ended December 31,
1996 and 1997. The settlement resulted in an increase in net federal and state
taxes payable of approximately $50,000 for 1996 and 1997. The IRS has also
notified the Company of its intent to examine the Company's 1998 tax return.
While the ultimate outcome is uncertain, management believes that the
assessments, if any, will result in future income tax deductions that will
represent additional deferred tax assets and that interest and penalties will
not be material.
At December 31, 1999, the Company has $133,758 of research and development
credits for federal purposes which begin to expire in 2009 and $467,230 of
minimum tax credits for federal purposes which do not expire. During 1999 and
1998, the Company paid approximately $71,000 and $2,119,000 for income taxes,
respectively.
8. Commitments and Contingencies
Leases
The Company leases manufacturing and office facilities and certain equipment
under noncancelable operating leases that expire in various years through 2008.
In addition, the Company is responsible for certain monthly operating and
maintenance expenses on the manufacturing and office facilities. Total rent
expense, including operating and maintenance expenses, was approximately
$1,782,000 and $1,421,000 during the years ended December 31, 1999 and 1998,
respectively.
Future minimum payments under noncancelable operating leases with initial terms
of one year or more consisted of the following at December 31, 1999:
2000 $ 1,499,678
2001 1,235,405
2002 1,218,499
2003 1,276,326
2004 1,285,680
Thereafter 4,369,451
---------------
Total future minimum lease payments $10,885,039
===============
F-14
Axxess Technologies, Inc.
Notes to Financial Statements (Continued)
8. Commitments and Contingencies (continued)
Litigation
The Company is a party to certain litigation and other proceedings which arise
out of the ordinary course of business. Based upon advice from outside legal
counsel, management is of the opinion that these matters will have no material
effect on the Company's financial position or results of operations.
9. Significant Customers
During 1999 and 1998, the Company had two customers which accounted for in
excess of 10 percent of total sales each.
1999 1998
-------------------------------------
Customer A 40% 32%
Customer B 10% -
Customer C - 14%
The Company performs ongoing credit risk evaluations of its customers' financial
condition and generally does not require collateral. The Company's significant
customers are major, well-known businesses in the retail industry. Credit losses
have been provided for in the financial statements and have been within
management's expectations.
10. 401K Plan
Effective October 1, 1996, the Company adopted the Axxess Technologies, Inc.
401K Retirement Plan (the Plan). Employees of the Company over the age of 21 are
eligible to enroll in the Plan quarterly, after 12 months of consecutive
service. Employees are able to defer up to 17 percent of their salary into the
Plan. The Company matches 50 percent of up to 6 percent of employee deferrals at
December 31 to active employees at that date. The Company's contributions vest
equally over three years. The Company recorded contribution expense of $191,000
and $233,000 for the years ended December 31, 1999 and 1998, respectively.
F-15
Axxess Technologies, Inc.
Notes to Financial Statements (Continued)
11. Impact of Year 2000 (Unaudited)
In late 1999, the Company completed its remediation and testing of systems. As a
result of those planning and implementation efforts, the Company experienced no
significant disruptions in mission critical information technology and
non-information technology systems and believes those systems successfully
responded to the Year 2000 date change. The Company is not aware of any material
problems resulting from Year 2000 issues, either with its products, its internal
systems, or the products and services of third parties. The Company will
continue to monitor its mission critical computer applications and those of its
suppliers and vendors throughout the year 2000 to ensure that any latent Year
2000 matters that may arise are addressed promptly.
12. Subsequent Event
During April 2000, SunSource, Inc. acquired all of the Company's outstanding
preferred and common stock. Upon completion of the acquisition, all of the
Company's debt described in Note 4, which was in default, was paid in full.
F-16
SIGNATURE
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 hereunto duly authorized.
SUNSOURCE, INC.
Date: May 11, 2000 By: /s/ Joseph M. Corvino
---------------------------------
Joseph M. Corvino
Vice President- Finance and Chief
Financial Officer