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 SEPTEMBER 30, 2001
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
------------------------ -----------------------------------------
11.6% Junior Subordinated Debentures
Preferred Securities Guaranty
Preferred Share Purchase Rights
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 NO X
----- -----
On November 14, 2001, there were 7,135,124 Common Shares outstanding.
Page 1 of 31
SUNSOURCE INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE(S)
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 2001
(Unaudited), December 31, 2000 and September 30, 2000
(Unaudited) 3
Consolidated Statements of Operations for
the Three Months ended September 30, 2001 and 2000
(Unaudited) 4
Consolidated Statements of Operations for
the Nine Months ended September 30, 2001 and 2000
(Unaudited) 5
Consolidated Statements of Cash Flows
for the Three Months ended September 30, 2001 and 2000
(Unaudited) 6
Consolidated Statements of Cash Flows
for the Nine Months ended September 30, 2001 and 2000
(Unaudited) 7
Consolidated Statement of Changes in Stockholders'
Equity for the Nine Months ended September 30, 2001
(Unaudited) 8
Notes to Consolidated Financial Statements
(Unaudited) 9-17
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18-28
PART II. OTHER INFORMATION 29 -30
SIGNATURES 31
Page 2 of 31
SUNSOURCE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
SUCCESSOR PREDECESSOR
--------------- -------------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2001 DECEMBER 31, 2000
ASSETS (UNAUDITED) 2000 (UNAUDITED)
------ --------------- --------------- ------------------
Current assets:
Cash and cash equivalents $ 19,679 $ 2,811 $ 3,736
Restricted cash -- 10,955 --
Marketable securities 7,313 -- --
Accounts receivable, net 35,578 46,912 56,513
Inventories 49,758 78,658 78,403
Deferred income taxes 11,594 14,483 9,964
Net assets held for sale and liquidation 407 1,767 3,387
Income taxes receivable -- 27 12,532
Other current assets 6,142 6,167 3,231
--------- --------- ---------
Total current assets 130,471 161,780 167,766
Property and equipment, net 55,716 58,314 59,331
Goodwill and other intangibles 129,471 77,949 79,761
Deferred income taxes 22,472 15,118 3,791
Other investments 20,000 1,030 232
Deferred financing fees 5,896 5,835 4,431
Other assets 3,462 2,115 9,228
Cash surrender value of life insurance policies -- -- 12,551
--------- --------- ---------
Total assets $ 367,488 $ 322,141 $ 337,091
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 20,416 $ 39,785 $ 44,171
Current portion of senior term loans 3,500 375 5,000
Current portion of capitalized lease obligations 170 915 933
Current portion of unsecured subordinated notes -- 2,677 2,400
Notes payable -- 624 --
Dividends / distributions payable 1,019 1,019 1,019
Deferred income tax liability 260 594 --
Accrued expenses:
Salaries and wages 2,512 4,307 4,799
Income and other taxes 5,354 6,605 4,789
Deferred compensation 2,187 4,543 --
Accrued liabilities on discontinued operations 1,413 2,407 2,837
Other accrued expenses 16,456 20,977 18,857
--------- --------- ---------
Total current liabilities 53,287 84,828 84,805
Long term unsecured subordinated notes 40,000 40,960 11,562
Long term senior term loans 51,500 2,125 10,774
Bank revolving credit 35,113 55,111 73,027
Long term capitalized lease obligations 214 627 777
Deferred compensation 6,126 7,868 12,764
Deferred income tax liability 3,846 1,629 --
Other non-current liabilities 1,303 1,541 1,619
--------- --------- ---------
Total liabilities 191,389 194,689 195,328
--------- --------- ---------
Guaranteed preferred beneficial interests in the
Company's junior subordinated debentures 102,072 114,848 114,936
--------- --------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par, 1,000,000 shares
authorized, none outstanding -- -- --
Preferred stock Series B, $.01 par, 275,000 shares
authorized, none outstanding -- -- --
Common stock, $.01 par, 20,000,000 shares authorized,
7,135,124 issued and outstanding at September 30, 2001,
7,352,137 issued and 6,873,037 outstanding at December 31, 2000
and 7,344,778 issued and 6,865,678 outstanding at September 30, 2000 71 74 73
Additional paid-in capital 73,956 22,808 21,881
Retained earnings (accumulated deficit) -- (617) 17,293
Unearned compensation -- (428) (472)
Accumulated other comprehensive income -- (528) (3,243)
Treasury stock, at cost -- (8,705) (8,705)
--------- --------- ---------
Total stockholders' equity 74,027 12,604 26,827
--------- --------- ---------
Total liabilities and stockholders' equity $ 367,488 $ 322,141 $ 337,091
========= ========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 3 of 31
SUNSOURCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
FOR THE THREE MONTHS ENDED,
(dollars in thousands)
SEPTEMBER 30, SEPTEMBER 30,
2001 2000
---- ----
Predecessor
Net sales $ 114,767 $ 116,111
Cost of sales 65,551 68,758
--------- ---------
Gross profit 49,216 47,353
--------- ---------
Operating expenses:
Selling, general and administrative expenses 38,302 38,884
Depreciation 3,505 2,893
Amortization 989 1,006
--------- ---------
Total operating expenses 42,796 42,783
--------- ---------
Other income (expenses) (105) 14
--------- ---------
Income from operations 6,315 4,584
Interest expense, net 2,921 2,959
Distributions on guaranteed preferred
beneficial interests 3,058 3,058
Equity in earnings of affiliate (Note 3) 118 525
--------- ---------
Income (loss) before provision
for income taxes 454 (908)
Income tax benefit (634) (438)
--------- ---------
Income (loss) from continuing operations 1,088 (470)
--------- ---------
Discontinued operations (Note 1)
Income from operations of discontinued
segments, net of income taxes of $10 -- 10
Loss on disposal of discontinued segments,
net of income tax benefit of $262 -- (488)
--------- ---------
Loss from discontinued operations -- (478)
--------- ---------
Net income (loss) $ 1,088 $ (948)
========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 4 of 31
SUNSOURCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
FOR THE NINE MONTHS ENDED,
(dollars in thousands)
SEPTEMBER 30, SEPTEMBER 30,
2001 2000
------------- -------------
Predecessor
Net sales $ 341,307 $ 360,117
Cost of sales 197,743 215,117
--------- ---------
Gross profit 143,564 145,000
--------- ---------
Operating expenses:
Selling, general and administrative expenses 113,443 123,770
Depreciation 9,593 6,481
Amortization 2,895 2,378
--------- ---------
Total operating expenses 125,931 132,629
--------- ---------
Other income (expenses) (398) 346
--------- ---------
Income from operations 17,235 12,717
Interest expense, net 9,222 8,416
Distributions on guaranteed preferred
beneficial interests 9,174 9,174
Gain (loss) on divestitures (Note 3) -- 49,115
Equity in earnings of affiliate (Note 3) 1,063 1,479
--------- ---------
Income (loss) before provision
for income taxes (98) 45,721
Provision for income taxes 1,229 5,085
--------- ---------
Income (loss) from continuing operations (1,327) 40,636
--------- ---------
Discontinued operations (Note 1)
Income from operations of discontinued
segments, net of income taxes of $85 -- 85
Gain on disposal of discontinued segments,
net of income tax benefit of $7,191 -- 1,869
--------- ---------
Income from discontinued operations -- 1,954
--------- ---------
Net income (loss) $ (1,327) $ 42,590
========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 5 of 31
SUNSOURCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE THREE MONTHS ENDED,
(dollars in thousands)
SUCCESSOR PREDECESSOR
------------- ------------------------------------
SEPTEMBER 30, SEPTEMBER 30,
(AT INCEPTION) 2001 2000
-------------- -------------------------------------
Cash flows from operating activities:
Net income (loss) $ -- $ 1,088 $ (948)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization -- 4,494 3,899
Loss from discontinued segments before taxes -- -- 730
Equity in earnings of affiliate -- (118) (525)
Deferred income tax benefit -- (144) --
Changes in current operating items:
Decrease (increase) in accounts receivable -- (2,430) 6,211
Decrease in inventories -- 691 269
Increase in income taxes receivable -- -- (648)
Decrese (increase) in other current assets -- 515 (478)
Increase (decrease) in accounts payable -- (2,046) 1,545
Increase (decrease) in other accrued liabilities -- (1,490) 64
Other items, net -- 636 842
--------- --------- ---------
Net cash provided by operating activities -- 1,196 10,961
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sale/liquidation of discontinued operations -- 173 --
Proceeds from sale of division, net of cash (Note 3) 17,136 -- --
Costs associated with sale/liquidation of discontinued operations -- (267) (373)
Proceeds from sale of property and equipment -- 93 95
Increase in net assets held for sale -- (100) (66)
Capital expenditures & contruction in process -- (4,400) (2,786)
Merger transaction fees -- (3,112) --
Other, net -- (1,945) (133)
--------- --------- ---------
Net cash provided by (used for) investing activities 17,136 (9,558) (3,263)
--------- --------- ---------
Cash flows from financing activities:
Borrowings under new credit agreements 100,113 -- --
Borrowings (repayments) under credit agreements, net (85,194) 13,109 (3,873)
Repayment of long term debt (2,250) (125) (1,726)
Repayment of subordinated notes (8,803) -- --
Repayments under other credit facilities, net -- (212) (127)
Principal payments under capitalized lease obligations -- (226) (238)
Repayment of note issued for purchase of treasury stock (1,261) -- --
Prepayment penalty (1,675) -- --
Financing fees (4,447) -- --
--------- --------- ---------
Net cash provided by (used for) financing activities (3,517) 12,546 (5,964)
--------- --------- ---------
Net increase in cash and cash equivalents 13,619 4,184 1,734
Cash and cash equivalents at beginning of period 6,060 1,876 2,002
--------- --------- ---------
Cash and cash equivalents at end of period $ 19,679 $ 6,060 $ 3,736
========= ========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 6 of 31
SUNSOURCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE NINE MONTHS ENDED,
(dollars in thousands)
Successor Predecessor
------------- ------------------------------------
September 30, September 30,
(at inception) 2001 2000
-------------- ------------------------------------
Cash flows from operating activities:
Net income (loss) $ -- $ (1,327) $ 42,590
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Depreciation and amortization -- 12,488 8,859
Loss from discontinued segments before taxes -- -- 5,152
Gain on contribution from subsidiaries -- -- (49,115)
Equity in earnings of affiliate -- (1,063) (1,479)
Deferred income tax provision -- 1,044 --
Changes in current operating items:
Increase in accounts receivable -- (13,792) (1,146)
Decrease in inventories -- 1,228 5,535
Decrease (increase) in income taxes receivable -- 27 (874)
Decrease (increase) in other current assets -- (356) 1,808
Decrease in accounts payable -- (185) (480)
Decrease in other accrued liabilities -- (4,881) (4,952)
Other items, net -- 2,013 (74)
--------- --------- ---------
Net cash provided by (used for) operating activities -- (4,804) 5,824
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of subsidiary, net of cash (Note 3) 17,136 -- --
Proceeds from contribution of subsidiaries -- -- 105,000
Costs associated with contribution of subsidiaries -- -- (655)
Proceeds from sale/liquidation of discontinued operation -- 1,623 31,446
Costs associated with sale/liquidation of discontinued operations -- (1,214) (1,500)
Payment for acquired business -- -- (87,000)
Proceeds from sale of property and equipment -- 718 1,219
Increase in net assets held for sale -- (43) (1,272)
Capital expenditures & contruction in process -- (12,179) (6,268)
Merger transaction fees -- (3,112) --
Other, net -- (3,462) (513)
--------- --------- ---------
Net cash provided by (used for) investing activities 17,136 (17,669) 40,457
--------- --------- ---------
Cash flows from financing activities:
Borrowings under new credit agreements 100,113 -- --
Borrowings (repayments) under credit agreements, net (85,194) 30,083 (29,764)
Repayment of long term debt (2,250) (250) (5,726)
Repayment of subordinated notes (8,803) (2,785) (9,600)
Repayments under other credit facilities, net -- (624) (376)
Principal payments under capitalized lease obligations -- (707) (722)
Repayment of note issued for purchase of treasury stock (1,261) -- --
Prepayment penalty (1,675) -- --
Financing fees (4,447) 5 (1,632)
--------- --------- ---------
Net cash provided by (used for) financing activities (3,517) 25,722 (47,820)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 13,619 3,249 (1,539)
Cash and cash equivalents at beginning of period 6,060 2,811 5,275
--------- --------- ---------
Cash and cash equivalents at end of period $ 19,679 $ 6,060 $ 3,736
========= ========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 7 of 31
SUNSOURCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001,
(dollars in thousands)
Additional
Common Paid-in Accumulated Unearned
Stock Capital Deficit Compensation
------- ---------- ----------- ------------
Beginning balance at December 31, 2000 - Predecessor $74 $22,808 $(617) $(428)
Net loss (1,327)
Issuance of 16,807 shares of common stock
to certain non-employee directors 58
Issuance of 366,804 shares of common stock
in exchange for warrants and stock options 3 (3)
Amortization of stock option discount 55
Amortization of vested portion of
restricted stock 75
Purchase of 121,524 shares of common stock
for treasury
Cancellation of 600,624 shares of common stock
in treasury (9,966)
-------- -------- -------- --------
Ending balance at September 30, 2001 - Predecessor 77 12,897 (1,944) (298)
Close predecessor's stockholders' equity at merger date (77) (12,897) 1,944 298
Issuance of 7,135,124 shares of common stock
to shareholders 71 73,956
-------- -------- -------- --------
Ending balance - September 30, 2001 - Successor $71 $73,956 $ -- $ --
======== ======== ======== ========
Accumulated
Other Total
Comprehensive Treasury Stockholders'
Income (1) Stock Equity
------------- -------- --------------
Beginning balance at December 31, 2000 - Predecessor $(528) $(8,705) $12,604
Net loss (1,327)
Issuance of 16,807 shares of common stock
to certain non-employee directors 58
Issuance of 366,804 shares of common stock
in exchange for warrants and stock options --
Amortization of stock option discount 55
Amortization of vested portion of
restricted stock 75
Purchase of 121,524 shares of common stock
for treasury (1,261) (1,261)
Cancellation of 600,624 shares of common stock
in treasury 9,966 --
-------- -------- --------
Ending balance at September 30, 2001 - Predecessor (528) -- 10,204
Close predecessor's stockholders' equity at merger date 528 (10,204)
Issuance of 7,135,124 shares of common stock
to shareholders 74,027
-------- -------- --------
Ending balance - September 30, 2001 - Successor $ -- $ -- $74,027
======== ======== ========
(1) Cumulative foreign translation adjustment represents the only item of other
comprehensive income.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 8 of 31
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION:
On September 26, 2001, SunSource Inc. (the "Company" or "SunSource") was
acquired by Allied Capital Corporation ("Allied Capital"). Pursuant to the terms
and conditions of an Agreement and Plan of Merger dated as of June 18, 2001,
certain members of management and other stockholders continued as stockholders
of the Company after the merger. The total transaction value was $74,027,
consisting of the cash purchase price paid for the outstanding common stock of
the Company aggregating $71,494 and management's common shares valued at $2,533.
The Company survived the merger as an independently managed, privately held
portfolio company of Allied Capital. The Company's Consolidated Balance Sheets
and its related Statements of Operations, Cash flows and Changes in
Stockholders' equity for the periods presented as of and prior to September 30,
2001 are referenced herein as the predecessor financial statements (the
"Predecessor"or "Predecessor Financial Statements"). The Company's Consolidated
Balance Sheet as of September 30, 2001 and its related Statement of Operation,
Cash Flow and Changes in Stockholders' Equity for the period presented at
inception of the Merger Transaction are referenced herein as the successor
financial statements(the "Successor"or "Sucessor Financial Statements"). The
Successor Financial Statements include the effects of the Company's debt
refinancing and sale of an operating subsidiary completed subsequent to the
Merger Transaction (see allocation of the purchase price below and reference
Notes 3 and 4 for information related to these events). The Company's final two
business days of operation in September 2001 are immaterial for separate
presentation. Accordingly, the Successor presentation is limited to the debt
refinancing and sale of an operating subsidiary.
The accompanying Predecessor Financial Statements include the consolidated
accounts of the Company and its wholly-owned subsidiaries, principally The
Hillman Group, Inc. (the "Hillman Group" or "Hillman"), and SunSource Technology
Services Company, L.L.C. ("Technology Services" or "STS"), and includes an
investment trust, SunSource Capital Trust (the "Trust"). The accompanying
Successor Financial Statements at inception of the Merger Transaction consist of
the consolidated accounts of the Company and its wholly-owned subsidiaries
including primarily the Hillman Group and the Trust. The Company also has an
investment in an affiliate, G-C Sun Holdings, L.P., operating as Kar Products.
All significant intercompany balances and transactions have been eliminated.
The accompanying Successor Financial Statements reflect the allocation of the
aggregate purchase price of $74,027 to the assets and liabilities of SunSource
based on fair values at the date of the merger in accordance with Accounting
Principles Board Opinion #16, Accounting for Business Combinations for
transactions initiated prior to June 30, 2001. The following table reconciles
the fair value of the acquired assets and assumed liabilities to the total
purchase price:
Accounts Receivable $ 60,704
Inventory 77,430
Property and equipment 59,321
Goodwill 108,060
Intangible assets 12,924
Other current assets 31,322
Other non-current assets 41,899
------
Total assets acquired $ 391,660
Less:
Liabilities assumed 215,561
Guaranteed preferred beneficial
interests in the Company's
junior subordinated debentures 102,072
-------
Total Assumed Liabilities 317,633
---------
Total Purchase Price $ 74,027
=========
Page 9 of 31
1. BASIS OF PRESENTATION, CONTINUED
The total liabilities include transaction related costs aggregating $4,723
which were associated with Allied Capital's purchase of the Company and assumed
by the Company in accordance with push down accounting.
The following unaudited pro forma consolidated net sales and net loss for the
nine months ended September 30, 2001 and the year ended December 31, 2000,
assume that the acquisition of SunSource, its subsequent refinancing and the
acquisitions and dispostions described in Note 3 were consummated on January 1,
2000:
Y-T-D
2001 2000
----- ----
Net Sales $188,746 $238,338
Net Loss $ (1,041) $ (6,434)
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, operations 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 the rules and regulations of the
Securities and Exchange Commission for quarterly reports on Form 10-Q
requirements although the Company believes that disclosures are adequate to make
the information presented not misleading. These financial statements should 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,
2000; Form 10-Q for the quarter ended June 30, 2001; the proxy statement dated
August 28, 2001 related to the Merger Transaction; Form 8-K, Report of
Unscheduled Material Events, filed on June 21, 2001; Form 8-K, Report of Change
in Control of Registrant filed on October 10, 2001; and Form 8-K, Report of
Disposition of Assets filed on October 15, 2001.
DISCONTINUED OPERATIONS:
In December 1999, the Company's Board of Directors approved management's plan to
dispose of the glass business, Harding Glass, Inc. ("Harding"). In December
2000, the Company's Board of Directors also approved management's plan to
liquidate the Company's Integrated Supply - Mexico business (the "Mexican
segment"). Accordingly, Harding and the Mexican business segments have been
accounted for as discontinued operations with their respective results of
operations 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. The liquidation of the Mexican Segment was
substantially completed as of June 30, 2001. See Note 3, Contribution of
Subsidiaries/Acquisitions/Divestitures.
Page 10 of 31
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION, CONTINUED:
DISCONTINUED OPERATIONS, CONTINUED:
Following is summary financial information for the Company's discontinued
Harding and Mexican operations:
Three Months Nine Months
Ended 9/30/00 Ended 9/30/00
------------- -------------
NET SALES:
Harding $ -- $ 27,966
Mexican segment 3,861 11,742
-------- --------
Consolidated net sales $ 3,861 $ 39,708
======== ========
INCOME FROM
DISCONTINUED OPERATIONS:
Before income taxes
Harding $ -- $ --
Mexican segment 20 170
-------- --------
Total income from
discontinued operations
before income taxes $ 20 $ 170
Income tax expense:
Harding
Mexican segment (10) (85)
-------- --------
Total income tax expense $ (10) $ (85)
-------- --------
Net income from
discontinued operations: $ -- $ --
Harding 10 85
-------- --------
Mexican segment
Total net income
from discontinued operations $ 10 $ 85
======== ========
GAIN (LOSS) ON DISPOSAL:
Harding $ (750) $ (5,322)
Mexican segment -- --
-------- --------
Total loss on disposal $ (750) $ (5,322)
-------- --------
Income tax benefit on disposal:
Harding $ 262 $ 7,191
Mexican segment -- --
-------- --------
Total tax benefit on disposal $ 262 $ 7,191
-------- --------
Total gain (loss) on disposal
from discontinued operations $ (488) $ 1,869
======== ========
TOTAL INCOME (LOSS) FROM
DISCONTINUED OPERATIONS:
HARDING $ (488) $ 1,869
MEXICAN SEGMENT 10 85
-------- --------
TOTAL INCOME (LOSS)
FROM DISCONTINUED OPERATIONS $ (478) $ 1,954
======== ========
Page 11 of 31
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION, CONTINUED:
DISCONTINUED OPERATIONS, CONTINUED:
No additional loss on disposal of the discontinued segments has been recorded
during the three and nine months ended September 30, 2001.
As of September 30, 2001, the Company had net assets held for sale of the
discontinued operations of $407 consisting of receivables, prepaid assets, and
property and equipment, and accrued liabilities of $1,413, which consists
primarily of severance and other termination-related liabilities.
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. RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards Board ("the FASB") issued
Statement of Financial Accounting Standards ("SFAS") 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 established accounting
and reporting standards for derivative financial instruments and hedging
activities, and requires the Company to recognize all derivatives as either
assets or liabilities on the balance sheet and measure them at fair value. Gains
and losses resulting from changes in fair value are accounted for depending on
the use of the derivative and whether it is designated and qualifies for hedge
accounting. In June 1999, the FASB issued SFAS 137, which deferred the
implementation of SFAS 133. The Company adopted SFAS 133 during the first
quarter of 2001. The adoption of SFAS 133 has not had a material impact on the
Company's financial position and results of operations because the Company
generally does not engage in derivative transactions.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" ("FAS 141")
and SFAS No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). FAS 141
requires that all business combinations be accounted for under the purchase
method, and the use of the pooling-of-interests method is prohibited for
business combi-nations initiated after June 30, 2001. FAS 141 also establishes
criteria for the separate recognition of intangible assets acquired in a
business combination. FAS 142 requires that goodwill no longer be amortized to
earnings, but instead be subject to periodic testing for impairment. FAS 142 is
effective for fiscal years beginning after December 15, 2001, with earlier
application permitted only in specified circumstances. Management is currently
evaluating the expected impact of FAS 141 and FAS 142.
At the end of June 2001, the FASB issued FASB Statement No. 143, Accounting for
Asset Retirement Obligations. FAS 143 requires that obligations associated with
the retirement of a tangible long-lived asset be recorded as a liability when
those obligations are incurred, with the amount of the liability initially
measured at fair value. FAS 143 will be effective for financial statements for
fiscal years beginning after June 15, 2002. Management is currently evaluating
the expected impact of FAS 143.
FAS 144 supersedes FAS 121, accounting for the Impairment of Long-Lived assets
and for Long-Lived Assets to be Disposed OF, and the accounting and reporting
provisions of APB 30, Reporting the Results of Operations, Reporting the Effects
of Disposal of a
Page 12 of 31
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS)
2. RECENT ACCOUNTING PRONOUNCEMENTS, CONTINUED:
Segment of a Business and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the disposal of a segment of a business. FAS 144
was necessary to resolve significant implementation issues related to SFAS 121.
Although the proposed statement supercedes FAS No. 121, it retains the
fundamental measurement provisions for assets that are to be disposed of by
sale. Additionally, FAS 144 retains the basic provisions of APB 30 for the
presentation of discontinued operations in the income statement but broadens
that presentation to include a component of an entity, rather than a segment of
a business. The provisions of FAS 144 are effective for financial statements
issued for fiscal years beginning after December 15, 2001 and interim periods
within those fiscal years. Management is currently evaluating the expected
impact of FAS 144.
3. CONTRIBUTION OF SUBSIDIARIES/ACQUISITIONS/DIVESTITURES:
On September 28, 2001 the Company sold substantially all of the assets of its
Technology Services subsidiary. The sales price aggregated $25,546 in cash and
preferred stock, subject to post-closing adjustments, plus the assumption of
certain liabilities by the buyer. The sale of assets resulted in no gain or loss
on the sale transaction because the assets and liabilities of Technology
Services were recorded at fair value in conjunction with the Merger Transaction.
As of September 30, 2001, the Company's consolidated balance sheet includes
$5,000 in other investments related to the Company's investment in the preferred
stock of the buyer of the Technology Services business. The cash proceeds from
the sale will be distributed to Allied Capital and certain members of
management, who are the remaining shareholders of the Company.
In December 2000, the Board approved a plan to liquidate the Mexican segment
which provided comprehensive inventory management services of maintenance,
repair and operating materials to large manufacturing plants in Mexico. The
Company recorded a pre-tax loss on liquidation of approximately $4,572
representing non-cash charges for accumulated translation losses, the write-down
of inventories and other assets, and other liquidation-related costs. The
liquidation process was substantially completed as of June 30, 2001.
On November 3, 2000, the Company's Hillman Group purchased inventory and other
assets of the Sharon-Philstone division of Pawtucket Fasteners, L.P. of Rhode
Island. Hillman assumed the sales and servicing of the Sharon-Philstone
division, distributors of fasteners to the retail hardware marketplace with
annual sales of approximately $14,000 for the twelve-month period prior to
acquisition. The purchase price was $5,460 for inventory and other assets
including certain post-closing adjustments.
On April l3, 2000, the Company sold substantially all of the assets of Harding
for a cash purchase price of $30,592 plus the assumption by the buyer of certain
liabilities aggregating $12,693, subject to certain post-closing adjustments.
On April 7, 2000, the Company's Hillman Group acquired Axxess Technologies, Inc.
("Axxess" or "Axxess Technologies"), a Tempe, Arizona manufacturer of key
Page 13 of 31
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS)
3. CONTRIBUTION OF SUBSIDIARIES/ACQUISITIONS/DIVESTITURES, CON'T.:
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 which was repaid on April 7,
2001 and 2) an $11,000 note which was paid on September 28, 2001 at a discount
as part of the Company's debt refinancing arrangement. The aggregate
consideration for the transaction was $111,537, including transaction costs of
$1,537, plus the assumption of certain liabilities aggregating $14,018. The
Hillman Group recorded goodwill and other intangible assets of $48,259 related
to this acquisition. Axxess' sales aggregated $19,364 for the three months ended
March 31, 2000, and its results of operations are included in the results of the
Hillman Group from the date of acquisition.
On March 2, 2000, the Company contributed the interests in its Kar Products,
Inc. and A & H Bolt & Nut Company Limited operations (collectively, "Kar" or the
"Kar Products" 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 and
retained a minority ownership in G-C. Affiliates of Glencoe hold a controlling
interest in G-C. SunSource 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.
On October 4, 2000, the Company's Kar Products affiliate through the partnership
formed with Glencoe Capital acquired all of the outstanding stock of Brampton
Fastener Co. Limited, d/b/a Brafasco, based in Toronto, Canada. G-C purchased
the outstanding stock of Brafasco for cash and notes. Brafasco is a supplier of
maintenance and repair products serving primarily industrial customers. Brafasco
had sales of $28,534 ($CDN) for the year ended December 31, 2000. As a result of
this transaction, the Company holds a 44% ownership in the Kar Products
affiliate.
The Company accounts for its investment in the partnership under the equity
method. Prior to the Merger Transaction, the Company had an investment in G-C of
$2,207. As of September 30, 2001, the Company's consolidated balance sheet
includes $15,000 in other investments which represents the Company's investment
in G-C at fair value at the date of merger.
4. LINES OF CREDIT AND LONG-TERM DEBT:
On September 28, 2001, the Company, through its Hillman subsidiary, refinanced
its $115,000 bank revolving credit and $21,500 term loan with $105,000 in senior
secured credit facilities (the "Refinancing") consisting of $50,000 revolving
credit (the "Revolver"), a $20,000 term loan (the "Term Loan A"), and a $35,000
term loan (the "Term Loan B"). The new credit agreement has a five-year term for
the Revolver and Term Loan A and a seven-year term for the Term Loan B (the
"Credit Agreement"). The Hillman Group is the borrower (the "Borrower") under
the Credit Agreement. The Credit Agreement provides borrowings at interest rates
based on the London Interbank Offered Rates (the "LIBOR") plus a margin of
between 3.25% and 3.75% (the "LIBOR Margin"), or prime (the "Base Rate") plus a
margin of between 2.0% and 2.5% (the "Base Rate Margin"). In accordance with the
Credit Agreement, letter of credit commitment fees are based on the average
daily face amount of each outstanding letter of credit multiplied by three and
one quarter percent (3.25%) per annum.
Page 14 of 31
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS)
4. LINES OF CREDIT AND LONG-TERM DEBT, CONTINUED:
As of September 30, 2001, the Company had $8,709 available under the Revolver.
The Company had $90,497 of outstanding debt at September 30, 2001, consisting of
revolver borrowings of $35,113, outstanding term loans of $55,000 (Term Loan A
of $20,000 and Term Loan B of $35,000) and capital lease obligations of $384.
The Credit Agreement, among other provisions, contains financial covenants
requiring the maintenance of specific coverage ratios and levels of financial
position, restricts the incurrence of additional debt, and the sale of assets,
and permits acquisitions with the consent of the lenders. If the Company sells a
significant amount of assets as defined in the Credit Agreement, it must make a
repayment in an amount equal to the net proceeds of such sale. Such repayments
shall be applied to the Term Loans and at any time after the Term Loans have
been prepaid in full, such repayments shall then be applied to reduce the
outstanding principal balance of the Revolver.
Accounts payable includes $6,963 representing checks issued and outstanding as
of September 30, 2001, for which funds would have been drawn against the
Company's revolving credit facility if they had been presented on that date.
On April 7, 2000, in connection with the acquisition of Axxess, the Company
issued a $12,000 unsecured subordinated note. In connection with the sale of
Harding on April 13, 2000, the Company repaid $9,600 of this unsecured
subordinated note and the balance of $2,400 was repaid on April 6, 2001 along
with accrued interest of $385.
On December 28, 2000, the Company issued $30,000 of unsecured subordinated notes
to Allied Capital which was amended on September 28, 2001 to increase the
existing subordinated debenture to $40,000 maturing on September 29, 2009 (the
"Amended Subordinated Debt Issuance"). The additional $10,000 in cash proceeds
generated from the Amended Subordinated Debt Issuance was used in part to repay
an unsecured subordinated note held by Allied Capital in the amount of $8,803 in
conjunction with the Refinancing. Interest on the Amended Subordinated Debt
Issuance is at a fixed rate of 18.0% per annum, with cash interest payments
required on a quarterly basis at a fixed rate of 13.5% commencing November 15,
2001. The outstanding principal balance of the Amended Subordinated Debt
Issuance shall be increased on a quarterly basis at the remaining 4.5% fixed
rate (the "PIK Amount"). All of the PIK Amounts are due on the fifth anniversary
of the Amended Subordinated Debt Issuance.
5. 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.
Page 15 of 31
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS)
5. CONTINGENCIES, CONTINUED:
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.
6. STOCKHOLDERS' EQUITY:
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 16,807 common shares in the first nine months
of 2001, which resulted in a compensation charge of $58.
STOCK OPTIONS
As of September 25, 2001, the Company had 1,120,000 stock options outstanding
under the 1998 SunSource Inc. Equity Compensation Plan (the "Existing Plan"). On
September 26, 2001, in conjunction with the Merger Transaction, 131,500 of these
options were converted to common shares and 545,500 options were cancelled. The
balance of the outstanding options will remain in effect pursuant to the same
terms and conditions of the Existing Plan except that these roll-over options
aggregating 443,000 became fully vested in connection with the Merger
Transaction.
In conjunction with the Merger Transaction, the Company has reserved 1,337,316
stock options for issuance under the SunSource Inc. 2001 Stock Incentive Plan
(the "New Plan"). Under the New Plan, the stock options are intended to vest
over four years with 25% of the options vesting on each anniversary of the
merger through the end of year four.
Page 16 of 31
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS)
7. SEGMENT INFORMATION - PREDECESSOR:
Through September 30, 2001, the Company has two reportable segments which are
the Hillman Group and Technology Services. The two 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 nine months
ended September 30, 2001 and 2000. Corporate information is included to
reconcile segment data to the consolidated financial statements.
FOR THE THREE MONTHS ENDED, FOR THE NINE MONTHS ENDED,
SEPT 30, 2001 SEPT 30, 2000 SEPT 30, 2001 SEPT 30, 2000
-------------------------------- -------------------------------
NET SALES
Hillman Group $ 66,355 $ 60,756 $ 188,746 $ 158,516
Technology Services 48,412 55,355 152,561 178,431
--------- --------- --------- ---------
Consolidated net sales -
business segments $ 114,767 $ 116,111 $ 341,307 $ 336,947
--------- --------- --------- ---------
Expediter Segment -- -- -- 22,122
Integrated Supply-terminated contract -- -- -- 1,048
--------- --------- --------- ---------
Consolidated net sales $ 114,767 $ 116,111 $ 341,307 $ 360,117
========= ========= ========= =========
EBITDA
Hillman Group $ 13,265 $ 11,767 $ 35,007 $ 25,529
Technology Services (927) (1,438) (1,205) (1,421)
--------- --------- --------- ---------
EBITDA - business segments $ 12,338 $ 10,329 $ 33,802 $ 24,108
========= ========= ========= =========
RECONCILIATION OF SEGMENT PROFIT
TO INCOME (LOSS) BEFORE INCOME TAXES
EBITDA - business segments $ 12,338 $ 10,329 $ 33,802 $ 24,108
Equity in earnings of affiliate 118 525 1,063 1,479
Corporate expenses (1,529) (1,846) (4,079) (5,355)
EBITDA from contributed
subsidiaries, sold business,
and terminated contracts -- -- -- 2,823
--------- --------- --------- ---------
Consolidated EBITDA 10,927 9,008 30,786 23,055
Depreciation (3,505) (2,893) (9,593) (6,481)
Amortization (989) (1,006) (2,895) (2,378)
Interest expense, net (2,921) (2,959) (9,222) (8,416)
Distributions on guaranteed
preferred beneficial interests (3,058) (3,058) (9,174)
Gain on contribution of
subsidiaries -- -- -- 49,115
--------- --------- --------- ---------
Income(loss) before income taxes $ 454 $ (908) $ (98) $ 45,721
========= ========= ========= =========
Following is a supplemental table of segment tangible assets for ongoing
operations as of September 30, 2001, and December 31, 2000.
$ %
9/30/01 12/31/00 INC(DEC) INC(DEC)
-------- -------- --------- ---------
Hillman Group $147,243 $128,198 $ 19,045 14.9%
Technology Services -- 62,132 (62,132) (100.0%)
-------- -------- -------- -------
Total $147,243 $190,330 $ 15,196 22.6%
======== ======== ======== =======
Page 17 of 31
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
On September 26, 2001, SunSource Inc. (the "Company" or "SunSource") was
acquired by Allied Capital Corporation ("Allied Capital"). Pursuant to the terms
and conditions of an Agreement and Plan of Merger dated as of June 18, 2001,
certain members of management and other stockholders continued as stockholders
of the Company after the merger. The total transaction value was approximately
$74.0 million, consisting of the cash purchase price paid for the outstanding
common stock of the Company aggregating approximately $71.5 million and
management's common shares valued at approximately $2.5 million. The Company
survived the merger as an independently managed, privately held portfolio
company of Allied Capital. The Company's operations for the periods presented
prior to September 30, 2001 are referenced herein as the predecessor operations
(the "Predecessor" or "Predecessor Operations"). The Company's operations for
the period presented at inception of the Merger Transaction are referenced
herein as the successor operations (the "Successor" or "Successor Operations")
and include the effects of the Company's debt refinancing and sale of an
operating subsidiary completed subsequent to the Merger Transaction (see
Financing Arrangements and Acquisitions/Divestitures below). The Company's final
two business days of operation in September 2001 are immaterial for separate
presentation and have been reflected in the Predecessor Operations.
SunSource is one of the largest providers of value-added services and products
to retail markets in North America. The Company is organized as a single
business segment which is The Hillman Group, Inc.(the "Hillman Group" or
"Hillman"). Also, the Company has a minority investment in an affiliate, G-C Sun
Holdings, L.P., operating as Kar Products.
The Hillman Group provides merchandising services and products, such as,
fasteners and related hardware items, key duplication equipment, keys and
related accessories and identification equipment and items to retail outlets,
primarily hardware stores, home centers and mass merchants. Kar Products offers
personalized inventory management systems of maintenance, repair and operations
("MRO") products to industrial manufacturing customers and maintenance and
repair facilities.
FINANCING ARRANGEMENTS
On September 28, 2001, the Company through its Hillman Group subsidiary
refinanced its $115 million bank revolving credit and $21.5 million term loan
with $105 million in senior secured credit facilities (the "Refinancing"). The
new senior debt arrangement has a $50 million revolving credit line and a $20
million term loan that expires on September 27, 2006 and a $35 million term loan
that expires on September 27, 2008.
On December 28, 2000, the Company issued $30 million of unsecured subordinated
notes which was amended on September 28, 2001 to increase the existing
subordinated debenture to $40 million (the "Amended Subordinated Debt
Issuance"). The majority of the cash proceeds generated from the Amended
Subordinated Debt Issuance were used to repay at a discount the unsecured
subordinated note issued in connection with the acquisition of Axxess on April
7, 2000 (the "Axxess Subordinated Note Repayment").
Page 18 of 31
ACQUISITIONS/DIVESTITURES
On September 28, 2001 the Company sold substantially all of the assets of its
Technology Services business. The sales price aggregated $25.5 million in cash
and preferred stock, subject to post-closing adjustments, plus the assumption of
certain liabilities by the buyer.
In December 2000, the Board approved a plan to liquidate the Mexican segment
which provided comprehensive inventory management services of MRO materials to
large manufacturing plants in Mexico. The Company recorded a pre-tax loss on
liquidation of approximately $4.6 million representing non-cash charges for
accumulated translation losses, the write-down of inventories and other assets,
and other liquidation-related costs. The liquidation process was substantially
completed as of June 30, 2001. No additional loss on disposal was recorded for
the three and nine months ended September 30, 2001.
On November 3, 2000, the Company's Hillman Group purchased inventory and other
assets of the Sharon-Philstone division of Pawtucket Fasteners, L.P. of Rhode
Island. Hillman assumed the sales and servicing of the Sharon-Philstone
division, distributors of fasteners to the retail hardware marketplace with
annual sales of approximately $14 million for the twelve months ended prior to
the acquisition. The purchase price was $5.5 million for inventory and other
assets including certain post-closing adjustments.
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. Through December 31, 2000, the Company
had recorded a loss on the discontinued Harding segment of $22.0 million in the
aggregate, net of tax benefits. No additional loss on disposal has been recorded
for the three and nine months ended September 30, 2001.
On April 13, 2000, the Company completed the sale of its Harding Glass, Inc.
("Harding") subsidiary to VVP America. The Company sold substantially all of the
assets of Harding for a cash purchase price of $30.6 million plus the assumption
by the buyer of certain liabilities aggregating $12.7 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.
On April 7, 2000, the Company acquired Axxess Technologies, Inc. ("Axxess") a
Tempe, Arizona 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
$19.4 million for the three months ended March 31, 2000. Axxess results of
operations are included in the results of Hillman from the date of acquisition.
Page 19 of 31
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 assumed debt by G-C and retained a minority ownership in
G-C. Affiliates of Glencoe hold a controlling interest in G-C. SunSource
recorded a pre-tax gain on the transaction of approximately $49.1 million in the
first quarter of 2000. SunSource accounts for its investment in the partnership
under the equity method.
On October 4, 2000, SunSource's Kar Products affiliate, through the partnership
formed with Glencoe Capital, acquired all of the outstanding stock of Brampton
Fastener Co. Limited, d/b/a Brafasco, a supplier of maintenance and repair
products to industrial customers based in Toronto, Canada. Brafasco had sales of
$28.5 million ($CDN) for the year ended December 31, 2000. As a result of this
transaction, the Company holds a 44% ownership in the Kar Products affiliate.
Page 20 of 31
RESULTS OF OPERATIONS - PREDECESSOR
SEGMENT SALES AND PROFITABILITY FROM ONGOING OPERATIONS FOR THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
FOR THE THREE MONTHS ENDED,
---------------------------------------------
SEPTEMBER 30, 2001 SEPTEMBER 30, 2000
---------------------- ---------------------
% OF % OF
SALES AMOUNT TOTAL AMOUNT TOTAL
- ----- -------- -------- -------- -------
Hillman Group (a) $ 66,355 57.8% $ 60,756 52.3%
Technology Services 48,412 42.2% 55,355 47.7%
-------- -------- -------- --------
Consolidated net sales -
ongoing operations 114,767 100.0% 116,111 100.0%
Expediter Segment (b) -- --
Integrated Supply - terminated
contract (c) -- --
-------- --------
Consolidated Net Sales $114,767 $116,111
======== ========
FOR THE NINE MONTHS ENDED,
------------------------------------------
SEPTEMBER 30, 2001 SEPTEMBER 30, 2000
--------------------- --------------------
% OF % OF
SALES AMOUNT TOTAL AMOUNT TOTAL
- ----- -------- --------- -------- --------
Hillman Group (a) $188,746 55.3% $158,516 47.0%
Technology Services 152,561 44.7% 178,431 53.0%
-------- -------- -------- --------
Consolidated net sales -
ongoing operations 341,307 100.0% 336,947 100.0%
Expediter Segment (b) -- 22,122
Integrated Supply - terminated
contract (c) -- 1,048
-------- --------
Consolidated Net Sales $341,307 $360,117
======== ========
% OF % OF
GROSS PROFIT SALES SALES
- -------------- -------- --------
Hillman Group (a) $ 37,383 56.3% $ 34,391 56.6%
Technology Services 11,833 24.4% 12,962 23.4%
--------- ---------
Consolidated gross profit -
ongoing operations 49,216 42.9% 47,353 40.8%
Expediter Segment (b) -- --
--------- ---------
Consolidated Gross Profit $ 49,216 $ 47,353
========= =========
EBITDA FROM ONGOING OPERATIONS (e)
Hillman Group (a) $ 13,265 20.0% $ 11,767 19.4% $
Technology Services
(927) (1.9%) (1,438) (2.6%)
Equity in Earnings of
Expediter Segment (d)
118 525
Corporate expenses (1,529) (1.3%) (1,846) (1.6%)
--------- ---------
Consolidated EBITDA -
ongoing operations 10,927 9.5% 9,008 7.8%
Expediter Segment (b)
-- --
--------- ---------
Consolidated EBITDA $ 10,927 $ 9,00
========= =========
% OF % OF
GROSS PROFIT SALES SALES
- -------------- -------- --------
Hillman Group (a) $ 106,541 56.4% $ 87,852 55.4%
Technology Services 37,023 24.3% 42,096 23.6%
---------
Consolidated gross profit -
ongoing operations 143,564 42.1% 129,948 38.6%
Expediter Segment (b) -- 15,052
---------
Consolidated Gross Profit $ 143,564 $ 145,000
========= =========
EBITDA FROM ONGOING OPERATIONS (e)
Hillman Group (a) 35,007 18.5% $ 25,529 16.1%
Technology Services
(1,205) (0.8%) (1,421) (0.8%)
Equity in Earnings of
Expediter Segment (d)
1,063 1,479
Corporate expenses (4,079) (1.2%) (5,355) (1.6%)
--------- ---------
Consolidated EBITDA -
ongoing operations 30,786 9.0% 20,232 6.0%
Expediter Segment (b)
-- 2,823
--------- ---------
Consolidated EBITDA $ 30,786 $ 23,055
========= =========
(a) Includes sales, gross profit and EBITDA from Axxess Technologies, Inc. since
its date of acquisition on April 7, 2000.
(b) 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.
(c) Represents sales from an Integrated Supply contract that was terminated in
2000. A loss from termination of this contract was recorded in the fourth
quarter of 1999.
(d) Represents Equity in Earnings from the contributed Expediter Segment.
(e) "EBITDA" (earnings before interest, taxes, depreciation and amortization) is
defined as income (loss) from ongoing operations before depreciation and
amortization.
Page 21 of 31
THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 - (PREDECESSOR)
Net sales from ongoing operations decreased $1.3 million or 1.2% in the third
quarter of 2001 to $114.8 million from $116.1 million in 2000. Sales variances
by business segment are as follows:
SALES INCREASE (DECREASE)
-------------------------
AMOUNT %
------ ---
(In thousands)
Hillman Group $ 5,599 9.2 %
Technology Services (6,943) (12,5)%
-------
Total Company - Ongoing Operations $(1,344) (1.2)%
=======
The Hillman Group's sales increased $5.6 million, or 9.2% in the third quarter
of 2001 to $66.4 million from $60.8 million in the third quarter of 2001
primarily as a result of the acquisition of Sharon-Philstone and strong sales
from national accounts. Technology Services' sales decreased $6.9 million or
12.5% in the third quarter of 2001 to $48.4 million from $55.3 million in 2000
mainly as a result of soft market conditions experienced by original equipment
manufacturers in certain industrial sectors in the third quarter of 2001.
The Company's sales backlog on a consolidated basis from ongoing operations was
$51.5 million as of September 30, 2001, compared with $48.6 million at December
31, 2000, representing an increase of 6.0%.
The Company's consolidated gross margin from ongoing operations was 42.9% in the
third quarter of 2001 compared with 40.8% in the third quarter of 2000. The
Hillman Group's gross margin decreased 0.3% in the comparison period as a result
of a shift in sales mix. Technology Services' gross margin of 24.4% in the third
quarter of 2001 increased from 23.4% in the third quarter of 2000 primarily as a
result of a change in sales mix.
The Company's selling, general and administrative expenses ("S,G&A") from
ongoing operations decreased $0.6 million from $38.9 million in the third
quarter of 2000 to $38.3 million in the third quarter of 2001. Selling expenses
decreased $0.3 million primarily as a result of headcount and travel expense
reductions at STS. Warehouse and delivery expenses increased $0.7 million as a
result of increased freight and labor costs from new business offset by reduced
property taxes at the Hillman Group. General and administrative expenses
decreased by $1.0 million primarily as a result of reduced professional fees at
Hillman, headcount reductions which occurred in the fourth quarter of 2000 at
STS and reduced corporate expenses.
Total S,G&A expenses from ongoing operations on a comparable basis, including
Axxess, as a percentage of sales compared with the third quarter of 2000 are as
follows:
THREE MONTHS ENDED SEPT. 30,
----------------------------
AS OF A % OF SALES 2001 2000
------------------ ---- ----
Selling Expenses 17.8% 17.8%
Warehouse and Delivery Expenses 7.8% 7.1%
General and Administrative Expenses 7.8% 8.6%
----- -----
Total S,G&A Expenses 33.4% 33.5%
====== =====
EBITDA from ongoing operations after corporate expenses for the third quarter of
2001 was $10.9 million compared with $9.0 million for the same prior-year
period, representing an increase of 21.3%.
Page 22 of 31
The Company's consolidated operating profit margin (EBITDA as a percentage of
sales) after corporate expenses increased to 9.5% in the third quarter of 2001
compared with 7.8% in the third quarter of 2000. The Hillman Group's operating
profit margin increased to 20.0% in the third quarter comparison period from
19.4% primarily as a result of price increases, operational efficiencies and
integration of the Axxess acquisition. STS had a loss of 1.9% in the third
quarter compared to an operating loss of 2.6% in the third quarter of 2000.
Reduced sales at STS were offset by improved gross margins as a result of a
change in sales mix and a reduction in operating expenses.
Depreciation expense increased $0.6 million to $3.5 million in the third quarter
of 2001 from $2.9 million in the same quarter of 2000 primarily as a result of
an increase in the depreciable fixed asset base in connection with the
production of new key duplication machines at the Hillman Group for national
accounts.
Amortization expense was comparable in the third quarter comparison period.
Interest expense, net was slightly lower in the third quarter of 2001 from the
comparison period primarily as a result of reduced interest payments on capital
lease obligations at STS.
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 September 30, 2001 and
2000, 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 operation 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 tax benefit
for income taxes of $0.6 million on pre-tax income of $0.5 million in the third
quarter of 2001. The Company's third quarter tax benefit includes an adjustment
totaling $0.7 million for additional federal and state tax benefits related to
the year 2000. Excluding this adjustment, the Company's tax provision would have
been approximately $0.1 million or 3.7% of pretax income. The effective rate in
the third quarter of 2001 has been reduced due primarily to adjustments to
non-deductible items. The Company recorded a provision for income taxes of $0.4
million on a pre-tax loss of $0.9 million in the third quarter of 2000 primarily
as a result of non-deductible items related to the acquisition of Axxess.
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 - (PREDECESSOR)
Net sales from ongoing operations increased $4.4 million or 1.3% in the first
nine months of 2001 to $341.3 million from $336.9 million in 2000. Sales
variances by business segment are as follows:
SALES INCREASE (DECREASE)
-------------------------
AMOUNT %
------ ---
(In thousands)
Hillman Group $ 30,230 19.0 %
Technology Services (25,870) (14.5)%
--------
Total Company - Ongoing Operations $ 4,360 1.3 %
=========
Page 23 of 31
The Hillman Group's sales increased $30.2 million in the first nine months of
2001 to $188.7 million from $158.5 million in the first nine months of 2000
primarily as a result of the acquisition of Axxess and Sharon Philstone, and
strong sales from the national accounts. On a pro forma basis including Axxess,
the Hillman Group's sales increased 6.1% in the first nine months of 2001 over
the same prior-year period. Technology Services' sales decreased $25.9 million
or 14.5% in the first nine months of 2001 to $152.5 million from $178.4 million
in the same 2000 period, mainly as a result of soft market conditions
experienced by original equipment manufacturers in certain industrial sectors in
the first nine months of 2001.
The Company's consolidated gross margin from ongoing operations was 42.1% in the
first nine months of 2001 compared with 38.6% in the first nine months of 2000.
On a comparable basis, including Axxess, the consolidated gross margin from
ongoing operations was 39.6% for the nine months ended September 30, 2000. The
Hillman Group's gross margin improved 1.0% in the comparison period as a result
of higher margin sales of keys and identification items related to the
acquisition of Axxess, price increases for certain fastener products and
productivity gains in the various manufacturing operations. Technology Services'
gross margin of 24.3% in the first nine months of 2001 increased slightly from
23.6% in the first nine months of 2000 primarily as a result of a change in
sales mix.
The Company's S,G&A expenses from ongoing operations on a comparable basis,
including Axxess, decreased $5.4 million from $118.8 million in the first nine
months of 2000 to $113.4 million in the first nine months of 2001. Selling
expenses on a comparable basis, including Axxess, decreased $2.1 million
primarily as a result of headcount and travel expense reductions at STS offset
by conversion costs associated with the Hillman Group's purchase of inventory
and other assets of Sharon-Philstone. Warehouse and delivery expenses on a
comparable basis, including Axxess, increased by $0.1 million. Higher labor
costs from new business and increased rent expense from a new facility offset
reduced property taxes at the Hillman Group. General and administrative expenses
on a comparable basis, including Axxess, decreased by $3.4 million primarily as
a result of headcount reductions which occurred in the fourth quarter of 2000 at
STS and reduced corporate expenses.
Total S,G&A expenses from ongoing operations on a comparable basis, including
Axxess, as a percentage of sales compared with the first nine months of 2000 are
as follows:
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
AS OF A % OF SALES 2001 2000
------------------ ---- ----
Selling Expenses 18.3% 18.0%
Warehouse and Delivery Expenses 7.3% 7.0%
General and Administrative Expenses 7.6% 8.3%
----- -----
Total S,G&A Expenses 33.2% 33.3%
====== =====
EBITDA from ongoing operations for the first nine months of 2001 was $30.8
million including Axxess and corporate expenses compared with $24.2 million on a
pro forma basis including Axxess and corporate expenses for the first nine
months of 2000 or an increase of 27.2%.
The Company's consolidated operating profit margin for ongoing operations
(EBITDA as a percentage of sales) after corporate expenses increased to 9.0% in
the first nine months of 2001 compared with 6.0% in the first nine months of
2000. The Hillman Group's operating profit margin increased to 18.5% in the
first nine months of 2001 compared with 16.1% primarily as a result of the
acquisition of Axxess and operational efficiencies. STS had an operating loss of
0.8% in the first nine months 2001 which was comparable to the same prior-year
period.
Page 24 of 31
Depreciation expense increased $3.1 million to $9.6 million in the first nine
months of 2001 from $6.5 million in the same period of 2000 primarily as a
result of the acquisition of Axxess.
Amortization expense increased $0.5 million to $2.9 million as a result of the
acquisition of Axxess.
Interest expense, net increased $0.8 million in the first nine months of 2001
from $8.4 million in the first nine months of 2000, primarily as a result of
additional interest and related amortization of deferred financing fees in
connection with the Company's December 2000 issuance of $30.0 million of
unsecured subordinated notes.
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 nine months ended September 30, 2001 and
2000, the Company paid $9.1 million in interest on the Junior Subordinated
Debentures, equivalent to the amounts distributed by the Trust on the Trust
Preferred Securities.
The Company recorded a provision for income taxes of $1.2 million on a pre-tax
loss of $0.1 million for the nine months ended September 30, 2001 as a result of
non-deductible goodwill and other items related to acquisition and divestiture
activities. The Company's effective tax rate was 11.1% in the first nine months
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 ownership in
G-C, offset by non-deductible items related to the acquisition of Axxess.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position of $19.7 million as of September 30, 2001, increased
$16.9 million from the balance at December 31, 2000. Cash was provided during
this period primarily from new senior credit facilities ($90.1 million), an
increase in unsecured subordinated debentures ($10.0 million), proceeds from the
sale of STS ($17.1 million) and proceeds from the liquidation of the Mexico
segment ($1.6 million). Cash was used during this period predominantly for the
repayment of the revolving credit line and term loan balances as a result of the
Refinancing ($57.6 million), the Axxess Subordinated Note Repayment ($11.6
million), Refinancing and Merger Transaction fees and expenses ($9.2 million),
working capital investments in operations ($4.8 million), capital expenditures
and construction in process ($12.2 million), long-term investments ($3.4
million), costs associated with the sale and liquidation of discontinued
operations ($1.2 million), and other items, net ($1.9 million).
The Company's net interest coverage ratio from continuing operations for the
nine months ended September 30, 2001 increased to 1.0X (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 0.8X in the 2000 comparison period (including
Kar for the first two months of 2000) as a result of increased earnings.
Page 25 of 31
The Company's working capital position of $77.2 million at September 30, 2001,
represents an increase of $0.3 million from the December 31, 2000 level of $76.9
million as a result of reinvestment in working capital of $18.7 million,
proceeds from the sale of STS of $17.1 million and repayment of the current
portion of subordinated notes of $2.8 million, offset by a decrease due to the
sale of STS's working capital of $28.2 million, an increase in current term
loans payable of $3.1 million, a decrease in deferred tax assets and liabilities
of $2.6 million, a decrease in restricted cash used for deferred compensation
funding of $3.6 million and other items net, of $0.8 million. The Company's
current ratio increased to 2.5x at September 30, 2001 from 1.9x at December 31,
2000.
As of September 30, 2001, the Company had $8.7 million available under its
secured credit facilities. The Company had approximately $90.5 million of
outstanding debt at September 30, 2001, consisting of $55 million in term loans,
$35.1 million in revolving credit borrowings and $0.4 million in capitalized
lease obligations. The term loans consisted of a $35 million Term B Loan (the
"Term Loan B") currently at a three (3) month LIBOR rate of 6.19% and a $20.0
million Term A loan (the "Term Loan A") currently at a three (3) month LIBOR
rate of 5.69%. The revolver borrowings (the "Revolver") consist of $30.0 million
currently at a six (6) month LIBOR rate of 5.63% and $5.1 million at an
effective rate of 7.5%. The capitalized lease obligations were at various
interest rates.
On September 28, 2001, the Company through its Hillman subsidiary refinanced its
$115 million bank revolving credit and $21.5 million term loan with $105 million
in senior secured credit facilities. The new financing consists of a Revolver,
Term Loan A, and Term Loan B. The Revolver and Term Loan A have a five-year term
and Term Loan B has a seven-year term. The credit facility provides Hillman and
the Company with adequate funds for working capital and other corporate
requirements.
On September 28, 2001, the Company sold substantially all of the assets of
Technology Services, including its Canadian operation for a sales price of $25.5
million in cash and preferred stock plus the assumption of certain liabilities
by the buyer, subject to certain post-closing adjustments. The cash proceeds
from the sale of SunSource Technology Services will be distributed to Allied
Capital and certain members of management, who are the remaining shareholders of
the Company.
Interest on the Amended Subordinated Debt Issuance of $40 million which matures
September 29, 2009 is at a fixed rate of 18.0% per annum, with cash interest
payments being required on a quarterly basis at a fixed rate of 13.5% commencing
November 15, 2001. The outstanding principal balance of the Amended Subordinated
Debt Issuance shall be increased on a quarterly basis at the remaining 4.5%
fixed rate (the "PIK Amount"). All of the PIK Amounts are due on the fifth
anniversary of the Amended Subordinated Debt Issuance. Most of the additional
cash proceeds generated from the Amended Subordinated Debt Issuance of $10
million were used primarily for the Axxess Subordinated Note Repayment which had
a balance of approximately $8.8 million on September 28, 2001.
As of September 30, 2001, the Company's total debt (including distributions
payable) as a percentage of its consolidated capitalization (total debt, trust
preferred securities and stockholders' equity) was approximately 42.9% compared
with 45.0% at December 31, 2000 and 42.7% as of September 30, 2000. The
Company's consolidated capitalization (including distributions payable) as of
September 30, 2001, was approximately $306.7 million compared to $231.9 million
at December 31, 2000 and $247.3 million at September 30, 2000.
Page 26 of 31
The Company has spent $10.2 million for capital expenditures through September
30, 2001, primarily for key duplication machines and machinery and equipment. In
addition, the Company has spent $2.0 million in the third quarter of 2001 for
materials and supplies and component parts for construction in process of key
duplication machines for placement next quarter. The Company expects to incur
total fixed capital spending of $15.2 million in 2001 primarily for the Hillman
Group which represents an increase of $6.8 million compared to total year 2000
as a result of the acquisition of Axxess and growth in national accounts for key
duplication machines.
The Company has deferred tax assets aggregating $34.1 million as of September
30, 2001, 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.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("the FASB") issued
Statement of Financial Accounting Standards ("SFAS") 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 established accounting
and reporting standards for derivative financial instruments and hedging
activities, and requires the Company to recognize all derivatives as either
assets or liabilities on the balance sheet and measure them at fair value. Gains
and losses resulting from changes in fair value are accounted for depending on
the use of the derivative and whether it is designated and qualifies for hedge
accounting. In June 1999, the FASB issued SFAS 137, which deferred the
implementation of SFAS 133. The Company adopted SFAS 133 during the first
quarter of 2001. The adoption of SFAS 133 has not had a material impact on the
Company's financial position and results of operations because the Company
generally does not engage in derivative transactions.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" ("FAS 141")
and SFAS No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). FAS 141
requires that all business combinations be accounted for under the purchase
method, and the use of the pooling-of-interests method is prohibited for
business combinations initiated after June 30, 2001. FAS 141 also establishes
criteria for the separate recognition of intangible assets acquired in a
business combination. FAS 142 requires that goodwill no longer be amortized to
earnings, but instead be subject to periodic testing for impairment. FAS 142 is
effective for fiscal years beginning after December 15, 2001, with earlier
application permitted only in specified circumstances. Management is currently
evaluating the expected impact of FAS 142.
At the end of June 2001, the FASB issued FASB Statement No. 143, Accounting for
Asset Retirement Obligations. FAS 143 requires that obligations associated with
the retirement of a tangible long-lived asset be recorded as a liability when
those obligations are incurred, with the amount of the liability initially
measured at fair value. FAS 143 will be effective for financial statements for
fiscal years beginning after June 15, 2002. Management is currently evaluating
the expected impact of FAS 143.
FAS 144 supersedes FAS 121, accounting for the Impairment of Long-Lived assets
and for Long-Lived Assets to be Disposed OF, and the accounting and reporting
provisions of APB 30, Reporting the Results of Operations, Reporting the Effects
of Disposal of a Segment of a Business and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, for the disposal of a segment of
a business. FAS 144 was necessary to resolve significant implementation issues
related to SFAS 121. Although the proposed statement supercedes FAS No. 121, it
retains the fundamental measurement provisions for assets that are to be
disposed of by sale. Additionally, FAS 144 retains the basic provisions of APB
30 for the presentation of discontinued operations in the income statement but
broadens that presentation to include a component of an entity, rather than a
segment of a business. The provisions of FAS 144 are effective for financial
statements issued for fiscal years beginning after December 15, 2001 and interim
periods within those fiscal years. Management is currently evaluating the
expected impact of FAS 144.
Page 27 of 31
FORWARD LOOKING STATEMENTS
Certain disclosures related to acquisitions and divestitures, refinancing,
capital expenditures, liquidation of the Mexican segment, resolution of pending
litigation and realization of deferred tax assets 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" set forth in Item 1 of
the Company's Annual Report on Form 10-K for the year ended December 31, 2000.
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 28 of 31
PART II
OTHER INFORMATION
ITEMS 1, 2, 3, & 5 - NONE
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held a special meeting of stockholders on September 25, 2001, to
consider and approve a merger agreement and a merger between Allied Capital
Corporation and SunSource Inc. and a vote for the grant of discretionary
authority in favor of an adjournment of the meeting, if necessary. The
proposals are discussed in detail in the Definitive Proxy Statement filed on
August 29, 2001. The voting results for this item are as follows:
1. Merger Agreement and Merger
Votes For Votes Against Abstain
--------- ------------- -------
4,413,106 31,730 3,529
2. Grant of Discretionary Authority
Votes For Votes Against Abstain
--------- ------------- -------
4,338,901 79,406 30,058
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS, INCLUDING THOSE INCORPORATED BY REFERENCE.
The following is a list of exhibits filed as part of this quarterly
report on Form 10-Q. Where so indicated by footnote, exhibits which
were previously filed are incorporated by reference. For exhibits
incorporated by refefence, the location of the exhibit in the
previous filing is indicated in parentheses.
2.1 Agreement and Plan of Merger dated as of June 18, 2001 by and among
Allied Capital Corporation, Allied Capital Lock Acquisition
Corporation and SunSource Inc. (1) (Exhibit 2.1)
2.2 Asset Purchase Agreement dated September 28, 2001, by and between
SunSource Technology Services, LLC, and STS Operating, Inc. (3)
(Exhibit 2.1)
3.1** Amended and Restated bylaws as adopted by the Corporation's
stockholders as of September 26, 2001.
4.1 Form of Stockholders Agreement (2) (Exhibit d5)
Page 29 of 31
10.1** Credit Agreement dated as of September 28, 2001, by and among The
Hillman Group, Inc., as Borrower and Heller Financial, Inc., as
Agent, an Issuing Lender and a Lender and Antares Capital
Corporation, General Electric Capital Corporation and Madison
Capital Funding LLC each as a Co-Agent and the other financial
institutions party hereto as lenders.
10.2** First Amended and Restated Investment Agreement by and among
SunSource Inc., SunSource Investment Company, Inc., The Hillman
Group, Inc., and Allied Capital Corporation dated September 28,
2001.
10.3** SunSource Inc. 2001 Stock Incentive Plan.
10.4 Termination Agreement dated as of June 18,2001 by and among
SunSource, Lehman Brothers, Donald T. Marshall, John P. McDonnell,
Norman V. Edmonson, Harold Cornelius, Max W. Hillman, Joseph P.
Corvino and the respective S corporations of Marshall, McDonnell,
Edmonson, Cornelius, Hillman and Corvino. (2) (Exhibit d6)
10.5 Employment Agreement by and between SunSource Inc. and Maurice P.
Andrien, Jr. entered into June 18, 2001. (2) (Exhibit e1)
10.6 Employment Agreement by and between SunSource Inc. and Stephen W.
Miller entered into June 18, 2001 (2) (Exhibit e2)
10.7** Employment Agreement by and between SunSource Inc. and Joseph M.
Corvino entered into June 18, 2001.
10.8** Employment Agreement by and between SunSource Inc. and Max W.
Hillman entered into June 18, 2001.
------------------------
(1) Filed as an exhibit to the Current Report on Form 8-K filed on
June 21, 2001.
(2) Filed as an exhibit to Schedule 13E-3 filed on July 11, 2001, as
amended.
(3) Filed as an exhibit to the Current Report on Form 8-K filed on
October 15, 2001.
** Filed herewith
b) REPORTS ON FORM 8-K.
A Current Report on Form 8-K was filed on June 21, 2001 reporting an
unscheduled material event under Item 5 of Form 8-K (See exhibit 2.1
hereto)
A Current Report on Form 8-K was filed on October 10, 2001 reporting
a change of control of registrant under Item 1 of form 8-K (See
exhibit 2.1 hereto)
A Current Report on Form 8-K was filed on October 15, 2001 reporting
a disposition of assets under Item 2 of Form 8-K (See exhibit 2.1
hereto)
Page 30 of 31
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: November 14, 2001
Page 31 of 31