<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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): February 27, 1998
-----------------
SUNSOURCE INC.
-----------------------------------------------
(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
--------------------------------------- ------------
(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)
<PAGE>
Item 5. Other Events.
This Report includes the unaudited pro forma consolidated statement of
income of the registrant and subsidiaries for the twelve months ended December
31, 1997 and the audited consolidated financial statements of the registrant and
subsidiaries as of December 31, 1997 and 1996 and for each of the three years in
the period ended December 31, 1997 as follows.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Unaudited Pro Forma Consolidated Statement of Income Page
----
SunSource Inc. and Subsidiaries
Introduction to Unaudited Pro Forma Consolidated Statement of Income . . . . F-1
Unaudited Pro Forma Consolidated Statement of Income for the twelve
months ended December 31, 1997 . . . . . . . . . . . . . . . . . . . . . F-2
Notes to Unaudited Pro Forma Consolidated Financial Statement of Income . . . F-3
Audited Historical Consolidated Financial Statements
SunSource Inc. and Subsidiaries
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Balance Sheets dated as of December 31, 1997 and 1996 . . . . . F-5
Consolidated Statements of Income for the Years ended December 31, 1997,
1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Consolidated Statements of Cash Flows for the Years ended December 31,
1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
Consolidated Statements of Changes in Partners' Capital for the Years ended
December 31, 1996 and 1995 and Changes in Stockholders' Deficit for
the Year ended December 31, 1997 . . . . . . . . . . . . . . . . . . . . F-8
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . F-9
</TABLE>
SunSource Inc. and Subsidiaries
Pro Forma Consolidated Statement of Income (Unaudited)
The following unaudited pro forma consolidated statement of income of
SunSource Inc. (the "Company"), gives effect to the closing of the offering of
Common Shares of the Company (the "Offering"), the conversion of its
predecessor, SunSource L.P. (the "Partnership") to corporate form, including
the elimination of non-recurring charges and credits (the "Conversion") and the
refinancing of debt in conjunction with the Conversion (the "Refinancing"). The
pro forma consolidated statement of income includes the accounts of the Company
and its indirect wholly-owned subsidiary partnership, SDI Operating Partners,
L.P. (the "Operating Partnership").
The pro forma consolidated statement of income assumes the Offering and
the Refinancing closed and the Conversion occurred at the beginning of the year
presented. The pro forma consolidated income statement is not necessarily
indicative of operating results that would have been achieved had the Offering,
the Conversion, and the Refinancing occurred on the date indicated and should
not be construed as representative of future operating results.
This pro forma consolidated statement of income should be read in
conjunction with the audited consolidated financial statements for the twelve
months ended December 31, 1997 filed by the Company on Form 8-K and included
elsewhere herein.
F-1
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(dollars in thousands, except for per share data)
<TABLE>
<CAPTION>
Twelve Months Ended December 31, 1997
-----------------------------------------------------
Pro Forma
Adjustments
Historical Amount Note* Pro Forma
------------ ------------- ------- ------------
<S> <C> <C> <C> <C>
Net sales ................................................... $698,131 $ -- $ 698,131
Cost of sales ............................................... 414,853 -- 414,853
-------- --------- ---------
Gross profit .............................................. 283,278 -- 283,278
-------- --------- ---------
Operating expenses:
Selling, general and administrative expenses ............... 235,777 -- 235,777
Management fee to general partner .......................... 2,491 (2,491) 1A --
Depreciation ............................................... 4,009 -- 4,009
Amortization ............................................... 1,894 390 1B 2,284
-------- --------- ---------
Total operating expenses .................................. 244,171 (2,101) 242,070
-------- --------- ---------
Transaction and other costs related to Conversion ........... 3,053 (3,053) 1C --
-------- --------- ---------
Income from operations .................................... 36,054 5,154 41,208
Interest expense, net ....................................... 7,198 (321) 1D 6,877
Other income, net ........................................... 54 263 1E 317
Distributions on guaranteed preferred beneficial interests in
the Company's junior subordinated debentures ............... (3,058) (9,174) 1F (12,232)
-------- --------- ---------
Income before income taxes ................................ 25,852 (3,436) 22,416
Provision (benefit) for income taxes ........................ (6,680) 16,911 1G 10,231
-------- --------- ---------
Income before extraordinary loss .......................... 32,532 (20,347) 12,185
Extraordinary loss from early extinguishment of debt, net
of deferred income tax benefit of $951 ..................... (3,392) 3,392 1H --
-------- --------- ---------
Net income ................................................ $ 29,140 $ (16,955) $ 12,185
======== ========= =========
Net income per Common Share (basic and diluted) ............. $ 1.76
Weighted average number of outstanding Common Shares 6,918,936
</TABLE>
*SEE ACCOMPANYING NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF INCOME
F-2
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(dollars in thousands)
1. Pro Forma Adjustments to Consolidated Statement of Income:
A. To eliminate, in consolidation, the management fee paid to SDI Partners I,
L.P., the "General Partner" or "GP" of the Operating Partnership.
B. To record amortization of goodwill associated with the exchange of the GP's
Minority Interest in the Operating Partnership, using the Partnership's
current estimated useful life of goodwill.
C. To eliminate transaction and other costs related entirely to the Conversion
which have been recorded by the Company for the period presented.
D. To adjust 1997 interest expense utilizing, (i) an interest rate of 6.98%
(equal to current LIBOR rates of 5.73% plus 125 basis points, which
reflects interest rates under the new revolving credit facility), and
(ii) the estimated net proceeds from the offering.
<TABLE>
<CAPTION>
1997
----------
<S> <C>
Interest expense reduction as a result of proceeds from the Offering used to repay
the Company's bank revolving credit ............................................. $ (740)
Interest expense reduction as a result of the Company's Refinancing ............... (582)
Interest expense related to incremental debt used to pay distributions, transaction
costs and other items as a result of the Conversion ............................. 1,001
------
Net reduction in interest expense ................................................. $ (321)
======
Increase or decrease in pro forma interest expense adjustment due to each 1/8 per-
cent (.00125) change in interest rate ........................................... $ 13
</TABLE>
E. Eliminate minority interest expense as a result of the Conversion.
F. Record an expense for the monthly distributions on Trust Preferred
Securities; the annual yield is 11.6% on the liquidation amount of the
securities of $105,446, resulting in an approximate charge of $1,019 per
month.
G. Adjust the partnership basis state and foreign provision or benefit for
income taxes to reflect a total provision for federal, state and foreign
income taxes under corporate form.
H. Eliminate extraordinary loss from early extinguishment of debt as a
non-recurring charge.
F-3
<PAGE>
Report of Independent Accountants
The Board of Directors
SunSource Inc.
We have audited the accompanying consolidated balance sheets of SunSource Inc.
and subsidiaries as of December 31, 1997 and 1996, the related consolidated
statements of income and cash flows for each of the three years in the period
ended December 31, 1997, the related consolidated statement of changes in
stockholders' deficit for the year ended December 31, 1997 and the related
consolidated statement of changes in partners' capital for the years ended
December 31, 1996 and 1995. 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 the 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 consolidated financial position of SunSource Inc.
and subsidiaries as of December 31, 1997 and 1996, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
January 29, 1998, except
for Note 22 as to which
the date is February 5, 1998
F-4
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
-------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................................... $ 5,638 $ 1,666
Accounts receivable, net of allowance for doubtful accounts of $2,195 and $2,208, 82,501 78,578
respectively .
Inventories ............................................................................. 103,369 102,396
Deferred income taxes ................................................................... 10,791 --
Other current assets .................................................................... 4,559 4,672
--------- ---------
Total current assets .................................................................. 206,858 187,312
Property and equipment, net .............................................................. 21,939 21,409
Goodwill (net of accumulated amortization of $14,367 and $12,879, respectively) .......... 62,588 43,036
Other intangibles (net of accumulated amortization of $14,910 and $14,372, respectively) . 784 667
Deferred income taxes .................................................................... 5,014 5,007
Cash surrender value of life insurance policies .......................................... 8,407 4,566
Other assets ............................................................................. 552 558
--------- ---------
Total assets .......................................................................... $ 306,142 $ 262,555
========= =========
LIABILITIES, PARTNERS' CAPITAL AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable ........................................................................ $ 50,125 $ 48,557
Notes payable ........................................................................... 2,080 2,670
Current portion of senior notes ......................................................... -- 6,395
Current portion of capitalized lease obligations ........................................ 156 107
Distributions payable to partners ....................................................... 2,353 1,857
Deferred tax liability .................................................................. 935 --
Accrued expenses:
Salaries and wages ..................................................................... 6,891 5,696
Management fee due the general partner ................................................. -- 3,330
Income and other taxes ................................................................. 4,286 2,695
Other accrued expenses ................................................................. 19,094 15,224
--------- ---------
Total current liabilities ............................................................. 85,920 86,531
Senior notes ............................................................................. 60,000 57,539
Bank revolving credit .................................................................... 33,000 11,000
Capitalized lease obligations ............................................................ 572 504
Deferred compensation .................................................................... 10,451 8,644
Other liabilities ........................................................................ 787 3,718
--------- ---------
Total liabilities ..................................................................... 190,730 167,936
--------- ---------
Guaranteed preferred beneficial interests in the Company's junior subordinated debentures 115,903 --
--------- ---------
Commitments and contingencies
Partners' capital:
General partner ......................................................................... -- 960
Limited partners:
Class A interests ...................................................................... -- 67,642
Class B interests ...................................................................... -- 29,040
Class B interests held in treasury ..................................................... -- (1,514)
Cumulative foreign translation adjustment .............................................. -- (1,509)
--------- ---------
Total partners' capital ............................................................... -- 94,619
--------- ---------
Stockholders' deficit:
Preferred stock, $.01 par, 1,000,000 shares authorized, none issued ..................... -- --
Common stock, $.01 par, 20,000,000 shares authorized, 6,418,936 shares issued and 64 --
outstanding
Retained earnings ....................................................................... 1,735 --
Cumulative foreign translation adjustment ............................................... (2,290) --
--------- ---------
Total stockholders' deficit ........................................................... (491) --
--------- ---------
Total liabilities, partners' capital and stockholders' deficit ........................ $ 306,142 $ 262,555
========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-5
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
(dollars in thousands, except for partnership interest and share amounts)
<TABLE>
<CAPTION>
1997 1996 1995
------------ -------------- --------------
<S> <C> <C> <C>
Net sales .......................................................... $ 698,131 $ 649,254 $ 628,935
Cost of sales ...................................................... 414,853 388,660 377,598
--------- ----------- ----------
Gross profit .................................................... 283,278 260,594 251,337
--------- ----------- ----------
Operating expenses:
Selling, general and administrative expenses ...................... 235,777 219,185 211,048
Management fee to general partner ................................. 2,491 3,330 3,330
Depreciation ...................................................... 4,009 3,603 3,661
Amortization ...................................................... 1,894 1,924 1,996
--------- ----------- ----------
Total operating expenses ........................................ 244,171 228,042 220,035
--------- ----------- ----------
Restructuring charges .............................................. -- 5,950 --
Transaction and other related costs ................................ 3,053 2,150 --
--------- ----------- ----------
Income from operations .......................................... 36,054 24,452 31,302
Interest expense, net .............................................. 7,198 6,875 6,920
Distributions on guaranteed preferred beneficial interests ......... 3,058 -- --
Other income ....................................................... 54 550 256
Gain on sale of divisions (note 3) ................................. -- -- 20,644
--------- ----------- ----------
Income before provision for income taxes .......................... 25,852 18,127 45,282
Provision (benefit) for income taxes ............................... (6,680) (1,140) 537
--------- ----------- ----------
Income before extraordinary loss .................................. 32,532 19,267 44,745
Extraordinary loss from early extinguishment of debt (note 6) ...... (3,392) -- (629)
--------- ----------- ----------
Net income ...................................................... $ 29,140 $ 19,267 $ 44,116
========= =========== ==========
Net income allocated to partners:
General partner ................................................... N/A $ 193 $ 441
----------- ----------
Class A limited partners .......................................... N/A $ 12,210 $ 12,210
----------- ----------
Class B limited partners .......................................... N/A $ 6,864 $ 31,465
----------- ----------
Earnings per limited partnership interest:
Income before extraordinary loss
-- Class A interest ............................................. N/A $ 1.10 $ 1.10
-- Class B interest ............................................. N/A $ 0.32 $ 1.48
Extraordinary loss
-- Class A interest ............................................. N/A -- --
-- Class B interest ............................................. N/A -- ($ 0.03)
Net income
-- Class A interest ............................................. N/A $ 1.10 $ 1.10
-- Class B interest ............................................. N/A $ 0.32 $ 1.45
Pro forma net income per common share (note 1) ..................... $ 1.88 N/A N/A
Pro forma weighted average number of outstanding common
shares ............................................................ 6,418,936 N/A N/A
Weighted average number of outstanding limited partnership
interests:
-- Class A interests ............................................ N/A 11,099,573 11,099,573
-- Class B interests ............................................ N/A 21,675,746 21,675,746
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-6
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(dollars in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ................................................. $ 29,140 $ 19,267 $ 44,116
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ............................ 5,903 5,547 5,657
Decrease (increase) in cash value of life insurance ...... (525) (157) 58
Gain on sale of divisions ................................ -- -- (20,644)
Extraordinary loss ....................................... 3,392 -- 629
Restructuring charges .................................... -- 5,950 --
Transaction costs ........................................ 3,053 2,150 --
Provision for deferred compensation ...................... 2,649 1,071 2,340
Deferred income tax benefit .............................. (8,912) (2,163) (700)
Changes in current operating items:
Increase in accounts receivable ......................... (3,627) (2,465) (3,666)
Increase in inventories ................................. (848) (7,572) (8,209)
Decrease in other current assets ........................ 175 70 857
Increase in accounts payable ............................ 1,325 6,062 2,531
Decrease in accrued interest ............................ (473) (47) (141)
Decrease in accrued restructuring charges and
transaction costs ..................................... (4,569) (1,899) --
Increase (decrease) in other accrued liabilities ........ 2,595 (2,769) (6,062)
Other items, net ......................................... (1,365) 253 284
--------- --------- ---------
Net cash provided by operating activities .................. 27,913 23,298 17,050
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of divisions ............................ -- -- 44,873
Proceeds from sale of property and equipment ............... 802 62 757
Payments for acquired businesses ........................... (793) (683) (7,385)
Capital expenditures ....................................... (4,933) (4,341) (4,299)
Investment in life insurance policies ...................... (3,316) (1,400) (3,067)
Other, net ................................................. 144 (39) (93)
--------- --------- ---------
Net cash (used for) provided by investing activities ..... (8,096) (6,401) 30,786
--------- --------- ---------
Cash flows from financing activities:
Prepayment of senior notes ................................. (63,934) -- --
Proceeds from issuance of senior notes ..................... 60,000 -- --
Cash distributions to partners ............................. (13,901) (25,641) (27,218)
Cash distributions paid on Class A exchange ................ (14,429) -- --
Repayment of senior notes .................................. -- (6,395) (18,971)
Borrowings under the bank credit agreement, net ............ 22,000 11,000 --
Prepayment penalties and related costs ..................... (4,278) -- (629)
Borrowings (repayments) under other credit facilities,
net ...................................................... (590) (83) 44
Principal payments under capitalized lease obligations ..... (140) (12) (65)
Other, net ................................................. (573) -- ---
--------- --------- ---------
Net cash used for financing activities ................... (15,845) (21,131) (46,839)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ........ 3,972 (4,234) 997
Cash and cash equivalents at beginning of period ............ 1,666 5,900 4,903
--------- --------- ---------
Cash and cash equivalents at end of period .................. $ 5,638 $ 1,666 $ 5,900
========= ========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-7
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL FOR THE YEARS ENDED
DECEMBER 31, 1996 AND 1995 AND CHANGES IN STOCKHOLDERS'
DEFICIT FOR THE YEAR ENDED DECEMBER 31, 1997
(dollars in thousands)
<TABLE>
<CAPTION>
PARTNERS' CAPITAL
-------------------------------------
General Class A Class B
Partner Limited Limited
----------- ----------- -----------
<S> <C> <C> <C>
Partners' Capital -- December 31, 1994 .................... $ 791 $ 67,642 $ 12,300
Net income ............................................... 441 12,210 31,465
Cash distributions paid and/or declared to partners ...... (269) (12,210) (14,513)
Change in cumulative foreign translation adjustment ...... -- -- --
--------- --------- ---------
Partners' Capital -- December 31, 1995 .................... 963 67,642 29,252
Net income ............................................... 193 12,210 6,864
Cash distributions paid and/or declared to partners ...... (196) (12,210) (7,076)
Change in cumulative foreign translation adjustment ...... -- -- --
--------- --------- ---------
Partners' Capital -- December 31, 1996 .................... 960 67,642 29,040
Net income ............................................... 260 9,157 16,633
Cash distributions paid and/or declared to partners ...... (150) (8,140) (6,730)
Change in cumulative foreign translation adjustment ...... -- -- --
--------- --------- ---------
Partners' Capital -- September 30, 1997 ................... 1,070 68,659 38,943
Conversion adjustments:
Common stock ............................................. (64)
Paid-in capital .......................................... (1,070) (68,659)
Cumulative foreign translation adjustment ................
Retained earnings ........................................ (38,879)
Minority interest (a) ....................................
Class A exchange (b) .....................................
Goodwill -- Minority interest (c) ........................
--------- --------- ---------
Stockholders' Deficit -- September 30, 1997 ............... $ -- $ -- $ --
========= ========= =========
Net income ...............................................
Change in cumulative foreign translation adjustment ......
Adjustment to cash distributions declared to partners ....
Dividends declared on common stock .......................
Stockholders' Deficit -- December 31, 1997 ................
</TABLE>
<TABLE>
<CAPTION>
STOCKHOLDERS'DEFICIT
---------------------------------------------------------------------
Cumulative Retained
Foreign Earnings /
Class B Translation Common Paid-in (Accumulated
Treasury Adjustment Stock Capital Deficit)
------------- ------------- -------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Partners' Capital -- December 31, 1994 .................... $ (1,514) $ (1,338)
Net income ............................................... -- --
Cash distributions paid and/or declared to partners ...... -- --
Change in cumulative foreign translation adjustment ...... -- (62)
--------- ---------
Partners' Capital -- December 31, 1995 .................... (1,514) (1,400)
Net income ............................................... -- --
Cash distributions paid and/or declared to partners ...... -- --
Change in cumulative foreign translation adjustment ...... -- (109)
--------- ---------
Partners' Capital -- December 31, 1996 .................... (1,514) (1,509)
Net income ...............................................
Cash distributions paid and/or declared to partners ......
Change in cumulative foreign translation adjustment ...... -- (167) -- -- --
--------- --------- -- -- --
Partners' Capital -- September 30, 1997 ................... (1,514) (1,676) -- -- --
Conversion adjustments:
Common stock ............................................. 64
Paid-in capital .......................................... 68,659 1,070
Cumulative foreign translation adjustment ................ 1,676
Retained earnings ........................................ 1,514 37,365
Minority interest (a) .................................... 1,082
Class A exchange (b) ..................................... (68,659) (61,761)
Goodwill -- Minority interest (c) ........................ 20,759
--------- --------- ---- ---------- ----------
Stockholders' Deficit -- September 30, 1997 ............... $ -- $ -- 64 -- (1,485)
========= =========
Net income ............................................... 3,090
Change in cumulative foreign translation adjustment ......
Adjustment to cash distributions declared to partners .... 772
Dividends declared on common stock ....................... (642)
---- ---------- ----------
Stockholders' Deficit -- December 31, 1997 ................ $ 64 $ -- $ 1,735
==== ========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Cumulative Total Partners'
Foreign Capital /
Translation Stockholders'
Adjustment Deficit
------------- ----------------
<S> <C> <C>
Partners' Capital -- December 31, 1994 .................... $ 77,881
Net income ............................................... 44,116
Cash distributions paid and/or declared to partners ...... (26,992)
Change in cumulative foreign translation adjustment ...... (62)
-----------
Partners' Capital -- December 31, 1995 .................... 94,943
Net income ............................................... 19,267
Cash distributions paid and/or declared to partners ...... (19,482)
Change in cumulative foreign translation adjustment ...... (109)
-----------
Partners' Capital -- December 31, 1996 .................... 94,619
Net income ............................................... 26,050
Cash distributions paid and/or declared to partners ...... (15,020)
Change in cumulative foreign translation adjustment ...... -- (167)
-- -----------
Partners' Capital -- September 30, 1997 ................... -- 105,482
Conversion adjustments:
Common stock ............................................. --
Paid-in capital .......................................... --
Cumulative foreign translation adjustment ................ (1,676) --
Retained earnings ........................................ --
Minority interest (a) .................................... 1,082
Class A exchange (b) ..................................... (130,420)
Goodwill -- Minority interest (c) ........................ 20,759
--------- -----------
Stockholders' Deficit -- September 30, 1997 ............... (1,676) (3,097)
Net income ............................................... 3,090
Change in cumulative foreign translation adjustment ...... (614) (614)
Adjustment to cash distributions declared to partners .... 772
Dividends declared on common stock ....................... (642)
--------- -----------
Stockholders' Deficit -- December 31, 1997 ................ $ (2,290) $ (491)
========= ===========
</TABLE>
- - --------
(a) Minority interest included as other liabilities by the Partnership.
(b) Each Class A limited partnership interest was exchanged for $1.30 in cash
plus 0.38 share of Trust Preferred Securities recorded at fair value based
on the price of the Class A interests upon close of trading on the New
York Stock Exchange on September 30, 1997 of $11.75. This fair value of
$115,991 is recorded by the Company as Guaranteed Preferred Beneficial
Interests in the Company's Junior Subordinated Debentures.
(c) Goodwill related to the exchange of the GP minority interest (See Note 1).
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-8
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
1. Basis of Presentation:
The accompanying financial statements include the consolidated accounts of
SunSource Inc. (the "Company"), its predecessor, SunSource L.P. (the
"Partnership"), and its wholly-owned subsidiaries including SDI Operating
Partners, L.P. (the "Operating Partnership") and SunSource Capital Trust (the
"Trust"). All significant intercompany balances and transactions have been
eliminated.
Nature of Operations:
The Company is one of the leading providers of industrial products and
related value-added services in North America. The Company is organized into
three businesses which are SunSource Industrial Services Company, Hillman and
Harding.
SunSource Industrial Services Company operates in three business segments:
(1) Technology Services, operating as SunSource Technology Services ("STS");
(2) Inventory Management -- Expediter and (3) Inventory Management --
Integrated Supply, operating as SunSource Inventory Management Company
("SIMCO"). STS offers a full range of technology-based products and services to
small, medium and large manufacturers. SIMCO provides small parts inventory
management to low volume customers through its expediter activity and
integrated inventory management to large industrial manufacturing customers
through its integrated supply activity.
Hillman operates in the Hardware Merchandising Services Segment, providing
small hardware related items and merchandising services, to retail outlets,
primarily hardware stores, home centers and lumberyards.
Harding operates in the Glass Merchandising Segment, selling retail and
wholesale automotive and flat glass and providing auto glass installation and
small contract glazing services to individual consumers, insurance companies,
autobody shops, and other customers through a large network of retail glass
shops.
STS, SIMCO -- Expediter and SIMCO -- Integrated Supply accounted for 46%,
18% and 8%, respectively, of the Company's consolidated 1997 net sales and
Hillman and Harding accounted for 15% and 13%, respectively. On a consolidated
basis, the Company has over 188,000 customers, the largest of which accounted
for less than 6% of 1997 net sales. The Company's foreign sales in Canada and
Mexico accounted for less than 10% of its consolidated 1997 net sales. The
average single sale in 1997 was less than three hundred and fifty dollars.
Sales performance is tied closely to the overall performance of the
non-defense-goods producing sector of Gross Domestic Product in the United
States.
Conversion to Corporate Form:
On September 25, 1997, the limited partners of the Partnership approved
the conversion of the Partnership to a corporation effective at the close of
business on September 30, 1997 (the "Conversion"). As a result of the
Conversion, each Class A limited partnership interest in the Partnership was
converted into $1.30 of cash and 0.38 share of 11.6% Guaranteed Preferred
Beneficial Interests in the Company's Junior Subordinated Debentures (the
"Trust Preferred Securities", which were issued by the Trust), each Class B
limited partnership interest in the Partnership was converted into 0.25 share
of common stock of the Company and the general and limited partnership
interests in SDI Partners I, L.P., the General Partner of the Partnership and
the Operating Partnership (the "GP"), were exchanged with the Company for
1,000,000 shares of its common stock (the "GP Exchange"). In conjunction with
the Conversion, the Company also refinanced all of its outstanding bank
revolving credit and senior note debt (the "Refinancing").
The exchange represented by the GP's 1% ownership interest in the Company
(the "Minority Ownership") is subject to purchase accounting in accordance with
Accounting Principles Bulletin ("APB") No. 16. Accordingly, the excess of fair
value of the consideration received for the Minority Ownership over its book
value was
F-9
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
(dollars in thousands)
1. Basis of Presentation: -- (continued)
recorded by the Corporation as goodwill at September 30, 1997, calculated as
follows:
Fair value of the GP Minority Ownership (i) $21,841
Less book value of the GP Minority Ownership (ii) 1,082
-------
Excess over book value recorded as goodwill $20,759
=======
(i) Represents 92.9% of the GP Exchange (the portion allocable to the
Minority Ownership) valued at $23,500 in the aggregate for 1,000,000
common shares, based on the closing price of the Class B interest on
the New York Stock Exchange at September 30, 1997 of $5.875.
(ii) As reported on the pre-Conversion balance sheet of the Partnership
at September 30, 1997.
The Company incurred transaction and other costs related to the Conversion
of $5,203, of which $4,700 represents transaction costs and $503 a charge for
deferred compensation accelerated as a result of the Conversion. Cash payments
in 1997 and 1996 were $2,698 and $1,732, respectively, and $773 was accrued as
of December 31, 1997.
Net Income per Common Share:
In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 128, "Earnings Per Share".
As a result, the Company is required to disclose basic and diluted Earnings Per
Share ("EPS") information for all periods presented. In accordance with SFAS
128, dilutive EPS is to include the dilutive effects of options, warrants and
convertible securities; however, there are no potentially dilutive securities
outstanding. Accordingly, only basic EPS amounts have been presented. Due to
the fact that the Company was not a corporation for the full year ended
December 31, 1997, a pro forma net income per common share has been presented.
Pro forma net income per common share assumes the Conversion and Refinancing
occurred at the beginning of the year and accordingly excludes the
extraordinary loss of $0.53 per common share.
<PAGE>
The computation of pro forma net income per common share is as follows:
<TABLE>
<CAPTION>
Year
Ended
December 31, 1997
------------------
<S> <C>
Numerator:
- - ------------------------------------------------------------------------------------------
Net income .............................................................................. $ 29,140
Eliminate extraordinary loss from early extinguishment of debt ........................ 3,392
Eliminate historical income tax benefit ............................................... (6,680)
Eliminate income of Minority Ownership ................................................ 263
Distributions on guaranteed preferred beneficial interests ............................ (9,174)
Incremental interest expense to reflect the Conversion and Refinancing ................ (419)
Eliminate transaction and other costs related to the Conversion ....................... 3,053
Incremental amortization on goodwill associated with the GP Exchange .................. (390)
Eliminate management fee .............................................................. 2,491
Pro forma provision for income taxes .................................................. (9,607)
-----------
Pro forma net income .................................................................... $ 12,069
===========
Denominator:
- - -------------------------------------------------------------------------------------------
Actual weighted average number of outstanding Partnership Class B interests during the
period
before the Conversion ................................................................... 21,675,746
Conversion ratio -- reverse split of one common share for four Class B interests. ........ X.25
-----------
Sub-total -- pro forma outstanding common shares ....................................... 5,418,936
Common shares received by the general and limited partners of the GP ..................... 1,000,000
-----------
Pro forma weighted average number of common shares ..................................... 6,418,936
===========
Pro forma net income per common share .................................................... $ 1.88
===========
</TABLE>
F-10
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
(dollars in thousands)
1. Basis of Presentation: -- (continued)
Restructuring Charges:
In December 1996, the Company recorded a provision for restructuring
charges in the amount of $5,950 for STS and Harding in accordance with the
provisions of Emerging Issues Task Force ("EITF") Abstract 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity." Restructuring charges for STS in the amount of $4,400 included
termination benefits for 175 employees and other exit costs. Restructuring
charges for Harding in the amount of $1,550 represent primarily the write-off
of assets in connection with the Company's decision to withdraw from certain
geographic markets which was completed in 1997. The following table summarizes
activity in the restructuring liability for STS by balance sheet classification
for the twelve months ended December 31, 1997:
<TABLE>
<CAPTION>
Termination Other
Benefits Exit Costs Total
------------- ------------ ----------
<S> <C> <C> <C>
Current -- other accrued expenses:
- - -----------------------------------------------
Balance at December 31, 1996: ................. $ 829 $ 817 $ 1,646
Reduction for payments ....................... (1,156) (668) (1,824)
Reclassified from long-term .................. 1,605 335 1,940
-------- ------ --------
Balance at December 31, 1997: ................. $ 1,278 $ 484 $ 1,762
======== ====== ========
Long-term -- other liabilities:
- - ------------------------------------------------
Balance at December 31, 1996: ................. $ 2,014 $ 573 $ 2,587
Long-term -- reclassified to current ......... (1,605) (335) (1,940)
-------- ------ --------
Balance at December 31, 1997: ................. $ 409 $ 238 $ 647
======== ====== ========
</TABLE>
Termination payments represent severance payments and other support costs
for 50 employees; other exit costs include legal and consulting costs to
execute termination activities and facility shut-down costs.
2. Summary of Significant Accounting Policies:
Cash Equivalents:
Cash equivalents consist of commercial paper, U.S. Treasury obligations
and other liquid securities purchased with initial maturities less than 90 days
and are stated at cost which approximates market value.
Inventories:
Inventories, which consist of products purchased for resale, are valued at
the lower of cost or market, cost being determined principally on the first-in,
first-out method.
Property and Equipment:
Property and equipment, including assets acquired under capital leases, is
carried at cost and includes expenditures for new facilities and major
renewals. Maintenance and repairs are charged to expense as incurred. When
assets are sold, or otherwise disposed of, the cost and related accumulated
depreciation are removed from their respective accounts, and the resulting gain
or loss is reflected in current operations.
Depreciation:
For financial accounting purposes, depreciation, including that related to
plant and equipment acquired under capital leases, is computed on the
straight-line method over the estimated useful lives of the assets, generally
three to twenty-five years, or, if shorter, over the terms of the related
leases.
F-11
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
(dollars in thousands)
2. Summary of Significant Accounting Policies: -- (continued)
Goodwill and Other Intangible Assets:
Goodwill related to the excess of acquisition cost over the fair value of
net assets acquired and the goodwill associated with the GP Exchange discussed
in Note 1 is amortized on a straight-line basis over forty years. Other
intangible assets arising principally from acquisitions by the Operating
Partnership are amortized on a straight-line basis over periods ranging from
three to ten years.
Long-Lived Assets:
Under the provisions of SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of", the Company has
evaluated its long-lived assets for financial impairment, and will continue to
evaluate them as events or changes in circumstances indicate that the carrying
amount of such assets may not be fully recoverable.
The Company evaluates the recoverability of long-lived assets not held for
sale by measuring the carrying amount of the assets against the estimated
undiscounted future cash flows associated with them. At the time such
evaluations indicate that the future undiscounted cash flows of certain
long-lived assets are not sufficient to recover the carrying value of such
assets, the assets are adjusted to their fair values. Based on these
evaluations, there were no adjustments to the carrying value of long-lived
assets in 1997. See Note 1, "Restructuring Charges" for information on the
write-down of assets at Harding in 1996.
Income Taxes:
Deferred income taxes are computed using the liability method. Under this
method, deferred income tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
(temporary differences) and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. As a
result of the Conversion, the Company recognized additional deferred income tax
benefits which were not previously available to the Partnership due to its
partnership status.
Retirement Benefits:
Certain employees are covered under profit-sharing retirement plans
("defined contribution plans") for which contributions are determined on an
annual basis in accordance with the requirements of each plan. Defined benefit
plan contributions covering certain employees are funded, at a minimum, in
accordance with the requirements of the Employee Retirement Income Security Act
of 1974, as amended.
In accordance with collective bargaining agreements, annual contributions
to multi-employer pension plans are made. These contributions, which are based
on fixed contributions per month for each hour worked, are charged to income as
incurred.
Certain employees are covered under post-retirement benefit plans for
which benefits are determined in accordance with the requirements of each plan.
Fair Value of Financial Instruments:
Cash, accounts receivable, short-term borrowings, accounts payable,
accrued liabilities and bank revolving credit are reflected in the consolidated
financial statements at fair value because of the short-term maturity or
revolving nature of these instruments. The fair values of the Company's debt
instruments are disclosed in Note 10. The fair value of the Trust Preferred
Securities are disclosed in Note 13.
Translation of Foreign Currencies:
The translation of applicable foreign-currency-based financial statements
into U.S. dollars is performed for balance sheet accounts using exchange rates
in effect at the balance sheet date and for revenue and expense
F-12
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
(dollars in thousands)
2. Summary of Significant Accounting Policies: -- (continued)
accounts using an average exchange rate during the period. The changes in the
cumulative foreign translation adjustment for each period relate to translation
adjustments in their entirety.
Exchange adjustments resulting from foreign currency transactions are
recognized in net income and were immaterial for the three years ended December
31, 1997.
Use of Estimates in the Preparation of Financial Statements:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Recent Accounting Pronouncements:
In 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income," which
requires changes in comprehensive income be shown in a financial statement that
is displayed with the same prominence as other financial statements. Adoption
of SFAS 130 is required in 1998, however, the Company does not anticipate a
significant impact on its financial disclosure requirements due to the adoption
of SFAS 130.
3. Acquisitions/Divestitures:
Since August 31, 1997, Harding has purchased the assets of three retail
glass shops for an aggregate purchase price of $793 and the assumption of
certain liabilities. The aggregate purchase price includes goodwill of $429.
On April 11, 1996, STS purchased certain assets of Hydraulic Depot, Inc.,
of Reno, Nevada, for an aggregate purchase price of $700, including goodwill of
$141.
In November 1995, Hillman purchased certain assets of the Retail division
of Curtis Industries of Eastlake, Ohio, for an aggregate purchase price of
$8,011 and the assumption of certain liabilities. The aggregate purchase price
includes goodwill of $3,442. The purchase price and goodwill amounts include
post-closing adjustments recorded in 1996.
<PAGE>
These acquisitions have been accounted for as purchases and, accordingly,
the results of operations have been included in the accompanying consolidated
financial statements from the date of acquisition.
On October 27, 1995, the Operating Partnership sold certain assets of its
Downey Glass division for a cash consideration, net of expenses, of
approximately $6,237 and the assumption of certain liabilities. The Operating
Partnership recorded a gain on the sale in the amount of $4,144 included in the
1995 consolidated statement of income. The aggregate assets sold, net of
liabilities, in connection with the sale of the Downey Glass division was
approximately $2,093.
On January 3, 1995, the Operating Partnership sold certain assets of its
Dorman Products division for a cash consideration, net of expenses, of
approximately $36,600 (subject to certain post-closing adjustments) and the
assumption of certain liabilities. The Operating Partnership recorded a gain on
the sale in the amount of $16,500 included in the 1995 consolidated statement
of income. The aggregate assets sold, net of liabilities, in connection with
the sale of Dorman Products was approximately $20,100.
4. Related Party Transactions:
Previously under partnership form, the GP earned a management fee annually
from the Operating Partnership equal to 3% of the aggregate initial Capital
Investment of the holders of Class A interests ($110,996).
F-13
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
(dollars in thousands)
4. Related Party Transactions: -- (continued)
Management fees earned in each of years 1997, 1996 and 1995 were $2,491, $3,330
and $3,330, respectively. The 1997 management fee was pro-rated through the
Conversion and paid in full on September 30, 1997. The management fees for the
years 1996 and 1995 were paid in full in March 1997 and 1996, respectively.
A member of the Company's Board of Directors is a partner in a law firm
which represents the Company in various matters and with which the Company had
a leasing arrangement for office space. Payments to this law firm were $811,
$407 and $260 in 1997, 1996 and 1995 respectively.
Two members of the Company's Board of Directors are officers of a firm
which performed investment banking services for the Company in 1996 and 1995.
Payments for these services were $125 and $1,509 in 1996 and 1995,
respectively.
A member of the Company's Board of Directors is an officer of a firm which
performed investment banking services for the Company in 1996 and 1995.
Payments for these services were $2 and $34 in 1996 and 1995, respectively.
5. Income Taxes:
The components of the provision (benefit) for income taxes are as follows
for the three years ended:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1997 1996 1995
------------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal ........................................ $ 770 $ -- $ --
State and local ................................ 457 418 608
Foreign ........................................ 1,005 605 629
--------- -------- -------
Total current ...................... .......... 2,232 1,023 1,237
--------- -------- -------
Deferred:
Federal ........................................ 183 (1,919) $ (621)
State and local ................................ 42 (244) (79)
Foreign ........................................ 428 -- --
--------- -------- -------
Total deferred ................................ 653 (2,163) (700)
--------- -------- -------
Deferred tax benefit upon conversion ............ (9,565) -- --
--------- -------- -------
Provision (benefit) for income taxes ......... $ (6,680) $ (1,140) $ 537
========= ======== =======
</TABLE>
F-14
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
(dollars in thousands)
5. 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. Upon the Conversion, the
Company recorded additional deferred tax assets of $9,565 not previously
available under partnership form. The table below reflects the significant
components of the company's net deferred tax assets:
December 31,
------------------------
1997 1996
---------- -----------
Deferred tax assets:
Inventory ............................. $ 5,180 $ --
Deferred compensation ................. 3,827 3,292
Casualty loss liability ............... 1,560 548
Prepayment penalty .................... 1,059 304
Bad debt reserve ...................... 936 --
Vacation pay liability ................ 998 --
Restructuring reserve ................. 780 1,034
Net operating loss -- Mexico .......... 489 --
Transaction costs ..................... 777 --
All other ............................. 199 --
------- -------
Gross deferred tax assets ........... 15,805 5,178
Valuation allowance ................... -- (171)
------- -------
Net deferred tax assets ............. 15,805 5,007
------- -------
Deferred tax liabilities:
Costs of goods sold -- Mexico ......... (935) --
------- -------
Net deferred tax assets ............ $14,870 $ 5,007
======= =======
Below is a reconciliation of U.S. Federal income tax rates to the
effective tax rates for the period from the Conversion through December 31,
1997:
<TABLE>
<CAPTION>
Three Months
Ended December 31, 1997
------------------------
<S> <C>
U.S. federal income tax rate ..................... 35.0%
Foreign income tax rates in excess of U.S. federal
income tax rates ............................... 8.9%
State and local income taxes, net of U.S. federal
income tax benefit ............................. 4.2%
Non-deductible expenses .......................... 4.3%
Recognition of deferred tax benefits relating to
cumulative temporary differences ............... (10.2%)
-----
Effective income tax rate ........................ 42.2%
=====
</TABLE>
6. Extraordinary Losses:
In connection with the Refinancing, the Company paid prepayment penalties
of $4,343 and recorded an extraordinary loss of $3,392 (net of deferred tax
benefits of $951) due to the early extinguishment of all of the Operating
Partnership's previously outstanding Series A 9.08% and Series B 8.44% Senior
Notes. Funding for these prepayment penalties was provided by the Company's
revolving credit facility.
F-15
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
(dollars in thousands)
6. Extraordinary Losses: -- (continued)
In 1995, the Company recorded an extraordinary loss of $629 due to early
extinguishment of a portion of the Operating Partnership's Series A 9.08% and
Series B 8.44% Senior Notes. Funding for these prepayment penalties was
provided by the Company's operating cash.
7. Property and Equipment:
Property and equipment consist of the following at December 31, 1997 and
1996:
1997 1996
---------- ----------
Land .......................................... $ 3,196 $ 3,289
Buildings and leasehold improvements .......... 18,367 18,642
Machinery and equipment ....................... 20,493 18,680
Furniture and fixtures ........................ 10,592 10,368
------- -------
52,648 50,979
Less accumulated depreciation ................. 30,709 29,570
------- -------
$21,939 $21,409
======= =======
8. Notes Payable:
Notes payable consisted of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Short-term bank borrowings drawn on working capital
lines of credit ................................... $ -- $ 557
Trade notes payable in accordance with glass
inventory financing arrangements .................. 1,099 1,193
Notes payable in accordance with insurance financing
arrangements ...................................... 981 920
------ ------
$2,080 $2,670
====== ======
</TABLE>
The weighted average interest rate on the outstanding notes payable
borrowings at December 31, 1997 and 1996 was 2.83% and 3.05%, respectively.
9. Lines of Credit:
On September 30, 1997, the Operating Partnership entered into a $90,000
five-year bank credit agreement with five lenders (the "Credit Agreement"). The
Credit Agreement provides borrowings on a revolving credit basis at interest
rates based on the London Interbank Offered Rate ("LIBOR") plus a margin of
between 1.00% and 1.50% (the "LIBOR Margin") based on certain leverage ratios
as stated in the Credit Agreement, or prime. Letters of credit commitment fees
are based on the LIBOR Margin when issued. As of December 31, 1997, the LIBOR
rate was 5.77%, the LIBOR Margin was 1.50% and the prime rate was 8.50%. As of
December 31, 1997, the Operating Partnership had $54,808 available under this
Credit Agreement. The $35,192 outstanding consists of bank borrowings at LIBOR
amounting to $33,000 as reflected on the Company's consolidated balance sheet
at December 31, 1997, and letter of credit commitments aggregating $2,192.
Amounts outstanding under the Credit Agreement are due upon its termination on
September 30, 2002.
The Credit Agreement, among other provisions, contains financial covenants
requiring the maintenance of specific coverage ratios and levels of financial
position and restricts incurrence of additional debt and the sale of assets.
F-16
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
(dollars in thousands)
9. Lines of Credit: -- (continued)
The Company is able to utilize any unused capacity under the revolving
credit line for acquisitions. If the Company sells a significant amount of
assets as defined in the Credit Agreement, it must make an offer of prepayment
of note principal to the lenders determined on an applicable share basis with
the senior noteholder under the Noteholder Agreement (see Note 10).
The Company has another credit facility available in the amount of $500
for letters of credit of which no amount was outstanding at December 31, 1997.
The letters of credit commitments are issued at varying rates. This facility,
renewable annually, is not subject to compensating balance requirements or
unused commitment fees.
An indirect, wholly-owned Canadian subsidiary of the Company has a $2,500
Canadian dollar line of credit with a local lender for working capital purposes
of which no amount was outstanding at December 31, 1997. This facility, which
is renewable annually, provides bank borrowings at an interest rate of prime
plus 1/4 of 1%.
10. Long-Term Debt:
On September 30, 1997, the Company issued $60,000 of senior notes through
a private placement with an institutional investor. The senior notes are
payable in full on September 30, 2002 and were issued at a fixed rate of 7.66%.
A surcharge rate of 7.91% was in effect from September 30, 1997 through
December 31, 1997, as provided in the noteholder agreement (the "Noteholder
Agreement"). Interest is required to be paid quarterly on March 30, June 30,
September 30 and December 30 on the outstanding principal of the senior notes.
Optional prepayments, in multiples of $100, may be made at anytime, as a whole
or in part, with accrued interest thereon plus a penalty (the "Make-Whole
Amount"), if any, as defined in the Noteholder Agreement.
The Noteholder Agreement, among other provisions, contains financial
covenants requiring the maintenance of specific coverage ratios and levels of
financial position and restricts incurrence of additional debt and the sale of
assets.
If the Company sells a significant amount of assets as defined in the
Noteholder Agreement, it must make an offer of prepayment of note principal to
the senior noteholder determined on an applicable share basis with the lenders
under the Credit Agreement. The prepayment offer must also include accrued
interest thereon as defined in the Noteholder Agreement. A Make Whole Amount is
not required to be paid on the first $15,000 of net cash proceeds from certain
dispositions accepted as a prepayment by the senior noteholder or upon a change
in control as defined in the Noteholder Agreement.
As of December 31, 1997, the estimated fair value of the Company's senior
notes is approximately $62,900 as determined in accordance with SFAS 107. The
Company discounted the future cash flows of its senior notes based on borrowing
rates for debt with similar terms and remaining maturities. The fair value
estimate is made at a specific point in time and is subjective in nature and
involves uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions could significantly affect
the estimate.
F-17
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
(dollars in thousands)
11. Leases:
Certain warehouse and office space and equipment are leased under capital
and operating leases with terms in excess of one year. Future minimum lease
payments under noncancellable leases consisted of the following at December 31,
1997:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
--------- ----------
<S> <C> <C>
1998 ....................................... $ 180 7,562
1999 ....................................... 180 5,691
2000 ....................................... 180 4,301
2001 ....................................... 180 2,718
2002 ....................................... 116 1,695
Later years ................................ -- 10,083
------ ------
Total minimum lease payments .............. $ 836 $32,050
=======
Less amounts representing interest ......... (108)
------
Present value of Net Minimum Lease payments
(including $156 currently payable)......... $ 728
======
</TABLE>
Total rental expenses for all operating leases amounted to $15,921 in
1997, $15,239 in 1996, and $14,232 in 1995.
12. Deferred Compensation Plans:
Certain officers and employees earn performance-based compensation,
payment of which is deferred until future periods. All of the deferred
compensation plans contain change in control provisions which are triggered
upon a sale of all of the Operating Partnership's business, a change in the GP
(including its reorganization) or a change, other than due to death or
retirement, in a majority of the directors of Lehman/SDI, Inc., the general
partner of the GP during any one-year period. A change of control occurred at
September 30, 1997 as a result of the Conversion because a majority of the
directors of Lehman/SDI, Inc. did not continue as directors of Lehman/SDI, Inc.
after the Conversion.
The Company adopted a deferred compensation plan effective December 1,
1996, to offer key employees an opportunity to defer a portion of their
compensation including bonuses and any amounts credited to the accounts of such
employees which otherwise may become payable to such employees under other
incentive compensation programs maintained by the Company. This plan allows
participants eligible for accelerated payments under the change in control
provision of the deferred compensation plans an election to continue to defer
their balances. Certain deferrals were made when participants were entitled to
payment of accelerated awards upon the change in control as a result of the
Conversion.
Under the Company's Long-Term Performance Share Plan, adopted January 1,
1994, and amended thereafter, certain officers earn awards based on operating
performance over a five-year period which vest and are paid in cash only at the
end of the fifth year. At the end of any year within the five-year program, the
cumulative award is subject to reduction or forfeiture if performance goals are
not achieved. Upon a change in control as defined in the plan, participants are
entitled to payment of awards earned through completion of the most recent plan
year. The initial three years of this plan became complete as of December 31,
1996, as a result of the Conversion at September 30, 1997, which triggered the
change of control provision in the plan. The plan was amended to include a
two-year performance cycle, January 1, 1997 through December 31, 1998, to
complete the initial five-year program of the plan.
For the Company's Deferred Compensation for Division Presidents Plan,
adopted in 1987 and amended thereafter, certain employees earned awards which
vest at the rate of 20% per year over the 5-year period following the year in
which the award was earned. The awards will be paid at age 60, if elected by
the employee, or upon death, disability or retirement and accrue investment
earnings until paid. Upon a change in control, as
F-18
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
(dollars in thousands)
12. Deferred Compensation Plans: -- (continued)
defined in the plan, participants are entitled to payment of all vested and
non-vested amounts including accrued interest. The change in control provision
was triggered as a result of the Conversion and all account balances became
fully vested and eligible for distribution at September 30, 1997. The full
award is charged to operations in the year earned.
Under a former plan, the Long-Term Performance Award Plan, effective
through December 31, 1986, certain employees and officers earned deferred
compensation amounts which unconditionally vested at the rate of 20% per year
over the 5-year period following the year in which the award was earned.
Participants of the former plan have elected to defer all outstanding awards
until retirement. Upon a change in control, as defined in the plan,
participants are entitled to payment of their total account balance including
accrued interest. The change in control provision was triggered as a result of
the Conversion and all account balances were eligible for distribution at
September 30, 1997.
The Operating Partnership has established a Rabbi Trust (the "Trust") to
assist in funding the liabilities of all deferred compensation plans. The Trust
holds insurance policies purchased by the Company on the lives of certain
participants in the deferred compensation plans. The Trust is the sole
beneficiary of these insurance policies of which the cash surrender value
aggregated $8,407 at December 31, 1997. Prior to a change in control and upon
direction from the Company in writing, the Trust shall pay to the Company all
or a portion of the proceeds of any death benefits payable under any insurance
policy held by the Trust in excess of any benefits payable under the Company's
deferred compensation plans with respect to the insured participant.
The amounts charged to income under the Company's deferred compensation
plans were $3,152, $1,071 and $2,340 in 1997, 1996 and 1995, respectively. The
1997 charge includes $503 which is classified in transaction and other related
costs on the accompanying statement of income for the year ended December 31,
1997, since this charge would not have been incurred had the Conversion not
been consummated. During the three years ended December 31, 1997, distributions
from the deferred compensation plans aggregated $2,876 in 1997, $1,160 in 1996
and $1,422 in 1995. The Company's deferred compensation liabilities amounted to
$10,451 as of December 31, 1997 and $9,208 as of December 31, 1996.
13. Guaranteed Preferred Beneficial Interests in the Company's Junior
Subordinated
Debentures:
In connection with the Conversion, Class A interests of the Partnership
were exchanged for Trust Preferred Securities of the Trust, as discussed in
Note 1. The Trust was organized in connection with the Conversion for the
purpose of (a) issuing its Trust Preferred Securities to the Company in
consideration of the deposit by the Company of Junior Subordinated Debentures
in the Trust as trust assets, and its Trust Common Securities to the Company in
exchange for cash and investing the proceeds thereof in an equivalent amount of
Junior Subordinated Debentures and (b) engaging in such other activities as are
necessary or incidental thereto. The Trust had no operating history prior to
the issuance of the Trust Preferred Securities. The terms of the Junior
Subordinated Debentures include those stated in the Indenture (the "Indenture")
between the Company and the indenture trustee, and those made part of the
Indenture by the Trust Indenture Act.
The Company has guaranteed on a subordinated basis the payment of
distributions on the Trust Preferred Securities and payments on liquidation of
the Trust and redemption of Trust Preferred Securities (the "Preferred
Securities Guarantee"). The sole assets of the Trust are the Junior
Subordinated Debentures and the obligations of the Company under the Indenture,
the Preferred Securities Guarantee and the Junior Subordinated Debentures in
the aggregate constitute a full and unconditional guarantee by the Company of
the Trust's obligations under the Trust Preferred Securities.
F-19
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
(dollars in thousands)
13. Guaranteed Preferred Beneficial Interests in the Company's Junior
Subordinated
Debentures: -- (continued)
The Trust Preferred Securities have equity characteristics but creditor's
rights and are therefore classified between liabilities and stockholders'
deficit on the balance sheet. On September 30, 1997, the Trust Preferred
Securities were recorded at fair value of $115,991 based on the price of the
Class A interests of $11.75 upon close of trading on the New York Stock
Exchange on that date. The Trust Preferred Securities have a liquidation value
of $25.00 per security. The excess of fair value of the Trust Preferred
Securities on September 30, 1997 over their liquidation value of $105,446, or
$10,545 is amortized over the life of the Trust Preferred Securities. The fair
value of the Trust Preferred Securities on December 31, 1997 was $127,853,
based on the closing price on the New York Stock Exchange of $30.3125 per
security on that date.
The interest payments on the Junior Subordinated Debentures underlying the
Trust Preferred Securities, aggregating $12,232 per year, are deductible for
federal income tax purposes under current law and will remain an obligation of
the Company until the Trust Preferred Securities are redeemed or upon their
maturity in 2027.
14. Dividend on Common Shares:
The Board of Directors of the Company declared on December 10, 1997 a cash
dividend of $0.10 per common share which was paid on January 6, 1998 to holders
of record as of December 22, 1997.
15. Allocation of Partnership Taxable Income:
Prior to the Conversion, for the shortened Partnership tax year from
January 1, 1997 through September 30, 1997, the Partnership earned federal
taxable income of $0.5605 per Class B limited partnership interest. For 1996
and 1995 federal taxable income amounted to $0.70, and $1.6923 per B interest,
respectively. In 1997 and 1996, federal taxable income consisted of ordinary
income only. Federal taxable income in 1995 consisted of ordinary income of
$0.5326 per B interest and a combined capital gain of $1.1597 per B interest
related to the sale of the Dorman Products and Downey Glass divisions (see Note
3, Acquisitions/Divestitures).
Under the Partnership Agreement, holders of B interests were entitled to
receive annual cash distributions sufficient to cover their tax liabilities on
taxable income allocated to the B interests. For 1997, 1996 and 1995 these cash
distributions amounted to $6,136 or $0.2775 per B interest, $7,663 or $0.3465
per B interest and $14,807 or $0.6695 per B interest, respectively.
16. Retirement Benefits:
The following tables reflect net periodic pension cost (income) for
non-contributory defined benefit plans and significant assumptions used in the
determination:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Service cost during the period ............................ $ 920 $ 879 $ 675
Interest cost on projected benefit obligations ............ 1,702 1,656 1,578
Actual return on assets ................................... (4,708) (3,432) (3,503)
Net amortization and deferral ............................. 2,059 917 1,509
-------- -------- --------
Net periodic pension cost (income) ...................... $ (27) $ 20 $ 259
======== ======== ========
Discount rate ............................................. 7.25% 7.25% 8.25%
Rates of increase in compensation levels .................. 6.50% 6.50% 6.50%
Expected long-term rate of return on plan assets .......... 9.75% 9.75% 8.50%
</TABLE>
F-20
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
(dollars in thousands)
16. Retirement Benefits: -- (continued)
The following table sets forth the defined benefit plans' funded status
and amounts recognized in the Company's balance sheets:
<TABLE>
<CAPTION>
Assets Exceed Accumulated
Benefit Obligations
December 31,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Actuarial present value of beneficial obligations:
Vested benefit obligation ................................................. $ 16,756 $ 19,019
======== ========
Accumulated benefit obligation ............................................ $ 17,209 $ 19,290
======== ========
Projected benefit obligation .............................................. $ 22,225 $ 23,716
Plan assets at fair value ................................................. 26,642 26,519
-------- --------
Projected benefit obligation less than plan assets ........................ 4,417 2,803
Unrecognized net loss ..................................................... (3,039) (1,247)
Prior service cost not yet recognized in net periodic pension cost ........ (303) (328)
Unamortized balance of unrecognized net transition asset established at
January 1, 1987 .......................................................... (1,136) (1,648)
-------- --------
Prepaid pension liability recognized in the balance sheet ................. $ (61) $ (420)
======== ========
</TABLE>
None of the Company's defined benefit plans had accumulated benefit
obligations which exceeded assets.
The discount rate assumptions used in determining actuarial present value
of benefit obligations at December 31, 1997 and 1996 was 7.25%.
Certain employees of the Company's Kar Products, J.N. Fauver Co., and its
divested Dorman Products and American Electric Co. divisions are covered by
these defined benefit retirement plans. Assets of the defined benefit plans
consist of insurance contracts and assets managed under a commingled trust
agreement. The trust assets are invested primarily in equity and fixed income
holdings.
Costs (income) charged to operations under all retirement benefit plans
are as follows:
1997 1996 1995
--------- --------- ---------
Defined contribution plans ............ $1,154 $1,327 $2,693
Multi-employer pension plans .......... 253 189 374
Defined benefit plans ................. (27) 20 259
------ ------ ------
Total ............................... $1,380 $1,536 $3,326
====== ====== ======
Management estimates that its share of unfunded vested liabilities under
multi-employer pension plans is not material.
For the years ended December 31, 1997, 1996 and 1995, the costs of
post-retirement benefits charged to income were $94, $87, and $81,
respectively. The charges were determined in accordance with SFAS 106 on an
accrual basis with costs recognized in prior years upon payment of the
post-retirement obligations. The Company's unrecognized accumulated
post-retirement benefit liability as of December 31, 1997, 1996 and 1995 was
$454, $472 and $516, respectively.
17. Commitments and Contingencies:
Performance and bid bonds are issued on the Company's behalf during the
ordinary course of business through surety bonding companies as required by
certain contractors. As of December 31, 1997, the Company had outstanding
performance and bid bonds aggregating $541.
F-21
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
(dollars in thousands)
17. Commitments and Contingencies: -- (continued)
Letters of credit are issued by the Company during the ordinary course of
business through major domestic banks as required by certain vendor contracts,
legal proceedings and acquisition activities. As of December 31, 1997, the
Company had outstanding letters of credit in the aggregate amount of $442
related to these activities.
As of December 31, 1997, the Company has guaranteed approximately $839
worth of lease obligations, principally relating to businesses previously
divested. The Company is not currently aware of any existing conditions which
would cause a financial loss related to these guarantees.
Under the Company's insurance programs, commercial umbrella coverage is
obtained for catastrophic exposure and aggregate losses in excess of normal
claims. Beginning in 1991, the Company has retained risk on certain expected
losses from both asserted and unasserted claims related to worker's
compensation, general liability and automobile as well as the health benefits
of certain employees. Provisions for losses expected under these programs are
recorded based on an analysis of historical insurance claim data and certain
actuarial assumptions. As of December 31, 1997, the Company has provided
insurers letters of credit aggregating $1,750 related to certain insurance
programs.
Litigation originally instituted on February 27, 1996 is pending in the
Court of Common Pleas of Montgomery County, Pennsylvania in which Dorman
Products of America, Ltd. ("Dorman"), and its parent, R&B, Inc. ("R&B"), allege
that misrepresentations of certain facts were made by the Operating
Partnership, upon which R&B allegedly based its offer to purchase the assets of
the Dorman Products division of the Operating Partnership. Dorman and R&B seek
damages of approximately $21,000.
Certain other legal proceedings are pending which are either in the
ordinary course of business or incidental to the Company's business. Those
legal proceedings incidental to the business of the Company are generally not
covered by insurance or other indemnity. In the opinion of management, the
ultimate resolution of these matters will not have a material effect on the
consolidated financial position, operations or cash flows of the Company.
F-22
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
(dollars in thousands)
18. Statements of Cash Flows:
Supplemental disclosures of cash flow information are presented below:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ---------- ----------
<S> <C> <C> <C>
Cash paid during the period for:
Interest ..................................................... $ 7,357 $ 6,769 $ 7,304
========= ======= =======
Income taxes ................................................. $ 1,433 $ 1,189 $ 1,190
========= ======= =======
Non-cash investing activities:
Acquisitions (see Note 3):
Fair value of assets acquired .............................. $ 1,029 $ 758 $ 8,515
Less liabilities assumed ................................... (236) (58) (504)
Post-closing adjustments ................................... -- (17) (626)
--------- ------- -------
Cash paid for acquired businesses .............. .......... $ 793 $ 683 $ 7,385
========= ======= =======
Non-cash financing activities:
Accrued and unpaid dividends on common shares ................ $ 642 $ -- $ --
Accrued and unpaid partnership distributions ................. $ 2,353 $ 1,857 $ 7,819
Exchange of 11,099,573 Class A limited partnership
interests for 4,217,837 Trust Preferred Securities ......... $ 115,991 $ -- $ --
Exchange of 21,675,246 Class B limited partnership
interests for 5,418,936 common shares ...................... $ 38,943 $ -- $ --
Exchange of GP's Minority Interest for 1,000,000
common shares .............................................. $ 21,841 $ -- $ --
</TABLE>
19. Quarterly Data (unaudited):
<TABLE>
<CAPTION>
1997 Fourth Third Second First
- - -------------------------------------------------- ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Net sales ........................................ $168,932 $178,540 $ 181,643 $ 169,016
Gross profit ..................................... 69,079 72,791 73,808 67,600
Income before extraordinary loss (1) ............. 3,090 15,673 9,193 4,576
Extraordinary loss (Note 6) ...................... -- (3,392) -- --
Net income (1) ................................... 3,090 12,281 9,193 4,576
Net income (loss) per limited partnership interest
-- Class A ................................. N/A N/A $ .28 $ .27
-- Class B ................................. N/A N/A $ .28 $ .07
Pro forma net income per common share ............ N/A $ .58 N/A N/A
Net income per common share ...................... $ .48 N/A N/A N/A
1996
- - ----
Net sales ........................................ $159,737 $167,125 $ 167,500 $ 154,892
Gross profit (2) ................................. 64,826 67,469 66,399 61,900
Net income (3) ................................... (1,342) 8,286 8,313 4,010
Net income (loss) per limited partnership interest
-- Class A ................................. $ .28 $ .27 $ .28 $ .27
-- Class B ................................. ($ .20) $ .24 $ .24 $ .04
</TABLE>
- - ------------
(1) Includes $2,428, $275 and $350 of non-recurring transaction and other
related costs recorded in the third, second and first quarters,
respectively.
(2) Includes amounts reclassified to conform to current accounting.
(3) Includes $5,950 and $2,150 of non-recurring restructuring charges and
transaction costs, respectively, recorded in the fourth quarter.
F-23
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
(dollars in thousands)
20. Concentration of Credit Risk:
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of cash and cash equivalents
and trade receivables. The Company places its cash and cash equivalents with
high credit quality financial institutions. Concentrations of credit risk with
respect to sales and trade receivables are limited due to the large number of
customers comprising the Company's customer base, and their dispersion across
many different industries and geographies. The Company performs periodic credit
evaluations of its customers' financial condition and generally does not
require collateral.
21. Segment Information:
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information," which replaces previous generally accepted
accounting principles on segment reporting. Although adoption of SFAS 131 is
not required until 1998 reporting, the Company has elected to apply the
provisions of this SFAS beginning with its 1997 reporting, as contained herein.
Previously reported information has been restated to conform to reporting under
SFAS 131.
The Company has five reportable segments (see Note 1 "Nature of
Operations") which are disaggregated based on the products and services
provided, markets served, marketing strategies and delivery methods.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. Intersegment sales are
immaterial. The Company measures segment profitability and allocates corporate
resources based on each segment's Earnings Before Interest, Taxes and
Amortization ("EBITA"), which is defined as income from operations before
amortization. The Company also measures the segments on performance on their
tangible asset base. The table below provides the Company's segment disclosures
and is followed by reconciliations of the segment amounts to the consolidated
amounts where appropriate:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net Sales
Technology Services ............................... $ 323,588 $ 299,068 $ 285,466
Inventory Management -- Expediter ................. 125,911 121,389 113,715
Inventory Management -- Integrated Supply ......... 52,979 43,392 31,860
Hardware Merchandising Services ................... 107,395 95,036 77,263
Glass Merchandising ............................... 88,258 90,369 120,631
--------- --------- ---------
Consolidated net sales ............................ $ 698,131 $ 649,254 $ 628,935
- - ---------------------------------------------------- --------- --------- ---------
Gross Profit
Technology Services ............................... $ 85,902 $ 76,896 $ 75,527
Inventory Management -- Expediter ................. 90,171 87,839 83,122
Inventory Management -- Integrated Supply ......... 13,216 11,436 9,372
Hardware Merchandising Services ................... 58,319 48,878 41,037
Glass Merchandising ............................... 35,670 35,545 42,279
--------- --------- ---------
Segment gross profit .............................. $ 283,278 $ 260,594 $ 251,337
- - ---------------------------------------------------- --------- --------- ---------
EBITA
Technology Services ............................... $ 14,784 $ 13,335 $ 15,743
Inventory Management -- Expediter ................. 21,160 19,199 15,478
Inventory Management -- Integrated Supply ......... 2,968 1,892 1,723
Hardware Merchandising Services ................... 10,874 7,130 7,314
Glass Merchandising ............................... 2,131 3,231 3,710
--------- --------- ---------
Segment profit .................................... $ 51,917 $ 44,787 $ 43,968
- - ---------------------------------------------------- --------- --------- ---------
</TABLE>
F-24
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
(dollars in thousands)
21. Segment Information: -- (continued)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Tangible Assets
Technology Services ................................................ $ 90,597 $ 81,720 $ 77,215
Inventory Management -- Expediter .................................. 41,991 42,274 40,606
Inventory Management -- Integrated Supply .......................... 13,138 13,813 10,204
Hardware Merchandising Services .................................... 40,579 41,322 32,544
Glass Merchandising ................................................ 23,879 24,427 24,858
--------- --------- ---------
Segment tangible assets ............................................ $ 210,184 $ 203,556 $ 185,427
- - --------------------------------------------------------------------- --------- --------- ---------
Capital Expenditures
Technology Services ................................................ $ 2,045 $ 1,112 $ 1,470
Inventory Management -- Expediter .................................. 622 786 782
Inventory Management -- Integrated Supply .......................... 266 282 63
Hardware Merchandising Services .................................... 1,754 1,985 539
Glass Merchandising ................................................ 373 640 1,254
--------- --------- ---------
Segment capital expenditures ....................................... $ 5,060 $ 4,805 $ 4,108
- - --------------------------------------------------------------------- --------- --------- ---------
Depreciation
Technology Services ................................................ $ 1,438 $ 1,323 $ 1,239
Inventory Management -- Expediter .................................. 886 897 865
Inventory Management -- Integrated Supply .......................... 107 72 67
Hardware Merchandising Services .................................... 747 451 292
Glass Merchandising ................................................ 730 775 1120
--------- --------- ---------
Segment depreciation ............................................... $ 3,908 $ 3,518 $ 3,583
- - --------------------------------------------------------------------- --------- --------- ---------
Geographic Segment Data:
Net Sales
United States ...................................................... $ 644,299 $ 609,485 $ 598,741
Canada ............................................................. 34,022 30,888 29,127
Mexico ............................................................. 19,810 8,881 1,067
--------- --------- ---------
Consolidated net sales ............................................. $ 698,131 $ 649,254 $ 628,935
- - --------------------------------------------------------------------- --------- --------- ---------
Reconciliation of Segment Profit to Income Before Income
Taxes and Extraordinary Loss:
Segment profit -- EBITA ............................................ $ 51,917 $ 44,787 $ 43,968
Amortization ....................................................... (1,894) (1,924) (1,996)
Corporate expenses ................................................. (8,425) (6,981) (7,340)
Non-recurring charges:
Restructuring ..................................................... -- (5,950) --
Transaction and other costs ....................................... (3,053) (2,150) --
Management fee .................................................... (2,491) (3,330) (3,330)
--------- --------- ---------
Income from operations ............................................. 36,054 24,452 31,302
Interest expense, net .............................................. (7,198) (6,875) (6,920)
Distributions on guaranteed preferred beneficial interests ......... (3,058) -- --
Other income ....................................................... 54 550 256
Gain on sale of divisions .......................................... -- -- 20,644
--------- --------- ---------
Income before income taxes and extraordinary items ................. $ 25,852 $ 18,127 $ 45,282
- - --------------------------------------------------------------------- --------- --------- ---------
</TABLE>
F-25
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (continued)
(dollars in thousands)
21. Segment Information: -- (continued)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Reconciliation of Segment Tangible Assets to Total Assets:
Segment tangible assets .................................. $ 210,917 $ 203,556 $ 185,427
Goodwill ................................................. 62,588 43,036 44,250
Other intangible assets .................................. 170 503 1,015
Deferred income taxes .................................... 15,805 5,007 2,844
Cash value of life insurance ............................. 8,407 4,566 3,009
Other corporate assets ................................... 8,255 5,887 18,046
--------- --------- ---------
Total assets ............................................. $ 306,142 $ 262,555 $ 254,591
- - ----------------------------------------------------------- --------- --------- ---------
Reconciliation of Segment Capital Expenditures to
Total Capital Expenditures:
Segment capital expenditures (1) ......................... $ 5,060 $ 4,805 $ 4,108
Corporate capital expenditures ........................... 130 159 191
--------- --------- ---------
Total capital expenditures ............................... $ 5,190 $ 4,964 $ 4,299
- - ----------------------------------------------------------- --------- --------- ---------
</TABLE>
- - ------------
(1) Includes $257 and $623 of assets acquired under capital leases in 1997 and
1996, respectively.
<TABLE>
<S> <C> <C> <C>
Reconciliation of Segment Depreciation to Total
Depreciation:
Segment depreciation .......................... $ 3,908 $ 3,498 $ 3,583
Corporate depreciation ........................ 101 105 78
------- ------- -------
Total depreciation ............................ $ 4,009 $ 3,603 $ 3,661
- - ------------------------------------------------ ------- ------- -------
</TABLE>
22. Subsequent Events:
On January 22, 1998, the Company filed a registration statement on Form
S-2 with the United States Securities and Exchange Commission, which was
amended thereafter, for an offering of common shares of the Company (the
"Offering"). Of the 1,976,059 common shares included in the Offering, 500,000
shares are being issued and sold by the Company and 1,476,059 shares are being
sold by selling stockholders. The Company will not receive any of the proceeds
for the shares being sold by the selling stockholders. The Company will use the
net proceeds from its shares sold in the Offering to repay borrowings under its
revolving credit facility.
The Board of Directors of the Company has authorized the acquisition by
Hillman of certain assets of a retail hardware business which had sales in its
last fiscal year of approximately $17.0 million.
F-26
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits.
(a) Financial Statements of Businesses Acquired.
None.
(b) Pro Forma Financial Information.
None.
(c) Exhibits.
23.1 Consent of Coopers & Lybrand L.L.P.
<PAGE>
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.
By: /s/ Joseph M. Corvino
---------------------------------
Joseph M. Corvino
Vice President- Finance and Chief
Financial Officer
Dated: March 2, 1998
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
23.1 Consent of Coopers & Lybrand L.L.P.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this other events statement on Form 8-K of
our report, dated January 29, 1998, except for Note 22 as to which the date is
February 5, 1998, on our audits of the Financial Statements of SunSource Inc.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, PA
February 23, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contaions summary financial information extracted from the Balance
Sheet as of December 31, 1997 and the related Statement of Income for the
year-to-date ended December 31, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,638
<SECURITIES> 0
<RECEIVABLES> 84,696
<ALLOWANCES> 2,195
<INVENTORY> 103,369
<CURRENT-ASSETS> 206,858
<PP&E> 52,648
<DEPRECIATION> 30,709
<TOTAL-ASSETS> 306,142
<CURRENT-LIABILITIES> 85,920
<BONDS> 60,000<F1>
115,903<F2>
0
<COMMON> 64
<OTHER-SE> (491)
<TOTAL-LIABILITY-AND-EQUITY> 306,142
<SALES> 698,131
<TOTAL-REVENUES> 698,131
<CGS> 414,853
<TOTAL-COSTS> 244,171
<OTHER-EXPENSES> (54)
<LOSS-PROVISION> 1,711
<INTEREST-EXPENSE> 7,198
<INCOME-PRETAX> 25,852
<INCOME-TAX> (6,680)
<INCOME-CONTINUING> 32,532
<DISCONTINUED> 0
<EXTRAORDINARY> (3,392)
<CHANGES> 0
<NET-INCOME> 29,140
<EPS-PRIMARY> 1.88
<EPS-DILUTED> 1.88
<FN>
<F1>Bonds represents all long-term debt for senior notes.
<F2>Represents Guaranteed preserved bebeficial interests
in the corporation's junior subordinated debentures.
</FN>
</TABLE>
