<PAGE>
As filed with the Securities and Exchange Commission on March 24, 1997
Registration No. 333-19077
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-----------
Amendment No. 1
to
Form S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
-----------
SunSource Inc.
(Exact name of registrant as specified in its charter)
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Delaware 6719 23-2874736
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification No.)
</TABLE>
2600 One Logan Square
Philadelphia, Pennsylvania 19103
(215) 665-3650
(Address, I ncluding zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
DONALD T. MARSHALL
President and Chief Executive Officer
2600 One Logan Square
Philadelphia, Pennsylvania 19103
(215) 665-3650
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------
SunSource Capital Trust
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
Delaware 6719 23-2874735
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification No.)
</TABLE>
2600 One Logan Square
Philadelphia, Pennsylvania 19103
(215) 665-3650
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
---------------
DONALD T. MARSHALL
2600 One Logan Square
Philadelphia, Pennsylvania 19103
(215) 665-3650
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
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<S> <C> <C>
DONALD A. SCOTT ANDREW R. KELLER WILLIAM G. LAWLOR
Morgan, Lewis & Bockius LLP Simpson Thacher & Bartlett Dechert Price & Rhoads
2000 One Logan Square 425 Lexington Avenue 1717 Arch Street
Philadelphia, PA 19103 New York, NY 10017 Philadelphia, PA 19103
(215) 963-5000 (212) 455-2000 (215) 994-4000
</TABLE>
<PAGE>
Approximate date of commencement of proposed sale to the public: As
soon as practicable after the effectiveness of this Registration Statement and
the satisfaction or waiver of all other conditions to the merger of SunSource
L.P. (the "Partnership") anda wholly-owned subsidiary of the Partnership with
and into the Registrant pursuant to the Agreement and Plan of Conversion dated
March __, 1997 among the Registrant, the Partnership, PartSub Inc., a Delaware
corporation, Lehman/SDI, Inc., a Delaware corporation and the limited partners
of SDI Partners I, L.P., described in the enclosed Proxy Statement/Prospectus.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, as amended, other than securities offered only in
connection with dividend or interest reinvestment plans, check the following box
[X].
---------------------------
CALCULATION OF REGISTRATION FEE
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==============================================================================================================================
Proposed
maximum Amount of
Title of each class of aggregate registration
securities to be registered offering price(1) fee
- -------------------------------------------------------------------------------------------------------------------------------
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Common Stock of SunSource Inc., par value $.01 per share(2)....... $90,436,552 $28,261(3)
- -------------------------------------------------------------------------------------------------------------------------------
Trust Preferred Securities of SunSource Capital Trust, $124,870,196 $39,022(3)
liquidation value $25.00 per share................................
- -------------------------------------------------------------------------------------------------------------------------------
Junior Subordinated Debentures of SunSource Inc. (4) (4)
- -------------------------------------------------------------------------------------------------------------------------------
Guarantee of the Trust Preferred Securities by SunSource Inc. (5) (5)
==============================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933, as amended.
(2) Includes rights attached to shares of Common Stock pursuant to the
Registrant's Stockholders Rights Plan.
(3) In accordance with Rule 0-11 of the Securities Exchange Act of 1934, as
amended, a filing fee of $23,979 was paid to the Commission on December 30,
1996, when the preliminary proxy was filed along with Schedule 13E-3 of
SunSource L.P. and the remainder of the filing fee was paid on December 31,
1996 with the initial filing of the Registration Statement.
(4) Held by the Trust for holders of Trust Preferred Securities.
(5) No payment will be received by SunSource Inc. or SunSource Capital Trust for
the guarantee.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant to such Section
8(a), may determine.
<PAGE>
Philadelphia, Pennsylvania
April __, 1997
NOTICE OF SPECIAL MEETING OF LIMITED PARTNERS
To Be Held On April __, 1997
To the Limited Partners of SunSource L.P.:
NOTICE IS HEREBY GIVEN that a Special Meeting of the limited partners
of SunSource L.P., a Delaware limited partnership (the "Partnership"), will be
held at _______________________, Philadelphia, Pennsylvania on April __, 1997 at
10:00 a.m., local time.
At the Special Meeting, the limited partners will vote upon a proposal
(the "Conversion Proposal") to convert the Partnership to corporate form (the
"Conversion"). If the limited partners approve the Conversion Proposal:
o Each Class A limited partnership interest ("A Interest") will be
exchanged for $1.30 in cash and 0.38 of an 11.6% Trust Preferred
Security of SunSource Capital Trust, a business trust holding 11.6%
Junior Subordinated Debentures of the Corporation. The Trust Preferred
Securities will have a liquidation preference of $25, will be entitled
to cumulative distributions of $2.90 per year payable monthly and will
mature in 30 years, subject to optional redemption after five years or
earlier upon the occurrence of a Tax Event.
o Each Class B limited partnership interest ("B Interest") will be
exchanged for 0.25 share of Common Stock of the Corporation (the
"Common Stock").
The Conversion will be accomplished by the following:
o The contribution by the Partnership of its limited partnership interest
in SDI Operating Partners, L.P. (the "Operating Partnership") and by
Lehman/SDI, Inc. ("Lehman/SDI") of its general partnership interest in
SDI Partners I, L.P., the general partner of the Partnership and the
Operating Partnership (the "General Partner"), to a subsidiary of the
Partnership ("LPSub") in exchange for common stock of LPSub.
o The contribution by certain current and former members of management of
their limited partnership interests in the General Partner to SunSource
Inc., a newly formed Delaware corporation (the "Corporation"), in
exchange for 462,000 shares of Common Stock, of which 75,000 shares
will be held in escrow to be distributed after two years if all
distributions on the Trust Preferred Securities have then been paid,
and the contribution by the Corporation of the limited partnership
interests to a wholly owned subsidiary.
o A merger (the "Merger") of the Partnership and LPSub with and into the
Corporation, in which (i) the A Interests will be converted into
4,217,837 Trust Preferred Securities and cash; (ii) the B Interests
will be converted into 5,418,936 shares of Common Stock and (iii) the
common stock of LPSub held by Lehman/SDI will be converted into 538,000
shares of Common Stock.
As a result of the Conversion, the Partnership will cease to exist and
subsidiaries of the Corporation will own all of the partnership interests in the
Operating Partnership and the General Partner. Unaffiliated holders of A
Interests will hold 4,187,543 and affiliated holders of A Interests will hold
30,294 Trust Preferred Securities (in each case, less the number of fractional
shares for which holders will receive cash in the Conversion) Trust Preferred
Securities and unaffiliated holders of B Interests will hold 2,954,601 (less the
number of fractional shares for which holders will receive cash in the
Conversion) shares of Common Stock (46.0% of the total outstanding). The
partners of the General Partner and other affiliates of the General Partner who
presently hold B Interests will hold 3,464,335 shares of Common Stock (54.0% of
the total outstanding).
<PAGE>
The Conversion Proposal and related matters are more fully described in
the attached Proxy Statement/Prospectus, which (together with the exhibits
thereto and the documents incorporated by reference therein) forms a part of
this Notice and is incorporated herein by reference. Frequently used capitalized
terms are defined in Exhibit A thereto and a chart illustrating the relative
relationships of the entities before and after the Conversion is set forth
before the Summary to the Proxy Statement/Prospectus.
The Conversion will require (i) the approval of limited partners
holding a majority of the outstanding A Interests and B Interests, each voting
separately as a class, and (ii) the approval of unaffiliated limited partners
(limited partners other than affiliates of the General Partner) holding a
majority of the A Interests and B Interests held by unaffiliated limited
partners, each voting separately as a class. Only limited partners of the
Partnership of record at the close of business on March __, 1997 are entitled to
notice of and to vote at the Special Meeting.
You are cordially invited to attend the Special Meeting. If you cannot
attend, please sign and date the accompanying form of proxy and return it
promptly in the enclosed envelope. If you attend the meeting, you may vote in
person regardless of whether you have given your proxy. Any proxy may be revoked
at any time before it is exercised, as indicated herein.
By Order of the General Partner
Joseph M. Corvino, Secretary
SDI Partners I, L.P.
Your vote is important. Accordingly, you are asked to complete, sign and return
the accompanying proxy card in the envelope provided, which requires no postage
if mailed in the United States.
<PAGE>
Proxy Statement/Prospectus
SUNSOURCE INC.
6,418,936 Shares of Common Stock
SUNSOURCE CAPITAL TRUST
4,217,837 11.6% Trust Preferred Securities
(Liquidation Amount $25 per Trust Preferred Security)
Fully and unconditionally guaranteed, as described herein, by
SUNSOURCE INC.
This Proxy Statement (which is also a Prospectus) relates to the
issuance of (i) Common Stock, par value $0.01 per share ("Common Stock") of
SunSource Inc., a Delaware corporation which has been newly formed by SunSource
L.P., a Delaware limited partnership, and (ii) 11.6% Trust Preferred Securities
(the "Trust Preferred Securities") of SunSource Capital Trust, a Delaware
statutory business trust (the "Trust"), representing preferred undivided
beneficial interests in the assets of the Trust, which will consist of 11.6%
Junior Subordinated Debentures ("Junior Subordinated Debentures") of SunSource
Inc. In this Proxy Statement/Prospectus, SunSource Inc. is referred to as the
"Corporation" and SunSource L.P. as the "Partnership." Other frequently used
capitalized terms are defined in Exhibit A hereto (located inside the back
cover).
This Proxy Statement is being sent by the Partnership to the holders of
Class A limited partnership interests ("A Interests") and Class B limited
partnership interests ("B Interests," and together with A Interests,
"Interests") in connection with the solicitation by SDI Partners I, L.P., a
Delaware limited partnership which is the general partner of the Partnership
(the "General Partner"), of proxies to be voted at a Special Meeting of the
Partnership's limited partners in Philadelphia on April __, 1997. At the Special
Meeting, the limited partners will vote on a proposal (the "Conversion
Proposal") that, if approved, will result in the conversion of the Partnership
to corporate form (the "Conversion").
The Conversion will be accomplished through a merger (the "Merger") of
the Partnership and a subsidiary of the Partnership ("LPSub") with and into the
Corporation. Upon consummation of the Merger, each A Interest will be exchanged
for 0.38 of a Trust Preferred Security and $1.30 in cash. The Trust Preferred
Securities will have a liquidation preference of $25, will be entitled to
cumulative distributions of $2.90 per year payable monthly and will mature in 30
years, subject to optional redemption after five years or earlier upon the
occurrence of a Tax Event. Each B Interest will be exchanged for 0.25 share of
Common Stock of the Corporation. The general partnership interest in the General
Partner held by Lehman/SDI, Inc. ("Lehman/SDI") will be exchanged for 538,000
shares of Common Stock. The limited partnership interests in the General Partner
held by current and former members of management will be exchanged with the
Corporation for 462,000 shares of Common Stock, of which 75,000 shares will be
held in escrow to be distributed after two years if all distributions on the
Trust Preferred Securities have then been paid. As a result of the Conversion,
(i) the Partnership will cease to exist and subsidiaries of the Corporation will
own all of the partnership interests in the Operating Partnership and the
General Partner; (ii) the unaffiliated holders of A Interests will hold
4,187,543 and affiliated holders of A Interests will hold 30,294 Trust Preferred
Securities (in each case, less the number of fractional shares for which holders
will receive cash in the Conversion); (iii) unaffiliated holders of B Interests
will hold 2,954,601 (less the number of fractional shares for which holders will
receive cash in the Conversion) shares of Common Stock (46.0% of the total
outstanding); and (iv) the partners of the General Partner and affiliates of the
General Partner who presently hold B Interests will hold 3,464,335 shares of
Common Stock (54.0% of the total outstanding).
(cover page continued)
-------------
NEITHER THIS TRANSACTION NOR THESE SECURITIES HAVE BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF THIS TRANSACTION
OR THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
The date of this Proxy Statement/Prospectus is April __, 1997.
<PAGE>
The General Partner believes that the Conversion is in the best
interests of the Partnership and its limited partners and recommends that the
limited partners approve the Conversion. There are conflicts of interest between
the General Partner and the limited partners with respect to certain matters
relating to the Conversion.
The Conversion involves certain factors that should be considered by
all limited partners. The effects of the Conversion may differ for each limited
partner and may be disadvantageous to some depending upon their individual
circumstances and investment objectives. See "RISK FACTORS, CONFLICTS OF
INTEREST AND OTHER IMPORTANT CONSIDERATIONS" and "SPECIAL FACTORS." In
particular, limited partners should consider that:
o There are conflicts of interest between the General Partner and the limited
partners in the Conversion. A benefit to the partners of the General
Partner which is not shared by the limited partners is the elimination of
liability of the General Partner for liabilities of the Partnership which
occur after the Conversion. Limited partners were not separately
represented in establishing the terms of the Conversion. Such
representation might have caused the terms of the Conversion to be
different in some respects from those described herein. The fiduciary
duties owed by the directors of the Corporation after the Conversion may be
less than those owed by the General Partner of the Partnership before the
Conversion, which may result in decreased potential liability of the
directors of the Corporation. See "COMPARISON OF INTERESTS AND SECURITIES
TO BE ISSUED -- Fiduciary Duties." In addition, certain members of
management will receive accelerated payments under certain deferred
compensation plans of the Operating Partnership.
o If the Conversion is approved, the Partnership and the limited partners
will forego the potential future tax benefits associated with operating in
partnership form (e.g., no tax paid at the Partnership level on its taxable
income) immediately, rather than beginning after December 31, 1997.
o After the Conversion, holders of A Interests will no longer have their
contractual right under the Partnership Agreement to the Priority Return
(as defined herein), although they will be entitled to receive
distributions on the Trust Preferred Securities in an amount equal to such
Priority Return before dividends are paid on the Common Stock. Holders of B
Interests will no longer have the right to receive tax distributions with
respect to their allocable share of the Partnership's taxable income,
although they will no longer be taxed with respect to income of the
Corporation. If the Conversion is approved, the Board of Directors will
have discretion to defer payments on the Junior Subordinated Debentures for
up to five years. If such payments are deferred, the Trust will be unable
to make distributions on the Trust Preferred Securities, and the
Corporation will be prohibited from paying dividends on the Common Stock.
Provided distributions on the Trust Preferred Securities are not in
arrears, the Board of Directors will have discretion to declare and pay
dividends on the Common Stock, but there can be no assurance that the
Corporation will make dividend distributions. Management presently intends
not to recommend the payment of dividends on the Common Stock in order to
retain cash to fund the Corporation's acquisition program and general
corporate requirements.
o Limited partners have no dissenters' or appraisal rights in the Conversion.
Therefore, limited partners will not be entitled to receive a cash payment
from the Partnership for the fair value of their interests if they dissent
and the Conversion is approved and consummated.
o Prior to the Conversion, there has been no public market for the Trust
Preferred Securities or the Common Stock. Because the consideration
received by the holders of A Interests includes $1.30 in cash for each A
Interest, it is likely that the Trust Preferred Securities received in
respect of each A Interest will trade at prices below the market price of
the A Interests immediately prior to the Merger. The Common Stock received
by the holders of B Interests may trade at prices below the market price of
the B Interests. If a large number of holders of Trust Preferred Securities
or Common Stock were to offer their securities for sale immediately after
consummation of the Conversion, the market prices of the securities could
decline substantially absent a corresponding demand for the securities from
other investors.
o Transaction costs of approximately $3,600,000 will be incurred by the
Partnership, of which approximately $3,000,000 will be paid whether or not
the Conversion is completed.
-ii-
<PAGE>
Holders of A Interests should also consider the following additional risks:
o The receipt of Trust Preferred Securities and cash by the holders of A
Interests will be a taxable event. The receipt of Trust Preferred
Securities, Common Stock and cash by the holders who hold both A Interests
and B Interests will be a taxable event. In addition, holders of Trust
Preferred Securities will be required to accrue original issue discount
income with respect to any unpaid distributions on the Trust Preferred
Securities.
o Unlike the A Interests, which are not subject to mandatory or optional
redemption by the Partnership, the Junior Subordinated Debentures held by
the Trust may be redeemed by the Corporation at 100% of the principal
amount plus accrued and unpaid interest at any time after April 30, 2002 or
earlier at 101% of the principal amount plus accrued and unpaid interest
upon the occurrence of a Tax Event. See "DESCRIPTION OF JUNIOR SUBORDINATED
DEBENTURES -- Optional Redemption."
o The obligations of the Corporation under the Junior Subordinated Debentures
will be unsecured obligations and will be subordinate and junior in right
of payment to senior indebtedness of the Corporation and will be
structurally subordinated to all liabilities and obligations of the
Operating Partnership and the Corporation's other subsidiaries. As of
September 30, 1996 (on a pro forma basis, assuming the Merger had occurred
on such date), the Corporation would have had approximately $97.3 million
principal amount of senior indebtedness outstanding, and the Operating
Partnership and the Corporation's other subsidiaries would have had
approximately $85.3 million of indebtedness and other liabilities. There
are no terms in the Trust Preferred Securities or the Junior Subordinated
Debentures that limit the Corporation's or its subsidiaries' ability to
incur additional indebtedness.
Holders of B Interests should also consider the following additional risks:
o There are conflicts of interest between the A Interests and the B Interests
and between the General Partner and the B Interests with respect to the
determination of the consideration to be received in the Conversion. To the
extent the partners of the General Partner receive Common Stock in the
Conversion, the interest in the Corporation represented by the shares of
Common Stock to be received by holders of B Interests will be diluted.
Also, the value of the consideration to be received by holders of B
Interests and by the partners of the General Partner will be reduced to the
extent of the consideration to be received by holders of A Interests.
o Certain provisions of Delaware law and the Corporation's organizational
documents may reduce the likelihood of a takeover of the Corporation that,
if successful, would permit stockholders to receive a premium over the
market price of the Common Stock.
o Issuances of additional shares of Common Stock or Preferred Stock by the
Corporation could adversely affect existing stockholders' equity interest
in the Corporation and the market price of the Common Stock.
o The Corporation has agreed to file registration statements for the sale of
shares of Common Stock by Lehman/SDI and certain of its affiliates
(collectively, "Lehman Brothers") and, subject to certain limitations, by
management, after the Conversion. Lehman Brothers and management have
agreed to cooperate to execute an underwritten secondary offering of all or
some portion of their shares of Common Stock as soon as practicable after
the effective date of the Conversion, subject to market conditions. The
Corporation has agreed not to sell any additional shares of Common Stock
prior to the earlier of such initial secondary offering and the nine-month
anniversary of the Conversion, except in connection with acquisitions. In
addition, Lehman Brothers Capital Partners I, an affiliate of Lehman/SDI
holding 5,788,124 B Interests, may distribute the shares of Common Stock it
receives in the Merger (a majority of which shares would be freely
tradeable immediately after such distribution) to its partners. See "RESALE
OF SECURITIES -- Resales by Lehman Brothers and Management."
-iii-
<PAGE>
o The Corporation's unaudited pro forma balance sheet at September 30, 1996
reflect a stockholders' deficit of approximately $19 million and a negative
net book value per common share of $2.97. Counsel has advised the
Partnership and the Corporation that under Delaware law, dividends or
distributions on the stock of a Delaware corporation may be declared or
paid out of surplus, so that the net assets of the corporation after such
payment shall at least equal the amount of its capital. However, such a
dividend or distribution is permissible under such provision only if the
corporation's board of directors concludes that (a) immediately following
payment of such dividend or distribution, the fair market value of the
corporation's assets will exceed its liabilities and (b) the payment of
such dividend or distribution is being made out of the corporation's
surplus (net assets minus capital) and not out of capital in contravention
of Delaware law. In case there shall be no surplus, dividends may also be
paid out of net profits for the fiscal year in which the dividend is
declared and/or the preceding fiscal year. The foregoing restrictions will
not affect the payment of distributions on the Trust Preferred Securities
which are issued by the Trust rather than the Corporation. In addition, it
is the current intention of the Board of Directors of the Corporation not
to declare dividends on the Common Stock.
In addition to the factors noted above, an investment in SunSource
(whether in partnership or corporate form) is subject to risks associated with
operating conditions, competitive factors, economic conditions, industry
conditions and equity market conditions.
The General Partner believes that the Conversion will provide SunSource
and the holders of B Interests the following benefits:
o Expand the base of potential investors in SunSource to include persons and
institutional entities who do not typically invest in limited partnership
securities. In addition, the General Partner anticipates that the Common
Stock (as compared to Interests) will receive additional investor interest
through increased review and evaluation by research analysts.
o Conserve cash by the retention of the annual management fee of $3,330,000
and the retention of distributions on the General Partner's ownership in
the Partnership and the Operating Partnership amounting to approximately
$400,000 annually.
o Although the Corporation will have to pay tax on its income, SunSource will
conserve additional cash (i) because the interest payable on the Junior
Subordinated Debentures, which will approximately equal the distributions
currently paid on the A Interests, will be deductible for federal income
tax purposes, resulting in a corporate tax benefit of approximately
$4,900,000 annually and (ii) because of the difference in rates between the
B Tax Distribution (as defined herein), which will be eliminated, and the
tax that will become payable by the Corporation. Subject to changes in
federal income tax laws, approval of the Conversion Proposal should assure
tax deductibility on the distributions in respect of the Trust Preferred
Securities, which will replace the Priority Return. If the Conversion is
not approved, the Priority Return would have to be paid from net income
after corporate income taxes after December 31, 1997.
o Permit greater flexibility to consummate acquisitions due to conservation
of cash resources and the ability to use capital stock as acquisition
currency.
o Provide greater access to public and private debt and equity capital
markets at a potentially lower cost of capital.
o Simplify and reduce costs of tax reporting for investors in SunSource.
The General Partner also believes that the Conversion will provide the
holders of A Interests with benefits in the form of the cash payment of $1.30,
the continuation of the $1.10 distribution and a more readily tradeable
security, and will simplify and reduce costs of tax reporting for holders. In
addition, to the extent the benefits described above for the holders of B
Interests strengthen the financial condition of the Corporation, the risk that
distributions on the Trust Preferred Securities will not be paid will decrease.
-iv-
<PAGE>
The Conversion will require (i) the approval of limited partners holding a
majority of the outstanding A Interests and B Interests, each voting separately
as a class, and (ii) the approval of unaffiliated limited partners (limited
partners other than affiliates of the General Partner) holding a majority of the
A Interests and B Interests held by unaffiliated limited partners, each voting
separately as a class. Such majority approvals will bind all limited partners
regardless of whether they vote against the Conversion. The affiliates of the
General Partner, who own approximately 46% of the B Interests, have advised the
Partnership that they will vote in favor of the Conversion Proposal. Failure to
forward a proxy or to vote in person at the Special Meeting will have the same
effect as if a limited partner had voted against the Conversion Proposal.
This Proxy Statement/Prospectus and the related form of proxy are first
being sent to limited partners on or about March __, 1997.
Application has been made to list the Trust Preferred Securities and Common
Stock on the New York Stock Exchange.
No person is authorized to give any information or to make any representation
not contained in this Proxy Statement/Prospectus, and any information or
representation not contained herein must not be relied upon as having been
authorized by the Partnership, the General Partner, the Corporation or the
Trust. This Proxy Statement/Prospectus does not constitute an offer of any
securities other than the registered securities to which it relates or an offer
to any person in any jurisdiction where such offer would be unlawful. Neither
the delivery of this Proxy Statement/Prospectus nor any sales made hereunder
shall, under any circumstances, create any implication that there has been no
change in the affairs of the Partnership or the Corporation since the date
hereof.
Until 25 days after the date of this Proxy Statement/Prospectus, all dealers
effecting transactions in the Trust Preferred Securities and the Common Stock,
whether or not participating in this distribution, may be required to deliver a
Proxy Statement/Prospectus.
-v-
<PAGE>
<TABLE>
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TABLE OF CONTENTS
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ORGANIZATION CHART.......................................................................................................1
SUMMARY..................................................................................................................2
RISK FACTORS, CONFLICTS OF INTEREST AND
OTHER IMPORTANT CONSIDERATIONS..........................................................................................16
Risks Applicable to Holders of A Interests and B
Interests .....................................................................................................16
Additional Risks Applicable to Holders of A
Interests......................................................................................................18
Additional Risks Applicable to Holders of
B Interests....................................................................................................21
VOTING AND PROXY INFORMATION............................................................................................22
SPECIAL FACTORS.........................................................................................................23
Background of the Conversion.......................................................................................23
Existing Partnership Structure.....................................................................................24
Existing Economic Interests of the Partners........................................................................25
Alternatives to the Conversion.....................................................................................25
Reasons to Convert to Corporate Form...............................................................................27
Terms of the Conversion............................................................................................28
Consequences if Conversion is Not Approved.........................................................................29
Limited Partner Litigation.........................................................................................30
Determinations of the Special Committee............................................................................30
Opinion of Smith Barney............................................................................................41
Recommendation of the General Partner and
Fairness Determination.........................................................................................46
Source and Amount of Funds.........................................................................................46
Accounting Treatment...............................................................................................46
Fees and Expenses..................................................................................................47
Exchange of Depositary Receipts....................................................................................47
Treatment of Fractional Shares.....................................................................................47
COMPARISON OF INTERESTS AND SECURITIES
TO BE ISSUED.......................................................................................................48
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES.......................................................................................................55
Partnership Status and Taxation of the
Partnership....................................................................................................56
General Tax Treatment of the Conversion............................................................................56
Certain Tax Consequences of the Conversion
to Holders of B Interests......................................................................................57
Certain Tax Consequences of the Conversion
to Holders of A Interests......................................................................................58
Other Tax Issues Affecting Limited Partners........................................................................61
Tax Consequences to the Corporation
and the Partnership............................................................................................61
Unrelated Business Taxable Income..................................................................................62
Other Tax Aspects..................................................................................................62
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
MARKET PRICES AND DISTRIBUTIONS.........................................................................................62
CAPITALIZATION..........................................................................................................62
SELECTED HISTORICAL
FINANCIAL INFORMATION..............................................................................................66
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS......................................................................................................68
BUSINESS................................................................................................................80
General............................................................................................................80
Acquisition Strategy...............................................................................................81
Products and Services..............................................................................................82
Marketing..........................................................................................................82
Competition........................................................................................................83
Insurance Arrangements.............................................................................................83
Employees..........................................................................................................83
Backlog............................................................................................................84
Federal Income Tax Considerations..................................................................................84
Legal Proceedings..................................................................................................85
MANAGEMENT..............................................................................................................86
Executive Officers and Directors...................................................................................86
Directors and Executive Officers After the
Conversion.....................................................................................................87
Compensation.......................................................................................................88
Deferred Compensation Plans........................................................................................89
Change in Control Arrangements.....................................................................................89
Management Fee.....................................................................................................89
Certain Business Relations.........................................................................................89
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND
MANAGEMENT.........................................................................................................90
SUNSOURCE CAPITAL TRUST.................................................................................................91
DESCRIPTION OF TRUST PREFERRED
SECURITIES.........................................................................................................93
General............................................................................................................94
Distributions......................................................................................................94
Mandatory Redemption...............................................................................................95
Special Event Redemption or Distribution...........................................................................96
Redemption Procedures..............................................................................................97
Subordination of Trust Common Securities...........................................................................98
</TABLE>
-vi-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Liquidation Distribution Upon Dissolution..........................................................................98
No Merger, Consolidation or Amalgamation
of the Trust...................................................................................................99
Declaration Events of Default......................................................................................99
Voting Rights......................................................................................................99
Modification and Amendment of the
Declaration...................................................................................................101
Book-Entry; Delivery and Form.....................................................................................102
Expenses and Taxes................................................................................................103
Registrar, Transfer Agent and Paying Agent........................................................................103
Information Concerning the Property Trustee.......................................................................104
Governing Law.....................................................................................................104
Miscellaneous.....................................................................................................104
DESCRIPTION OF PREFERRED
SECURITIES GUARANTEE..............................................................................................104
General...........................................................................................................104
Certain Covenants of the Corporation..............................................................................105
Amendments and Assignment.........................................................................................105
Termination of the Preferred Securities
Guarantee.....................................................................................................105
Status of the Preferred Securities Guarantee......................................................................106
Governing Law.....................................................................................................106
DESCRIPTION OF JUNIOR
SUBORDINATED DEBENTURES...........................................................................................106
General...........................................................................................................106
Optional Redemption...............................................................................................107
Proposed Tax Legislation..........................................................................................107
Interest..........................................................................................................108
Option to Extend Interest Payment Period..........................................................................108
Compounded Interest...............................................................................................109
Certain Covenants of the Corporation
Applicable to the Junior Subordinated
Debentures....................................................................................................109
Subordination.....................................................................................................109
Indenture Events of Default.......................................................................................110
Modification of the Indenture.....................................................................................111
Book-Entry and Settlement.........................................................................................111
Consolidation, Merger and Sale....................................................................................111
Defeasance and Discharge..........................................................................................111
Governing Law.....................................................................................................112
Information Concerning the Indenture Trustee......................................................................112
Miscellaneous.....................................................................................................112
RELATIONSHIP AMONG THE TRUST
PREFERRED SECURITIES, THE
JUNIOR SUBORDINATED DEBENTURES
AND THE PREFERRED
SECURITIES GUARANTEE..............................................................................................112
DESCRIPTION OF CAPITAL STOCK...........................................................................................114
Preferred Stock...................................................................................................114
Common Stock......................................................................................................114
Stockholders Agreement............................................................................................114
Anti-takeover Provisions..........................................................................................115
Limitation of Liability...........................................................................................116
Transfer Agent and Registrar......................................................................................116
RESALE OF SECURITIES...................................................................................................116
LEGAL MATTERS..........................................................................................................117
EXPERTS................................................................................................................118
AVAILABLE INFORMATION..................................................................................................118
INCORPORATION OF CERTAIN DOCUMENTS
BY REFERENCE......................................................................................................118
INDEX TO FINANCIAL STATEMENTS........................................................................................F - 1
EXHIBIT A - GLOSSARY OF DEFINED TERMS............................................................................... A - 1
EXHIBIT B - CONVERSION AGREEMENT.....................................................................................B - 1
EXHIBIT C - SMITH BARNEY FAIRNESS
OPINION.........................................................................................................C - 1
</TABLE>
-vii-
<PAGE>
ORGANIZATION CHART
BEFORE CONVERSION
Lehman Brothers
Holdings, Inc.
(Lehman)
100%
Lehman/SDI, Management
Inc.
53.8% 46.2% A Holders Public B Lehman Management
GP LP Holders Affiliates
100% 53.7% 27.2% 19.1%
SDI Partners I, L.P. A B B B
(The General Partner) 1% Interests Interests Interests Interests
GP
SunSource L.P.
(The Partnership)
99%
LP
GP SDI Operating
1% and Fee Partners, L.P.
(The Operating Partnership)
AFTER CONVERSION
Former Public Former Lehman and
A Holders B Holders Affiliates Management
| | | |
| | | |
100% 46.0% 31.4% 22.6%
Preferred Common Common Common
Securities Stock Stock Stock
| |
- -------------- Junior ----------------------------------------------
SunSource Subordinated
Capital Trust Debentures SunSource Inc.
(The Trust) | (The Corporation)
- -------------- Common
Securities ----------------------------------------------
| |
100% 100%
| |
SunSub A SunSub B
| | |
LP LP GP
| | |
| |----------------- SDI Partners I, L.P.
| (The General Partner)
|
SDI Operating Partners, L.P.
(The Operating Partnership) ------- GP
Fee
-1-
<PAGE>
SUMMARY
The following is not intended to be complete and is qualified in all
respects by the more detailed information set forth elsewhere in this Proxy
Statement/Prospectus and the documents incorporated by reference herein. Unless
otherwise indicated, all information in this Prospectus assumes a 1-for-4
reverse stock split that will be effected by the exchange ratio of 0.25 share of
Common Stock for each B Interest in the Conversion. A glossary of frequently
used capitalized and other specialized terms is attached as Exhibit A and a
chart describing the SunSource structure before and after the Conversion is set
forth immediately preceding this Summary. Limited partners are urged to review
carefully the entire Proxy Statement/Prospectus and to request such documents
incorporated by reference herein as they desire. This Proxy Statement/Prospectus
contains forward-looking statements that address, among other things, source and
amount of funds, amount of sales, projected capital expenditures and acquisition
strategy. These statements may be found under "SPECIAL FACTORS," "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," and
"BUSINESS," as well as in the Proxy Statement/Prospectus generally. Actual
events or results may differ materially from those discussed in forward-looking
statements as a result of various factors, including without limitation, those
discussed in "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT
CONSIDERATIONS" and matters set forth in the Proxy Statement/Prospectus
generally.
The Partnership, the Corporation and the Trust
SunSource L.P.(the "Partnership") was organized as a Delaware limited
partnership in 1986 under the name Sun Distributors L.P. to conduct the business
formerly conducted by Sun Distributors, Inc. when it was a subsidiary of Sun
Company, Inc. The Partnership assumed its present name in April 1996. The
general partner of the Partnership is SDI Partners I, L.P. (the "General
Partner"), a Delaware limited partnership, whose general partner is Lehman/SDI,
Inc. ("Lehman/SDI"), a Delaware corporation, and whose limited partners are
current or former members of management of the Partnership and the Operating
Partnership. Lehman/SDI is an indirect wholly owned subsidiary of Lehman
Brothers Holdings Inc.
The business of the Partnership is conducted through SDI Operating
Partners, L.P. (the "Operating Partnership"), a Delaware limited partnership.
The General Partner is the general partner of the Operating Partnership and the
limited partner of the Operating Partnership is the Partnership. The Operating
Partnership is one of the largest wholesale distributors of industrial products
and services in the United States, organized in three segments: industrial
services, hardware merchandising and glass merchandising. See "BUSINESS." The
principal executive offices of the Partnership and the Operating Partnership are
located at 2600 One Logan Square, Philadelphia, PA 19103 and their telephone
number is (215) 665-3650.
SunSource Inc. (the "Corporation") is a Delaware corporation which has
been newly formed to accomplish the conversion of the Partnership to corporate
form (the "Conversion"). The outstanding shares of the Corporation are presently
owned by the Partnership. The Corporation's address and telephone number are the
same as the Partnership.
In this Proxy Statement/Prospectus, the term SunSource means the
Partnership prior to the Conversion and/or the Corporation after the Conversion,
in each case including subsidiaries.
SunSource Capital Trust (the "Trust") is a newly formed Delaware statutory
business trust which has been organized to issue the Trust Preferred Securities
(the "Trust Preferred Securities"), representing preferred undivided beneficial
interests in the assets of the Trust, which will be exchanged for A Interests in
the Merger. All of the Trust Common Securities, representing common undivided
beneficial interests in the assets of the Trust, are owned by the Corporation.
The Trust's address is 501 Silverside Road, Suite 17, Wilmington, DE and its
telephone number is (302) 798-6665.
Overview of the Conversion
In the Conversion:
o The Partnership and a subsidiary of the Partnership will merge with and
into the Corporation (the "Merger").
o In the Merger each A Interest will be exchanged for 0.38 (with a
liquidation preference of $9.50) of a Trust Preferred Security and $1.30 in
cash. Each B Interest will be exchanged for 0.25 share of Common Stock.
Through the Merger and other contributions, the interests of the general
and limited partners of the General Partner in the Partnership and the
Operating
-2-
<PAGE>
Partnership will be exchanged for 1,000,000 shares of Common Stock, of
which 75,000 shares will be held in escrow to be distributed after two
years if all distributions on the Trust Preferred Securities have then been
paid.
o As a result of the Conversion, subsidiaries of the Corporation will own all
of the partnership interests in the Operating Partnership and the General
Partner.
o At the time of the Conversion, the existing bank credit agreement will be
canceled and the Partnership's long-term debt will be repaid and replaced
with new credit facilities at interest rates expected to be lower than
financing rates currently incurred by the Partnership. Prepayment of the
Partnership's long-term debt will result in the payment of a make-whole
penalty of approximately $5 million.
The chart on page 1 describes the ownership structure of SunSource before
and after the Conversion.
As a result of the Conversion, the Partnership will cease to exist, the
holders of A Interests will own 100% of the outstanding Trust Preferred
Securities, the holders of B Interests who are not affiliated with the General
Partner will own 46.0% of the Common Stock and affiliates of the General Partner
will own 54.0% of the Common Stock. The directors and certain officers of
Lehman/SDI will become directors and officers of the Corporation. The
Corporation will own, through its wholly owned subsidiaries, 100% of the equity
in the business and operations owned by the Operating Partnership which will
remain in partnership form after the Conversion. The employees of the Operating
Partnership will continue as employees after the Conversion.
The following table illustrates the proposed exchange of partnership interests
for Common Stock:
<TABLE>
<CAPTION>
Partnership Corporation
--------------------- ---------------------
B Interests % Common Stock %
<S> <C> <C> <C> <C>
Public Investors 11,633,603 53.7 2,954,601 46.0
Lehman Holdings and Affiliates 5,896,678 27.2 2,012,169 31.4
Executive Officers and Directors 4,145,465 19.1 1,452,166 22.6
----------- ------ --------- -----
21,675,746 100.0 6,418,936 100.0
========== ===== ========= =====
</TABLE>
The General Partner may decide not to pursue the Conversion at any time
before it becomes effective, whether before or after approval by the
Partnership's limited partners.
Existing Economic Interests of the Partners
All cash receipts of the Partnership, less cash used to pay or establish a
reserve for expenses, ("Available Cash") are distributed 99% to the holders of A
Interests and 1% to the General Partner until holders of A Interests have
received annually a $1.10 simple, cumulative return, which has historically been
paid on a monthly basis to holders of record on the first day of the month.
After distribution of the Priority Return, Available Cash is distributed
1% to the General Partner and 99% to the holders of B Interests until such
holders have received an annual distribution (the "B Tax Distribution") equal to
the product of (i) 125% of the then applicable maximum Federal income tax rate
for individuals and (ii) the taxable income allocable to the B Interests. The B
Tax Distribution has historically been partially distributed on a monthly basis
to holders of record on the first day of the month with the balance distributed
by March 31 of the succeeding year. See Note 3 of Notes to Consolidated
Financial Statements. The Partnership suspended the payment of monthly advance B
Tax Distributions effective January 1, 1997 pending approval of the Conversion.
Upon liquidation of the Partnership, after provision for all liabilities,
the holders of A Interests would receive a preferential distribution equal to
$10 per A Interest plus any unpaid Priority Return and the balance would be
distributed to the General Partner
-3-
<PAGE>
and the holders of B Interests in accordance with their respective capita
accounts.
The Operating Partnership distributes its Cash Available for Distribution
99% to the Partnership and 1% to the General Partner until the amount
distributed to the Partnership is sufficient to pay the Priority Return and the
B Tax Distribution. The General Partner also receives a management fee from the
Operating Partnership of $3,330,000 annually. To the extent that the Priority
Return and the B Tax Distribution have not been paid on a cumulative basis, the
management fee will not be paid, but will be deferred and be paid, together with
any management fees then owed with respect to any other year, after the Priority
Return and B Tax Distribution have been paid. In addition, the management fee
can be paid only if the Operating Partnership complies with the covenants
required by the Operating Partnership's credit agreements. See Notes 8 and 9 of
Notes to Consolidated Financial Statements.
Risk Factors, Conflicts of Interest and Other Important Considerations
In evaluating the Conversion, limited partners should take into account
the following risk factors and other special considerations, which are discussed
at greater length in "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT
CONSIDERATIONS" and "SPECIAL FACTORS."
Risk Factors Applicable to Holders of A Interests and B Interests
o There are conflicts of interest between the General Partner and the limited
partners in the Conversion. The General Partner's economic and other
interests and risks in the Partnership differ from those of the limited
partners. A benefit to the partners of the General Partner of the
Conversion which is not shared by the limited partners is the elimination
of liability of the partners of the General Partner for obligations and
liabilities of SunSource which occur after the Conversion. Limited partners
were not separately represented in establishing the terms of the
Conversion. Such representation might have caused the terms of the
Conversion to be different in some respects from those described herein.
See "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS
-- Risks Applicable to Holders of A Interests and B Interests -- Potential
Conflicts of Interest." The fiduciary duties owed by the directors of the
Corporation after the Conversion may be less than those owed by the General
Partner of the Partnership before the Conversion, which may result in
decreased potential liability of the directors of the Corporation. See
"COMPARISON OF INTERESTS AND SECURITIES TO BE ISSUED -- Fiduciary Duties."
In addition, certain members of management will receive accelerated
payments under certain deferred compensation plans of the Operating
Partnership.
o If the Conversion is approved, the Partnership and the limited partners
will forego the potential future tax benefits associated with operating in
partnership form immediately, rather than after December 31, 1997 and these
benefits will not therefore be available to the Partnership and the limited
partners. A corporation pays taxes on its taxable income and its
stockholders generally pay taxes on any dividends from the corporation,
whereas a partnership pays no tax and its partners pay tax on their share
of partnership net income whether or not distributions are made. Efforts
have been made over the last several years to have the December 31, 1997
deadline extended or eliminated. To date such efforts have been
unsuccessful. See "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT
CONSIDERATIONS -- Risks Applicable to Holders of A Interests and B
Interests -- Adverse Tax Implications."
o If the Conversion is approved, holders of A Interests will no longer have
their contractual right under the Partnership Agreement to the Priority
Return, although they will be entitled to distributions on the Trust
Preferred Securities in an amount equal to such Priority Return before
dividends, if any, are paid on the Common Stock. If the Conversion is
approved, holders of B Interests will no longer have the right to receive
tax distributions with respect to their allocable share of the
Partnership's taxable income, although they will no longer be taxed with
respect to income of the Corporation. If the Conversion is approved, the
Board of Directors of the Corporation will have discretion to defer
payments on the Junior Subordinated Debentures for up to five years. If
such payments are deferred, the Trust will be unable to make distributions
on the Trust Preferred Securities, and the Corporation will be prohibited
from paying dividends on the Common Stock. Provided distributions on the
Trust Preferred Securities are not in arrears, the Board of Directors will
have discretion to declare and pay dividends on the Common Stock, and there
can be no assurance that the Corporation will make dividend distributions.
Management presently intends not to recommend the payment of dividends on
the Common Stock in order to retain cash to fund the Corporation's
acquisition program and corporate requirements.
-4-
<PAGE>
o Limited partners have no dissenters' or appraisal rights in the Conversion.
Therefore, limited partners will not be entitled to receive cash payments
from SunSource for the fair value of their Interests if they dissent and
the Conversion is approved and consummated.
o Prior to the Conversion, there has been no public market for the Trust
Preferred Securities or Common Stock. Because the consideration received by
the holders of A Interests includes $1.30 in cash for each A Interest, it
is likely that the Trust Preferred Securities received in respect of each A
Interest will trade at prices below the market price of the A Interests
immediately prior to the Merger. The Common Stock received by the holders
of the B Interests may trade at prices below the historical trading levels
of the B Interests. If a large number of holders of Trust Preferred
Securities or Common Stock were to offer their securities for sale
immediately after consummation of the Conversion, the market price of the
particular security could decline. Various anti-takeover provisions which
would apply to the Corporation after the Conversion could also have a
negative effect on the market price of the Common Stock.
o Transaction costs of approximately $3,600,000 will be incurred by the
Partnership, of which approximately $3,000,000 will be paid, whether or not
the Conversion is completed.
Additional Risk Factors Applicable to Holders of A Interests
o The receipt of Trust Preferred Securities and cash by the holders of A
Interests will be a taxable event. The receipt of Trust Preferred
Securities, Common Stock and cash by holders who hold both A Interests and
B Interests will be a taxable event. In addition, holders of Trust
Preferred Securities will be required to accrue original issue discount
income with respect to any unpaid distributions on the Trust Preferred
Securities.
o Unlike the A Interests, which are not subject to mandatory or optional
redemption by the Partnership, the Junior Subordinated Debentures held by
the Trust may be redeemed by the Corporation at 100% of the principal
amount plus accrued and unpaid interest at any time after April 30, 2002 or
earlier at 101% of the principal amount plus accrued and unpaid interest
upon the occurrence of a Tax Event. See "DESCRIPTION OF JUNIOR SUBORDINATED
DEBENTURES -- Optional Redemption."
o The obligations of the Corporation under the Junior Subordinated Debentures
will be unsecured obligations and will be subordinate and junior in right
of payment to senior indebtedness of the Corporation and will be
structurally subordinated to all liabilities and obligations of the
Operating Partnership and the Corporation's other subsidiaries. As of
September 30, 1996 (on a pro forma basis, assuming the Merger had occurred
on such date), the Corporation would have had approximately $97.3 million
principal amount of senior indebtedness outstanding, and the Operating
Partnership and the Corporation's other subsidiaries would have had
approximately $85.3 million of indebtedness and other liabilities. There
are no terms in the Trust Preferred Securities or the Junior Subordinated
Debentures that limit the Corporation's or its subsidiaries' ability to
incur additional indebtedness.
Additional Risk Factors Applicable to Holders of B Interests
o There are conflicts of interest between the A Interests and the B Interests
and between the General Partner and the B Interests with respect to the
determination of the consideration to be received in the Conversion. To the
extent the partners of the General Partner receive Common Stock in the
Conversion, the interest in the Corporation represented by the shares of
Common Stock to be received by holders of B Interests will be diluted.
Also, the value of the consideration to be received by holders of B
Interests and by the General Partner will be reduced to the extent of the
consideration to be received by holders of A Interests.
o Certain provisions of Delaware law and the Corporation's organizational
documents, as well as provisions of the Stockholders Agreement dated as of
March __, 1997 among the Corporation and certain of its stockholders (the
"Stockholders Agreement") and the stockholder rights plan, contain
provisions that may reduce the likelihood of a takeover of the Corporation
that, if successful, might permit stockholders to receive a premium over
the market price for the Common Stock. See "DESCRIPTION OF CAPITAL STOCK."
o Issuances of additional shares of Common Stock or Preferred Stock by the
Corporation could adversely affect existing stockholders' equity interest
in the Corporation and the market price of the Common Stock. Although it
has no present plans
-5-
<PAGE>
to do so, after the Conversion, the Corporation may consider issuing
additional shares of Common Stock or Preferred Stock to raise capital or
for acquisitions, subject to certain restrictions in the Registration
Rights Agreement. Issuances of additional shares may be more likely after
the Conversion because the General Partner believes that one of the
advantages of the Conversion is that the corporate form will expand the
potential investor base, provide greater access to equity markets and
permit the use of capital stock as acquisition currency.
o The Corporation has agreed to file registration statements for the sale of
shares of Common Stock by Lehman Brothers and, subject to certain
limitations, by management, after the Conversion. Lehman Brothers and
management have agreed to cooperate to execute an underwritten secondary
offering of all or some portion of their shares of Common Stock as soon as
practicable after the effective date of the Conversion, subject to market
conditions. The Corporation has agreed not to sell any additional shares of
Common Stock prior to the earlier of such initial secondary offering and
the nine-month anniversary of the Conversion, except in connection with
acquisitions. In addition, Lehman Brothers Capital Partners I, an affiliate
of Lehman/SDI holding 5,788,124 B Interests, may distribute the shares of
Common Stock it receives in the Merger (a majority of which shares would be
freely tradeable immediately after such distribution) to its partners. See
"RESALES OF SECURITIES -- Resales by Lehman Brothers and Management."
o The Corporation's unaudited pro forma balance sheet at ended September 30,
1996 reflect a stockholders' deficit of approximately $19 million and a
negative net book value per common share of $2.97. Counsel has advised the
Partnership and the Corporation that under Delaware law, dividends or
distributions on the stock of a Delaware corporation may be declared or
paid out of surplus, so that the net assets of the corporation after such
payment shall at least equal the amount of its capital. However, such a
dividend or distribution is permissible under such provision only if the
corporation's board of directors concludes that (a) immediately following
payment of such dividend or distribution, the fair market value of the
corporation's assets will exceed its liabilities and (b) the payment of
such dividend or distribution is being made out of the corporation's
surplus (net assets minus capital) and not out of capital in contravention
of Delaware law. In case there shall be no surplus, dividends may also be
paid out of net profits for the fiscal year in which the dividend is
declared and/or the preceding fiscal year. The foregoing restrictions will
not affect the payment of distributions on the Trust Preferred Securities
which are issued by the Trust rather than the Corporation. In addition, it
is the current intention of the Board of Directors of the Corporation not
to declare dividends on the Common Stock.
In addition to the factors noted above, an investment in SunSource (whether
in partnership or corporate form) is subject to risks associated with operating
conditions, competitive factors, economic conditions, industry conditions and
equity market conditions.
Reasons to Convert to Corporate Form
The Conversion will convert SunSource to corporate form, replacing
partnership interests presently held by limited partners with securities of the
Corporation and the Trust. The General Partner believes that there are six
principal reasons for converting to corporate form at this time, which are
discussed at greater length in "SPECIAL FACTORS -- Reasons to Convert to
Corporate Form":
o Expansion of Potential Investor Base. The General Partner anticipates that
the Conversion will expand SunSource's potential investor base to include
institutional and other investors who do not typically invest in limited
partnership securities because of various tax and administrative reasons.
In addition, the General Partner anticipates that the Common Stock (as
compared to Interests) will receive additional investor interest through
increased review and evaluation by research analysts.
o Conservation of Cash. The Corporation will conserve cash by the retention
of the annual management fee of $3,330,000 and the retention of
distributions on the General Partner's ownership in the Partnership and the
Operating Partnership amounting to approximately $400,000 annually.
o Tax Consequences. The benefit of being taxed as a partnership will end
under current law after December 31, 1997. Although the Corporation will
also have to pay tax on its income, SunSource will conserve additional cash
(i) because the interest payable on the Junior Subordinated Debentures,
which will approximately equal the distributions currently paid on the A
Interests, is deductible for federal income tax purposes, resulting in a
corporate tax benefit of approximately $4,900,000 annually and (ii) because
of the difference in rates between the B Tax Distribution, which will be
eliminated, and the tax that
-6-
<PAGE>
will become payable by the Corporation. Subject to changes in federal
income tax laws, approval of the Conversion Proposal should assure tax
deductibility on the distributions in respect of the Trust Preferred
Securities, which will replace the Priority Return. If the Conversion is
not approved, the Priority Return would have to be paid from net income
after corporate income taxes after December 31, 1997.
o Acquisition Currency. The General Partner believes that current industry
conditions may provide opportunities for SunSource to grow through the
acquisition of businesses and assets which are complementary to its
existing businesses. In certain cases, SunSource may want to be able to
issue equity interests as payment of the purchase price for such
acquisitions. The General Partner believes that an equity interest in a
corporation will be a more attractive acquisition currency to sellers than
an interest in a partnership. SunSource is not presently party to any
agreement or understanding regarding a material acquisition and currently
has no plans to make a material acquisition.
o Greater Access to Equity Markets. The General Partner expects that the
Corporation will have greater access to the public and private equity
capital markets than the Partnership, potentially enabling it to raise
capital on more favorable terms than are now available to the Partnership.
This greater access may be of particular benefit if SunSource proposes to
issue equity securities to reduce existing debt or to seek additional funds
for capital expenditures or otherwise expand its business.
o Tax Reporting. The General Partner believes that the complexities of tax
reporting associated with partnership investments are regarded as unduly
burdensome for most limited partners under current conditions. The
ownership of stock rather than Interests will greatly simplify tax
reporting with respect to an investment in SunSource on each limited
partner's individual federal and state income tax returns for future years.
Alternatives to the Conversion
The alternatives to the Conversion which were considered by the General
Partner were continuing the existence of the Partnership as a limited
partnership and the liquidation of the Partnership. The Board of Directors of
Lehman/SDI believes that the Conversion will be more beneficial to the limited
partners than either of these alternatives. The General Partner believes that
other long-term strategies available to SunSource, such as diversification,
disposition of assets and acquisition of assets, are not materially adversely
affected by the decision to convert.
o The benefit of continuing the existence of the Partnership as a limited
partnership by reason of the possible reduction of aggregate federal
income taxes payable by the Partnership and its partners compared to the
aggregate federal income taxes payable by the Corporation and its
stockholders with respect to the income of SunSource, ends under current
law on December 31, 1997. See "SPECIAL FACTORS -- Alternatives to the
Conversion" and "-- Reasons to Convert to Corporate Form."
o The benefit of liquidating the Partnership at this time rather than
effecting the Conversion would be the possibility that the currently
realizable value of the Partnership assets may exceed the value of
SunSource as a continuing business. The General Partner believes that a
liquidation of the Partnership's assets at this time would not result in a
price which would produce an acceptable return to the limited partners,
after the repayment of debt and after paying all costs and expenses of
liquidating and winding up the Partnership, including taxes on the sale of
the assets. Furthermore, the holders of B Interests would not be able to
have a continuing equity interest in the business of the Partnership. See
"SPECIAL FACTORS -- Alternatives to the Conversion" and "-- Recommendation
of the General Partner and Fairness Determination."
Structure of the Conversion
If approved by the limited partners, the Conversion will be effected as
follows:
o The Partnership will contribute its limited partnership interest in the
Operating Partnership and Lehman/SDI, Inc. will contribute its general
partnership interest in the General Partner to a newly formed subsidiary
of the Partnership in exchange for common stock of such subsidiary.
Certain members of management of the General Partner will contribute their
limited partnership interests in the General Partner to the Corporation,
in exchange for 462,000 shares of Common Stock, of which 75,000 shares
will be held in escrow to distributed after two years if all distributions
on the Trust Preferred Securities have then been paid. The Partnership and
its subsidiary will then merge with and into the Corporation and (i) the A
Interests will
-7-
<PAGE>
be converted into 4,217,837 Trust Preferred Securities and cash; (ii) the
B Interests will be converted into 5,418,936 shares of Common Stock and
(iii) the common stock of LPSub held by Lehman/SDI will be converted into
538,000 shares of Common Stock. The Corporation will contribute the
limited partnership interests in the Operating Partnership and the General
Partner and the general partnership interest in the General Partner to a
wholly owned subsidiary.
o As a result of the Conversion, the former holders of the A Interests will
be holders of Trust Preferred Securities and the former holders of B
Interests and the partners of the General Partner will be holders of
shares of Common Stock of the Corporation.
o The Corporation, through its subsidiaries, will then be the holder of the
general and limited partnership interests in the Operating Partnership and
the General Partner. See page 1 above for a diagram of the corporate
structure after the Conversion.
Control of SunSource
The directors and certain officers of Lehman/SDI will become the directors
and officers of the Corporation at the time of the Conversion. For a list of the
directors and executive officers of the Corporation at the time of the
Conversion, see "MANAGEMENT--Directors and Executive Officers After the
Conversion."
Special Committee
Because of its concern regarding the conflicts of interest between the
General Partner and the limited partners with respect to the determination of
the exchange ratios for the exchange of partnership interests for shares of the
Corporation, in June 1996, the Board of Directors of Lehman/SDI appointed a
special committee consisting of two members of the Board of Directors, O. Gordon
Brewer, Jr. and Ernest L. Ransome, III (the "Special Committee"), to consider
and advise the Board with respect to the terms of the Conversion as to the
fairness of the terms of the Conversion to the limited partners, and to make a
recommendation to the Board of Directors with respect to the Conversion. The
members of the Special Committee were not otherwise affiliated with the
Partnership. Smith Barney Inc. ("Smith Barney") was retained to advise the
Special Committee as to the fairness from a financial point of view to the
limited partners of the exchange ratios. The Special Committee retained Dechert
Price & Rhoads as its counsel. The limited partners were not independently
represented in the evaluation or negotiation of the Conversion.
For a more detailed description of the deliberations of the Special
Committee and its determinations regarding certain matters related to the
Conversion, see "SPECIAL FACTORS -- Determinations of the Special Committee,"
and "-- Opinion of Smith Barney," and the opinion of Smith Barney attached as
Exhibit C to this Proxy Statement/Prospectus.
For its services, Smith Barney has been paid a fee of $1,250,000. The fee
was not contingent upon the consummation of the Conversion or any other
occurrence. Smith Barney will also be indemnified against certain liabilities,
including liabilities under the Securities Act and the Exchange Act.
SunSource and its affiliates have had no relationship with Smith Barney
other than that described above.
Recommendation of General Partner and Fairness Determination
The Board of Directors of Lehman/SDI has determined that the Conversion is
fair in all respects, including with regard to procedural matters, to the
limited partners. See "SPECIAL FACTORS--Recommendation of the General Partner
and Fairness Determination." This belief is principally based on the fairness
opinion of Smith Barney, the deliberations concerning the exchange ratios of the
Special Committee consisting of disinterested directors and the requirement that
the Conversion be approved by a majority of the unaffiliated holders of the A
Interests and the B Interests, each voting separately as a class. The Board of
Directors of Lehman/SDI took into account the benefits of the Conversion to
SunSource, the alternatives of continuing in existence as a partnership and
liquidation, and other considerations, including the fact that the General
Partner will no longer have a fiduciary duty to the Partnership and its
partners, and the fact that it will no longer have any liability for the
liabilities of SunSource after the Conversion. See "SPECIAL FACTORS --
Determinations of the Special Committee."
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<PAGE>
The General Partner believes that the Conversion is in the best interests
of the Partnership and the limited partners and recommends that the limited
partners approve the Conversion. There are conflicts of interest between the
General Partner and the limited partners with respect to certain matters
relating to the Conversion. See "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER
IMPORTANT CONSIDERATIONS," "SPECIAL FACTORS -- Determinations of the Special
Committee," "-- Opinion of Smith Barney," and "-- Recommendation of the General
Partner and Fairness Determination."
Summary Description of Trust Preferred Securities
The Trust is a statutory business trust that was formed under the Delaware
Business Trust Act (the "Business Trust Act") pursuant to a declaration of trust
(as amended and restated, the "Declaration"). The Declaration has been filed as
an exhibit to the Registration Statement of which this Prospectus forms a part.
The Trust exists, among other things, for the purpose of (a) issuing (i) its
Trust Preferred Securities to the Corporation in consideration for the deposit
by the Corporation of Junior Subordinated Debentures in the Trust as trust
assets, and (ii) the Trust Common Securities to the Corporation in exchange for
cash and investing the proceeds thereof in an equivalent amount of Junior
Subordinated Debentures. The rights of the holders of the Trust Securities,
including economic rights, rights to information and voting rights, are as set
forth in the Declaration, the Business Trust Act and the Trust Indenture Act of
1939, as amended (the "Trust Indenture Act"). See "SUNSOURCE CAPITAL TRUST" and
"DESCRIPTION OF TRUST PREFERRED SECURITIES." The Corporation has agreed to pay
for all debts and obligations (other than with respect to the Trust Securities)
and all costs and expenses of the Trust, including the fees and expenses of the
Trustees and any income taxes, duties and other governmental charges, and all
costs and expenses with respect thereto, to which the Trust may become subject,
except for United States withholding taxes. See "RISK FACTORS, CONFLICTS OF
INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Additional Risks Applicable to
Holders of A Interests," "SUNSOURCE CAPITAL TRUST" and "DESCRIPTION OF TRUST
PREFERRED SECURITIES."
The Trust Preferred Securities evidence preferred undivided beneficial
interests in the assets of the Trust and will rank pari passu with, and have
terms equivalent to, the Trust Common Securities; provided that (i) if an Event
of Default under the Declaration occurs and is continuing, the holders of Trust
Preferred Securities will have a priority over holders of the Trust Common
Securities with respect to payments in respect of distributions and payments
upon liquidation, redemption or otherwise and (ii) holders of Trust Common
Securities have the exclusive right (subject to the terms of the Declaration) to
appoint, remove and replace Trustees and to increase or decrease the number of
Trustees, subject to the right of holders of Trust Preferred Securities to
appoint a Special Regular Trustee upon the occurrence of an Appointment Event
(as defined herein). The Declaration does not permit the issuance by the Trust
of any securities or beneficial interests in the assets of the Trust other than
the Trust Preferred Securities and the Trust Common Securities, the incurrence
of any indebtedness for borrowed money by the Trust or the making of any
investments other than in the Junior Subordinated Debentures. The Declaration
defines an event of default with respect to the Trust Securities (an "Event of
Default") as the occurrence and continuance of an "event of default" under the
Indenture with respect to the Junior Subordinated Debentures (an "Indenture
Event of Default").
Periodic cash distributions on each Trust Preferred Security will be fixed
at a rate per annum of $2.90 (11.6% of the stated liquidation amount of $25 per
Trust Preferred Security). Distributions in arrears will compound monthly at the
rate per annum of 11.6% of the amount in arrears. Distributions on the Trust
Preferred Securities will be cumulative, will accrue from the Accrual Date (as
defined herein) and, except as otherwise described herein, will be made monthly
in arrears, on the last day of each calendar month of each year, commencing on
May 31, 1997, but only if and to the extent that interest payments are made in
respect of the Junior Subordinated Debentures.
The distribution rate and the distribution and other payment dates for the
Trust Preferred Securities will correspond to the interest rate and the interest
and other payment dates on the Junior Subordinated Debentures deposited in the
Trust as trust assets. As a result, if principal or interest is not paid on the
Junior Subordinated Debentures, including as a result of the Corporation's
election to extend the interest payment period on the Junior Subordinated
Debentures as described below, the Trust will not make payments on the Trust
Securities. The Junior Subordinated Debentures provide that, so long as the
Corporation shall not be in default in the payment of interest on the Junior
Subordinated Debentures, the Corporation has the right under the Indenture to
defer payments of interest on the Junior Subordinated Debentures by extending
the interest payment period from time to time on the Junior Subordinated
Debentures for a period not exceeding 60 consecutive months (each, an "Extension
Period") and, as a consequence, monthly distributions on the Trust Preferred
Securities would not be made (but would continue to accrue with interest thereon
at the rate of 11.6% per annum, compounded monthly by the Trust during any such
Extension Period). During an Extension
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<PAGE>
Period, the Corporation may not declare or pay dividends on, or redeem,
purchase, acquire or make a distribution or liquidation payment with respect to,
any of its Common Stock or Preferred Stock or make any guarantee payments with
respect thereto during such Extension Period. See "RISK FACTORS, CONFLICTS OF
INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Additional Risks Applicable to
Holders of A Interests"; "DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES --
Interest" and "-- Option to Extend Interest Payment Period."
The payment of distributions on the Trust Preferred Securities and
payments on liquidation of the Trust and the redemption of Trust Preferred
Securities, as set forth below, are guaranteed by the Corporation on a
subordinated basis as and to the extent set forth under "DESCRIPTION OF
PREFERRED SECURITIES GUARANTEE." The Preferred Securities Guarantee is a full
and unconditional guarantee from the time of issuance of the Trust Preferred
Securities, but the Preferred Securities Guarantee covers distributions and
other payments on the Trust Preferred Securities only if and to the extent that
the Corporation has made a payment to the Property Trustee of interest or
principal on the Junior Subordinated Debentures deposited in the Trust as trust
assets.
The Trust Preferred Securities and Trust Common Securities are redeemable
on a Pro Rata Basis (as defined herein) from time to time, in whole or in part,
to the same extent as the Junior Subordinated Debentures are redeemable by the
Corporation, on or after April 30, 2002, upon not less than 30 nor more than 60
days' notice, at $25 per Trust Preferred Security plus accrued and unpaid
distributions thereon to the date of redemption, including distributions accrued
as a result of the Corporation's election to defer payments of interest on the
Junior Subordinated Debentures (the "Redemption Price"), payable in cash. The
Trust Preferred Securities will be redeemed upon the maturity or earlier
redemption of the Junior Subordinated Debentures. See "DESCRIPTION OF TRUST
PREFERRED SECURITIES -- Mandatory Redemption." As used in this Proxy
Statement/Prospectus, the term "Pro Rata Basis" shall mean pro rata to each
holder of Trust Securities according to the aggregate liquidation amount of the
Trust Securities held by the relevant holder in relation to the aggregate
liquidation amount of all Trust Securities outstanding unless, in relation to a
payment, an Event of Default under the Declaration has occurred and is
continuing, in which case any funds available to make such payment shall be paid
first to each holder of the Trust Preferred Securities pro rata according to the
aggregate liquidation amount of the Trust Preferred Securities held by the
relevant holder in relation to the aggregate liquidation amount of all Trust
Preferred Securities outstanding, and only after satisfaction of all amounts
owed to the holders of the Trust Preferred Securities, to each holder of Trust
Common Securities pro rata according to the aggregate liquidation amount of the
Trust Common Securities held by the relevant holder in relation to the aggregate
liquidation amount of all the Trust Common Securities outstanding.
In addition, upon the occurrence and during the continuation of a Tax
Event or an Investment Company Event (each as defined herein) arising from a
change in law or a change in legal interpretation or other specified
circumstances, the Trust shall, unless the Junior Subordinated Debentures are
redeemed in the limited circumstances described below, be dissolved with the
result that, after satisfaction of creditors of the Trust, the Junior
Subordinated Debentures will be distributed to the holders of the Trust
Preferred Securities and the Trust Common Securities on a Pro Rata Basis, in
lieu of any cash distribution. If the Junior Subordinated Debentures are
distributed to the holders of the Trust Preferred Securities, the Corporation
will use its best efforts to have the Junior Subordinated Debentures listed on
the New York Stock Exchange or on such other exchange as Trust Preferred
Securities are then listed. In the case of a Tax Event, the Corporation will
have the right in certain circumstances to redeem the Junior Subordinated
Debentures at any time with the result that the Trust will redeem the Trust
Securities on a Pro Rata Basis to the same extent as the Junior Subordinated
Debentures are redeemed. Any redemption for a Tax Event will be at a Redemption
Price of $25.25 per Trust Preferred Security if the redemption occurs within
five years after the Effective Time of the Conversion and at $25 thereafter
plus, in each case, accrued and unpaid distributions to the date of redemption.
If such redemption occurs while the 75,000 shares of Common Stock are held in
escrow on behalf of management employees, Lehman Brothers has agreed that, to
the extent it has disposed of any shares of Common Stock it received in the
Conversion, it will pay to the Corporation a portion of the 1% premium paid by
the Corporation on such redemption proportionate to the percentage interest in
the Corporation that it so disposed of. See "DESCRIPTION OF TRUST PREFERRED
SECURITIES -- Special Event Redemption or Distribution."
The Junior Subordinated Debentures will be issued pursuant to an
indenture, dated as of _______ (the "Indenture") between the Corporation and
Bank of New York, as trustee (the "Indenture Trustee"). See "DESCRIPTION OF
JUNIOR SUBORDINATED DEBENTURES." The Junior Subordinated Debentures will mature
on April 30, 2027 and will bear interest at an annual rate of 11.6% from the
Accrual Date. Interest will be payable monthly in arrears on the last day of
each calendar month of each year, commencing on April 30, 1997; provided that,
as described above, so long as the Corporation shall not be in default in the
payment of interest on the Junior Subordinated Debentures, the Corporation shall
have the right to extend the interest payment period from time to time for a
period not exceeding 60 consecutive months. The Corporation has no current
intention of exercising its right to
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<PAGE>
extend an interest payment period. However, should the Corporation determine to
exercise such right in the future, the market price of the Trust Preferred
Securities is likely to be adversely affected. See "RISK FACTORS, CONFLICTS OF
INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Additional Risks Applicable to
Holders of A Interests" and "DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES --
Option to Extend Interest Payment Period."
The Corporation shall have the right to redeem the Junior Subordinated
Debentures, in whole or in part, from time to time, on or after April 30, 2002,
upon not less than 30 nor more than 60 days' notice, at a redemption price equal
to 100% of the principal amount to be redeemed, plus any accrued and unpaid
interest to the redemption date, including interest accrued as a result of the
Corporation's election to defer payments of interest on the Junior Subordinated
Debentures, payable in cash. In addition, upon the occurrence of a Tax Event,
the Corporation will also have the right if certain conditions are met to redeem
the Junior Subordinated Debentures in whole (but not in part), upon not less
than 30 nor more than 60 days' notice, at a redemption price equal to 101% of
the principal amount to be redeemed if the redemption occurs within five years
after the Effective Time and 100% thereafter, plus, in each case, any accrued
and unpaid interest, to the redemption date.
Comparative Rights of the Interests and the Securities to be Issued
If the Conversion is approved, the rights and limitations to which holders
of Trust Preferred Securities and Common Stock will be subject will be similar
in some respects and will differ in other respects from those to which they are
subject as holders of Interests. These rights and limitations are discussed
below under "COMPARISON OF INTERESTS AND SECURITIES TO BE ISSUED."
Summary of Certain Federal Income Tax Consequences
See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES" for a general description of
the tax consequences of the Merger and the Conversion to holders of A Interests
and B Interests and tax consequences generally.
Conditions to the Conversion
The principal conditions to the Conversion are (i) the affirmative vote of
limited partners holding an aggregate of more than 50% of the outstanding A
Interests and B Interests, each voting separately as a class; (ii) the
affirmative vote of unaffiliated limited partners (limited partners other than
affiliates of the General Partner) holding an aggregate of more than 50% of the
A Interests and B Interests held by unaffiliated limited partners, each voting
separately as a class; (iii) approval of the Trust Preferred Securities and
Common Stock for listing on the NYSE; (iv) no withdrawal of the Special
Committee's determination that the Conversion is fair to the holders of A
Interests and B Interests or of the fairness opinion of Smith Barney; (v)
receipt of a satisfactory tax opinion; (vi) the availability of financing to
refinance existing senior debt on terms acceptable to the Corporation; and (vii)
no material change in applicable law, including with respect to the taxation of
the Conversion, the Corporation or the Trust Preferred Securities.
No Appraisal Rights
Limited partners who object to the Conversion will have no appraisal,
dissenters' or similar rights. Therefore, limited partners will not be entitled
to receive cash payments from SunSource for the fair value of their Interests if
they dissent and the Conversion is approved and consummated. See "VOTING AND
PROXY INFORMATION -- No Appraisal Rights."
Consequences if Conversion Is Not Approved
If the Conversion is not approved by the limited partners, or if the
Conversion is not consummated for any other reason, the Partnership presently
intends to continue to operate as an ongoing business in its current form,
although the General Partner anticipates that, after December 31, 1997, the
Partnership would be taxed as a corporation for federal income tax purposes and
there would be no tax distributions with respect to the B Interests. No other
transaction is currently being considered by the Partnership as an alternative
to the Conversion, although the Partnership may from time to time explore other
alternatives. See "SPECIAL FACTORS -- Consequences if Conversion is Not
Approved."
Limited Partner Litigation
On January 16, 1997, a holder of B Interests filed a purported class
action in the Delaware Court of Chancery seeking to
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<PAGE>
enjoin the Conversion on the terms proposed as well as an order requiring the
defendants to account to the plaintiff and the class for damages and requiring
the General Partner or its affiliates to hold the consideration received in
trust pending a determination of the amounts properly attributable to the
General Partner's interest. Defendants named in the complaint are the
Partnership, the Corporation, the General Partner, Lehman/SDI, Lehman Brothers
Holdings Inc. and all of the directors of Lehman/SDI. The complaint alleges that
the terms of the Conversion unfairly transfer substantial equity to the General
Partner to the detriment of the B Interests and constitute a breach of fiduciary
duty. A second complaint containing substantially identical allegations was
filed by a limited partner in the Delaware Court of Chancery on February 11,
1997. The defendants believe the complaints are without merit and intend to
vigorously defend themselves.
Voting at the Special Meeting
<TABLE>
<CAPTION>
<S> <C>
The Special Meeting......................... The Special Meeting will be held at ____________________________,
Philadelphia, Pennsylvania on April __, 1997 at 10:00 a.m., local time.
Voting...................................... Each Interest entitles the holder thereof on the record date to one vote.
Only limited partners of the Partnership on the record date are entitled to
vote at the Special Meeting. March __, 1997 is the record date for the
determination of limited partners entitled to vote at the Special Meeting.
Interests Outstanding....................... On the record date, 11,099,573 A Interests and 21,675,746 B Interests
were outstanding.
Vote Required............................... Approval of the Conversion will require (i) the favorable vote of limited
partners holding a majority of the outstanding A Interests and B
Interests, each voting separately as a class and (ii) the favorable vote of
unaffiliated limited partners (limited partners other than affiliates of the
General Partner) holding a majority of the A Interests and B Interests
held by unaffiliated limited partners, each voting separately as a class.
Directors, executive officers and other affiliates of the General Partner
own less than 1% of the outstanding A Interests and 46.3% of the
outstanding B Interests and have advised the Partnership that they each
intend to vote their Interests in favor of the Conversion in the first vote
described above.
</TABLE>
List of Partners
Each limited partner has the right for a proper purpose reasonably related
to the limited partner's interest in the Partnership, upon reasonable demand and
at the limited partner's own expense, to have furnished to the limited partner,
upon notification to the General Partner at 2600 One Logan Square, Philadelphia,
PA 19103, Attention: Joseph M. Corvino, Secretary and Vice President - Finance,
a current list of the name and last known business, residence or mailing address
of each partner.
Delivery of Depositary Receipts
Promptly after the Effective Time, the Corporation will cause to be mailed
to all limited partners of record a letter of transmittal containing
instructions with respect to the surrender of Depositary Receipts for A and B
Interests in exchange for certificates representing Trust Preferred Securities
and shares of Common Stock and cash in the case of A Interests. Upon surrender
to the Corporation of one or more Depositary Receipts, together with a properly
completed letter of transmittal, there will be issued and mailed to former
limited partners a certificate or certificates representing the number of Trust
Preferred Securities and shares of Common Stock (and related Rights) to which
such holder is entitled and a check for cash in the case of A Interests. From
and after the Effective Time, each such Depositary Receipt will evidence only
the right to receive Trust Preferred Securities or shares of Common Stock. No
fractional shares will be issued. Instead, (i) each holder of A Interests will
be entitled to receive cash in an amount equal to the fraction of a share of
Trust Preferred Securities to which the holder is otherwise entitled multiplied
by the average closing price of the Trust Preferred Securities for the five
trading days following the Effective Time; and (ii) each holder of B Interests
shall be entitled to receive cash in an amount equal to the fraction of a share
of Common Stock to which the holder is otherwise entitled multiplied by the
average closing price of the Common Stock for the five trading days following
the Effective
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Time. Limited partners should not send any Depositary Receipts with the enclosed
proxy. They should retain such Depositary Receipts until their receipt of the
letter of transmittal after the Effective Time.
Reverse Stock Split
As a result of the one-for-four reverse stock split, each holder of B
Interests will receive one post-split share of Common Stock for every four B
Interests held by such holder prior to the Conversion. The General Partner
believes that current trading prices for the B Interests reduce the
attractiveness of the Corporation's equity securities to the financial community
and the investing public. The reverse stock split will not affect a holder's
percentage ownership in the Corporation or of the outstanding Common Stock
(except for minor differences resulting from the elimination of fractional
shares as described herein). It is impossible to predict the market's reaction
to any reverse stock split or, in this case, to separate that reaction from the
market's reaction to the Conversion as a whole. However, the Corporation expects
that immediately after the reverse stock split each share of Common Stock would
be valued at a price approximately four times greater than without the split.
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<PAGE>
Summary Financial Information of the Partnership
and Summary Unaudited Pro Forma Financial Information of the Corporation
(dollars in thousands, except for per unit data)
The following tables set forth summary consolidated historical and unaudited pro
forma financial and operating data of the Partnership and the Corporation as of
the dates and for the periods indicated. The summary historical financial
information of the Partnership for the five years ended December 31, 1995 has
been derived from financial statements which have been audited by Coopers &
Lybrand L.L.P., independent accountants. The financial data for the nine-month
periods ending September 30, 1996 and 1995 are derived from unaudited financial
statements. The unaudited financial statements include all adjustments,
consisting of normal recurring accruals, which the Partnership considers
necessary for a fair presentation of the financial position and the results of
operations for these periods. Operating results for the nine months ended
September 30, 1996 are not necessarily indicative of the results that may be
expected for the entire year ending December 31, 1996. The summary unaudited pro
forma financial information gives effect to the Conversion as if it occurred at
the beginning of the period for the pro forma income statement data presented
and as of the date presented with respect to the balance sheet data. The pro
forma financial information is also presented excluding gains and results of
operations from divested divisions. The summary financial information should be
read in conjunction with the Consolidated Financial Statements and Notes thereto
of the Partnership and the unaudited Pro Forma Financial Statements and Notes
thereto of the Corporation included elsewhere herein. See "INDEX TO FINANCIAL
STATEMENTS." See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" for acquisitions and divestitures that affect
comparability, and for a discussion of the Corporation's recently announced
restructuring plans.
<TABLE>
<CAPTION>
P A R T N E R S H I P - H I S T O R I C A L
-----------------------------------------------------------------------------------------------
Nine Months Ended
September 30, Years Ended
(Unaudited) December 31,
-------------------------- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA: 1996 1995 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- -------- -------- ------
Net sales $489,517 $481,826 $628,935 $735,861 $655,707 $612,052 $573,457
Income from operations 24,914 25,623 31,302 37,759 28,975 29,712 27,225
Gain on Sale of Divisions -- 16,500 20,644 3,523 -- -- --
Provision (benefit) for income
taxes (372) 362 537 100 869 493 630
Income before extraordinary loss
and cumulative effect of change in
accounting principle 20,609 36,067 44,745 29,544 18,506 17,691 15,073
Extraordinary loss -- (629) (629) -- -- (3,434) --
Cumulative effect on prior years of
change in accounting principle -- -- -- -- -- 822 --
Net income $ 20,609 $ 35,438 $ 44,116 $ 29,544 $ 18,506 $ 15,079 $ 15,073
Net income per limited partner
interest:
- Class A $ 0.82 $ 0.82 $ 1.10 $ 1.10 $ 1.10 $ 1.10 $ 1.10
- Class B $ 0.52 $ 1.20 $ 1.45 $ 0.79 $ 0.28 $ 0.13 $ 0.13
Cash distributions declared per
limited partnership interest:
- Class A $ 0.82 $ 0.82 $ 1.10 $ 1.10 $ 1.10 $ 1.10 $ 1.10
- Class B $ 0.23 $ 0.55 $ 0.67 $ 0.49 $ 0.27 $ 0.13 $ 0.13
Weighted average number of
outstanding limited partner
interests
- Class A 11,099,573 11,099,573 11,099,573 11,099,573 11,099,573 11,099,573 11,099,573
- Class B 21,675,746 21,675,746 21,675,746 21,675,746 21,675,746 21,675,746 21,675,746
</TABLE>
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<TABLE>
<CAPTION>
Nine Months Ended
September 30, Years Ended
(Unaudited) December 31,
-------------------------- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA: 1996 1995 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- -------- -------- ------
Cash provided by operating
activities $20,623 $ 7,683 $17,050 $17,704 $23,571 $27,056 $30,038
BALANCE SHEET DATA:
Total assets 263,303 257,567 254,591 266,186 273,493 261,588 264,544
Long-term debt and capitalized
lease obligations 63,934 70,465 63,934 74,781 104,185 115,503 120,108
Total liabilities 162,143 159,385 159,648 186,967
</TABLE>
C O R P O R A T I O N - P R O F O R M A
--------------------------------------------
Nine Months Ended Year Ended
September 30, December 31,
-------------------------- ----------------
INCOME STATEMENT DATA: 1996 1995 1995
---- ---- ----
Net sales $489,517 $455,501 $599,865
Income from operations 27,405 27,718 34,362
Distribution on guaranteed
preferred beneficial interest
in theCorporation's junior
subordinateddebentures (9,174) (9,174) (12,232)
Income before income taxes 12,848 12,222 14,598
Provision for income taxes 7,013 6,157 7,194
Net income 7,067 6,839 8,026
Net income per common share $1.09 $.96 $1.12
Weighted average number of
outstanding common shares 6,418,936 6,418,936 6,418,936
BALANCE SHEET DATA: September 30,
1996
-------------
Total assets $268,924
Long-term debt 97,259
Guaranteed preferred beneficial
interests in Corporation's Junior
Subordinated Debentures 105,446
Stockholders' deficit $(19,073)
Book value per common share
$ (2.97)
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<PAGE>
RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS
Before completing the enclosed form of proxy, each limited partner should
carefully read this entire Proxy Statement/Prospectus, including the Exhibits
and the Partnership's Form 10-K for the year ended December 31, 1995 and the
other documents incorporated herein by reference, and should give particular
attention to the following considerations.
Risks Applicable to Holders of A Interests and B Interests
Conflicts of Interest
The General Partner has conflicts of interest with the limited partners in
the Conversion. The General Partner's economic and other interests and risks in
the Partnership differ from those of the limited partners. A benefit to the
General Partner from the Conversion which is not shared by the limited partners
is the elimination of its liability for obligations and liabilities of SunSource
which may occur after the Conversion. If these conflicts of interest did not
exist, it is possible that the terms of the Conversion might be different than
the terms approved by the Board of Directors of the General Partner. For
additional information concerning the conflicts of interest between the General
Partner and the limited partners in the Conversion, see "SPECIAL FACTORS --
Background of the Conversion," "-- Determinations of the Special Committee," "--
Opinion of Smith Barney," and "-- Recommendation of the General Partner and
Fairness Determination." In addition, certain members of management will receive
accelerated payments under certain deferred compensation plans of the Operating
Partnership.
Possible Reduction in Fiduciary Standards
At least one Delaware court has stated that the fiduciary duties of a
general partner to limited partners are comparable to those of a director to
stockholders. Other courts, however, have indicated that the fiduciary duties of
a general partner are greater than those of a director to stockholders.
Therefore, although it is unclear whether or to what extent there are any
differences in such fiduciary duties, it is possible that the fiduciary duties
of directors of the Corporation to its stockholders could be less than those of
the General Partner to the limited partners, which may result in decreased
potential liability of the directors of the Corporation. The Certificate of
Incorporation of the Corporation expressly limits the potential liabilities of
the directors for certain breaches of their fiduciary duties. See "COMPARISON OF
INTERESTS AND SECURITIES TO BE ISSUED -- Fiduciary Duties."
No Independent Representation
The Conversion was proposed by the General Partner and negotiated by the
Special Committee with the General Partner without independent representation of
the limited partners. Independent representation on behalf of the limited
partners might have caused the terms of the Conversion to be different in
material respects from those described herein. In addition, Smith Barney, the
independent investment banking firm retained by the Special Committee on behalf
of the Partnership to render its opinion as to the fairness, from a financial
point of view, of the exchange ratios, was not separately selected by the
limited partners.
Adverse Tax Implications
A primary disadvantage of converting to corporate form is tax related. The
principal tax disadvantage is that a corporation pays taxes on its taxable
income, and its stockholders generally pay taxes on any dividends from the
corporation out of current or accumulated earnings and profits; whereas a
partnership pays no tax and its partners pay tax on their distributive share
(whether or not actually distributed) of the Partnership's taxable income, gain,
loss, deductions and credits. Under current law, the Partnership will be taxed
as a corporation after December 31, 1997; however, efforts have been made to
extend this date and there can be no assurance that further efforts in this
regard will not be successful. As a result of a conversion of the Partnership to
corporate form, limited partners will forego the potential future tax benefits
associated with operating in partnership form, including primarily the right,
through December 31, 1997, to have the Partnership income subject to only one
level of federal income taxation.
In addition, the Conversion will be a taxable transaction to holders of A
Interests, who will recognize gain or loss equal to the difference between the
cash and the fair market value of the Trust Preferred Securities received in the
Conversion and their tax basis in their A Interests, and to holders of both A
and B Interests. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES."
Addition of Provisions that May Discourage Changes of Control
The Partnership Agreement of the Partnership contains many provisions
which are designed to vest in the General Partner
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the right to manage the business of the Partnership and to restrict the right of
the limited partners to change management and to approve transactions of a type
which are generally subject to stockholder approval in the case of a
corporation. The Partnership does not hold annual meetings of limited partners
and does not permit limited partners to vote on many of the matters upon which
stockholders of the Corporation will be permitted to vote. Upon effectiveness of
the Conversion, the Partnership will terminate and the stockholders will have
the rights described under the captions "DESCRIPTION OF TRUST PREFERRED
SECURITIES," "DESCRIPTION OF CAPITAL STOCK" and "COMPARISON OF INTERESTS AND
SECURITIES TO BE ISSUED."
The Corporation's Certificate of Incorporation and By-laws, the
Stockholders Agreement and the stockholder rights plan contain certain
provisions that may have the effect of encouraging persons considering an
acquisition or takeover of the Corporation to negotiate with the Board of
Directors rather than to pursue non-negotiated acquisitions or takeover attempts
that a stockholder might consider to be in the stockholders' best interests,
including offers that might result in a premium over market price for the Common
Stock. These provisions include authorization for the Board of Directors to
issue classes or series of Preferred Stock, a prohibition on stockholder action
by written consent and a requirement that stockholders notify the Corporation in
advance of any director nominees or items of business to be proposed at any
meeting of stockholders. See "DESCRIPTION OF CAPITAL STOCK -- Anti-takeover
Provisions." In addition, the deferred compensation plans of the Operating
Partnership will continue to provide that, upon the occurrence of a change in
control as defined in the plans, the vesting provisions of awards under the
plans will be accelerated. See "MANAGEMENT -- Deferred Compensation Plans."
These provisions may reduce interest in the Corporation as a potential
acquisition target or reduce the likelihood of a change in the management or
voting control of the Corporation without the consent of the then incumbent
Board of Directors.
Loss of Contractual Right to Distributions
The Partnership Agreement requires the Partnership to distribute Cash
Available for Distribution to the A Interests to the extent of the Priority
Return and to the B Interests to the extent of the B Tax Distribution. However,
Cash Available for Distribution is determined after deducting such reserves as
the General Partner, in its sole discretion, determines to be necessary for
capital expenditures and other business purposes. After converting into
corporate form, limited partners will lose this contractual right. Payment of
distributions on the Trust Preferred Securities by the Trust will depend on
payments by the Corporation on the Junior Subordinated Debentures which can be
deferred for as long as five years. The Board of Directors of the Corporation
will have complete discretion as to the distribution of dividends on the Common
Stock. It is the current intention of the Board of Directors not to declare
dividends on the Common Stock; future dividends will depend on, among other
things, the future after-tax earnings, operations, capital requirements,
borrowing capacity and financial condition of the Corporation and general
business conditions.
Elimination of General Partner Liability for Corporation Obligations
The partners of the General Partner will receive a benefit from the
Conversion which is not shared by all limited partners generally in the
elimination of the General Partner's liability for obligations and liabilities
of SunSource which may occur after the Conversion. Under Delaware law, as a
general partner of the Partnership, the General Partner is liable to the extent
of its assets for the debts and obligations of the Partnership. If the
Conversion is consummated, the partners of the General Partner would be
stockholders of the Corporation and would not have liability for the debts and
obligations of the Corporation.
No Dissenters', Appraisal or Similar Rights for Nonconsenting Limited
Partners
If the limited partners approve the Conversion, all holders of Interests
will be bound by such approval even though they, individually, may have voted
against the Conversion. Under applicable state law and the terms of the
Partnership Agreement, limited partners will have no dissenters', appraisal or
similar rights in connection with the Conversion, nor will such rights be
voluntarily accorded to limited partners by the Partnership or the Corporation.
Therefore, limited partners will not be entitled to receive cash payment from
SunSource for the fair value of their Interests if they dissent and the
Conversion is approved and consummated. See "VOTING AND PROXY INFORMATION -- No
Appraisal Rights."
Uncertainty Regarding Market Price for Trust Preferred Securities and
Common Stock
At present there is no trading market for the Trust Preferred Securities
and Common Stock. Application has been made to list these securities on the NYSE
under the trading symbols SDP for the Trust Preferred Securities and SDPB for
the Common Stock. There can be no assurance that holders will be able to sell
their securities at favorable prices or that the trading prices for the
securities will be comparable to the trading prices for the Interests prior to
consummation of the Conversion. A large number of securities may be traded by
former limited partners immediately following completion of the Conversion for
various reasons, including the perceived increased liquidity that the securities
may afford to limited partners. This might tend to depress the market
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price of the securities. The Corporation has agreed to file registration
statements for the sale of shares of Common Stock by Lehman Brothers and subject
to certain limitations, by management after the Conversion.
The closing prices on the New York Stock Exchange on March __, 1997 for A
Interests and B Interests were $____ and $___, respectively.
Various anti-takeover provisions which would apply to the Corporation
after the Conversion could also have a negative effect on the market price of
the Common Stock.
Transaction Costs
Transaction costs of approximately $3,600,000 will be incurred by the
Partnership, of which $3,000,000 will be paid by the Partnership whether or not
the Conversion is completed.
Change in Ownership Rights
As a result of the Conversion, limited partners will lose certain rights
associated with their ownership of Interests and will acquire certain rights
associated with their ownership of Trust Preferred Securities and shares of
Common Stock. A comparison of these factors, which may relate to investment
objectives of limited partners, is set forth in "COMPARISON OF INTERESTS AND
SECURITIES TO BE ISSUED."
Additional Risks Applicable to Holders of A Interests
Ranking of Subordinated Obligations under Preferred Securities Guarantee
and Junior Subordinated Debentures; Dependence on the Corporation
The obligations of the Corporation under the Junior Subordinated
Debentures are unsecured obligations of the Corporation and will be subordinate
and junior in right of payment to Senior Indebtedness of the Corporation but
senior to its capital stock. The Corporation's obligations under the Preferred
Securities Guarantee are unsecured and will rank (i) subordinate and junior in
right of payment to all other liabilities of the Corporation, including the
Junior Subordinated Debentures, except those made pari passu or subordinate by
their terms, and (ii) senior to all capital stock now or hereafter issued by the
Corporation and to any guarantee now or hereafter entered into by the
Corporation in respect of its capital stock. Because the Corporation is a
holding company, the Junior Subordinated Debentures (and the Corporation's
obligations under the Preferred Securities Guarantee) are also effectively
subordinated to all existing and future liabilities, including trade payables,
of the Operating Partnership and other subsidiaries of the Corporation, except
to the extent that the Corporation is a creditor of the subsidiaries recognized
as such. There are no terms in the Trust Preferred Securities, the Junior
Subordinated Debentures or the Preferred Securities Guarantee that limit the
Corporation's ability to incur additional indebtedness, including indebtedness
that ranks senior to or pari passu with the Junior Subordinated Debentures and
the Preferred Securities Guarantee, or the ability of its subsidiaries to incur
additional indebtedness. See "DESCRIPTION OF PREFERRED SECURITIES GUARANTEE --
Status of the Preferred Securities Guarantee" and "DESCRIPTION OF JUNIOR
SUBORDINATED DEBENTURES -- Subordination."
The Indenture provides that the Corporation shall pay all debts and
obligations (other than with respect to the Trust Securities) and all costs and
expenses of the Trust, including any taxes and all costs and expenses with
respect thereto, to which the Trust may become subject, except for United States
withholding taxes. No assurance can be given that the Corporation will have
sufficient resources to enable it to pay such debts, obligations, costs and
expenses on behalf of the Trust.
Enforcement of Certain Rights by Holders of Trust Preferred Securities
If an Event of Default (as defined herein) under the Declaration occurs
and is continuing, then the holders of Trust Preferred Securities would rely on
the enforcement by the Property Trustee (as defined herein) of its rights as a
holder of the Junior Subordinated Debentures against the Corporation. The
holders of a majority in liquidation amount of the Trust Preferred Securities
will have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Property Trustee or to direct the
exercise of any trust or power conferred upon the Property Trustee under the
Declaration, including the right to direct the Property Trustee to exercise the
remedies available to it as a holder of the Junior Subordinated Debentures. If
the Property Trustee fails to enforce its rights with respect to the Junior
Subordinated Debentures held by the Trust, any record holder of Trust Preferred
Securities may institute legal proceedings directly against the Corporation to
enforce the Property Trustee's rights under such Junior Subordinated Debentures
without first instituting any legal proceedings against such Property Trustee or
any other person or entity.
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The Trust's ability to make distributions and other payments on the Trust
Preferred Securities is solely dependent upon the Corporation making interest
and other payments on the Junior Subordinated Debentures deposited as trust
assets as and when required. If the Corporation were not to make distributions
or other payments on the Junior Subordinated Debentures for any reason,
including as a result of the Corporation's election to defer the payment of
interest on the Junior Subordinated Debentures by extending the interest period
on the Junior Subordinated Debentures, the Trust will not make payments on the
Trust Securities. In such an event, holders of the Trust Preferred Securities
would not be able to rely on the Preferred Securities Guarantee since
distributions and other payments on the Trust Preferred Securities are subject
to such Guarantee only if and to the extent that the Corporation has made a
payment to the Property Trustee of interest or principal on the Junior
Subordinated Debentures deposited in the Trust as trust assets. Instead, holders
of Trust Preferred Securities would rely on the enforcement by the Property
Trustee of its rights as registered holder of the Junior Subordinated Debentures
against the Corporation pursuant to the terms of the Indenture and may vote to
appoint a Special Regular Trustee. In the event the Corporation failed to pay
interest on or principal of the Junior Subordinated Debentures on the payment
date on which such payment is due and payable (or, in the case of redemption,
the redemption date), then a holder of Trust Preferred Securities may directly
institute a proceeding against the Corporation under the Indenture for
enforcement of payment to such holder of the interest on or principal of such
Junior Subordinated Debentures having a principal amount equal to the aggregate
liquidation amount of the Trust Preferred Securities of such holder (a "Direct
Action"). In connection with such Direct Action, the Corporation will be
subrogated to the rights of such holder of Trust Preferred Securities under the
Declaration to the extent of any payment made by the Corporation to such holder
of Trust Preferred Securities in such Direct Action. Except as set forth herein,
holders of Trust Preferred Securities will not be able to exercise directly any
other remedy available to the holders of Junior Subordinated Debentures or
assert directly any other rights in respect of the Junior Subordinated
Debentures. See "DESCRIPTION OF PREFERRED SECURITIES GUARANTEE," and
"DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES -- Indenture Events of Default."
If the Trust's failure to make distributions on the Trust Preferred Securities
is a consequence of the Corporation's exercise of its right to extend the
interest payment period for the Junior Subordinated Debentures, the Property
Trustee will have no right to enforce the payment of distributions on the Trust
Preferred Securities until an Event of Default under the Declaration shall have
occurred.
Option to Extend Interest Payment Period; Tax Impact of Extension
So long as the Corporation shall not be in default in the payment of
interest on the Junior Subordinated Debentures, the Corporation has the right
under the Indenture to defer payments of interest on the Junior Subordinated
Debentures by extending the interest payment period from time to time for an
Extension Period not exceeding 60 consecutive months, during which no interest
shall be due and payable. In such an event, monthly distributions on the Trust
Preferred Securities would not be made (but would continue to compound monthly
at the rate of 11.6% per annum) by the Trust during any such Extension Period.
If the Corporation exercises the right to extend an interest payment period, the
Corporation may not during such Extension Period declare or pay dividends on, or
redeem, purchase, acquire or make a distribution or liquidation payment with
respect to, any of its Common Stock or Preferred Stock.
Prior to the termination of any Extension Period, the Corporation may
further extend such Extension Period; provided that such Extension Period
together with all such previous and further extensions thereof may not exceed 60
consecutive months. Upon the termination of any Extension Period and the payment
of all amounts then due, the Corporation may commence a new Extension Period,
subject to the above requirements. The Corporation may also prepay at any time
all or any portion of the interest accrued during an Extension Period.
Consequently, there could be multiple Extension Periods of varying lengths
throughout the term of the Junior Subordinated Debentures. See "DESCRIPTION OF
TRUST PREFERRED SECURITIES -- Distributions" and "DESCRIPTION OF THE JUNIOR
SUBORDINATED DEBENTURES -- Option to Extend Interest Payment Period."
Because the Corporation has the right to extend the interest payment
period up to 60 consecutive months on various occasions, the Junior Subordinated
Debentures will be treated as issued with "original issue discount" for United
States federal income tax purposes. As a result, holders of Trust Preferred
Securities will be required to include their pro rata share of original issue
discount in gross income as it accrues for United States federal income tax
purposes in advance of the receipt of cash. Generally, all of a securityholder's
taxable interest income with respect to the Junior Subordinated Debentures will
be accounted for as "original issue discount" and actual distributions of stated
interest will not be separately reported as taxable income. See "CERTAIN FEDERAL
INCOME TAX CONSEQUENCES -- Certain Tax Consequences of the Conversion to Holders
of A Interests -- Accrual of Original Issue Discount and Premium" and "--
Potential Extension of Payment Period on the Junior Subordinated Debentures."
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As described above, the Corporation has the right to extend an interest
payment period on the Junior Subordinated Debentures from time to time for a
period not exceeding 60 consecutive monthly interest periods. If the Corporation
determines to extend an interest payment period, or if the Corporation
thereafter extends an Extension Period or prepays interest accrued during an
Extension Period as described above, the market price of the Trust Preferred
Securities is likely to be adversely affected. In addition, as a result of such
rights, the market price of the Trust Preferred Securities (which represent an
undivided beneficial interest in Junior Subordinated Debentures) may be more
volatile than other securities on which original issue discount accrues that do
not have such rights. A holder that disposes of Trust Preferred Securities
during an Extension Period, therefore, may not receive the same return on
investment as a holder that continues to hold its Trust Preferred Securities.
See "DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES -- Option to Extend Interest
Payment Period."
Unlike the A Interests, which are not subject to mandatory or optional
redemption by the Partnership, the Junior Subordinated Debentures held by the
Trust may be redeemed by the Corporation at 100% of the liquidation amount plus
accrued and unpaid distributions at any time after April 30, 2002.
Special Event Redemption or Distribution
Upon the occurrence and during the continuation of a Tax Event or
Investment Company Event (each as defined herein), which may occur at any time,
the Trust shall, unless the Junior Subordinated Debentures are redeemed in the
circumstances described below, be dissolved with the result that, in the manner
described in "DESCRIPTION OF TRUST PREFERRED SECURITIES -- Liquidation
Distribution Upon Dissolution," Junior Subordinated Debentures having an
aggregate principal amount equal to the aggregate stated liquidation amount of,
and bearing accrued and unpaid interest equal to accrued and unpaid
distributions on, the Trust Preferred Securities and Trust Common Securities
would be distributed on a Pro Rata Basis to the holders of the Trust Preferred
Securities and Trust Common Securities in liquidation of the Trust. In the case
of a Tax Event, in certain circumstances, the Corporation shall have the right
to redeem at any time the Junior Subordinated Debentures, in whole or in part,
in which event the Trust will redeem Trust Preferred Securities and Trust Common
Securities on a Pro Rata Basis to the same extent as the Junior Subordinated
Debentures are redeemed. The price paid on such redemption will be $25.25 in
respect of each Trust Preferred Security if the redemption in the case of a Tax
Event occurs within five years of the Conversion and $25 thereafter. There can
be no assurance as to the market prices for Trust Preferred Securities or the
Junior Subordinated Debentures which may be distributed in exchange for Trust
Preferred Securities if a dissolution and liquidation of the Trust were to
occur. Accordingly, the Trust Preferred Securities or the Junior Subordinated
Debentures which the investor may receive on dissolution and liquidation of the
Trust, may trade at a discount. See "DESCRIPTION OF TRUST PREFERRED SECURITIES
- -- Special Event Redemption or Distribution" and "DESCRIPTION OF JUNIOR
SUBORDINATED DEBENTURES -- General."
Under current United States federal income tax law and interpretation
thereof and assuming, as expected, the Trust is treated as a grantor trust for
United States federal income tax purposes, a distribution by the Trust of the
Junior Subordinated Debentures pursuant to a liquidation of the Trust will not
be a taxable event to the Trust or to holders of the Trust Preferred Securities
and will result in a holder of the Trust Preferred Securities receiving directly
such holder's pro rata share of the Junior Subordinated Debentures (previously
held indirectly through the Trust). If, however, the liquidation of the Trust
were to occur because the Trust is subject to United States federal income tax
with respect to income accrued or received on the Junior Subordinated Debentures
as a result of the occurrence of a Tax Event or otherwise, the distribution of
Junior Subordinated Debentures to holders of the Trust Preferred Securities by
the Trust would be a taxable event to the Trust and each holder, and holders of
the Trust Preferred Securities would recognize gain or loss as if they had
exchanged their Trust Preferred Securities for the Junior Subordinated
Debentures they received upon the liquidation of the Trust. See "CERTAIN FEDERAL
INCOME TAX CONSEQUENCES -- Certain Tax Consequences of the Conversion to Holders
of A Interests -- Distribution of Junior Subordinated Debentures to Holders of
Trust Preferred Securities."
On March 19, 1996, the Revenue Reconciliation Bill of 1996 (the "Bill")
was introduced in the 104th Congress which would have, among other things,
generally denied interest deductions on an instrument, issued by a corporation,
that has a maximum term of more than 20 years and that is not shown as
indebtedness on the separate balance sheet of the issuer or, where the
instrument is issued to a related party (other than a corporation), where the
holder or some other related party issues a related instrument that is not shown
as indebtedness on the issuer's consolidated balance sheet. The above-described
provisions of the Bill were proposed to be effective generally for instruments
issued on or after December 7, 1995. If this provision were to apply to the
Junior Subordinated Debentures, the Company would not be able to deduct interest
on the Junior Subordinated Debentures. However, on March 29, 1996, the Chairmen
of the Senate Finance and House Ways and Means Committees issued a joint
statement (the "Joint Statement") to the effect that it was their intention that
the effective date of the Bill, if enacted, would be no earlier than the date of
appropriate Congressional action. In addition, subsequent to the publication of
the Joint Statement, Senator Daniel Patrick
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Moynihan and Representatives Sam M. Gibbons and Charles B. Rangel wrote letters
to Treasury Department officials concurring with the view expressed in the Joint
Statement (the "Democrat Letters"). The 104th Congress adjourned without
enacting the Bill. Similar legislation was reproposed by the Treasury Department
on February 6, 1997, as part of President Clinton's Fiscal 1998 Budget Proposal
(the "Proposed Legislation"). The Proposed Legislation would, however, generally
deny an interest deduction with respect to an instrument not shown as
indebtedness on the separate or consolidated balance sheet of the issuer (as
described above) and with a maximum term of more than 15 years (as contrasted to
a maximum term of more than 20 years under the provision of the Bill). Such
provision is proposed to be effective generally for instruments issued on or
after the date of the first committee action. There can be no assurance that
current or future legislative or administrative proposals or final legislation
will not adversely affect the ability of the Company to deduct interest on the
Junior Subordinated Debentures or otherwise affect the tax treatment described
herein. Such a change, therefore, could give rise to a Tax Event, which would
permit the Company to cause a redemption of the Trust Preferred Securities or to
dissolve the Trust and distribute the Junior Subordinated Debentures to the
holders of Trust Securities in liquidation of the Trust upon receiving an
opinion of counsel as described more fully under "DESCRIPTION OF CAPITAL STOCK
- -- Redemption -- Special Event Redemption or Distribution of Junior Subordinated
Debentures."
Limited Voting Rights
Holders of Trust Preferred Securities will have limited voting rights and,
subject to the rights of holders of Trust Preferred Securities to appoint a
Special Regular Trustee upon the occurrence of an Appointment Event, will not be
able to appoint, remove or replace, or to increase or decrease the number of,
Trustees, which rights are vested exclusively in the holders of Trust Common
Securities.
Additional Risks Related to Holders of B Interests
Conflicts of Interest with A Interests and General Partner
The A Interests and the General Partner have conflicts of interest with
the B Interests with respect to the determination of the consideration to be
received in the Conversion. To the extent the partners of the General Partner
will receive Common Stock in the Conversion, the shares of Common Stock to be
received by holders of B Interests will be diluted. Also, the value of the
consideration to be received by holders of B Interests and by the General
Partner will be reduced to the extent of the consideration to be received by
holders of A Interests.
Future Dilution of Common Stock
The Corporation will be permitted to issue additional equity or debt
securities, including shares of Preferred Stock. Issuances of additional shares
of Common Stock or shares of Preferred Stock could adversely affect
stockholders' equity interest in the Corporation and the market price of the
Common Stock, and the interests in the assets, liabilities, cash flow and
results of operations of the Corporation represented by the shares of Common
Stock issued pursuant to the Conversion may be diluted. Issuances of additional
shares may be more likely after the Conversion if the corporate form expands the
potential investor base, provides greater access to equity markets and permits
the use of capital stock as acquisition currency. Holders of Common Stock will
not be entitled to preemptive rights.
Sale of Common Stock by Lehman Brothers and Management
The Corporation has agreed to file registration statements for the sale of
shares of Common Stock by Lehman Brothers and, subject to certain limitations,
by management after the Conversion. Lehman Brothers and management have agreed
to cooperate to execute an underwritten secondary offering of all or some
portion of their shares of Common Stock as soon as practicable after the
effective date of the Conversion, subject to market conditions.
The Corporation has agreed not to sell any additional shares of Common
Stock prior to the earlier of such initial secondary offering and the nine-month
anniversary of the Conversion, except in connection with acquisitions. In
addition, Lehman Brothers Capital Partners I, an affiliate of Lehman/SDI holding
5,788,124 B Interests, may distribute the shares of Common Stock it receives in
the Merger (a majority of which shares would be freely tradeable immediately
after such distribution) to its partners. See "RESALES OF SECURITIES -- Resales
by Lehman Brothers and Management."
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Certain Delaware Corporate Law Considerations
The Corporation's unaudited pro forma balance sheet at September 30, 1996
reflect a stockholders' deficit of approximately $19 million and a negative net
book value per common share of $2.97. Counsel has advised the Partnership and
the Corporation that under Delaware law, dividends or distributions on the stock
of a Delaware corporation may be declared or paid out of surplus, so that the
net assets of the corporation after such payment shall at least equal the amount
of its capital. However, such a dividend or distribution is permissible under
such provision only if the corporation's board of directors concludes that (a)
immediately following payment of such dividend or distribution, the fair market
value of the corporation's assets will exceed its liabilities and (b) the
payment of such dividend or distribution is being made out of the corporation's
surplus (net assets minus capital) and not out of capital in contravention of
Delaware law. In case there shall be no surplus, dividends may also be paid out
of net profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year. The foregoing restrictions will not affect the payment of
distributions on the Trust Preferred Securities which are issued by the Trust
rather than the Corporation. In addition, it is the current intention of the
Board of Directors of the Corporation not to declare dividends on the Common
Stock.
Other Considerations
In addition to the factors noted above, an investment in SunSource
(whether in partnership or corporate form) is subject to risks associated with
operating conditions, competitive factors, economic conditions, industry
conditions and equity market conditions. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Recent
Developments."
VOTING AND PROXY INFORMATION
Voting Procedures
Under the Partnership Agreement, a holder of an Interest may vote only if
the holder has been admitted as a limited partner of the Partnership on or
before the record date for the Special Meeting. Each Interest entitles the
holder thereof to one vote with respect to matters to be voted on at the Special
Meeting. The General Partner has set the close of business on March __, 1997 as
the record date (the "Record Date") for the determination of limited partners
entitled to vote at the Special Meeting.
The Partnership will accept proxies at any time before the Conversion is
voted on at the Special Meeting. The enclosed form of proxy, when properly
completed and returned, will constitute a limited partner's vote for or against,
or abstention on, the Conversion. If a limited partner returns a form of proxy
duly signed without voting, the limited partner will be deemed to have voted for
the Conversion.
Revocation of Proxies
A limited partner may revoke a proxy any time during the solicitation
period before its exercise by (i) delivering written notice of revocation to the
Partnership, (ii) executing and delivering to the Partnership a later dated form
of proxy or (iii) voting in person at the Special Meeting. Any such written
notice or later dated proxy should be sent to SunSource L.P., 2600 One Logan
Square, Philadelphia, Pennsylvania 19103, Attention: Joseph M. Corvino,
Secretary.
Vote Required; Quorum
Approval of the Conversion will require (i) the affirmative vote of
limited partners holding an aggregate of more than 50% of the outstanding A
Interests and B Interests, each voting separately as a class, and (ii) the
affirmative vote of unaffiliated limited partners (limited partners other than
affiliates of the General Partner) holding an aggregate of more than 50% of the
A Interests and B Interests held by unaffiliated limited partners, each voting
separately as a class. As of the Record Date, there were 11,099,573 A Interests
outstanding, of which 11,019,850 were held by unaffiliated holders, and
21,675,746 B Interests outstanding, of which 11,633,603 were held by
unaffiliated holders. The presence, in person or by proxy, of limited partners
holding an aggregate of more than 50% of each class will constitute a quorum at
the Special Meeting. Abstentions and broker non-votes will be treated as present
for the purpose of determining a quorum but will have the effect of votes
against the Conversion Proposal.
The executive officers, directors and other affiliates of the General
Partner own less than 1% of the outstanding A Interests and 46.3% of the
outstanding B Interests. They have advised the Partnership that they each intend
to vote their Interests in favor
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of the Conversion, although they will not participate in the votes by the
unaffiliated holders of A Interests and B Interests. For further information
concerning the ownership of Interests by the General Partner's affiliates,
executive officers and directors, see "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT."
Solicitation of Proxies
This solicitation is being made by the General Partner on behalf of the
Partnership. The Partnership will pay the cost of soliciting proxies. The
Partnership will reimburse brokerage houses and other nominees for their
reasonable expenses of forwarding proxy materials to beneficial owners of
Interests. The Partnership has retained D.F. King & Co., Inc. to aid in the
solicitation of proxies and to verify certain records related to the
solicitation of proxies for a fee of $10,000, plus an additional fee of $3.00
for each incoming or outgoing limited partner contact, plus line charges and
other out-of-pocket expenses. In addition, representatives of SunSource may meet
with brokers, research analysts and other members of the investment community to
discuss the Conversion. Representatives of SunSource may also contact limited
partners in person or by telephone, or arrange meetings with limited partners to
discuss the Conversion.
Independent Auditors
Representatives of Coopers & Lybrand L.L.P., the Partnership's independent
accountants, are expected to be present at the Special Meeting.
No Appraisal Rights
Limited partners who object to the Conversion will have no appraisal,
dissenters' or similar rights (i.e., the right, instead of receiving securities
of the Corporation, to seek a judicial determination of the "fair value" of
their Interests and to compel SunSource to purchase their Interests for cash in
that amount) under state law or the Partnership Agreement, nor will such rights
be voluntarily accorded to limited partners by SunSource. Thus, approval of the
Conversion by the requisite vote of limited partners will bind all limited
partners, and objecting limited partners will have no alternative to receipt of
securities of the Corporation other than selling their Interests (or securities
of the Corporation) in the open market.
Other Matters
The enclosed form of proxy grants discretionary authority to the persons
named to vote on any other matters that may properly come before the Special
Meeting. The Partnership is not aware of any other proposals planned to be made
at the Special Meeting and has no current intention of making any additional
proposals.
SPECIAL FACTORS
Background of the Conversion
In October 1986, the predecessor to Lehman Brothers acquired all of the
capital stock of Sun Distributors, Inc. ("SDI") from Sun Company, Inc. In
December 1986, the Partnership and the Operating Partnership were organized as
Delaware limited partnerships, and in January 1987 the assets and liabilities of
SDI were transferred to the Operating Partnership in exchange for a note and a
99% limited partnership interest in the Operating Partnership. Lehman Brothers'
predecessor then contributed the limited partnership interest to the Partnership
in exchange for 11,099,573 A Interests and 22,199,146 B Interests. In February
1987, 10,653,990 units (each consisting of one A Interest and one B Interest)
were sold in an underwritten public offering.
At the time of organization, the limited partnership form offered
important tax advantages since there was no federal income tax at the
partnership level. However, in December 1987 Congress passed the Revenue Act of
1987, one of the provisions of which provided that publicly held limited
partnerships ("MLP's"), with certain exceptions not applicable to the
Partnership, would be taxed for federal income tax purposes as corporations.
MLP's existing on December 17, 1987 were "grandfathered" for ten years until
December 31, 1997.
In addition to the limited time period for the tax benefits, management
found that the structure of the Partnership impeded the strategic direction of
its business. Prior to 1987, the business had grown principally through
acquisitions made either with cash or Sun Company stock. With a limited
partnership, acquisitions with Interests became impracticable. Available cash is
limited by the required payment of the B Tax Distribution which has to be made
at 125% of the maximum individual federal income tax rate.
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<PAGE>
This meant that, at the outset, 38.75% (125% x 31%) of federal taxable income
allocable to the B Interests had to be distributed. In 1993, the maximum tax
rate was increased to 39.6% meaning that the B Tax Distribution increased to
49.5% of federal taxable income allocable to the B Interests.
During the early 1990's the question whether to convert to a corporation
was examined from time to time. One of the advantages of conversion was that, if
the A Interests could be replaced with debt, the interest on the debt would be
deductible which would offset to some degree the tax disadvantages of being
taxed as a corporation. However, the amount of this much debt on the balance
sheet would have impaired SunSource's ability to borrow money. It therefore
became impracticable to convert without the sale of some assets to provide
additional net worth.
In the spring and summer of 1992, Lehman Brothers and Legg Mason Wood
Walker, Incorporated ("Legg Mason") were engaged to seek out buyers for the
entire Partnership. Lehman Brothers and Legg Mason prepared descriptive
memoranda for the operations of the divisions, solicited confidentiality
agreements from prospective buyers, assisted in the due diligence efforts of the
prospective buyers and received various offers. Approximately 60 companies were
contacted but the effort produced no proposals attractive to pursue, due in part
to the financial and economic climate at that time and its effect on the
Partnership's business.
On September 13, 1993, the Partnership publicly announced that the Board
had begun to explore the possible sale of assets or becoming a publicly traded
corporation and had authorized the engagement of financial advisors to assist in
the process. Lehman Brothers and Legg Mason (the "Advisors") were again engaged
and conducted an extensive search for buyers of the entire Partnership or of
divisions of the Partnership. Again, the Advisors prepared memoranda for the
operations of the divisions, solicited confidentiality agreements from and
assisted in the due diligence efforts of, the prospective buyers and received
various offers. The Advisors contacted 77 strategic and 44 financial buyers.
They received no interest in the Partnership as a whole from acquirors at an
acceptable level. They received a number of bids for divisions, some of which
were attractive. However, the Board determined that the realizable sale value of
all of the Partnership's assets was not adequate, and also decided that
conversion to a corporation at that time would be unattractive. Finally the
Board determined that the bids for the Electrical Group and for the Dorman
Products division should be pursued further and instructed the Advisors to
obtain final bids for these businesses.
The Operating Partnership sold its Electrical Group on December 5, 1994
and the Dorman Products division on January 3, 1995. In addition, although not
the result of the study of strategic alternatives in 1993-1994, the Downey Glass
division was sold on October 27, 1995. The Operating Partnership received an
aggregate cash consideration, net of expenses, of approximately $70 million, of
which $14.2 million was used for a mandatory prepayment on its senior debt. With
the regularly scheduled principal payment on the senior debt in December 1995,
the Partnership's total debt as a percentage of its consolidated capitalization
was reduced to 43.5% at December 31, 1995 compared with 55% at December 31,
1994. The sales not only strengthened the financial position of the Partnership
but enabled it to remove the restriction on acquisitions which had been imposed
by the lenders for 1993 and 1994.
The strengthened balance sheet therefore removed one of the negative
considerations for conversion to a corporation and, with the deadline of
December 31, 1997 approaching, management and Lehman Brothers began to develop a
concept for conversion to a corporation. This concept was presented to the Board
of Lehman/SDI at its June 12, 1996 meeting. The Board authorized further work on
the conversion and appointed the Special Committee to review the terms of the
conversion proposal to be prepared by the General Partner. See "--
Determinations of the Special Committee" below.
At the same meeting, the Board reviewed a presentation prepared by
management which outlined a range of values which might be realized if the
Partnership were to be liquidated. Because the valuations presented did not
suggest an attractive potential sale value for the Partnership and because of
the other difficulties in a liquidation described below, the Board decided that
pursuit of the conversion alternative offered a higher expected value for
Interest holders than the liquidation plan. For more information on the
liquidation alternative, see "-- Alternatives to the Conversion."
Existing Partnership Structure
The Partnership is a Delaware limited partnership. Unless earlier
terminated pursuant to the Conversion or the Partnership Agreement, the
Partnership will continue in existence until December 31, 2086. The General
Partner holds a 1% general partnership interest. The limited partnership
interests in the Partnership, representing a 99% limited partnership interest,
are represented by 11,099,573 A Interests and 21,675,746 B Interests, both of
which are traded on the NYSE. The Partnership holds a 99% limited partnership
interest in the Operating Partnership and the General Partner holds a 1% general
partnership interest. The Partnership conducts all of its business activities
through the Operating Partnership. Lehman/SDI is the general partner of the
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<PAGE>
General Partner and makes all the decisions relating to the management of the
Partnership and the Operating Partnership and manages and controls their
activities. Lehman Brothers Holdings Inc., as the sole stockholder of
Lehman/SDI, elects the members of the Board of Directors of Lehman/SDI. See the
chart on page 1 of this Proxy Statement/Prospectus.
The General Partner receives, as part of its general partnership interest
in the Operating Partnership, a management fee of $3,330,000 per year from the
Operating Partnership as well as distributions attributable to its general
partnership interests. The Partnership will continue to pay the management fee
until the Effective Time of the Conversion. See "-- Existing Economic Interests
of the Partners." All expenses incurred by the General Partner are paid or
reimbursed by the Operating Partnership, except for the compensation of the
non-management directors of Lehman/SDI.
Existing Economic Interests of the Partners
Cash Available for Distribution of the Partnership (i.e., all cash
receipts of the Partnership, less cash used to pay or establish a reserve for
expenses) is distributed 99% to the holders of A Interests and 1% to the General
Partner until holders of A Interests have received annually a $1.10 simple,
cumulative return. The Priority Return has been paid on a monthly basis to
holders of record on the first day of the month.
After distribution of the Priority Return, Cash Available for Distribution
is distributed 1% to the General Partner and 99% to the holders of B Interests
until such holders have received an annual distribution equal to the product of
(i) 125% of the then applicable maximum Federal income tax rate for individuals
and (ii) the taxable income allocable to the B Interests. The B Tax Distribution
has been partially distributed on a monthly basis to holders of record on the
first day of the month with the balance distributed by March 31 of the
succeeding year. See Note 3 of Notes to Consolidated Financial Statements. The
Partnership suspended the payment of monthly advance B Tax Distributions
effective January 1, 1997.
Upon liquidation of the Partnership, after provision for all liabilities,
the holders of A Interests will receive a preferential distribution equal to $10
per A Interest plus any unpaid Priority Return and the balance will be
distributed to the General Partner and the holders of B Interests in accordance
with their respective capital accounts.
The Operating Partnership distributes its available cash 99% to the
Partnership and 1% to the General Partner until the amount distributed to the
Partnership is sufficient to pay the Priority Return and the B Tax Distribution.
The General Partner also receives a management fee from the Operating
Partnership of $3,330,000 annually. To the extent that the Priority Return and
the B Tax Distribution have not been paid on a cumulative basis, the management
fee will not be paid, but will be deferred and be paid, together with any
management fees then owed with respect to any other year, after the Priority
Return and B Tax Distribution have been paid. In addition, the management fee
can be paid only if the Operating Partnership complies with the covenants
required by the Operating Partnership's credit agreements. See Notes 8 and 9 of
Notes to Consolidated Financial Statements.
Alternatives to the Conversion
The alternatives to the Conversion which were considered by the General
Partner were continuing the existence of the Partnership as a limited
partnership and the liquidation of the Partnership, either immediately or over
an extended period of time.
The benefit of continuing the existence of the Partnership as a limited
partnership is the possible reduction of aggregate federal income taxes payable
by the Partnership and its partners compared to the aggregate federal income
taxes payable by the Corporation with respect to the income of SunSource and its
stockholders with respect to any dividends received. See "CERTAIN FEDERAL INCOME
TAX CONSEQUENCES." This federal income tax benefit will end under current law on
December 31, 1997 and the Partnership will thereafter be taxed as a corporation.
The Partnership will then be subject to tax at the Partnership level and the
partners will also be subject to tax on any distributions received. In addition,
payments of the Priority Return would not be deductible for tax purposes. In
view of the impending double taxation at both the Partnership and the partner
levels, the General Partner no longer believes it would be in the best interests
of the Partnership and the limited partners to remain in partnership form.
Another alternative to the Conversion considered by the General Partner
was liquidation. One benefit of liquidating the Partnership at this time rather
than effecting the Conversion would be the possibility that the currently
realizable value of the Partnership assets may exceed the value of SunSource as
a continuing business. Another benefit of liquidating in partnership form is
that a liquidation of the Partnership would likely result in less federal income
taxes payable on any gains recognized by the Partnership than if the Partnership
were converted to a corporation and subsequently liquidated because the partners
of the Partnership would only pay federal income tax at the partner level on
liquidation gains, while a corporation would pay federal income tax on gains
derived from liquidating its assets and the corporation's stockholders would
also pay federal income tax on
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<PAGE>
the amount by which the liquidation proceeds received by the stockholders
exceeded their basis in the shares.
Management made a presentation to the Board on June 12, 1996 during which
it outlined a range of values which might be realized if the Partnership were to
be liquidated. Information presented included (i) current and projected earnings
before interest, taxes and amortization ("EBITA") for all of the Partnership's
business units, and (ii) management's estimate of the costs of liquidation,
including transaction costs, severance pay, make-whole penalties on long-term
debt, payment of unfunded deferred compensation liabilities, the expenses of
closing the Philadelphia home office and miscellaneous administrative expenses.
Management also presented a summary table showing how the above information
would translate into liquidation values per B Interest using an assumed 6.0x
multiple of EBITA, as follows:
<TABLE>
<CAPTION>
Assumed Liquidation Values Per B Interest (1)
Years Ended December 31
Assumed
EBITA Multiple 1996 1997 1998 1999 2000
- -------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
6.0 X $4.54 $5.84 $5.80 $6.74 $7.79
</TABLE>
(1) Figures after 1997 reflect payment of capital gains taxes at the corporate
level. The above figures assume redemption of the A Interests at $10.00,
plus accrued interest, each in accordance with the terms of the
Partnership Agreement. On the day of the presentation, the closing price
for the B Interests was $4.50 and the closing price for the A Interests
was $11.25.
The above EBITA multiples were selected based upon information developed
by the Partnership's investment bankers during the course of their work in 1992,
1993 and 1994. Management believed such multiples had not subsequently changed
materially based on several unsolicited indications of interest the Partnership
had received during 1995 and 1996. Also, the Partnership's EBITA from continuing
operations during 1995 and 1996 was only modestly higher than the 1994 level.
In discussing the liquidation alternative, the Board noted that previous
efforts by the Partnership's investment bankers had resulted neither in a bid
for the entire partnership nor bids as high as 6.0 X EBITA for two of the
Partnership's larger business units. In addition, the most aggressive previous
bidder for the Partnership's largest business group had sharply curtailed its
acquisition activity in the United States. In summary, the Board concluded that
there was substantial doubt that the Partnership could realize as much as 6.0 X
EBITA for all of its business units within a reasonable time frame.
The failure to sell all but a few units would prevent the Partnership from
liquidating. At the same time, the requirement to pay the A Interest Priority
Return would place an onerous cash burden upon the remaining operating units.
The Board determined that the administrative burdens that would result from an
attempt to sell simultaneously all business units in separate transactions made
liquidation an unattractive alternative.
An additional risk in the liquidation proposal was the amount of time it
could take to dispose of multiple businesses on satisfactory terms. Management
was concerned that morale could become a problem at those units not sold
quickly, and diminished performance and increased employee defections could
rapidly impair the value of the affected units. Finally, potential buyers of the
last few business units would have superior negotiating power when it became
clear that the Partnership had to sell the remaining assets in a short time
frame in order to complete the liquidation prior to December 31, 1997, after
which any capital gains from liquidation would become subject to corporate
taxation.
The Board also considered that liquidation would create an immediate large
taxable gain for the Partnership's investors while the Conversion would result
in a substantially smaller taxable gain.
Based on the considerations described below, the Board believes that a
liquidation of the Partnership's assets (either through individual or bulk asset
sales or the sale of the Partnership in its entirety) at this time would not
result in the limited partners receiving acceptable value. The Board did not
obtain an appraisal or other valuation of the assets because, in light of the
previous efforts to sell the Partnership's business units and the Board's
conclusions regarding the logistical and financial risks of liquidation, the
Board believed that a liquidation of assets would not result in sufficient value
to the limited partners.
The Board also rejected the liquidation alternative because liquidation
would not provide the limited partners and the General Partner with any
continuing equity interest in the Partnership and would be unlikely to be
accomplished on a tax-advantaged basis.
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<PAGE>
The General Partner believes that in the long term the value of the Partnership,
whether or not the Conversion is effected, to the General Partner and the
limited partners would exceed the value of the proceeds of a liquidation at this
time.
The General Partner believes that other long-term strategies available to
SunSource such as diversification, disposition of assets and acquisition of
assets are not materially adversely affected by the decision to convert and may
be enhanced by the decision to convert as set forth above. From time to time in
the past, the General Partner has considered, and in some cases effected, the
possibility of disposing of surplus assets, acquiring assets, diversifying its
operations geographically and engaging in new lines of business. For example in
1994 and 1995, the Partnership sold its Electrical Group, Dorman Products
division, and Downey Glass division. Similarly, the Partnership has acquired a
number of companies which complement its operations. See "BUSINESS -- General."
The General Partner believes that SunSource will continue to consider, and in
some cases effect, similar transactions in the future, regardless of whether
SunSource is organized in partnership or corporate form. However, the General
Partner believes that the Conversion will enhance SunSource's ability to pursue
its long-term strategies by conserving cash and creating the possibility of
using Common Stock in future acquisitions. The General Partner currently is not
considering any significant transaction involving the Partnership or SunSource's
business which is outside the ordinary course of business of the Partnership.
Reasons to Convert to Corporate Form
The General Partner believes that there are six principal reasons to
convert to corporate form at this time: (i) the potential for the Corporation's
and the Trust's equity securities to attain greater acceptance within the
investment community; (ii) the conservation of cash by the retention of the
management fee and reduction in tax payments; (iii) the ability to deduct
interest payments on the Junior Subordinated Debentures for federal income tax
purposes; (iv) the potential for the Corporation to issue equity in payment of
the purchase price for complementary acquisitions; (v) the potential for the
Corporation to have greater access to equity capital markets; and (vi) the
simplification and reduction in cost of tax reporting for investors in
SunSource.
o Expansion of Potential Investor Base. The General Partner anticipates that
the Conversion will expand SunSource's potential investor base to include
institutional and other investors who do not typically invest in limited
partnership securities because of various tax and administrative reasons.
In addition, the General Partner anticipates that the Common Stock (as
compared to Interests) will receive additional investor interest through
increased review and evaluation by research analysts.
o Conservation of Cash. The Corporation will conserve cash by the retention
of the annual management fee of $3,330,000 and the retention of
distributions on the General Partner's ownership in the Partnership and
the Operating Partnership amounting to approximately $400,000 annually.
o Tax Consequences. The benefit of being taxed as a partnership will end
under current law after December 31, 1997. Although the Corporation will
also have to pay tax on its income, SunSource will conserve additional
cash because (i) the interest payable on the Junior Subordinated
Debentures, which will approximately equal the distributions currently
paid on the A Interests, is deductible for federal income tax purposes,
resulting in a corporate tax benefit of approximately $4,900,000 annually
and (ii) the difference in rates between the B Tax Distribution, which
will be eliminated, and the tax that will become payable by the
Corporation. Subject to changes in federal income tax laws, approval of
the Conversion Proposal should assure tax deductibility on the
distributions in respect of the Trust Preferred Securities, which will
replace the Priority Return. If the Conversion is not approved,
the Priority Return would have to be paid from net income after corporate
income taxes after December 31, 1997.
o Acquisition Currency. The General Partner believes that current industry
conditions may provide opportunities for SunSource to grow through the
acquisition of businesses and assets which are complementary to its
existing businesses. In certain cases, SunSource may want to be able to
issue equity interests as payment of the purchase price for such
acquisitions. The General Partner believes that an equity interest in a
corporation will be a more attractive acquisition currency to sellers than
an interest in a partnership. SunSource is not presently party to any
agreement or understanding regarding a material acquisition and currently
has no plans to make a material acquisition.
o Greater Access to Equity Markets. The General Partner expects that the
Corporation will have greater access to the public and private equity
capital markets than the Partnership, potentially enabling it to raise
capital on more favorable terms than are now available to the Partnership.
This greater access may be of particular benefit if SunSource proposes to
issue equity securities to reduce existing debt, or to raise additional
funds for capital expenditures or otherwise to expand its business.
o Tax Reporting. In addition, the General Partner believes that the
complexities of tax reporting associated with partnership investments are
regarded as unduly burdensome for most limited partners under current
conditions. The ownership of stock
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<PAGE>
rather than Interests will greatly simplify tax reporting with respect to
an investment in SunSource on each limited partner's individual federal
and state income tax returns for future years.
Terms of the Conversion
Structure of the Conversion. If approved by the limited partners, the
Conversion will be effected as follows:
If approved by the limited partners, the Conversion will be effected as
follows:
o The Partnership will contribute its limited partnership interest in the
Operating Partnership and Lehman/SDI, Inc. will contribute its general
partnership interest in the General Partner to LPSub in exchange for
common stock of such subsidiary. Certain members of management of the
General Partner will contribute their limited partnership interests in the
General Partner to the Corporation, in exchange for 462,000 shares of
Common Stock, of which 75,000 shares will be held in escrow to distributed
after two years if all distributions on the Trust Preferred Securities
have then been paid. The Partnership and its subsidiary will then merge
with and into the Corporation and (i) the A Interests will be converted
into 4,217,837 Trust Preferred Securities and cash; (ii) the B Interests
will be converted into 5,418,936 shares of Common Stock and (iii) the
common stock of LPSub held by Lehman/SDI will be converted into 538,000
shares of Common Stock. The Corporation will then contribute the limited
partnership interests in the Operating Partnership and the General Partner
and the general partnership interest in the General Partner to a wholly
owned subsidiary.
o As a result of the Conversion, the former holders of A Interests will be
holders of Trust Preferred Securities and the former holders of B
Interests and the partners of the General Partner will be holders of
shares of Common Stock of the Corporation.
o The Corporation, through its subsidiaries, will then be the holder of the
general and limited partnership interests in the Operating Partnership and
the General Partner. See page 1 above for a diagram of the corporate
structure after the Conversion.
The Operating Partnership will be managed by the General Partner, whose
general partner will be Sun Sub B, which will act under the direction of its
parent, the Corporation. By reason of the Merger, the Corporation will be
responsible for all liabilities and obligations of the Partnership.
The Conversion is proposed to be effected pursuant to an Agreement and
Plan of Conversion, attached as Exhibit B and incorporated by reference herein,
among the Corporation, the Partnership, the Operating Partnership, the General
Partner, SunSub A, Lehman/SDI and the limited partners of the General Partner
(the "Conversion Agreement").
Diagrams illustrating the structure of SunSource and its subsidiaries,
both before and after the Conversion, are set forth immediately preceding the
Summary.
Effective Time. If approved at the Special Meeting, the Conversion is
expected to become effective on April __, 1997 (the "Effective Time").
Conditions to the Conversion. The principal conditions to the Conversion
are (i) the affirmative vote of limited partners holding an aggregate of more
than 50% of the outstanding A Interests and B Interests, each voting separately
as a class; (ii) the affirmative vote of unaffiliated limited partners (limited
partners other than affiliates of the General Partner) holding an aggregate of
more than 50% of the A Interests and B Interests held by unaffiliated limited
partners, each voting separately as a class; (iii) approval of the Trust
Preferred Securities and Common Stock for listing on the NYSE; (iv) no
withdrawal of the Special Committee's determination that the Conversion is fair
to the holders of A Interests and B Interests or of the fairness opinion of
Smith Barney; (v) receipt of a satisfactory tax opinion; (vi) the availability
of financing to refinance existing senior debt on terms acceptable to the
Corporation; and (vii) no material change in applicable law, including with
respect to the taxation of the Conversion, the Corporation or the Trust
Preferred Securities.
Termination; Amendment. The General Partner may terminate the Conversion
Agreement and abandon the Conversion at any time before it becomes effective,
whether before or after approval by the limited partners. Any provision of the
Conversion Agreement may be waived at any time by the party that is entitled to
the benefits thereof, and the Conversion Agreement may be amended at any time
before or after approval thereof by the limited partners by agreement of the
Board of Directors of Lehman/SDI and the other parties to the Conversion
Agreement. After any such approval, however, no amendment or waiver may be made
that decreases the amount or changes the type of the consideration or that in
any way materially and adversely affects the
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<PAGE>
rights of the holders of Interests without the approval of a majority of such
holders.
Consequences if Conversion is Not Approved
If the Conversion is not approved by the limited partners, or if the
Conversion is not consummated for any other reason, the Partnership presently
intends to continue to operate as an ongoing business in its current form. No
other transaction is currently being considered by the Partnership as an
alternative to the Conversion, although the Partnership may from time to time
explore other alternatives.
Failure to convert to corporate form could result in a substantial
reduction in income available to B Interests after December 31, 1997, since it
is likely that payment of the A Interest Priority Return would be distributed
from net income after payment of corporate income taxes. This result could also
impede the Partnership's ability to pay the Priority Return after December 31,
1997. The following table shows that the pro forma results for the nine months
ended September 30, 1996 would produce net income of $0.273 per existing B
Interest if the Partnership were to have converted to corporate form, but only
$0.082 per existing B Interest if the Conversion were not approved and the
Partnership were to be taxed as a corporation (as it will be after December 31,
1997 under current tax law). Of the $0.191 increase in earnings per B Interest
in the pro forma results for the Conversion, $0.169 is attributable to the
exchange of A Interests for Trust Preferred Securities and cash (and the tax
benefits of the deduction of the interest payments on the related Junior
Subordinated Debentures) and $0.022 is attributable to the elimination of the
General Partner's management fee and respective 1% ownership interests in the
Partnership and the Operating Partnership in exchange for the issuance of
4,000,000 shares of Common Stock (before reverse stock split).
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1996
------------------
(dollars in thousands)
Pro Forma Partnership
Taxable as a Corporation Pro Forma Corporation
------------------------ ---------------------
<S> <C> <C>
Income from Operations $27,405 $27,405
Management Fee 2,491 N/A
Interest Expense, Net 5,147 6,061
Other Income, Net 678 678
Distribution on Trust Preferred Securities -- (9,174)
--------- ---------
Income Before Taxes $20,445 $12,848
Income Tax Provision 9,282 5,835
--------- ---------
Net Income $11,163 $7,013
--------- ---------
General Partner Income Allocations 222 --
A Interest Priority Return Payments 9,158 --
--------- ---------
Net income to holders of B Interests $1,783 $7,013
--------- ---------
Number of B Interests Outstanding 21,675,746 25,675,746
(Before reverse stock split)
Earnings Per B Interest
(Before reverse stock split) $0.082 $0.273
--------- ---------
</TABLE>
Tax cash distributions to B Interest holders would be discontinued after
December 31, 1997 even if the Conversion is not approved, because income taxes
will be paid by the Partnership after that date.
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<PAGE>
Failure to convert pursuant to the terms of the Conversion will result in
reduced cash flow, which may inhibit the Partnership's ability to finance
adequately future growth by internal expansion or acquisition. The above table
shows pro forma net income of $7.0 million to holders of corporate B Interests
for the nine months ended September 30, 1996 versus $1.8 million to holders of B
Interests if the Partnership were taxed as a corporation. If the Conversion is
not approved, the General Partner might reconsider other alternatives, including
liquidation of the Partnership. In the event of a liquidation, the A Interests
would be entitled to a liquidation preference of $10 per Interest.
Limited Partner Litigation
On January 16, 1997, a holder of B Interests filed a purported class
action in the Delaware Court of Chancery seeking to enjoin the Conversion on the
terms proposed as well as an order requiring the defendants to account to the
plaintiff and the class for damages and requiring the General Partner or its
affiliates to hold the consideration received in trust pending a determination
of the amounts properly attributable to the General Partner's interest.
Defendants named in the complaint are the Partnership, the Corporation, the
General Partner, Lehman/SDI, Lehman Brothers Holdings Inc. and all of the
directors of Lehman/SDI. The complaint alleges that the terms of the Conversion
unfairly transfer substantial equity to the General Partner to the detriment of
the B Interests and constitute a breach of fiduciary duty. A second complaint
containing substantially identical allegations was filed by a limited partner in
the Delaware Court of Chancery on February 11, 1997. The defendants believe the
complaints are without merit and intend to vigorously defend themselves.
Determinations of the Special Committee
Appointment of the Special Committee and its Independent Advisors. On June
12, 1996, the Board of Directors of Lehman/SDI appointed the Special Committee
to review, evaluate and reach a determination with respect to the fairness of
the terms of the Conversion to the limited partners, and to make a
recommendation to the Board of Directors with respect to the Conversion. In
connection with these instructions, the Special Committee was authorized to take
such action it deemed necessary or appropriate, including retaining, at the
expense of Lehman/SDI (which expenses are payable by the Partnership and
Operating Partnership pursuant to the terms of the Partnership Agreement and the
Operating Partnership Agreement), legal counsel and a financial advisor. The
Special Committee was also authorized to negotiate and document any agreement
with respect to the Conversion or any revisions thereto. The resolution
establishing the Special Committee provided that the Special Committee is only
advisory in nature and is not authorized or empowered to take any action on
behalf of, or binding upon, Lehman/SDI or its Board of Directors regarding the
Conversion or otherwise. The Board of Directors of Lehman/SDI did not instruct
the Special Committee to consider the relative merits of the Conversion as
compared to any alternative business strategies that might exist for the
Partnership or the effect of any alternative transaction in which the
Partnership might engage, including the acquisition by one or more third parties
of all or any part of the Partnership or its securities. For a discussion of the
review of certain alternatives to the Conversion considered by the Board of
Directors of Lehman/SDI, see "--Alternatives to the Conversion."
O. Gordon Brewer, Jr. and Ernest L. Ransome, III were appointed to serve
on the Special Committee and Mr. Brewer was elected to be the Special
Committee's Chairman. Except for their directorship in Lehman/SDI and the
Corporation and membership on the Special Committee, the members of the Special
Committee are not otherwise affiliated with the Partnership, Operating
Partnership, General Partner, Corporation or Lehman/SDI. As of December 10,
1996, Mr. Brewer beneficially owned 3,000 A Interests and 1,000 B Interests and
Mr. Ransome beneficially owned 5,000 A Interests and 5,000 B Interests. As
compensation for serving on the Special Committee, Lehman/SDI agreed to pay to
each member of the Special Committee a retainer of $10,000 (subsequently
increased to $20,000 in January 1997 at the request of the Special Committee) in
recognition of the substantial effort and time commitment invested in the
Conversion process by the Special Committee, plus a meeting fee of $1,000 per
meeting. Lehman/SDI also provided the Special Committee with a letter
acknowledging that the members of the Special Committee would be indemnified,
and have expenses advanced, under Lehman/SDI's bylaws to the fullest extent
permitted under law for any losses or claims arising out of the performance of
the Special Committee.
On June 24, 1996, the Special Committee selected Dechert Price & Rhoads as
its independent legal counsel to advise the Special Committee regarding its
fiduciary duties and the legal aspects of the Conversion and any other matters
related to fulfilling the purpose of the Special Committee. On July 16, 1996,
the Special Committee formally engaged Smith Barney to act as independent
financial advisor to the Special Committee and in that capacity, among other
things, to (i) assist the Special Committee in its review of the business and
operations of the Partnership and the Operating Partnership and their historical
and projected financial condition, (ii) assist the Special Committee in its
review, evaluation and negotiation of the financial terms and structure of the
Conversion and (iii) render an opinion to the Special Committee and to the Board
of Directors as to whether (x) the consideration to be received in the
Conversion by the holders of A Interests is fair from a financial point of view
to such holders, (y) the consideration to be received in the Conversion by the
holders of B Interests is fair from a financial point of view to such
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holders, and (z) the consideration (the "General Partner Consideration") to be
received by the General Partner in exchange for the General Partnership
Interests (as defined below) is fair from a financial point of view to the
holders of A Interests and to the holders of the B Interests, respectively.
Due Diligence, Evaluation and Preliminary Analysis of Initial Conversion
Proposal. Beginning in July 1996, at the instruction of the Special Committee,
Smith Barney and Dechert Price & Rhoads reviewed certain financial and legal
information relating to the Partnership and its operations to assist the Special
Committee. In addition, representatives of Smith Barney met with the senior
management team to discuss the Partnership's business, operations and prospects.
On August 8, 1996, the Special Committee received the General Partner's
proposal (the "Initial Conversion Proposal"), to convert the Partnership into a
corporation. The Initial Conversion Proposal provided for (i) each A Interest to
be exchanged for a package of preferred stock and subordinated debt of the
Corporation with an aggregate liquidation preference and face value of $10.00
per A Interest and aggregate annual cash distributions of $1.10 per year, (ii)
each B Interest to be exchanged for 0.25 of Common Stock(1), and (iii) the
General Partner's general partnership interests in and rights under the
Partnership and the Operating Partnership (the "General Partnership Interests"),
to be exchanged for 2,285,750 shares of Common Stock. The General Partner
informed the Special Committee that the number of shares of Common Stock
proposed to be exchanged for the General Partnership Interests represented the
General Partner's determination of the value of the General Partnership
Interests, including the General Partner's percentage interest in each of the
Partnership and the Operating Partnership, the value attributable to the General
Partner's right to receive the Management Fee pursuant to the terms of the
Operating Partnership Agreement, and a "control premium" in addition to the
value attributable to the percentage interests and Management Fee. The Initial
Conversion Proposal was supplemented on August 16 with a description of the
terms of the preferred stock and subordinated debt to be exchanged for the A
Interests.
On August 26, 1996, the Special Committee met with its financial and legal
advisors to preliminarily discuss the Initial Conversion Proposal. Smith Barney
discussed with the Special Committee its preliminary views of the financial
aspects of the Initial Conversion Proposal. The Special Committee's advisors
reported on the status of their review of the Partnership and its operations.
After extensive discussion of the terms of the Initial Conversion Proposal, the
Special Committee instructed its advisors to arrange for a meeting with
representatives of the General Partner and its advisors to express a number of
areas of concern to the General Partner, including the likely effect on market
liquidity for holders of A Interests resulting from the proposed issuance of
multiple classes of securities in exchange for the A Interests.
On September 4, 1996, the General Partner modified the Initial Conversion
Proposal and provided the Special Committee and its advisors with draft terms
for trust preferred securities which were proposed to be exchanged for the A
Interests. Each A Interest would be exchanged for 0.40 trust preferred
securities, with a liquidation preference of $25.00 (or $10.00 for each A
Interest) and cumulative cash distributions of 11% per annum ($1.10 per year for
each A Interest).
Negotiations with the General Partner. On September 9, 1996, representatives of
Smith Barney and Dechert Price & Rhoads met with representatives of the General
Partner (including Lehman Brothers and the Partnership's management) and legal
counsel to Lehman Brothers. The Special Committee's advisors informed the
General Partner that in evaluating the fairness of any exchange of securities
for A Interests in the Conversion, the Special Committee would attribute
significant weight to the current market price of the A Interests as opposed to
their liquidation value, and that the terms of the Conversion should reflect the
taxable nature of the exchange of A Interests and any elimination of existing
economic and other rights currently available to the A Interests. With respect
to the proposed consideration for the General Partnership Interests, the General
Partner was informed that the Special Committee believed the number of shares of
Common Stock proposed to be exchanged for General Partnership Interests
substantially overstated the value of the General Partnership Interests. The
Special Committee had taken note of certain limitations on the value of the
Management Fee, including the limited partners' right under the Partnership
Agreement to remove the General Partner by a vote of 80% of the outstanding
unaffiliated Interests and the termination of the General Partner's right to
receive the Management Fee upon the liquidation of the Partnership. The General
Partner was also advised that the Special Committee did not believe that the
General Partner was entitled to a "control premium" for the General Partnership
Interests (i.e., any value over and above the value attributable to the General
Partner's percentage interest in each of the Partnership and the Operating
Partnership and the Management Fee), especially in view of the significant
Common Stock ownership which Lehman Brothers, its affiliates and management
would have in the Corporation after the Conversion and their representation on
the Corporation's
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(1) All references to shares of Common Stock reflect the one-for-four reverse
stock split implied by the exchange ratio for B Interests in the Conversion.
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Board of Directors. Moreover, the Special Committee's legal counsel conveyed the
Special Committee's concern with a number of issues relating to the governance
of the Corporation after the Conversion, including (i) the potential shift in
voting power from the current unaffiliated holders of A Interests and B
Interests to Lehman Brothers, its affiliates and management as a result of both
the issuance of a significant number of shares of Common Stock in exchange for
the General Partnership Interests and the loss of voting rights previously
belonging to the A Interests, (ii) the potential for a post-Conversion sale by
Lehman Brothers of a control block of Common Stock at a premium not available to
all holders of Common Stock generally or otherwise in a manner not in the best
interests of all holders, and (iii) the need for a meaningful independent check
on any decision by Lehman Brothers or management with respect to any major
transaction by the Corporation with change of control implications occurring
shortly after the Conversion, particularly given the substantial equity to be
received by the General Partner in exchange for the General Partnership
Interests, and Lehman Brothers' expression of interest in possibly liquidating
some or all of its Common Stock holdings after the Conversion.
From September 10-17, 1996, representatives of Lehman Brothers and Smith
Barney had a number of discussions regarding the value and terms of the proposed
trust preferred securities. Lehman Brothers indicated that, in response to the
Special Committee's concerns, the General Partner was prepared to increase the
annual yield on the proposed securities to 11.8%, resulting in the holders of A
Interests receiving cash distributions of $1.18 per annum with respect to the
trust preferred securities received in exchange for each A Interest. During the
same period, counsel to the Special Committee and Lehman Brothers discussed the
corporate governance issues raised by the Special Committee.
On September 17 and 18, 1996, the Special Committee met telephonically and
in person with its legal counsel and financial advisors to consider the
revisions to the Conversion proposal. The Special Committee received a report
from its advisors regarding the September 9 meeting and reviewed with them the
revised Conversion proposal. The Special Committee identified as its major areas
of concern (i) the value of the trust preferred securities, (ii) the taxable
nature of the Conversion to holders of the A Interests, (iii) the differences
between the trust preferred securities and the A Interests, including the
Corporation's right to call the trust preferred securities at par after five
years or at any time upon the occurrence of a Tax Event, and the Corporation's
ability to defer payments on the trust preferred securities at any time or from
time to time for up to 60 consecutive months, (iv) the number of shares of
Common Stock proposed to be issued with respect to the General Partnership
Interests, and (v) the need for certain corporate governance provisions for the
benefit of unaffiliated holders of Common Stock given the Special Committee's
concerns in this area noted above.
On October 22, 1996, the General Partner presented the Special Committee
with a new set of proposed terms for the Conversion (the "Second Conversion
Proposal"). The Second Conversion Proposal provided for (i) each A Interest to
be exchanged for (a) 0.38 of an 11.6% Trust Preferred Security with a
liquidation amount of $25.00 (or $9.50 per A Interest), callable at par in five
years, and (b) $1.00 in cash, (ii) each B Interest to be exchanged for 0.25
share of Common Stock, and (iii) the General Partnership Interests to be
exchanged for an aggregate of 1,375,000 shares of Common Stock, 1,000,000 shares
of which would be received by the General Partner upon consummation of the
Conversion, and the remaining 375,000 shares of which would be received by the
General Partner in 125,000 share installments on the first three anniversaries
of the Conversion, provided that if there were accrued and unpaid distributions
on the Trust Preferred Securities on such dates, such shares would not be
received by the General Partner until such distributions had been paid. The
Second Conversion Proposal also contained a restriction on the ability of Lehman
Brothers and management to vote or transfer the shares of Common Stock which
they received in exchange for the General Partnership Interests, although such
restrictions did not apply to Common Stock received by them with respect to
their B Interests. In response to the Special Committee's concerns regarding the
dominant influence of certain stockholders after the Conversion, the Second
Conversion Proposal also provided for the Corporation's Board of Directors to
consist of nine directors, up to two designated by Lehman Brothers and its
affiliates, three from management and four independent directors (the
"Independent Directors").
On October 23 and 24, 1996, the Special Committee met telephonically and in
person with its financial and legal advisors to discuss the Second Conversion
Proposal. At these meetings the Special Committee concluded that the Second
Conversion Proposal did not adequately compensate holders of the A Interests and
that the 1,375,000 shares of Common Stock proposed to be exchanged for the
General Partnership Interests was excessive. The Special Committee discussed
with its advisors various alternative structures regarding the timing of the
issuance of Common Stock for the General Partnership Interests, including the
possibility of issuing a smaller number of shares without any vesting
requirements, or linking a portion of the shares to a contingent vesting
schedule based on the financial performance of the Corporation after the
Conversion. As to the corporate governance aspects of the Second Conversion
Proposal, the Special Committee determined to continue negotiating for
additional provisions protecting minority, unaffiliated stockholders, including
as to voting and resale restrictions on Lehman Brothers' and management's Common
Stock, and a provision requiring approval of a majority of the Independent
Directors for some period of time following the Conversion with respect to
certain types of transactions.
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Later on October 24, the Special Committee and its advisors met with Lehman
Brothers, management, and counsel to Lehman Brothers and the Partnership to
further negotiate the terms of the Second Conversion Proposal. The parties were
unable to reach an agreement with respect to the number of shares comprising the
General Partner Consideration, although they did reach agreement on the $1.30
cash payment to be included as part of the consideration for the A Interests and
the nature of the restrictions on the voting power of Lehman Brothers and
management after the Conversion. See "--Factors Considered by the Special
Committee - Certain Corporate Governance Matters" and "DESCRIPTION OF CAPITAL
STOCK - Stockholders Agreement."
During the next three weeks, the Special Committee's advisors continued to
discuss the General Partner Consideration, the terms of any vesting of
contingent shares and further refinements to the corporate governance provisions
with the General Partner and its counsel, including the prohibition on certain
resales of Common Stock by Lehman Brothers and certain senior members of
management, and the requirement of Independent Director approval of certain
types of transactions after the Conversion. See "--Factors Considered by the
Special Committee - Certain Corporate Governance Matters" and "DESCRIPTION OF
CAPITAL STOCK - Stockholders Agreement." On November 15, 1996, the Special
Committee met with Mr. Donald T. Marshall, the Partnership's Chairman and Chief
Executive Officer. Mr. Marshall proposed various vesting alternatives and
performance targets which resulted in a maximum of 1,125,000 shares being paid
out for the General Partnership Interests if all such performance targets were
met. The parties were unable to reach agreement on the number of shares or
performance targets.
During telephonic meetings on November 7, 14, 15, 18 and 25 an December 3,
the Special Committee continued to examine with its advisors the terms of the
Conversion. The Special Committee concluded that it was unlikely that the
Special Committee and the General Partner would be able to reach agreement on
the appropriate performance vesting targets and determined to drop its request
for vesting based on performance targets in exchange for a reduction in the
aggregate number of shares to be paid for the General Partnership Interests.
During November and the first week of December 1996, the Special Committee
and its advisors had a series of discussions with Lehman Brothers, management,
counsel to Lehman Brothers and counsel to the Partnership regarding the
resolution of the remaining issues on the proposal, including the agreement that
1,000,000 shares of Common Stock be issued to the General Partner for the
General Partnership Interests. On December 4, 1996, during a telephone
conference among the members of the Special Committee, Lehman Brothers, Mr.
Marshall and Mr. Edmonson, the parties agreed upon a premium of 101% of
liquidation value upon a Tax Event redemption of the Trust Preferred Securities
and a two year vesting requirement for 75,000 shares of the Common Stock to be
issued to the General Partner. At the Special Committee's request, the General
Partner clarified that the three most senior members of management (Messrs.
Marshall, Edmonson and McDonnell) would agree to waive any right to receive
accelerated payments under the change in control provisions of the Partnership's
deferred compensation plans. See "MANAGEMENT -- Change in Control Arrangements."
On December 9, 1996, the Special Committee received the final draft of the
summary terms of the Conversion proposal (the "Term Sheet") from the General
Partner reflecting the terms agreed upon.
Initial Determination to Recommend the Conversion, Fairness Opinion. On
December 2, 1996, and again on December 10, 1996, the Special Committee met with
Smith Barney and Dechert Price & Rhoads for a comprehensive review of the terms
of the Conversion proposal. At both meetings, Smith Barney made a presentation
to the Special Committee regarding the fairness of the consideration to be
received in the Conversion from a financial point of view to the holders of the
A Interests and the B Interests, respectively, and the fairness from a financial
point of view of the General Partner Consideration to the holders of the A
Interests and the B Interests, respectively. At the December 10 meeting, Smith
Barney, upon the Special Committee's request, rendered its written fairness
opinion, dated December 10, 1996, to the effect that, as of such date based upon
and subject to certain matters as stated therein, (i) the consideration to be
received in the Conversion by the holders of A Interests is fair, from a
financial point of view to such holders, (ii) the consideration to be received
in the Conversion by the holders of B Interests is fair, from a financial point
of view to such holders, and (iii) the General Partner Consideration to be
received in the Conversion is fair from a financial point of view to the holders
of the A Interests and to the holders of B Interests, respectively. See "--
Opinion of Smith Barney."
Upon receipt of Smith Barney's written fairness opinion, the Special
Committee unanimously determined to recommend to the Board of Directors that, as
of such date, (i) the terms of the Conversion set forth on the Term Sheet were
(x) fair to the holders of the A Interests and (y) fair to the holders of the B
Interests, and (ii) the consideration to be received in the Conversion by the
General Partner (the "General Partner Consideration") in exchange for its
general partnership interests in the Partnership and the Operating Partnership
is fair to the holders of the A Interests and the holders of the B Interests,
respectively. The Special Committee's recommendation was subject to its review
of, and satisfaction with, the definitive documentation effecting the Conversion
and to its receipt of an updated written fairness opinion of Smith Barney, in
form and substance satisfactory to the Special Committee, after such definitive
documentation had been completed. Consistent with its instructions from the
Board of Directors of Lehman/SDI, the Special Committee also noted that it had
not considered the relative merits of the Conversion as compared to any
alternative business strategies that might exist for the Partnership or the
effect of any alternative transaction in
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which the Partnership might engage, including the acquisition by one or more
third parties of all or any part of the Partnership or its securities. For a
discussion of the review of certain alternatives to the Conversion considered by
the Board of Directors of Lehman/SDI, see "--Alternatives to the Conversion."
On December 11, 1996, the Special Committee and its financial and legal
advisors met with the Board of Directors and advised the Board of Directors that
the Special Committee had reviewed the proposed terms of the Conversion set
forth on the Term Sheet submitted to it by the General Partner and that at the
Special Committee meeting held the previous afternoon, the Special Committee had
received a written fairness opinion dated December 10, 1996 from Smith Barney
and the Special Committee delivered to the Board of Directors a letter of
recommendation as described above with respect to the proposed terms of the
Conversion. The Special Committee and Smith Barney advised the Board of
Directors that their analyses did not include any effects of the restructuring
charge related to the Partnership's Technology Services divisions and Glass
Merchandising business, which was finalized and announced later that day. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Recent Developments." The Special Committee informed the Board of
Directors that, when it convened to review the final documentation of the
Conversion prior to the mailing of the Proxy Statement/Prospectus, it and Smith
Barney would include the effects, if any, of such restructuring charge in any
updated recommendations by the Special Committee or fairness opinions rendered
by Smith Barney. The Board of Directors then considered the recommendation of
the Special Committee and unanimously approved the proposed terms of the
Conversion.
On December 11, 1996, the Partnership issued press releases announcing the
Conversion and the restructuring.
Factors Considered by Special Committee
In reaching its recommendations, the Special Committee considered a number
of factors. The Special Committee's recommendations were made after considering
all of the factors as a whole with respect to each such recommendation, and were
not based on any single factor. In making its recommendations, the members of
the Special Committee exercised their independent business judgment assisted by
their independent financial and legal advisors. The material factors considered
by the Special Committee included the following:
o Fairness Opinion and Related Presentations. The Special Committee reviewed,
considered and analyzed information provided by the Partnership and its
advisors during various meetings and telephone conferences, including the
information as to the historical and forecasted financial performance of
the Partnership and the Corporation and the pro forma effects of the
Conversion, the information and analyses relating to the Partnership, the
Corporation, the A Interests, the B Interests, the General Partnership
Interests (including the Management Fee), the Trust Preferred Securities
and the Common Stock, and the terms and conditions of the Trust Preferred
Securities and the corporate governance arrangements. In reaching its
determination as to the fairness of the Conversion to each of the A
Interests and the B Interests, the Special Committee placed particular
weight on the fairness opinion rendered by Smith Barney. See "-- Opinion of
Smith Barney."
o Trading Volumes and Market Prices. The Special Committee considered (i) the
relatively low trading volumes of the A Interests and the B Interests, (ii)
the relatively narrow trading ranges of $10 1/4 to $11 3/4 for the A
Interests and $4 to $5 1/8 for the B Interests between January 1, 1995 and
December 9, 1996, (iii) the absence of a trading market for the Trust
Preferred Securities and Common Stock at the time of the Special
Committee's recommendation, and (iv) the reverse stock split implied by the
exchange ratio of B Interests for Common Stock. The closing sales prices of
the A Interests and B Interests on December 9, 1996, were $10 1/2 and $4
3/8, respectively. For more information regarding the trading ranges and
market prices of the A Interests and the B Interests, see "MARKET PRICES
AND DISTRIBUTIONS."
As to the matters noted in (i) and (ii) above, the Special Committee
recognized that the Conversion will benefit the holders of Trust Preferred
Securities and Common Stock to the extent the Conversion expands the
potential investor base for the Corporation's securities. See "-- Reasons
to Convert to Corporate Form." As to the matter noted in (ii) above, the
Special Committee considered the presentations and analyses of Smith Barney
and its fairness opinion. See "-- Opinion of Smith Barney." In assessing
the fairness of the consideration to be received by the holders of the A
Interests in the Conversion, the Special Committee attributed significant
weight to the current market price of the A Interests (see "MARKET PRICES
AND DISTRIBUTIONS") as opposed to their liquidation value of $10.00 per
Interest. As to the matter noted in (iii) above, the Special Committee
recognized, and discussed with its financial advisor, the possibility of
short-term selling pressure on the Trust Preferred Securities and Common
Stock as a result of the change in the form of investment for holders of
the A Interests and B Interests. The Special Committee was also aware that
there could be downward pressure on the market price of the Common Stock
after the Conversion to the extent Lehman Brothers or management take steps
to sell any of their Common Stock holdings. See "RESALE OF SECURITIES --
Resales by Lehman Brothers and Management." As to the matters noted
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in (iii) and (iv) above, the Special Committee consulted with Smith Barney
with respect to the level of market acceptance of the Trust Preferred
Securities and Common Stock. However, Smith Barney's fairness opinion did
not express any opinion as to what the value of the Trust Preferred
Securities or the Common Stock actually will be when issued to holders of A
Interests and B Interests, or the prices at which the Trust Preferred
Securities or Common Stock will trade subsequent to the Conversion. See "--
Opinion of Smith Barney." The Special Committee noted that the Trust
Preferred Securities and Common Stock will be new securities. See "RISK
FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Risks
Applicable to Holders of A Interests and B Interests -- Uncertainty
Regarding Market Price for Trust Preferred Securities and Common Stock." In
addition, Smith Barney advised the Special Committee that the valuation of
the Trust Preferred Securities was further complicated by the limited
number of Trust Preferred Securities of issuers of generally comparable
credit quality. As to the matter noted in (iv) above, the Special Committee
noted that the General Partner had structured the reverse stock split
implied by the exchange ratio in the Conversion with respect to the B
Interests because it believes the current trading prices for the B
Interests reduce the attractiveness of the Corporation's equity securities
to the financial community and the investing public. After consultation
with Smith Barney, the Special Committee determined this stated reason was
reasonable and credible. See "THE SUMMARY -- Reverse Stock Split."
o General Partner's Reasons to Convert to Corporate Form. The Special
Committee considered the reasons expressed by the General Partner in
support of the Conversion. See "-- Reasons to Convert to Corporate Form."
The Special Committee consulted with its financial and legal advisors to
assess the validity of these reasons and determined that they were
reasonable and credible.
o Maintain Current Annual Distributions to Holders of A Interests. The
Special Committee recognized that holders of the Trust Preferred Securities
would receive distributions of $2.90 per annum for each Trust Preferred
Security, which equates to the Priority Return paid of $1.10 per annum on
each A Interest after giving effect to the exchange ratio of Trust
Preferred Securities for A Interests. The Special Committee believed that
maintaining the aggregate annual amount of distributions payable was a
benefit to the holders of the A Interests.
o Differences Between A Interests and Trust Preferred Securities. In
evaluating the Trust Preferred Securities, the Special Committee,
considered the various differences between the A Interests and the Trust
Preferred Securities. These differences included, among others: (i) the
Corporation's ability to defer interest payments on the Junior Subordinated
Debentures with respect to the Trust Preferred Securities at any time or
from time to time for a period up to 60 consecutive months, in which case
no distributions will be paid on the Trust Preferred Securities although
holders of Trust Preferred Securities will still be required to accrue
original issue discount income with respect to the unpaid distributions on
the Trust Preferred Securities (see "RISK FACTORS, CONFLICTS OF INTEREST
AND OTHER CONSIDERATIONS -- Additional Risks Applicable to Holders of A
Interests -- Option to Extend Interest Payment Period; Tax Impact of
Extension"); (ii) the retention of the Management Fee as a payment
subordinated to the Priority Return on A Interests; (iii) the Corporation's
ability to redeem at par the Junior Subordinated Debentures on or after
April 30, 2002; (iv) the Corporation's ability to cause the Trust Preferred
Securities to be redeemed at 101% of their liquidation preference during
the first five years upon the occurrence of a Tax Event if certain
conditions are met (see "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER
CONSIDERATIONS -- Additional Risks Applicable to Holders of A Interests --
Special Event Redemption or Distribution"; (v) that holders of A Interests
are entitled under the terms of the Partnership Agreement to receive in
liquidation, after the satisfaction of all liabilities of the Partnership,
an amount equal to their capital account ($10.00), whereas holders of Trust
Preferred Securities will receive in liquidation, after satisfaction of all
liabilities of the Trust, the equivalent of $9.50 for each A Interest
previously held; and (vi) the loss of certain rights associated with the
ownership of A Interests, such as voting rights, rights to remove the
General Partner, rights to compel dissolution and duration of the holder's
investment (see "COMPARISON OF INTERESTS AND SECURITIES TO BE ISSUED").
As to the matters noted in (i) and (ii) above, the Special Committee
discussed with its advisors the credit quality of the Junior Subordinated
Debentures and Trust Preferred Securities and the prospective terms of the
refinancing, including the circumstances under which the lenders could
block payment of the Junior Subordinated Debentures (see "-- Source and
Amount of Funds"). The Special Committee also noted that although the
Corporation could elect for any reason to defer interest payments on Junior
Subordinated Debentures, this unfettered deferral right was counterbalanced
by (a) the adverse consequences such a deferral would have on the
Corporation and the market value of the Common Stock and the Trust
Preferred Securities, (b) the fact that interest would accrue on such
unpaid distributions at a rate of 11.6% per annum compounded monthly, and
(c) the two-year escrow for some of the shares of Common Stock to be issued
to senior management of the Corporation in exchange for the General
Partnership Interests, with payment of such shares being contingent on
prior payment of all dividends due on the Trust Preferred Securities. See
"SUMMARY -- Overview of the Conversion." As to the matters noted in (iii)
above, the Special Committee discussed with Smith Barney its view of the
effect
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of the optional redemption feature of the Junior Subordinated Securities
including its effect on the trading yield of the Trust Preferred
Securities. See "--Opinion of Smith Barney - Valuation of the A
Consideration." As to the matters noted in (iv) above, the Special
Committee discussed with its advisors the possibility of changes in federal
tax law which might give rise to a Tax Event redemption. The Special
Committee believed that any risk of a Tax Event redemption was mitigated by
the redemption price of $25.25 per Trust Preferred Security (101% of
liquidation value) negotiated by the Special Committee as well as the other
benefits of the Conversion to the holders of the A Interests, including the
maintenance of a level of income distributions on the Trust Preferred
Securities equivalent to the Priority Return, the $1.30 cash consideration,
the conservation of the Corporation's cash resulting from the retention of
the Management Fee and the tax deductibility of the interest on Junior
Subordinated Debentures, and the simplified tax reporting for investors in
the Corporation. The Special Committee considered and discussed with its
advisors the possibility of a change in federal tax law affecting
securities similar to the Junior Subordinated Securities or the Trust
Preferred Securities. See "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER
IMPORTANT CONSIDERATIONS -- Additional Risks Applicable to Holders of A
Interests -- Special Event Redemption or Distribution." It is a condition
to the effectiveness of the Conversion that no tax legislation be pending
or in effect which would adversely affect the tax consequences of the Trust
Preferred Securities, although there can be no assurance that a Tax Event
will not occur after the Conversion is completed. As to the matters noted
in (v) above, the Special Committee believed that the difference in
liquidation value between the A Interests and the Trust Preferred
Securities was adequately compensated for by the higher distribution rate
of the Trust Preferred Securities and the $1.30 in cash to be received with
respect to each A Interest in the Conversion. As to the matters noted in
(vi) above, the Special Committee viewed the A Interests and Trust
Preferred Securities as principally yield-oriented securities and, after
consultation with its financial and legal advisors, the Special Committee
concluded that, on balance, the loss of such voting and other rights was
outweighed by the benefits of the Conversion to the holders of the A
Interests discussed herein.
o Certain Federal Income Tax Consequences of the Conversion. The Special
Committee considered the applicable federal income tax consequences of the
Conversion to the Partnership and to the Corporation and the holders of A
Interests and B Interests, including the tax consequences noted below:
o Tax Advantages to Corporation of Trust Preferred Securities. The
Special Committee considered the tax benefits to the Corporation
of the issuance of the Trust Preferred Securities. See "-- Reasons
to Convert to Corporate Form -- Deductibility of Interest."
o Corporate Level Tax. The Special Committee considered as a
negative factor the loss of the potential future tax benefits
associated with operating in partnership form, including primarily
the right to have Partnership income subject to only one level of
federal income taxation. See "RISK FACTORS, CONFLICTS OF INTEREST
AND OTHER IMPORTANT CONSIDERATIONS -- Risks Applicable to Holders
of A Interests and B Interests -- Adverse Tax Implications." In
addition, the Special Committee considered the loss of the
Partnership's favorable tax status for the period from the date of
consummation of the Conversion until December 31, 1997.
<PAGE>
o Exchange of A Interest for Trust Preferred Securities and Cash is
Taxable. The Special Committee considered the potential tax
consequences of the Conversion to holders of A Interests. The
Special Committee negotiated the cash portion of the consideration
to be exchanged for the A Interests in the Conversion in part to
provide that the holders of the A Interests would be compensated
for, and have the liquidity to pay, income tax which may be
incurred by them as a result of the Conversion. In connection with
its consideration of the tax position of holders of A Interests,
the Special Committee discussed with its advisors and the General
Partner the historical trading prices and volumes of the A
Interests, as well as certain tax basis estimates prepared by
management. However, the Special Committee realized that it could
not determine precisely the financial impact of those federal
income tax consequences of the Conversion because the tax basis of
each holder of A Interests in his or her A Interests may be
different and tax rates vary depending on the circumstances and
tax status of each holder. Furthermore, in assessing the tax
consequences the Special Committee recognized that the taxes
imposed on any gain recognized as a result of the Conversion
essentially represent an acceleration of the tax gain which a
holder of an A Interest would incur when such holder sold his or
her A Interests in the future. See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES -- Certain Tax Consequences of the Conversion to
Holders of A Interests." The Special Committee also considered the
likely income tax consequences of the Conversion to holders of A
Interests and B Interests together. See "CERTAIN FEDERAL INCOME
TAX CONSEQUENCES -- General Tax Treatment of the Conversion."
o Termination of Tax Distributions on B Interests. The Special
Committee considered the termination of the B Tax Distribution as
a consequence of the Conversion, and the Corporation's current
intention of not paying cash dividends on the Common Stock. The
Special Committee noted that the purpose of the B Tax Distribution
was to provide
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holders of the B Interests with the cash required to pay income
taxes on the Partnership's taxable income which is allocable and
taxable to holders of the B Interests. The Special Committee
believed that termination of the B Tax Distribution is mitigated
by the fact that holders of Common Stock generally will be taxed
only on distributions of money or other property received from the
Corporation and not on their allocable share of the Corporation's
taxable income. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES --
Certain Tax Consequences of the Conversion to Holders of the B
Interests." The Special Committee also compared the B Tax
Distribution, which is made at the rate of 49.5% of the taxable
income allocated to the B Interests, with the Corporation's
estimate of federal, state and local income taxes payable on its
taxable income at the effective rate of approximately 40%. The
Special Committee was aware that applicable tax rates vary
depending upon the individual circumstances and tax status of each
holder. The Special Committee viewed as a negative factor the
possibility that the B Tax Distribution was a cash resource to B
Interest holders to the extent of its monthly payout feature,
particularly for certain holders of B Interests with respect to
the portion of the B Tax Distribution which exceeded the holders'
federal, state and local income taxes on their allocable portion
of the taxable income of the Partnership. However, the Special
Committee considered that this factor was mitigated by the
increased cash flow to the Corporation from this aspect of the
Conversion, which in the Special Committee's view benefits both
the A Interests and the B Interests, and that, on balance, the
loss of the B Tax Distribution was outweighed by the benefits of
the Conversion to the holders of the B Interests, including the
expansion of the potential investor base for the Common Stock, the
conservation of the Corporation's cash resulting from the
retention of the Management Fee and the tax deductibility of
interest on the Junior Subordinated Debentures, the Corporation's
potential for better access to equity markets and the potential
use of the Common Stock as an acquisition currency, the simplified
tax reporting for investors in the Corporation, and the
restrictions on Lehman Brothers' and management's voting power and
ability to resell shares under the Stockholders' Agreement.
o Possible Reduction in Fiduciary Duties. The Special Committee
considered the elimination of the fiduciary duties owed to the
limited partners by the General Partner, the nature of the
fiduciary duties owed to the holders of Common Stock and Trust
Preferred Securities, and the absence generally of fiduciary
duties of the directors of the Corporation to the Trust holding
the Junior Subordinated Debentures or the holders of the Trust
Preferred Securities. See "RISK FACTORS, CONFLICTS OF INTEREST AND
OTHER IMPORTANT CONSIDERATIONS -- Additional Risks Applicable to
Holders of B Interests -- Possible Reduction in Fiduciary
Standards." The Special Committee believed the change in the scope
of the fiduciary duties owed to the former limited partners,
especially with respect to the A Interests exchanged for Trust
Preferred Securities, to be a negative factor, mitigated to some
extent because the Special Committee viewed the A Interests as
principally yield-oriented securities.
o Certain Effects of the Conversion. The Special Committee also considered
the pro forma effects of the Conversion (including the transaction costs
associated with the Conversion and the Corporation's pro forma negative
stockholders' equity). See "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER
IMPORTANT CONSIDERATIONS -- Risks Applicable to Holders of A Interests and
B Interests -- Transaction Costs." For a discussion of the pro forma
effects of the Conversion, see the pro forma financial statements included
in "INDEX TO FINANCIAL STATEMENTS."
<PAGE>
The Special Committee noted that after giving effect to the Conversion, the
Corporation would have pro forma negative stockholders' equity and the
Common Stock would have a pro forma negative book value per share,
resulting primarily from the exchange of Trust Preferred Securities for the
A Interests. The Special Committee did not consider this to be a
significant negative factor, because the accounting measures of
stockholders' equity and net book value per share are not viewed by Smith
Barney as useful benchmarks for determining the fairness of the Conversion
from a financial point of view. The Special Committee also considered the
effects of the foregoing pro forma computations with respect to the
Corporation's ability to legally pay dividends or other distributions on
the Trust Preferred Securities and the Common Stock. For a discussion of
these restrictions, see "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER
IMPORTANT CONSIDERATIONS -- Risk Factors Applicable to Holders of B
Interests -- Certain Delaware Corporate Law Considerations."
The Special Committee was aware that, as a result of the Conversion,
holders of the A Interests and the B Interests would no longer have a
contractual right to receive the Priority Return and the B Tax
Distribution. See "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT
CONSIDERATIONS -- Risks Applicable to Holders of A Interests and B
Interests -- Loss of Contractual Right to Distributions." The Special
Committee was also aware that the shares of Common Stock issued in the
Conversion may be diluted by additional issuances, which may be more likely
as a result of the Conversion. See "RISK FACTORS, CONFLICTS OF INTEREST AND
OTHER IMPORTANT CONSIDERATIONS -- Additional Risks Applicable to Holders of
B Interests -- Future Dilution of Common Stock." Benefits to General
Partner of Conversion. In evaluating the fairness to the holders of the A
Interests and the B Interests of the allocation of the number of shares of
Common Stock to be issued with respect to the General Partnership Interests
and the effects of the Conversion, the Special Committee considered and
discussed with its financial and legal advisors a number of factors
benefiting the General Partner, including: (i) the elimination of the
General Partner's liability for obligations of the Partnership and
Operating Partnership (see "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER
IMPORTANT CONSIDERATIONS - Risks Applicable to Holders of A Interests and B
Interests -- Elimination of General Partner Liability for Corporation
Obligations"); (ii) the ability of the General Partner to convert
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o
its illiquid General Partnership Interests into a liquid security,
thereby facilitating the possible sale by the former general and
limited partners of some or all of their Common Stock in the
Corporation, and the value to Lehman Brothers and management of
the registration rights they will receive pursuant to the
Registration Rights Agreement; (iii) the value to the General
Partner of monetizing the Management Fee and receiving most of its
shares of Common Stock immediately upon consummation of the
Conversion; (iv) the potential for the General Partner to treat as
capital gain income some or all of the income realized by its
partners as a result of the exchange of the General Partnership
Interests for shares of Common Stock; and (v) the acceleration of
benefits under the Operating Partnership's deferred compensation
plans due to certain limited partners of the General Partner
(although the Special Committee viewed as a mitigating factor the
waiver of such acceleration by the three most senior members of
the Partnership's management.) See "MANAGEMENT -- Change in
Control Arrangements."
o Valuation of General Partnership Interest. In evaluating the
fairness to the holders of the A Interests and the B Interests of
the number of shares of Common Stock to be issued with respect to
the General Partnership Interests, the Special Committee
considered and discussed with its financial and legal advisors a
number of factors, including: (i) the value of the General
Partner's 1% percentage interest in the capital and income of the
Partnership; (ii) the value of the General Partner's 1% percentage
interest in the capital and income of the Operating Partnership;
(iii) the present value of the General Partner's right to receive
the Management Fee pursuant to the terms of the Operating
Partnership Agreement; (iv) the value to the Partnership of the
services provided by the General Partner with respect to the
Management Fee; (v) the subordination of the Management Fee to the
liabilities and obligations of the Operating Partnership and
Partnership and to the Priority Return on the A Interests and the
B Tax Distribution on the B Interests; (vi) the potential
termination of the Management Fee upon the liquidation of the
Partnership; (vii) the potential removal of the General Partner by
a vote of 80% of the Interests owned by unaffiliated limited
partners, voting as a single class, which would result in the
payment to the General Partner of 1.01% of the aggregate fair
market value of the A Interests and the B Interests (with no
additional payment with respect to the Management Fee); (viii) the
potential for all or a portion of the Management Fee to be
deductible to the Corporation for income tax purposes after the
Conversion if the Corporation and the General Partner entered into
a management agreement providing for the continuation of the
Management Fee on the same terms and conditions presently
applicable; and (ix) the value of the shares of Common Stock after
the Conversion. In addition, the Special Committee considered
certain benefits to the General Partner arising out of the
Conversion discussed under "--Benefits to General Partner of
Conversion" above. As to the matters noted above generally, the
Special Committee considered the presentations and analyses of
Smith Barney and its fairness opinion. See "-- Opinion of Smith
Barney." As to the matters noted in (vi) and (vii) above, the
Special Committee observed that, although the Partnership
Agreement and the Operating Partnership Agreement essentially
provided for no payment to the General Partner attributable to the
General Partner's right to receive the Management Fee upon
liquidation or removal of the General Partner, the Conversion was
neither a liquidation nor a removal of the General Partner. The
Special Committee recognized that the Board of Directors of
Lehman/SDI had considered and rejected the alternative of
liquidation at this time, and liquidation would likely be an
unattractive option in corporate form because of the two levels of
income taxation applicable to corporate liquidations. See "--
Alternatives to the Conversion" and "RISK FACTORS, CONFLICTS OF
INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Risks Related to
the Conversion -- Adverse Tax Implications." In addition, the
Special Committee recognized that the right of the Unaffiliated
Limited Partners to remove the General Partner required a
supermajority vote of the outstanding Interests of the
Unaffiliated Limited Partners, which made it difficult for the
Unaffiliated Limited Partners to successfully remove the General
Partner. The Special Committee also recognized that the General
Partner's cooperation was required to engage in the Conversion,
and that such cooperation was unlikely to be forthcoming if the
General Partner did not receive some value for all of the economic
components of its General Partnership Interests, including the
Management Fee. As to the matter noted in (viii) above, the
Special Committee considered this tax aspect of the Management Fee
and during negotiations raised the possibility of continuation of
the Management Fee after the Conversion. The Special Committee
ultimately concluded that continuation of the Management Fee in
corporate form would be unduly burdensome to the Corporation and
that the
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<PAGE>
retention of the Management Fee and the substitution of Common
Stock for its value, as provided for in the Conversion, more
closely aligns the interests of the beneficial owners of the
General Partner with the interests of holders of Common Stock. The
Special Committee also believed that the resulting incremental
cash flow to the Corporation was a benefit to the holders of the A
Interests and the B Interests. The Special Committee did not
attach any weight to the General Partner's request for a "control
premium" during its deliberations.
o No Appraisal Rights; Separate Class Vote. The Special Committee
noted the absence of appraisal or dissenters' rights for the
benefit of holders of Interests. The Special Committee believed
this factor was mitigated by the requirement that the Conversion
be approved by the affirmative vote of Unaffiliated Limited
Partners holding an aggregate of more than 50% of the A Interests
and B Interests, respectively, each voting separately as a class.
See "VOTING AND PROXY INFORMATION -- Vote Required; Quorum" and
"-- No Appraisal Rights."
o Certain Corporate Governance Matters. The Special Committee
recognized that the Conversion altered, or could potentially
alter, a number of the existing corporate governance relationships
among the General Partner, Lehman Brothers, management, and the
unaffiliated limited partners. These included in particular (i)
the increased voting power that could accrue to Lehman Brothers or
senior management, (ii) potential sales of control blocks of
stock, and (iii) the potential effect of Conversion on major
strategic decisions, in each case as discussed in "-- Negotiations
with the General Partner" above.
As to the matters noted in (i) above, the Special Committee was
aware that as a result of the loss of voting rights of the A
Interests and the issuance of Common Stock for the General
Partnership Interests, Lehman Brothers' and management's pro forma
voting power would have increased from 18.0% and 12.7%,
respectively, to 31.3% and 22.5%, respectively. Accordingly, the
Special Committee negotiated a provision in the Stockholders
Agreement with Lehman Brothers and certain members of senior
management that restricts the respective voting power of such
persons to the voting power held by each of them with respect to a
vote of the limited partners prior to the Conversion. See
"DESCRIPTION OF CAPITAL STOCK -- Stockholders Agreement." Under
the terms of such restriction, such persons will agree to vote, in
the same proportion as the shares not owned by them (the
"Unaffiliated Shares") that are voted on any such matter, that
percentage of Excess Voting Shares held by them at such time that
equals the percentage of outstanding Unaffiliated Shares that are
voted on such matter. The Special Committee was aware of the
significant ownership of Interests by Lehman Brothers and
management in partnership form and the absence of any voting
restrictions on such Interests in the Partnership Agreement. The
Special Committee believed the voting restrictions obtained in the
Stockholders Agreement (which effectively provides that, as to
matters requiring a majority vote of stockholders of the
Corporation, the holders of approximately 73% of the Common Stock
held by persons other than Lehman Brothers and its affiliates and
certain members of senior management have the ability to control
the outcome of any such vote) were of benefit to the other holders
of Common Stock, particularly in view of the fact that the
provision in the Partnership Agreement providing for the removal
of the General Partner upon the affirmative vote of 80% of the
Interests of the Unaffiliated Limited Partners would not be
carried forward in the Corporation's Certificate of Incorporation
or Bylaws. See "COMPARISON OF INTERESTS AND SECURITIES TO BE
ISSUED."
<PAGE>
As to the matter noted in (ii) above, the Special Committee viewed
the Conversion as significantly enhancing the possibility of
change of control transactions involving major stockholders of the
Corporation given its more simplified corporate structure and the
likelihood of broader market liquidity for its Common Stock. After
extensive negotiations with the General Partner, the Special
Committee concluded that the general prohibition on sales to third
persons which would beneficially own more than 10% (or in certain
cases involving institutional stockholders, 15%) of the Common
Stock substantially diminished the likelihood of Lehman Brothers
or management selling shares of Common Stock for a premium not
available to all stockholders, or effecting a change of control
transaction without the consent of the Independent Directors. The
Special Committee was not aware of any plans or proposals on the
part of the General Partner, Lehman Brothers, management or their
respective affiliates to engage in any block sales of Common
Stock, whether or not prohibited by the terms of the Stockholders
Agreement. See "DESCRIPTION OF CAPITAL STOCK -- Stockholders
Agreement."
As to the matter noted in (iii) above, the Special Committee
believed it important that there be some meaningful independent
check on any decision by Lehman Brothers or management with
respect to any major transaction by the Corporation with change of
control implications occurring shortly after the Conversion,
particularly in light of the substantial equity to be received by
the General Partner in exchange for the General Partnership
Interests and Lehman Brothers' expression of interest in possibly
liquidating some or all of its Common Stock holdings after
theConversion. Accordingly, the Special Committee negotiated
provisions in the Stockholders Agreement requiring that at least
four of the nine members of the Corporation's Board of Directors
be Independent Directors, and that, for three years after the
Conversion, certain specified transactions, including mergers,
asset sales, liquidations and tender and exchange offers for the
Corporation, be approved by a majority of the Independent
Directors on the Corporation's Board of Directors. Also, the
Stockholders Agreement provides for the approval by the
Independent Directors of certain transactions between management
and Lehman Brothers, on the one hand, and the Corporation, on the
other. See "DESCRIPTION OF CAPITAL STOCK -- Stockholders
Agreement."
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<PAGE>
As to the matters noted in (i), (ii) and (iii) above, the Special
Committee was also aware that certain provisions in the
Corporation's Certificate of Incorporation and Bylaws and the
Corporation's stockholder rights plan could have certain
anti-takeover effects. See "DESCRIPTION OF CAPITAL STOCK --
Anti-takeover Provisions." However, the Special Committee believed
such provisions and the stockholder rights plan could also
facilitate the Special Committee's objectives in preventing sale
of control transactions that were not in the best interests of all
holders of Common Stock as discussed above.
o Conflicts of Interest. In considering the proposed Conversion, the
Special Committee was aware of certain conflicts of interest with
respect to the Committee's deliberations (in addition to those
conflicts of interest noted under "RISK FACTORS, CONFLICTS OF
INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Conflicts of
Interest" applicable to the proposed Conversion generally). These
conflicts included the following: (i) the Special Committee
considered the fairness of the proposed Conversion with respect to
both the A Interests and the B Interests (as opposed to having
separate committees consider the terms of the proposed Conversion
with respect to the A Interests and B Interests, respectively);
(ii) Smith Barney's fairness opinion, upon which the Special
Committee relied in recommending the proposed Conversion to the
Board of Directors, dealt with fairness from a financial point of
view for both the A Interests and the B Interests (as opposed to
having separate investment banks render fairness opinions with
respect to the A Interests and B Interests, respectively); (iii)
the Special Committee members' beneficial ownership of A Interests
and B Interests; (iv) the Special Committee members' compensation
for serving on the Special Committee and indemnification rights
with respect to their service on the Committee, as described in
"-- Appointment of the Special Committee and its Independent
Advisors" above; (v) the Special Committee members' status as
directors of Lehman/SDI with fiduciary duties to the stockholders
of Lehman/SDI; and (vi) the designation of the Special Committee
as a committee of the Board of Directors (as opposed to formally
and directly representing the holders of the A Interests and B
Interests, respectively--see "RISK FACTORS, CONFLICTS OF INTEREST
AND OTHER IMPORTANT CONSIDERATIONS -- Risks Applicable to Holders
of A Interests and B Interests -- No Independent Representation"
above), as well as the general expectation of the Special
Committee members' continuing to serve on the Board of Directors
of the Corporation after the consummation of the proposed
Conversion.
As to the matters noted in (i) and (ii) above, the Special
Committee believed that the conflicts of interest were mitigated
by the different terms of the A Interests and the B Interests. The
Special Committee viewed the A Interests as securities with
attributes generally like preferred stock, and therefore
principally as yield-oriented securities. On the other hand, the
Special Committee viewed the B Interests as securities with
attributes generally like common stock, and therefore principally
as growth-oriented securities. Consequently, the Special Committee
considered the two instruments as sufficiently different vis-a-vis
their competing claims on the Partnership's resources to
accommodate a single committee review and engagement of one
financial advisor to render fairness opinions for both classes of
securities. In addition, the Special Committee noted the
requirement that the Conversion be approved by a majority of the
outstanding unaffiliated A Interests and B Interests, voting as
separate classes. See "VOTING AND PROXY INFORMATION - Vote
Required; Quorum". As to the matter noted in (iii) above, the
members of the Special Committee did not consider their ownership
of A and B Interests to be meaningful in light of the relatively
small number of Interests involved. See "--Appointment of the
Special Committee and its Independent Advisors" above. As to the
matter noted in (iv) above, the Special Committee viewed as
mitigating factors the Committee's belief that the compensation
and indemnification provisions are generally customary for
transactions of this nature and beneficial to the overall process
in light of its complex and time-consuming nature. As to the
matters noted in (v) and (vi) above, the Special Committee
considered that its designation as a committee of the Board of
Directors of Lehman/SDI and its members' prospective continued
service on the Corporation's Board of Directors were mitigated by
the Special Committee's retention of independent advisors, as well
as the Special Committee's charge to negotiate any modifications
to the General Partner's proposal if necessary.
o Extent of Negotiations. The Special Committee and its independent
financial and legal advisors were involved in extensive
negotiations regarding the terms of the Conversion with the
General Partner, Lehman/SDI, management
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and counsel to Lehman/SDI and the Partnership. The Special
Committee believed that it had significant leverage in the these
negotiations, because it understood that the Conversion was not
likely to proceed without approval from the Special Committee. The
Special Committee considered whether further negotiations would
have resulted in more favorable results for the A Interests or the
B Interests, especially in relation to the amount of consideration
exchanged for the General Partnership Interests. In addition, the
Special Committee considered that additional delays in the
negotiation process could adversely affect the timing of the
Conversion or jeopardize the Corporation's ability to realize the
benefits of the Trust Preferred Securities in view of possible
changes in tax laws. See "RISK FACTORS, CONFLICTS OF INTEREST AND
OTHER IMPORTANT CONSIDERATIONS -- Additional Risks Applicable to
Holders of A Interests -- Special Event Redemption or
Distribution".
o Limitation of Scope of Special Committee's Review. Consistent with
its instructions from the Board of Directors of Lehman/SDI, the
Special Committee did not specifically consider the relative
merits of the Conversion as compared to any alternative strategies
or transactions, including liquidation or sale of the Partnership.
See "-- Determinations of the Special Committee." For a discussion
of the review of certain alternatives to the Conversion considered
by the Board of Directors of Lehman/SDI, see "-- Alternatives to
the Conversion." Accordingly, the Special Committee did not
specifically consider the potential liquidation values of the A
Interests and B Interests, although the Special Committee was
aware of the $10.00 liquidation preference of the A Interests and
the liquidation analyses previously undertaken by the Board of
Directors of Lehman/SDI and the Board's determination that
liquidation was not an acceptable alternative to the Partnership.
In addition, the Special Committee did not consider, and was not
aware of, any firm offers during the preceding 18 months for the
Partnership or all or any substantial part of its assets.
The foregoing is a summary of the information and factors considered by the
Special Committee and is not intended to be exhaustive but is believed to
include all material factors considered by the Special Committee. In reaching
its recommendation that the Conversion is fair to the holders of the A Interests
and fair to the holders of the B Interests, and that the General Partner
Consideration is fair to the holders of the A Interests and the holders of the B
Interests, respectively, the Special Committee did not assign specific or
relative weights to the foregoing factors, except that each member placed
significant weight on the fairness opinion of Smith Barney.
For additional information regarding certain risks relating to the
Conversion, limited partners should read carefully "RISK FACTORS, CONFLICTS OF
INTEREST AND OTHER IMPORTANT CONSIDERATIONS" herein.
Opinion of Smith Barney
The Special Committee, Lehman/SDI, the Partnership, the Operating
Partnership and the General Partner have retained Smith Barney to act as
financial advisor to the Special Committee in connection with the Conversion. In
connection with its engagement, Smith Barney has delivered to the Special
Committee its written opinion, dated December 10, 1996, to the effect that, as
of such date based upon and subject to certain matters as stated therein, (i)
the consideration to be received in the Conversion by the holders of A Interests
is fair, from a financial point of view to such holders, (ii) the consideration
to be received in the Conversion by the holders of B Interests is fair, from a
financial point of view to such holders, and (iii) the General Partner
Consideration to be received in the Conversion is fair from a financial point of
view to the holders of the A Interests and to the holders of the B Interests,
respectively.
<PAGE>
In rendering its opinion, Smith Barney, among other things, reviewed the
Term Sheet and the partnership agreements of the Partnership, the Operating
Partnership and the General Partner and held discussions with certain of the
senior operating management of the Partnership and the Operating Partnership
("Management") and representatives and advisors of the Partnership, the
Operating Partnership and the General Partner to discuss the business,
operations and prospects of the Partnership. Smith Barney also examined certain
publicly available business and financial information relating to the
Partnership as well as internal financial statements, forecasts and other
financial and operating data concerning the Partnership prepared by Management.
Smith Barney reviewed the financial terms of the Conversion as set forth in the
Term Sheet in relation to, among other things, current and historical market
prices and trading volumes of the A Interests and B Interests, historical and
projected earnings and operating data of the Partnership and projected earnings
and operating data of the Corporation, and the capitalization and financial
condition of the Partnership. Smith Barney considered, to the extent publicly
available, the financial terms of certain other similar transactions which Smith
Barney considered comparable to the Conversion, and analyzed certain financial,
capital market and other publicly available information relating to the
businesses of other companies whose operations Smith Barney considered
comparable to those of the Partnership. In addition to the foregoing, Smith
Barney conducted such other analyses and examinations and considered such other
financial, economic and market criteria as it deemed necessary to arrive at its
opinion.
In rendering its opinion, Smith Barney assumed and relied, without
independent verification, upon the accuracy and completeness of all financial
and other information publicly available or furnished to or otherwise reviewed
by or discussed with Smith Barney. With respect to financial forecasts and other
information furnished to or otherwise reviewed by or discussed with Smith
Barney, Smith Barney was informed by Management that such forecasts and other
information were reasonably prepared on bases reflecting the best currently
available estimates and judgments of Management as to the expected future
financial performance of the Partnership or the Corporation, as the case may be.
Smith Barney further relied on the assurances of Management that it was unaware
of any facts that would make the information or forecasts provided to Smith
Barney incomplete or misleading. Smith Barney did not express any opinion as to
what the value of the Common Stock or the Trust Preferred Securities actually
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<PAGE>
will be when issued to holders of A Interests and B Interests, respectively, or
the prices at which the Common Stock or the Trust Preferred Securities will
trade subsequent to the Conversion. In addition, Smith Barney did not make and
was not provided with an independent evaluation or appraisal of the assets or
liabilities (contingent or otherwise) of the Partnership. Smith Barney was not
asked to and did not express an opinion as to the relative merits of the
Conversion as compared to any alternative business strategies that might exist
for the Partnership or the effect of any other transaction in which the
Partnership might engage. Smith Barney was not asked to solicit third-party
indications of interest in acquiring all or any part of the Partnership. Smith
Barney's opinion is necessarily based upon financial, capital market and other
conditions and circumstances existing and disclosed to Smith Barney as of the
date of its opinion. No limitation was imposed by the Special Committee on the
scope of the investigation by Smith Barney in connection with its fairness
opinion.
The full text of the written opinion of Smith Barney, which sets forth the
assumptions made, matters considered and limitation on the review undertaken, is
attached as Exhibit C to this Proxy Statement/Prospectus and is incorporated
herein by reference. Holders of A Interests and B Interests are urged to read
this opinion carefully in its entirety. Smith Barney's opinion is directed only
to the fairness of the consideration to be received by holders of A Interests
and B Interests and of the General Partner Consideration from a financial point
of view to holders of A Interests and B Interests, respectively, and has been
provided for the use of the Special Committee and the Board of Directors of
Lehman/SDI, Inc. in their evaluation of the Conversion, does not address any
other aspect of the Conversion or any related transaction and does not
constitute a recommendation to any holder of A Interests or B Interests as to
how such holder should vote at the Special Meeting. The summary of the opinion
of Smith Barney set forth in this Proxy Statement/Prospectus is qualified in its
entirety by reference to the full text of such opinion.
In preparing its opinion to the Special Committee, Smith Barney performed a
variety of financial and comparative analyses, including those described below.
The summary of such analyses does not purport to be a complete description of
the analyses underlying Smith Barney's opinion. The preparation of a fairness
opinion is a complex analytic process involving various determinations as to the
most appropriate and relevant methods of financial analyses and the application
of those methods to the particular circumstances and, therefore, such an opinion
is not necessarily susceptible to summary description. In arriving at its
opinion, Smith Barney did not attribute any particular weight to any analysis or
factor considered by it, but rather made qualitative judgments as to the
significance and relevance of such analyses and factors. Accordingly, Smith
Barney believes that its analyses must be considered as a whole and that
selecting portions of its analyses and factors, without considering all analyses
and factors, could create a misleading or incomplete view of the processes
underlying such analyses and its opinion. In its analyses, Smith Barney made
numerous assumptions with respect to the Partnership, industry performance,
general business, economic, market and financial conditions and other matters,
many of which are beyond the control of the Partnership. The estimates contained
in such analyses are not necessarily indicative of actual values or predictive
of actual future results or values, which may be significantly more or less
favorable than suggested by such analyses. In addition, analyses relating to the
value of the businesses or securities do not purport to be appraisals or to
reflect the prices at which the business or securities may actually be sold.
Accordingly, such analyses and estimates are inherently subject to substantial
uncertainty.
A Interests
Valuation of A Interests. In order to value the A Interests, Smith Barney
performed discounted cash flow analyses of the distributions payable to the
holders of A Interests taking into account the preferential distribution of $10
per A Interest that holders of A Interests are entitled to receive upon
liquidation. Due to the fact that holders of A Interests do not have a right to
immediately receive $10 per A Interest, Smith Barney performed discounted cash
flow analyses assuming the Partnership was liquidated at four different points
in time and utilizing three different discount rates. Smith Barney assumed (i)
the Partnership is liquidated immediately, (ii) the Partnership is liquidated on
12/31/97, (iii) the Partnership is liquidated on 12/31/2001 and (iv) the
Partnership is liquidated on 12/31/2036. In these analyses, discount rates of
9.4%, 10.6% and 12.5% were used. These discount rates were based on the
historical range of trading yields on the A Interests. The implied valuation
range for the A Interests resulting from these analyses was $98.0 million ($8.83
per A Interest) to $129.3 million ($11.65 per A Interest). The mid-point of the
implied valuation range was then calculated to be $113.6 million ($10.24 per A
Interest).
Valuation of the A Consideration. Upon consummation of the Merger, each A
Interest will be exchanged for 0.38 shares of Trust Preferred Securities and
$1.30 in cash (collectively, the "A Consideration"). Smith Barney analyzed the
value of the Trust Preferred Securities in relation to the trading value of the
A Interests. Unlike the A Interests which are not redeemable (other than in a
liquidation of the Partnership), the Trust Preferred Securities are callable by
the Corporation at liquidation value five years after the date of issuance.
Based on the treasury yield curve on December 6, 1996, assumed interest rate
volatility of 9% and a 40 year maturity, Smith Barney estimated that an
additional yield of 93 basis points (0.93%) would be required to compensate
holders of A Interests for this change in call protection.
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<PAGE>
In addition to the changes in the distribution rate and call protection in
the Trust Preferred Securities, in analyzing the differences between the A
Interests and the Trust Preferred Securities, Smith Barney also considered,
among other things, (i) the market risk associated with the Trust Preferred
Securities, (ii) the potential for the deferment for up to 60 months of the
monthly distributions on the Trust Preferred Securities, and (iii) the lack of
voting rights granted to holders of the Trust Preferred Securities. In comparing
the value of the A Consideration with the value of the A Interests, Smith Barney
also considered the potential payment of taxes by holders of A Interests in the
Conversion and the fact that the amount of monthly distributions to be received
by holders of A Interests after the Conversion would be the same as the monthly
distributions payable on the A Interests prior to the Conversion.
Smith Barney analyzed the value of the A Consideration assuming a range of
trading yields on the Trust Preferred Securities of 9.4% to 12.2% on a yield to
first call basis. The range of implied values for the A Consideration based on
such yields on the Trust Preferred Securities was calculated to be $10.59 to
$11.63.
The range of implied values of the A Consideration was compared to $10.50,
the average of the closing market prices of an A Interest on the five trading
days preceding December 12, 1996, the day the Partnership announced the terms of
the Conversion (the "Announcement Date"). The range of premiums of such implied
values over such average market price for an A Interest was .9% to 10.8%. The
range of implied values of the A Consideration was also compared to the
mid-point of the DCF valuation range of the A Interests and the range of
premiums over such valuation was 3.4% to 13.6%.
B Interests
Valuation of B Interests. In order to value the B Interests, Smith Barney
performed discounted cash flow analyses of the projected free cash flows of the
Partnership assuming the Partnership begins paying corporate income taxes in
1998. Smith Barney also assumed discount rates of 11.5%, 12.5% and 13.5% and
terminal multiples of earnings before interest, taxes, depreciation and
amortization ("EBITDA") of 5.5x to 7.0x. The discount rates used were based on
the cost of capital of the Partnership, adjusted to take into account that
beginning in 1998, distributions on the A Interests would not be tax deductible.
The terminal multiples used were based on the trading multiples of the
Comparable Companies (as defined below).
Smith Barney performed the discounted cash flow analyses on the operating
projections prepared by Management. These analyses resulted in an implied
valuation range for the B Interests of $93.3 million ($4.30 per B Interest) to
$165.8 million ($7.65 per B Interest). The mid-point of the implied valuation
range was then calculated to be $129.5 million ($5.97 per B Interest).
Valuation of the B Consideration. Upon consummation of the Merger, each B
Interest will be exchanged for 0.25 shares of Common Stock (the "B
Consideration"). Smith Barney analyzed the value of the Common Stock by
examining trading multiples of comparable companies and performing discounted
cash flow analyses of the Corporation's projected free cash flows.
Comparable Company Analysis. Using publicly available information,
Smith Barney analyzed the market values and trading multiples of a group of
eight selected comparable wholesale distributors of industrial products and
services comprised of Barnes Group, Inc., BMC West Corp., Bearings, Inc.,
Cameron Ashley Building Products, Inc., Hughes Supply, Inc., Lawson Products,
Inc., NCH Corporation and Rexel Inc. (collectively the "Comparable Companies").
Smith Barney compared market values as multiples of projected 1996 and 1997
net income. The multiples of projected 1996 and 1997 net income of the
Comparable Companies were between the following ranges: (i) projected 1996 net
income: 11.0x to 18.2x (with a mean of 12.8x and a median of 12.0x); and (ii)
projected 1997 net income: 9.5x to 14.1x (with a mean of 11.6x and a median of
11.7x). Smith Barney also compared market values as multiples of historical
EBITDA and projected 1996 and 1997 EBITDA. The multiples of latest twelve months
ended September 30, 1996 ("LTM") EBITDA and projected 1996 and 1997EBITDA of the
Comparable Companies were between the following ranges: (i) LTM EBITDA: 5.8x to
12.1x (with a mean of 7.2x and a median of 6.5x); (ii) projected 1996 EBITDA:
5.6x to 10.6x (with a mean of 6.6x and a median of 6.1x); and (iii) projected
1997 EBITDA: 5.2x to 8.7x (with a mean of 6.2x and a median of 5.9x).
Smith Barney also compared the debt to capitalization ratios, interest
coverage ratios, historical profit margins, historical EBITDA and net income
growth, returns of average assets, equity and invested capital (total debt plus
book value of common equity plus book value of preferred equity plus book value
of minority interests plus deferred income tax liabilities), dividend yield and
projected earnings per share ("EPS") growth of the Comparable Companies. All
projected EPS figures for the Comparable Companies were based on the consensus
net income estimates of selected investment banking firms and all projections
for the Corporation were based on operating projections prepared by Management.
All multiples were based on closing stock prices as of December 6, 1996.
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<PAGE>
Smith Barney applied a range of trading multiples representative of the
Comparable Companies to pro forma historical and projected operating data of the
Corporation (derived by adjusting the operating data of the Partnership to
reflect consummation of the Conversion and application of a 40% corporate tax
rate) to arrive at a range of implied equity values for the shares of Common
Stock. Smith Barney applied the Comparable Companies' mean and median multiples
of 12.8x and 12.0x to projected 1996 net income, and 11.6x and 11.7x to
projected 1997 net income. Based on these multiples, Smith Barney arrived at an
implied valuation range of $18.96 to $22.92 per share of Common Stock or $4.74
to $5.73 for the B Consideration. Smith Barney also applied the Comparable
Companies' mean and median multiples of 7.2x and 6.5x to LTM EBITDA, 6.6x and
6.1x to projected 1996 EBITDA, and 6.2x and 5.9x to projected 1997 EBITDA. Based
on these multiples of EBITDA, Smith Barney arrived at an implied valuation range
of $9.56 to $15.00 per share of Common Stock or $2.39 to $3.75 for the B
Consideration. In valuing the Common Stock, Smith Barney relied more heavily on
the implied valuation range derived from the multiples of net income rather than
the multiples of EBITDA since they believe that net income multiples would be a
better indicator of the trading value of the Common Stock.
Smith Barney compared the implied equity valuation range for the B
Consideration based on multiples of net income to $4.35, the average closing
market price of a B Interest on the five trading days immediately preceding the
Announcement Date, and derived a range of premiums of 9.0% to 31.7%. The
above-described range of implied values for the B Consideration was also
compared to the mid-point of the implied valuation range of a B Interest ($5.97
per B Interest) and the range of discounts over such valuation was (4.0%) to
(20.6%).
None of the Comparable Companies is identical to the Corporation.
Accordingly, an analysis of the results of the foregoing is not entirely
mathematical; rather, it involves complex considerations and judgments
concerning differences in financial and operating characteristics and other
factors that could affect the public trading value of the Comparable Companies
or the company to which they are being compared.
Discounted Cash Flow Analyses. Smith Barney also performed discounted cash
flow analyses of the projected free cash flows of the Corporation for the five
fiscal years ended December 31, 2001. Smith Barney assumed discount rates of
9.0%, 10.0% and 11.0% and terminal multiples of EBITDA of 6.0x to 7.5x. The
discount rates used were based on the cost of capital of the Partnership,
adjusted to take into account the capital structure of the Corporation and the
fact that dividends on the Trust Preferred Securities will be tax deductible.
The terminal multiples used were based on the trading multiples of the
Comparable Companies. The discounted cash flow analyses were performed on the
operating projections prepared by Management and resulted in an implied equity
valuation range per share of Common Stock of $17.64 to $31.56 or $4.41 to $7.89
for the B Consideration.
Smith Barney compared the implied equity valuation range for the B
Consideration based on the discounted cash flow analyses to $4.35, the average
closing market price of a B Interest on the five trading days immediately
preceding the Announcement Date, and derived a range of premiums of 1.4% to
81.4%. The above-described range of implied values for the B Consideration was
also compared to $5.97, the mid-point of the implied valuation range of a B
Interest, and the range of premiums over such valuation was (26.1%) to 32.2%.
Smith Barney concluded that the range of values of the B Consideration
supported a fairness conclusion since such ranges represent a very significant
premium to the average closing market price of a B Interest on the five trading
days immediately preceding the Announcement Date and the implied valuation range
based on the discounted cash flow analyses represents a reasonable premium to
the mid-point of the implied valuation range of a B Interest.
General Partnership Interests
Valuation of the General Partnership interests. Smith Barney analyzed the
value of the General Partnership Interests consisting of (i) the Management Fee
and (ii) an effective percentage equity interest of 1.99% in the Operating
Partnership (the "1.99% Interest"). In order to determine the potential value
attributable to the General Partnership Interests, Smith Barney performed a net
present value calculation of the Management Fee in perpetuity assuming discount
rates of 9.4%, 10.5% and 12.5%. Based on these net present value calculations,
Smith Barney estimated the range of the total potential value of the Management
Fee to be $26.6 million to $35.6 million. Smith Barney also capitalized the
Management Fee based on the Comparable Companies' mean and median LTM EBITDA
multiples (6.5x and 7.2x) and capitalized the after-tax equivalent of the
Management Fee based on the Comparable Companies' mean and median LTM net income
multiples (13.0x and 13.4x). The capitalization of the Management Fee resulted
in a range of total potential value of $21.6 million to $26.8 million. The two
valuation methodologies produced a composite total potential valuation range for
the Management Fee of $21.6 million to $35.6 million.
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<PAGE>
In addition to looking at the valuation methodologies described in the
preceding paragraph, Smith Barney took into consideration the following factors
which detract from the value of the Management Fee in analyzing the value of the
Management Fee: (i) the accelerated timing of the receipt by the General Partner
of value for the Management Fee in the Conversion; (ii) the illiquidity of the
right to receive the Management Fee; (iii) the potential for the Management Fee
to be terminated in the event of (a) liquidation or sale of the Partnership, or
(b) removal of the General Partner upon the vote of 80% of the unaffiliated
limited partners; (iv) the subordination of the Management Fee to the payment of
distributions on the A Interests; and (v) the termination of the services
provided by the General Partner following the consummation of the Conversion.
Smith Barney estimated the value for the 1.99% Interest by taking 1.99% of
the enterprise value for the Partnership less net debt. Enterprise value for the
Partnership was calculated using discounted cash flow analyses of the projected
free cash flows of the Partnership assuming the Partnership begins paying
corporate income taxes in 1998. Smith Barney also assumed discount rates of
11.5%, 12.5% and 13.5% and terminal multiples of EBITDA of 5.5x to 7.0x. Smith
Barney performed these analyses on the operating projections prepared by
Management. These analyses resulted in an implied valuation range for the 1.99%
Interest of $4.1 million to $5.6 million. Smith Barney then added the range of
total potential values derived from the analysis of the Management Fee and the
range of implied values of the 1.99% Interest and derived a total potential
value range for the General Partnership Interests of $25.7 million to $41.2
million, with a resulting mid-point of $33.4 million. The total potential value
did not take into account the factors listed in the preceding paragraph that
detract from the value of the Management Fee.
Valuation of the General Partner Consideration. Upon consummation of the
Merger, the General Partnership Interests will be exchanged for 1,000,000 shares
of Common Stock (the "General Partner Consideration"). Smith Barney analyzed the
value of the Common Stock using the equity values implied by the comparable
company trading multiples and discounted cash flow analyses described above. See
"-- B Interests -- Valuation of the B Consideration." Smith Barney derived an
implied equity valuation range per share of Common Stock of $18.28 to $27.24 by
averaging the composite values derived through the comparable company analysis
based on net income multiples and the discounted cash flow analysis. The
valuation range for the General Partner Consideration was then calculated to be
$18.3 million to $27.2 million. The range of implied values of the General
Partner Consideration was compared to the mid-point of the total potential value
of the General Partnership Interests and the range of discounts from such
valuation was -45.2% to -18.4%.
Other Factors and Comparative Analyses
In rendering its opinion, Smith Barney considered certain other factors and
conducted certain other comparative analyses, including a review of (i) the
projected financial results of the Partnership, (ii) the history of trading
prices for the A and B Interests, (iii) the treatment of general partnership
interests in selected partnership conversions, (iv) certain pro forma effects on
the Partnership resulting from the Conversion and (v) the pro forma ownership of
the Corporation.
The Special Committee, Lehman/SDI, the Partnership, the Operating
Partnership and the General Partner entered into an engagement letter with Smith
Barney on July 16, 1996 pursuant to which the Partnership agreed to pay Smith
Barney fees of $1.25 million, comprised of a retainer fee of $250,000, which was
paid upon execution of the engagement letter and an opinion fee of $1.0 million,
which was paid shortly after delivery of Smith Barney's opinion, dated December
10, 1996. The Partnership has agreed to reimburse Smith Barney for its
out-of-pocket expenses, including reasonable fees and disbursements of counsel
provided that such fees and expenses of counsel shall not be in excess of
$25,000 in the aggregate without the prior written consent of the Special
Committee, which consent shall not be unreasonably withheld. Lehman/SDI, the
General Partner, the Partnership and the Operating Partnership have also agreed,
in a separate letter agreement, to indemnify Smith Barney and its affiliates,
their respective directors, officers, agents and employees and each person, if
any, controlling Smith Barney or any of its affiliates against certain
liabilities, including liabilities under the federal securities laws and
expenses related to Smith Barney's engagement.
In light of Smith Barney's familiarity with, and understanding of, the
operations of the Partnership as well as their experience in advising on matters
relating to the conversion of partnerships to corporate form generally, the
Special Committee believed that it was advisable to engage Smith Barney in
connection with the proposed Conversion. Smith Barney is a nationally recognized
investment banking firm and is regularly engaged in the valuation of businesses
and their securities in connection with mergers and acquisitions, negotiated
underwritings, competitive bids, secondary distributions of listed and unlisted
securities, private placements and valuations for estate, corporate and other
purposes. Other than acting as financial advisor in connection with the
Conversion (and delivery of its fairness opinion), Smith Barney has not
previously rendered investment banking services to the Partnership, Lehman/SDI,
the Operating Partnership or the General Partner in the past two years. In the
ordinary course of its business, Smith Barney may, from time to time, buy and
sell securities of the Partnership.
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The report of Smith Barney referred to above is filed as an exhibit to the
Rule 13e-3 Transaction Statement on Schedule 13E-3, as amended, filed with the
Commission by the Partnership, the General Partner and Lehman/SDI relating to
the Conversion and may be obtained in the manner described in "AVAILABLE
INFORMATION."
Recommendation of the General Partner and Fairness Determination
The General Partner believes the Conversion is fair to and in the best
interests of the Partnership and the limited partners. The General Partner
recommends that the limited partners approve the Conversion. There are conflicts
of interest between the General Partner and the limited partners with respect to
certain matters relating to the Conversion.
As described under "-- Alternatives to the Conversion," the General Partner
does not believe that liquidation is a viable alternative for the Partnership
because, among other things, there was substantial doubt that acceptable prices
could be found for all of the business units within an acceptable time period.
The General Partner's determination to recommend that SunSource convert to
corporate form is based on its belief that the Conversion will result in the
benefits to the limited partners and to the Corporation described above under
"-- Reasons to Convert to Corporate Form." On the other hand, the General
Partner considered the potential disadvantages of the Conversion, see "RISK
FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS" and, given
the alternatives to the Conversion, believes that the advantages of the
Conversion outweigh any potential disadvantages.
In reaching a recommendation with respect to the Conversion, the General
Partner also considered (i) the fact that the consideration to be received and
the other terms of the Conversion resulted from arms-length negotiation with the
Special Committee and were determined by the Special Committee to be fair to the
limited partners and (ii) the fact that Smith Barney has delivered its opinion
(and the basis for such opinion) to the Special Committee to the effect that,
(a) the consideration to be received in the Conversion by the holders of A
Interests is fair, from a financial point of view to such holders, (b) the
consideration to be received in the Conversion by the holders of B Interests is
fair, from a financial point of view to such holders, and (c) the General
Partner Consideration to be received in the Conversion is fair from a financial
point of view to the holders of the A Interests and to the holders of the B
Interests, respectively. The General Partner also considered the consequences to
the Partnership and its partners if the Conversion is not consummated, as
discussed under "-- Consequences if Conversion is Not Approved" and other
information about the Conversion and the Corporation included in this Proxy
Statement/Prospectus, and concluded that the Conversion was in the best
interests of the Partnership and the limited partners. No particular weight was
assigned to any one factor in arriving at its decision.
The General Partner sought to provide procedural fairness to the limited
partners in connection with the consideration of the Conversion by (i) creating
a Special Committee composed of disinterested directors to advise the Board of
Directors with respect to the terms of the Conversion as to its fairness to the
limited partners, and to make a recommendation to the Board of Directors with
respect to the Conversion, (ii) authorizing the Special Committee to select a
financial advisor and legal counsel to assist it in its deliberations, and (iii)
implementing the Conversion only if approved by the affirmative vote of a
majority of the unaffiliated A Interests and B Interests, each voting separately
as a class. Through these arrangements the General Partner believes it has
provided procedural fairness to the limited partners and to minimize the extent
to which the consideration of the Conversion was subject to conflicts of
interest of the management and affiliates of the General Partner.
Source and Amount of Funds
It is estimated that the funds required to make the $1.30 cash payment to
the A Interests and to pay for fractional shares and for the fees and expenses
described below will be less than $18,500,000. Payments to be made prior to the
Conversion will be made from funds borrowed under the Partnership's existing
bank credit agreement which is described in Note 8 of Notes to Consolidated
Financial Statements. Upon consummation of the Conversion, the existing bank
credit agreement and the Partnership's long-term debt will be repaid and
replaced with new credit facilities at interest rates expected to be lower than
financing rates currently incurred by the Partnership. Prepayment of the
Partnership's long-term debt will result in the payment of a make-whole penalty
of approximately $5 million.
Accounting Treatment
For financial accounting purposes, the Conversion will be treated as a
recapitalization. Therefore, the assets and liabilities of the Partnership will
be recorded by the Corporation at their historical cost basis, except that the
Corporation will also record incremental deferred tax assets in accordance with
Statement of Financial Accounting Standards No. 109 ("SFAS 109"), relating to
the temporary differences for certain assets and liabilities of the Partnership
at the date of conversion to corporate form. The
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<PAGE>
existing values of the tax basis in assets and liabilities of the Partnership at
the date of conversion will carry over to the Corporation which will also record
a provision for U.S. federal and state income taxes on its taxable earnings.
For financial reporting purposes, the Trust will be treated as a subsidiary
of the Corporation and, accordingly, the accounts of the Trust will be included
in the consolidated financial statements of the Corporation. The Trust Preferred
Securities will be presented in the consolidated balance sheet of the
Corporation as a separate line item directly above stockholders' equity under
the caption "Guaranteed Preferred Beneficial Interest in the Corporation's
Junior Subordinated Debentures" and appropriate disclosures about the Trust
Preferred Securities, the Guarantee and the Junior Subordinated Debentures will
be included in the Notes to the Consolidated Financial Statements. For financial
reporting purposes, the Corporation will record distributions payable on the
Trust Preferred Securities as an expense in its consolidated statements of
income.
Fees and Expenses
All legal and other costs and expenses incurred by the Corporation or the
Partnership in connection with the Conversion will be paid by the Partnership,
whether or not the Conversion is consummated. The following is a statement of
certain estimated fees and expenses incurred by the Corporation in connection
with the Conversion:
SEC registration fee........................................ $ 67,000
New York Stock Exchange listing fee......................... 60,000
Legal fees and expenses..................................... 850,000
Financial advisory fees and expenses........................ 1,475,000
Accounting fees and expenses................................ 825,000
Solicitation fees and expenses.............................. 200,000
Printing and engraving expenses............................. 100,000
Miscellaneous .............................................. 23,000
-----------
Total ............................................ $3,600,000
Exchange of Depositary Receipts
Limited partners should not send any depositary receipts with the enclosed
proxy. They should retain the depositary receipts until they receive further
instructions if the Conversion is consummated.
Promptly after the Effective Time, the Corporation will mail to all limited
partners of record a letter of transmittal containing instructions with respect
to the surrender of depositary receipts for Interests in exchange for
certificates representing shares of Trust Preferred Securities or Common Stock
and cash in the case of A Interests. Upon surrender to the Corporation of one or
more depositary receipts, together with a properly completed letter of
transmittal, there will be issued and mailed to former limited partners of
record at the Effective Time a certificate or certificates representing the
number of shares of Trust Preferred Securities or Common Stock to which such
holder is entitled and a check for cash in the case of A Interests. From and
after the Effective Time, each depositary receipt will evidence only the right
to receive shares of Trust Preferred Securities and Common Stock and cash in the
case of A interests.
No distributions or dividends with respect to the Trust Preferred
Securities or Common Stock payable to the holders of record thereof after the
Effective Time will be paid to the holder of any unsurrendered depositary
receipts until such depositary receipts are surrendered for exchange, at which
time accumulated interest or dividends will be paid, without interest, subject
to any applicable escheat laws.
If any certificate representing Trust Preferred Securities or Common Stock
is to be issued in a name other than that in which the depositary receipt
surrendered in exchange therefor is registered on the books of the Partnership
as of the Effective Time, it will be a condition of such issuance that (i) the
depositary receipt so surrendered be properly endorsed and otherwise in proper
form for transfer, and (ii) the person requesting such exchange pay to the
Corporation any transfer or other taxes required by reason of the issuance of a
certificate representing Trust Preferred Securities or Common Stock in any name
other than that of the registered owner of the depositary receipt surrendered,
or the person requesting such exchange establish to the satisfaction of the
Corporation that such tax has been paid or is not applicable.
After the Effective Time, there will be no further registration of
transfers of Interests that were issued and outstanding immediately before such
time. If, after the Effective Time, depositary receipts representing Interests
are presented for transfer, they will be canceled and exchanged for one or more
certificates representing shares of Trust Preferred Securities or Common Stock
and cash in the case of A Interests.
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Treatment of Fractional Shares
No fractional shares will be issued. Instead, (i) each holder of A
Interests will be entitled to receive cash in an amount equal to the fraction of
a Trust Preferred Security to which the holder is otherwise entitled multiplied
by the average closing price of the Trust Preferred Securities for the five
trading days following the Effective Time; and (ii) each holder of B Interests
shall be entitled to receive cash in an amount equal to the fraction of a share
of Common Stock to which the holder is otherwise entitled multiplied by the
average closing price of the Common Stock for the five trading days following
the Effective Time.
COMPARISON OF INTERESTS AND SECURITIES TO BE ISSUED
The following summary compares a number of differences between ownership of
Interests and ownership of Trust Preferred Securities and Common Stock and the
effects relating thereto.
<TABLE>
<CAPTION>
Interests Common Stock Trust Preferred Securities
--------- ------------ --------------------------
Issuer
<S> <C> <C>
The Partnership The Corporation The Trust. Payment of
distributions and on liquidation or
redemption is guaranteed on a
subordinated basis as and to the
extent described herein by the
Corporation.
Taxation
Under current law, the Partnership is not The Corporation is a taxable entity with Each holder of Trust Preferred
a taxpaying entity. Rather, each holder of respect to its income after allowable Securities will be considered to
Interests includes the holder's share of deductions and credits. Stockholders will own a pro rata portion of the
the income and gain and, subject to have taxable income from the Junior Subordinated Debentures
certain limitations, the losses, deductions Corporation's operations only to the held by the trust and will be
and credits of the Partnership in extent that taxable dividends and other required to include in gross
computing taxable income without regard distributions are declared and paid on the income the pro rata share of
to the cash distributed to the limited Common Stock. See "CERTAIN income accrued on the Junior
partner. Generally, cash distributions to FEDERAL INCOME TAX Subordinated Debentures and any
holders of Interests are not taxable, CONSEQUENCES." original issue discount attributable
unless distributions exceed the limited to the Junior Subordinated
partner's basis in the Interests. See Debentures. See "CERTAIN
"CERTAIN FEDERAL INCOME TAX FEDERAL INCOME TAX
CONSEQUENCES." CONSEQUENCES."
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Interests Common Stock Trust Preferred Securities
--------- ------------ --------------------------
<S> <C> <C>
A tax-exempt limited partner's share of No portion of the earnings of, or any No portion of the income accrued
the Partnership's taxable income dividends received from, the Corporation or distributions received on the
constitutes unrelated business taxable will constitute unrelated business taxable Trust Preferred Securities will
income to the tax-exempt unitholder. See income to tax-exempt stockholders, constitute unrelated business
"CERTAIN FEDERAL INCOME TAX except to the extent their investment in taxable income to tax-exempt
CONSEQUENCES." stock of the Corporation is considered stockholders, except to the extent
debt-financed. See "CERTAIN their investment in the Trust
FEDERAL INCOME TAX Preferred Securities is considered
CONSEQUENCES." debt-financed. See CERTAIN
FEDERAL INCOME TAX
CONSEQUENCES."
Distributions and Dividends
The Partnership is required under the The Board of Directors of the The holders of Trust Preferred
Partnership Agreement to make Corporation has the discretion to Securities will be entitled to
distributions of the Partnership's Cash determine whether or not and when to monthly distributions at the rate of
Available for Distribution, less certain declare and pay dividends and the $2.90 per annum (11.6% of the
permitted retentions to the A Interests for amount of any dividend. Holders of $25 liquidation amount) to the
the Priority Return of $1.10 per annum Common Stock will have no contractual extent interest is paid by the
and to the B Interests for the Tax right to receive dividends. Corporation on the Junior
Distribution. Cash Available for Subordinated Debentures. The
Distribution generally means the Corporation has the right to defer
Partnership's cash receipts less (i) cash payment of interest on the Junior
operating expenses and other Subordinated Debentures for a
expenditures, and (ii) reserves, period up to 60 consecutive
established by the General Partner in its months in which case no
sole discretion for working capital, distributions will be paid on the
capital expenditures, debt service and Trust Preferred Securities. Any
other purposes and contingencies. unpaid distributions will cumulate
and must be paid prior to any
dividends on the Common Stock.
Management
The business and affairs of the The business and affairs of the The Trust is managed by five
Partnership are managed by the General Corporation are managed by or under the trustees appointed by the
Partner. direction of the Board of Directors of the Corporation.
Corporation. The members of the
Board of Directors of Lehman/SDI
will become the members of the
Board of Directors of the
Corporation after the Conversion.
Therefore, the personnel in
control of the Corporation will be
identical to that of the
Partnership.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Interests Common Stock Trust Preferred Securities
--------- ------------ --------------------------
<S> <C> <C>
The General Partner may be removed The holders of Common Stock of the The holders of Trust Preferred
only by vote of 80% of the Interests held Corporation will have the ability to elect Securities will have no rights to
by unaffiliated limited partners. See members of the Board of Directors with a elect or remove management of
"DESCRIPTION OF CAPITAL STOCK - plurality of the votes cast for such the Corporation. The holders will
- - Stockholders Agreement." election and to remove the Board of be entitled to elect a Special
Directors with a majority vote of the Regular Trustee if the Trust fails
Common Stock outstanding and entitled to make distributions for 18
to vote. consecutive months or there is an
Event of Default.
Voting Rights
Under Delaware law and the Partnership Holders of Common Stock will have the The holders of Trust Preferred
Agreement, limited partners have voting right to vote on matters specified by Securities will have no voting
rights with respect to (i) the removal and Delaware law affecting the corporate rights except to elect a Special
replacement of the General Partner, (ii) structure of the Corporation, including Regular Trustee as described
the merger of the Partnership, (iii) the election of the Board of Directors. above and with respect to certain
sale of all or substantially all of the Stockholders of the Corporation will modifications and amendments.
assets owned, directly or indirectly, by the have the right to vote on all matters on
Partnership, (iv) the dissolution of the which stockholders must be permitted to
Partnership or the Operating Partnership, vote including, as a general matter,
and (v) material amendments to the election of directors, fundamental
Partnership Agreement and the Operating changes in the Corporation, sale of all or
Partnership Agreement, subject to certain substantially all of the assets of the
limitations. Corporation and amendments to the
Certificate of Incorporation.
Each Interest entitles each holder thereof Each share of Common Stock entitles its Each of the Trust Preferred
who is admitted as a limited partner to holder to cast one vote on each matter Securities entitles its holder to cast
the Partnership to cast one vote on all presented to stockholders. one vote on each matter presented
matters presented to limited partners. to the holders of Trust Preferred
Securities.
Approval of any matter submitted to Approval of any matter submitted to Approval on any matter on which
limited partners generally requires the stockholders generally requires the holders of Trust Preferred
affirmative vote of limited partners affirmative vote of holders of more than Securities are entitled to vote
holding more than 50% of the Interests 50% of the Common Stock outstanding requires the affirmative vote of a
then outstanding. The removal of the and entitled to vote. majority of the outstanding Trust
General Partner requires the affirmative Preferred Securities except that
vote of 80% of the unaffiliated limited modifications and amendments of
partners. the Declaration require a 66 2/3%
vote.
</TABLE>
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<TABLE>
<CAPTION>
Interests Common Stock Trust Preferred Securities
--------- ------------ --------------------------
<S> <C> <C>
Holders of 25% of the Interests held by Amendment of the certificate of The holders of the Trust Preferred
limited partners may propose incorporation or bylaws requires Securities have no right to amend
amendments to the partnership approval of a majority of the members of the Declaration of Trust.
agreement. the Board of Directors and, in certain
cases, approval by the
stockholders. The Stockholders
Agreement has certain requirements
with regard to approval of
amendments by the Independent
Directors. In addition, the
Stockholders Agreement contains
provisions under which Lehman
Brothers and certain members of
management will agree to vote, in
the same proportion as the
"Unaffiliated Shares" that are
voted on any such matter, that
percentage of Excess Voting Shares
(as defined herein) held by them
at such time that equals the
percentage of outstanding
Unaffiliated Shares that are voted
on such matter. See "DESCRIPTION
OF CAPITAL STOCK - - Stockholders
Agreement."
Any action that may be taken at a Stockholders may act by written consent Holders of Trust Preferred
meeting of limited partners may be taken in lieu of a meeting with a number of Securities may not act by written
by written consent in lieu of a meeting votes sufficient for such action. consent in lieu of a meeting.
executed by limited partners sufficient to
authorize such action at a meeting of
limited partners.
Special Meetings
Special meetings of Limited Partners Stockholders are permitted to call a Holders of Trust Preferred
may be called by the General Partner or special meeting or require that the board Securities may call a special
by Limited Partners holding at least 25% of directors call a special meeting of meeting of the Trust only to elect
of the outstanding Interests. stockholders if such meeting is called by a Special Regular Trustee.
holders of at least 25% of outstanding
Common Stock.
Conversion Rights
The Interests are not convertible into any The Common Stock is not convertible The Trust Preferred Securities are
other securities. into any other securities. not convertible into any other
securities.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Interests Common Stock Trust Preferred Securities
--------- ------------ --------------------------
<S> <C> <C>
Redemption
Interests are not subject to mandatory or The Common Stock is not subject to The Trust Preferred Securities will
optional redemption. mandatory or optional redemption. be redeemed upon maturity or
earlier redemption of the Junior 100%
of the liquidation amount plus
accrued and unpaid distributions,
provided that any redemption by
reason of a Tax Event within the
first five years will be at 101%.
The Junior Subordinated
Debentures may be redeemed by
the Corporation at any time after
April 30, 2002.
Liquidation Rights
In the event of the liquidation of the In the event of a liquidation of the In the event of a liquidation of the
Partnership the assets of the Partnership Corporation, the holders of Common Trust, the holders of Trust
remaining after the satisfaction of all Stock would be entitled to share ratably Preferred Securities would be
debts and liabilities of the Partnership are in any assets remaining after satisfaction entitled to receive a preferential
distributed to holders of A Interests in an of obligations to creditors and any distribution of $25 per Trust
amount equal to their capital account liquidation preferences on any series of Preferred Security plus accrued
($10) plus any unpaid Priority Return and preferred stock of the Corporation that and unpaid distributions except
the remainder is distributed to the may then be outstanding. that, upon the occurrence of a
General Partner and the B Interests in Special Event, the Trust will be
accordance with their capital accounts. liquidated and, after satisfaction of
creditors of the Trust, the holders
will receive Junior Subordinated
Debentures.
Right to Compel Dissolution
Under the Partnership Agreement, Under Delaware law, holders of Under the Declaration, holders of
limited partners may compel dissolution Common Stock may compel dissolution Trust Preferred Securities may
of the Partnership by the affirmative vote of the Corporation, absent prior action by not compel dissolution of the
of the holders of a majority of the board of directors, only if all holders Trust.
outstanding Interests. consent in writing. A plan of dissolution
adopted by the board of directors
must be approved by a majority of
the Common Stock outstanding and
entitled to vote.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Interests Common Stock Trust Preferred Securities
--------- ------------ --------------------------
Limited Liability
<S> <C> <C>
In general, holders of Interests are limited Shares of Common Stock will be fully Holders of Trust Preferred
partners in a Delaware limited paid and nonassessable. Stockholders Securities will be entitled to the
partnership, and do not have personal generally will not have personal liability same limitation of personal
liability for obligations of the for obligations of the Corporation. liability extended to stockholders
Partnership. of private corporations for profit
organized under the general
corporation law of the State of
Delaware.
Liquidity and Marketability
The Interests are freely transferable and The Common Stock will be freely The Trust Preferred Securities will
are currently listed and traded on the transferable and application has been be freely transferable and
New York Stock Exchange. After the made for listing the Common Stock on application has been made for
Effective Time, the Interests will cease to the New York Stock Exchange. listing the Trust Preferred
be traded. Securities on the New York Stock
Exchange.
Continuity of Existence
The Partnership Agreement provides for The Corporation's Certificate of The Trust will dissolve on April
the Partnership to continue in existence Incorporation provides for perpetual 30, 2027 or upon the earlier
until December 31, 2086, unless earlier existence, subject to Delaware law. redemption of the Trust Preferred
terminated in accordance with the Securities or the distribution to the
Partnership Agreement. holders of the Junior Subordinated
Debentures.
Financial Reporting
The Partnership is subject to the The Corporation will be subject to the The Corporation will provide
reporting requirements of the Exchange reporting requirements of the Exchange annual and quarterly reports of the
Act and files annual and quarterly reports Act and will file annual and quarterly Corporation to the holders of the
thereunder. The Partnership also provides reports thereunder. The Corporation also Trust Preferred Securities. For the
annual and quarterly reports to its limited will provide annual and quarterly reports reasons set forth under "Available
partners. to its stockholders. Information," the Trust will not
issue any separate reports.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Interests Common Stock Trust Preferred Securities
--------- ------------ --------------------------
Certain Legal Rights
<S> <C> <C>
Delaware law allows a limited partner to Delaware law affords stockholders of a Delaware law allows a beneficial
institute legal action on behalf of the corporation rights to bring stockholder owner of the Trust to institute
Partnership (a partnership derivative derivative actions when the board of legal action on behalf of the Trust
action) to recover damages from a third directors has failed to institute an action (a trust derivative action) to
party or a general partner where the against third parties or directors of the recover damages from a third
general partner has failed to institute the corporation, and class actions to recover party or a trustee where the
action. In addition, a limited partner may damages from directors for violations of trustees with authority to do so
have rights to institute legal action on their fiduciary duties. Stockholders may have failed to institute the action.
behalf of the limited partner or all other also have rights to bring actions in In addition, a beneficial owner of
similarly situated limited partners (a class federal courts to enforce federal rights. the Trust may have rights to
action) to recover damages from a These rights are comparable to the rights institute legal action on behalf of
general partner for violations of fiduciary of the limited partners in the Partnership. himself or all other similarly
duties to the limited partners. Limited situated beneficial owners (a class
partners may also have rights to bring action) to recover damages from a
actions in federal courts to enforce trustee for violations of fiduciary
federal rights. duties to the beneficial owners.
Beneficial owners of the Trust
may also have rights to bring
actions in federal courts to enforce
federal rights.
Right to List of Holders; Inspection of Books and Records
Upon reasonable demand, at the limited Under Delaware law, upon written Upon reasonable demand [, at the
partner's own expense and for a purpose request, at reasonable times and for a expense of the requesting holder
reasonably related to his interest in the proper purpose reasonably related to a of Trust Preferred Securities] and
Partnership, a limited partner may have stockholder's interest as a stockholder, for a purpose reasonably related to
access, at reasonable times, to certain any stockholder of record shall have the his interest as a beneficial owner
information regarding the status of the right to examine and copy the of the Trust, a Holder of Trust
business and financial condition of the Corporation's stock ledger, a list of its Preferred Securities may have
Partnership, tax returns, governing stockholders and its other books and access, at reasonable times, to
instruments of the Partnership and a records. In certain circumstances under certain information regarding the
current list of the partners of the Delaware law, stockholders may not have status of the business and financial
Partnership, provided that the General the same right to information regarding condition of the Trust, governing
Partner may keep confidential any trade the Corporation that they currently have instruments of the Trust and a
secrets or any other information the under the Partnership Agreement with current list of the beneficial
disclosure of which could damage the respect to information regarding the owners and trustees of the Trust,
Partnership or violate any agreement or Partnership. provided that the trustees of the
applicable law. Trust may keep confidential any
trade secrets or other information
the disclosure of which could
damage the Trust or violate any
agreement or applicable law.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Interests Common Stock Trust Preferred Securities
--------- ------------ --------------------------
Subordination
<S> <C> <C>
Subordinated to claims of creditors of the Subordinated to claims of creditors of the Subordinated to creditors of the
Partnership and Operating Partnership. Corporation and the Operating Trust, if any. The Preferred
Partnership Securities Guarantee and the
Junior Subordinated Debentures
of the Corporation will be
subordinate to all liabilities of the
Corporation and the Operating
Partnership except those made
pari passu or subordinate by their
terms.
</TABLE>
Fiduciary Duties
As a general partner of a limited partnership, the General Partner owes the
limited partners, under Delaware law, the fiduciary duties of good faith and
loyalty in handling the affairs of the Partnership, including, in certain
instances, a duty to disclose material information concerning the Partnership's
affairs. The General Partner believes it has satisfied its fiduciary duties in
connection with the Conversion. Following consummation of the Conversion, the
directors of Lehman/SDI will become directors of the Corporation. Under Delaware
law, a director's fiduciary duties to the stockholders of the Corporation in
such capacity will be substantially similar to those currently owed by the
General Partner to limited partners under Delaware law.
The Partnership Agreement further provides that neither the General Partner
nor any of its affiliates will be liable to the Partnership or the limited
partners for any act or omission if (i) taken in good faith and in a manner
reasonably believed to be in, or not opposed to, the interests of the
Partnership, and (ii) the conduct did not constitute gross negligence or willful
or wanton misconduct. Thus, the General Partner and its affiliates may have a
more limited liability to the limited partners than would otherwise be the case
absent such provisions. Similarly, the Corporation's Certificate of
Incorporation provides that a director of the Corporation shall not be liable
for any act or omission in the director's capacity as director except to the
extent the director is found liable for (i) a breach of the duty of loyalty,
(ii) an act or omission not in good faith, (iii) a transaction in which the
director received an improper benefit or (iv) an act or omission for which the
liability of a director is expressly provided for by statute. Under the
Partnership Agreement, the Partnership is required to indemnify the General
Partner and the officers, directors, employees and agents of the General Partner
against liabilities and expenses incurred by the General Partner or such persons
if (i) the General Partner or such persons acted in good faith, and in a manner
reasonably believed to be in, or not opposed to, the interests of the
Partnership and, with respect to any criminal proceeding, had no reason to
believe the conduct was unlawful and (ii) the General Partner's or such persons'
conduct did not constitute actual fraud, gross negligence or willful misconduct.
The Corporation's By-laws provide indemnification to all its directors,
officers, employees and agents.
After the Conversion, the General Partner will dissolve and will not owe
any fiduciary duties to the Corporation or persons holding Trust Preferred
Securities or Common Stock.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following general discussion summarizes certain federal income tax
considerations relating to the Conversion. These summaries are included herein
for general information only. They do not discuss all aspects of federal income
taxation that may be relevant to a particular taxpayer in light of the
taxpayer's personal tax circumstances or to certain types of taxpayers subject
to special treatment under the federal income tax laws. No legal opinion
regarding such tax considerations is being rendered hereby. Except as otherwise
indicated, statements of legal conclusion regarding tax treatments, tax effects
or tax consequences reflect the opinions of Morgan, Lewis & Bockius LLP, counsel
for the Corporation and the Partnership, which has rendered its opinion
regarding the accuracy of the discussion herein to the Partnership. A copy of
Morgan, Lewis & Bockius LLP's opinion has been filed as an exhibit to the
Registration Statement of which this Proxy Statement/Prospectus forms a part,
and a copy of the opinion may be obtained by written request addressed to
SunSource L.P., 2600 One Logan Square, Philadelphia, Pennsylvania 19103,
-55-
<PAGE>
Attention: Joseph M. Corvino, Secretary, telephone number (215) 665-3650. The
Partnership has not requested, and does not intend to request, a ruling from the
Internal Revenue Service ("IRS"). An opinion of counsel is not binding on the
IRS or the courts, and no assurance can be given that the IRS will not challenge
the tax treatment of certain matters discussed herein, or if it does, that it
will be unsuccessful. Accordingly, each limited partner should consult the
limited partner's own tax advisor as to the specific tax consequences to the
limited partner including the application and effect of state or local income
and other tax laws.
The following discussion is based on existing provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), existing and proposed regulations
and existing administrative interpretations and court decisions. Future
legislation, regulations, administrative interpretations or court decisions
could significantly change such authorities either prospectively or
retroactively.
Partnership Status and Taxation of the Partnership
The Partnership is properly classified for federal income tax purposes as a
partnership rather than an association taxable as a corporation. Currently, the
Partnership is not itself subject to federal income tax. Rather, each limited
partner is subject to income tax based on the limited partner's allocable share
of Partnership taxable income, gain, loss, deduction, and credits, whether or
not any cash is actually distributed to such limited partner.
The Revenue Act of 1987 amended the Code to treat certain publicly-traded
partnerships as corporations rather than partnerships for federal income tax
purposes. Under a transition rule, however, an existing publicly-traded
partnership, such as the Partnership, will not be classified as a corporation
until the earlier of (i) the partnership's first taxable year beginning after
December 31, 1997 or (ii) the time at which the partnership adds a new line of
business that is substantial. Under the above-described transition rule, the
Partnership will be taxed as a corporation no later than its taxable year
beginning on January 1, 1998. At that time the Partnership will be treated as if
it had transferred all of its assets (subject to its liabilities) to a newly
formed corporation in exchange for the stock of the corporation, and then
distributed such stock to its partners in liquidation of their interests in the
Partnership. Upon classification as a corporation for tax purposes, the
Partnership would be subject to federal income tax on its earnings at corporate
tax rates.
General Tax Treatment of the Conversion
The Partnership has been a Delaware limited partnership since it began
operations in 1987. In the Conversion, the Partnership and the subsidiaries of
the Corporation will be merged with and into the Operating Partnership with each
A Interest being exchanged for Trust Preferred Securities and cash and each B
Interest being exchanged for Common Stock.
There is no specific authority dealing with a substantially similar
transaction. Accordingly, counsel cannot predict with certainty how the
Conversion will be treated for federal income tax purposes.
The exchange of A Interests for Trust Preferred Securities and cash
pursuant to the Merger will be a taxable transaction. In the case of a holder
who exchanges A Interests, gain or loss will be recognized in an amount equal to
the difference between the sum of the amount of cash and the fair market value
of Trust Preferred Securities received in the exchange and the exchanging
holder's tax basis in the A Interests exchanged. Such gain or loss will be
long-term capital gain or loss if the A Interests have been held for more than
one year as of such date and if such Interests have been held as capital assets.
The Corporation does not expect that any portion of the gain will be treated as
ordinary income pursuant to the rules of section 751 of the Code. A holder of A
Interests will have a tax basis in the Trust Preferred Securities received in
the Merger equal to the fair market value of such Trust Preferred Securities
received. A holder's aggregate tax basis in his pro rata share of the underlying
Junior Subordinated Debentures will be equal to his pro rata share of their
"issue price" on the Expiration Date as defined below.
As to holders of B Interests, counsel is of the opinion that the limited
partners will be treated as exchanging their B Interests for shares of Common
Stock in an exchange described in Section 351 of the Code, pursuant to which
such holders should not recognize gain or loss, except to the extent of any cash
received in lieu of fractional shares. Any such cash should result in capital
gain to the recipient, assuming that the B Interests are held as capital assets.
Counsel's opinion that holders of B Interests will be treated as exchanging
their Partnership interests for stock of the Corporation is based on the federal
income tax treatment of analogous transactions. It is well settled, and the
Service has issued published rulings to the effect that, if a parent corporation
forms a transitory subsidiary corporation and merges it into another corporation
to enable the parent to acquire the stock of such other corporation, the merger
of the transitory subsidiary corporation into such other corporation will be
ignored, and the stockholders of the target corporation will be treated as
receiving directly from
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<PAGE>
the parent corporation stock or other property of the parent in exchange for
their shares of the target. In addition, the Service has issued private letter
rulings addressing the treatment of transactions in which a corporation forms a
transitory partnership and merges it into an existing partnership as a means of
transforming the partners of the existing partnership into stockholders of the
corporation. The conclusions expressed in the private letter rulings are
consistent with the treatment of the Conversion expressed above. Holders of B
Interests should be aware that, unlike published rulings, private letter rulings
cannot be cited as authority, and may be relied upon only by the taxpayer
requesting the ruling, although the conclusions expressed therein are indicative
of the Service's thinking on a particular matter.
As to persons that hold both A Interests and B Interests at the time of the
Conversion, while not free from doubt, a likely result is that these investors
will recognize gain on an aggregate basis - i.e. the difference between their
aggregate tax basis in the A Interests and the B Interests and the aggregate
fair market value of the cash, Trust Preferred Securities and Common Stock
received in the Conversion will constitute the gain realized, which realized
gain will be recognized to the extent of the fair market value of cash or other
property ("boot") received in the Conversion - i.e. the sum of the cash and the
fair market value of the Trust Preferred Securities received. Such gain should
be treated as long-term capital gain, provided that the Interests have been held
for more than one year, and provided that such Interests have been held as
capital assets. As noted earlier, the Corporation does not expect that any
portion of the gain will be treated as ordinary income pursuant to section 751
of the Code. Such a holder's basis in the Common Stock received in the
Conversion will be equal to sum of such holder's basis in the A Interests and B
Interests exchanged therefor, plus the amount of gain recognized, less the
amount of cash and the value of the Trust Preferred Securities received. If the
aggregate tax basis of the A and B Interests exceeds the aggregate fair market
values of the cash, Trust Preferred Securities, and Common Stock received in the
Conversion, it is likely that no loss will be recognized. A person that holds
both A Interests and B Interests could take the position that a treatment of the
Conversion other than the aggregate basis approach described above should apply,
and such persons should consult their own tax advisors regarding the tax
consequences of the aggregate basis approach.
The Partnership and the Corporation intend to treat the Conversion in
accordance with the positions reflected in the foregoing description and to
prepare reports and tax information accordingly. Except as otherwise noted, the
following discussion assumes the correctness of such treatment.
Certain Tax Consequences of the Conversion to Holders of B Interests
Nonrecognition of Gain or Loss. Section 351 (a) of the Code provides, in
general, that no gain or loss is recognized upon the transfer by one or more
persons of property (such as partnership interests) to a corporation solely in
exchange for stock in such corporation if, immediately after the exchange, such
person or persons are in control of the corporation to which the property was
transferred. Section 368(c) of the Code defines control as the ownership of
stock possessing at least 80 percent of the total combined voting power of all
classes of stock entitled to vote and at least 80 percent of the total number of
shares of all other classes of stock. Section 351 (b) of the Code provides that
if boot is received in addition to stock in an otherwise qualifying transaction,
taxable income must be recognized in an amount equal to the lesser of (i) any
gain realized on the exchange or (ii) the amount of boot received. For this
purpose, gain realized is generally equal to the excess, if any, of (x) the
amount of cash and the fair market value of stock and other property received
from the corporation over (y) the adjusted basis of property transferred to the
corporation. In determining realized gain, a limited partner's share of
partnership liabilities is treated as cash received upon the transfer. Section
357(c) of the Code generally provides that if the sum of the liabilities assumed
in the Section 351 exchange exceeds the aggregate tax basis of the assets
transferred in the exchange, such excess is treated as gain from the sale or
exchange of the assets transferred. Section 752 of the Code generally provides
that a partner's tax basis for its partnership interest includes its share of
the liabilities of the partnership, as determined under Treasury regulations. A
published ruling issued by the Service holds that upon the transfer of a
partnership interest to a corporation in a Section 351 transaction, the
transferor's share of partnership liabilities is treated as assumed by the
corporation for purposes of Section 357(c) of the Code.
<PAGE>
Assuming the Conversion is treated for federal income tax purposes in the
manner described above under "General Tax Treatment of the Conversion," it is
counsel's opinion that the exchange by holders of B Interests of their Interests
for Common Stock will be treated as part of a transaction described in Code
Section 351(a). Accordingly, holders of B Interests should incur no federal
income tax liability as a result of the exchange, except to the extent of any
cash received in lieu of fractional shares. Any such cash should result in
capital gain to the recipient, assuming that such B Interests are held as
capital assets. This conclusion is based on the assumption that (i) such holders
do not own any A Interests (see the discussion above), (ii) holders of B
Interests and the parties exchanging their interests in the General Partner
(together, the "Transferors") as steps in the Conversion will own, immediately
after such transfers, more than 80 percent of each class of stock of the
Corporation and (iii) not more than 20 percent of the shares of stock
transferred to the Transferors pursuant to the Conversion will be subsequently
disposed of pursuant to contracts or other formal or informal agreements entered
into prior to the Conversion (the "Control Assumption"). If the Control
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<PAGE>
Assumption were not correct, each holder of B Interests could recognize gain or
loss on the Conversion as if such holder had sold the B Interests in a taxable
transaction for an amount equal to the value of stock received in the
Conversion. Counsel is not aware of any contracts or other formal or informal
agreements entered into by persons receiving shares of stock to dispose of such
shares.
Notwithstanding the above, any holders of B Interests who are treated as
receiving shares of stock in exchange for services will be taxed on the receipt
of the stock to the extent of the value thereof.
Any portion of the liabilities of the Partnership allocated to a holder of
B Interests would increase such holder's tax basis in such B Interest by an
amount equal to such allocated liability. As such allocated liability cannot
exceed such holder's tax basis in the B Interest, no gain recognition under
Section 357(c) of the Code will result from the Conversion for a holder of B
Interests.
Basis and Holding Period of Common Stock. The aggregate tax basis of the
Common Stock that a holder of B Interests receives in the exchange will be equal
to the tax basis of their B Interests immediately prior to the Conversion.
The holding period for Common Stock received in the Conversion will include
the exchanging holder's holding period for the B Interests, provided such holder
held such Interests as capital assets at the time of the Conversion.
Sale of Stock. In general, any gain or loss from the sale or exchange of
the Common Stock received in the Conversion will be characterized as capital
gain or loss provided such item was held as a capital asset. Gain or loss will
be measured by the difference between the amount realized and the holder's
adjusted tax basis in the Common Stock.
Ownership of Stock. After the Conversion, a holder of Common Stock
generally will be taxed only on distributions of money or other property
received from the Corporation, if any, out of current or accumulated earnings
and profits. Such income will be characterized as a dividend and as investment
or portfolio income for purposes of certain tax rules, e.g., those regarding
deductibility of interest expense, under Section 163 of the Code. To the extent
that the Corporation has no current or accumulated earnings and profits at the
time of a distribution, the amount of the distribution will first reduce a
stockholder's adjusted basis in the Common Stock and, thereafter, will be taxed
as an amount received from the sale or exchange of the Common Stock. The
Corporation will have no accumulated earnings and profits as it begins
operations following consummation of the Conversion. Distributions in connection
with a complete liquidation of the Corporation will be treated as amounts
received from the sale or exchange of the Common Stock. Distributions received
in connection with a redemption will be treated as dividends or as amounts
received from the sale or exchange of the stock depending upon the redeeming
stockholder's actual or constructive ownership of other stock of the
Corporation.
Certain Tax Consequences of the Conversion to Holders of A Interests
Classification of the Trust. In connection with the issuance of the Trust
Preferred Securities, Morgan, Lewis & Bockius LLP, counsel to the Corporation
and the Trust, will render its opinion generally to the effect that, under then
current law and assuming full compliance with the terms of the Declaration, the
Trust will be classified for United States federal income tax purposes as a
grantor trust and not as an association taxable as a corporation. Accordingly,
each holder of Trust Preferred Securities (a "Securityholder") will be
considered the owner of a pro rata portion of the Junior Subordinated Debentures
held by the Trust. Accordingly, each Securityholder will be required to include
in gross income the Securityholder's pro rata share of the income accrued on the
Junior Subordinated Debentures.
Recognition of Gain or Loss. The exchange of A Interests for Trust
Preferred Securities and cash pursuant to the Merger will be a taxable
transaction. Gain or loss will be recognized in an amount equal to the
difference between the sum of the cash and the fair market value of Trust
Preferred Securities received in the exchange and the exchanging holder's tax
basis in the A Interest exchanged. Such gain will be long-term capital gain or
loss if the A Interests has been held for more than one year as of such date and
if such Interests have been held as capital assets.
Basis and Holding Period of Junior Subordinated Debentures. A
Securityholder's initial tax basis for the Securityholder's pro rata share of
the Junior Subordinated Debentures will be equal to the Securityholder's pro
rata share of their "issue price" (for each $25 principal amount of Junior
Subordinated Debentures the "issue price" will be equal to the fair market value
of a Trust Preferred Security on the Expiration Date (reduced by Pre-Issuance
Accrued Interest (as defined below)), which may be more or less than $25) and
will be increased by original issue discount (as discussed below) accrued with
respect thereto, and reduced by the amount of cash distributions (including the
amount of any Pre-Issuance Accrued Interest) paid to such Securityholder.
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<PAGE>
Accrual of Original Issue Discount and Premium. The Junior Subordinated
Debentures will be considered to have been issued with "original issue discount"
and each Securityholder, including a taxpayer who otherwise uses the cash method
of accounting, will be required to include the Securityholder's pro rata share
of original issue discount on the Junior Subordinated Debentures in income as it
accrues, in accordance with a constant yield method based on a compounding of
interest, before the receipt of cash distributions on the Trust Preferred
Securities. Generally, all of a Securityholder's taxable interest income with
respect to the Junior Subordinated Debentures will be accounted for as "original
issue discount" and actual distributions of stated interest will not be
separately reported as taxable income. So long as the interest payment period is
not extended, cash distributions received by an initial holder for any monthly
interest period (assuming no disposition prior to the record date for such
distribution) will equal or exceed the sum of the daily accruals of income for
such monthly interest period, unless the issue price of the Junior Subordinated
Debentures is less than $25.
The total amount of "original issue discount" on the Junior Subordinated
Debentures will equal the difference between the issue price of the Junior
Subordinated Debentures and their "stated redemption price at maturity." Because
the Corporation has the right to extend the interest payment period of the
Junior Subordinated Debentures, all of the stated interest payments on the
Junior Subordinated Debentures will be includible in determining their "stated
redemption price at maturity." The issue price of each $25 principal amount of
the Junior Subordinated Debentures will be equal to the fair market value of a
Trust Preferred Security on the Expiration Date (reduced by Pre-Issuance Accrued
Interest), which may be more or less than $25, with the result that the total
amount of original issue discount on the Junior Subordinated Debentures may be
more or less than the amount of stated interest payable with respect thereto.
No portion of the amounts received on the Trust Preferred Securities will
be eligible for the dividends received deduction applicable to holders that are
U.S. corporations, unless the Trust Preferred Securities constitute "high yield
discount obligations" ("HYDOs") under the Internal Revenue Code. If the Trust
Preferred Securities do constitute HYDOs, the original issue discount on the
Trust Preferred Securities will not be deductible by the Corporation until
actually paid by the Corporation, and depending upon the instrument's yield as
computed under the original issue discount rules, a portion of such original
issue discount (the "Disqualified Portion") may not be deductible by the
Corporation at any time. Such Disqualified Portion, if any, will be eligible for
the dividends received deduction for corporate holders of A Interests, however,
if the Corporation has sufficient earnings and profits. The question whether the
Trust Preferred Securities will constitute HYDOs cannot be determined at the
time of this writing, because the issue depends, in part, on factors that will
not be determined until the date of issuance of the Trust Preferred Securities
(including their "issue price" and the prevailing "applicable federal rate"
under the Code). In order to constitute HYDOs, the yield to maturity on the
Trust Preferred Securities must equal or exceed five percentage points over the
applicable federal rate. For March 1997, the applicable federal rate is 6.86%.
Potential Extension of Payment Period on the Junior Subordinated
Debentures. Securityholders will continue to accrue original issue discount with
respect to their pro rata share of the Junior Subordinated Debentures during an
extended interest payment period, and any holders who dispose of Trust Preferred
Securities prior to the record date for the payment of interest following such
extended interest payment period, will not receive from the Trust any cash
related thereto.
Distribution of Junior Subordinated Debentures to Holders of Trust
Preferred Securities. Under current law, except in the unlikely event that the
Trust were determined to be taxable as a corporation for tax purposes, a
distribution by the Trust of the Junior Subordinated Debentures as described in
the Prospectus detailing the terms of the Trust Preferred Securities under the
caption "Description of the Trust Preferred Securities -- Special Event
Redemption or Distribution," will be non-taxable and will result in the
Securityholder receiving directly his pro rata share of the Junior Subordinated
Debentures previously held indirectly through the Trust, with a holding period
and tax basis equal to the holding period and adjusted tax basis such
Securityholder was considered to have had in his pro rata share of the
underlying Junior Subordinated Debentures prior to such distribution.
<PAGE>
Treatment of the Payment of Pre-issuance Accrued Interest. "Pre-Issuance
Accrued Interest" payable on the first interest payment date should be treated
as a return of capital with respect to a Securityholder's pro rata interest in
the Junior Subordinated Debentures, reducing the Securityholder's tax basis in
his pro rata share of the Junior Subordinated Debentures.
Market Discount and Bond Premium. Securityholders other than initial
holders may be considered to have acquired their pro rata interest in the Junior
Subordinated Debentures with market discount, acquisition premium or amortizable
bond premium. Such holders are advised to consult their tax advisors as to the
income tax consequences of the acquisition, ownership and disposition of the
Trust Preferred Securities.
Disposition of the Trust Preferred Securities. Upon on a sale, exchange or
other disposition of the Trust Preferred Securities (including a distribution of
cash in redemption of a Securityholder's Trust Preferred Securities upon
redemption or repayment of
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<PAGE>
the underlying Junior Subordinated Debentures, but excluding the distribution of
Junior Subordinated Debentures), a Securityholder will be considered to have
disposed of all or part of the Securityholder's pro rata share of the Junior
Subordinated Debentures, and will recognize gain or loss equal to the difference
between the amount realized and the Securityholder's adjusted tax basis in the
Securityholder's pro rata share of the underlying Junior Subordinated Debentures
deemed disposed of. Gain or loss will be capital gain or loss (except to the
extent of any accrued market discount with respect to such Securityholder's pro
rata share of the Junior Subordinated Debentures not previously included in
income) provided the Trust Preferred Securities are a capital asset in a
Securityholder's hands. See "Market Discount and Bond Premium" above. Such gain
or loss will be long-term capital gain or loss if the Trust Preferred Securities
have been held for more than one year.
The Trust Preferred Securities may trade at a price that does not fully
reflect the value of accrued but unpaid interest with respect to the underlying
Junior Subordinated Debentures. A Securityholder who disposes of his Trust
Preferred Securities between record dates for payments of distributions thereon
will nevertheless be required to include in income accrued but unpaid interest
on the Junior Subordinated Debentures through the date of disposition, and to
add such amount to the Securityholder's adjusted tax basis in the
Securityholder's pro rata share of the underlying Junior Subordinated Debentures
deemed disposed of. Accordingly, such a Securityholder will recognize a capital
loss to the extent the selling price (which may not fully reflect the value of
accrued but unpaid interest) is less than the Securityholder's adjusted tax
basis (which will include accrued but unpaid interest). Subject to certain
limited exceptions, capital losses cannot be applied to offset ordinary income
for United States federal income tax purposes.
United States Alien Holders. For purposes of this discussion, a "United
States Alien Holder" is any corporation, individual, partnership, estate or
trust that is, as to the United States, a foreign corporation, a non-resident
alien individual, a foreign partnership or a non-resident fiduciary of a foreign
estate or trust.
Under present United States federal income tax law:
(i) payments by the Trust or any of its paying agents to any
holder of a Trust Preferred Security who or which is a United States Alien
Holder will not be subject to United States federal withholding tax,
provided that (a) the beneficial owner of the Trust Preferred Security does
not actually or constructively own 10 percent or more of the total combined
voting power of all classes of stock of the Corporation entitled to vote,
(b) the beneficial owner of the Trust Preferred Security is not a
controlled foreign corporation that is related to the Corporation through
stock ownership, and (c) either (A) the beneficial owner of the Trust
Preferred Security certifies to the Trust or its agent, under penalties of
perjury, that it is not a United States holder and provides its name and
address or (B) a securities clearing organization, bank or other financial
institution that holds customers' securities in the ordinary course of its
trade or business (a "Financial Institution") and holds the Trust Preferred
Security certifies to the Trust or its agent under penalties of perjury
that such statement has been received from the beneficial owner by it or by
a Financial Institution between it and the beneficial owner and furnishes
the Trust or its agent with a copy thereof;
(ii) a United States Alien Holder of a Trust Preferred Security
will not be subject to United States federal withholding tax on any gain
realized upon the sale or other disposition of a Preferred Security; and
(iii) any gain realized by a United States Alien Holder upon the
exchange of A Interests for Trust Preferred Securities will not be subject
to United States federal withholding tax.
Information Reporting to Holders. The Trust will report the original issue
discount that accrued during the year with respect to the Junior Subordinated
Debentures, and any gross proceeds received by the Trust from the retirement or
redemption of the Junior Subordinated Debentures, annually to the holders of
record of the Trust Preferred Securities and the Internal Revenue Service. The
Trust currently intends to deliver such reports to holders of record prior to
January 31 following each calendar year. It is anticipated that persons who hold
Trust Preferred Securities as nominees for beneficial holders will report the
required tax information to beneficial holders on Form 1099.
Backup Withholding. Payments made on, and proceeds from the sale of Trust
Preferred Securities may be subject to a "backup" withholding tax of 31 percent
unless the holder complies with certain identification requirements. Any
withheld amounts will generally be allowed as a credit against the holder's
federal income tax, provided the required information is timely filed with the
Internal Revenue Service.
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<PAGE>
Other Tax Issues Affecting Limited Partners
Pre-Conversion Operations of the Partnership. The income and deductions of
the Partnership incurred during 1997 prior to the Conversion will be allocated
among the partners, and each partner's basis in its general or limited
partnership interest will be adjusted by such allocations, in essentially the
same manner they would have been allocated and adjusted apart from the
Conversion. Each partner will receive a Schedule K-1 for 1996 and 1997
reflecting the income and deductions allocated to the partner during the period
in 1996 and 1997 in which the partner owned such Interests, even if the partner
sells the Interests prior to the Conversion.
Pre-Conversion Sale of Interests. The tax consequences to a limited partner
who sells a Partnership Interest prior to the Conversion are not affected by the
Conversion.
(i) The limited partner may recognize both ordinary income and
capital gain or loss. The ordinary income amount will be approximately the
amount of ordinary income, including depreciation recapture and other
unrealized receivables as defined in Section 751 of the Code, that would
have been allocated to the limited partner if the Partnership had sold all
its assets. Such amount will vary depending on the amount paid for the
Partnership Interests, the date acquired and other factors. The capital
gain or loss amount will normally be the difference between the limited
partner's adjusted tax basis and the amount realized from the sale of the
Interest (reduced by the portion treated as ordinary income).
(ii) The deductibility of a noncorporate taxpayer's investment
interest expense is generally limited to the amount of such taxpayer's net
investment income. Investment interest expense includes (1) interest on
indebtedness incurred or continued to purchase or carry property held for
investment (such as the Common Stock); (2) a partnership's interest expense
attributed to the portfolio income of the Partnership under the passive
activity loss rules; and (3) that portion of interest expense incurred or
continued to purchase or carry an interest in a passive activity (such as a
limited partner's Interest in the Partnership) to the extent attributed to
portfolio income (within the meaning of the passive activity loss rules).
Investment interest deductions which are disallowed may be carried forward
and deducted in subsequent years to the extent of net investment income in
such years.
Reporting Requirements. Each limited partner who receives Common Stock in
the Conversion will be required to file with the limited partners' federal
income tax return a statement that provides details relating to the property
transferred and the stock received in the Conversion. The Corporation will
provide former limited partners with information to assist them in preparing
such statement.
Tax Consequences to the Corporation and the Partnership
The following discussion assumes that the Conversion will be treated for
federal income tax purposes in the manner described above under "--Tax Treatment
of the Conversion." In counsel's opinion, the acquisition by the Corporation of
the various partnership interests and other interests as a result of the
Conversion and issuance of cash, the Trust Preferred Securities and Common Stock
will not give rise to the recognition of gain or loss by the Corporation or the
Partnership, and the basis of the Partnership interests received by the
Corporation in exchange for cash, the Trust Preferred Securities and Common
Stock will generally be determined by reference to the tax basis of the B
Interests in the hands of the exchanging partners immediately prior to the
Conversion increased by the fair market value of the cash and Trust Preferred
Securities received by the holders of A Interests.
The acquisition of Partnership interests by the Corporation will result in
a constructive termination of the Partnership for federal income tax purposes
under Section 708 of the Code. This section provides that a "sale or exchange"
(which includes a transfer in connection with a Section 351 transaction) of 50
percent or more of the total interest in a partnership's capital and profits
within a 12-month period terminates a partnership for tax purposes. Upon such
termination, there is a hypothetical liquidation and distribution of the
partnership's assets to the transferees of the partnership interests and the
remaining partners, and a hypothetical contribution of the assets to the
partnership, which for tax purposes is considered a new partnership. The
constructive termination of the Partnership under Section 708 of the Code
results in a constructive termination of the Operating Partnership. The
Corporation does not expect that this termination will result in any material
adverse tax consequences to the Corporation or the Partnership.
As part of the Conversion, the Partnership will be merged with the
Operating Partnership. The merger of the Partnership and the transfer of its
assets to the Operating Partnership will not result in the recognition of gain
or loss to the Partnership or the Operating Partnership.
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<PAGE>
Unrelated Business Taxable Income
Certain persons otherwise generally exempt from federal income taxes (such
as pension plans and other exempt organizations) are taxed under Section 511 of
the Code on unrelated business taxable income. Currently, substantially all
taxable income generated by the Partnership is considered unrelated business
taxable income for tax-exempt organizations. Dividends distributed by the
Corporation will not be taxed under Section 511 of the Code, except to the
extent that the Common Stock is debt-financed property as that term is defined
in Section 514 of the Code.
Other Tax Aspects
Apart from federal income taxes, no attempt has been made to determine any
tax that may be imposed on limited partners by the country, state or
jurisdiction in which such partner resides or is a citizen. In addition to
federal income taxes, limited partners may be subject to other taxes, such as
state or local income taxes that may be imposed by various jurisdictions, and
may be required to file tax returns through the date of consummation of the
Conversion in those states in which properties owned by the Partnership (through
the Operating Partnership) are located. Limited partners may also be subject to
income, intangible property, estate, and inheritance taxes in their state of
domicile. Limited partners should consult their own tax advisors with regard to
state income, inheritance, and estate taxes.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INTENDED TO PROVIDE
ONLY A GENERAL SUMMARY AND DOES NOT ADDRESS TAX CONSEQUENCES WHICH MAY VARY
WITH, OR ARE CONTINGENT ON, INDIVIDUAL CIRCUMSTANCES. MOREOVER, THIS DISCUSSION
DOES NOT ADDRESS ANY FOREIGN, STATE OR LOCAL TAX CONSEQUENCES OF DISPOSITION OF
INTERESTS IN THE PARTNERSHIP PURSUANT TO THE CONVERSION. ACCORDINGLY, EACH
LIMITED PARTNER IS STRONGLY URGED TO CONSULT HIS OWN TAX ADVISOR TO DETERMINE
THE PARTICULAR TAX CONSEQUENCES TO SUCH LIMITED PARTNER OF THE CONVERSION,
INCLUDING THE APPLICABILITY AND EFFECT OF FOREIGN, STATE, LOCAL AND OTHER TAX
LAWS.
MARKET PRICES AND DISTRIBUTIONS
Effective May 1, 1990, the Partnership separated its publicly traded
limited partnership unit into one A Interest and one B Interest. The A Interests
and B Interests trade separately on the New York Stock Exchange under the
symbols SDP and SDPB, respectively.
The following table shows the quarterly range of high and low closing sales
prices for the A Interests and B Interests separately for the periods indicated.
A Interests B Interests
------------------- ---------------------
High Low High Low
------ ------ ----- -----
1995
First Quarter 10 3/4 10 1/4 4 3/4 4
Second Quarter 11 10 3/8 4 3/8 4
Third Quarter 11 3/8 10 3/4 4 7/8 4
Fourth Quarter 11 3/8 10 7/8 5 1/8 4 1/2
1996
First Quarter 11 3/4 11 1/4 5 1/8 4
Second Quarter 11 1/2 10 7/8 4 1/2 4
Third Quarter 11 1/8 10 3/8 4 1/2 4 1/4
Fourth Quarter 11 1/4 10 3/8 4 5/8 4 1/8
1997
First Quarter 11 1/2 10 7/8 4 1/2 4 1/8
(through February 28)
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<PAGE>
The closing sales prices on March __, 1997, the last trading day prior to
the mailing of this Proxy Statement/Prospectus, were ____ per A Interest and
____ per B Interest. The closing sales prices on December 11, 1996, the last
trading day before the Partnership publicly announced the planned Conversion,
were $10 1/2 per A Interest and $4 1/4 per B Interest.
As of November 30, 1996, the Partnership had 11,099,573 A Interests and
21,675,746 B Interests outstanding. The total number of record holders of A
Interests and B Interests as of November 30, 1996 was 1,754 and 1,034,
respectively.
The holders of the A Interests are entitled to receive annually $1.10 per A
Interest (the "Priority Return") to the extent that cash is available for
distribution. Priority Return distributions are paid monthly on the last day of
the month to holders of record on the first day of that month.
When federal taxable income is allocated to the holders of B Interests,
such holders are entitled to annual tax distributions (the "B Tax Distribution")
equal to the product of (i) 125% of the then applicable maximum federal income
tax rate for individuals and (ii) the federal taxable income allocated to the
holders of B Interests with respect to the preceding year.
The Priority Return and B Tax Distribution will be paid to the extent cash
is available for distribution and accumulate until paid. To the extent that the
Priority Return and B Tax Distribution have not been paid on a cumulative basis,
management fees due the General Partner will be deferred, and will be paid,
together with any management fees then owed with respect to any other year,
after the Priority Return and B Tax Distribution have been paid. If cash
available for distribution exceeds the amount necessary to pay the Priority
Return and B Tax Distribution, the General Partner may make additional
discretionary distributions to the holders of B Interests, provided that no
distribution, except the B Tax Distribution, may be made to holders of the B
Interests if, after such distribution, such holders' capital accounts with
respect to their B Interests would be below $.50 on a per Interest basis.
The Partnership paid Priority Return distributions of $1.10 per A Interest
in 1995 and 1996. For 1994, the B Tax Distribution amounted to $10,895,000 or
$.492619 per B Interest which was partially paid in the amount of $.009352 per B
Interest per month for the period January through March 1994 and $.02 per B
Interest per month during the period April through December 1994. The monthly
tax distributions were paid to holders of record on the first day of each month
during 1994 and aggregated $.208056 per B Interest for the full year 1994. On
March 31, 1995, the Partnership distributed the balance of the tax distribution
due of $.284563 per B Interest, as follows: approximately $.01981 per month to
holders of record of B Interests on the first day of the month during January
through March 1994; $.00916 per month for April through November 1994; and
$.15185 for December 1994 which included $.14269 related to the capital gain on
the sale of the Electrical Group divisions on December 5, 1994.
For 1995, the B Tax Distribution amounted to $14,807,000 or $.669517 per B
Interest which was partially paid in the amount of $.02 per B interest per month
for the period January through December, 1995, along with a partial distribution
of $.15 on April 10, 1995 to holders of record on December 30, 1994, related to
the taxable gain on the sale of Dorman Products. The monthly tax distributions
were paid to holders of record on the first day of each month during 1995 and
aggregated $.24 per B interest for the full year 1995. On March 29, 1996, the
Partnership distributed the balance of the tax distribution due of $.279517 per
B Interest, as follows: $.174544 to holders of record on December 30, 1994 for
the balance due on the taxable gain on the sale of Dorman Products; $.001968 per
month to holders of record of B Interests on the first day of the month during
January through December 1995 for the balance due on ordinary taxable income;
and $.081356 to holders of record on September 29, 1995 related to the taxable
gain on the sale of Downey Glass on October 27, 1995.
For 1996, the B Tax Distribution amounted to $7.7 million or $.35 per B
Interest, which was partially paid in the amount of $.02 per B Interest per
month for the period January through April 1996 and in the amount of $.03 per B
Interest per month for the period May through December 1996 (including a
distribution declared November 18, 1996, payable December 31, 1996, to holders
of record November 29, 1996). On March 31, 1997, the Partnership anticipates
distributing the balance of the tax distribution due of $.0265 per B Interest to
the holders of record for the entire year.
The Partnership suspended the payment of monthly advance B Tax
Distributions effective January 1, 1997, pending the conversion to corporate
form. The required B Tax Distribution for the period January 1, 1997 through the
Effective Time will be paid on April 30, 1998, if any. For the period January 1,
1997 through the Effective Time, the Partnership expects to pay Priority Return
distributions of approximately $.091666 per month per A Interest.
After the Effective Time, the former holders of A Interests will be
entitled to monthly distributions on the Trust Preferred
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<PAGE>
Securities subject to the right of the Corporation to defer payments on the
Junior Subordinated Debentures for up to five years in which case the
distributions will accumulate, compounding monthly. Dividends on the Common
Stock will be payable when and as declared by the Board of Directors of the
Corporation. Management presently intends not to recommend the payment of
dividends on the Common Stock in order to retain cash to fund the Corporation's
acquisition program and corporate requirements. The payment of dividends by the
Corporation will be at the discretion of the Board of Directors, will be subject
to legal and contractual limitations, and will depend upon the future earnings,
operations, financial conditions and capital and other requirements of the
Corporation.
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<PAGE>
CAPITALIZATION
The following table sets forth the historical capitalization of the
Partnership at September 30, 1996, and the pro forma capitalization of the
Corporation as if the conversion had occurred on September 30, 1996. The table
should be read in conjunction with the historical and pro forma financial
statements of the Partnership and related Notes thereto, appearing elsewhere in
this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
(dollars in thousands)
September 30, 1996
--------------------------------------------
Pro Forma
Partnership Corporation
----------------- ----------------
<S> <C> <C>
Current portion of senior notes $ 6,395 $ --
============= ============
Long-term portion of senior notes $ 63,934 $ --
------------ ------------
Bank revolving credit -- --
------------ -----------
Replacement credit facility (ies) -- 97,259
------------ -----------
Guaranteed preferred beneficial interests -- 105,446
in the Corporation's Junior Subordinated Debentures ------------ -----------
General Partner's minority interest in the
operating partnership 1,035 --
------------ ----------
Partners' capital:
General partner 1,024 --
Limited partners:
A interests 67,642 --
B interests 35,296 --
B interest held in treasury (1,514) --
Cumulative foreign currency
translation adjustment (1,288) --
------------ ----------
Total partners' capital 101,160 --
------------ ----------
Stockholders' deficit:
Preferred stock, $.01 par, 1,000,000 shares
authorized, none issued -- --
Common Stock, $0.01 par; 20,000,000 shares
authorized; 6,418,936 shares issued and
outstanding -- 64
Accumulated deficit -- (17,849)
Cumulative foreign currency
translation adjustment -- (1,288)
------------ ----------
Total stockholders' deficit -- (19,073)
------------ ----------
Total capitalization $ 166,129 $ 183,362
=========== ==========
</TABLE>
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<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION
The following table sets forth selected consolidated historical financial
data of the Partnership as of the dates and for the periods indicated. The
selected historical financial information of the Partnership for the five years
ended December 31, 1995, has been derived from financial statements which have
been audited by Coopers & Lybrand L.L.P., independent accountants. The financial
data for the nine-month periods ending September 30, 1996 and 1995 are derived
from unaudited financial statements. The unaudited financial statements include
all adjustments, consisting of normal recurring accruals, which the Partnership
considers necessary for a fair presentation of the financial position and the
results of operations for these periods. Operating results for the nine months
ended September 30, 1996 are not necessarily indicative of the results that may
be expected for the entire year ending December 31, 1996. The selected financial
information should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto appearing elsewhere herein. See "INDEX TO
FINANCIAL STATEMENTS." See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" for acquisitions and divestitures that
affect comparability.
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
(Unaudited) Years Ended December 31,
------------------- ------------------------
(dollars in thousands, except for partnership interest data)
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Net sales $489,517 $481,826 $628,735 $735,861 $655,707 $612,052 $573,457
Income from operations 24,914 25,623 31,302 37,759 28,975 29,712 27,225
Gain on Sale of Divisions -- 16,500 20,644 3,523 -- -- --
Provision (benefit) for income taxes (372) 362 537 100 869 493 630
Income before extraordinary loss and
cumulative effect of change in accounting
principle 20,609 36,067 44,745 29,544 18,506 17,691 15,073
Extraordinary loss -- (629) (629) -- -- (3,434) --
Cumulative effect on prior years of change
in accounting principle -- -- -- -- -- 822 --
Net income $20,609 $35,438 $44,116 $29,544 $18,506 $15,079 $15,073
Earnings per limited partnership interest:
Income before extraordinary loss
and cumulative effect of change in
accounting principle
- Class A
- Class B $0.82 $0.82 $1.10 $1.10 $1.10 $1.10 $1.10
$0.52 $1.23 $1.48 $0.79 $0.28 $0.25 $0.13
Extraordinary loss
- Class A -- -- -- -- -- -- --
- Class B -- $(0.03) $(0.03) -- -- $(0.16) --
Cumulative effect on prior years
of change in accounting principal
- Class A -- -- -- -- -- -- --
- Class B -- -- -- -- -- $0.04 --
Net income per limited partnership interest
- Class A
- Class B $0.82 $0.82 $1.10 $1.10 $1.10 $1.10 $1.10
$0.52 $1.20 $1.45 $0.79 $0.28 $0.13 $0.13
Cash distributions declared per limited
partnership interest
- Class A $0.82 $0.82 $1.10 $1.10 $1.10 $1.10 $1.10
- Class B $0.23 $0.55 $0.67 $0.49 $0.27 $0.13 $0.13
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
(Unaudited) Years Ended December 31,
----------------- ------------------------
(dollars in thousands, except for partnership interest data)
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Weighted average number of shares
outstanding 11,099,573 11,099,573 11,099,573 11,099,573 11,099,573 11,099,573 11,099,573
- Class A 21,675,746 21,675,746 21,675,746 21,675,746 21,675,746 21,675,746 21,675,746
- Class B
Cash provided by operating activities $20,623 $7,683 $17,050 $17,704 $23,571 $27,056 $30,038
Total assets 263,303 257,567 254,591 266,186 273,493 261,588 264,544
Long-term debt and capitalized lease
obligations 63,934 70,465 63,934 74,781 104,185 115,503 120,108
</TABLE>
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information which management believes is
relevant to an assessment and understanding of the Partnership's operations and
financial condition. The discussion pertains to the consolidated statements of
income of the Partnership and subsidiary for the years ended December 31, 1993,
1994 and 1995 (audited) and the nine-month periods ended September 30, 1995 and
1996 (unaudited), and the consolidated balance sheets dated December 31, 1994
and 1995 (audited) and September 30, 1995 and 1996 (unaudited), and should be
read in conjunction with these consolidated financial statements and notes
thereto appearing elsewhere herein. In connection with the proposed conversion
of the Partnership to a C corporation, references are also made, where
appropriate, to the unaudited pro forma financial statements contained elsewhere
herein.
General
The Partnership is currently a publicly traded master limited partnership
operating in the wholesale distribution industry through a subsidiary
partnership, SDI Operating Partners, L.P. (the "Operating Partnership"). The
Partnership consists of a headquarters operation and three business segments
which are Industrial Services, Hardware Merchandising and Glass Merchandising.
The Partnership's Industrial Services segment is comprised of the Sun
Inventory Management ("SIMCO") divisions and the Sun Technology Services
divisions. The SIMCO divisions are Kar Products, A&H Bolt and
SIMCO/Special-T-Metals. The SIMCO divisions provide maintenance products and
inventory management services to both original equipment manufacturers and
maintenance and repair facilities, including in-plant systems. Sun Technology
Services, formerly the Fluid Power group, is comprised of Activation, Air-Dreco,
J.N. Fauver Co., Hydra-Power Mexico, Walter Norris and Warren Fluid Power. The
Technology Services divisions provide fluid power products, engineering design,
and equipment repair services to a wide variety of industrial customers.
The Partnership's Hardware Merchandising segment consists of the Hillman
division. Hillman distributes hardware items and related products and also
provides merchandising systems service and support to both large and small
hardware retailers.
The Partnership's Glass Merchandising segment consists of the Harding Glass
division. Harding provides glass products and point-of-sale related services
such as the installation and repair of automobile and flat glass.
Recent Developments
On December 11, 1996, the Board of Directors of Lehman/SDI, Inc., approved
management's plan to restructure its Technology Services divisions and its Glass
Merchandising business. During the fourth quarter of 1996, the Partnership
recorded a $6.0 million restructuring charge related to the integration and
consolidation of its five domestic Technology Services divisions and the
write-off of certain non-performing assets in the Glass Merchandising segment.
The restructuring plan is expected to result in the elimination of 175 employees
in the Technology Services divisions by December 31, 1998, and is expected to
produce net annualized cost savings of approximately $5.0 million per year
thereafter.
Pending the conversion to corporate form, the Partnership will suspend the
payment of monthly advance B Tax Distributions effective January 1, 1997.
The Partnership's net income for the year ended December 31, 1996 amounted
to $19.3 million including the previously mentioned restructuring charge of $4.9
million, net of $1.1 million in related deferred tax benefits and $2.1 million
of transaction costs associated with the proposed conversion to a taxable C
corporation. Net income in 1995 amounted to $44.1 million including a combined
gain of $20.6 million from the sale of the Downey Glass Division in October 1995
and the Dorman Products Division in January 1995. See " -- Sale of Certain
Divisions". Results for 1995 also included a $0.6 million charge related to the
early retirement of debt and $.3 million of operating income from the divested
Downey Glass. Excluding these non-recurring items, net income in 1996 would have
been $26.3 million, or 10.5% above the comparable 1995 earnings of $23.8
million.
Sales in 1996 amounted to $649.3 million, an increase of $49.4 million or
8.2% over the 1995 level of $599.9 million, excluding the divested Downey Glass
Division. The increase in sales levels resulted primarily from a higher volume
of products sold due to continued strength in existing markets as well as market
penetration from new product lines and value-added services.
-68-
<PAGE>
Conversion to Corporate Form
In connection with the proposed conversion of the limited partnership to a
C corporation, limited partnership interests in the Partnership will be
exchanged for securities and cash. Holders of A Interests will receive $119.9
million in the aggregate, consisting of $105.5 million of Trust Preferred
Securities of SunSource Capital Trust, a business trust holding Junior
Subordinated Debentures of the Corporation and $14.4 million of cash. Per A
Interest, each holder will receive 0.38 of a Trust Preferred Security, with a
liquidation preference of $25 and $1.30 in cash. The Trust Preferred Securities
will be payable monthly at a rate of 11.6% which will result in $1.102 per annum
payable to each current holder of an A Interest, substantially equivalent to the
pre-conversion Priority Return paid to each A Interest. Holders of B Interests
will receive .25 share of Common Stock for each outstanding B Interest or one
share of Common Stock for each four B Interests. Lehman/SDI and limited partners
(current and former executive officers of the Partnership) will receive
1,000,000 shares of Common Stock upon consummation of the Conversion in exchange
for their interests in the General Partner and the Operating Partnership.
The holders of A Interests will be subject to federal income tax on the
gain recognized as the difference between the tax basis in their A Interests and
the total consideration received in Trust Preferred Securities and cash. The
holders of only B Interests will not be subject to federal income tax on the
receipt of Common Stock. Investors holding both A Interests and B Interests will
be subject to federal income tax on the gain recognized as the difference
between the aggregate tax basis in their A and B Interests and the aggregate
fair market value of the consideration received (Trust Preferred Securities,
cash and Common Stock) to the extent of boot received (Trust Preferred
Securities and cash only).
Sale of Certain Divisions
The Operating Partnership sold its Downey Glass division on October 27,
1995, its Dorman Products division on January 3, 1995 and its three Electrical
Group divisions on December 5, 1994, for an aggregate cash consideration, net of
expenses, of approximately $70.6 million (subject to certain post-closing
adjustments) and the assumption of certain liabilities. The proceeds from these
divestitures were used to reduce debt and for general Partnership purposes,
including acquisitions for integration with its remaining businesses.
Sales from the divested divisions aggregated $ 29.1 million for the year
ended December 31, 1995, $177.1 million for the year ended December 31, 1994,
and $162.3 million for the year ended December 31, 1993. Income contributions
from these divisions aggregated $.3 million or $.01 per B Interest in 1995, $8.6
million or $.39 per B Interest in 1994, and $6.6 million or $.30 per B Interest
in 1993.
Acquisitions
On April 11, 1996, the Partnership's Industrial Services segment, through
its Warren Fluid Power Division, purchased certain assets of Hydraulic Depot,
Inc. of Reno, Nevada for an aggregate purchase price of $.7 million. Annual
sales of Hydraulic Depot, Inc. are approximately $2.5 million. This acquisition
expands Warren's previous geographic markets.
On November 13, 1995, the Partnership's Hardware Merchandising segment,
through its Hillman Division, purchased certain assets of the Retail Division of
Curtis Industries of Eastlake, Ohio for an aggregate purchase price of $7.5
million and the assumption of certain liabilities. The Curtis Retail operation
was integrated with the Operating Partnership's Hillman division. Curtis' sales
were $1.6 million from the acquisition date through December 31, 1995 and $8.0
million through the first nine months of 1996. Annual sales of Curtis' Retail
Division are expected to be approximately $10.5 million.
Results of Operations
Market Developments
Through the first nine months of 1996, the Industrial Services and Hardware
Merchandising segments continued to expand as a result of economic strength in
most product markets and the addition of new product lines and value-added
services. However, the Glass business has experienced a decline in sales volume
primarily attributable to the discontinuation of certain product lines and
markets and competitive pressures from major glass manufacturers in the
wholesale distribution business. This decline has been partially offset by real
growth in Harding's retail glass shops, its primary strategic focus. Growth in
the retail glass business is expected to continue, complemented by internal
expansion and acquisition growth opportunities.
-69-
<PAGE>
Operating expense control and liquidity in working capital investment
allows the operating divisions to respond quickly to market conditions affected
by economic recession or growth. Management has and will continue to respond to
changing market conditions.
Nine Months Ended September 30, 1996 and September 30, 1995
The following table of results from ongoing operations excludes from the
nine months ended September 30, 1995, sales of $26.3 million and net results of
operations of $.4 million from divisions sold.
(dollars in thousands)
Nine Months Ended
---------------------------------
September 30, September 30,
1996 1995
---------------- ------------
Net sales $ 489,517 $ 455,501
Cost of sales 291,920 269,623
---------- ----------
Gross profit 197,597 185,878
---------- ----------
Operating expenses:
Selling, general & admin. expenses 166,059 154,148
Management fee to general partner 2,491 2,491
Depreciation 2,684 2,531
Amortization 1,449 1,481
--------- ---------
Total operating expenses 172,683 160,651
--------- -------
Income from ongoing operations $ 24,914 $ 25,227
========= =========
Net income for the first nine months of 1996 was $20.6 million compared
with $35.4 million in 1995. The results for the first nine months of 1995
included a $16.5 million gain from the sale of Dorman Products, a $.6 million
charge related to the early retirement of debt, and $.4 million of operating
income from Downey Glass which was divested on October 27, 1995. Excluding these
1995 events, net income increased $1.4 million or 7.5% over the first nine
months of 1995.
Net sales increased $34.0 million or 7.5% over the first nine months of
1995, excluding Downey, resulting primarily from an increase in the volume of
products sold due to strengthening in most product markets and the addition of
new product lines and value-added services. Sales recorded in the first nine
months of 1996 were $489.5 million compared with sales of $455.5 million in the
first nine months of 1995, excluding divisions sold.
Sales increases (decreases) by business segment are as follows:
<TABLE>
<CAPTION>
Sales Increase (Decrease)
Amount %
------ ---
<S> <C> <C>
Industrial Services
Technology Services divisions 7.1 million 3.3%
SIMCO divisions 12.2 million 11.7%
----
Total Industrial Services 19.3 million 6.0%
Hardware Merchandising 15.6 million 24.4%
Glass Merchandising (.9) million (1.3)%
-------
Total Partnership $34.0 million 7.5%
=====
</TABLE>
-70-
<PAGE>
The sales increase in the Hardware Merchandising segment includes
approximately $8.0 million of revenue contributed from the acquisition of
Curtis. The increase in sales in the SIMCO divisions is comprised of sales
growth in inventory management services of $6.8 million or 36.7% and in
maintenance products of $5.4 million or 6.3%.
The decline in sales volume in the Glass Merchandising segment is
attributable to the discontinuation of certain product lines and markets served
accounting for $.7 million of the sales decline and a decrease in wholesale
glass, contract, brokerage and other product line sales of $1.4 million, offset
by an increase in retail glass sales of $1.2 million or almost 4%.
Cost of sales increased $22.3 million or 8.3% from the first nine months of
1995, due primarily to increased sales levels in the comparison period.
Gross margins were 40.4% in the first nine months of 1996 compared with
40.8% in the same period of 1995, comprised by business segment as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1996 1995
---- ----
<S> <C> <C>
Industrial Services
Technology Services divisions 26.7% 27.2%
SIMCO divisions 61.4% 64.8%
Total Industrial 38.6% 39.4%
Hardware Merchandising 49.9% 52.3%
Glass Merchandising 38.0% 36.6%
</TABLE>
The erosion in gross margin in the SIMCO divisions is due mainly to
competitive pricing pressures and changes in sales mix. Gross margins in the
Hardware Merchandising segment decreased due to reduced packaging productivity
levels and costs associated with the Curtis acquisition and other business
expansion programs.
Selling, general and administrative expenses ("SG&A") expenses increased by
$11.9 million or 7.7% over the first nine months of 1995, comprised as follows:
increased selling expenses of $6.1 million or 8.3%, increased warehouse and
delivery expenses of $4.6 million or 16.7% and increased general and
administrative expenses of $1.2 million or 2.3%. The increase in S,G&A expenses
supported increased 1996 sales levels, the integration of the Curtis retail
division, the addition of six large in-plant accounts in the SIMCO divisions and
expansion programs by several other operating units.
Including the changes discussed above, S,G&A expenses as a percentage of
sales in the comparison period, were as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1996 1995
---- ----
<S> <C> <C>
Selling Expenses 16.3% 16.1%
Warehouse and Delivery Expenses 6.5% 6.0%
General and Administrative Expenses
Total S,G&A Expenses 11.1% 11.7%
----- -----
33.9% 33.8%
</TABLE>
As calculated in accordance with the partnership agreement, the management
fee due the General Partner annually amounts to $3.3 million which is based on
3% of the aggregate initial capital investment ($111 million) of the limited
partners. The management fee is accrued each quarter in the amount of
approximately $.8 million.
Interest income decreased $.3 million in the comparison period due
primarily to reduced investment of excess cash that was generated during the
fourth quarter of 1994 and the first quarter of 1995 from divisions sold.
-71-
<PAGE>
Interest expense decreased $.4 million in the comparison period due
primarily to reduced financing costs from the prepayment of senior notes on
March 14, 1995.
Other income increased by $.9 million in the comparison period due
primarily to legal settlements and post-closing adjustments from divisions sold.
Currently, the Partnership incurs state and local income taxes on its
domestic operations and foreign income taxes on its Canadian and Mexican
operations. Also, the Partnership provides for deferred income taxes as
determined in accordance with Statement of Financial Accounting Standard No.
109. As currently calculated, deferred income taxes represent state and federal
income tax benefits expected to be realized after December 31, 1997, when the
Partnership will be taxed as a corporation. The Partnership's provision for
income taxes in the first nine months of 1996 decreased $.7 million from the
first nine months of 1995 due to the recording of the following: a $.3 million
deferred income tax benefit relating to book/tax differences in the
Partnership's casualty loss insurance program, a $.2 million favorable
adjustment to prior year's state income tax provisions and to a $.2 million
reduction in the foreign income tax provision.
The allocation of net income to the General Partner is based on the General
Partner's 1% ownership interest in the profits of the Partnership. The
allocation of net income to the limited partners for financial statement
purposes represents a 99% interest in the profits of the Partnership. The net
income allocation resulted in $.82 of income per A Interest for the nine months
ended September 30, 1996 and September 30, 1995; and $.52 of income per B
Interest in the first nine months of 1996 compared with $1.20 of income per B
Interest for the first nine months of 1995. Income per B Interest in 1995
included a gain of $.75 from the sale of Dorman Products, results of operations
from divisions sold of $.02 and an extraordinary loss of $.03 from the early
extinguishment of debt. Excluding these 1995 events, income per B Interest
amounted to $.52 in the first nine months of 1996 compared with $.46 in the
first nine months of 1995.
Income from Operations - Excluding Divisions Sold in 1995 and 1994
As previously stated, the Operating Partnership sold certain divisions in
1994 and 1995. In order to provide an analysis of the results of ongoing
operations, the sales, gross profit and operating expenses of these divisions
have been excluded from the following discussion of results of operations. The
table below reflects the results from ongoing operations of the Partnership for
each year:
<TABLE>
<CAPTION>
(dollars in thousands)
1995 1994 1993
---------------- -------------------- ----------
<S> <C> <C> <C>
Net sales $ 599,865 $ 558,754 $ 493,437
Cost of sales 355,004 331,609 292,878
---------- ---------- ---------
Gross profit 244,861 227,145 200,559
---------- ---------- ---------
Operating expenses:
Selling, general & admin. expenses 205,180 189,252 168,839
Management fee to general partner 3,330 3,330 3,330
Depreciation 3,358 3,249 3,556
Amortization 1,961 2,143 2,496
--------- --------- ----------
Total operating expenses 213,829 197,974 178,221
--------- ------- --------
Income from ongoing operations $ 31,032 $ 29,171 $ 22,338
========= ========= =========
</TABLE>
Years Ended December 31, 1995 and 1994
Net income for the year ended December 31, 1995 was $44.1 million including
a combined gain of $20.6 million from the sale of the Downey Glass and Dorman
Products divisions, compared with $29.5 million earned in 1994 which included a
gain of $3.5 million from the sale of the Electrical Group divisions. Results
for 1995 also included $.3 million of income from Downey Glass, a $.6 million
charge related to the early retirement of debt and a reduction in net financing
costs of almost $3.2 million from the prior year. 1994 net income included
income from the Electrical Group of $4.1 million, from Dorman Products of $2.8
million,
-72-
<PAGE>
and from Downey Glass of $1.7 million. Excluding income contributions and gains
from divisions sold, as well as the extraordinary loss on the early
extinguishment of debt, net income for 1995 amounted to $23.8 million or 36.7%
above the comparable 1994 earnings of $17.4 million.
Net sales increased $41.1 million or 7.4% over 1994 resulting primarily
from an increase in the volume of products sold due to strengthening in most
product markets and significant growth from sales programs and services
initiated since 1992. Excluding divisions sold, sales recorded in 1995 were
$599.9 million compared with 1994 sales of $558.8 million. Sales increases
(decreases) by business segment were as follows:
<TABLE>
<CAPTION>
Sales Increase (Decrease)
Amount %
------ ---
<S> <C> <C>
Industrial Services
Technology Services divisions 25.0 million 9.6%
SIMCO divisions 10.1 million 7.9%
-----
Total Industrial Services 35.1 million 9.1%
Hardware Merchandising 11.9 million 16.3%
Glass Merchandising (5.9) million (6.1)%
------
Total Partnership $41.1 million 7.4%
=====
</TABLE>
The decline in sales volume in the Glass Merchandising segment was
primarily attributable to the discontinuation of certain product lines and
markets served, resulting in a sales reduction of $5.0 million from 1994. On a
comparable basis, sales decreased $.9 million, or .9%, in the Glass
Merchandising segment.
Cost of sales increased $23.4 million or 7.1% from the twelve months ended
December 31, 1994, due primarily to increased sales levels in the comparison
period.
Excluding divisions sold, gross margins were 40.8% in 1995 compared with
40.7% in 1994, comprised by business segment as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994
---- ----
<S> <C> <C>
Industrial Services
Technology Services divisions 27.4% 27.7%
SIMCO divisions 64.5% 65.9%
Total Industrial Services 39.5% 40.3%
Hardware Merchandising 52.4% 51.0%
Glass Merchandising 35.9% 34.4%
</TABLE>
Sales mix was the principal contributor to the changes in gross margins.
S,G&A expenses, excluding divisions sold, increased by $15.9 million or
8.4% over 1994, comprised as follows: increased selling expenses of $8.9 million
or 9.9%, increased warehouse and delivery expenses of $3.2 million or 10.0% and
increased general and administrative expenses of $3.9 million or 5.7%. The
increase in S,G&A expenses supported increased 1995 sales levels and expansion
programs by certain operating units.
-73-
<PAGE>
Excluding divisions sold, S,G&A expenses as a percentage of sales, were as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1995 1994
---- ----
<S> <C> <C>
Selling Expenses 16.5% 16.1%
Warehouse and Delivery Expenses 5.8% 5.7%
General and Administrative Expenses 11.9% 12.1%
----- -----
Total S,G&A Expenses 34.2% 33.9%
===== =====
</TABLE>
The increase in S,G&A as a percentage of sales is due mainly to increased
support payments, incentive programs and marketing efforts for the sales force.
The management fee due the General Partner is accrued in the amount of $3.3
million annually, as previously discussed.
Depreciation expense increased $.1 million in the comparison period due
primarily to an increase in the depreciable fixed asset base at the remaining
divisions of the Partnership.
Amortization expense decreased $.2 million in 1995 compared with 1994 due
primarily to the expiration of non-compete agreements in the Glass Merchandising
segment.
Interest income increased $.3 million in the comparison period due
primarily to the investment of excess cash generated from divisions sold.
Interest expense decreased $2.6 million in the comparison period due
primarily to reduced financing costs of approximately $1.5 million from the
prepayment of senior notes on March 14, 1995, and $1.1 million from reduced
borrowing levels under the Partnership's revolving credit facility.
Other income was $.3 million for the twelve months ended December 31, 1995,
compared to $1.7 million of other expense recorded in the 1994 comparison
period. This change was primarily due to the favorable settlement of certain
non-recurring insurance and legal matters in the 1995 period.
As previously stated, the Partnership incurs state, local and foreign
income taxes, and provides for deferred income taxes as determined in accordance
SFAS No. 109. The Partnership's provision for income taxes in 1995 increased $.4
million from 1994 due primarily to an increase in state taxes as a result of
gains on divisions sold.
The allocation of net income, which was discussed previously, resulted in
$1.10 of income per A Interest for the years ended December 31, 1995 and
December 31, 1994; and $1.45 of income per B Interest in 1995 compared with $.79
of income per B Interest for the year ended December 31, 1994. Income per B
Interest in 1995 included a combined gain of $.94 from the sale of the Dorman
Products and Downey Glass divisions and an extraordinary loss of $.03 from the
early extinguishment of debt. Income per B Interest for the twelve months ended
December 31, 1994 included a gain of $.16 on the sale of the Electrical Group
divisions. Income per B Interest for the twelve months ended December 31, 1995
and 1994 included $.01 and $.39, respectively, of income from divisions sold.
Years Ended December 31, 1994 and 1993
Net income for the year ended December 31, 1994 was $29.5 million including
a gain of $3.5 million from the sale of the Electrical Group divisions, compared
with $18.5 million earned in 1993. This increase was a result of continued
economic expansion across all product markets and internal growth strategies
implemented primarily in these periods.
Results for 1994 and 1993 included income from divisions sold as follows:
Downey Glass division of $ 1.7 and $ .1 million; Dorman Products division of
$2.8 and $3.3 million; and Electrical Group divisions of $4.1 and $3.2 million,
respectively. Excluding income contributions and gains from divisions sold, net
income for 1994 amounted to $17.4 million or 46.9% above the comparable 1993
earnings of $11.9 million.
-74-
<PAGE>
Excluding divisions sold, net sales increased $65.4 million or 13.2 % over
1993, resulting primarily from an increase in the volume of products sold due to
strengthening in most product markets and significant growth from sales programs
and services initiated since 1992. Sales recorded in 1994 were $558.8 million
compared with 1993 sales of $493.4 million. Sales increases by business segment
were as follows:
<TABLE>
<CAPTION>
Sales Increase
--------------
Amount %
------ -----
<S> <C> <C>
Industrial Services
Technology Services divisions $35.9 million 16.0%
SIMCO divisions 10.4 million 8.8%
------
Total Industrial Services 46.3 million 13.5%
Hardware Merchandising 16.2 million 28.6%
Glass Merchandising 2.9 million 3.0%
-------
Total Partnership $65.4 million 13.2%
=====
</TABLE>
Cost of sales increased $38.7 million or 13.2%, due primarily to increased
sales levels in the existing businesses in the comparison period.
Excluding divisions sold, gross margins were 40.7% in 1994 compared with
40.6% in 1993, comprised by business segment as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1995 1994
---- ----
<S> <C> <C>
Industrial Services
Technology Services divisions 27.7% 27.2%
SIMCO divisions 65.9% 66.4%
Total Industrial Services 40.3% 40.7%
Hardware Merchandising 51.0% 50.7%
Glass Merchandising 34.4% 34.4%
</TABLE>
The erosion in gross margin in the SIMCO divisions is due mainly to
increased sales allowances related to business expansion programs and
competitive pricing pressures. Sales mix contributed principally to the change
in gross margins in the remaining divisions/segments.
Excluding divisions sold, total S,G&A expenses increased by $20.4 million
or 12.1% compared with 1993, comprised as follows: increased selling expenses of
$12.1 million or 15.5%, increased warehouse and delivery expenses of $3.3
million or 11.7% and increased general and administrative expenses of $5.0
million or 8.0%.
Selling and warehouse and delivery expense increased during 1994 to support
the substantial increase in 1994 sales levels and expansion programs. General
and administrative expenses in 1994 increased primarily by inflationary growth
in fixed costs and increased incentive-based compensation for management as a
result of 1994 net income performance.
-75-
<PAGE>
Excluding divisions sold, S,G&A expenses, as a percentage of sales were as
follows in 1994 and 1993:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1994
---- ----
<S> <C> <C>
Selling Expenses 16.1% 15.8%
Warehouse and Delivery Expenses 5.7% 5.8%
General and Administrative Expenses 12.1% 12.7%
----- -----
Total S,G&A Expenses 33.9% 34.2%
===== =====
</TABLE>
Overall, as a percentage of sales, total S,G&A expenses decreased due
mainly to the increase in sales levels in relation to the fixed cost component
of S,G&A expenses.
The management fee due the General Partner is accrued in the amount of $3.3
million annually, as previously discussed.
Depreciation expense decreased $.3 million due primarily to a reduction in
the depreciable fixed asset base as a result of fully depreciated assets.
Amortization expense decreased $.3 million due primarily to the expiration
of non-compete agreements in the Glass Merchandising segment.
Interest expense increased $.1 million in the comparison period due mainly
to higher interest rates in 1994 over the 1993 year.
Other expense of $1.7 million in 1994 consisted primarily of provisions for
legal, insurance and investment banking matters compared with favorable
resolution of legal and insurance matters in 1993 resulting in other income of
$.2 million.
As previously stated, the Partnership incurs state, local and foreign
income taxes, and provides for deferred income taxes as determined in accordance
SFAS No. 109. The Partnership's provision for income taxes in 1994 decreased $.8
million from 1993 due to increased deferred tax benefits related to deferred
compensation.
The allocation of net income, which was discussed previously, resulted in
$1.10 of income per A Interest for the year ended December 31, 1994, and
December 31, 1993; and $.79 of income per B Interest in 1994 including a gain of
$.16 per B Interest from the sale of the Electrical Group divisions, compared
with $.28 of income per B Interest in 1993. Income per B Interest for the twelve
months ended December 31, 1994 and 1993 included $.39 and $.30, respectively, of
income from divisions sold.
Liquidity and Capital Resources
Net cash provided by operations in the first nine months of 1996 was $20.6
million, an increase of $12.9 million over the first nine months of 1995. The
increase was due primarily to decreased working capital investment in operations
in the comparison period of approximately $14.0 million, of which $6.2 million
resulted from a significant increase in accounts payable. The Partnership's
accounts payable days outstanding were 49.6 as of September 30, 1996, and have
declined to 45.1 at December 31, 1996. For the twelve months ended December 31,
1995 and 1994, net cash provided by operations was $17.1 million and $17.7
million, respectively.
The Partnership's net interest coverage ratio (earnings before interest,
taxes and gain on sale of divisions over net interest expense) improved to 4.91X
in the first nine months of 1996 from 4.77X for the nine months ended September
30, 1995. For the full year 1995, the net interest coverage ratio was 4.56X.
The Partnership's cash position of $1.7 million as of September 30, 1996,
decreased $4.2 million from the balance at December 31, 1995. Cash was provided
during this period primarily from operations in the amount of $20.6 million.
Cash was used during this period predominantly for distributions to the general
and limited partners ($20.5 million), capital expenditures ($2.7 million),
repayment of credit facilities ($.7 million) and other items ($.9 million).
-76-
<PAGE>
For the twelve months ended December 31, 1995, cash was provided primarily
from operations of $17.1 million and proceeds from the sale of the Dorman
Products and Downey Glass divisions in the aggregate amount of $44.9 million.
Cash was used during 1995 predominantly for distributions to the general and
limited partners ($27.2 million), repayment of debt obligations ($19.0 million),
acquisitions ($7.4 million), capital expenditures ($4.3 million) and the
purchase of life insurance ($3.1 million) in conjunction with funding the
Partnership's deferred compensation plans.
The Partnership's working capital position of $101.5 million at September
30, 1996, represents an increase of $5.6 million from the December 31, 1995
level of $95.8 million. The increase is attributable to reinvestment in working
capital of $4.1 million, a decrease in distributions payable to partners of $5.9
million, a decrease in management fee payable to the General Partner of $.8
million and working capital from acquisitions of $.6 million, offset by an
increase in accrued interest on senior notes of $1.6 million and a decrease in
cash of $4.2 million. The Partnership's current ratio increased to 2.14 at
September 30, 1996 from the December 31, 1995 level of 2.11. As a corporation on
a pro forma basis, the current ratio is 2.55 as of September 30, 1996.
The Partnership's financial position strengthened during 1994 and 1995 as a
result of the sale of the Downey Glass, Dorman Products and Electrical Group
divisions. The Partnership reduced the principal balance on its original $95
million senior note obligation by $24.7 million during 1994 and 1995, and paid
an additional prepayment of $6.4 million on December 1, 1996. As of September
30, 1996, the total debt as a percentage of its consolidated capitalization is
40.8% compared with 42.3% as of December 31, 1995 and 43.1% as of September 30,
1995.
The Operating Partnership was required to reduce permanently the bank
revolver commitment under the bank credit agreement by approximately $13.0
million as a result of the sale of divisions. However, the banks waived this
permanent reduction and maintained the existing bank credit commitment of $50
million. The lenders agreed to revise certain covenant tests to exclude the
impact of cash distributions to holders of B Interests related solely to tax
gains on divisions sold.
The taxable gains per B Interest on the sale of divisions amounted to $.232
and $.927 on Downey and Dorman, respectively, in 1995 and $.408 on the
Electrical Group in 1994. The Operating Partnership made tax distributions to
holders of record of B Interests as of September 29, 1995 on the Downey gain
($.081 paid on March 29, 1996) and to holders of record of B Interests as of
December 30, 1994 related to the gains on the Electrical Group ($.143 paid on
March 31, 1995) and Dorman ($.15 paid on April 10, 1995 and $.175 paid on March
29, 1996).
The Partnership anticipates spending approximately $3.5 million for capital
expenditures for the full year 1996, primarily for machinery and equipment.
As of September 30, 1996, the Operating Partnership had $42.6 million
available under its Bank Credit Agreement which provides revolving credit for
working capital purposes and acquisitions through December 31, 1997. The $7.4
million outstanding under the Bank Credit Agreement consisted entirely of Letter
of Credit commitments. In addition, an indirect, wholly owned Canadian
subsidiary of the Operating Partnership has a $2.5 million Canadian dollar line
of credit for working capital purposes of which $.8 million USD was outstanding
at September 30, 1996.
The Partnership was restricted from making acquisition investments in 1993
and 1994 under the Senior Note and Bank Credit Agreements. Acquisition spending
in 1995 amounted to $7.5 million and management continues to pursue acquisitions
to complement internal growth, with annual permitted spending of up to $15
million in the aggregate. Through the first nine months of 1996, the Partnership
spent $.7 million on acquisitions.
Effective May 1, 1996, the Partnership increased its monthly B Interest
tax-related cash distribution from $.02 to $.03 per B Interest and expects this
tax distribution rate to continue for the balance of 1996 to assist the holders
of B Interests in meeting their 1996 estimated tax obligations. As a result of
the proposed conversion, the Corporation would not be required to make
tax-related cash distributions to the holders of B Interests. Accordingly, a
decision regarding dividends on common stock received in exchange for B
Interests would solely be within the discretion of the Board of Directors of the
Corporation.
See Item 3 - Legal Proceedings of Form 10-K dated December 31, 1995, Part
II, Item 1 of Forms 10-Q dated March 31, 1996 and June 30, 1996, and Note 14 of
Notes to Consolidated Financial Statements included herein, for the description
of a lawsuit with respect to the sale of the Partnership's Dorman Products
Division. Certain other legal proceedings are pending which are either in the
ordinary course of business or incidental to the Partnership's business. Those
legal proceedings incidental to the business of the Partnership 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 Partnership.
-77-
<PAGE>
Pro Forma Liquidity and Capital Resources
In connection with the proposed conversion of the Partnership to a
corporation, SunSource's cash flow is expected to improve due to the following:
(i) retention of General Partner management fees in the amount of $3.3 million
per year, (ii) retention of distributions on the General Partner's ownership in
the Partnership and the Operating Partnership, amounting to approximately
$400,000 annually and (iii) a reduction in income tax rates, offset in part by
increased interest expense as discussed below. As a corporation, the
Corporation's effective tax rate for state and federal income taxes is expected
to be approximately 40% compared with the Partnership's current tax distribution
rate of 49.5% (based on 125% of the maximum individual federal income tax rate
of 39.6% applied to B Interest taxable ordinary income in accordance with the
Partnership Agreement) plus the elimination of certain partnership-only state
and local taxes of approximately 1.5% of partnership taxable income.
The proposed conversion to corporate form will result in SunSource
reporting a negative net worth due to the exchange of Trust Preferred Securities
and cash for the A Interests. The Trust Preferred Securities have certain equity
characteristics but also have certain creditors' rights, thereby being
classified between liabilities and equity on the balance sheet. The new 11.6%
Trust Preferred Securities are cumulative, callable after five years at
SunSource's option and the interest on the Junior Subordinated Debentures is
deductible for income tax purposes. SunSource's fixed charge for the A Interests
after the exchange of Trust Preferred Securities for A Interests. The holders of
A Interests will continue to receive approximately $.092 per month for each
current A Interest owned, which will aggregate approximately $1.10 annually.
Also, SunSource anticipates financing cost savings of approximately 100
basis points through refinancing of its current outstanding debt with a
combination of new long-term debt and bank revolver financing, of which
approximately $97.3 million would be outstanding on a pro forma basis as a
corporation at September 30, 1996. As a result of its refinancing, SunSource
will prepay its outstanding senior notes in whole upon consummation of the
proposed conversion. SunSource would incur a make- whole penalty of
approximately $5.0 million as a result of prepayment of the senior notes in
their entirety. The refinancing is expected to provide SunSource with additional
working capital for reinvestment in its businesses and acquisition capital for
future growth.
Overall, debt will increase as a result of the proposed conversion due to
the payment of $14.4 million to the holders of A Interests as part of the
exchange ratio discussed above and $3.6 million in transaction costs. Also, debt
will increase due to the prepayment of the senior notes described above
resulting in an expected make-whole payment of approximately $5.0 million.
Interest expense, net for the nine months ended September 30, 1996, is $6.1
million on a pro forma corporate basis compared with $5.1 million as a
partnership. The increase in interest expense is the result of incremental debt
incurred directly related to the conversion, as noted herein.
The Partnership's consolidated capitalization as of September 30, 1996, was
$166.1 million in its current partnership form compared to $183.6 million as a
corporation on a pro forma basis. Total debt (excluding the Trust Preferred
Securities) as a percentage of SunSource's consolidated capitalization is
expected to increase to 53.0% as a corporation on a pro forma basis from its
current 40.8% as of September 30, 1996.
Income Taxes
As a result of the Partnership's adoption of SFAS No. 109 in 1992, the
Partnership has deferred tax assets aggregating $3.7 million as of September 30,
1996 and $2.8 million as of December 31, 1995. Management believes that the
Partnership's deferred tax assets will be realized through the reversal of
existing temporary differences at the earlier of the date of conversion to a C
corporation should the proposed conversion be approved, or after December 31,
1997, when the Partnership will be treated as a corporation for federal income
tax purposes. The temporary differences expected to reverse at the date of
conversion or after December 31, 1997, between the financial statement and tax
bases, at September 30, 1996 are composed of prepayment penalties in the amount
of $.8 million, deferred compensation liabilities in the amount of $8.5 million,
and insurance casualty loss liabilities of $1.0 million, net of a valuation
allowance of $.4 million and at December 31, 1995 are composed of prepayment
penalties in the amount of $.8 million and deferred compensation liabilities in
the amount of $7.5 million, net of a valuation allowance of $.4 million. See
Note 13 of Notes to Consolidated Financial Statements.
Upon conversion to a corporation, additional deferred tax assets will be
recognized in the amount of $7.5 million on a pro forma basis as of September
30, 1996, as a result of temporary differences expected to reverse before
December 31, 1997, between the financial statement and tax bases. These
additional temporary differences result from inventory adjustments ($9.9
million), accrued self-insurance loss liabilities ($3.8 million), bad debts
($1.7 million), vacation pay liabilities ($1.5 million) and other
-78-
<PAGE>
liabilities ($1.9 million). Additionally, the Corporation may receive a step-up
in the tax basis of the assets and liabilities acquired from the Partnership
and, as a result, would record additional deferred tax assets at the conversion
date. The actual amount of incremental deferred tax assets will be calculated
based on the temporary differences existing at the date of conversion to a
corporation. As a corporation on a pro forma basis, the deferred tax assets
aggregate $11.3 million as of September 30, 1996, reflecting all temporary
differences between the financial statement and tax bases.
The minimum level of future taxable income necessary to realize SunSource's
deferred tax assets on a pro forma basis at September 30, 1996, is approximately
$28.8 million. For the three years ended December 31, 1995, the SunSource's
consolidated net income per the financial statements reconciled to federal
taxable income in thousands of dollars is shown below:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Consolidated Net Income per the
Financial Statements ("Book") $44,116 $29,544 $18,506
Tax Adjustments to Book Income:
Goodwill & Other Intangible Asset
Amortization 1,252 1,634 1,807
Depreciation 467 506 796
Deferred Compensation, net 942 2,917 384
Self-Insurance Accrued Expenses, net (776) 844 3,331
Tax gain in excess of book gain from
sale of Divisions 1,977 1,216 --
Other Increase (Decrease) to Book Income, net 1,893 451 (288)
----- --- -----
Federal Taxable Income $49,871 $37,112 $24,536
======= ======= =======
</TABLE>
Partnership Tax Status
As previously stated, the Partnership will be taxed as a corporation for
federal income tax purposes either upon conversion to a corporation should the
proposed conversion be approved, or after December 31, 1997, whichever is
earlier. If the proposed conversion is approved and the Partnership converts to
a corporation, the Corporation will record a provision for U.S. federal, state
and foreign income taxes on its taxable earnings. The payments made to the
holders of the trust preferred securities will be deductible by the Corporation
for U.S. federal income tax purposes.
If the Partnership remains a limited partnership, the effect of the change
in taxation after December 31, 1997 will result in the Partnership paying a
corporate income tax at the Partnership level. Therefore, in accordance with the
Partnership Agreement, the Partnership's income would not be allocated for tax
purposes to the partners as is currently being done, and limited partners would
pay taxes only on distributions from the Partnership, if any. Additionally, in
accordance with the Partnership Agreement, the Partnership would no longer make
tax distributions with respect to B Interests. Accordingly, a decision on
whether any other distribution would be made with respect to the B Interests
would solely be within the discretion of the General Partner. Based on current
operations, it is likely that cash would be retained in the Partnership to fund
its acquisition program and other partnership requirements. If the Partnership
remains a limited partnership, there will be no change with respect to the
priority return distribution paid to the A Interests in the amount of
approximately $.092 per month to each A Interest to aggregate $1.10 annually.
Inflation
Inflation in recent years has had a modest impact on the operations of the
Partnership. Continued inflation, over a period of years at higher than current
rates, would result in significant increases in inventory costs and operating
expenses. However, such higher cost of sales and operating expenses can
generally be offset by increases in selling prices, although the ability of the
Partnership's operating divisions to raise prices is dependent upon competitive
market conditions.
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<PAGE>
BUSINESS
General
The Partnership through the Operating Partnership is one of the largest
wholesale distributors of industrial products and services in the United States.
Since January 1987, the business of the Partnership and the Operating
Partnership has been managed by the General Partner, a limited partnership whose
general partner is Lehman/SDI, an indirect, wholly owned subsidiary of Lehman
Brothers Holdings Inc. ("Lehman Holdings"). The General Partner owns 1% of the
Partnership and 1% of the Operating Partnership. All of the limited partnership
interests in the General Partner are beneficially owned by members of management
of the Partnership and the Operating Partnership (the "Management Employees").
While the Partnership has historically viewed its operations as one
business segment, changes in the marketplace, risks and the economy demand that
the Partnership measure and value its businesses with a customer-based focus on
value added services such as engineering design, inventory management, and
integrated supply. These services are expected to provide greater revenue growth
in future years than general product distribution. In December 1995, the
Partnership reorganized its operating businesses, operating management, and
current strategic plan to support markets for industrial services and
merchandising services for hardware and glass. The current organization consists
of its headquarters operation and three business segments comprised of twelve
operating divisions, as follows:
<TABLE>
<CAPTION>
Principal Year Acquired/
Location Organized
----------------- ---------------
<S> <C> <C>
Sun Distributors Headquarters Philadelphia, PA 1975
Industrial Services Segment Chicago, IL 1996
Sun Inventory Management Company ("SIMCO") Divisions
- Kar Products Chicago, IL 1977
- A&H Bolt & Nut Company Windsor, Ontario 1989
- SIMCO/Special-T-Metals Lenexa, KS 1992/1981
Sun Technology Services Divisions
- Walter Norris Rosemont, IL 1976
- J.N. Fauver Company Madison Heights, MI 1978
- Warren Fluid Power Denver, CO 1987
- Air-Dreco Houston, TX 1988
- Activation Birmingham, AL 1991
- Hydra Power de Mexico Tlalnepantla, C.P.,
International Mexico 1992
- SIMCO de Mexico Mexico City, Mexico 1992
Hardware Merchandising Segment
- Hillman Fastener Cincinnati, OH 1982
Glass Merchandising Segment
- Harding Glass Industries Kansas City, MI 1980
</TABLE>
In November 1995, the Operating Partnership's Hillman Fastener division
acquired the retail hardware business of Curtis Industries. Annual sales of
Curtis' Retail division are approximately $10.5 million. The acquisition of
Curtis will significantly expand Hillman's position as a supplier of goods and
services to the hardware home center market where Curtis has concentrated much
of its attention. In addition, the Curtis product line can now be offered to
Hillman's present customer base. This acquisition continues Hillman's long-term
growth strategy to become a major provider of products and services to all
segments of the hardware merchandising business.
-80-
<PAGE>
The Operating Partnership sold the Electrical Products Group divisions on
December 5, 1994, the Dorman Products division on January 3, 1995, and the
Downey Glass division on October 27, 1995, (the "divested operations or
divisions sold") as listed below:
Divisions Sold Principal Location
- -------------- ------------------
Electrical Products Group Divisions
- - American Electric Company St. Joseph, MI
- - Philips & Company Columbia, MI
- - Keathley-Patterson Electric Co. N. Little Rock, AR
Dorman Products Division Warsaw, KY
Downey Glass Division Los Angeles, CA
For the year ended December 31, 1995, the Partnership had net sales of
approximately $600 million, excluding sales from the divested Downey Glass
division of $29 million, with the largest operating division contributing
approximately $154 million.
The Partnership's business strategy has been to identify and develop
specific industrial distribution markets. However, the Partnership's current
strategic plan seeks to increase its emphasis on sales of high gross-margin
products by providing its customers with value added services, such as
engineering design services through its Sun Technology Services divisions and
inventory management and integrated supply services primarily through its SIMCO
divisions. In addition, the Partnership has opened new service centers for
repair of fluid power equipment and seeks to expand this service outside its
core geography and across Canada. The Partnership also continues to enhance its
retail service offerings in the glass segment and broaden its retail
merchandising of hardware related products.
Presidents of the Partnership's operating divisions exercise broad
discretion in the conduct of their businesses, including responsibility for the
management of their suppliers, customers and employees. Strong formal and
informal planning and monitoring functions are performed by the General Partner,
and the individual presidents of operating units are evaluated against the
financial and non-financial goals established jointly each year with the General
Partner. A substantial portion of each president's compensation is tied to the
performance of his division against its annual plan. Also, certain presidents
can earn substantial deferred compensation for maintaining the results of their
operations in the upper quartile within the industrial distribution industry.
Management believes that much of the Partnership's prior success has been the
result of fostering and perpetuating the entrepreneurial drive of operating
management.
The Partnership evaluates on an ongoing basis the performance and prospects
of each of its operating divisions in light of the Partnership's overall
business strategy.
Acquisition Strategy
Since the organization of its predecessor in 1975, the business of the
Partnership has grown primarily through acquisitions of existing distribution
companies. The acquisition strategy has expanded the Partnership's operations,
both geographically and in the number and type of products offered. The
Partnership evaluates companies that have developed attractive product/market
niches and have demonstrated their ability to achieve high returns on invested
capital. The Partnership looks for companies with strong management capabilities
and stable growth patterns. Prior to making certain acquisitions, an extensive
operational review is performed by an external consulting firm. Subsequent to
most acquisitions, certain agreed upon procedures are performed by internal and
external auditors.
In December 1992, the Partnership refinanced its then outstanding $110.0
million 9 1/2% Senior Notes through proceeds provided by institutional investors
in the amount of $95.0 million and the balance from a $50.0 million Bank Credit
Agreement. Under the credit agreements, the Partnership was not permitted to
make acquisitions in 1993 and 1994. In 1995, this restriction was removed and
acquisition spending amounted to $7.5 million with authorized spending of up to
$15.0 million in accordance with the terms of the Partnership's credit
agreements. See Notes 5, 8 and 9 of Notes to Consolidated Financial Statements.
-81-
<PAGE>
As the result of an analysis of strategic alternatives by the Partnership,
the Partnership sold the non-strategic businesses described above. Through the
sale, the Partnership has strengthened its balance sheet and is now in a
position to resume its acquisition program by focusing on businesses which fit
its current strategic plan.
Products and Services
Excluding the divested operations discussed previously, the Partnership
provides distribution and value-added services related to over 1,300 product
lines. Such value-added services are typically provided to the Partnership's
customers on a non-fee basis and are an integral component of the Partnership's
marketing strategy. These products and services are provided in three main
business segments: (1) industrial services which consist of inventory
management, engineering and integrated supply services to industrial businesses
through sales of products such as fasteners (nuts, bolts, screws, etc.),
hydraulic, pneumatic and electronic systems and parts; (2) retail merchandising
services through sales of fasteners and related products to hardware and home
center retail stores; and (3) retail glass services consisting of installation
and repair through sales of glass products such as large sheet glass, auto
glass, insulated glass, mirrors and specialty glass. The average single sale
during the year ended December 31, 1995, was approximately $297.
Inasmuch as the Partnership is principally providing distribution and
related services, most of the products sold are manufactured by others. However,
several divisions sell a majority of their products under their own labels. In
some cases, most notably through its Technology Services divisions, the
Partnership assembles products or designs systems to the specifications of the
end-users and performs related product repairs. Through its Glass Merchandising
segment, the Partnership produces insulated glass units according to customer
specifications. In addition, several of the products which the Partnership
distributes are purchased by the Partnership in bulk and subsequently repackaged
in small quantities.
The Partnership regularly uses a large number of suppliers and has
long-term relationships with many of them. Most items which the Partnership
distributes are purchased from several sources, and the Partnership believes
that the loss of any single supplier would not significantly affect the
operations of the Partnership viewed as a whole. No single supplier accounted
for more than 5% of the Partnership's purchases for the year ended December 31,
1995.
The following table shows the percentages of consolidated net sales
reported for the years ended December 31, 1995, 1994, and 1993 derived from the
Partnership's current business segments, excluding divisions sold:
<TABLE>
<CAPTION>
Percentage of Consolidated Net Sales for
Year Ended December 31,
------------------------------------------
Nine Months Ended
Business Segment September 30, 1996 1995 1994 1993
- ---------------- ------------------ ---- ---- ----
<S> <C> <C> <C> <C>
Industrial Services
Technology Services divisions 45.8% 47.6% 46.6% 45.5%
SIMCO divisions 23.9% 23.0% 22.9% 23.9%
----- ----- ----- -----
Total Industrial Services 69.7% 70.6% 69.5% 69.4%
Hardware Merchandising 16.2% 14.1% 13.1% 11.4%
Glass Merchandising 14.1% 15.3% 17.4% 19.2%
----- ----- ----- -----
100.0% 100.0% 100.0% 100.0%
</TABLE>
Marketing
While the Partnership sells across three main business segments (industrial
services, hardware merchandising and glass merchandising), a substantial portion
of its sales are industrially based, and sales performance is tied closely to
the overall performance of the non-defense-goods producing sector of Gross
Domestic Product in the United States. However, risks and economic changes in
the marketplace demand a customer-based focus on value-added services which vary
by business segment. The principal markets for the Partnership's products and
services by business segment, as determined by management are as follows:
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<PAGE>
Maintenance and Repair Markets and Original Equipment Manufacturers
Customers in this market are served by the divisions in the Industrial
Services segment. These customers include diverse industrial plants and
commercial establishments as well as producers of automotive equipment,
farm equipment, machine tools and a broad range of other equipment.
Hardware Merchandising
This market is primarily comprised of retail hardware stores, home service
centers, and lumberyards seeking merchandising services for hardware
related products.
Glass Merchandising
This market is primarily comprised of individuals seeking automotive and
residential glass replacement as well as contractors seeking glazing
materials and services.
The Partnership has over 179,000 customers, the largest of which accounted
for less than 4% of net sales for the year ended December 31, 1995. Each
division maintains its own sales force which is compensated for the most part on
a commission basis. The divisions' sales forces vary in size, the largest of
which has approximately 775 sales people.
The Partnership's products and services are sold in all 50 states. While
its Glass Merchandising segment sells in regional markets, the remaining two
segments sell on a national scale. In general, fluid power products and
technology services are sold primarily in the upper Midwest, Southeast,
Southwest, Canada and Mexico; maintenance products and inventory management
services are sold nationwide in the U.S., Canada, and Mexico; retail
merchandising products and services are sold nationally in the U.S. and Mexico;
and retail glass products and services are sold primarily in the West, the
Midwest, the Mid-Atlantic and the Southeast.
Competition
The distribution business is highly competitive, with the principal methods
of competition being quality of service, quality of products, product
availability, credit terms, price and the provision of value-added services such
as engineering design, integrated supply and inventory management. The
Partnership encounters competition from a large number of regional and local
distributors and from several national distributors, some of which have greater
financial resources than the Partnership. The wholesale distribution business is
highly fragmented, with a majority of the wholesale distributors in the United
States being operated as family-owned businesses. The Partnership's competitors
have annual sales of approximately $5 million on the average with approximately
one-half under $2 million. The Partnership believes that its business differs
from that of other large national distributors in that the Partnership carries a
diverse range of product lines and provides significant value-added services,
while most large distributors concentrate on only one or two product groups.
Insurance Arrangements
Under the Partnership's current insurance programs, commercial umbrella
coverage is obtained for catastrophic exposure and aggregate losses in excess of
expected claims. Since October 1991, the Partnership has retained the exposure
on certain expected losses related to workman's compensation, general liability
and automobile. The Partnership also retains the exposure on expected losses
related to health benefits of certain employees. The Partnership believes that
its present insurance is adequate for its businesses. See Note 14 of Notes to
Consolidated Financial Statements.
Employees
Currently, the Partnership, through the Operating Partnership, employs
3,843 employees, of which 1,670 are sales personnel, 1,142 are employed as
warehouse and delivery personnel, and 1,031 hold administrative positions. The
Operating Partnership has collective bargaining agreements with five unions
representing a total of 65 employees. In the opinion of management, employee
relations are good.
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<PAGE>
Backlog
The Partnership's sales backlog excluding divested operations was
$54,935,000 as of December 31, 1995, and $56,335,000 as of December 31, 1994.
Normally, in the distribution business, orders are shipped within a week of
receipt. On average, the Partnership's backlog is less than one month's sales.
Federal Income Tax Considerations
The Revenue Act of 1987 (the "1987 Act") amended the Code with respect to
the tax treatment of publicly traded partnerships, such as the Partnership, and
the passive activity losses and credits attributable thereto. Section 7704 of
the Code provides that publicly traded partnerships generally will be treated as
corporations for tax purposes commencing in tax years beginning after 1987. The
effective date of this amendment was delayed, however, for certain "existing
partnerships," such as the Partnership, until the taxable year beginning after
December 31, 1997, provided that such partnerships do not add any substantial
new line of business before the delayed effective date. The Partnership does not
intend to add any substantial new line of business during the period when it
otherwise qualifies for delayed effectiveness under Section 7704.
Section 469 of the Code provides that, in the case of publicly traded
partnerships that are not treated as corporations under Section 7704, net losses
and credits attributable to an interest in each such partnership shall not be
applied against the partner's other income. Such net losses and credits are
suspended and carried forward to be applied against net income from the
Partnership in succeeding years. Since the commencement of operations, the
Partnership has not incurred a net loss for federal income tax purposes.
However, if the Partnership should incur a net loss for federal income tax
purposes in any subsequent year until taxable years beginning after December 31,
1997, such net losses will be suspended at the limited partner level, carried
forward and netted in a later year or years against the limited partner's share
of the net income of the Partnership, or will be used when the entire investment
is disposed of in a taxable transaction. Similarly, a limited partner's share of
any credits of the Partnership in excess of the tax liability attributable to
his or her interest in the Partnership will be suspended, carried forward and
applied against the tax liability attributable to the Partnership in a
subsequent year or years, or may be used to increase the basis of such
partnership interest when the entire investment is disposed of in a taxable
transaction. Generally, these credits may not be applied against tax liability
attributable to other activities.
Assuming the continued effectiveness of Section 7704 of the Code in its
current form, if the Partnership remains a publicly traded partnership, the
Partnership would be treated as a corporation for tax purposes beginning in
fiscal year 1998. Section 469 would then be inapplicable to the limited
partners' treatment of income or credits attributable to the Partnership. The
income of the Partnership would be taxed to it as a separate entity, and any
losses of the Partnership would not be deductible by limited partners. This tax
at the corporate level would reduce the amount distributable to partners and
cash distributions to limited partners would be taxed at the individual level as
dividends to the extent of earnings and profits. See Part II, Item 5, Market for
Registrant's Partnership Interests and Related Matters - Partnership Tax Status.
The Revenue Reconciliation Act of 1993 (the "1993 Act") amended the Code
with respect to the tax treatment of unrelated business taxable income ("UBTI")
in an effort to allow pension funds and other tax-exempt organizations (such as
individual retirement accounts and charitable organizations) to invest in
publicly traded partnerships. Such entities are subject to federal income tax on
net UBTI in excess of $1,000.
The 1993 Act repeals the rule that automatically treats income from
publicly traded partnerships as gross income that is derived from an unrelated
trade or business. As a result, investments in publicly traded partnerships will
be treated the same as investments in other partnerships for purposes of the
UBTI rules for partnership years beginning on or after January 1, 1994.
Section 708 of the Code, in general, provides for termination of a
partnership if 50 percent or more of the total interest in partnership capital
and profits is sold or exchanged within a twelve-month period. However, the
legislative history to the Technical and Miscellaneous Revenue Act of 1988
indicates that termination of a partnership within the meaning of Section 708
will not cause a partnership to cease to qualify as an "existing partnership"
for purposes of Section 7704. Accordingly, sales or exchanges of Interests in
the Partnership pursuant to trading of the Partnership's Interests on the New
York Stock Exchange will not impair the status of the Partnership as an
"existing partnership" that qualifies for a delayed effective date under Section
7704.
-84-
<PAGE>
Legal Proceedings
A civil complaint was filed by Dorman Products of America, Ltd. ("Dorman"),
a subsidiary of R&B, Inc. ("R&B"), against the Operating Partnership, in the
United States District Court for the Eastern District of Pennsylvania on
February 27, 1996, alleging misrepresentation of certain facts by the Operating
Partnership upon which R&B allegedly based their offer to purchase the assets of
the Dorman Products division of the Operating Partnership. The complaint sought
damages of approximately $21 million. The Operating Partnership moved to dismiss
for lack of jurisdiction and the complaint was withdrawn. On April 25, 1996, the
Operating Partnership filed an action against Dorman and R&B in the Court of
Common Pleas of Montgomery County, Pennsylvania alleging breach of contract,
intentional interference with contractual relations and negligence and
requesting a declaratory judgment that the Operating Partnership did not make
any misrepresentations in connection with the sale of the division. Dorman and
R&B have counterclaimed making the same allegations which were made in the
original complaint. In the opinion of management, the ultimate resolution of
this matter will not have a material effect on the consolidated financial
position, operations or cash flows of the Partnership.
On January 16, 1997, a holder of B Interests filed a purported class action
in the Delaware Court of Chancery seeking to enjoin the Conversion on the terms
proposed as well as an order requiring the defendants to account to the
plaintiff and the class for damages and requiring the General Partner or its
affiliates to hold the consideration received in trust pending a determination
of the amounts properly attributable to the General Partner's interest.
Defendants named in the complaint are the Partnership, the Corporation, the
General Partner, Lehman/SDI, Lehman Brothers Holdings Inc. and all of the
directors of Lehman/SDI. The complaint alleges that the terms of the Conversion
unfairly transfer substantial equity to the General Partner to the detriment of
the B Interests and constitute a breach of fiduciary duty. A second complaint
containing substantially identical allegations was filed by a limited partner in
the Delaware Court of Chancery on February 11, 1997. The defendants believe the
complaints are without merit and intend to vigorously defend themselves.
-85-
<PAGE>
MANAGEMENT
Executive Officers and Directors
The business of the Partnership and the Operating Partnership is managed by
the General Partner, whose general partner is Lehman/SDI. The directors of
Lehman/SDI, each of whom has served as such since February 1987, except for Mr.
Eliot M. Fried, who has served since December 1994, Mr. Henri I. Talerman, who
has served since March 1995, and Mr. John P. McDonnell, who has served since May
1995, are set forth below. The description of the principal occupation is for
the entire five-year period unless otherwise indicated.
<TABLE>
<CAPTION>
Principal Occupation; Five-Year
Name, Age and Address Employment History; Other Directorships
--------------------- ---------------------------------------
<S> <C>
O. Gordon Brewer, Jr.,60 Vice President-Finance, Ikon Office Solutions, formerly Alco
Alco Standard Corp. Standard Corporation (distributor of office and paper products);
P. O. Box 834 Executive Officer, Alco Standard Corporation from 1970 to
Valley Forge, PA 19482 present; Director, Corporate Insurance and Reinsurance Limited.
Norman V. Edmonson, 56 Executive Vice President of the Partnership since December 1994;
2600 One Logan Square Group Vice President of the Partnership from January 1991 to
Philadelphia, PA 19103 December 1994.
Eliot M. Fried, 63 Managing Director, Lehman Brothers Inc.; Director, Axysis
Lehman Brothers Technologies, Inc. from January 1993 to present; Bridgeport
American Express Tower - 17th Floor Machines, Inc.; Energy Ventures, Inc.; Walter Industries, January
World Financial Center 1994 to present.
New York, NY 10285
Arnold S. Hoffman, 61 Senior Managing Director, Legg Mason Wood Walker,
Legg Mason Wood Walker Incorporated Incorporated; Director, Intelligent Electronics Incorporated.
Mellon Bank Center, Suite 1100
1735 Market Street
Philadelphia, PA 19103
Donald T. Marshall, 63 Chairman and Chief Executive Officer of the Partnership.
2600 One Logan Square
Philadelphia, PA 19103
John P. McDonnell, 60 President of the Partnership since December 1994; Group Vice
2600 One Logan Square President of the Partnership from 1987 to December 1994.
Philadelphia, PA 19103
Ernest L. Ransome, III, 70 Chairman, Giles & Ransome, Inc. (distributor of construction
Giles & Ransome equipment).
2975 Galloway Road
Bensalem, PA 19020
Donald A. Scott, 67 Senior Partner, Morgan, Lewis & Bockius LLP; Director,
2000 One Logan Square Provident Mutual Life Insurance Company.
Philadelphia, PA 19103
Henri I. Talerman, 39 Managing Director, Lehman Brothers Inc. from June 1952 to
Lehman Brothers present; Senior V.P., Lehman Brothers prior to 1992; Director,
American Express Tower - 18th Floor McBride plc from May 1993 to present; Financier Gerflor SA,
World Financial Center 1992 to present; Advisory Director, Europe Capital Partners.
New York, NY 10285
</TABLE>
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<PAGE>
All directors hold office until the next annual meeting of the sole
stockholder of Lehman/SDI and until their successors are duly elected and
qualified.
The executive officers of the Partnership and the Operating Partnership
(constituting, except for Mr. Brus, the "Management Employees" referred to
herein), each of whom has served as such for the past five years, except as
noted, are set forth below:
<TABLE>
<CAPTION>
Principal Occupation; Five-Year
Name, Age and Address Employment History; Other Directorships
--------------------- ---------------------------------------
<S> <C>
Richard J. Brus, 58 President, Sun Technology Services since 1995; President,
153 W. Valley Avenue Activation Division 1992 to 1995; and Vice President-Sales
& Birmingham, AL 35259 Marketing, Activation Division, prior to 1992.
Harold J. Cornelius, 47 Group Vice President.
Harding Glass Industries
7201 W. 110th Street
Overland Park, KS 66210
Joseph M. Corvino, 42 Vice President-Finance, Chief Financial Officer, Treasurer and
2600 One Logan Square Secretary since December 1995; Vice President and Controller
Philadelphia, PA 19103 prior to December 1995.
Norman V. Edmonson, 56 Executive Vice President since December 1994; Group Vice
2600 One Logan Square President from 1987 to December 1994.
Philadelphia, PA 19103
Max W. Hillman, Jr., 49 Group Vice President.
Hillman Fastener
10590 Hamilton Avenue
Cincinnati, OH 45231
Donald T. Marshall, 63 Chairman and Chief Executive Officer.
2600 One Logan Square
Philadelphia, PA 19103
John P. McDonnell, 60 President and Chief Operating Officer since December 1994;
2600 One Logan Square Group Vice President from 1987 to December 1994.
Philadelphia, PA 19103
</TABLE>
All executive officers hold office at the pleasure of the board of
directors.
Directors and Executive Officers After the Conversion
The directors of the Corporation after the Conversion will be the same as
the existing directors of Lehman/SDI. Pursuant to the terms of the Stockholders
Agreement, the nine directors will consist of three directors nominated by
management, two directors nominated by Lehman/SDI as long as it (together with
its affiliates) holds 20% or more of the outstanding Common Stock or one member
if it (together with its affiliates) holds between 10% and 20% of the
outstanding Common Stock, and four independent directors. The officers of the
Corporation will be: Donald T. Marshall, Chairman Officer of the Corporation;
John P. McDonnell, President and Chief Operating Officer; Norman V. Edmonson,
Executive Vice President and Joseph M. Corvino, Vice President - Finance, Chief
Financial Officer, Treasurer and Secretary.
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<PAGE>
Compensation
The following table sets forth all cash compensation paid and accrued by
the Operating Partnership for services rendered during the three years ended
December 31, 1995, by each of the Chief Executive Officer and the four other
most highly compensated executive officers of the Partnership and the Operating
Partnership whose remuneration exceeded $100,000.
<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------
Name and Principal Position Annual Compensation All Other
----------------------------------------------- Compensation
Year Salary Bonus -------------
---- ------ -----
<S> <C> <C> <C> <C>
Donald T. Marshall 1995 $488,688 $ 4,347 $ 10,234 (2)
Chairman and Chief Executive Officer 1994 454,043 221,144 8,185 (2)
1993 403,392 62,897 6,367 (2)
John P. McDonnell 1995 374,451 32,812 2,500 (2)
President and Chief Operating Officer 1994 295,354 96,915 2,135 (2)
1993 273,947 44,278 1,843 (2)
Norman V. Edmonson 1995 333,849 82,200 1,638 (2)
Executive Vice President 1994 300,477 94,400 1,418 (2)
1993 285,144 89,000 1,250 (2)
Harold J. Cornelius 1995 291,609 27,400 --
Group Vice President 1994 275,375 102,729 90,128 (2)
1993 261,147 37,621 58,818 (2)
Max W. Hillman, Jr. 1995 268,920 36,250 50,186 (3)
Group Vice President 1994 294,793 104,898 107,632 (3)
1993 234,707 16,578 13,661 (3)
</TABLE>
- ----------------
(1) Represents Earned Bonus for services rendered in each year. Does not
include the management fee payable to the General Partner. See "Management
Fee" under Item 13.
(2) Represents primarily term life insurance premiums paid by the Operating
Partnership for the benefit of the named executive officer.
(3) Represents deferred compensation earned and awarded for services rendered
in the year which unconditionally vests at the rate of 20% per year over
the five-year period from the date earned.
The above table excludes deferred compensation awards earned in 1995 and 1994 by
the executive officers in accordance with the Partnership's Long-Term
Performance Share Plan since the awards earned are subject to reduction or
forfeiture through 1998 if performance goals are not achieved. The value of the
awards credited for December 31, 1995 and December 31, 1994, respectively, for
each executive officer are as follows: Donald T. Marshall $553,934 and $586,037;
Norman V. Edmonson, $364,012 and $385,110; John P. McDonnell, $174,092 and
$184,182; Harold J. Cornelius, $174,092 and $184,182, and Max W. Hillman,
$174,092 and $184,182.
Directors of Lehman/SDI who are not employees of the Partnership or Lehman
Brothers Inc. are paid an annual fee of $14,000 and a fee of $1,000 for each
board or committee meeting attended. Such fees are paid by the General Partner.
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<PAGE>
Deferred Compensation Plans
The Partnership's deferred compensation plans are described in Note 11 to
Consolidated Financial Statements. Completion of the Conversion will result in
100% vesting for all participant balances as of the date of the Conversion. The
present intention is to continue operation of the plans following the
Conversion.
The Partnership's Long-Term Performance Share Plan (the "Share Plan") is
based upon annual and cumulative performance for a five year term ending
December 31, 1998. If the Conversion is approved, the participants will be
entitled to 100% vesting of the awards earned through December 31, 1996 in
accordance with the change of control provision of the Share Plan. See "--
Change in Control Arrangements." If the conversion is approved, the Share Plan
will continue to run from January 1, 1997 to December 31, 1998, to complete the
Share Plan's original five-year performance cycle.
Change in Control Arrangements
The executive officers named above were participants in the Operating
Partnership's Deferred Compensation Plans (the "Plans") in certain years. Upon a
change in control, the Plans provide for payment of all vested and non-vested
amounts including accrued interest. The change in control provision is triggered
upon a sale of all of the Operating Partnership's business, a change in the
General Partner, or a change, other than due to death or retirement, in a
majority of the directors of Lehman/SDI during any one-year period. See Note 11
of Notes to Consolidated Financial Statements. As a result of the proposed
conversion, the change of control provisions of the Plans will be triggered.
Participants will be offered an opportunity to defer receipt of amounts
available for payment under a new deferred compensation plan, the "Deferred
Compensation Plan for Key Employees of SDI Operating Partners, L.P.," effective
December 1, 1996. The Partnership estimates that approximately $9.2 million of
deferred compensation balances will become payable as a result of the change of
control provision and eligible for elective deferral. Management expects
approximately $6.5 million of these balances eligible for payment to be deferred
and $2.7 million to be paid. Payments to current and former executive officers
are expected to aggregate about $0.1 million. Messrs. Marshall, McDonnell and
Edmonson have waived their rights to accelerate payments.
Management Fee
The Operating Partnership pays the Management Fee to the General Partner.
The Management Fee, payable annually on March 31 (with respect to the preceding
year), is equal to 3% of the aggregate initial capital investment of
$110,995,730 by the limited partners. The amount of the Management Fee paid on
March 31, 1996, was $3,329,872. The amount of management fee paid in 1995 with
respect to 1994 was $3,329,872. See footnotes (1) and (2) to the table under
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" for ownership
of the General Partner. The interests of Lehman/SDI and the Management
Employees, in the fee for 1995 were as follows: Lehman/SDI, $1,791,471; Harold
J. Cornelius, $92,304; Joseph M. Corvino, $30,768; Norman V. Edmonson, $384,600;
Max W. Hillman, Jr., $92,304; Donald T. Marshall, $599,977; and John P.
McDonnell, $184,608.
Certain Business Relations
Mr. Scott is a partner in Morgan, Lewis & Bockius LLP, a law firm that has
performed services for the Partnership during the last fiscal year.
Messrs. Fried and Talerman are officers of Lehman Brothers Inc., which
performed investment banking services for the Partnership during 1995 and 1996.
Mr. Hoffman is an officer of Legg Mason Wood Walker, Incorporated, which
performed investment banking services for the Partnership during 1995.
The Partnership and the Corporation propose to have these firms perform
similar services as needed during the current fiscal year.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
Since the Partnership is managed by its General Partner and has no Board of
Directors, there are no "voting securities" of the Partnership outstanding
within the meaning of Item 403(a) of Regulation S-K and Rule 12b-2 under the
Securities Exchange Act of 1934. As set forth above, the general partner of the
General Partner is Lehman/SDI, an indirect, wholly owned subsidiary of Lehman
Brothers Holdings Inc., American Express Tower, World Financial Center, New
York, NY 10285-1800.
Security Ownership of Certain Beneficial Owners and Management
The following table shows for (i) each director, (ii) executive officer
named in the Summary Compensation Table, (iii) certain persons known to the
Company to own beneficially more than 5% of the outstanding interests and (iv)
for all officers and directors as a group, the beneficial ownership of A and B
Interests of the Partnership as of December 1, 1996. None of the amounts equals
more than 1% of the outstanding A Interests.
<TABLE>
<CAPTION>
Ownership Before Conversion Ownership After Conversion
--------------------------- --------------------------
Percent of
----------
Name of Beneficial A Interest B Interest Percent of B Shares of Common Stock
------------------ ---------- ----------- ------------ --------- ------------
Owner Amount(1) Amount(1) Interest Held Common Stock Held
----- --------- --------- ------------- ------------ ----
<S> <C> <C> <C> <C> <C>
Lehman LTD I, Inc. -- 108,554 --(5) 27,138 --(5)
Lehman Brothers
Capital Partners I -- 5,788,124 26.7% 1,447,031 22.5%
Lehman/SDI, Inc. -- -- -- 538,000 8.4%
O. Gordon Brewer, Jr. 3,000 1,000 --(5) 250 --(5)
Harold J. Cornelius 200 200 --(5) 27,770 --(5)
Joseph M. Corvino 1,415 105,546 --(5) 35,626 --(5)
Richard J. Brus 1,186 2,500 --(5) 625 --(5)
Norman V. Edmonson 4,900 1,300,916 6.0% 440,729 6.9%
Eliot M. Fried --(2) --(2) --(2) -- --(6)
Max W. Hillman, Jr. 4,000 10,000 --(5) 30,220 --(5)
Arnold S. Hoffman 13,000(2)(3) 13,000(2)(3) --(5) 3,250 --(6)
Donald T. Marshall 30,311 2,075,232 9.6% 698,988 10.9%
John P. McDonnell 7,711 623,071 2.9%(5) 211,208 3.3%
Ernest L. Ransome, III 5,000(4) 5,000 -- 1,250 --(5)
Donald A. Scott 9,000 9,000 -- 2,250 --(5)
Henri I. Talerman --(2) -- -- -- --(5)
All directors and 79,723 4,145,465 19.1% 1,452,166 22.6%
executive officers as a
group (13 persons)
</TABLE>
-90-
<PAGE>
- ----------------------
(1) In addition to the Interests listed, the Management Employees beneficially
own limited partnership interests in the General Partner (the "GP Interests").
The GP Interests held by the Management Employees collectively represent 46.2%
of the limited partnership interests in the General Partner. The General Partner
owns 1% of the Partnership and the Operating Partnership. The table does not
include the GP Interests owned by the Management Employees.
(2) Does not include (i) 108,554 B Interests owned by Lehman LTD I, Inc., or
(ii) 5,788,124 B Interests owned by Lehman Brothers Capital Partners I ("Capital
Partners"), affiliates of Lehman Brothers Inc. Messrs. Hoffman and Fried, as
limited partners of Capital Partners, derive economic benefit of approximately
1% from interests held by Capital Partners. An affiliate of Lehman Brothers
Inc., of which Messrs. Fried and Talerman are officers, also owns all of the
capital stock of Lehman/SDI, which is the general partner of the General Partner
and holds the remaining interest in the General Partner not owned by the
Management Employees.
(3) 3,000 of these A and B Interests are owned by Hoffman Investment Co., of
which Mr. Hoffman is Managing Partner. In addition, Mr. Hoffman's children own
4,000 A and B Interests with respect to which he disclaims beneficial ownership.
(4) 2,500 of these A and B Interests are held in a trust, of which Mr. Ransome
is a trustee.
(5) Represents less than 1% of the outstanding B Interests.
(6) Does not include 1,447,031 shares of Common Stock expected to be owned by
Lehman Brothers Capital Partners I ("Capital Partners") after the Conversion.
Messrs. Hoffman and Fried, as limited partners of Capital Partners, derive
economic benefit of approximately 1% from interests held by Capital Partners.
- -----------------------
SUNSOURCE CAPITAL TRUST
The Trust is a statutory business trust that was formed under the Business
Trust Act pursuant to a declaration of trust (as amended and restated, the
"Declaration") among the Trustees and the Corporation and the filing of a
certificate of trust with the Secretary of State of Delaware. The Declaration is
qualified under the Trust Indenture Act. Upon issuance of the Trust Preferred
Securities, the holders thereof will own all of the issued and outstanding Trust
Preferred Securities. The Corporation has agreed to acquire Trust Common
Securities in an amount equal to at least 3% of the total capital of the Trust
and will own, directly or indirectly, all of the issued and outstanding Trust
Common Securities. The Trust Preferred Securities and the Trust Common
Securities will rank pari passu with each other and will have equivalent terms;
provided that (i) if an Event of Default under the Declaration occurs and is
continuing, the holders of Trust Preferred Securities will have a priority over
holders of the Trust Common Securities with respect to payments in respect of
distributions and payments upon liquidation, redemption or otherwise and (ii)
holders of Trust Common Securities have the exclusive right (subject to the
terms of the Declaration) to appoint, remove or replace Trustees and to increase
or decrease the number of Trustees, subject to the right of holders of Trust
Preferred Securities to appoint a Special Regular Trustee upon the occurrence of
an Appointment Event.
The number of Trustees of the Trust shall initially be five. Three of the
Trustees will be the Regular Trustees. The fourth trustee is Bank of New York
which is unaffiliated with the Corporation and which will serve as the Property
Trustee and act as the indenture trustee for purposes of the Trust Indenture
Act. The fifth trustee is an affiliate of Bank of New York and will serve as the
Delaware Trustee. Pursuant to the Declaration, legal title to the Junior
Subordinated Debentures will be held by the Property Trustee for the benefit of
the holders of the Trust Securities and the Property Trustee will have the power
to exercise all rights, powers and privileges under the Indenture with respect
to the Junior Subordinated Debentures. In addition, the Property Trustee will
maintain exclusive control of the Property Account to hold all payments in
respect of the Junior Subordinated Debentures for the benefit of the holders of
Trust Securities. The Property Trustee will promptly make distributions to the
holders of the Trust Securities out of funds from the Property Account. The
Preferred Securities Guarantee is separately qualified under the Trust Indenture
Act and will be held by Bank of New York acting in its capacity as indenture
trustee with respect thereto, for the benefit of the holders of the Trust
Preferred Securities. Subject to the right of holders of Trust Preferred
Securities to appoint a Special Regular Trustee upon the occurrence of an
Appointment Event, the Corporation, as the direct or indirect owner of all of
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<PAGE>
the Trust Common Securities, has the exclusive right (subject to the terms of
the Declaration) to appoint, remove or replace Trustees and to increase or
decrease the number of Trustees, provided that the number of Trustees shall at
least be three, a majority of which shall Regular Trustees.
The Trust exists for the purpose of (a) issuing (i) its Trust Preferred
Securities to the Corporation in consideration of the deposit by the Corporation
of Junior Subordinated Debentures in the Trust as trust assets, and (ii) its
Trust Common Securities to the Corporation 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 rights of the holders of the Trust Preferred Securities, including
economic rights, rights to information and voting rights, are set forth in the
Declaration, the Business Trust Act and the Trust Indenture Act.
Under the Declaration, the Trust shall not, and the Trustees shall cause
the Trust not to, engage in any activity other than in connection with the
purposes of the Trust or other than as required or authorized by the
Declaration. In particular, the Trust shall not and the Trustees shall not (a)
invest any proceeds received by the Trust from holding the Junior Subordinated
Debentures but shall promptly distribute from the Property Account all such
proceeds to holders of Trust Securities pursuant to the terms of the Declaration
and of the Trust Securities; (b) acquire any assets other than as expressly
provided in the Declaration; (c) possess Trust property for other than a Trust
purpose; (d) make any loans, other than loans represented by the Junior
Subordinated Debentures; (e) possess any power or otherwise act in such a way as
to vary the Trust assets or the terms of the Trust Securities in any way
whatsoever; (f) issue any securities or other evidences of beneficial ownership
of, or beneficial interests in, the assets of the Trust other than the Trust
Securities; (g) incur any indebtedness for borrowed money or (h)(i) direct the
time, method and place of exercising any trust or power conferred upon the
Indenture Trustee with respect to the Junior Subordinated Debentures or the
Property Trustee with respect to the Trust Preferred Securities, (ii) waive any
past default that is waivable under the Indenture or the Declaration, (iii)
exercise any right to rescind or annul any declaration that the principal of all
of the Junior Subordinated Debentures shall be due and payable or (iv) consent
to any amendment, modification or termination of the Indenture or the Junior
Subordinated Debentures or the Declaration, in each case where such consent
shall be required, unless in the case of this clause (h) the Property Trustee
shall have received an unqualified opinion of nationally recognized independent
tax counsel recognized as expert in such matters to the effect that such action
will not cause the Trust to be classified for the United States federal income
tax purposes as an association taxable as a corporation or a partnership and
that the Trust will continue to be classified as a grantor trust for United
States federal income tax purposes.
The books and records of the Trust will be maintained at the principal
office of the Trust and will be open for inspection by a holder of Trust
Preferred Securities or the holder's representative for any purpose reasonably
related to the holder's interest in the Trust during normal business hours. Each
holder of Trust Preferred Securities will be furnished annually with unaudited
financial statements of the Trust as soon as available after the end of the
Trust's fiscal year.
Except as provided below or under the Business Trust Act and the Trust
Indenture Act, holders of Trust Preferred Securities have no voting rights. If
(i) distributions on the Trust Preferred Securities are in arrears for 18
consecutive months or (ii) an Event of Default under the Declaration occurs and
is continuing, holders of Trust Preferred Securities shall have the right to
vote, as a single class, for the appointment of a Special Regular Trustee who
need not be an employee or officer of or otherwise affiliated with the
Corporation. The Special Regular Trustee shall have the same rights, powers and
privileges under the Declaration as the Regular Trustees. See "DESCRIPTION OF
TRUST PREFERRED SECURITIES -- Voting Rights."
The Property Trustee, for the benefit of the holders of the Trust
Securities, is authorized under the Declaration to exercise all rights under the
Indenture with respect to the Junior Subordinated Debentures to enforce the
Corporation's obligations under the Junior Subordinated Debentures upon the
occurrence of an Indenture Event of Default. The Property Trustee shall also be
authorized to enforce the rights of holders of Trust Preferred Securities under
the Preferred Securities Guarantee. If the Trust's failure to make distributions
on the Trust Preferred Securities is a consequence of the Corporation's exercise
of its right to extend the interest payment period for the Junior Subordinated
Debentures, the Property Trustee will have no right to enforce the payment of
distributions on the Trust Preferred Securities until an Event of Default shall
have occurred. Holders of at least a majority in liquidation amount of the Trust
Preferred Securities will have the right to direct the Property Trustee with
respect to certain matters under the Declaration and the Preferred Securities
Guarantee. If the Property Trustee fails to enforce its rights under the
Indenture or fails to enforce the Preferred Securities Guarantee, any holder of
Trust Preferred Securities may, after a period of 30 days has elapsed from such
holder's written request to the Property Trustee to enforce such rights or the
Preferred Securities Guarantee, to the fullest extent permitted by law,
institute a legal proceeding against the Corporation to enforce such rights or
the Preferred Securities Guarantee, as the case may be, See "DESCRIPTION OF
TRUST PREFERRED SECURITIES -- Voting Rights."
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<PAGE>
If an Indenture Event of Default occurs and is continuing with respect to
Junior Subordinated Debentures, an Event of Default under the Declaration will
occur and be continuing with respect to the Trust Securities. In such event, the
Declaration provides that the holder of Trust Common Securities will be deemed
to have waived any such Event of Default with respect to the Trust Common
Securities until all Events of Default with respect to the Trust Preferred
Securities have been so cured or waived, the Property Trustee will be deemed to
be acting solely on behalf of the holders of the Trust Preferred Securities and
only the holders of the Trust Preferred Securities will have the right to direct
the Property Trustee with respect to certain matters under the Declaration and
consequently under the Indenture. In the event that any Event of Default with
respect to the Trust Preferred Securities is waived by the holders of the Trust
Preferred Securities as provided in the Declaration, the holders of Trust Common
Securities pursuant to the Declaration have agreed that such waiver also
constitutes a waiver of such Event of Default with respect to the Trust Common
Securities for all purposes under the Declaration without any further act, vote
or consent of the holders of the Trust Common Securities. See "DESCRIPTION OF
TRUST PREFERRED SECURITIES."
The Declaration provides that the Trustees may treat the person in whose
name a Trust Preferred Security is registered on the books and records of the
Trust as the sole holder thereof and of the Trust Preferred Securities
represented thereby for purposes of receiving distributions and for all other
purposes and, accordingly, shall not be bound to recognize any equitable or
other claim to or interest in such certificate or in the Trust Preferred
Securities represented thereby on the part of any person, whether or not the
Trust shall have actual or other notice thereof. Trust Preferred Securities will
be issued in fully registered form. Investors may elect to hold their Trust
Preferred Securities directly or, subject to the rules and procedures of The
Depository Trust Company ("DTC") described under "DESCRIPTION OF TRUST PREFERRED
SECURITIES -- Book-Entry; Delivery and Form," hold interests in a global
certificate registered on the books and records of the Trust in the name of DTC
or its nominee. Under the Declaration:
(i) the Trust and the Trustees shall be entitled to deal
with DTC (or any successor depositary) for all purposes,
including the payment of distributions and receiving approvals,
votes or consents under the Declaration, and except as set forth
in the Declaration with respect to the Property Trustee, shall
have no obligation to persons owning Trust Preferred Securities
("Beneficial Owners") registered in the name of and held by DTC
or its nominee; and
(ii) the rights of Beneficial Owners shall be exercised
only through DTC (or any successor depositary) and shall be
limited to those established by law and agreements between such
Owners and DTC and/or its participants. See "DESCRIPTION OF TRUST
PREFERRED SECURITIES -- Book-Entry; Delivery and Form." With
respect to Trust Preferred Securities registered in the name of
and held by DTC or its nominee, all notices and other
communications required under the Declaration shall be given to,
and all distributions on such Trust Preferred Securities shall be
given or made to, DTC (or its successor).
In the Declaration, the Corporation has agreed to pay for all debts and
obligations (other than with respect to the Trust Securities) and all costs and
expenses of the Trust, including the fees and expenses of the Trustees and any
taxes and all costs and expenses with respect thereto, to which the Trust may
become subject, except for United States withholding taxes. The foregoing
obligations of the Corporation under the Declaration are for the benefit of, and
shall be enforceable by, any person to whom any such debts, obligations, costs,
expenses and taxes are owed (a "Creditor") whether or not such Creditor has
received notice hereof. Any such Creditor may enforce such obligations of the
Corporation directly against the Corporation and the Corporation has irrevocably
waived any right or remedy to require that any such Creditor take any action
against the Trust or any other person before proceeding against the Corporation.
The Corporation has agreed in the Declaration to execute such additional
agreements as may be necessary or desirable in order to give full effect to the
foregoing.
THE FOREGOING SUMMARY OF CERTAIN PROVISIONS OF THE DECLARATION CONTAINS
ALL MATERIAL ELEMENTS OF THE DECLARATION BUT DOES NOT PURPORT TO BE COMPLETE AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE DECLARATION WHICH HAS BEEN
FILED AS AN EXHIBIT TO THE REGISTRATION STATEMENT OF WHICH THIS PROXY
STATEMENT/PROSPECTUS IS A PART.
The business address of the Trust is 2600 One Logan Square, Philadelphia,
PA 19103, telephone number (215) 665-3650.
DESCRIPTION OF TRUST PREFERRED SECURITIES
The Trust Preferred Securities will be issued pursuant to the terms of the
Declaration which is qualified under the Trust Indenture Act. The Property
Trustee, Bank of New York, but not the other Trustees of the Trust, will act as
the indenture trustee for purposes of the Trust Indenture Act. The terms of the
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<PAGE>
Trust Preferred Securities and the Declaration include those stated in the
Declaration and those made part of the Declaration by the Trust Indenture Act.
The summary of material terms and provisions of the Trust Preferred Securities
and the Declaration set forth below does not purport to be complete and is
subject to and qualified in its entirety by reference to the Declaration, which
has been filed as an exhibit to the Registration Statement of which this Proxy
Statement/Prospectus forms a part, the Business Trust Act and the Trust
Indenture Act.
General
The Declaration authorizes the Trust to issue the Trust Preferred
Securities, which represent preferred undivided beneficial interests in the
assets of the Trust, and the Trust Common Securities, which represent common
undivided beneficial interests in the assets of the Trust. All of the Trust
Common Securities will be owned, directly or indirectly, by the Corporation. The
Trust Common Securities and the Trust Preferred Securities will have equivalent
terms except that (i) if an Event of Default under the Declaration occurs and is
continuing, the rights of the holders of the Trust Common Securities to payment
in respect of periodic distributions and payments upon liquidation, redemption
or otherwise are subordinated to the rights of the holders of the Trust
Preferred Securities and (ii) holders of Trust Common Securities have the
exclusive right (subject to the terms of the Declaration) to appoint, remove or
replace Trustees and to increase or decrease the number of Trustees, subject to
the right of holders of Trust Preferred Securities to appoint a Special Regular
Trustee upon the occurrence of an Appointment Event. The Declaration does not
permit the issuance by the Trust of any securities or other evidences of
beneficial ownership of, or beneficial interests in, the assets of the Trust
other than the Trust Preferred Securities and the Trust Common Securities, the
incurrence of any indebtedness for borrowed money by the Trust or the making of
any investment other than in the Junior Subordinated Debentures. Pursuant to the
Declaration, the Property Trustee will own and hold the Junior Subordinated
Debentures as trust assets for the benefit of the holders of the Trust Preferred
Securities and the Trust Common Securities. The payment of distributions out of
moneys held by the Property Trustee and payments on redemption of the Trust
Preferred Securities or liquidation of the Trust are guaranteed by the
Corporation on a subordinated basis as and to the extent described under
"DESCRIPTION OF PREFERRED SECURITIES GUARANTEE." The Property Trustee will hold
the Preferred Securities Guarantee for the benefit of holders of the Trust
Preferred Securities. The Preferred Securities Guarantee is a full and
unconditional guarantee from the time of issuance of the Trust Preferred
Securities, but the Preferred Securities Guarantee covers distributions and
other payments on the Trust Preferred Securities only if and to the extent that
the Corporation has made a payment to the Property Trustee of interest or
principal on the Junior Subordinated Debentures deposited in the Trust as trust
assets. See "-Voting Rights."
Distributions
Distributions on the Trust Preferred Securities will be fixed at a rate
per annum of $2.90 (11.6% of the stated liquidation amount of $25) per Trust
Preferred Security. Distributions in arrears will compound monthly thereon at
the rate per annum of 11.6% thereof. The term "distributions" as used herein
includes any such interest payable unless otherwise stated. The amount of
distributions payable for any period will be computed on the basis of a 360-day
year of twelve 30-day months and for any period shorter than a full monthly
period for which distributions are computed, the amount of the distribution
payable will be computed on the basis of the actual number of days elapsed in
such a 30-day month.
Distributions on the Trust Preferred Securities will be cumulative, will
accrue from the first day following the Effective Time (the "Accrual Date") and,
except as otherwise described below, will be payable monthly in arrears, on the
last day of each calendar month of each year, commencing on April 30, 1997, but
only if, and to the extent that, interest payments are made in respect of Junior
Subordinated Debentures held by the Property Trustee.
So long as the Corporation shall not be in default in the payment of
interest on the Junior Subordinated Debentures, the Corporation has the right
under the Indenture to defer payments of interest on the Junior Subordinated
Debentures by extending the interest payment period from time to time on the
Junior Subordinated Debentures for a period not exceeding 60 consecutive months
and, as a consequence, distributions on the Trust Preferred Securities would not
be made (but would continue to accrue with interest thereon at the rate of 11.6%
per annum, compounded monthly) by the Trust during any such Extension Period. If
the Corporation exercises the right to extend an interest payment period, the
Corporation may not declare or pay dividends on, or redeem, purchase, acquire or
make a distribution or liquidation payment with respect to, any of its Common
Stock or Preferred Stock during such Extension Period. Prior to the termination
of any such Extension Period, the Corporation may further extend such Extension
Period; provided that such Extension Period together with all such previous and
further extensions thereof may not exceed 60 consecutive months. Upon the
termination of any Extension Period and the payment of all amounts then due, the
Corporation may commence a new Extension Period, subject to the above
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requirements. The Corporation may also prepay at any time all or any portion of
the interest accrued during an Extension Period. Consequently, there could be
multiple Extension Periods of varying lengths (up to five Extension Periods of
60 consecutive monthly interest periods each or more numerous shorter Extension
Periods) throughout the term of the Junior Subordinated Debentures. See "RISK
FACTORS, CONFLICTS OF INTEREST AND OTHER CONSIDERATIONS -- Additional Risks
Applicable to Holders of A Interests," "DESCRIPTION OF JUNIOR SUBORDINATED
DEBENTURES -- Interest" and "-- Option to Extend Interest Payment Period."
Payments of accrued distributions will be payable to holders of Trust Preferred
Securities as they appear on the books and records of the Trust on the first
record date after the end of an Extension Period.
Distributions on the Trust Preferred Securities must be paid on the dates
payable to the extent that the Property Trustee has cash on hand in the Property
Account to permit such payment. The funds available for distribution to the
holders of the Trust Preferred Securities will be limited to payments received
by the Property Trustee in respect of the Junior Subordinated Debentures that
are deposited in the Trust as trust assets. See "DESCRIPTION OF JUNIOR
SUBORDINATED DEBENTURES." If the Corporation does not make interest payments on
the Junior Subordinated Debentures, the Property Trustee will not make
distributions on the Trust Preferred Securities. Under the Declaration, if and
to the extent the Corporation does make interest payments on the Junior
Subordinated Debentures deposited in the Trust as trust assets, the Property
Trustee is obligated to make distributions on the Trust Securities on a Pro Rata
Basis. The payment of distributions on the Trust Preferred Securities is
guaranteed by the Corporation on a subordinated basis as and to the extent set
forth under "DESCRIPTION OF PREFERRED SECURITIES GUARANTEE." The Preferred
Securities Guarantee is a full and unconditional guarantee from the time of
issuance of the Trust Preferred Securities but the Preferred Securities
Guarantee covers distributions and other payments on the Trust Preferred
Securities only if and to the extent that the Corporation has made a payment to
the Property Trustee of interest or principal on the Junior Subordinated
Debentures deposited in the Trust as trust assets. As used in this Proxy
Statement/Prospectus the term "Pro Rata Basis" shall mean pro rata to each
holder of Trust Securities according to the aggregate liquidation amount of the
Trust Securities held by the relevant holder in relation to the aggregate
liquidation amount of all Trust Securities outstanding unless, in relation to a
payment, an Event of Default under the Declaration has occurred and is
continuing, in which case any funds available to make such payment shall be paid
first to each holder of the Trust Preferred Securities pro rata according to the
aggregate liquidation amount of the Trust Preferred Securities held by the
relevant holder in relation to the aggregate liquidation amount of all the Trust
Preferred Securities outstanding, and only after satisfaction of all amounts
owed to the holders of the Trust Preferred Securities, to each holder of Trust
Common Securities pro rata according to the aggregate liquidation amount of the
Trust Common Securities held by the relevant holder in relation to the aggregate
liquidation amount of all the Trust Common Securities outstanding.
Distributions on the Trust Preferred Securities will be made to the
holders thereof as they appear on the books and records of the Trust on the
relevant record dates, which will be the first business day of the month of the
relevant distribution payment date. The Declaration provides that the payment
dates or record dates for the Trust Preferred Securities shall be the same as
the payment dates and record dates for the Junior Subordinated Debentures.
Distributions payable on any Trust Preferred Securities that are not punctually
paid on any distribution date as a result of the Corporation having failed to
make the corresponding interest payment on the Junior Subordinated Debentures
will forthwith cease to be payable to the person in whose name such Trust
Preferred Security is registered on the relevant record date, and such defaulted
distribution will instead be payable to the person in whose name such Trust
Preferred Security is registered on the special record date established by the
Regular Trustees, which record date shall correspond to the special record date
or other specified date determined in accordance with the Indenture; provided,
however, that distributions shall not be considered payable on any distribution
payment date falling within an Extension Period unless the Corporation has
elected to make a full or partial payment of interest accrued on the Junior
Subordinated Debentures on such distribution payment date. Distributions on the
Trust Preferred Securities will be paid through the Property Trustee who will
hold amounts received in respect of the Junior Subordinated Debentures in the
Property Account for the benefit of the holders of the Preferred and Trust
Common Securities. All distributions paid with respect to the Trust Securities
shall be paid on a Pro Rata Basis to the holders thereof entitled thereto. If
any date on which distributions are to be made on the Trust Preferred Securities
is not a Business Day, then payment of the distribution to be made on such date
will be made on the next succeeding day that is a Business Day (and without any
interest or other payment in respect of any such delay) except that, if such
Business Day is in the next succeeding calendar year, such payment shall be made
on the immediately preceding Business Day, in each case with the same force and
effect as if made on such date.
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Mandatory Redemption
Upon the repayment of the Junior Subordinated Debentures, whether at
maturity, upon redemption or otherwise, the proceeds from such repayment or
payment will be promptly applied to redeem Trust Preferred Securities and Trust
Common Securities having an aggregate liquidation amount equal to the Junior
Subordinated Debentures so repaid, upon not less than 30 nor more than 60 days'
notice, at the Redemption Price. The Trust Common Securities will be entitled to
be redeemed on a Pro Rata Basis with the Trust Preferred Securities, except that
if an Event of Default under the Declaration has occurred and is continuing, the
Trust Preferred Securities will have a priority over the Trust Common Securities
with respect to payment of the Redemption Price. Subject to the foregoing, if
fewer than all outstanding Trust Preferred Securities and Trust Common
Securities are to be redeemed, the Trust Preferred Securities and Trust Common
Securities will be redeemed on a Pro Rata Basis.
Special Event Redemption or Distribution
If, at any time, a Tax Event or an Investment Company Event (each as
defined herein, and each a "Special Event") shall occur and be continuing, the
Trust shall, unless the Junior Subordinated Debentures are redeemed in the
circumstances described below, be dissolved with the result that, after
satisfaction of creditors of the Trust, Junior Subordinated Debentures with an
aggregate principal amount equal to the aggregate stated liquidation amount of
the Trust Preferred Securities and the Trust Common Securities would be
distributed on a Pro Rata Basis to the holders of the Trust Preferred Securities
and the Trust Common Securities in liquidation of such holders' interests in the
Trust, within 90 days following the occurrence of such Special Event; provided,
however, that in the case of the occurrence of a Tax Event, as a condition of
such dissolution and distribution, the Regular Trustees shall have received an
opinion of nationally recognized independent tax counsel experienced in such
matters (a "No Recognition Opinion"), which opinion may rely on any then
applicable published revenue rulings of the Internal Revenue Service, to the
effect that the holders of the Trust Preferred Securities will not recognize any
gain or loss for United States federal income tax purposes as a result of such
dissolution and distribution of Junior Subordinated Debentures; and, provided,
further, that, if at the time there is available to the Trust the opportunity to
eliminate, within such 90-day period, the Special Event by taking some
ministerial action, such as filing a form or making an election, or pursuing
some other similar reasonable measure, which has no adverse effect on the Trust
or the Corporation or the holders of the Trust Preferred Securities, the Trust
will pursue such measure in lieu of dissolution. Furthermore, if in the case of
the occurrence of a Tax Event, (i) the Regular Trustees have received an opinion
(a "Redemption Tax Opinion") of nationally recognized independent tax counsel
experienced in such matters that, as a result of a Tax Event, there is more than
an insubstantial risk that the Corporation would be precluded from deducting the
interest on the Junior Subordinated Debentures for United States federal income
tax purposes even if the Junior Subordinated Debentures were distributed to the
holders of Trust Preferred Securities and Trust Common Securities in liquidation
of such holders' interests in the Trust as described above or (ii) the Regular
Trustees shall have been informed by such tax counsel that a No Recognition
Opinion cannot be delivered to the Trust, the Corporation shall have the right,
upon not less than 30 nor more than 60 days notice, to redeem the Junior
Subordinated Debentures in whole or in part for cash within 90 days following
the occurrence of such Tax Event, and promptly following such redemption Trust
Preferred Securities and Trust Common Securities with an aggregate liquidation
amount equal to the aggregate principal amount of the Junior Subordinated
Debentures so redeemed will be redeemed by the Trust at the Redemption Price on
a Pro Rata Basis at $25.25 if the redemption occurs within five years after the
Effective Time of the Conversion and at $25.00 thereafter; provided, however,
that if at the time there is available to the Corporation or the Regular
Trustees the opportunity to eliminate, within such 90-day period, the Tax Event
by taking some ministerial action, such as filing a form or making an election,
or pursuing some other similar reasonable measure, which has no adverse effect
on the Trust, the Corporation or the holders of the Trust Preferred Securities,
the Corporation, or the Regular Trustees on behalf of the Trust, will pursue
such measure in lieu of redemption and provided further that the Corporation
shall have no right to redeem the Junior Subordinated Debentures while the
Regular Trustees on behalf of the Trust are pursuing any such ministerial
action. The Trust Common Securities will be redeemed on a Pro Rata Basis with
the Trust Preferred Securities, except that, if an Event of Default under the
Declaration has occurred and is continuing, the Trust Preferred Securities will
have a priority over the Trust Common Securities with respect to payment of the
Redemption Price.
"Tax Event" means that the Regular Trustees shall have obtained an opinion
(a "Dissolution Tax Opinion") of nationally recognized independent tax counsel
experienced in such matters to the effect that on or after the Effective Time as
a result of (a) any amendment to, or change (including any announced prospective
change) in, the laws (or any regulations thereunder) of the United States or any
political subdivision or taxing authority thereof or therein, (b) any amendment
to, or change in, an interpretation or application of any such laws or
regulations by any legislative body, court, governmental agency or regulatory
authority (including the enactment of any legislation and the publication of any
judicial decision or regulatory determination), (c) any interpretation or
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pronouncement that provides for a position with respect to such laws or
regulations that differs from the theretofore generally accepted position or (d)
any action taken by any governmental agency or regulatory authority, which
amendment or change is enacted, promulgated, issued or effective or which
interpretation or pronouncement is issued or announced or which action is taken,
in each case on or after the Effective Time, there is more than an insubstantial
risk that (i) the Trust is, or will be within 90 days of the date thereof,
subject to United States federal income tax with respect to income accrued or
received on the Junior Subordinated Debentures, (ii) the Trust is, or will be
within 90 days of the date thereof, subject to more than a de minimis amount of
other taxes, duties or other governmental charges or (iii) interest payable by
the Corporation to the Trust on the Junior Subordinated Debentures is not, or
within 90 days of the date thereof will not be, deductible by the Corporation
for United States federal income tax purposes.
It should be noted that certain legislation proposed as recently as
February 1997 would have applied to securities similar to the Junior
Subordinated Debentures, with the result that the Corporation would not have
been entitled to an interest deduction with respect to the payments on the
Junior Subordinated Debentures. See the discussion above under "RISK FACTORS,
CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS." No prediction can be
made as to the likelihood that such legislation will be enacted or as to whether
such legislation would be effective retroactively to deny interest deductions
with respect to securities issued prior to the date of enactment of such
legislation. See "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT
CONSIDERATIONS -- Additional Risks Applicable to Holders of A Interests --
Special Event Redemption or Distribution."
"Investment Company Event" means that the Regular Trustees shall have
received an opinion of nationally recognized independent counsel experienced in
practice under the Investment Company Act of 1940, as amended (the "1940 Act"),
that as a result of the occurrence of a change in law or regulation or a change
in interpretation or application of law or regulation by any legislative body,
court, governmental agency or regulatory authority (a "Change in 1940 Act Law"),
there is more than an insubstantial risk that the Trust is or will be considered
an "investment company" which is required to be registered under the 1940 Act,
which Change in 1940 Act Law becomes effective on or after the Effective Time.
On the date fixed for any distribution of Junior Subordinated Debentures,
upon dissolution of the Trust, (i) the Trust Preferred Securities and the Trust
Common Securities will no longer be deemed to be outstanding and (ii)
certificates representing Trust Preferred Securities will be deemed to represent
Junior Subordinated Debentures having an aggregate principal amount equal to the
stated liquidation amount of, and bearing accrued and unpaid interest equal to
accrued and unpaid distributions on, such Trust Preferred Securities until such
certificates are presented to the Corporation or its agent for transfer or
reissuance.
There can be no assurance as to the market price for the Junior
Subordinated Debentures which may be distributed in exchange for Trust Preferred
Securities if a dissolution and liquidation of the Trust were to occur.
Accordingly, the Junior Subordinated Debentures which the investor may
subsequently receive on dissolution and liquidation of the Trust may trade at a
discount to the price of the Trust Preferred Securities exchanged. If the Junior
Subordinated Debentures are distributed to the holders of Trust Preferred
Securities upon the dissolution of the Trust, the Corporation will use its best
efforts to list the Junior Subordinated Debentures on the NYSE or on such other
exchange on which the Trust Preferred Securities are then listed.
Redemption Procedures
The Trust may not redeem fewer than all the outstanding Trust Preferred
Securities unless all accrued and unpaid distributions have been paid on all
Trust Preferred Securities for all monthly distribution periods terminating on
or prior to the date of redemption.
If the Trust gives a notice of redemption in respect of Trust Preferred
Securities (which notice will be irrevocable) then immediately prior to the
close of business on the redemption date, provided that the Corporation has paid
to the Property Trustee a sufficient amount of cash in connection with the
related redemption or maturity of the Junior Subordinated Debentures,
distributions will cease to accrue on the Trust Preferred Securities called for
redemption, such Trust Preferred Securities shall no longer be deemed to be
outstanding and all rights of holders of such Trust Preferred Securities so
called for redemption will cease, except the right of the holders of such Trust
Preferred Securities to receive the Redemption Price, but without interest on
such Redemption Price. Neither the Trustees nor the Trust shall be required to
register or cause to be registered the transfer of any Trust Preferred
Securities which have been so called for redemption. If any date fixed for
redemption of Trust Preferred Securities is not a Business Day, then payment of
the Redemption Price payable on such date will be made on the next succeeding
day that is a Business Day (and without any interest or other payment in respect
of any such delay) except that, if such Business Day falls in the next calendar
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year, such payment will be made on the immediately preceding Business Day, in
each case with the same force and effect as if made on such date fixed for
redemption. If the Corporation fails to repay Junior Subordinated Debentures on
maturity or on the date fixed for this redemption or if payment of the
Redemption Price in respect of Trust Preferred Securities is improperly withheld
or refused and not paid by the Property Trustee or by the Corporation pursuant
to the Preferred Securities Guarantee described under "Description of the
Preferred Securities Guarantee," distributions on such Trust Preferred
Securities will continue to accrue, from the original redemption date of the
Trust Preferred Securities to the date of payment, in which case the actual
payment date will be considered the date fixed for redemption for purposes of
calculating the Redemption Price.
If a partial redemption of the Trust Preferred Securities would result in
the delisting of the Trust Preferred Securities by any national securities
exchange or other organization on which the Trust Preferred Securities are then
listed, the Corporation pursuant to the Indenture will only redeem Junior
Subordinated Debentures in whole and, as a result, the Trust may only redeem the
Trust Preferred Securities in whole.
Subject to the foregoing and applicable law (including, without
limitation, United States federal securities laws), the Corporation or any of
its subsidiaries may at any time and from time to time purchase outstanding
Trust Preferred Securities by tender, in the open market or by private
agreement.
Subordination of Trust Common Securities
Payment of distributions on, and the redemption price of, the Trust
Preferred Securities and the Trust Common Securities, as applicable, shall be
made pro rata based on the liquidation amount of such Trust Preferred Securities
and Trust Common Securities; provided, however, that if on any distribution date
or redemption date an Indenture Event of Default shall have occurred and be
continuing, no payment of any distribution on, or redemption price of, any of
the Trust Common Securities, and no other payment on account of the redemption,
liquidation or other acquisition of such Trust Common Securities, shall be made
unless payment in full in cash of all accumulated and unpaid distributions on
all of the outstanding Trust Preferred Securities for all distribution periods
terminating on or prior thereto, or in the case of payment of the redemption
price, the full amount of such redemption price on all of the outstanding Trust
Preferred Securities then called for redemption, shall have been made or
provided for, and all funds available to the Property Trustee shall first be
applied to the payment in full in cash of all distributions on, or redemption
price of, the Trust Preferred Securities then due and payable.
Liquidation Distribution Upon Dissolution
In the event of any voluntary or involuntary dissolution, winding-up or
termination of the Trust, the holders of the Trust Preferred Securities and
Trust Common Securities at the date of dissolution, winding-up or termination of
the Trust will be entitled to receive on a Pro Rata Basis solely out of the
assets of the Trust, after satisfaction of creditors of the Trust (to the extent
not satisfied by the Corporation as provided in the Declaration), an amount
equal to the aggregate of the stated liquidation amount of $25 per Trust
Security plus accrued and unpaid distributions thereon to the date of payment
(such amount being the "Liquidation Distribution"), unless, in connection with
such dissolution, winding-up or termination, Junior Subordinated Debentures in
an aggregate principal amount equal to the aggregate stated liquidation amount
of such Trust Securities and bearing accrued and unpaid interest in an amount
equal to the accrued and unpaid distributions on such Trust Securities, shall be
distributed on a Pro Rata Basis to the holders of the Trust Preferred Securities
and Trust Common Securities in exchange therefor, after satisfaction of
creditors of the Trust (to the extent not satisfied by the Corporation as
provided in the Declaration).
If, upon any such dissolution, the Liquidation Distribution can be paid
only in part because the Trust has insufficient assets available to pay in full
the aggregate Liquidation Distribution, then the amounts payable directly by the
Trust on the Trust Preferred Securities and the Trust Common Securities shall be
paid on a Pro Rata Basis. The holders of the Trust Common Securities will be
entitled to receive distributions upon any such dissolution on a Pro Rata Basis
with the holders of the Trust Preferred Securities, except that if an Event of
Default under the Declaration has occurred and is continuing, the Trust
Preferred Securities shall have a priority over the Trust Common Securities with
respect to payment of the Liquidation Distribution.
Pursuant to the Declaration, the Trust shall dissolve: (i) on April 30,
2027, (ii) when all of the Trust Securities shall have been called for
redemption and the amounts necessary for redemption thereof shall have been paid
to the holders of Trust Securities in accordance with the terms of the Trust
Securities, (iii) when all of the Junior Subordinated Debentures shall have been
distributed to the holders of Trust Securities in exchange for all of the Trust
Securities in accordance with the terms of the Trust Securities, (iv) upon the
bankruptcy of the Corporation or the Trust, (v) upon the filing of a certificate
of dissolution
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or the equivalent with respect to the Corporation, the filing of a certificate
of cancellation with respect to the Trust after having obtained the consent of
at least a majority in liquidation amount of the trust Securities, voting
together as a single class, to file such certificate of cancellation, or the
revocation of the charter of the Corporation and the expiration of 90 days after
the date of revocation without a reinstatement thereof, or (vi) upon the entry
of a decree of judicial dissolution of the Corporation or the Trust.
No Merger, Consolidation or Amalgamation of the Trust
The Trust may not consolidate, amalgamate, merge with or into, or be
replaced by, or convey, transfer or lease its properties and assets to, any
corporation or other entity.
Declaration Events of Default
An Indenture Event of Default will constitute an event of default under
the Declaration with respect to the Trust Securities (an "Event of Default");
provided that pursuant to the Declaration, the holder of the Trust Common
Securities will be deemed to have waived any such Event of Default with respect
to the Trust Common Securities until all Events of Default with respect to the
Trust Preferred Securities have been cured or waived. Until all such Events of
Default with respect to the Trust Preferred Securities have been so cured or
waived, the Property Trustee will be deemed to be acting solely on behalf of the
holders of the Trust Preferred Securities, and only the holders of the Trust
Preferred Securities will have the right to direct the Property Trustee with
respect to certain matters under the Declaration and consequently under the
Indenture. In the event that any Event of Default with respect to the Trust
Preferred Securities is waived by the holders of the Trust Preferred Securities
as provided in the Declaration, the holders of Trust Common Securities pursuant
to the Declaration have agreed that such waiver also constitutes a waiver of
such Event of Default with respect to the Trust Common Securities for all
purposes under the Declaration without any further act, vote or consent of the
holders of the Trust Common Securities. See "-- Voting Rights."
Upon the occurrence of an Event of Default, the Property Trustee as the
holder of all of the Junior Subordinated Debentures will have the right under
the Indenture to declare the principal of and interest on the Junior
Subordinated Debentures to be immediately due and payable. In addition, the
Property Trustee will have the power to exercise all rights, powers and
privileges under the Indenture. See "DESCRIPTION OF JUNIOR SUBORDINATED
DEBENTURES."
If the Property Trustee fails to enforce its rights with respect to the
Junior Subordinated Debentures held by the Trust to the fullest extent permitted
by law, any record holder of Trust Preferred Securities may institute legal
proceedings directly against the Corporation to enforce the Property Trustee's
rights under such Junior Subordinated Debentures without first instituting any
legal proceedings against such Property Trustee or any other person or entity.
In addition, if an Event of Default under the Declaration has occurred and is
continuing and such event is attributable to the failure of the Corporation to
pay interest, principal or other required payments on the Junior Subordinated
Debentures issued to the Trust on the date such interest, principal or other
payment is otherwise payable (or, in the case of redemption, the redemption
date), then a record holder of Trust Preferred Securities may, on or after the
respective due dates specified in the Junior Subordinated Debentures, institute
a proceeding directly or indirectly against the Corporation under the Indenture
for enforcement of payment on Junior Subordinated Debentures having a principal
amount equal to the aggregate liquidation amount of the Trust Preferred
Securities held by such holder without first (i) directing the Property Trustee
to enforce the terms of the Junior Subordinated Debentures or (ii) instituting a
legal proceeding against the Corporation to enforce the Property Trustee's
rights under the Junior Subordinated Debentures. In connection with such Direct
Action, the Corporation will be subrogated to the rights of such record holder
of Trust Preferred Securities to the extent of any payment made by the
Corporation to such record holder of Trust Preferred Securities in such Direct
Action. See "DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES."
Voting Rights
Except as provided below, under "Modification and Amendment of the
Declaration" and "DESCRIPTION OF PREFERRED SECURITIES GUARANTEE -- Amendments
and Assignment" and as otherwise required by the Business Trust Act, the Trust
Indenture Act and the Declaration, the holders of the Trust Preferred Securities
will have no voting rights.
If (i) the Trust fails to make distributions in full on the Trust Preferred
Securities for 18 consecutive months or (ii) an Event of Default under the
Declaration occurs and is continuing (each, an "Appointment Event"), then the
holders of the Trust Preferred Securities, acting as a single class, will be
entitled, by the vote of holders of Trust Preferred Securities representing a
majority in aggregate liquidation amount of the outstanding Trust Preferred
Securities, to appoint a Special Regular Trustee (who need not be an officer or
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an employee of or otherwise affiliated with the Corporation) who shall have the
same rights, powers and privileges under the Declaration as the Regular
Trustees. Any holder of Trust Preferred Securities (other than the Corporation
or any of its affiliates) shall have the right to nominate any person to be
appointed as Special Regular Trustee. For purposes of determining whether the
Trust has failed to pay distributions in full for 18 consecutive months,
distributions shall be deemed to remain in arrears, notwithstanding any payments
in respect thereof, until full cumulative distributions have been or
contemporaneously are paid with respect to all monthly distribution periods
terminating on or prior to the date of payment of such cumulative distributions.
Not later than 30 days after such right to appoint a Special Regular Trustee
arises, the Regular Trustees will convene a meeting for the purpose of
appointing a Special Regular Trustee. If the Regular Trustees fail to convene
such meeting within such 30-day period, the holders of Trust Preferred
Securities representing 10% in liquidation amount of the outstanding Trust
Preferred Securities will be entitled to convene such meeting. The provisions of
the Declaration relating to the convening and conduct of the meetings of the
holders will apply with respect to any such meeting. If, at any such meeting,
holders of less than a majority in aggregate liquidation amount of Trust
Preferred Securities entitled to vote for the appointment of a Special Regular
Trustee vote for such appointment, no Special Regular Trustee shall be
appointed. Any Special Regular Trustee may be removed without cause at any time
by holders of Trust Preferred Securities representing a majority in liquidation
amount of the Trust Preferred Securities and holders of Trust Preferred
Securities representing 10% in liquidation amount of the Trust Preferred
Securities shall be entitled to convene a meeting for such purpose. Any Special
Regular Trustee appointed shall cease to be a Special Regular Trustee if the
Appointment Event pursuant to which the Special Regular Trustee was appointed
and all other Appointment Events have been cured and cease to be continuing.
Notwithstanding the appointment of any such Special Regular Trustee, the
Corporation shall retain all rights under the Indenture, including the right to
extend the interest payment period as provided under "DESCRIPTION OF JUNIOR
SUBORDINATED DEBENTURES -- Option to Extend Interest Payment Period." If such an
extension occurs, there will be no Indenture Event of Default for failure to
make any scheduled interest payment during the Extension Period on the date
originally scheduled.
The holders of a majority in aggregate liquidation amount of the Trust
Preferred Securities have the right (i) on behalf of all holders of Trust
Securities, to waive any past default that is waivable under the Declaration and
(ii) to direct the time, method and place of conducting any proceeding for any
remedy available to the Property Trustee, or exercising any trust or power
conferred upon the Property Trustee under the Declaration, including the right
to direct the Property Trustee, as the holder of the Junior Subordinated
Debentures, to (a) direct the time, method and place of conducting any
proceeding for any remedy available to the Indenture Trustee, or exercising any
trust or power conferred on the Indenture Trustee with respect to the Junior
Subordinated Debentures, (b) waive any past default that is waivable under the
Indenture, or (c) exercise any right to rescind or annul a declaration that the
principal of all the Junior Subordinated Debentures shall be due and payable;
provided that where a consent under the Indenture would require the consent of
(1) holders of Junior Subordinated Debentures representing a specified
percentage greater than a majority in principal amount of the Junior
Subordinated Debentures or (2) each holder of Junior Subordinated Debentures
affected thereby, no such consent shall be given by the Property Trustee without
the prior consent of, in the case of clause (1) above, holders of Trust
Preferred Securities representing such specified percentage of the aggregate
liquidation amount of the Trust Preferred Securities or, in the case of clause
(2) above, each holder of all Trust Preferred Securities affected thereby. The
Property Trustee shall not revoke any action previously authorized or approved
by a vote of the holders of Trust Preferred Securities. The Property Trustee
shall notify all holders of record of Trust Preferred Securities of any notice
of default received from the Indenture Trustee with respect to the Junior
Subordinated Debentures. Other than with respect to directing the time, method
and place of conducting any proceeding for any remedy available to the Property
Trustee or the Indenture Trustee as set forth above, the Property Trustee shall
be under no obligation to take any of the foregoing actions at the direction of
the holders of the Trust Preferred Securities unless the Property Trustee shall
have obtained an opinion of nationally recognized independent tax counsel
recognized as expert in such matters to the effect that the Trust will not be
classified for United States federal income tax purposes as an association
taxable as a corporation or a partnership on account of such action and will be
treated as a grantor trust for United States federal income tax purposes
following such action. If the Property Trustee fails to enforce its rights under
the Declaration (including, without limitation, its rights, powers and
privileges as a holder of the Junior Subordinated Debentures under the
Indenture) to the fullest extent permitted by law, any holder of Trust Preferred
Securities may, upon such holder's written request to the Property Trustee to
enforce such rights, institute a legal proceeding directly against the
Corporation to enforce the Property Trustee's rights under the Declaration,
without first instituting a legal proceeding against the Property Trustee or any
other Person; provided that any holder may institute a direct action without
prior request to the Property Trustee to enforce the Corporation's payment
obligations on the Junior Subordinated Debentures.
A waiver of an Indenture Event of Default by the Property Trustee at the
direction of holders of the Trust Preferred Securities will constitute a waiver
of the corresponding Event of Default under the Declaration in respect of the
Trust Securities.
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In the event the consent of the Property Trustee as the holder of the
Junior Subordinated Debentures is required under the Indenture with respect to
any amendment, modification or termination of the Indenture or the Junior
Subordinated Debentures, the Property Trustee shall request the direction of the
holders of the Trust Securities with respect to such amendment, modification or
termination and shall vote with respect to such amendment, modification or
termination as directed by a majority in liquidation amount of the Trust
Securities voting together as a single class; provided, however, that where any
such amendment, modification or termination under the Indenture would require
the consent of (i) holders of Junior Subordinated Debentures representing a
specified percentage greater than a majority in principal amount of the Junior
Subordinated Debentures or (ii) each holder of Junior Subordinated Debentures
affected thereby, the Property Trustee may only give such consent at the
direction of the holders of Trust Securities representing such specified
percentage of the aggregate liquidation amount of the Trust Securities in the
case of clause (i) above, or each holder of Trust Securities affected thereby,
in the case of clause (ii) above; and, provided, further, that the Property
Trustee shall be under no obligation to take any such action in accordance with
the directions of the holders of the Trust Securities unless the Property
Trustee has obtained an opinion of nationally recognized independent tax counsel
recognized as expert in such matters to the effect that the Trust will not be
classified for United States federal income tax purposes as an association
taxable as a corporation or a partnership on account of such action and will be
treated as a grantor trust for United States federal income tax purposes
following such action.
Any required approval or direction of holders of Trust Preferred
Securities may be given at a separate meeting of holders of Trust Preferred
Securities convened for such purpose, at a meeting of all of the holders of
Trust Securities or pursuant to written consent. The Regular Trustees will cause
a notice of any meeting at which holders of Trust Preferred Securities are
entitled to vote, or of any matter upon which action by written consent of such
holders is to be taken, to be mailed to each holder of record of Trust Preferred
Securities. Each such notice will include a statement setting forth (i) the date
of such meeting or the date by which such action is to be taken, (ii) a
description of any resolution proposed for adoption at such meeting on which
such holders are entitled to vote or of such matter upon which written consent
is sought and (iii) instructions for the delivery of proxies or consents.
No vote or consent of the holders of Trust Preferred Securities will be
required for the Trust to redeem and cancel Trust Preferred Securities or
distribute Junior Subordinated Debentures in accordance with the Declaration.
Notwithstanding that holders of Trust Preferred Securities are entitled to
vote or consent under any of the circumstances described above, any of the Trust
Preferred Securities at such time that are owned by the Corporation or by any
entity directly or indirectly controlling or controlled by or under direct or
indirect common control with the Corporation shall not be entitled to vote or
consent and shall, for purposes of such vote or consent, be treated as if they
were not outstanding.
The procedures by which persons owning Trust Preferred Securities
registered in the name of and held by DTC or its nominee may exercise their
voting rights are described under "Book-Entry; Delivery and Form" below.
Subject to the right of holders of Trust Preferred Securities to appoint a
Special Regular Trustee upon the occurrence of an Appointment Event, holders of
the Trust Preferred Securities will have no rights to increase or decrease the
number of Trustees or to appoint, remove or replace a Trustee, which rights are
vested exclusively in the holders of the Trust Common Securities.
Modification and Amendment of the Declaration
The Declaration may be modified and amended on approval of a majority of
the Regular Trustees, provided that, if any proposed modification or amendment
provides for, or the Regular Trustees otherwise propose to effect, (i) any
action that would adversely affect the powers, preferences or special rights of
the Trust Securities, whether by way of amendment to the Declaration or
otherwise, or (ii) the dissolution, winding-up or termination of the Trust other
than pursuant to the terms of the Declaration, then the holders of the
outstanding Trust Securities as a class will be entitled to vote on such
amendment or proposal and such amendment or proposal shall not be effective
except with the approval of at least 66 2/3% in liquidation amount of the Trust
Securities, provided that if any amendment or proposal referred to in clause (i)
above would adversely affect only the Trust Preferred Securities or the Trust
Common Securities, then only the affected class will be entitled to vote on such
amendment or proposal and such amendment or proposal shall not be effective
except with the approval of 66 2/3% in liquidation amount of such class of
securities.
Notwithstanding the foregoing, (i) no amendment or modification may be made
to the Declaration unless the Regular Trustees shall have obtained (A) either a
ruling from the Internal Revenue Service or a written unqualified opinion of
nationally recognized independent tax counsel experienced in such matters to the
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effect that such amendment will not cause the Trust to be classified for United
States federal income tax purposes as an association taxable as a corporation or
a partnership and to the effect that the Trust will continue to be treated as a
grantor trust for purposes of United States federal income taxation and (B) a
written unqualified opinion of nationally recognized independent counsel
experienced in such matters to the effect that such amendment will not cause the
Trust to be an "investment company" which is required to be registered under the
1940 Act; (ii) certain specified provisions of the Declaration may not be
amended without the consent of all of the holders of the Trust Securities; (iii)
no amendment which adversely affects the rights, powers and privileges of the
Property Trustee shall be made without the consent of the Property Trustee; (iv)
Article IV of the Declaration relating to the obligation of the Corporation to
purchase the Trust Common Securities and to pay certain obligations and expenses
of the Trust as described under "SUNSOURCE CAPITAL TRUST" may not be amended
without the consent of the Corporation; (v) the rights of holders of Trust
Common Securities under Article V of the Declaration to increase or decrease the
number of, and to appoint, replace or remove, Trustees (other than a Special
Regular Trustee) shall not be amended without the consent of each holder of
Trust Common Securities; and (vi) the rights of holders of Trust Preferred
Securities under the Declaration to appoint or remove a Special Regular Trustee
shall not be amended without the consent of each holder of Trust Preferred
Securities.
The Declaration further provides that it may be amended without the
consent of the holders of the Trust Securities to (i) cure any ambiguity, (ii)
correct or supplement any provision in the Declaration that may be defective or
inconsistent with any other provision of the Declaration, (iii) add to the
covenants, restrictions or obligations of the Corporation, (iv) preserve the
status of the Trust as a grantor trust for federal income tax purposes, and (v)
to conform to changes in, or a change in interpretation or application of
certain 1940 Act requirements by the SEC, which amendment does not adversely
affect the rights, preferences or privileges of the holders.
Book-Entry; Delivery and Form
Trust Preferred Securities will be issued in fully registered form.
Investors may elect to hold their Trust Preferred Securities directly or,
subject to the rules and procedures of DTC described below, hold interests in a
global certificate (the "Trust Preferred Securities Global Certificate")
registered in the name of DTC or its nominee.
The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of securities in definitive form. Such laws
may impair the ability to transfer beneficial interests in a global Trust
Preferred Security.
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York Banking
Law, a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its participants ("Participants") deposit with DTC. DTC
also facilitates the settlement among Participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in Participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct Participants
include securities brokers and dealers, banks, trust companies, clearing
corporations, and certain other organizations ("Direct Participants"). DTC is
owned by a number of its Direct Participants and by the NYSE, the American Stock
Exchange, Inc., and the National Association of Securities Dealers, Inc. Access
to the DTC system is also available to others such as securities brokers and
dealers, banks and trust companies that clear through or maintain a custodial
relationship with a Direct Participant, either directly or indirectly ("Indirect
Participants"). The rules applicable to DTC and its Participants are on file
with the Securities and Exchange Commission.
<PAGE>
Upon issuance of a Trust Preferred Securities Global Certificate, DTC will
credit on its book-entry registration and transfer system the number of Trust
Preferred Securities represented by such Trust Preferred Securities Global
Certificate to the accounts of institutions that have accounts with DTC.
Ownership of beneficial interests in a Trust Preferred Securities Global
Certificate will be limited to Participants or persons that may hold interests
through Participants. The ownership interest of each actual purchaser of each
Trust Preferred Security ("Beneficial Owner") is in turn to be recorded on the
Direct and Indirect Participants' records. Beneficial Owners will not receive
written confirmation from DTC of their purchases, but Beneficial Owners are
expected to receive written confirmations providing details of the transactions,
as well as periodic statements of their holdings, from the Direct or Indirect
Participants through which the Beneficial Owners purchased Trust Preferred
Securities. Transfers of ownership interests in the Trust Preferred Securities
are to be accomplished by entries made on the books of Participants acting on
behalf of Beneficial Owners.
DTC has no knowledge of the actual Beneficial Owners of the Trust Preferred
Securities; DTC's records reflect only the identity of the Direct Participants
to whose accounts such Trust Preferred Securities are credited, which may or may
not be the Beneficial Owners. The Participants will remain responsible for
keeping account of their holdings on behalf of their customers. So long as DTC,
or its nominee, is the owner of a Trust Preferred Securities Global Certificate,
DTC or such nominee, as the case may be, will be considered the sole owner and
holder of record of the Trust Preferred Securities represented by such Trust
Preferred Securities Global Certificate for all purposes.
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Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
Redemption notices shall be sent to Cede & Co. If less than all of the
Trust Preferred Securities are being redeemed, DTC will reduce pro rata (subject
to adjustment to eliminate fractional Trust Preferred Securities) the amount of
interest of each Direct Participant in the Trust Preferred Securities to be
redeemed.
Although voting with respect to the Trust Preferred Securities is limited,
in those instances in which a vote is required, neither DTC nor Cede & Co.
itself will consent or vote with respect to Trust Preferred Securities. Under
its usual procedures, DTC would mail an Omnibus Proxy to the Trust as soon as
possible after the record date. The Omnibus Proxy assigns Cede & Co.'s
consenting or voting rights to those Direct Participants to whose accounts the
Trust Preferred Securities are credited on the record date (identified in a
listing attached to the Omnibus Proxy).
Distribution payments on the Trust Preferred Securities represented by a
Preferred Series Global Certificate will be made by the Property Trustee to DTC.
DTC's practice is to credit Direct Participants' accounts on the relevant
payment date in accordance with their respective holdings shown on DTC's records
unless DTC has reason to believe that it will not receive payments on such
payment date. Payments by Participants to Beneficial owners will be governed by
standing instructions and customary practices and will be the responsibility of
such Participants and not of DTC, the Trust or the Corporation, subject to any
statutory or regulatory requirements as may be in effect from time to time.
Payment of distributions to DTC is the responsibility of the Trust, disbursement
of such payments to Direct Participants is the responsibility of DTC, and
disbursement of such payments to the Beneficial Owners is the responsibility of
Direct and Indirect Participants.
DTC may discontinue providing its services as securities depository with
respect to the Trust Preferred Securities at any time by giving reasonable
notice to the Trust. Under such circumstances, if a successor securities
depository is not obtained, Trust Preferred Security certificates will be
required to be printed and delivered. Additionally, the Trust may decide to
discontinue use of the system of book-entry transfers through DTC (or a
successor depository). In that event, certificates for the Trust Preferred
Securities will be printed and delivered.
Expenses and Taxes
In the Indenture, the Company, as borrower, has agreed to pay all debts
and other obligations (other than with respect to the Trust Preferred
Securities) and all costs and expenses of the Trust (including costs and
expenses relating to the organization of the Trust, the fees and expenses of the
Trustees and the costs and expenses relating to the operation of the Trust) and
to pay any and all taxes and all costs and expenses with respect thereto (other
than United States withholding taxes) to which the Trust might become subject.
The foregoing obligations of the Company under the Indenture are for the benefit
of, and shall be enforceable by, any person to whom any such debts, obligations,
costs, expenses and taxes are owed (a "Creditor") whether or not such Creditor
has received notice thereof. Any such Creditor may enforce such obligations of
the Corporation directly against the Corporation, and the Corporation has
irrevocably waived any right or remedy to require that any such Creditor take
any action against the Trust or any other person before proceeding against the
Company. The Corporation has also agreed in the Indenture to execute such
additional agreements as may be necessary or desirable to give effect to the
foregoing.
Registrar, Transfer Agent and Paying Agent
Payment of distributions and payments on redemption of the Trust Preferred
Securities will be payable, the transfer of the Trust Preferred Securities will
be registrable, and Trust Preferred Securities will be exchangeable for Trust
Preferred Securities of other denominations of a like aggregate liquidation
amount, at the principal corporate trust office of the Property Trustee in The
City of New York; provided that payment of distributions may be made at the
option of the Regular Trustees on behalf of the Trust by check mailed to the
address of the persons entitled thereto and that the payment on redemption of
any Trust Preferred Security will be made only upon surrender of such Trust
Preferred Security to the Property Trustee.
Registrar and Transfer Company or one of its affiliates will act as
registrar and transfer agent for the Trust Preferred Securities. Registrar and
Transfer Company will also act as paying agent and, with the consent of the
Regular Trustees, may designate additional paying agents.
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Registration of transfers of Trust Preferred Securities will be effected
without charge by or on behalf of the Trust, but upon payment (with the giving
of such indemnity as the Trust or the Corporation may require) in respect of any
tax or other governmental charges that may be imposed in relation to it.
The Trust will not be required to register or cause to be registered the
transfer of Trust Preferred Securities after such Trust Preferred Securities
have been called for redemption.
Information Concerning the Property Trustee
The Property Trustee, prior to a default with respect to the Trust
Securities, undertakes to perform only such duties as are specifically set forth
in the Declaration and, after default, shall exercise the same degree of care as
a prudent individual would exercise in the conduct of his or her own affairs.
Subject to such provision, the Property Trustee is under no obligation to
exercise any of the powers vested in it by the Declaration at the request of any
holder of Trust Preferred Securities, unless offered reasonable indemnity by
such holder against the costs, expenses and liabilities which might be incurred
thereby. The Property Trustee is not required to expend or risk its own funds or
otherwise incur personal financial liability in the performance of its duties if
the Property Trustee reasonably believes that repayment or adequate indemnity is
not reasonably assured to it.
Governing Law
The Declaration and the Trust Preferred Securities will be governed by,
and construed in accordance with, the internal laws of the State of Delaware.
Miscellaneous
Application has been made to list the Trust Preferred Securities on the
NYSE, subject to notice of issuance.
The Regular Trustees are authorized and directed to take such action as
they deem reasonable in order that the Trust will not be deemed to be an
"investment company" required to be registered under the 1940 Act or that the
Trust will not be classified for United States federal income tax purposes as an
association taxable as a corporation or a partnership and will be treated as a
grantor trust for United States federal income tax purposes. In this connection,
the Regular Trustees are authorized to take any action, not inconsistent with
applicable law, the certificate of trust or the Declaration, that the Regular
Trustees determine in their discretion to be reasonable and necessary or
desirable for such purposes, as long as such action does not adversely affect
the interests of holders of the Trust Securities.
The Corporation and the Regular Trustees on behalf of the Trust will be
required to provide to the Property Trustee annually a certificate as to whether
the Corporation and the Trust, respectively, are in compliance with all the
conditions and covenants under the Declaration.
DESCRIPTION OF PREFERRED SECURITIES GUARANTEE
Set forth below is a summary of information concerning the Preferred
Securities Guarantee that will be executed and delivered by the Corporation for
the benefit of the holders from time to time of Trust Preferred Securities. The
Preferred Securities Guarantee is separately qualified under the Trust Indenture
Act and will be held by Bank of New York acting in its capacity as indenture
trustee with respect thereto, for the benefit of the holders of the Trust
Preferred Securities. The terms of the Preferred Securities Guarantee include
those stated in such Guarantee and those made part of the Preferred Securities
Guarantee by the Trust Indenture Act. The summary set forth below contains all
material elements of the Preferred Securities Guarantee but does not purport to
be complete and is subject in all respects to the provisions of, and is
qualified in its entirety by reference to, the Preferred Securities Guarantee,
which is filed as an exhibit to the Registration Statement of which this Proxy
Statement/Prospectus forms a part, and the Trust Indenture Act.
General
Pursuant to the Preferred Securities Guarantee, the Corporation will
irrevocably and unconditionally agree, to the extent set forth therein, to pay
in full, to the holders of the Trust Preferred Securities, the Guarantee
Payments (as defined below) (without duplication of amounts theretofore paid by
the Trust), to the extent not paid by the Trust, regardless of any defense,
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right of set-off or counterclaim that the Trust may have or assert. The
following payments or distributions with respect to the Trust Preferred
Securities to the extent not paid or made by the Trust (the "Guarantee
Payments") will be subject to the Guarantee (without duplication): (i) any
accrued and unpaid distributions on the Trust Preferred Securities and the
redemption price, including all accrued and unpaid distributions to the date of
the redemption, with respect to the Trust Preferred Securities called for
redemption by the Trust but if and only to the extent that in each case the
Corporation has made a payment to the Property Trustee of interest or principal
on the Junior Subordinated Debentures and (ii) upon a voluntary or involuntary
dissolution, winding-up or termination of the Trust (other than in connection
with the distribution of Junior Subordinated Debentures to holders of Trust
Preferred Securities or the redemption of all of the Trust Preferred Securities
upon the maturity or redemption of the Junior Subordinated Debentures), the
lesser of (a) the aggregate of the liquidation amount and all accrued and unpaid
distributions on the Trust Preferred Securities to the date of payment, to the
extent the Trust has funds available therefor, and (b) the amount of assets of
the Trust remaining available for distribution to holders of Trust Preferred
Securities in liquidation of the Trust. The Corporation's obligation to make a
Guarantee Payment may be satisfied by direct payment of the required amounts by
the Corporation to the holders of Trust Preferred Securities or by causing the
Trust to pay such amounts to such holders. The Preferred Securities Guarantee,
when taken together with the Corporation's obligations under the Junior
Subordinated Debentures and the Indenture and its obligations under the
Declaration, including its obligation to pay costs, expenses and certain
liabilities of the Trust, constitutes a full and unconditional guarantee of
amounts due on the Trust Preferred Securities.
Certain Covenants of the Corporation
In the Preferred Securities Guarantee, the Corporation will covenant that,
so long as the Trust Preferred Securities remain outstanding, the Corporation
will not declare or pay any dividends on, or redeem, purchase, acquire or make a
distribution or liquidation payment with respect to, any of its common stock or
preferred stock or make any guarantee payment with respect thereto if at such
time (i) the Corporation shall be in default with respect to its Guarantee
Payments or other payment obligations under the Preferred Securities Guarantee,
(ii) there shall have occurred any Indenture Event of Default or any Event of
Default under the Declaration or (iii) the Corporation shall have given notice
of its selection of an Extension Period as provided in the Indenture and such
period, or any extension thereof, is continuing. In addition, so long as any
Trust Preferred Securities remain outstanding, the Corporation has agreed (i) to
remain the sole direct or indirect owner of all of the outstanding Trust Common
Securities and shall not cause or permit the Trust Common Securities to be
transferred except to the extent permitted by the Declaration; provided that any
permitted successor of the Corporation under the Indenture may succeed to the
Corporation's ownership of the Trust Common Securities and (ii) to use
reasonable efforts to cause the Trust to continue to be treated as a grantor
trust for United States federal income tax purposes except in connection with a
distribution of Junior Subordinated Debentures.
Amendments and Assignment
Except with respect to any changes that do not adversely affect the rights
of holders of Trust Preferred Securities (in which case no consent will be
required), the Preferred Securities Guarantee may be amended only with the prior
approval of the holders of not less than 66 2/3% in liquidation amount of the
outstanding Trust Preferred Securities. The manner of obtaining any such
approval of holders of the Trust Preferred Securities will be as set forth under
"DESCRIPTION OF TRUST PREFERRED SECURITIES -- Voting Rights." All guarantees and
agreements contained in the Preferred Securities Guarantee shall bind the
successors, assigns, receivers, trustees and representatives of the Corporation
and shall inure to the benefit of the holders of the Trust Preferred Securities
then outstanding. Except in connection with a consolidation, merger or sale
involving the Corporation that is permitted under the Indenture, the Corporation
may not assign its obligations under the Preferred Securities Guarantee.
Termination of the Preferred Securities Guarantee
The Preferred Securities Guarantee will terminate and be of no further
force and effect as to the Trust Preferred Securities upon full payment of the
Redemption Price of all Trust Preferred Securities, or upon distribution of the
Junior Subordinated Debentures to the holders of Trust Preferred Securities in
exchange for all of the Trust Preferred Securities, or upon full payment of the
amounts payable upon liquidation of the Trust. Notwithstanding the foregoing,
the Preferred Securities Guarantee will continue to be effective or will be
reinstated, as the case may be, if at any time any holder of Trust Preferred
Securities must restore payment of any sums paid with respect to the Trust
Preferred Securities or the Preferred Securities Guarantee.
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Status of the Preferred Securities Guarantee
The Corporation's obligations under the Preferred Securities Guarantee to
make the Guarantee Payments will constitute an unsecured obligation of the
Corporation and will rank (i) subordinate and junior in right of payment to all
other liabilities of the Corporation, including the Junior Subordinated
Debentures, except those made pari passu or subordinate by their terms, and (ii)
senior to all capital stock now or hereafter issued by the Corporation and to
any guarantee now or hereafter entered into by the Corporation in respect of any
of its capital stock. Because the Corporation is a holding company, the
Corporation's obligations under the Preferred Securities Guarantee are also
effectively subordinated to all existing and future liabilities, including trade
payables, of the Corporation's subsidiaries, except to the extent that the
Corporation is a creditor of the subsidiaries recognized as such. The
Declaration provides that each holder of Trust Preferred Securities by
acceptance thereof agrees to the subordination provisions and other terms of the
Preferred Securities Guarantee.
The Preferred Securities Guarantee will constitute a guarantee of payment
and not of collection (that is, the guaranteed party may institute a legal
proceeding directly against the guarantor to enforce its rights under the
guarantee without first instituting a legal proceeding against any other person
or entity). The Preferred Securities Guarantee will be deposited with the
Property Trustee, to be held in trust for the benefit of the holders of the
Trust Preferred Securities. The Property Trustee shall enforce the Preferred
Securities Guarantee on behalf of the holders of the Trust Preferred Securities
although any holder of Trust Preferred Securities may bring a direct action
against the Corporation to enforce the Preferred Securities Guarantee without
prior notice to the Property Trustee. The holders of not less than a majority in
aggregate liquidation amount of the Trust Preferred Securities, have the right
to direct the time, method and place of conducting any proceeding for any remedy
available in respect of the Preferred Securities Guarantee, including the giving
of directions to the Property Trustee.
Governing Law
The Preferred Securities Guarantee will be governed by and construed in
accordance with the laws of the State of New York.
DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES
Set forth below is a description of the Junior Subordinated Debentures
which will be deposited in the Trust as trust assets. The terms of the Junior
Subordinated Debentures include those stated in the Indenture dated
_____________ (the "Indenture"), between the Corporation and Bank of New York,
as trustee (the "Indenture Trustee"), the form of which has been filed as an
exhibit to the Registration Statement of which this Proxy Statement/Prospectus
forms a part, and those made part of the Indenture by the Trust Indenture Act.
The following description contains all material elements of the Junior
Subordinated Debentures but does not purport to be complete and is qualified in
its entirety by reference to the Indenture and the Trust Indenture Act. Whenever
particular provisions or defined terms in the Indenture are referred to herein,
such provisions or defined terms are incorporated by reference herein. Section
and Article references used herein are references to provisions of the
Indenture.
Under certain circumstances involving the dissolution of the Trust
following the occurrence of a Special Event, Junior Subordinated Debentures may
be distributed to the holders of the Trust Securities in liquidation of the
Trust. See "DESCRIPTION OF TRUST PREFERRED SECURITIES -- Special Event
Redemption or Distribution."
General
The Junior Subordinated Debentures are unsecured, subordinated obligations
of the Corporation, limited in aggregate principal amount to an amount equal to
the sum of (i) the stated liquidation amount of the Trust Preferred Securities
issued by the Trust in the Conversion and (ii) the proceeds received by the
Trust upon issuance of the Trust Common Securities to the Corporation (which
proceeds will be used to purchase an equal principal amount of Junior
Subordinated Debentures).
The entire principal amount of the Junior Subordinated Debentures will
become due and payable, together with any accrued and unpaid interest thereon,
on April 30, 2027. The Junior Subordinated Debentures are not subject to any
sinking fund.
If Junior Subordinated Debentures are distributed to holders of Trust
Preferred Securities in dissolution of the Trust, such Junior Subordinated
Debentures will be so issued in certificated form in denominations of $25 and
integral multiples thereof and may be transferred or exchanged at the offices
described below.
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Payments of principal and interest on Junior Subordinated Debentures will
be payable, the transfer of the Junior Subordinated Debentures will be
registrable, and Junior Subordinated Debentures will be exchangeable for Junior
Subordinated Debentures of other denominations of a like aggregate principal
amount, at the corporate trust office of the Indenture Trustee in The City of
New York; provided that payment of interest may be made at the option of the
Corporation by check mailed to the address of the persons entitled thereto and
that the payment of principal with respect to any Junior Subordinated Debenture
will be made only upon surrender of such Junior Subordinated Debenture to the
Indenture Trustee.
If the Junior Subordinated Debentures are distributed to the holders of
Trust Preferred Securities upon the dissolution of the Trust, the Corporation
will use its best efforts to list the Junior Subordinated Debentures on the NYSE
or on such other exchange on which the Trust Preferred Securities are then
listed.
Optional Redemption
Except as provided below, the Junior Subordinated Debentures may not be
redeemed prior to April 30, 2002. The Corporation shall have the right to redeem
the Junior Subordinated Debentures, in whole or in part, from time to time, on
or after April 30, 2002, upon not less than 30 nor more than 60 days' notice, at
a redemption price equal to 100% of the principal amount to be redeemed, plus
any accrued and unpaid interest, to the redemption date, including interest
accrued during an Extension Period. The Corporation will also have the right to
redeem the Junior Subordinated Debentures at any time upon the occurrence of a
Tax Event if certain conditions are met as described under "DESCRIPTION OF THE
TRUST PREFERRED SECURITIES -- Special Event Redemption or Distribution." The
redemption price for such redemption within five years of the Conversion will be
101% of the principal amount of the Junior Subordinated Debentures plus accrued
and unpaid interest.
If the Corporation gives a notice of redemption in respect of Junior
Subordinated Debentures (which notice will be irrevocable) then, by 12:00 noon,
New York City time, on the redemption date, the Corporation will deposit
irrevocably with the Indenture Trustee funds sufficient to pay the applicable
redemption price and will give irrevocable instructions and authority to pay
such redemption price to the holders of the Junior Subordinated Debentures. If
notice of redemption shall have been given and funds deposited as required, then
upon the date of such deposit, interest will cease to accrue on the Junior
Subordinated Debentures called for redemption, such Junior Subordinated
Debentures will no longer be deemed to be outstanding and all rights of holders
of such Junior Subordinated Debentures so called for redemption will cease,
except the right of the holders of such Junior Subordinated Debentures to
receive the applicable redemption price, but without interest on such redemption
price. If any date fixed for redemption of Junior Subordinated Debentures is not
a Business Day, then payment of the redemption price payable on such date will
be made on the next succeeding day that is a Business Day (and without any
interest or other payment in respect of any such delay) except that, if such
Business Day falls in the next calendar year, such payment will be made on the
immediately preceding Business Day, in each case with the same force and effect
as if made on such date fixed for redemption. If payment of the redemption price
in respect of Junior Subordinated Debentures is improperly withheld or refused
and not paid by the Corporation, interest on such Junior Subordinated Debentures
will continue to accrue compounded monthly, from the original redemption date to
the date of payment, in which case the actual payment date will be considered
the date fixed for redemption for purposes of calculating the applicable
redemption price. If fewer than all of the Junior Subordinated Debentures are to
be redeemed, the Junior Subordinated Debentures to be redeemed shall be selected
by lot or pro rata or in some other equitable manner determined by the Indenture
Trustee.
In the event of any redemption in part, the Corporation shall not be
required to (i) issue, register the transfer of or exchange any Junior
Subordinated Debentures during a period beginning at the opening of business 15
days before any selection for redemption of Junior Subordinated Debentures and
ending at the close of business on the earliest date on which the relevant
notice of redemption is deemed to have been given to all holders of Junior
Subordinated Debentures to be redeemed and (ii) register the transfer of or
exchange any Junior Subordinated Debentures so selected for redemption, in whole
or in part, except the unredeemed portion of any Junior Subordinated Debentures
being redeemed in part.
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Proposed Tax Legislation
Certain tax law changes have been proposed that may, if enacted, deny
corporate issuers a deduction for interest in respect of certain debt
obligations, such as the Junior Subordinated Debentures. See "RISK FACTORS,
CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Additional Risks
Applicable to Holders of A Interests -- Special Event Redemption or
Distribution."
Interest
The Junior Subordinated Debentures will bear interest at an annual rate of
11.6% from the Accrual Date. Interest will be payable monthly in arrears on the
last day of each calendar month of each year (each, an "Interest Payment Date"),
commencing on May 31, 1997, to the person in whose name such Junior Subordinated
Debenture is registered, subject to certain exceptions, at the close of business
on the first day of the month in which such Interest Payment Date occurs.
Interest payable on any Junior Subordinated Debenture that is not punctually
paid or duly provided for on any Interest Payment Date will forthwith cease to
be payable to the person in whose name such Junior Subordinated Debenture is
registered on the relevant record date, and such defaulted interest will instead
be payable to the person in whose name such Junior Subordinated Debenture is
registered on the special record date or other specified date determined in
accordance with the Indenture; provided, however, that interest shall not be
considered payable by the Corporation on any Interest Payment Date falling
within an Extension Period unless the Corporation has elected to make a full or
partial payment of interest accrued on the Junior Subordinated Debentures on
such Interest Payment Date.
The amount of interest payable for any period will be computed on the
basis of a 360-day year of twelve 30-day months and for any period shorter than
a full monthly period for which interest is computed, the amount of interest
payable will be computed on the basis of the actual number of days elapsed in
such a 30-day month. If any Interest Payment Date is not a Business Day, then
payment of the interest payable on such date will be made on the next succeeding
day that is a Business Day (and without any interest or other payment in respect
of any such delay), except that, if such Business Day is in the next succeeding
calendar year, such payment shall be made on the immediately preceding Business
Day, in each case with the same force and effect as if made on such date.
Option to Extend Interest Payment Period
So long as the Corporation shall not be in default in the payment of
interest on the Junior Subordinated Debentures, the Corporation shall have the
right to extend the interest payment period from time to time for a period not
exceeding 60 consecutive months. The Corporation has no current intention of
exercising its right to extend an interest payment period. No interest shall be
due and payable during an Extension Period, except at the end thereof. During
any Extension Period, the Corporation shall not declare or pay any dividends on,
or redeem, purchase, acquire or make a distribution or liquidation payment with
respect to, any of its common stock or preferred stock or make any guarantee
payments with respect thereto. Prior to the termination of any such Extension
Period, the Corporation may further extend the interest payment period; provided
that such Extension Period together with all such previous and further
extensions thereof may not exceed 60 consecutive months. On the Interest Payment
Date occurring after the end of each Extension Period, the Corporation shall pay
to the holders of Junior Subordinated Debentures of record on the record date
for such Interest Payment Date (regardless of who the holders of record may have
been on other dates during the Extension Period) all accrued and unpaid interest
on the Junior Subordinated Debentures, together with interest thereon at the
rate specified for the Junior Subordinated Debentures to the extent permitted by
applicable law, compounded monthly, ("Compounded Interest"). Upon the
termination of any Extension Period and the payment of all amounts then due, the
Corporation may commence a new Extension Period, subject to the above
requirements. The Corporation may also prepay at any time all or any portion of
the interest accrued during an Extension Period. Consequently, there could be
multiple Extension Periods of varying lengths (up to five Extension Periods of
60 consecutive months each or more numerous shorter Extension Periods)
throughout the term of the Junior Subordinated Debentures. The failure by the
Corporation to make interest payments during an Extension Period would not
constitute a default or an event of default under the Indenture or the
Corporation's currently outstanding indebtedness.
If the Trust shall be the sole holder of the Junior Subordinated
Debentures, the Corporation shall give the Property Trustee and the Indenture
Trustee notice of its selection of such Extension Period ten Business Days prior
to the earlier of (i) the date the distributions on the Trust Preferred
Securities are payable or (ii) the date the Trust is required to give notice to
the NYSE or other applicable self-regulatory organization or to holders of the
Trust Preferred Securities of the record date or the date such distribution is
payable, but in any event not less than one Business Day prior to such record
date. The Trust shall give notice of the Corporation's selection of such
Extension Period to the holders of the Trust Preferred Securities.
If Junior Subordinated Debentures have been distributed to holders of
Trust Securities, the Corporation shall give the holders of the Junior
Subordinated Debentures notice of its selection of such Extension Period ten
Business Days prior to the earlier of (i) the next succeeding interest payment
date or (ii) the date the Corporation is required to give notice to the NYSE (if
the Junior Subordinated Debentures are then listed thereon) or other applicable
self-regulatory organization or to holders of the Junior Subordinated Debentures
of the record or payment date of such related interest payment.
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Compounded Interest
The Corporation will make payments of Compounded Interest to the Trust
with respect to the Junior Subordinated Debentures held by the Trust, and the
Property Trustee will make such funds available to pay any interest on
distributions in arrears in respect of the Trust Preferred Securities pursuant
to the terms thereof.
Certain Covenants of the Corporation Applicable
to the Junior Subordinated Debentures
In the Indenture, the Corporation will covenant that, so long as any Trust
Preferred Securities remain outstanding, the Corporation will not declare or pay
any dividends on, or redeem, purchase, acquire or make a distribution or
liquidation payment with respect to, any of its common stock or preferred stock
or make any guarantee payment with respect thereto if at such time (i) the
Corporation shall be in default with respect to its Guarantee Payments or other
payment obligations under the Preferred Securities Guarantee, (ii) there shall
have occurred any Indenture Event of Default with respect to the Junior
Subordinated Debentures or (iii) the Corporation shall have given notice of its
selection of an Extension Period as provided in the Indenture and such period,
or any extension thereof, is continuing. In addition, so long as the Trust
Preferred Securities remain outstanding, the Corporation has agreed (i) not to
cause or permit the Trust Common Securities to be transferred except to the
extent permitted by the Declaration, provided that any permitted successor of
the Corporation under the Indenture may succeed to the Corporation's ownership
of the Trust Common Securities, (ii) to comply fully with all of its obligations
and agreements contained in the Declaration and (iii) not to take any action
which would cause the Trust to cease to be treated as a grantor trust for United
States federal income tax purposes except in connection with a distribution of
Junior Subordinated Debentures.
Subordination
The Indenture provides that the Junior Subordinated Debentures are
subordinate and junior in right of payment to all Senior Indebtedness of the
Corporation. In the event (a) of any insolvency or bankruptcy proceedings, or
any receivership, liquidation, reorganization or other similar proceedings in
respect of the Corporation or its property or any proceeding for voluntary
liquidation, dissolution or other winding up of the Corporation, or (b) Junior
Subordinated Debentures are declared due and payable before their expressed
maturity because of the occurrence of an Indenture Event of Default (under
circumstances other than as set forth in clause (a) above), then the holders of
all Senior Indebtedness shall first be entitled to receive payment of the full
amount due thereon in money, before the holders of any of the Junior
Subordinated Debentures are entitled to receive a payment on account of the
principal of, premium, if any, or interest on the indebtedness evidenced by such
Junior Subordinated Debentures. In the event and during the continuation of any
default in payment of any Senior Indebtedness or if any event of default shall
exist under any Senior Indebtedness resulting in the acceleration of the
maturity thereof, or the right to accelerate maturity thereof, as "event of
default" is defined therein or in the agreement under which the same is
outstanding, then no payment of the principal of, premium, if any, or interest
on the Subordinated Debentures shall be made.
The term "Senior Indebtedness" shall mean the principal of and premium, if
any, and interest on (a) all indebtedness of the Corporation, whether
outstanding on the date of the Indenture or thereafter created, (i) for money
borrowed by the Corporation,(ii) for money borrowed by, or obligations of,
others and either assumed or guaranteed, directly or indirectly, by the
Corporation, (iii) in respect of letters of credit and acceptances issued or
made by banks, or (iv) constituting purchase money indebtedness, or indebtedness
secured by property included in the property, plant and equipment accounts of
the Corporation at the time of the acquisition of such property by the
Corporation, for the payment of which the Corporation is directly liable, and
(b) all deferrals, renewals, extensions and refundings of, and amendments,
modifications and supplements to, any such indebtedness. As used in the
preceding sentence the term "purchase money indebtedness" means indebtedness
evidenced by a note, debenture, bond or other instrument (whether or not secured
by any lien or other security interest) issued or assumed as all or a part of
the consideration for the acquisition of property, whether by purchase, merger,
consolidation or otherwise, unless by its terms such indebtedness is subordinate
to other indebtedness of the Corporation. Notwithstanding anything to the
contrary in the Indenture or the Junior Subordinated Debentures, Senior
Indebtedness shall not include (i) amounts owed to trade creditors in the
ordinary course of business, (ii) any indebtedness of the Corporation which, by
its terms or the terms of the instrument creating or evidencing it, is
subordinate in right of payment to or pari passu with the Junior Subordinated
Debentures, as the case may be, and, in particular, the Junior Subordinated
Debentures shall rank pari passu with respect to all other debt securities and
guarantees in respect thereof issued to any other trusts, partnerships or other
entity affiliated with the Corporation which is a financing vehicle of the
Corporation in connection with the issuance of preferred securities by such
financing vehicle, or (iii) any indebtedness of the Corporation to a subsidiary
of the Corporation.
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The Indenture does not limit the aggregate amount of indebtedness,
including Senior Indebtedness, that may be issued. Because the Corporation will
be a holding company after the Merger, the Junior Subordinated Debentures will
be effectively subordinated to all existing and future liabilities, including
trade payables, of the Corporation's subsidiaries. Any right of the Corporation
to participate in any distribution of the assets of any of the Corporation's
subsidiaries, including the Operating Partnership, upon the liquidation,
reorganization or insolvency of such subsidiary (and the consequent right of the
holders of the Junior Subordinated Debentures to participate in those assets)
will be subject to the claims of the creditors (including trade creditors) and
preferred stockholders of such subsidiary, except to the extent that claims of
the Corporation itself as a creditor of such subsidiary may be recognized, in
which case the claims of the Corporation would still be subordinate to any
security interest in the assets of such subsidiary and any indebtedness of such
subsidiary senior to that held by the Corporation. At September 30, 1996, the
Operating Partnership had outstanding indebtedness of $81,186,000, all of which
had been guaranteed by the Partnership. For a discussion of indebtedness to be
outstanding after the Merger, see "CAPITALIZATION." There are no terms in the
Trust Preferred Securities, the Junior Subordinated Debentures or the Preferred
Securities Guarantee that limit the Corporation's ability to incur additional
indebtedness, including indebtedness that ranks senior to or pari passu with the
Junior Subordinated Debentures and the Preferred Securities Guarantee, or the
ability of its subsidiaries to incur additional indebtedness. See "DESCRIPTION
OF PREFERRED SECURITIES GUARANTEE -- Status of the Preferred Securities
Guarantee."
Indenture Events of Default
The Indenture provides that any one or more of the following described
events, which has occurred and is continuing, constitutes an "Indenture Event of
Default" with respect to the Junior Subordinated Debentures:
(a) failure for 30 days to pay interest on the Subordinated
Debentures when due; provided that a valid extension of the interest payment
period by the Corporation shall not constitute a default in the payment of
interest for this purpose; or
(b) failure to pay principal of or premium, if any, on the Junior
Subordinated Debentures when due whether at maturity, upon redemption, by
declaration or otherwise; or
(c) failure to observe or perform any other covenant contained in
the Indenture with respect to the Junior Subordinated Debentures for 90 days
after written notice to the Corporation from the Indenture Trustee or the
holders of at least 25% in principal amount of the outstanding Junior
Subordinated Debentures; or
(d) certain events in bankruptcy, insolvency or reorganization of
the Corporation.
In each and every such case, unless the principal of all the Junior
Subordinated Debentures of shall have already become due and payable, either the
Indenture Trustee or the holders of not less than 25% in aggregate principal
amount of the Junior Subordinated Debentures then outstanding, by notice in
writing to the Corporation (and to the Indenture Trustee if given by such
holders), may declare the principal of all the Junior Subordinated Debentures to
be due and payable immediately, and upon any such declaration the same shall
become and shall be immediately due and payable.
The holders of a majority in aggregate outstanding principal amount of the
Junior Subordinated Debentures have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Indenture
Trustee. The Indenture Trustee or the holders of not less than 25% in aggregate
outstanding principal amount of the Junior Subordinated Debentures may declare
the principal due and payable immediately upon an Indenture Event of Default,
but the holders of a majority in aggregate outstanding principal amount of the
Junior Subordinated Debentures may annul such declaration and waive the default
if the default has been cured and a sum sufficient to pay all matured
installments of interest and principal otherwise than by acceleration and any
premium has been deposited with the Indenture Trustee.
The holders of a majority in aggregate outstanding principal amount of the
Junior Subordinated Debentures then outstanding may, on behalf of the holders of
all the Junior Subordinated Debentures, waive any past default, except a default
in the payment of principal, premium, if any, or interest (unless such default
has been cured and a sum sufficient to pay all matured installments of interest
and principal otherwise than by acceleration and any premium has been deposited
with the Indenture Trustee) or a call for redemption of Junior Subordinated
Debentures. The Corporation is required to file annually with the Indenture
Trustee a certificate as to whether or not the Corporation is in compliance with
all the conditions and covenants under the Indenture.
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An Indenture Event of Default also constitutes an Event of Default under
the Declaration. See "DESCRIPTION OF TRUST PREFERRED SECURITIES -Declaration
Events of Default."
Modification of the Indenture
The Indenture contains provisions permitting the Corporation and the
Indenture Trustee, with the consent of the holders of not less than a majority
in principal amount of the outstanding Junior Subordinated Debentures, to modify
the Indenture or any supplemental indenture affecting the rights of the holders
of such Junior Subordinated Debentures; provided that no such modification may,
without the consent of the holder of each outstanding Junior Subordinated
Debenture affected thereby, (i) change the time for payment of principal or
interest on any Junior Subordinated Debenture; (ii) reduce the principal of , or
any installment of principal of, or interest on, or reduce any premium payable
upon the redemption of, any Junior Subordinated Debenture; (iii) change the coin
or currency in which any Junior Subordinated Debenture or interest thereon is
payable; (iv) impair the right to institute suit for the enforcement of any
payment on or with respect to any Junior Subordinated Debenture; (v) reduce the
percentage in principal amount of the outstanding Junior Subordinated Debentures
the consent of which holders is required for modification or amendment of the
Indenture or for waiver of compliance with certain provisions of the Indenture
or for waiver of certain defaults; (vi) change the obligation of the Corporation
to maintain an office or agency in the places and for the purposes specified in
the Indenture; (vii) modify the provisions relating to waiver of certain
defaults or any of the foregoing provisions; or (viii) modify the provisions
with respect to the subordination of the Junior Subordinated Debentures.
Book-Entry and Settlement
If any Junior Subordinated Debentures are distributed to holders of Trust
Preferred Securities (see "DESCRIPTION OF TRUST PREFERRED SECURITIES"), such
Junior Subordinated Debentures will be issued in fully registered form. In such
event, investors may elect to hold their Junior Subordinated Debentures directly
or, subject to the rules and procedures of DTC, hold interests in a global
certificate registered in the name of DTC or its nominee.
For a description of DTC and DTC's book-entry system, see "DESCRIPTION OF
TRUST PREFERRED SECURITIES -- Book-Entry; Delivery and Form." As of the date of
this Proxy Statement/Prospectus, the description herein of DTC's book-entry
system and DTC's practices as they relate to purchases, transfers, notices and
payments with respect to the Trust Preferred Securities apply in all material
respects to any Junior Subordinated Debentures registered in the name of and
held by DTC or its nominee.
Consolidation, Merger and Sale
The Indenture provides that the Corporation may not consolidate with or
merge into any other person or sell, convey, transfer or lease or otherwise
dispose of all or substantially all of its properties and assets to any person
and may not permit any person to merge into or consolidate with the Corporation
unless (i) either the Corporation will be the resulting or surviving entity or
any successor or purchaser is a corporation organized under the laws of the
United States of America, any State or the District of Columbia, and any such
successor or purchaser expressly assumes the Corporation's obligations under the
Indenture and (ii) immediately after giving effect to the transaction no
Indenture Event of Default, and no event which, after notice or lapse of time or
both, would become an Indenture Event of Default, shall have occurred and be
continuing.
Defeasance and Discharge
Under the terms of the Indenture, the Corporation will be discharged from
any and all obligations in respect of the Junior Subordinated Debentures (except
in each case for certain obligations to register the transfer or exchange of
Junior Subordinated Debentures, replace stolen, lost or mutilated Junior
Subordinated Debentures, maintain paying agencies and hold moneys for payment in
trust) if (i) the Corporation irrevocably deposits with the Indenture Trustee
cash or U.S. Government Obligations, as trust funds in an amount certified to be
sufficient to pay at maturity (or upon redemption) the principal of, premium, if
any, and interest on all outstanding Junior Subordinated Debentures; (ii) the
Corporation delivers to the Indenture Trustee an opinion of counsel to the
effect that the holders of the Junior Subordinated Debentures will not recognize
income, gain or loss for United States federal income tax purposes as a result
of such defeasance and that defeasance will not otherwise alter such holders'
United States federal income tax treatment of principal, premium and interest
payments on such Junior Subordinated Debentures (such opinion must be based on a
ruling of the Internal Revenue Service or a change in United States federal
income tax law occurring after the date of such Indenture, since such a result
would not occur under current tax law); and (iii) no event or condition shall
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exist that, pursuant to certain provisions described under "- Subordination"
above, would prevent the Corporation from making payments of principal of,
premium, if any, and interest on the Junior Subordinated Debentures at the date
of the irrevocable deposit referred to above.
Governing Law
The Indenture and the Junior Subordinated Debentures will be governed by,
and construed in accordance with, the laws of the State of New York.
Information Concerning the Indenture Trustee
The Indenture Trustee, prior to default, undertakes to perform only such
duties as are specifically set forth in the Indenture and, after default, shall
exercise the same degree of care as a prudent individual would exercise in the
conduct of his or her own affairs. Subject to such provision, the Indenture
Trustee is under no obligation to exercise any of the powers vested in it by the
Indenture at the request of any holder of Junior Subordinated Debentures, unless
offered reasonable indemnity by such holder against the costs, expenses and
liabilities that might be incurred thereby. The Indenture Trustee is not
required to expend or risk its own funds or otherwise incur personal financial
liability in the performance of its duties if the Trustee reasonably believes
that repayment or adequate indemnity is not reasonably assured to it. The
Indenture Trustee is one of a number of banks with which the Corporation and its
subsidiaries maintain ordinary banking and trust relationships.
Miscellaneous
The Corporation will have the right at all times to assign any of its
rights or obligations under the Indenture to a direct or indirect wholly owned
subsidiary of the Corporation; provided that, in the event of any such
assignment, the Corporation will remain jointly and severally liable for all
such obligations. Subject to the foregoing, the Indenture will be binding upon
and inure to the benefit of the parties thereto and their respective successors
and assigns. The Indenture provides that it may not otherwise be assigned by the
parties thereto other than by the Corporation to a successor or purchaser
pursuant to a consolidation, merger or sale permitted by the Indenture.
RELATIONSHIP AMONG THE TRUST PREFERRED SECURITIES, THE JUNIOR SUBORDINATED
DEBENTURES AND THE PREFERRED SECURITIES GUARANTEE
As long as payments of interest and other payments are made when due on
the Junior Subordinated Debentures, such payments will be sufficient to cover
distributions and other payments due on the Trust Preferred Securities primarily
because (i) the aggregate principal amount of Junior Subordinated Debentures
held as trust assets will be equal to the sum of the aggregate stated
liquidation amount of the Trust Preferred Securities and the proceeds received
by the Trust upon issuance of the Trust Common Securities to the Corporation;
(ii) the interest rate and interest and other payment dates on the Junior
Subordinated Debentures will match the distribution rate and distribution and
other payment dates for the Trust Preferred Securities; (iii) the Indenture and
Declaration provides that the Corporation shall pay for all debts and
obligations (other than with respect to the Trust Securities) and all costs and
expenses of the Trust, including any taxes and all costs and expenses with
respect thereto, to which the Trust may become subject, except for United States
withholding taxes; and (iv) the Declaration further provides that the Trustees
shall not cause or permit the Trust, among other things, to engage in any
activity that is not consistent with the limited purposes of the Trust. With
respect to clause (iii) above, however, no assurance can be given that the
Corporation will have sufficient resources to enable it to pay such debts,
obligations, costs and expenses on behalf of the Trust.
Payments of distributions and other payments due on the Trust Preferred
Securities are guaranteed by the Corporation on a subordinated basis as and to
the extent set forth under "DESCRIPTION OF PREFERRED SECURITIES GUARANTEE." If
the Corporation does not make interest or other payments on the Junior
Subordinated Debentures, the Trust will not make distributions or other payments
on the Trust Preferred Securities. Under the Declaration, if and to the extent
the Corporation does make interest or other payments on the Junior Subordinated
Debentures, the Property Trustee is obligated to make distributions or other
payments on the Trust Preferred Securities. The Preferred Securities Guarantee
is a guarantee from the time of issuance of the Trust Preferred Securities, but
the Preferred Securities Guarantee covers distributions and other payments on
the Trust Preferred Securities only if and to the extent that the Corporation
has made a payment to the Property Trustee of interest or principal on the
Junior Subordinated Debentures deposited in the Trust as trust assets. In the
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event the Corporation fails to make such payments, a holder of Trust Preferred
Securities may institute a legal proceeding directly against the Corporation
under the Indenture to enforce payment of such distributions to such holder
after the respective due dates. Taken together, the Corporation's obligations
under the Junior Subordinated Debentures, the Indenture and the Preferred
Securities Guarantee provide, in the aggregate, a full and unconditional
guarantee of payments of distributions and other amounts due on the Trust
Preferred Securities. No single document standing alone or operating in
conjunction with fewer than all of the other documents constitutes such
guarantee. It is only the combined operation of these documents that has the
effect of providing a full and unconditional guarantee of the Trust's
obligations under the Trust Preferred Securities.
If an Appointment Event occurs, the Declaration provides that the holders
of the Trust Preferred Securities may appoint a Special Regular Trustee who will
have the same rights, powers and privileges under the Declaration as the Regular
Trustees. The Property Trustee will have the power to exercise all rights,
powers and privileges under the Indenture with respect to the Junior
Subordinated Debentures, including its rights as the holder of the Junior
Subordinated Debentures to enforce the Corporation's obligations under the
Junior Subordinated Debentures upon the occurrence of an Indenture Event of
Default, and will also have the right to enforce the Preferred Securities
Guarantee on behalf of the holders of the Trust Preferred Securities. In
addition, the holders of at least a majority in liquidation amount of the Trust
Preferred Securities will have the right to direct the Property Trustee with
respect to certain matters under the Declaration and the Preferred Securities
Guarantee. Under certain circumstances, holders of Trust Preferred Securities
may institute a legal proceeding against the Corporation to enforce the
Preferred Securities Guarantee and the Corporation's payment obligations on the
Junior Subordinated Debentures. See "DESCRIPTION OF TRUST PREFERRED SECURITIES"
and "DESCRIPTION OF PREFERRED SECURITIES GUARANTEE."
The above mechanisms and obligations, taken together, constitute a full
and unconditional guarantee by the Corporation of payments due on the Trust
Preferred Securities.
If a Special Event shall occur and be continuing, the Trust shall be
dissolved unless the Junior Subordinated Debentures are redeemed in the limited
circumstances described below, with the result that Junior Subordinated
Debentures held by the Trust having an aggregate principal amount equal to the
aggregate stated liquidation amount of the Trust Preferred Securities and Trust
Common Securities will be distributed on a Pro Rata Basis in exchange for the
outstanding Trust Preferred Securities and Trust Common Securities, subject in
the case of a Tax Event to the Corporation's right in certain circumstances to
redeem Junior Subordinated Debentures as described under "DESCRIPTION OF TRUST
PREFERRED SECURITIES -- Special Event Redemption or Distribution." The Trust
Preferred Securities represent preferred undivided beneficial interests in the
assets of the Trust, a statutory business trust which exists for the purpose of
(a) issuing (i) its Trust Preferred Securities pursuant to the Conversion to
holders of A Interests in consideration for the deposit by the Corporation of
Junior Subordinated Debentures in the Trust as trust assets, and (ii) its Trust
Common Securities to the Corporation 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.
Upon any voluntary or involuntary dissolution, winding-up or termination
of the Trust, the holders of Trust Preferred Securities will be entitled to
receive the Liquidation Distribution in cash or Junior Subordinated Debentures
and will be entitled to the benefits of the Preferred Securities Guarantee with
respect to any such distribution. See "DESCRIPTION OF TRUST PREFERRED SECURITIES
- -- Liquidation Distribution Upon Dissolution." Upon any voluntary or involuntary
liquidation or bankruptcy of the Corporation, the holders of Junior Subordinated
Debentures would be subordinated creditors of the Corporation, subordinated in
right of payment to all Senior Indebtedness, but entitled to receive payment in
full of principal, premium, if any, and interest, before any stockholders of the
Corporation receive payments or distributions.
A default or event of default under any Senior Indebtedness would not
constitute a default or event of default under the Junior Subordinated
Debentures. However, in the event of payment defaults under, or acceleration of,
Senior Indebtedness, the subordination provisions of the Junior Subordinated
Debentures provide that no payments may be made in respect of the Junior
Subordinated Debentures. Failure to make required payments on the Junior
Subordinated Debentures would constitute an event of default under the
Indenture.
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DESCRIPTION OF CAPITAL STOCK
Preferred Stock
The Certificate of Incorporation of the Corporation authorizes the
issuance of 1,000,000 shares of Preferred Stock, par value $.01 per share, by
the Board of Directors in one or more classes or series and with such voting
powers, designations, preferences and relative participating, optional or other
special rights and such qualifications, limitations, or restrictions thereof as
shall be set forth in the resolutions of the Board of Directors authorizing such
issuance. There will be no shares of Preferred Stock outstanding after the
Merger. There will be reserved for issuance 64,189 shares of Series A Junior
Participating Preferred Shares pursuant to the Corporation's Stockholder Rights
Plan. See "-- Stockholder Rights Plan."
Common Stock
The Certificate of Incorporation of the Incorporation authorizes the
issuance of 20,000,000 shares of Common Stock, par value of $.01 per share, of
which 1,000 shares are currently outstanding and owned by the Partnership. After
the Merger, there will be 6,418,936 shares of Common Stock outstanding.
Holders of shares of the Corporation's Common Stock are entitled to one
vote per share on all matters to be voted upon by the stockholders. There are no
cumulative voting rights with respect to the election of directors. Subject to
preferences that may be applicable to any outstanding Preferred Stock, holders
of shares of Common Stock are entitled to receive ratably such dividends, if
any, as may be declared from time to time by the Board of Directors out of funds
legally available therefor. In the event of liquidation, dissolution or winding
up of the Corporation, the holders of shares of Common Stock are entitled to
share ratably in all assets after satisfaction of liabilities, subject to prior
distribution rights of Preferred Stock, if any, then outstanding. Shares of
Common Stock have no preemptive, conversion or other subscription rights and
there are no redemption or sinking fund provisions applicable to the Common
Stock.
Stockholders Agreement
The Corporation and certain of its stockholders have entered into a
Stockholders Agreement dated as of _____________, that contains certain
restrictions with respect to voting and sale of shares of Common Stock. The
Stockholders Agreement requires the Corporation to include certain provisions in
its bylaws. See "-- Bylaw Provisions." In addition, the Stockholders Agreement
provides that Lehman Brothers and each of the following members of management,
Donald T. Marshall, John P. McDonnell, Norman V. Edmonson, Harold J. Cornelius,
Max W. Hillman and Joseph M. Corvino (the "Senior Executives") will agree with
the Corporation not to sell any shares of Common Stock that they beneficially
own, in a single transaction or series of related transactions, to any third
person(s) which, to the knowledge of Lehman Brothers and its affiliates and the
Senior Executives, after reasonable inquiry, would beneficially own after such
transactions more than 10% of the outstanding Common Stock (or more than 15% of
the outstanding common stock if such third person(s) are eligible to report the
acquisition of such shares on Schedule 13G pursuant to clauses (i), (ii) and
(iii) of Rule 13d-1(b)(1) under the Exchange Act, as such rule is currently in
effect.) The Stockholders Agreement also contains provisions that restrict the
respective voting power of Lehman Brothers and the Senior Executives. Under the
terms of such restriction, such persons will agree to vote, in the same
proportion as the "Unaffiliated Shares" that are voted on any such matter, that
percentage of Excess Voting Shares held by them at such time that equals the
percentage of outstanding Unaffiliated Shares that are voted on such matter.
"Excess Voting Shares" means the shares of Common Stock beneficially owned by
Lehman Brothers and its affiliates and the Senior Executives, at any time, that
represents voting power in excess of the respective voting powers immediately
prior to the Conversion that they would have had in a vote of the holders of A
Interests and B Interests voting together as a single class. See also "-- Bylaw
Provisions" below.
The Stockholders Agreement contains a provision regarding nomination of
the Board of Directors of the Corporation. The Board of Directors of the
Corporation will consist of up to nine members, of whom three will be nominated
by management, four will be independent and either one or two will be appointed
by Lehman Brothers, depending upon the percentage of Common Stock held by Lehman
Brothers.
-114-
<PAGE>
Anti-takeover Provisions
Certain provisions of the Corporation's Bylaws, the Stockholder Rights
Plan and the change in control provisions in the Deferred Compensation Plans
could have an anti-takeover effect. See "MANAGEMENT -- Change in Control
Arrangements." These provisions are intended to enhance the likelihood of
continuity and stability in the composition of the Corporation's Board of
Directors and management and in the policies formulated by the Board of
Directors and to discourage an unsolicited takeover of the Corporation if the
Board of Directors determines that the takeover is not in the best interests of
the Corporation and its stockholders. However, these provisions could have the
effect of discouraging certain attempts to acquire the Corporation or remove
incumbent management even if some or a majority of stockholders deemed such an
attempt to be in their best interests.
Bylaws Provisions. The Bylaws provide that any action required or
permitted to be taken by the stockholders of the Corporation may be effected
only at an annual or special meeting of stockholders. Stockholders are permitted
to call a special meeting or to require that the Board of Directors call a
special meeting of stockholders if such meeting is called by holders of at least
25% of outstanding Common Stock. In addition, the stockholders may act by
written consent in lieu of a meeting with a number of votes sufficient for such
action.
The Bylaws establish an advance notice procedure for the nomination of
candidates for election as directors, other than by or at the direction of the
Board of Directors, as well as for other stockholder proposals to be considered
at annual meetings of stockholders. In general, notice of intent to nominate a
director or raise business at such meetings must be received at least 60 days
prior to any annual meeting and must contain certain specified information
concerning the persons to be nominated or the matters to be brought before the
meeting and concerning the stockholder submitting the proposal.
Pursuant to the terms of the Stockholders Agreement, the Bylaws provide
that prior to the third anniversary of the date of the Conversion, the approval
of at least a majority of the Corporation's Independent Directors is required to
approve and authorize (i) amendments to the Corporation's Certificate of
Incorporation or Bylaws or any stockholder rights plan of the Corporation
(including the redemption of the rights thereunder or waiver of any provision
thereof) or any waiver of, or "opt-out" from, the benefit or effect of any
anti-takeover statute or other provision applicable to the Corporation
(including Section 203 of the Delaware General Corporation Law) or (ii) any
agreement binding the Corporation in respect of the sale, in a single
transaction or a series of related transactions, of all or a substantial part of
the Corporation. In addition, the approval of at least a majority of the
Corporation's Independent Directors is required to approve and authorize (i) any
transaction or series of related transactions between the Corporation or any of
its subsidiaries, on the one hand, and SDI Partners I, L.P., Lehman Brothers
Capital Partners I, Lehman/SDI, Inc. or Lehman Brothers Inc. or any affiliate of
these entities on the other, so long as any of such entities and its affiliates
own, in the aggregate, at least 10% of the outstanding Common Stock, (ii) any
amendment to, or waiver of, any provision of the Stockholders Agreement, or
(iii) any amendment to the Certificate of Incorporation or Bylaws that would
amend these restrictive provisions.
Stockholder Rights Plan. The Corporation has adopted a Stockholder Rights
Plan pursuant to a Rights Agreement, dated as of the Effective Time, between the
Corporation and ___________. The Plan is designed to insure that all
stockholders of the Corporation receive fair value for their shares of Common
Stock in the event of any proposed takeover of the Corporation and to guard
against the use of partial tender offers or other coercive tactics to gain
control of the Corporation without offering fair value to the Corporation's
stockholders. Under the Rights Plan, each share of Common Stock will have
attached thereto a Right. Each Right entitles the registered holder to purchase
from the Corporation one one-hundredth of a share of Series A Junior
Participating Preferred Shares, par value $.01 per share, of the Corporation
(the "Preferred Shares"), or a combination of securities and assets of
equivalent value, at a Purchase Price of ________, subject to adjustment. The
Purchase Price may be paid, at the option of the holder, in cash or shares of
Common Stock having a value at the time of exercise equal to the Purchase Price.
Until the Distribution Date, ownership of the Rights will be evidenced by
and will be transferred with and only with the certificates representing the
shares of Common Stock, and no separate Rights Certificates will be distributed.
The Distribution Date will occur upon the earlier of (i) 10 days following a
public announcement that a person or group has acquired, or obtained the right
to acquire, beneficial ownership of 20% or more of the outstanding shares of
Common Stock, or (ii) the close of business on a date fixed by the Board of
Directors following the commencement of a tender offer or exchange offer that
would result in a person or group beneficially owning 20% or more of the
outstanding shares of Common Stock. The Rights are not exercisable until the
Distribution Date and will expire at the close of business on April 30, 2007,
unless earlier redeemed by the corporation as described below. The percentage
ownership of shares of Common Stock by Lehman Brothers after the Conversion will
not cause a Distribution Date to occur.
-115-
<PAGE>
Except in the circumstances described below, after the Distribution Date
each Right will be exercisable into one one-hundredth of a Preferred Share (a
"Preferred Share Fraction"). Each Preferred Share Fraction carries voting and
dividend rights that are intended to produce the equivalent of one share of
Common Stock. Each Preferred Share Fraction will entitle the holder to receive
dividends each calendar quarter in an amount equal to the greater of $.02 or the
aggregate per share amount in cash of all dividends or other distributions
(other than dividends payable in Common Stock) declared on the Common Stock
during the preceding quarter. Each Preferred Share Fraction will entitle the
holder to one vote on all matters submitted to a vote of the stockholders of the
Corporation. Each Preferred Share Fraction will have a liquidation preference
equal to the greater of $1.00 per share, plus accrued dividends, or an amount
per share equal to the aggregate amount to be distributed per share to holders
of Common Stock. The Preferred Share Fractions are not redeemable.
It is unlikely that a holder of a Right will ever exercise the Right to
receive Preferred Shares. The Rights may be exercised if a "Flip-in" or
"Flip-over" event occurs.
If a "Flip-in" event occurs and the Distribution Date has passed, the
holder of each Right, with the exception of the Acquiror, is entitled to
purchase $______ worth of Common Shares for $_____. The Rights will no longer be
exercisable into Preferred Shares at that time. A "Flip-in" event takes place if
one of the following happens:
o A person or group acquires 20% or more of the outstanding Common Stock.
o A 20% stockholder merges with or acquires the Corporation and an equity
security of the Corporation remains outstanding.
o A 20% stockholder engages in "self-dealing" transactions with the
Corporation. Examples of this are the receipt of stock from the
Corporation or the sale of assets by the 20% stockholder to the
Corporation on the terms and conditions less favorable to the Company
than the Company would be able to obtain in an arm's length negotiation
with an unaffiliated third party.
If a "Flip-over" event occurs, the holder of Rights is entitled to
purchase $_____ worth of the Acquiror's stock for $_____ for each Right held. A
"Flip-over" event occurs if the Corporation is acquired or merged and no
outstanding shares remain or if 50% of the Corporation's assets or earning power
is sold or transferred. The Rights Plan prohibits the Corporation from entering
into this sort of transaction unless the Acquiror agrees to comply with the
"Flip-over" provisions of the Plan.
The Rights can be redeemed by the Corporation for $.01 per right until up
to ten days after the public announcement that someone has acquired 20% or more
of the Corporation's Common Shares or the Board can extend the redemption period
for as long as it determines appropriate. If the Rights are not redeemed or
substituted by the Corporation, they will expire on April 30, 2007.
Limitation of Liability
As permitted by the Delaware General Corporation Law (the "DGCL"), the
Corporation's Certificate of Incorporation provides that directors of the
Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL, relating to prohibited dividends or distributions or
the repurchase or redemption of stock, or (iv) for any transaction from which
the director derives an improper personal benefit.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Common Stock is Registrar and
Transfer Company.
-116-
<PAGE>
RESALE OF SECURITIES
Securities Act Restrictions
Trust Preferred Securities and shares of Common Stock received by persons
who may be deemed to be "affiliates" of the Partnership may be sold by those
persons only in accordance with the provisions of Rule 145 under the Securities
Act, pursuant to an effective registration under the Securities Act or in
transactions that are exempt from registration under the Securities Act. Rule
145 provides, in general, that the securities may be sold by the affiliate
during the one year following the date the securities were acquired from the
Corporation if (i) there is available adequate current public information with
respect to the Corporation and (ii) the number of Trust Preferred Securities or
shares of Common Stock sold within any three month period does not exceed the
greater of 1% of the total number of outstanding Trust Preferred Securities or
shares of Common Stock, as the case may be, or the average weekly trading volume
of the particular security during the four calendar weeks immediately preceding
the date of receipt of the order to execute the transaction by a broker or the
date of execution of the transaction directly with a market maker and (iii) the
securities are sold in transactions directly with a "market maker" or in
"brokers' transactions" within the meaning of Rule 144 under the Securities Act.
Rule 145 further provides that during the second year following the date the
securities were acquired from the Corporation the affiliate may sell such
securities if the affiliate is not an affiliate of the Corporation and there is
available adequate public information with respect to the Corporation, and
thereafter the affiliate may sell the securities without restriction if the
affiliate is not, and has not been for at least three months, an affiliate of
the Corporation.
Resales by Lehman Brothers and Management
Lehman Brothers and Messrs. Marshall, McDonnell and Edmonson have agreed
to cooperate to execute an underwritten secondary offering of their shares of
Common Stock, as soon as practicable after the effective date of the Conversion
pursuant to the registration rights described below, subject to market
conditions. Such parties have agreed not to sell their shares of Common Stock
prior to such secondary offering; provided that such restriction will lapse with
respect to sales pursuant to Rule 144 or Rule 145 under the Securities Act if
the secondary offering has not been consummated within nine months after the
effective date of the Conversion. Notwithstanding the foregoing, such parties
have agreed that Lehman Brothers Capital Partners I L.P. may distribute shares
of Common Stock that it holds to its partners at any time and that the
subsequent sale or transfer of such shares by such partners (other than shares
distributed to the general partner of Lehman Brothers Capital Partners I L.P.)
is not restricted.
In connection with the foregoing, the Corporation has entered into a
registration rights agreement with Lehman Brothers and Messrs. Marshall,
McDonnell and Edmonson affording registration rights with respect to all of the
shares of Common Stock to be acquired by Lehman Brothers pursuant to the
Conversion and 20% of the shares of Common Stock to be acquired by such
individuals pursuant to the Conversion. Lehman Bothers has the right to demand
registration of all or part of its registrable shares in the contemplated
initial secondary offering and registration of any remaining shares pursuant to
a shelf registration statement. Such individuals have the right to register
their registrable shares on a pro rata basis with Lehman Brothers in the initial
secondary offering. In addition, Lehman Brothers and such individuals have
piggy-back registration rights with respect to all subsequent primary and
secondary offerings of Common Stock.
The Corporation has agreed not to sell any additional shares of Common
Stock prior to the earlier of such initial secondary offering and the nine-month
anniversary of the Conversion, except in connection with acquisitions.
LEGAL MATTERS
The validity of the securities offered hereby, and certain federal income
tax matters set forth under "CERTAIN FEDERAL INCOME TAX CONSEQUENCES," will be
passed upon for the Partnership by Morgan, Lewis & Bockius LLP, Philadelphia,
Pennsylvania. Morgan, Lewis & Bockius LLP will rely as to certain matters of
Delaware law on Richards, Layton & Finger, Wilmington, Delaware. Donald A.
Scott, a partner in Morgan, Lewis & Bockius LLP, is a director of the
Partnership and will become a director of the Corporation.
-117-
<PAGE>
EXPERTS
The consolidated financial statements of the Partnership at December 31,
1995 and 1994 and for each of the three years in the period ended December 31,
1995 have been audited by Coopers & Lybrand L.L.P., independent accountants, as
set forth in their report dated March 8, 1996, and are included in reliance upon
such report and the authority of such firm as experts in accounting and
auditing.
AVAILABLE INFORMATION
The Partnership is (and following the Conversion, the Corporation will be)
subject to the informational requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and in accordance therewith files (and
will file) reports and other information with the Securities and Exchange
Commission (the "SEC"). Such reports and other information may be inspected and
copied at the public reference facilities maintained by the SEC, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the SEC's Regional Offices at Seven
World Trade Center, New York, New York 10048, and at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of this
material should also be available on-line through EDGAR and may be obtained at
the prescribed rates from the Public Reference Section of the SEC at its
principal office in Washington, D.C. The SEC also maintains a Web site
(http://www.sec.gov) that contains reports and other information regarding
SunSource. Such reports and other information concerning the Partnership can
also be inspected at the office of the New York Stock Exchange, 20 Broad Street,
New York, New York 10005, the exchange on which the limited partnership
interests are listed (and on which application has been made to list the Trust
Preferred Securities and Common Stock).
The Partnership, the General Partner and Lehman/SDI have filed with the
SEC a Schedule 13E-3 under the Exchange Act. The Corporation and the Trust have
filed with the SEC a Registration Statement on Form S-4 under the Securities Act
of 1933, as amended (the "Securities Act") with respect to the securities
offered hereby. This Proxy Statement/Prospectus, which constitutes part of the
Registration Statement, omits certain of the information contained in the
Schedule 13E-3 and in the Registration Statement and the exhibits and schedules
thereto on file with the SEC pursuant to the Exchange Act and the Securities Act
and the rules and regulations of the SEC thereunder. Statements contained in
this Proxy Statement/Prospectus as to the contents of any contract or other
document are necessarily summaries of such documents, and, although all material
elements of such documents or descriptions are set forth in this Proxy
Statement/Prospectus, such statements are not necessarily complete and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement or Schedule 13E-3, each such
statement being qualified in all respects by such reference.
No separate financial statements of the Trust have been included or
incorporated by reference herein. The Corporation and the Trust do not consider
that such financial statements would be material to holders of Trust Preferred
Securities because (i) all of the voting securities of the Trust will be owned,
directly or indirectly, by the Corporation, a reporting company under the
Exchange Act, (ii) the Trust has no independent operations but exists for the
sole purpose of issuing securities representing undivided beneficial interests
in its assets and investing the proceeds thereof in Junior Subordinated
Debentures issued by the Corporation, and (iii) the obligations of the Trust
under the Trust Preferred Securities are fully and unconditionally guaranteed by
the Corporation as described herein. See "RELATIONSHIP AMONG THE TRUST PREFERRED
SECURITIES, THE JUNIOR SUBORDINATED DEBENTURES AND THE PREFERRED SECURITIES
GUARANTEE."
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
This Proxy Statement/Prospectus incorporates documents by reference which
are not presented herewith. These documents (without exhibits, unless such
exhibits are specifically incorporated by reference herein) are available
without charge to each person to whom a copy of this Proxy Statement/Prospectus
is delivered, upon written or oral request addressed to SunSource L.P., 2600 One
Logan Square, Philadelphia, Pennsylvania 19103, Attention: Joseph M. Corvino,
Secretary, telephone number (215) 665-3650. In order to ensure timely delivery
of the documents, any request should be made by April __, 1997.
-118-
<PAGE>
The following documents of the Partnership have been filed with the SEC
and are incorporated herein by reference:
(a) Annual Report on Form 10-K for the fiscal year ended December 31,
1995.
(b) Quarterly Reports on Form 10-Q for the quarterly periods ended March
31, 1996, June 30, 1996 and September 30, 1996.
(c) Current Report on Form 8-K filed on December 19, 1996.
All documents filed by the Partnership pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act subsequent to the date of this Proxy
Statement/Prospectus and prior to the date of the Special Meeting shall be
deemed to be incorporated by reference in this Proxy Statement/Prospectus and to
be a part hereof from the date of filing of such documents.
Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes hereof to the extent
that a statement contained herein (or in any other subsequently filed document
which also is incorporated herein) modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed to constitute a
part hereof except as so modified or superseded.
-119-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
SunSource L.P. and Subsidiaries
<TABLE>
<CAPTION>
Unaudited Pro Forma Consolidated Financial Statements - REVISED Page
-----
<S> <C>
Introduction to Unaudited Pro Forma Consolidated Financial Statements F-2
Unaudited Pro Forma Consolidated Balance Sheets...................... F-3
Unaudited Pro Forma Consolidated Statements of Income:
for the nine months ended September 30, 1996........................ F-4
for the nine months ended September 30, 1995........................ F-5
for the twelve months ended September 30, 1995...................... F-6
Notes to Unaudited Pro Forma Consolidated Financial Statements....... F-7:12
SunSource, Inc. - Unaudited Balance Sheet as of December 31, 1996 F-13:14
Unaudited Historical Consolidated Financial Statements - REVISED
Consolidated Balance Sheets as of September 30, 1996 and 1995........ F-15
Consolidated Statements of Income for the Nine Months ended
September 30, 1996 and 1995......................................... F-16
Consolidated Statements of Cash Flows for the Nine Months ended
September 30, 1996 and 1995......................................... F-17
Consolidated Statements of Changes in Partners' Capital for the
Nine Months ended September 30, 1996 and 1995, and the Twelve
Months ended December 31, 1995...................................... F-18
Notes to Unaudited Consolidated Financial Statements................. F-19:20
Audited Historical Consolidated Financial Statements - REVISED
Report of Independent Accountants.................................... F-21
Consolidated Balance Sheets as of December 31, 1995 and 1994......... F-22
Consolidated Statements of Income for the Years ended
December 31, 1995, 1994 and 1993.................................... F-23
Consolidated Statements of Cash Flows for the Years ended
December 31, 1995, 1994 and 1993.................................... F-24
Consolidated Statements of Changes in Partners' Capital
for the Years ended December 31, 1995, 1994 and 1993................ F-25
Notes to Consolidated Financial Statements........................... F-26:41
</TABLE>
F - 1
<PAGE>
Pro Forma Consolidated Financial Statements
The following unaudited pro forma consolidated financial statements of SunSource
Inc., give effect to the proposed conversion of SunSource L.P. ("the
Partnership") to corporate form. In connection with the conversion, the
Partnership intends to recapitalize its outstanding long-term debt. The
Conversion and recapitalization ("the transaction") will be effected through the
formation of a new corporation, SunSource, Inc.
The unaudited pro forma consolidated statements of income assume the transaction
occurred: (i) on January 1, 1996 for the nine-month period ending September 30,
1996 and (ii) on January 1, 1995 for the nine-month period ending September 30,
1995 and the twelve-month period ending December 31, 1995. The pro forma balance
sheet assumes the transaction occurred on September 30, 1996.
The pro forma consolidated financial statements are not necessarily indicative
of operating results or financial position that would have been achieved had the
transaction occurred on the dates indicated and should not be construed as
representative of future operating results or financial position.
The pro forma consolidated financial statements and accompanying notes should be
read in conjunction with the historical financial statements and related notes
thereto included in this Proxy/Prospectus.
F - 2
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 (UNAUDITED)
-------------------------------
PRO FORMA
ADJUSTMENTS
-----------
ASSETS PARTNERSHIP AMOUNT NOTE* CORPORATION
------ ----------- ------ ----- -----------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 1,729 $ (1,729) 2A $ --
Accounts and notes receivable, net 86,693 -- 86,693
Inventories 97,088 -- 97,088
Deferred income taxes -- 8,012 2B 8,012
Other current assets 4,630 (467) 2C 4,163
----------- ----------- -----------
Total current assets 190,140 5,816 195,956
Property and equipment, net 20,267 -- 20,267
Goodwill 44,589 -- 44,589
Deferred income taxes 3,747 (508) 2B 3,239
Other assets 4,560 313 2D 4,873
----------- ----------- -----------
Total assets $ 263,303 $ 5,621 $ 268,924
=========== =========== ===========
LIABILITIES AND EQUITY
Current liabilities:
Accounts and notes payable, trade $ 54,858 $ -- $ 54,858
Current portion of senior notes 6,395 (6,395) 2E --
Distributions payable 1,934 (915) 2F 1,019
Accrued expenses:
Interest on senior notes 2,081 (2,081) 2E --
Management fee due the general partner 2,491 (2,491) 2G --
Other accrued expenses 20,905 -- 20,905
----------- ----------- -----------
Total current liabilities 88,664 (11,882) 76,782
Senior notes 63,934 (63,934) 2E --
Replacement credit facilities -- 97,259 2H 97,259
Other liabilities 9,545 (1,035) 2I 8,510
----------- ----------- -----------
Total liabilities 162,143 20,373 182,516
----------- ----------- -----------
Guaranteed preferred beneficial
interests in the Corporation's
junior subordinated debentures -- 105,446 2I 105,446
----------- ----------- -----------
Partners' Capital:
General partner 1,024 (1,024) 2I --
Limited partners:
Class A interests 67,642 (67,642) 2I --
Class B interests 35,296 (35,296) 2I --
Class B interests held in treasury (1,514) 1,514 2I --
Cumulative foreign currency
translation adjustment (1,288) 1,288 2I --
----------- ----------- -----------
Total partners' capital 101,160 (101,160) --
----------- ----------- -----------
Stockholders' deficit:
Preferred stock, $.01 par, 1,000,000
shares authorized, none issued -- -- 2I --
Common stock $0.01 par, 20,000,000
shares authorized; 6,418,936 shares
issued and outstanding -- 64 2I 64
Accumulated deficit -- (17,849) 2I (17,849)
Cumulative foreign currency
translation adjustment -- (1,288) 2I (1,288)
----------- ----------- ------------
Total stockholders' deficit -- (19,073) (19,073)
----------- ----------- ------------
Total liabilities, partners' capital,
preferred beneficial interests and
stockholders' deficit $ 263,303 $ 5,621 $ 268,924
=========== =========== ===========
Pro forma negative net book value per common share: $ (2.97)
===========
</TABLE>
* SEE ACCOMPANYING NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
F - 3
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except for per unit data)
<TABLE>
<CAPTION>
Page 1 of 3
Nine Months Ended September 30, 1996
------------------------------------
Pro Forma *
Partnership Adjustments Note Corporation
----------- ---------------- -----------
<S> <C> <C> <C>
Net sales $ 489,517 $ -- $ 489,517
Cost of sales 291,920 -- 291,920
------------ ----------- -----------
Gross profit 197,597 -- 197,597
------------ ----------- -----------
Operating expenses:
Selling, general and
administrative expenses 166,059 -- 166,059
Management fee to general partner 2,491 (2,491) 3A --
Depreciation 2,684 -- 2,684
Amortization 1,449 -- 1,449
------------ ----------- -----------
Total operating expenses 172,683 (2,491) 170,192
------------ ----------- -----------
Income from operations 24,914 2,491 27,405
Interest expense, net 5,147 914 3B 6,061
Other income, net 470 208 3C 678
Distribution on guaranteed preferred
beneficial interests in Corporation's
junior subordinated debentures -- (9,174) 3D (9,174)
------------ ----------- ------------
Income before income taxes 20,237 (7,389) 12,848
Provision (benefit) for
income taxes (372) 6,207 3E 5,835
------------ ----------- -----------
Net income $ 20,609 $ (13,596) $ 7,013
============ =========== ===========
Net income allocated to partners:
General partner $ 206
-----------
Class A limited partners $ 9,157
-----------
Class B limited partners $ 11,246
-----------
Earnings per limited partnership interest:
- Class A interest $ 0.82
- Class B interest $ 0.52
Weighted average number of outstanding limited partnership interests:
- Class A interests 11,099,573
- Class B interests 21,675,746
Net income per common share $ 1.09
Weighted average number of outstanding common shares 6,418,936
</TABLE>
* SEE ACCOMPANYING NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
F - 4
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except for per unit data)
<TABLE>
<CAPTION>
Page 2 of 3
Nine Months Ended September 30, 1995
------------------------------------
Pro Forma * Divested *
Partnership Adjustments Note Operations Note Corporation
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Net sales $ 481,826 $ -- $ (26,325) 3G $ 455,501
Cost of sales 287,973 -- (18,350) 3G 269,623
------------ ----------- ---------- -----------
Gross profit 193,853 -- 7,975 3G 185,878
------------ ----------- ---------- -----------
Operating expenses:
Selling, general and
administrative expenses 161,425 -- (7,277) 3G 154,148
Management fee to general partner 2,491 (2,491) 3A -- --
Depreciation 2,799 -- (268) 3G 2,531
Amortization 1,515 -- (34) 3G 1,481
------------ ----------- ---------- -----------
Total operating expenses 168,230 (2,491) (7,579) 3G 158,160
------------ ----------- ---------- -----------
Income from operations 25,623 2,491 (396) 3G 27,718
Interest expense, net 5,281 986 3B -- 6,267
Other income (expense), net (413) 358 3C -- (55)
Distribution on guaranteed preferred
beneficial interests in Corporation's
junior subordinated debentures -- (9,174) 3D -- (9,174)
Gain on sale of divisions 16,500 -- (16,500) 3G --
------------ ----------- ---------- -----------
Income before income taxes 36,429 (7,311) (16,896) 12,222
Provision for income taxes 362 5,703 3E -- 6,065
------------ ----------- ---------- -----------
Income before extraordinary loss 36,067 (13,014) (16,896) 6,157
Extraordinary loss from early
extinguishment of debt (629) 629 3F -- --
------------ ----------- ---------- -----------
Net income $ 35,438 $ (12,385) $ (16,896) $ 6,157
============ =========== ========== ===========
Net income allocated to partners:
General partner $ 354
------------
Class A limited partners $ 9,157
------------
Class B limited partners $ 25,927
------------
Earnings per limited partnership interest:
Income before extraordinary loss
- Class A interest $ 0.82
- Class B interest $ 1.23
Extraordinary loss
- Class A interest $ --
- Class B interest $ (0.03)
Net income
- Class A interest $ 0.82
- Class B interest $ 1.20
Weighted average number of outstanding limited partnership interests:
- Class A interests 11,099,573
- Class B interests 21,675,746
Net income per common share $ .96
Weighted average number of outstanding common shares 6,418,936
</TABLE>
* SEE ACCOMPANYING NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
F - 5
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except for per unit data)
<TABLE>
<CAPTION>
Page 3 of 3
Twelve Months Ended December 31, 1995
-------------------------------------
Pro Forma * Divested *
Partnership Adjustments Note Operations Note Corporation
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Net sales $ 628,935 $ -- $ (26,325) 3G $ 599,865
Cost of sales 375,425 -- (18,350) 3G 355,004
------------ ----------- ---------- -----------
Gross profit 253,510 -- 7,975 3G 244,861
------------ ----------- ---------- -----------
Operating expenses:
Selling, general and
administrative expenses 213,221 -- (7,277) 3G 205,180
Management fee to general partner 3,330 (3,330) 3A -- --
Depreciation 3,661 -- (303) 3G 3,358
Amortization 1,996 -- (35) 3G 1,961
------------ ----------- ---------- -----------
Total operating expenses 222,208 (3,330) (8,379) 3G 210,499
------------ ----------- ---------- -----------
Income from operations 31,302 3,330 (270) 3G 34,362
Interest expense, net 6,920 1,314 3B 8,234
Other income, net 256 446 3C 702
Distribution on guaranteed preferred
beneficial interests in Corporation's
junior subordinated debentures -- (12,232) 3D (12,232)
Gain on sale of divisions 20,644 -- (20,644) 3G --
------------ ----------- ----------- ------------
Income before income taxes 45,282 (9,770) (20,914) 14,598
Provision for income taxes 537 6,867 3E -- 7,404
------------ ----------- ----------- ------------
Income before extraordinary loss 44,745 (16,637) (20,914) 7,194
Extraordinary loss from early
extinguishment of debt (629) 629 3F -- --
------------ ----------- ----------- ------------
Net income $ 44,116 $ (16,008) $ (20,914) $ 7,194
============ ============ ============ ============
Net income allocated to partners:
General partner $ 441
-----------
Class A limited partners $ 12,210
-----------
Class B limited partners $ 31,465
-----------
Earnings per limited partnership interest:
Income before extraordinary loss
- Class A interest $ 1.10
- Class B interest $ 1.48
Extraordinary loss
- Class A interest $ --
- Class B interest $ (0.03)
Net income
- Class A interest $ 1.10
- Class B interest $ 1.45
Weighted average number of outstanding limited partnership interests:
- Class A interests 11,099,573
- Class B interests 21,675,746
Net income per common share $ 1.12
Weighted average number of outstanding common shares 6,418,936
</TABLE>
*SEE ACCOMPANYING NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
F - 6
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in thousands)
1. Basis of Presentation:
The accompanying financial statements include pro forma consolidated accounts of
SunSource L.P. (the "Partnership") and its subsidiary partnership, SDI Operating
Partners, L.P. (the "Operating Partnership"). On December 11, 1996, the
Partnership announced the terms of a plan to convert from its current limited
partnership structure to a taxable C corporation, which must be approved by a
majority of the holders of the Class A and Class B interests unaffiliated with
SDI Partners I, L.P., the General Partner ("GP"), each voting separately as a
class. In connection with the conversion of the partnership to corporate form,
the Partnership intends to refinance its outstanding long-term debt. The
conversion and refinancing ("the transaction") will be effected through the
formation of a new corporation, SunSource Inc. ("the Corporation").
The transaction, as proposed, does not result in a change of control and is
essentially a recapitalization. The assets and liabilities of the Partnership
will be recorded by the Corporation at their historical amounts. The Class B
Interests and the GP Interests will also be transferred at historical basis. The
Corporation will, however, record incremental deferred tax assets in accordance
with Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"),
relating to the temporary differences for certain assets and liabilities at the
date of conversion to corporate form (see note 2B below). The Corporation will
also record a tax provision on its taxable income for federal and state
corporate income taxes. Transaction costs of the conversion, estimated to be
$3,600, will be recorded by the Partnership in the consolidated statement of
income prior to the conversion. The Corporation will incur a make-whole penalty
after the conversion, estimated at $5,100, related to the repayment of its
existing senior notes with borrowing under new credit facilities.
See Notes 2 and 3 for a description of the adjustments made on the pro forma
financial statements to effect the transaction. The accompanying pro forma
consolidated financial statements and related notes have not been audited. In
management's opinion, all adjustments considered necessary for the fair
presentation of financial position and income for the unaudited pro forma
financial statements presented have been reflected. Results for periods for
which pro forma statements are provided are not necessarily indicative of those
to be expected in future periods, should the proposed transaction be approved.
Certain information in note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
has been condensed or omitted for the unaudited pro forma statements, although
management believes that disclosures are adequate to make the information
presented not misleading.
The unaudited pro forma financial information has been prepared based on the
historical financial statements of the Partnership as if the proposed
transaction had occurred at the beginning of the periods presented for the
consolidated statements of income and as of the date presented for the balance
sheet. The incremental deferred tax benefits have not been included in the pro
forma income statement due to their non-recurring nature. In addition,
adjustments are included in the pro forma statements of income to exclude
non-recurring transactions related to the sale of divisions in 1995 in order to
show pro forma financial statements on a corporate basis which are more
representative of ongoing operations.
F - 7
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in thousands)
1. Basis of Presentation, continued:
Exchange of Partnership Interests:
----------------------------------
The general and limited partners of the GP and the Limited Partners of the
Partnership will exchange with the Corporation, their respective partnership
interests for Guaranteed Preferred Beneficial Interests in the Corporation's
Junior Subordinated Debentures ("Trust Preferred Securities"), Common Stock and
cash, which have been recorded in the accompanying pro forma Balance Sheet as of
September 30, 1996 as follows:
o 11,099,573 Class A Limited Partnership Interests in the Partnership
will be exchanged for 4,217,838 Trust Preferred Securities valued at
$25.00 per interest. Accordingly, the Preferred Securities will be
recorded at fair value of $105,446.
o Class A Limited Partnership Interests will also receive $14,429, which
will be recorded as a charge to the Class A Partners' Capital Account.
o Class B Limited Partnership Interests in the Partnership and the
general and limited partnership interests in the GP will be exchanged
for 6,418,936 shares of Common Stock of the Corporation. This exchange
was recorded at the historical amounts of the Class B Limited
Partnership Interests and General Partnership Interests in the
Partnership.
The following table illustrates the proposed exchange of Partnership Interests
for Common Stock:
<TABLE>
<CAPTION>
Partnership Conversion to Common Stock Corporation
----------------- ------------------------------------- ---------------
Class B Class B General Common
Interests % Holders % Partner Stock &
----------- ----- ---------- ----- ---------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Public Investors 11,633,603 53.7% 2,908,401 53.7% 46,200 (c) 2,954,601 46.0%
Lehman Holdings
and Affiliates 5,896,678 27.2% 1,474,169 27.2% 538,000 (d) 2,012,169 31.4%
Executive Officers
and Directors 4,145,465 19.1% 1,036,366 19.1% 415,800 (e) 1,452,166 22.6%
---------- ------ ---------- ------ --------- --------- ------
Total 21,675,746 100.0% 5,418,936 100.0% 1,000,000 6,418,936 100.0%
========== ====== ========== ====== ========= ========= ======
(a) (b)
</TABLE>
(a) Net of 523,400 Class B interests held in the Partnership's treasury.
(b) Represents exchange of each Class B interest for .25 shares of the
Corporation's Common Stock.
(c) Represents limited partnership ownership of 4.62% in the GP exchanged by
former officers of the Partnership.
(d) Represents general partnership ownership of 53.8% in the GP exchanged by
Lehman/SDI, Inc.
(e) Represents limited partnership ownership of 41.58% in the GP exchanged by
current officers of the Partnership.
F - 8
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS, continued
(UNAUDITED)
(dollars in thousands)
1. Basis of Presentation, continued:
Conversion of Partners' Capital:
The following table illustrates the pro forma conversion of Partners' Capital of
the Partnership to Stockholder's Deficit of the Corporation:
<TABLE>
<CAPTION>
Pro forma
Partnership Adjustments Corporation
----------- ----------- -----------
<S> <C> <C> <C>
Accumulated deficit
- -------------------
Minority interest of the GP
in the Operating Partnership $ -- (a) $ 1,035 $ 1,035
Partner's Capital:
General Partner 1,024 -- 1,024
Class A Interests 67,642 (119,875) (b) (52,233)
Class B Interests 35,296 (64) (c) 35,232
Conversion (charges) credits:
Transaction costs -- (3,600) (d) (3,600)
Make-whole penalty -- (5,100) (d) (5,100)
Deferred financing fees -- (197) (d) (197)
Deferred tax assets -- 7,504 (e) 7,504
Class B Interests held
in treasury (1,514) -- (1,514)
----------
Total accumulated deficit -- -- (17,849)
- -------------------------
Common stock -- 64 (c) 64
- -------------
Cumulative foreign currency
translation adjustment (1,288) -- (1,288)
---------------------- --------- ---------- ----------
Total Partners' capital
/Stockholders' deficit $ 101,160 $(120,233) $ (19,073)
---------------------- ========= ========== ==========
</TABLE>
(a) Minority interest of $1,035 is classified by the Partnership as Other
liabilities in the Consolidated Balance Sheets.
(b) Valuation of the Class A exchange package (see Note 2I).
(c) Charge for par value of common stock - classified as a separate
component of stockholder's deficit (see Note 2I).
(d) Estimated charges to be recognized at the time of conversion, including
$3,600 of transaction costs, make-whole penalty on the prepayment of
Senior Notes of $5,100, and write-off of deferred financing fees on
existing debt of $197 (see Note 2D).
(e) Credit for recognition of incremental deferred tax assets upon
conversion (see Note 2B).
F - 9
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS, continued
(UNAUDITED)
(dollars in thousands)
2. Pro Forma Adjustments to Balance Sheet Dated September 30, 1996:
A. Reclassify cash to replacement credit facilities; all excess cash is
assumed to reduce current borrowing.
B. Upon conversion, under SFAS No. 109, the Corporation will be entitled
to record additional deferred tax assets not previously available to
the Partnership due to its partnership status. These deferred tax
assets represent temporary differences between book and tax bases of
assets and liabilities which are expected to reverse before December
31, 1997. The net incremental deferred tax asset of $7,504 (current and
long-term portion) is recorded on a pro forma basis as a credit to
corporate accumulated deficit upon conversion. Additionally, the
Corporation may receive a step-up in the tax basis of assets and
liabilities acquired from the Partnership and, as a result, would
record additional deferred tax assets at the conversion date. Should
the transaction be approved, the actual amount of the aggregate
additional deferred tax assets will be calculated based on temporary
differences existing at the date of conversion to a C corporation. The
following is the composition of the pro forma adjustment to historical
deferred tax assets at September 30, 1996:
<TABLE>
<CAPTION>
Partnership Pro Forma
Current deferred tax assets: (Unaudited) Adjustment Corporation
----------- ---------- -----------
<S> <C> <C> <C>
Inventory $ -- $ 3,939 $ 3,939
Self-insurance liability -- 1,533 1,533
Accounts receivable -- 679 679
Vacation pay liability -- 594 594
Other current liabilities -- 1,289 1,289
Other current items, net -- (22) (22)
---------- ---------- ---------
Net current deferred tax assets $ -- $ 8,012 $ 8,012
========== ========== =========
Long-term gross deferred
tax assets:
Deferred compensation $ 3,622 $ (158) $ 3,464
Other items, net 475 (340) 135
---------- ---------- ---------
4,097 (498) 3,599
Valuation allowance for long-
term deferred tax assets (350) (10) (360)
---------- ---------- ---------
Net long-term deferred tax assets $ 3,747 $ (508) $ 3,239
========== ========== =========
</TABLE>
C. Eliminate historical prepaid transaction costs of $467 (of the
estimated total of $3,600) from Other Current Assets and charge to
Class B Capital.
D. Write-off historical balance of deferred financing fees of $197, which
relate to Series A and B Senior Notes, to the Class B capital account.
Capitalize estimated deferred financing fees of $510 related to
commitment fees on the proposed replacement credit facilities.
E. Reclassify outstanding Series A and Series B Senior Note principal
balances totalling $70,329 (current and long-term portions) and accrued
interest of $2,081 to replacement credit facilities, assuming
outstanding senior note balance is repaid in full as part of the
transaction.
F - 10
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS, continued
(UNAUDITED)
(dollars in thousands)
2. Pro Forma Adjustments to Balance Sheet Dated September 30, 1996,
continued:
F. Record payment of $915 of the historical liability of $1,934 for
distributions payable as of September 30, 1996, leaving a balance of
$1,019 which represents the initial distribution payable to the new
Trust Preferred Securities.
G. Record payment of the management fee payable to GP at September 30,
1996.
H. The following table summarizes the estimated amount of the replacement
credit facility required at September 30, 1996 (see related note
disclosures):
<TABLE>
<CAPTION>
<S> <C> <C>
Reclassification of available cash (Note 2A) $ (1,729)
Pre-payment of senior notes (Note 2E) 70,329
Accrued interest on senior notes (Note 2E) 2,081
Make-whole penalty on pre-payment of senior notes (Note 1) 5,100
Replacement credit facility commitment fees (Note 2D) 510
Transaction costs (unpaid) (Notes 1 and 2C) 3,133
Distribution to Class A interests ($1.30 per interest)(Note 2I) 14,429
Payment of management fee due (Note 2G) 2,491
Payment of distributions payable (Note 2F) 915
--------
Estimated total replacement credit facility $ 97,259
========
</TABLE>
I. Issue 4,217,838 shares of Trust Preferred Securities with a liquidation
value of $25.00, in exchange for all 11,099,573 Class A limited
partnership interests, which amounts to .38 preferred shares for each
Class A interest. The Trust Preferred Securities will be credited at
fair value of $105,446 for the newly issued shares. Holders of Class A
interests will also receive $1.30 of cash per A interest, or $14,429 in
the aggregate. The beginning accumulated deficit of the Corporation
will be charged for the difference between the fair value of the total
Class A exchange package, aggregating $119,875, and the stated value of
the Class A capital account at September 30, 1996 of $67,642, or
$52,233 (see Note 1). The Preferred Securities have equity
characteristics but creditors' rights, thereby being classified between
liabilities and stockholders' equity on the balance sheet.
Authorize 1,000,000 shares of preferred stock, none being issued.
Authorize 20,000,000 shares and issue 6,418,936 shares of common stock
with a par value of $0.01. Holders of existing Class B limited
partnership interests will be issued 5,418,936 shares of Common Stock
upon conversion, in exchange for all 21,675,756 outstanding Class B
interests, which amounts to .25 common shares for each Class B
interest. The general partner, Lehman/SDI, Inc., and limited partners,
current and former executive officers of the Partnership, in the GP,
SDI Partners I, L.P., will receive 1,000,000 shares of the
Corporation's Common Stock in exchange for their respective partnership
interests. Common stock of the new corporation will be credited $64
from the Class B capital account for the newly issued shares. The
Cumulative Foreign Currency Translation Adjustment of $1,288 will be
classified as a separate component of stockholders' deficit of the
Corporation. See Note 1 for a description of additional charges and
credits which make up the beginning accumulated deficit of the
Corporation at September 30, 1996 in the amount of $17,849.
F - 11
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS, continued
(UNAUDITED)
(dollars in thousands)
3. Pro Forma Adjustments to Consolidated Statements of Income:
A. To eliminate, in consolidation, the management fee paid to the GP.
B. Adjust interest expense, net, to reflect incremental debt incurred
directly related to the conversion (the Class A distribution of $1.30
per A interest, or $14,429, and the transaction costs of $3,600). The
interest rate utilized to calculate the pro forma interest expense
adjustment was based on historical LIBOR rates plus 125 basis points,
which reflects pricing under the new bank credit facility on the
incremental debt. For the 1996 period the interest rate used is 6.76%
and for the 1995 periods the rate used is 7.29%.
C. Eliminate minority interest expense as a result of the conversion.
D. Record an expense for the monthly distributions on Preferred
Securities; the annual yield is 11.6% on the value of the debentures of
$105,446, resulting in an approximate charge of $1,019 per month.
E. Adjust the provision or benefit for income taxes to reflect current and
deferred income tax expense or benefit that would be expected under
corporate form. Under partnership form, the Partnership books a current
provision for state partnership and foreign taxes only and a deferred
tax benefit relating only to those temporary differences between book
and tax assets that are expected to reverse after December 31, 1997,
when the Partnership would begin paying federal corporate income taxes.
For pro forma purposes, the assumed combined federal and state
corporate tax rate utilized is 39.875%, applied to taxable income.
<TABLE>
<CAPTION>
Pro forma adjustments Nine Months Ended
to provision (benefit) ---------------------------------- Year Ended
for income taxes 9/30/96 9/30/95 12/31/95
--------------------- ------- ------- --------
<S> <C> <C> <C>
Eliminate state
partnership taxes $ (239) $ (412) $ (608)
Record current tax
provision based
on taxable income 5,867 6,246 7,542
Adjustment to deferred
portion 579 (131) (67)
--------- ---------- ----------
Total pro forma adjustments $ 6,207 $ 5,703 $ 6,867
========= ========== ==========
</TABLE>
F. Eliminate extraordinary loss due to the early extinguishment of debt as
a non- recurring item for pro forma purposes.
G. Eliminate Sales, Gross Profit, and Operating Expenses for divested
operations and gain on sale of divisions as non-recurring items for pro
forma purposes.
F - 12
<PAGE>
SUNSOURCE INC.
BALANCE SHEET
as of DECEMBER 31, 1996
ASSETS
- ------
Cash $1,000
======
STOCKHOLDER'S EQUITY
- --------------------
Common stock, $1.00 par value, 1,000 shares
authorized, issued and outstanding $1,000
======
See accompanying note to balance sheet
F - 13
<PAGE>
SUNSOURCE INC.
NOTE TO BALANCE SHEET
as of DECEMBER 31, 1996
Organization
- ------------
SunSource Inc., a Delaware corporation, was incorporated on December 30, 1996
and has conducted no business activity since inception.
The Corporation's common stock is held by SunSource L.P., pending consummation
of the Conversion described in this Proxy Statement.
F - 14
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
September 30, September 30,
1996 December 31, 1995
ASSETS (Unaudited) 1995 (Unaudited)
------ ------------- ------------- ------------
Current assets:
<S> <C> <C> <C>
Cash and cash equivalents $ 1,729 $ 5,900 $ 9,249
Accounts and notes receivable, net 86,693 75,824 83,255
Inventories 97,088 96,022 91,064
Other current assets 4,630 4,742 3,586
----------- ----------- ----------
Total current assets 190,140 182,488 187,154
Property and equipment, net 20,267 20,181 21,605
Goodwill 44,589 44,250 43,912
Other intangibles 821 1,312 1,489
Deferred income taxes 3,747 2,844 2,709
Cash surrender value of
life insurance policies 3,163 3,009 --
Other assets 576 507 698
---------- ----------- ----------
Total assets $ 263,303 $ 254,591 $ 257,567
========== =========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable, trade $ 52,837 $ 42,437 $ 45,955
Notes payable 2,021 2,753 2,145
Current portion of senior notes 6,395 6,395 4,795
Distributions payable to partners 1,934 7,819 1,638
Accrued expenses:
Salaries and wages 5,546 5,109 5,263
Interest on senior notes 2,081 520 2,223
Management fee due the general partner 2,491 3,330 2,491
Income and other taxes 2,864 3,398 3,182
Other accrued expenses 12,495 14,886 13,331
---------- ----------- ----------
Total current liabilities 88,664 86,647 81,023
Senior notes 63,934 63,934 70,330
Deferred compensation 8,300 7,829 7,547
Other liabilities 1,245 1,238 1,463
---------- ----------- ----------
Total liabilities 162,143 159,648 160,363
---------- ----------- ----------
Commitments and contingencies
Partners' capital:
General partner 1,024 963 980
Limited partners:
Class A interests; 11,099,573 outstanding 67,642 67,642 67,642
Class B interests; 21,675,746 outstanding 35,296 29,252 31,074
Class B interests held in treasury (1,514) (1,514) (1,514)
Cumulative foreign currency
translation adjustment (1,288) (1,400) (978)
---------- ----------- ----------
Total partners' capital 101,160 94,943 97,204
---------- ----------- ----------
Total liabilities and
partners' capital $ 263,303 $ 254,591 $ 257,567
========== =========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F - 15
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
FOR THE NINE MONTHS ENDED
(dollars in thousands, except for partnership interest amounts)
<TABLE>
<CAPTION>
September 30, September 30,
1996 1995
------------ ------------
<S> <C> <C>
Net sales $ 489,517 $ 481,826
Cost of sales 291,920 287,973
----------- -----------
Gross profit 197,597 193,853
----------- -----------
Operating expenses:
Selling, general and administrative expenses 166,059 161,425
Management fee to general partner 2,491 2,491
Depreciation 2,684 2,799
Amortization 1,449 1,515
----------- -----------
Total operating expenses 172,683 168,230
----------- -----------
Income from operations 24,914 25,623
Interest income 60 342
Interest expense 5,207 5,623
Other income (expense), net 470 (413)
Gain on sale of divisions (note 3) -- 16,500
----------- -----------
Income before provision for income taxes 20,237 36,429
Provision (benefit) for income taxes (372) 362
----------- -----------
Income before extraordinary loss 20,609 36,067
Extraordinary loss from early extinguishment
of debt (note 4) -- (629)
----------- ------------
Net income $ 20,609 $ 35,438
=========== ===========
Net income allocated to partners:
General partner $ 206 $ 354
----------- -----------
Class A limited partners $ 9,157 $ 9,157
----------- -----------
Class B limited partners $ 11,246 $ 25,927
----------- -----------
Earnings per Limited partnership interest:
Income before extraordinary loss
- Class A interest $ 0.82 $ 0.82
- Class B interest $ 0.52 $ 1.23
Extraordinary loss
- Class A interest -- --
- Class B interest -- $ (0.03)
Net income
- Class A interest $ 0.82 $ 0.82
- Class B interest $ 0.52 $ 1.20
Weighted average number of outstanding
limited partnership interests:
- Class A interests 11,099,573 11,099,573
- Class B interests 21,675,746 21,675,746
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F - 16
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE NINE MONTHS ENDED
(dollars in thousands)
<TABLE>
<CAPTION>
September 30, September 30,
1996 1995
------------ ------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 20,609 $ 35,438
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization:
- Existing divisions 4,133 2,799
- Divested divisions -- 1,515
Gain on sale of division -- (16,500)
Extraordinary loss -- 629
Provision for deferred compensation 898 2,058
Deferred income tax benefit (903) (565)
Changes in current operating items:
Increase in accounts and notes receivable (10,580) (11,097)
Increase in inventories (2,132) (6,945)
Decrease in other current assets 112 2,192
Increase in accounts payable 10,342 4,160
Increase in accrued interest 1,561 1,562
Decrease in other accrued liabilities (3,675) (8,218)
Other items, net 258 655
----------- -----------
Net cash provided by operating activities 20,623 7,683
----------- -----------
Cash flows from investing activities:
Proceeds from sale of divisions -- 37,786
Proceeds from sale of property and equipment 39 762
Payment for purchase of assets (673) --
Investment in life insurance policies (100) --
Capital expenditures (2,713) (3,471)
Other, net (80) (219)
----------- -----------
Net cash (used for) provided by
investing activities (3,527) 34,858
----------- -----------
Cash flows from financing activities:
Early extinguishment of senior notes -- (14,175)
Prepayment penalties and related costs -- (629)
Cash distributions to partners (20,535) (22,777)
Repayments under other credit facilities, net (732) (564)
Principal payments under
capitalized lease obligations -- (50)
----------- -----------
Net cash used for financing activities (21,267) (38,195)
----------- -----------
Net (decrease) increase in cash
and cash equivalents (4,171) 4,346
Cash and cash equivalents at beginning of period 5,900 4,903
------------ -----------
Cash and cash equivalents at end of period $ 1,729 $ 9,249
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F - 17
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE PERIODS ENDED
(dollars in thousands)
<TABLE>
<CAPTION>
PARTNER'S CAPITAL
-----------------------------------------------------------------------------
Cumulative
Foreign
Currency
Class A Class B Class B Translation
General Limited Limited Treasury Adjustment TOTAL
------- ------- ------- -------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ 791 $ 67,642 $ 12,300 $ (1,514) $ (1,338) $ 77,881
Net income 354 9,157 25,927 -- -- 35,438
Cash distributions paid and
or declared to partners (165) (9,157) (7,153) -- -- (16,475)
Change in cumulative foreign
currency translation
adjustment -- -- -- -- 360 360
-------- -------- --------- -------- --------- --------
Balance, September 30, 1995 980 67,642 31,074 (1,514) (978) 97,204
Net income 87 3,053 5,538 -- -- 8,678
Cash distributions paid and
or declared to partners (104) (3,053) (7,360) -- -- (10,517)
Change in cumulative foreign
currency translation
adjustment -- -- -- -- (422) (422)
-------- --------- --------- -------- --------- --------
Balance, December 31, 1995 963 67,642 29,252 (1,514) (1,400) 94,943
Net income 206 9,157 11,246 -- -- 20,609
Cash distributions paid and
or declared to partners (145) (9,157) (5,202) -- -- (14,504)
Change in cumulative foreign
currency translation
adjustment -- -- -- -- 112 112
-------- --------- --------- -------- --------- ---------
Balance, September 30, 1996 $1,024 $ 67,642 $ 35,296 $(1,514) $ (1,288) $101,160
======== ======== ========= ======== ========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F - 18
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
1. Basis of Presentation:
The accompanying financial statements include the consolidated accounts of
SunSource L.P. (the "Partnership"), formerly Sun Distributors L.P., and its
subsidiary partnership, SDI Operating Partners, L.P. (the "Operating
Partnership"). All significant intercompany balances and transactions have been
eliminated. The Partnership is one of the largest wholesale distributors of
industrial products and related services in the United States. The Partnership's
three business segments are Industrial Services, Hardware Merchandising and
Glass Merchandising.
The accompanying consolidated financial statements and related notes are
unaudited, except for the balance sheet as of December 31, 1995; however, in
management's opinion all adjustments (consisting of normal recurring accruals)
considered necessary for the fair presentation of financial position, income and
cash flows for the periods shown have been reflected. Results for the interim
period are not necessarily indicative of those to be expected for the full year.
Certain information in note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
has been condensed or omitted pursuant to Form 10-Q requirements although the
Partnership believes that disclosures are adequate to make the information
presented not misleading. It is suggested that these financial statements be
read in conjunction with the consolidated financial statements and notes thereto
included in the Partnership's report on Form 10-K for the year ended December
31, 1995, as amended.
Revision of Certain Items:
--------------------------
Statements of Income:
- ---------------------
The consolidated statements of income have been revised to replace the Net
sales, Cost of sales, Gross profit and Operating expenses of the Downey Glass
division, which was sold in 1995 and which had previously been presented as Net
results of operations from divisions sold. This revision has no effect on income
from operations or net income.
Translation of Foreign Currencies:
- ----------------------------------
The Cumulative foreign currency translation adjustment has been classified as a
separate component of Partners' capital with a corresponding increase in Other
Liabilities.
2. Related Party Transaction:
In March 1996, the Operating Partnership paid the 1995 management fee of $3,330
due the General Partner, SDI Partners I, L.P. (the "GP").
F - 19
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
3. Acquisitions/Divestitures:
On April 11, 1996, the Partnership's Industrial Services segment, through its
Warren Fluid Power division, purchased certain assets of Hydraulic Depot, Inc.,
of Reno, Nevada, for an aggregate purchase price of $700. Annual sales of
Hydraulic Depot, Inc. are approximately $2,500.
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 or $.75 per Class B interest included in the consolidated
statement of income for the nine months ended September 30, 1995. The aggregate
assets sold, net of liabilities, in connection with the sale of Dorman Products
was approximately $20,100.
4. Extraordinary Loss:
During the first quarter of 1995, the Partnership recorded an extraordinary loss
of $629 or approximately $.03 per Class B limited partnership interest due to
early extinguishment of a portion of the Partnership's Series A 9.08% and Series
B 8.44% senior notes. The extraordinary loss consists entirely of prepayment
penalties. (See Note 5, Lines of Credit and Long-Term Debt).
5. Lines of Credit and Long-Term Debt:
As of September 30, 1996, the Operating Partnership had $42,564 available under
its $50,000 Bank Credit Agreement which provides revolving credit for working
capital purposes and acquisitions. The $7,436 outstanding under the Bank Credit
Agreement consisted of letter of credit commitments only.
In addition, an indirect, wholly-owned Canadian subsidiary of the Operating
Partnership has a $2,500 Canadian dollar line of credit for working capital
purposes of which $829 USD was outstanding at September 30, 1996.
In connection with the sale of the Electrical Group divisions in December 1994
and the Dorman Products division in January 1995, the Operating Partnership was
required to offer the holders of its senior notes prepayment in the amount of
$14,175 which the noteholders accepted. Prepayment of the senior notes was made
on March 14, 1995, including accrued interest thereon of $360 and a prepayment
penalty of $629. (See Note 4 - Extraordinary Loss.)
6. Contingencies:
The Operating Partnership is a party to litigation in which the buyer of its
Dorman Products division claims that certain misrepresentations were made in
connection with the purchase. The buyer seeks damages of approximately $21,000.
In the opinion of management, the ultimate resolution of this matter will not
have a material effect on the consolidated financial position, operations or
cash flows of the Partnership.
Certain other legal proceedings are pending which are either in the ordinary
course of business or incidental to the Partnership's business. Those legal
proceedings incidental to the business of the Partnership 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 cashflows of the Partnership.
F - 20
<PAGE>
Report of Independent Accountants
The Board of Directors
Lehman/SDI, Inc.
We have audited the accompanying consolidated balance sheets of Sun Distributors
L.P. and subsidiary as of December 31, 1995 and 1994, and the related
consolidated statements of income, changes in partners' capital and cash flows
for each of the three years in the period ended December 31, 1995. We have also
audited the financial statement schedules listed in Item 14 (a)(2) of this Form
10-K. These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedules 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 Sun Distributors L.P.
and subsidiary as of December 31, 1995 and 1994, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedules
referred to above, when considered in relation to the basic financial statements
taken as a whole, present fairly, in all material respects, the information
required to be included therein.
As discussed in Note 1, the financial statements have been revised to modify
certain presentations and disclosures.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
F - 21
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
December 31, December 31,
ASSETS 1995 1994
------------ ----------- -----------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 5,900 $ 4,903
Accounts and notes receivable, net of
allowance for doubtful accounts of
$1,827 and $2,472, respectively 75,824 77,521
Inventories 96,022 92,653
Other current assets 4,742 6,703
----------- -----------
Total current assets 182,488 181,780
Property and equipment, net 20,181 27,514
Goodwill (net of accumulated amortization
of $11,739 and $11,259, respectively) 44,250 48,458
Other intangibles (net of accumulated
amortization of $13,724 and $14,396, respectively 1,312 2,477
Deferred income taxes 2,844 2,144
Cash surrender value of life insurance policies 3,009 --
Other assets 507 3,813
----------- -----------
Total assets $ 254,591 $ 266,186
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable $ 42,437 $ 44,435
Notes payable 2,753 2,709
Current portion of senior notes 6,395 18,970
Current portion of capitalized lease obligations -- 387
Distributions payable to partners 7,819 7,774
Accrued expenses:
Salaries and wages 5,109 7,131
Management fee due the general partner 3,330 3,330
Income and other taxes 3,398 3,338
Other accrued expenses 15,406 17,646
----------- -----------
Total current liabilities 86,647 105,720
Senior notes 63,934 70,330
Capitalized lease obligations -- 4,451
Deferred compensation 7,829 6,398
Other liabilities 1,238 1,406
----------- -----------
Total liabilities 159,648 188,305
----------- -----------
Commitments and contingencies
Partners' capital:
General partner 963 791
Limited partners:
Class A interests 67,642 67,642
Class B interests 29,252 12,300
Class B interests held in treasury (1,514) (1,514)
Cumulative foreign currency translation adjustment (1,400) (1,338)
----------- -----------
Total partners' capital 94,943 77,881
----------- -----------
Total liabilities and partners' capital $ 254,591 $ 266,186
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F - 22
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except for partnership interest amounts)
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Net sales $ 628,935 $ 753,861 $ 655,707
Cost of sales 375,425 451,785 402,441
--------- --------- ---------
Gross profit 253,510 284,076 253,266
--------- --------- ---------
Operating expenses:
Selling, general and administrative expenses 213,221 235,845 213,007
Management fee to general partner 3,330 3,330 3,330
Depreciation 3,661 4,502 5,106
Amortization 1,996 2,640 2,848
--------- --------- ---------
Total operating expenses 222,208 246,317 224,291
--------- --------- ---------
Income from operations 31,302 37,759 28,975
Interest income 412 66 85
Interest expense 7,332 9,956 9,876
Other income (expense), net 256 (1,748) 191
Gain on sale of division (note 5) 20,644 3,523 --
--------- --------- ---------
Income before provision for income taxes 45,282 29,644 19,375
Provision for income taxes 537 100 869
--------- --------- ---------
Income before extraordinary loss 44,745 29,544 18,506
Extraordinary loss from early extinguishment
of debt (note 4) (629) -- --
---------- --------- ---------
Net income $ 44,116 $ 29,544 $ 18,506
========== ========= =========
Net income allocated to partners:
General partner $ 441 $ 295 $ 185
--------- --------- ---------
Class A limited partners $ 12,210 $ 12,210 $ 12,210
--------- --------- ---------
Class B limited partners $ 31,465 $ 17,039 $ 6,111
--------- --------- ---------
Earnings per Limited partnership interest:
Income before extraordinary loss
- Class A interest $ 1.10 $ 1.10 $ 1.10
- Class B interest $ 1.48 $ 0.79 $ 0.28
Extraordinary loss
- Class A interest -- -- --
- Class B interest $ (0.03) -- --
Net income
- Class A interest $ 1.10 $ 1.10 $ 1.10
- Class B interest $ 1.45 $ 0.79 $ 0.28
Weighted average number of outstanding limited partnership interests:
- Class A interests 11,099,573 11,099,573 11,099,573
- Class B interests 21,675,746 21,675,746 21,675,746
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F - 23
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 44,116 $ 29,544 $ 18,506
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization:
- Existing divisions 5,319 5,392 6,052
- Divested divisions 338 1,750 1,902
Decrease in cash value of life insurance 58 -- --
Gain on sale of divisions (20,644) (3,523) --
Extraordinary loss 629 -- --
Provision for deferred compensation 2,340 3,187 721
Deferred income tax expense (benefit) (700) (734) 208
Changes in current operating items:
Increase in accounts and notes receivable (3,666) (11,783) (4,855)
Increase in inventories (8,209) (9,436) (10,689)
Decrease (increase) in other current assets 857 347 (815)
Increase in accounts payable 2,531 1,865 10,542
Increase (decrease) in accrued interest (141) (42) 516
Increase (decrease) in other
accrued liabilities (6,062) 4,836 2,415
Other items, net 284 (3,699) (932)
--------- --------- ---------
Net cash provided by operating activities 17,050 17,704 23,571
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of divisions 44,873 26,561 --
Proceeds from sale of property and equipment 757 724 384
Payment for purchase of assets (7,385) -- --
Investment in life insurance policies (3,067) -- --
Capital expenditures (4,299) (4,263) (3,734)
Other, net (93) 228 55
--------- --------- ---------
Net cash provided by (used for)
investing activities 30,786 23,250 (3,295)
--------- --------- ---------
Cash flows from financing activities:
Repayment of senior notes (18,971) (5,700) --
Repayments under the bank credit agreement, net -- (10,000) (5,000)
Prepayment penalties and related costs (629) -- --
Cash distributions to partners (27,218) (20,357) (14,940)
Borrowings (repayments) under other
credit facilities, net 44 (702) 817
Principal payments under capitalized
lease obligations (65) (619) (618)
Other, net -- -- 47
--------- --------- ---------
Net cash used for financing activities (46,839) (37,378) (19,694)
--------- --------- ---------
Net increase in cash and cash equivalents 997 3,576 582
Cash and cash equivalents at beginning of period 4,903 1,327 745
--------- --------- ---------
Cash and cash equivalents at end of period $ 5,900 $ 4,903 $ 1,327
========= ========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F - 24
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED
(dollars in thousands)
<TABLE>
<CAPTION>
PARTNERS' CAPITAL
-----------------
Cumulative
Foreign
Currency
Class A Class B Class B Translation
General Limited Limited Treasury Adjustment TOTAL
------- ------- ------- -------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992 $ 726 $ 67,642 $ 5,721 $ (1,514) $ (254) $ 72,321
Net income 185 12,210 6,111 -- -- 18,506
Cash distributions paid and/or
declared to partners (182) (12,210) (5,807) -- -- (18,199)
Change in cumulative foreign
currency translation
adjustment -- -- -- -- (440) (440)
-------- --------- --------- --------- --------- ---------
Balance, December 31, 1993 729 67,642 6,025 (1,514) (694) 72,188
Net income 295 12,210 17,039 -- -- 29,544
Cash distributions paid and/or
declared to partners (233) (12,210) (10,764) -- -- (23,207)
Change in cumulative foreign
currency translation
adjustment -- -- -- -- (644) (644)
-------- --------- --------- --------- --------- ---------
Balance, December 31, 1994 791 67,642 12,300 (1,514) (1,338) 77,881
Net income 441 12,210 31,465 -- -- 44,116
Cash distributions paid and/or
declared to partners (269) (12,210) (14,513) -- -- (26,992)
Change in cumulative foreign
currency translation
adjustment -- -- -- -- (62) (62)
-------- --------- --------- --------- --------- ---------
Balance, December 31, 1995 $ 963 $ 67,642 $ 29,252 $ (1,514) $ (1,400) $ 94,943
======== ========= ========= ========= ========== =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F - 25
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
1. Basis of Presentation:
The accompanying financial statements include the consolidated accounts of Sun
Distributors L.P. (the "Company") and its subsidiary partnership, SDI Operating
Partners, L.P. (the "Operating Partnership"). All significant intercompany
balances and transactions have been eliminated.
Nature of Operations:
---------------------
The Company is one of the largest wholesale distributors of industrial products
and related services in the United States. The Company's three operating
segments are: (1) industrial products and services, primarily maintenance and
fluid power products and inventory management services sold to industrial
customers for machine and plant maintenance and for manufacturing of original
equipment; (2) hardware merchandising, primarily of fasteners and related
products sold to retail hardware stores; and (3) glass merchandising of flat
glass and auto glass products sold to construction and retail markets. Based on
net sales, excluding divisions sold, for the year ended December 31, 1995, the
Industrial Services Segment provides approximately 71% of the Company's sales
through its Sun Technology Services divisions (48% of net sales) and the Sun
Inventory Management Company ("SIMCO") divisions (23% of net sales). The
Hardware Merchandising and Glass Merchandising Segments provide approximately
14% and 15%, respectively, of the Company's net sales.
Although its sales are primarily industrially-based, the Company has over
179,000 customers, the largest of which accounted for less than 4% of net sales
for the year ended December 31, 1995. The Company's products and services are
sold throughout all 50 states as well as in Canada and Mexico. Foreign sales
account for less than 5% of total revenues. The average single sale during the
year ended December 31, 1995 was less than three hundred 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. Substantially
all of the Company's revenue growth in 1995 was related to increases in the
volume of products sold.
Revision of Certain Items:
--------------------------
Statements of Income:
- ---------------------
The consolidated statements of income have been revised to replace the Net
sales, Cost of sales, Gross profit and Operating expenses of the divisions sold
in 1995 and 1994 (see Note 5) which had previously been presented as Net results
of operations from divisions sold. This revision has no effect on income from
operations or net income.
Translation of Foreign Currencies:
- ----------------------------------
The Cumulative foreign currency translation adjustment has been classified as a
separate component of Partners' capital with a corresponding increase in Other
liabilities.
F - 26
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
1. Basis of Presentation, continued:
Retirement Benefits:
- --------------------
The Company has revised Note 12 to include additional disclosures pursuant to
SFAS No. 87, "Employers' Accounting for Pensions", as related to its defined
benefit plans.
Segment Information:
- --------------------
The Company has added Note 18 to include disclosures pursuant to Statement of
Financial Accounting Standards ("SFAS") No. 14, "Financial Reporting for
Segments of a Business Enterprise".
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.
Goodwill and Other Intangible Assets:
-------------------------------------
Goodwill related to the excess of acquisition cost over the fair value of net
assets acquired 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.
F - 27
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
2. Summary of Significant Accounting Policies, continued:
Income Taxes:
-------------
As a partnership, the Company incurs no liability for federal income taxes.
Accordingly, no current provision for federal income taxes is reflected in the
accompanying consolidated financial statements. However, the Company does incur
certain state and local income taxes on its domestic operations and foreign
income taxes on its Canadian and Mexican operations. Therefore, a current
provision for state, local and foreign income taxes is reflected in the
accompanying consolidated financial statements.
The Revenue Act of 1987 provides that certain "existing publicly traded
partnerships", such as the Company, generally will not be treated as
corporations for federal income tax purposes until after December 31, 1997,
provided that such partnerships do not add any substantial new line of business
before the effective date.
SFAS No. 109 requires the Company to recognize deferred tax assets and
liabilities for expected future tax consequences of events that have been
recognized in the consolidated financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
temporary differences are expected to reverse. The Company's deferred taxes are
determined from temporary differences expected to reverse after December 31,
1997, when the Company will be taxed as a corporation. Therefore, a deferred
provision or benefit for state and federal income taxes is reflected in the
accompanying consolidated statements of income.
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.
Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers
Accounting for Post-retirement Benefits Other Than Pensions". The Company has
elected to amortize the accumulated post-retirement benefit liability
(transition obligation) resulting in delayed recognition. The impact of the
adoption on the Company's financial position and results of operations is
immaterial.
F - 28
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
2. Summary of Significant Accounting Policies, continued:
Fair Value of Financial Instruments:
------------------------------------
SFAS No. 107 "Disclosures About Fair Value of Financial Instruments" requires
disclosure of the fair value of certain 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 9.
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 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 ending December 31, 1995.
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.
3. Ownership Structure:
The General Partner of the Company and the Operating Partnership is SDI Partners
I, L.P. (the "GP"), a Delaware limited partnership whose sole general partner is
Lehman/SDI, Inc., formerly known as Shearson/SDI, Inc., an indirect,
wholly-owned subsidiary of Lehman Brothers Holdings, Inc. ("Lehman Holdings"),
formerly known as Shearson Lehman Brothers Holdings, Inc.
The Company's Class A and Class B limited partnership interests outstanding, as
of December 31, 1995, are held as follows:
Class A Class B
Interests Interests
Public Investors 11,010,035 ( 99.2%) 11,637,103 ( 53.7%)
Lehman Holdings and
Affiliates -- 5,896,678 ( 27.2%)
Executive Officers and
Directors (a) 89,538 ( 0.8%) 4,141,965 ( 19.1%)
------------------- -------------------
Total 11,099,573 (100.0%) 21,675,746 (100.0%)(b)
=================== ======================
(a) Executive officers of the Company and the Operating Partnership and
Directors of Lehman/SDI, Inc., including beneficial ownership.
(b) Net of 523,400 Class B interests held in the Company's treasury
as of December 31, 1995.
F - 29
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
3. Ownership Structure, continued:
Except as expressly limited by the partnership agreement, the GP has complete
and exclusive discretion in the management and control of the affairs and
business of the Company and its subsidiary partnership. The holders of Class A
and Class B interests have certain limited voting rights under the partnership
agreement generally regarding the removal of the GP and the sale of all or
substantially all of the assets of the Company or the Operating Partnership or
dissolution of the Company.
Holders of Class A interests are entitled to receive, to the extent cash is
available, $1.10 annually (the "priority return") per Class A interest, which is
currently paid monthly. On December 15, 1995, the Company declared a priority
return distribution for the month of January 1996 in the amount of $1,038 or
$.091666 per Class A interest payable January 31, 1996, to holders of record
December 29, 1995. The Class A capital account as of December 31, 1995 and 1994,
was $10.00 per Class A interest.
All items of income and loss and cash distributions of the Operating Partnership
are allocated 99% to the Company and l% to the GP. The GP is allocated l% of the
Company's share of income or loss and cash distributions, with the remaining 99%
allocated to the limited partners.
Income for federal income tax purposes is allocated to the holders of Class A
interests, until the Class A capital account of each holder is equal to the sum
of their initial capital investment ($10.00 per Class A interest), plus any
unpaid priority return. For years 1995, 1994, and 1993, federal taxable income
per Class A interest amounted to $1.10 per year, all of which represented
ordinary income. Any remaining income after the Class A allocation is allocated
to the holders of Class B interests. The holders of Class B interests receive an
allocable share of loss until the Class B capital account (as defined in the
partnership agreement) of each holder is reduced to zero. Thereafter, any
unallocated loss is allocated to the holders of Class A interests.
For 1995, 1994 and 1993, federal taxable income amounted to $1.6923, $1.1146 and
$.5411 per Class B interest, respectively. Federal taxable income in 1995
consists of ordinary income of $.5326 per Class B interest and a combined
capital gain of $1.1597 per Class B interest related to the sale of the Dorman
Products and Downey Glass divisions (see Note 5, Acquisitions/Divestitures).
Federal taxable income in 1994 consisted of ordinary income of $.7069 per Class
B interest and a capital gain of $.4077 per Class B interest related to the sale
of the Electrical Products Group divisions. In 1993, federal taxable income
consisted of ordinary income only. The Class B capital account as of December
31, 1995 and 1994, was approximately $2.54 and $1.52 per Class B interest,
respectively.
Holders of Class B interests are entitled to receive annual cash distributions
sufficient to cover their tax liabilities on taxable income allocated to the
Class B interests (the "Class B Tax Distribution"). For 1995, the Class B Tax
Distribution amounted to $14,807 or $.6695 per Class B interest which was
partially paid in the amount of $.02 per Class B interest per month for the
period January through December 1995 and a partial distribution of $.15 paid on
April 10, 1995 to holders of record on December 30, 1994, related to the taxable
gain on the sale of the Dorman Products division on January 3, 1995. On March
29, 1996, the Partnership intends to distribute the balance of the tax
distribution due of $.2795 per Class B interest, as follows: approximately
$.1745 to holders of record on December 30, 1994 for the balance due on the
taxable gain on the sale
F - 30
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
3. Ownership Structure, continued:
of Dorman Products; $.00197 per month to holders of record of Class B interests
on the first day of the month during January through December 1995 for the
balance due on ordinary income; and $.0814 to holders of record on September 29,
1995 related to the taxable gain on the sale of the Downey Glass division (see
Note 5, Acquisitions/Divestitures).
For 1994, the Class B Tax Distribution amounted to $10,895 or $.492619 per Class
B interest which was partially paid in the amount of $.009352 per Class B
interest per month for the period January through March 1994 and $.02 per Class
B interest per month during the period April through December 1994. The monthly
tax distributions were paid to holders of record on the first day of each month
during 1994 and aggregated $.208056 per Class B interest for the full year 1994.
On March 31, 1995, the Partnership paid the balance of the tax distribution due
of $.284563 per Class B interest, as follows: approximately $.01981 per month to
holders of record of Class B interests on the first day of the month during
January through March 1994, $.00916 per month for April through November 1994,
and $.15185 for December 1994 which includes $.14269 related to the capital gain
on the sale of the Electrical Products Group divisions. (See Note 5,
Acquisitions/ Divestitures.)
For 1993, the Class B Tax Distribution amounted to $5,925 or $.267864 per Class
B interest which was paid in the amount of $.009352 per Class B interest per
month during 1993 to holders of record on the first day of each month. The
remaining balance due of $.15564 per Class B Interest was paid on March 31, 1994
to holders of record on the first day of each month during 1993 in the amount of
$.01297 per Class B Interest.
On December 15, 1995, the Company declared a Class B Tax Distribution for the
month of January 1996 in the amount of $442 or $.02 per Class B interest payable
January 31, 1996, to holders of record on December 29, 1995.
4. Extraordinary Loss:
In 1995, the Company recorded an extraordinary loss of $629 or approximately
$.03 per Class B limited partnership interest, due to early extinguishment of a
portion of the Operating Partnership's Series A 9.08% and Series B 8.44% Senior
Notes (See Note 9, Long-Term Debt).
5. Acquisitions/Divestitures:
In November 1995, the Company's Hillman Fastener division purchased certain
assets of the Retail division of Curtis Industries of Eastlake, Ohio, for an
aggregate purchase price of $7,457 and the assumption of certain liabilities.
The aggregate purchase price includes goodwill of $2,051. This acquisition has
been accounted for as a purchase and, accordingly, the results of operations
have been included in the accompanying consolidated financial statements from
the date of acquisition.
No acquisitions were consummated during 1994 and 1993 as a result of
restrictions on acquisition expenditures imposed by the credit agreements of the
Operating Partnership (See Note 8, Lines of Credit and Note 9, Long-Term Debt).
F - 31
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
5. Acquisitions/Divestitures, continued:
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 (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 $4,144 or $.19 per Class B interest 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 or $.75 per Class B interest 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.
On December 5, 1994, the Operating Partnership sold certain assets of its
Electrical Products Group divisions for a cash consideration, net of expenses,
of approximately $27,800 (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 $3,523 or $.16 per Class B interest included in the
1994 consolidated statement of income. The aggregate assets sold, net of
liabilities, in connection with the sale of the Electrical Products Group
divisions was approximately $24,300.
Sales from the divested divisions aggregated $29,077, $177,107 and $162,270 for
the years ended December 31, 1995, 1994 and 1993, respectively. Total assets for
the divested divisions were $37,982 at December 31, 1994.
6. Related Party Transactions:
The GP earns 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). The management fee will be paid only after cumulative
outstanding priority returns and additional required cash distributions are
paid. In addition, the management fee can be paid only if the Company complies
with covenants required by the credit agreements (see Note 8, Lines of Credit,
and Note 9, Long-Term Debt). Management fees earned but not paid accumulate
until paid. Management fees earned in each of years 1995, 1994 and 1993 were
$3,330. In March 1995, the Operating Partnership paid $3,330 of the 1994
management fee. In March 1994, the Operating Partnership paid $1,665 of the 1993
management fee and deferred payment of the remaining $1,665 until June 1994 to
maintain compliance with requirements of the credit agreements. In March of
1993, the Operating Partnership paid $1,665 of the 1992 management fee and
deferred payment of the remaining $1,665 until June 1993 to maintain compliance
with requirements of credit agreements. Management expects to pay in full the
1995 management fee due March 31, 1996.
Certain warehouse and office facilities are leased from employees under various
operating leases. Charges to income applicable to these leases totaled $260 in
1995, $405 in 1994, and $367 in 1993. Aggregate future minimum lease obligations
under these leases at December 31, 1995, were $156.
F - 32
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
7. Property and Equipment:
Property and equipment consist of the following at December 31, 1995 and 1994:
1995 1994
------- -------
Land $ 3,319 $ 3,589
Buildings and leasehold improvements 18,048 24,133
Machinery and equipment 16,290 23,526
Furniture and fixtures 9,208 9,316
------- -------
46,865 60,564
Less accumulated depreciation 26,684 33,050
------- -------
$20,181 $27,514
======= =======
8. Lines of Credit:
On December 22, 1992, the Operating Partnership entered into a $50,000 bank
credit agreement with three lenders. This agreement provides borrowings on a
revolving credit basis at interest rates based on the London Interbank Offered
Rate ("LIBOR") plus 1 and 3/4% and prime. Letters of credit commitments are
issued at varying rates. The bank credit agreement's original termination date
of December 22, 1995 has been extended to December 31, 1997. The credit facility
requires a commitment fee of 1/2 of 1% per year on the average daily unused
portion of the commitment and an annual agent's fee. There is no compensating
balance requirement under this facility. The Company had no bank borrowings
outstanding at December 31, 1995, under the bank credit agreement. The $10,103
outstanding balance under the facility at December 31, 1995, represents letter
of credit commitments only.
The bank credit agreement contains covenants restricting distributions from the
Operating Partnership to the Company and the GP. Amounts available for
distribution in accordance with the bank credit agreement at December 31, 1995,
were $8,620. The agreement also requires the maintenance of specific coverage
ratios and levels of financial position and restricts incurrence of additional
debt and the sale of assets. The bank credit agreement did not permit the
Company to consummate acquisitions in 1994 and 1993. Amendments to the agreement
were negotiated in March and December of 1994 to ease certain coverage ratios
and other financial requirements in 1994 and future years. The December 1994
amendment allows for acquisition spending in 1995 and future years up to $15,000
in any calendar year, absent a default or event of default as defined in the
bank credit agreement.
In connection with the sale of operating divisions (see note 5, Acquisitions/
Divestitures) the Operating Partnership was required to reduce permanently the
bank revolver commitment under the bank credit agreement by approximately
$13,000. However, the banks waived this permanent reduction and maintained the
existing bank credit commitment of $50,000. For 1995 and future years, the
lenders have agreed to revise certain covenant tests to exclude the impact of
cash distributions to holders of Class B interests related solely to tax gains
on divisions sold.
The Operating Partnership has another credit facility available in the amount of
$500 for letters of credit of which no amount was outstanding at December 31,
1995. 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.
F - 33
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
8. Lines of Credit, continued:
An indirect, wholly-owned Canadian subsidiary of the Operating Partnership has a
$2,500 Canadian dollar line of credit with a local lender for working capital
purposes of which $463 USD was outstanding at December 31, 1995. This facility,
which is renewable annually, provides bank borrowings at an interest rate of
prime plus 1/4 of 1%. There are no compensating balance requirements or
commitment fees associated with this facility.
Notes payable consisted of the following at December 31, 1995 and 1994:
1995 1994
------ ------
Short-term bank borrowings drawn on
working capital lines of credit $ 463 $ 449
Trade notes payable in accordance with
glass inventory financing arrangements 1,474 1,474
Notes payable in accordance with insurance
financing arrangements 816 786
------ ------
$2,753 $2,709
====== ======
The weighted average interest rate on the outstanding notes payable borrowings
at December 31, 1995 and 1994 was 3.01% and 2.84%, respectively.
9. Long-Term Debt:
On December 22, 1992, the Operating Partnership issued $95,000 of senior notes
with a final maturity of December 1, 2002, through a private placement with
several institutional investors. The proceeds from the sale of the senior notes
in conjunction with the bank credit were used principally to extinguish $110,000
9 1/2% senior notes, interest thereon and related prepayment penalties (see Note
8, Lines of Credit).
The new senior notes were issued in two series, as follows: $65,000 Series A
notes at 9.08% and $30,000 Series B notes at 8.44%. Interest is required to be
paid semiannually on June 1 and December 1 on the outstanding principal of the
senior notes. The Operating Partnership repaid $4,796 and $5,700 of principal on
December 1, 1995 and 1994, respectively. This consisted of $3,282 and $3,900 in
Series A notes, and $1,514 and $1,800 in Series B notes in 1995 and 1994,
respectively. Principal repayments required on the senior notes during each of
the five years subsequent to December 31, 1995, are as follows:
Series A Series B
-------- --------
December 1, 1996 $4,375 $2,020
December 1, 1997 4,375 2,020
December 1, 1998 5,468 2,522
December 1, 1999 6,562 3,030
December 1, 2000 8,201 3,786
Optional prepayments, in multiples of $100, may be made at anytime, as a whole
or in part, with accrued interest thereon plus a penalty ("make-whole amount"),
if any, as defined in the note agreement.
F - 34
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
9. Long-Term Debt, continued:
If the Company sells a significant amount of assets as defined in the note
agreement, it must make an offer of prepayment of note principal to the senior
noteholders determined on an applicable share basis with the bank credit
agreement. The prepayment offer also must include accrued interest thereon plus
a make-whole amount, if any, as defined in the note agreement. Related to the
sale of operating divisions in December 1994 and January 1995 (see Note 5,
Acquisition/Divestitures), the Operating Partnership was required to offer the
noteholders prepayment of senior notes in the amount of $14,175. The noteholders
accepted the prepayment offer which the Operating Partnership paid on March 14,
1995, including accrued interest thereon of $360 and a prepayment penalty of
$629 (see Note 4, Extraordinary Loss).
The senior note agreement contains covenants restricting distributions from the
Operating Partnership to the Company and the GP. Additionally, the note
agreement restricts the incurrence of additional debt and the sale of assets and
requires the maintenance of specific coverage ratios and levels of financial
position. Also, the senior note agreement did not permit the Company to
consummate acquisitions in 1993 and 1994. For 1994 and future years, the senior
noteholders have agreed to ease certain coverage ratios and other financial
requirements. The Operating Partnership is permitted acquisition spending in
1995 and future years of up to $15,000 in any calendar year, absent a default or
event of default as defined in the senior note agreement.
As of December 31, 1995, the fair value estimate of the Company's senior notes
is approximately $73,000 as determined in accordance with SFAS No. 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.
10. 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, 1995:
Operating
Leases
------
1996 $ 9,362
1997 7,892
1998 6,086
1999 4,084
2000 3,228
Later years 5,933
-------
Total minimum lease payments $36,585
=======
Total rental expenses for all operating leases amounted to $14,232 in 1995,
$15,153 in 1994, and $13,830 in 1993.
F - 35
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
11. Deferred Compensation Plans:
Certain officers and employees earn performance-based compensation, payment of
which is deferred until future periods.
The Company adopted a new deferred compensation plan for its officers effective
January 1, 1994. Under this plan, awards are earned 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 of the Operating Partnership,
participants are entitled to payment of awards earned through completion of the
most recent plan year. The amounts charged to income under this plan were $1,186
in 1995 and $850 in 1994. The portion of the Operating Partnership's deferred
compensation liability attributable to this plan is $2,036 as of December 31,
1995.
For a 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
interest until paid. Upon a change in control of the Operating Partnership,
participants are entitled to payment of all vested and non-vested amounts
including accrued interest. The full award is charged to operations in the year
earned. The amounts charged to income under the plan were $1,135, $2,295 and
$700 in 1995, 1994 and 1993, respectively. During the three years ended December
31, 1995, distributions from the plan amounted to $1,422 in 1995, $240 in 1994,
and $332 in 1993. The deferred compensation liability attributable to the plan
amounted to $6,229 at December 31, 1995 of which $1,160 is included in other
accrued expenses.
Under a former 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 of the Operating
Partnership, participants are entitled to payment of their total account balance
including accrued interest. Amounts charged to income and distributions related
to the former plan for the three years ended December 31, 1995 were immaterial.
The portion of the Operating Partnership's deferred compensation liability
attributable to this plan is $724 at December 31, 1995.
In December 1995, the Operating Partnership established a Rabbi trust to assist
in funding the liabilities of the Deferred Compensation plans described above.
This trust purchased insurance policies on the lives of certain participants in
the Deferred Compensation plans. The Operating Partnership is the sole
beneficiary of these insurance policies. The cash surrender value of these
insurance policies was $3,009 at December 31, 1995.
The change of control provision in the deferred compensation plans is triggered
upon a sale of all of the Operating Partnership's business, a change in the GP
or a change, other than due to death or retirement, in a majority of the
directors of Lehman/SDI, Inc., during any one-year period.
F - 36
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
12. Retirement Benefits:
Net periodic pension cost (income) in 1995, 1994, and 1993 for non-contributory
defined benefit plans consists of:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- ------
<S> <C> <C> <C>
Service cost during the period $ 675 $ 1,102 $ 945
Interest cost on projected benefit obligations 1,578 1,534 1,473
Actual return on assets (3,503) (2,100) (2,050)
Net amortization and deferral 1,509 (270) (224)
------- ------- -------
Net periodic pension cost $ 259 $ 266 $ 144
======= ======= =======
Significant assumptions used in determining pension cost (income) include:
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Discount rate 8.25% 7.00% 7.50%
Rates of increase in compensation levels 6.50% 6.50% 4.0%-6.5%
Expected long-term rate of return
on plan assets 8.50% 9.50% 9.50%
The following table sets forth the defined benefit plans' funded status and
amounts recognized in the Company's balance sheets at December 31, 1995 and
1994:
December 31, 1995 December 31, 1994
-------------------------- ----------------------
Assets Projected Assets Projected
Exceed Benefit Exceed Benefit
Projected Obligations Projected Obligations
Actuarial present value of Benefit Exceed Benefit Exceed
beneficial obligations: Obligations Assets Obligations Assets
----------- ------ ----------- ------
<S> <C> <C> <C> <C>
Vested benefit obligation $ 17,304 $ 1,016 $ 9,923 $ 7,513
======== ======== ======== ========
Accumulated benefit obligation $ 17,450 $ 1,016 $ 10,141 $ 7,534
======== ======== ======== ========
Projected benefit obligation $ 21,467 $ 1,016 $ 12,487 $ 7,707
Plan assets at fair value 24,220 897 14,757 7,030
-------- -------- -------- --------
Projected benefit obligation
less than(in excess of)
plan assets 2,753 (119) 2,270 (677)
Unrecognized net loss (668) (161) (1,157) 701
Prior service cost not yet
recognized in net periodic
pension cost (352) - (376) -
Unamortized balance of
unrecognized net transition
asset established at
January 1, 1987 (1,693) (189) (672) (544)
--------- --------- --------- --------
Prepaid pension cost (pension
liability) recognized
in the balance sheet $ 40 $ (469) $ 65 $ (520)
========= ========= ========= =========
</TABLE>
F - 37
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
12. Retirement Benefits, continued:
The discount rate assumptions used in determining actuarial present value of
benefit obligations at December 31, 1995 and 1994 were 7.25% and 8.25%,
respectively.
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 charged to operations under all retirement benefit plans are as follows:
1995 1994 1993
---- ---- ----
Defined contribution plans $2,693 $3,498 $2,574
Multi-employer pension plans 374 362 422
Defined benefit plans 259 266 144
------ ------ ------
Total $3,326 $4,126 $3,140
====== ====== ======
Management estimates that its share of unfunded vested liabilities under
multi-employer pension plans is not material.
For the years ended December 31, 1995, 1994 and 1993, the costs of
post-retirement benefits charged to income were $81, $115 and $347,
respectively. The 1995 and 1994 charges were determined in accordance with SFAS
No. 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, 1995, 1994 and 1993 was
$705, $744 and $840, respectively.
13. Income Taxes:
Deferred tax assets are comprised of the following at December 31, 1995 and
1994:
1995 1994
---- ----
Gross deferred tax assets:
Deferred compensation $2,936 $2,123
Prepayment penalties related to
early extinguishment of debt 299 346
------ ------
3,235 2,469
Valuation allowance for deferred
tax assets (391) (325)
------- -------
Net deferred tax asset $2,844 $2,144
======= ======
Management has determined, based on the Company's history of prior operating
earnings and its expectations for the future, that operating income of the
Company will more likely than not be sufficient to recognize fully these net
deferred tax assets. The Company has no deferred tax liability at December 31,
1995 or December 31, 1994.
As of December 31, 1995, the Company's tax basis of its assets and liabilities
was greater than its financial statement basis by approximately $72,000.
F - 38
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
13. Income Taxes, continued:
The provision (benefit) for income taxes consists of the following:
Current income taxes 1995 1994 1993
------- ------- -------
State and local $ 608 $ 276 $ 260
Foreign 629 558 401
------- ------- -------
1,237 834 661
------- ------- -------
Deferred income taxes
Federal (627) (657) 186
State and local (73) (77) 22
------- ------- -------
(700) (734) 208
------- ------- -------
Total income taxes $ 537 $ 100 $ 869
======= ======= =======
14. 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, 1995, the Company had outstanding performance
and bid bonds aggregating $911. As required by sureties, the Company has standby
letters of credit outstanding in the amount of $650 as of December 31, 1995.
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, 1995, the
Company had outstanding letters of credit in the aggregate amount of $4,902
related to these activities.
As of December 31, 1995 the Company has guaranteed approximately $1,773 worth of
lease obligations, principally relating to businesses previously disposed. 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 workman'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, 1995, the Company has provided insurers letters of credit
aggregating $4,551 related to certain insurance programs.
On February 27, 1996, a lawsuit was filed against the Operating Partnership by
the buyer of its Dorman Products division for alleged misrepresentation of
certain facts by the Company upon which the buyer based its offer to purchase
Dorman. The complaint seeks damages of approximately $21,000. In the opinion of
management, the ultimate resolution of this matter will not have a material
effect on the consolidated financial position, operations or cash flows of the
Company.
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 - 39
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
15. Statements of Cash Flows:
Supplemental disclosures of cash flow information are presented below:
Cash paid during the period for: 1995 1994 1993
-------- ------- -------
Interest $ 7,304 $10,097 $ 9,412
------- ------- -------
Income taxes $ 1,190 $ 792 $ 955
------- ------- -------
Supplemental schedule of non-cash investing activities:
Assumed liabilities in connection with
the purchase of assets (See Note 5,
Acquisitions/Divestitures) $ 232 $ -- $ --
------- ------- -------
16. Quarterly Data (unaudited):
<TABLE>
<CAPTION>
1995 First Second Third Fourth
---- ----- ------ ----- ------
<S> <C> <C> <C> <C>
Net sales $154,792 $163,820 $163,214 $147,109
Gross profit 61,441 65,902 66,510 59,657
Income before extraordinary loss 19,862 8,377 7,828 8,678
Extraordinary loss (Note 4) (629) -- -- --
Net income 19,233 8,377 7,828 8,678
Earnings per limited partnership interest:
Income before extraordinary loss:
- Class A $ .27 $ .28 $ .27 $ .28
- Class B $ .77 $ .24 $ .22 $ .25
Extraordinary loss:
- Class A $ -- $ -- $ -- $ --
- Class B $ (.03) $ -- $ -- $ --
Net Income:
- Class A $ .27 $ .28 $ .27 $ .28
- Class B $ .74 $ .24 $ .22 $ .25
1994
Net sales $175,109 $189,360 $192,547 $178,845
Gross profit 67,457 72,019 73,486 71,114
Net income 4,165 8,026 7,656 9,697
Net income per limited
partnership interest
- Class A $ .27 $ .28 $ .27 $ .28
- Class B $ .05 $ .23 $ .21 $ .30
</TABLE>
17. 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.
F - 40
<PAGE>
SUN DISTRIBUTORS L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(dollars in thousands)
18. Segment Information:
The following are the segment disclosures required under SFAS No. 14 with
respect to the Company's reportable segments as identified in Note 1, "Basis of
Presentation" under "Nature of Operations":
<TABLE>
<CAPTION>
Year Ended December 31,
Industry Segment Data:
============================================
1995 1994 1993
====================== ====================== ======================
<S> <C> <C> <C>
Net Sales
Industrial Services $ 424,978 $ 532,719 $ 480,742
Hardware Merchandising 84,720 72,841 56,631
Glass Merchandising 120,650 132,063 120,269
Adjustments and eliminations (1,413) (1,762) (1,935)
----------- ----------- -----------
Consolidated Net Sales $ 628,935 $ 735,861 $ 655,707
Income from Operations
- ----------------------
Industrial Services $ 31,834 $ 39,773 $ 33,021
Hardware Merchandising 9,592 7,096 4,750
Glass Merchandising 3,387 5,756 3,740
Corporate Expenses (13,511) (14,866) (12,536)
----------- ----------- -----------
Consolidated Income from Operations $ 31,302 $ 37,759 $ 28,975
Identifiable Assets
- -------------------
Industrial Services $ 162,681 $ 181,545 $ 197,936
Hardware Merchandising 36,340 24,357 21,518
Glass Merchandising 42,041 53,058 50,299
Corporate Assets 13,635 7,352 3,766
Adjustments and Eliminations (106) (126) (26)
----------- ----------- -----------
Consolidated Assets $ 254,591 $ 266,186 $ 273,493
Capital Expenditures
- --------------------
Industrial Services $ 2,315 $ 2,736 $ 2,580
Hardware Merchandising 539 339 396
Glass Merchandising 1,254 1,094 570
Corporate 191 94 188
----------- ----------- ----------
Consolidated Capital Expenditures $ 4,299 $ 4,263 $ 3,734
Depreciation and Amortization
- -----------------------------
Industrial Services $ 3,339 $ 4,458 $ 4,850
Hardware Merchandising 401 364 392
Glass Merchandising 1,839 2,271 2,573
Corporate 78 49 139
----------- ----------- ----------
Consolidated Total $ 5,657 $ 7,142 $ 7,954
============================================ ====================== ====================== ======================
</TABLE>
F - 41
<PAGE>
EXHIBIT A
---------
GLOSSARY OF DEFINED TERMS
-------------------------
A Interests Class A limited partnership interests in the
Partnership including depositary receipts
therefor.
Appointment Event When the Trust has failed to make full
distributions on the Trust Preferred
Securities for 18 consecutive months or an
Event of Default under the Declaration.
B Interests Class B limited partnership interests in the
Partnership including depositary receipts
therefor.
B Tax Distribution Distribution to B Interests from Cash
Available for Distribution equal to the
product of (i) 125% of the then applicable
maximum Federal income tax rate for
individuals and (ii) the taxable income
allocable to the B Interests.
Business Trust Act Delaware Business Trust Act.
Cash Available for Distribution All cash receipts of the Partnership less
cash used to pay or establish a reserve for
expenses.
Code Internal Revenue Code of 1986, as amended.
Common Stock Common Stock, par value $.01 per
share, of the Corporation. Contribution
Agreement Contribution Agreement dated
_______, 1997 between the Corporation and
Lehman Brothers Holdings Inc.
Conversion The conversion of the Partnership to
corporate form as generally described in this
Proxy Statement/Prospectus and related
transactions entered into pursuant to the
Conversion Agreement.
Conversion Agreement Agreement and Plan of Conversion, dated
______ 1997, among the Partnership, LPSub,
the Operating Partnership, the General
Partner, SunSub A and SunSub B.
Conversion Proposal The proposal to convert the Partnership to
corporate form.
Corporation SunSource Inc., a Delaware corporation.
Creditor Person to whom the Trust owes any debts,
obligations, costs, expenses and taxes.
Declaration Declaration of trust of the Trust.
depositary receipts Depositary receipts for A Interests or B
Interests.
Delaware Trustee __________, an affiliate of the Indenture
Trustee.
DGCL Delaware General Corporation Law.
Direct Participant Securities brokers and dealers, banks, trust
companies, clearing corporations, and certain
other organizations that are participants in
DTC. Distributions Payments with respect to
the Trust Preferred Securities.
DTC The Depository Trust Company
A - 1
<PAGE>
Effective Time The date on which the Conversion will
become effective. The specific date will be
determined by the General Partner and will be
publicly announced no later than the date of
the Special Meeting.
Event of Default Event of Default with respect to the Trust
Securities.
Exchange Act Securities and Exchange Act of 1934, as
amended.
Expiration Date
Guarantee Payments Payments on distributions guaranteed by the
Corporation pursuant to the Preferred
Securities Guarantee.
General Partner SDI Partners I, L.P., a Delaware limited
partnership.
Indenture Indenture dated as of ______________, 1997
between the Corporation and Bank of New York,
as Trustee governing the Junior Subordinated
Debentures.
Indenture Event of Default Event of default under the Indenture with
respect to the Junior Subordinated
Debentures. Indenture Trustee Bank of New
York
Indirect Participants Securities brokers and dealers, banks and
trust companies that clear through or
maintain a custodial relationship with a
Direct Participant of DTC, either directly or
indirectly.
Interests Limited partnership interests in the
Partnership.
Investment Company Event The Regular Trustees shall have received a
legal opinion that the Trust may be
considered an investment company under the
Investment Company Act of 1940, as amended.
IRS Internal Revenue Service
Junior Subordinated Debentures Junior Subordinated Debentures of the
Corporation.
Lehman Brothers Lehman/SDI and any of its affiliates.
Lehman/SDI Lehman/SDI, Inc., a Delaware corporation,
general partner of the General Partner.
limited partners Holders of Interests, including holders that
are admitted to the Partnership as limited
partners, and holders who are merely
assignees of the Interests.
Liquidation Distribution Distribution on dissolution or liquidation of
the Trust.
LPSub LPSub Inc., a wholly owned subsidiary of the
Partnership.
Management Fee Management fee payable by the Operating
Partnership to the General Partner of
$3,330,000 annually.
Merger Merger of the Partnership, SunSub A and
SunSub B with and into the Operating
Partnership pursuant to the Conversion
Agreement.
NYSE New York Stock Exchange.
Operating Partnership SDI Operating Partners, L.P., a Delaware
limited partnership.
Operating Partnership Agreement Amended and Restated Agreement of Limited
Partnership of the Operating Partnership.
Pari passu Equal in priority.
Partners Both the holder of the general partnership
interest in the Partnership and holders of A
Interests and B Interests.
A - 2
<PAGE>
Partnership SunSource L.P., a Delaware limited
partnership.
Partnership Agreement Amended and Restated Agreement of Limited
Partnership of the Partnership.
Preferred Securities Guarantee Guarantee by the Corporation on a
subordinated basis of the payment of
distributions on the Trust Preferred
Securities and payments on liquidation of the
Trust and redemption of Trust Preferred
Securities. Preferred Securites Global
Certificate
Preferred Share Fraction One one-hundredth of a Preferred Share,
carrying voting and dividend rights that are
intended to produce the equivalent of one
share of Common Stock.
Preferred Shares Series A Junior Participating Preferred
Shares, par value $0.01 per share, of the
Corporation. Priority Return Distribution to
A Interests from Cash Available for
Distribution annually of $1.10 simple
cumulative return.
Pro Rata Basis Pro rata to each holder of Trust Securities
according to the aggregate liquidation amount
of the Trust Securities held by the relevant
holder in relation to the aggregate
liquidation amount of all Trust Securities
outstanding.
Property Trustee Core Sates Bank N.A.
Record Date Close of business on March , 1997, for
the determination of limited partners
entitled to vote at the Special Meeting.
Redemption Price $25 plus accrued and unpaid distributions on
the Trust Preferred Securities to the date of
redemption.
Regular Trustees Three individual trustees of the Trust.
Rights Rights to purchase shares of Preferred Stock
of the Corporation and, in certain cases,
Common Stock of the Corporation, as described
in the Rights Agreement.
SEC Securities and Exchange Commission.
Securities Act Securities Act of 1933, as amended.
Smith Barney Smith Barney, Inc., financial adviser to the
Special Committee.
Special Committee Elected by the Board of Directors of
Lehman/SDI to consider and advise the entire
Board concerning the fairness to the limited
partners of the terms of the Conversion
related to the exchange of general and
limited partnership interests in the
Partnership. The members of the Special
Committee are O. Gordon Brewer, Jr. and
Ernest L. Ransome, III.
Special Event A Tax Event or Investment Company Event.
Special Meeting The Special Meeting of the limited partners
of SunSource L.P., to be held at
__________________, Philadelphia,
Pennsylvania on April _____, 1997 at 10:00
a.m., local time. At the Special Meeting, the
limited partners will vote upon the proposed
Conversion.
Special Regular Trustee Trustee to be elected by
holders of Trust Preferred Securities if
distributions are in arrears for 18
consecutive months or there is an Event of
Default. SunSource The Partnership, prior to
the Conversion, and the Corporation, after
the Conversion, including in each case their
respective subsidiaries.
SunSub A SunSub A, Inc., a wholly owned subsidiary of
the Corporation.
SunSub B SunSub B Inc., a wholly owned subsidiary of
the Corporation.
A - 3
<PAGE>
Tax Event The Regular Trustees shall have received a
tax opinion to the effect that the payment of
interest to the Trust may be taxable to the
Trust or interest payable by the Corporation
on the Junior Subordinated Debentures may not
be deductible by the Corporation for federal
income tax.
Trust SunSource Capital Trust, a Delaware statutory
business trust.
Trust Indenture Act Trust Indenture Act of 1939, as amended.
Trust Common Securities Common Securities of the Trust.
Trust Preferred Securities 11.6% Trust Preferred Securities of the
Trust.
Trust Securities Trust Preferred Securities and Trust Common
Securities.
A - 4
<PAGE>
EXHIBIT B
AGREEMENT AND PLAN OF CONVERSION
AGREEMENT AND PLAN OF CONVERSION, dated as of March __, 1997, by and
among SunSource Inc., a Delaware corporation (the "Corporation"); SunSource
L.P., a Delaware limited partnership (the "Partnership"); LPSub Inc., a
Delaware corporation ("LPSub"); Lehman/SDI, Inc. a Delaware corporation
("Lehman/SDI"); and the limited partners of SDI Partners I, L.P. ("GP Limited
Partners").
B A C K G R O U N D
The Partnership is a master limited partnership whose general partner
is SDI Partners I, L.P. ("the General Partner") and whose Class A and Class B
limited partnership interests ("A Interests" and "B Interests") are publicly
held. Lehman/SDI is the general partner of the General Partner. The parties
desire to convert the Partnership to corporate form (the "Conversion") and to
that end have newly formed the Corporation and LPSub, a wholly-owned
subsidiary of the Partnership. The Partnership owns the limited partnership
interest in SDI Operating Partners, L.P. (the "Operating Partnership") with the
general partnership interest of the Operating Partnership being owned by the
General Partner.
- -------------------------------------------------------------------
The parties have also newly formed SunSource Capital Trust, a Delaware
statutory business trust (the "Trust"). The Corporation will contribute Junior
Subordinated Debentures to the Trust in exchange for 11.6% Trust Preferred
Securities (the "Trust Preferred Securities") and Trust Common Securities (the
"Trust Common Securities").
The parties desire to accomplish the Conversion through (i) the
contribution by the Partnership of the limited partnership interest in the
Operating Partnership to LPSub in exchange for shares of Class A Common Stock
of LPSub; (ii) the contribution by Lehman/SDI of its general partnership
interest in the General Partner to LPSub in exchange for shares of Class B
Common Stock of LPSub; (iii) the contribution by the GP Limited Partners of
their limited partnership interests in the General Partner to the Corporation in
exchange for shares of Common Stock of the Corporation; and (iv) the merger
provided for herein (the "Merger") by which the Partnership and LPSub will be
merged into the Corporation and the A Interests will receive Trust Preferred
Securities of the Trust and cash and the B Interests and Lehman/SDI will receive
Common Stock of the Corporation.
NOW, THEREFORE, in consideration of the mutual representations,
warranties, covenants, agreements and conditions contained herein, and in order
to set forth the terms and conditions of the Merger and the mode of carrying the
same into effect, the parties hereto, intending to be legally bound, hereby
agree as follows:
ARTICLE I
THE CONVERSION
SECTION 1.1 The Contributions. Immediately prior to the Effective Time
(as hereinafter defined) (i) the Partnership shall contribute the limited
partnership interest in the Operating Partnership to LPSub in exchange for 1,000
shares of Class A Common Stock of LPSub; (ii) Lehman/SDI shall contribute its
general partnership interest in the General Partner to LPSub in exchange for
1,000 shares of Class B Common Stock of LPSub; (iii) the GP Limited Partners
shall contribute their limited partnership interests in the General Partner to
the Corporation in exchange for an aggregate of 468,000 shares of Common Stock
of the Corporation, provided that 75,000 of such shares shall be held in escrow
until the second anniversary of the Effective Time and shall only be distributed
to the GP Limited Partners if the Corporation is then current on distributions
on the Trust Preferred Securities; and (iv) the Corporation shall contribute the
limited partnership interests in the General Partner to a newly formed wholly
owned subsidiary.
-1-
<PAGE>
SECTION 1.2 The Merger. Subject to the terms and conditions of this
Agreement, at the Effective Time, the Partnership and LPSub shall be merged with
and into the Corporation (such parties to the Merger being sometimes hereinafter
collectively referred to as the "Constituent Entities") pursuant to the
Agreement of Merger attached hereto as Annex 1 (the "Merger Agreement") and the
separate existence of the Partnership and LPSub shall cease. The Corporation
shall be the surviving entity in the Merger (sometimes hereinafter referred to
as the "Surviving Entity") and shall continue to be governed by the laws of the
State of Delaware, and all rights, privileges, immunities and franchises of the
Constituent Entities shall vest in the Surviving Entity and continue unaffected
by the Merger.
SECTION 1.3 Terms and Conditions of The Merger. The manner of
converting the securities of the Constituent Entities shall be as set forth in
Section 5 of the Merger Agreement.
SECTION 1.4 Timing
(a) Limited Partner Approval. The Partnership shall submit the
proposal to convert to corporate form (the "Conversion Proposal") to its limited
partners for approval and adoption at a meeting to be held as soon as
practicable. In connection with such meeting, the Partnership shall take such
reasonable steps as shall be necessary for the prompt preparation and filing by
the Partnership of a proxy statement (the "Proxy Statement") under the
Securities Exchange Act of 1934 (the "Exchange Act") and by the Corporation of a
registration statement (the "Registration Statement") and prospectus (the
"Prospectus") under the Securities Act of 1933 (the "Securities Act"), with the
Securities and Exchange Commission ("SEC") and shall cause the Proxy
Statement/Prospectus to be mailed to the limited partners of the Partnership as
soon as practicable. Adoption of the Conversion Proposal requires (i) the
approval of limited partners holding a majority of the outstanding A Interests
and B Interests, each voting separately as a class, and (ii) the approval of
unaffiliated limited partners (limited partners other than affiliates of the
General Partner) holding a majority of the outstanding A Interests and B
Interests held by unaffiliated limited partners, each voting separately as a
class (the "Class Votes").
(b) Approval by Other Parties. The Partnership and Lehman/SDI,
as stockholders of LPSub at the time of the Closing (as hereinafter defined)
approve and adopt the Merger Agreement. The Partnership and the GP Limited
Partners, as stockholders of the Corporation at the time of the Closing approve
and adopt the Merger Agreement. LPSub, as general partner of the General Partner
at the time of the Closing approves and adopts the Merger Agreement on behalf of
the General Partner.
(c) Closing and Effective Time. Subject to the Conversion
Proposal receiving the requisite approval by the limited partners and subject to
the provisions of this Agreement, the parties shall hold a closing (the
"Closing") on (i) the later of (A) the business day following the meeting of the
limited partners of the Partnership to consider and vote upon the Conversion
Proposal or (B) the business day on which the last of the conditions set forth
in Article IV is fulfilled or waived or (ii) such other date as the parties
hereto may agree (the "Closing Date"), at 10:00 A.M. (local time) at the offices
of Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania, or at such other
place or time as the parties hereto may agree. The Merger shall become effective
as set forth in Section 3 of the Merger Agreement (the "Effective Time"). At the
Closing, the contributions provided for in Section 1.1 hereof shall be made and
immediately thereafter a certificate of merger shall be filed in the Office
the Secretary of State of Delaware.
(d) Certificate of Incorporation and Bylaws. From and after
the Effective Time, and pursuant to the Merger, the Certificate of Incorporation
and Bylaws of the Corporation as attached as Annexes 2 and 3, respectively,
shall continue to be the Certificate of Incorporation and Bylaws of the
Corporation as the surviving entity without change or amendment until further
amended in accordance with the provisions thereof and applicable law.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
SECTION 2.1 Representations and Warranties by the Partnership. The
Partnership represents and warrants to the other parties that:
(a) Organization and Good Standing of the Partnership, the
Operating Partnership and LPSub. Each of the Partnership and the Operating
Partnership is a limited partnership duly organized, validly existing and in
good standing under the laws of the State of Delaware. LPSub is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware.
-2-
<PAGE>
(b) Capitalization. The sole general partner of the
Partnership is the General Partner and there are issued and outstanding
11,099,573 A Interests and 21,675,746 B Interests of the Partnership. The sole
general partner of the Operating Partnership is the General Partner and the sole
limited partner of the Operating Partnership is the Partnership. The authorized
capital stock of LPSub consists of 1,001 shares of Class A Common Stock, par
value $.01 per share, of which one share is outstanding and owned by the
Partnership, and 1,000 shares of Class B Common Stock, of which no shares are
outstanding.
There is no outstanding option, warrant or other agreement or
commitment to which either the Partnership, the Operating Partnership or LPSub
is a party or by which it is bound providing for the issuance of any additional
securities of the Partnership, the Operating Partnership or LPSub.
(c) Authorization. The execution, delivery and performance of
this Agreement have been duly and validly authorized by all necessary
partnership action on the part of the Partnership other than the approval of the
Conversion Proposal by the limited partners of the Partnership and by all
necessary corporate action on the part of LPSub. This Agreement has been duly
executed and delivered by the Partnership and by LPSub and is enforceable
against each of LPSub and the Partnership in accordance with its terms.
(d) Proxy Statement; Other Information. The Partnership
represents that the Registration Statement, the Proxy Statement, the Schedule
13E-3 and all other filings with the SEC in connection with the Conversion
comply in all material respects with the Securities Act and the Exchange Act, as
the case may be, and that these materials do not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which they were made, not
misleading.
(e) Consents and Approvals; No Violation. Neither the
execution and delivery of this Agreement by the Partnership and LPSub nor the
consummation of the transactions contemplated hereby will (i) conflict with or
result in any breach of any provision of the Agreement of Limited Partnership of
the Partnership (the "Partnership Agreement"); (ii) require any consent,
approval, authorization or permit of, or filing with or notification to, any
governmental or regulatory authority or body, except (A) pursuant to the
Securities Act and the Exchange Act or the rules and requirements of any
national securities exchange or the National Association of Securities Dealers,
Inc., (B) the filing of a certificate of merger pursuant to the Revised Uniform
Limited Partnership Act (the "Delaware RULPA") and the General Corporation Law
of the State of Delaware (the "DGCL"), (C) filings under state securities laws
or in connection with maintaining the good standing and qualification of the
Corporation following the Effective Time, (D) Hart-Scott-Rodino Premerger
Notification Act filings, if any or (E) where the failure to obtain such
consent, approval, authorization or permit, or to make such filing or
notification, would not in the aggregate have a material adverse effect on the
Partnership or the Operating Partnership; (iii) result in a default (or give
rise to any right of termination, unilateral modification or amendment,
cancellation or acceleration) under any of the terms, conditions or provisions
of any note, license, agreement or other instrument or obligation to which the
Partnership or the Operating Partnership is a party or by which the Partnership
or the Operating Partnership or any of their respective assets may be bound,
except for such defaults (or rights of termination, unilateral modification or
amendment, cancellation or acceleration) which in the aggregate would not have a
material adverse effect on the Partnership or the Operating Partnership; or (iv)
violate any order, writ, injunction, decree, judgment, ordinance, statute, rule
or regulation applicable to the Partnership or the Operating Partnership or any
of their respective properties or businesses, except for violations (other than
of orders, writs, injunctions or decrees) which would not in the aggregate have
a material adverse effect on the Partnership or the Operating Partnership.
SECTION 2.2 Representations and Warranties by the Corporation.
The Corporation represents and warrants to the other parties that:
(a) Organization and Good Standing of the Corporation and the
Trust. The Corporation is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware. The Trust is a statutory
business trust duly organized, validly existing and in good standing under the
laws of the State of Delaware.
-3-
<PAGE>
(b) Capitalization. The authorized capital stock of the
Corporation consists of 1,000,000 shares of Preferred Stock, par value $.01 per
share, of which none are outstanding, and 20,000,000 shares of Common Stock, par
value $.01 per share, of which 1,000 shares are outstanding and owned by the
Partnership. The authorized securities of the Trust consist of 4,217,837 shares
of Trust Preferred Securities, of which none are outstanding, and 130,449 shares
of Trust Common Securities, of which 1,000 shares are outstanding and owned by
the Corporation.
There is no outstanding option, warrant or other agreement or
commitment to which either the Corporation or the Trust is a party or by which
it is bound providing for the issuance of any additional securities of the
Corporation or the Trust except for the issuance by the Trust to the Corporation
of 4,217,837 Trust Preferred Securities in exchange for Junior Subordinated
Debentures and 130,449 Trust Common Securities for cash and except pursuant to
this Agreement.
(c) Authorization. The execution, delivery and performance of
this Agreement has been duly and validly authorized by all necessary corporate
action on the part of the Corporation. This Agreement has been duly executed and
delivered by the Corporation and is enforceable against it in accordance with
its terms.
(d) Consents and Approvals; No Violation. Neither the
execution and delivery of this Agreement by the Corporation nor the consummation
of the transactions contemplated hereby will (i) conflict with or result in any
breach of any provision of the Corporation's Certificate of Incorporation or
Bylaws; (ii) require any consent, approval, authorization or permit of, or
filing with or notification to, any governmental or regulatory authority or
body, except (A) pursuant to the Securities Act and the Exchange Act or the
rules and requirements of any national securities exchange or the National
Association of Securities Dealers, Inc., (B) the filing of a certificate of
merger pursuant to the Delaware RULPA and the DGCL, (C) filings under state
securities laws or in connection with maintaining the good standing and
qualification of the Corporation following the Effective Time, (D)
Hart-Scott-Rodino Premerger Notification Act filings, if any or (E) where the
failure to obtain such consent, approval, authorization or permit, or to make
such filing or notification, would not in the aggregate have a material adverse
effect on the Corporation; (iii) result in a default (or give rise to any right
of termination, unilateral modification or amendment, cancellation or
acceleration) under any of the terms, conditions or provisions of any note,
license, agreement or other instrument or obligation to which the Corporation is
a party or by which it or any of its assets may be bound, except for such
defaults (or rights of termination, unilateral modification or amendment,
cancellation or acceleration) which in the aggregate would not have a material
adverse effect on the Corporation; or (iv) violate any order, writ, injunction,
decree, judgment, ordinance, statute, rule or regulation applicable to the
Corporation or any of its properties or businesses, except for violations (other
than of orders, writs, injunctions or decrees) which would not in the aggregate
have a material adverse effect on the Corporation.
SECTION 2.3 Representations and Warranties by Lehman/SDI and the GP
Limited Partners. Each of Lehman/SDI and the GP Limited Partners severally
represents and warrants to the other parties that:
(a) Organization and Good Standing. It is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation.
(b) Authorization. The execution, delivery and performance of
this Agreement have been duly and validly authorized by all necessary corporate
action on its part. This Agreement has been duly executed and delivered by it.
(c) Consents and Approvals; No Violation. Neither the
execution and delivery of this Agreement by it nor the consummation of the
transactions contemplated hereby will (i) conflict with or result in any breach
of any provision of the Agreement of Limited Partnership of the General Partner,
the Partnership Agreement or its certificate of incorporation or bylaws, as the
case may be; (ii) require any consent, approval, authorization or permit of, or
filing with or notification to, any governmental or regulatory authority or
body, except (A) pursuant to the Securities Act and the Exchange Act or the
rules and requirements of any national securities exchange or the National
Association of Securities Dealers, Inc., (B) the filing of a certificate of
merger pursuant to the Delaware RULPA and DGCL, (C) filings under state
securities laws
-4-
<PAGE>
or in connection with maintaining the good standing and qualification of the
Corporation following the Effective Time, (D) Hart-Scott-Rodino Premerger
Notification Act filings, if any or (E) where the failure to obtain such
consent, approval, authorization or permit, or to make such filing or
notification, would not in the aggregate have a material adverse effect on the
General Partner or on it; (iii) result in a default (or give rise to any right
of termination, unilateral modification or amendment, cancellation or
acceleration) under any of the terms, conditions or provisions of any note,
license, agreement or other instrument or obligation to which it or the General
Partner is a party or by which they or any of their assets may be bound, except
for such defaults (or rights of termination, unilateral modification or
amendment, cancellation or acceleration) which in the aggregate would not have a
material adverse effect on it or on the General Partner; or (iv) violate any
order, writ, injunction, decree, judgment, ordinance, statute, rule or
regulation applicable to it or to the General Partner or any of its properties
or businesses, except for violations (other than of orders, writs, injunctions
or decrees) which would not in the aggregate have a material adverse effect on
it or on the General Partner.
(d) Certain Agreements. Except as disclosed in the
Registration Statement, (i) there are no agreements in effect between the
General Partner or any of its affiliates, on the one hand, and the Partnership
and the Operating Partnership, on the other; and (ii) there are no material
written agreements in effect between Lehman Brothers or any of its affiliates,
on the one hand, and any member of management, on the other.
(e) Ownership of Partnership Interests; Title. It is the owner
of record and beneficially of the general or limited partnership interest in the
General Partner. It has not received any notice of any adverse claim to the
ownership of any such interest and does not have any reason to know of any such
adverse claim that may be justified. On the Closing Date, it shall have good and
transferable title to such interest, free and clear of all liens.
ARTICLE III
ADDITIONAL COVENANTS AND AGREEMENTS
SECTION 3.1 Legal Conditions to Conversion. Each of the parties hereto
will take all reasonable actions necessary to comply promptly with all legal
requirements which may be imposed on itself with respect to the Conversion.
SECTION 3.2 Affiliates. Prior to the Closing Date the Partnership shall
deliver to the Corporation a letter identifying all persons who are, at the time
the Conversion Proposal is submitted for approval to the limited partners of the
Partnership, "affiliates" of the Partnership for purposes of Rule 145 under the
Securities Act. The Partnership shall use its best efforts to cause each such
person to deliver to the Corporation on or prior to the Closing Date executed
affiliates' letters in customary form.
SECTION 3.3 Fees and Expenses. Whether or not the Conversion is
consummated, all costs and expenses incurred by the Partnership in connection
with this Agreement and the transactions contemplated hereunder shall be paid by
the Partnership.
SECTION 3.4 Stock Exchange Listing. The Corporation shall use its best
efforts to cause the Trust Preferred Securities and Common Stock to be issued in
the Conversion to be approved for listing on the New York Stock Exchange (the
"NYSE"), subject to official notice of issuance, prior to the Closing Date. The
A Interests and the B Interests will be delisted at or immediately after the
Effective Time.
SECTION 3.5 Indemnification.
(a) The Partnership shall, and from and after the Effective
Time, the Corporation shall, indemnify, defend and hold harmless each person who
is now, or has been at any time prior to the date of this Agreement or who
becomes prior to the Effective Time, an officer, director, partner, shareholder,
agent or fiduciary of the Partnership, the Operating Partnership, the General
Partner, Lehman/SDI or the Corporation (the "Companies") or an affiliate of such
-5-
<PAGE>
person (collectively, the "Indemnified Parties") against all losses, claims,
damages, costs, expenses, liabilities or judgments, or amounts that are paid in
settlement with the approval of the indemnifying party (which approval shall not
be unreasonably withheld) of, or in connection with, any claim, action, suit,
proceeding or investigation ("Proceeding") based in whole or in part out of the
fact that such person is or was an officer, director, partner or shareholder of
one or more of the Companies or an affiliate of such person, whether pertaining
to any matter existing or occurring at or prior to the Effective Time and
whether asserted or claimed prior to, or at or after, the Effective Time
("Indemnified Liabilities") in each case to the full extent a partnership or a
corporation is permitted under Delaware law to indemnify such persons or
entities; and the Partnership (and after the Effective Time, the Corporation)
will pay or reimburse expenses in advance of the final disposition of any such
Proceeding to each Indemnified Party to the full extent permitted by law upon
receipt of an undertaking to repay such expenses if and when requested to do so
under applicable law. Without limiting the foregoing, in the event any such
Proceeding is brought against any Indemnified Party (whether arising before or
after the Effective Time), (i) the Indemnified Parties may retain counsel
satisfactory to them, (ii) the Partnership (and after the Effective Time, the
Corporation) shall pay all reasonable fees and expenses of such counsel for the
Indemnified Parties promptly as statements therefor are received, and (iii) the
Partnership (and after the Effective Time, the Corporation) will use all
reasonable efforts to assist in the vigorous defense of any such matter,
provided that neither the Partnership nor the Corporation shall be liable for
any settlement of any claim effected without its written consent, which consent,
however, shall not be unreasonably withheld. Any Indemnified Party wishing to
claim indemnification under this Section 3.5, upon learning of any Proceeding,
shall notify the Partnership (and after the Effective Time, the Corporation)
(but the failure so to notify the Partnership or the Corporation, as the case
may be, shall not relieve the Partnership or the Corporation from any liability
which it may have under this Section 3.5 except to the extent such failure
prejudices the indemnifying party) and shall deliver to the Partnership (and
after the Effective Time, the Corporation) the undertaking referred to above.
The Indemnified Parties as a group may retain only one law firm to represent
them with respect to each such matter unless there is, under applicable
standards of professional conduct, a conflict on any significant issue between
the positions of any two or more Indemnified Parties.
(b) The provisions of this Section 3.5 are intended to be for
the benefit of, and shall be enforceable by, each Indemnified Party and the
Indemnified Party's heirs, representatives, successors and assigns.
ARTICLE IV
CONDITIONS TO THE CONVERSION
SECTION 4.1 Conditions to Each Party's Obligation to Effect the
Conversion. The respective obligations of the parties to effect the Conversion
shall be subject to the satisfaction, on or before the Closing Date, of each of
the following conditions:
(a) Representations and Warranties and Performance. The
representations and warranties of each of the other parties herein contained
shall be true and correct on the Closing Date with the same effect as though
made at such time. Each of the other parties shall have performed in all
material respects all obligations and complied in all material respects with all
agreements, undertakings, covenants and conditions required by this Agreement to
be performed or complied with by it at or prior to the Closing Date.
(b) Pending Litigation. There shall not be any litigation or
other proceeding pending or threatened to restrain or invalidate the
transactions contemplated by this Agreement.
(c) Limited Partner Approval. The Conversion Proposal shall
have been approved and adopted by the requisite vote of the holders of the A
Interests and B Interests pursuant to the Class Votes.
-6-
<PAGE>
(d) Regulatory Approval. All authorizations, consents and
permits required to perform this Agreement and the Merger Agreement shall have
been obtained and the required statutory waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, if applicable, shall have
expired or been terminated.
(e) Registration Statement. The Registration Statement filed
pursuant to Section 1.4 (a) shall have become effective under the Securities Act
and shall not be the subject of any stop order or proceeding seeking a stop
order.
(f) NYSE Listing. The Trust Preferred Securities and the
Common Stock to be issued in the Conversion shall have been approved for listing
on the NYSE upon official notice of issuance.
(g) Blue Sky Compliance. The Corporation shall have complied
with all requirements of state securities or "blue sky" laws with respect to the
issuance of the securities in the Conversion.
(h) Special Committee Determination. The Special Committee
shall not have withdrawn its determination that the Conversion is fair to the
holders of A Interests and B Interests.
(i) Fairness Opinion. The fairness opinion delivered to the
Partnership by Smith Barney Inc. and included as an exhibit to the Proxy
Statement/Prospectus shall not have been rescinded prior to the Closing Date.
(j) Tax Opinion. The tax opinion of Morgan, Lewis & Bockius
LLP delivered to the Partnership and filed as an exhibit to the Registration
Statement shall not have been rescinded prior to the Closing Date.
(k) Validity Opinion. The securities law opinion of Richards,
Layton & Finger regarding the validity of the Trust Preferred Securities
delivered to the Trust and filed as an exhibit to the Registration Statement
shall not have been rescinded prior to the Closing Date.
(l) Available Financing. The Corporation shall have available
financing to refinance existing senior debt on terms acceptable to the
Corporation and the General Partner or shall have received approval of the
Conversion by the existing senior lenders.
(m) Deferred Compensation Plan. The Corporation shall have
received from Donald T. Marshall, John P. McDonnell and Norman V. Edmonson
("Management") undertakings to defer into the Deferred Compensation Plan for Key
Employees of the Operating Partnership all payments due under the previous
Deferred Compensation Plans and Long Term Performance Share Plan of the
Operating Partnership.
(n) Changes in Applicable Law. There shall have been no
material change, in effect or pending, in applicable law , including with
respect to the taxation of the Conversion, the Corporation or the Trust
Preferred Securities.
(o) Contribution Agreement. The Corporation shall have entered
into a Contribution Agreement with Lehman Brothers Inc. on terms satisfactory to
the parties hereto.
(p) Stockholders Agreement. The Corporation, Lehman Brothers
Inc. and Donald T. Marshall, John P. McDonnell, Norman V. Edmonson, Harold J.
Cornelius, Max W. Hillman and Joseph M. Corvino shall have entered into a
Stockholders Agreement on terms satisfactory to the parties hereto.
(q) Registration Rights Agreement. The Corporation, certain
affiliates of Lehman Brothers Inc. and Management shall have entered into a
Registration Rights Agreement on terms satisfactory to the parties hereto.
(r) Escrow Agreement. The Corporation and the Escrow Agent
shall have entered into an Escrow Agreement on terms satisfactory to the
parties hereto.
-7-
<PAGE>
(s) Resale Agreement. The Corporation, certain affiliates of
Lehman Brothers Inc. and Management shall have entered into an agreement
regarding resale of the Corporation's Common Stock.
(t) Other Documentation. The parties hereto shall have entered
into such other agreements as are contemplated by the Conversion, including,
without limitation, the Indenture and Declaration of Trust in respect of the
Junior Subordinated Debentures and Trust Preferred Securities, on terms
satisfactory to the parties hereto.
ARTICLE V
TERMINATION AND ABANDONMENT
SECTION 5.1 Termination and Abandonment. This Agreement may be
terminated and the Conversion may be abandoned at any time prior to the
Effective Time, whether before or after approval by the limited partners of the
Partnership, by action of the Board of Directors of Lehman/SDI.
SECTION 5.2 Amendment. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto; provided,
however, that after approval of the Conversion Proposal by the limited partners
of the Partnership, no amendment may be made which decreases the amount or
changes the type of consideration to which the limited partners of the
Partnership are entitled under this Agreement or otherwise materially adversely
affects the rights of the limited partners of the Partnership without the
further approval of the limited partners.
SECTION 5.3 Waiver. Any time prior to the Effective Time, whether
before or after the meeting referred to in Section 1.4(a), any party hereto may
waive compliance with any of the agreements of any other party or with any
conditions to the obligations of such party; provided, however, that after
approval of the Conversion Proposal by the limited partners of the Partnership,
no waiver may be given which materially adversely affects the rights of the
limited partners of the Partnership without the further approval of the limited
partners . Any agreement on the part of a party hereto to any such extension or
waiver shall be valid if set forth in an instrument in writing signed on behalf
of such party by a duly authorized officer.
ARTICLE VI
MISCELLANEOUS
SECTION 6.1 Notices. Any notices or other communications required or
permitted hereunder shall be sufficiently given if sent by telecopy or facsimile
transmission (with hard copy to follow), registered or certified mail, postage
prepaid, or Federal Express or similar overnight delivery services addressed, in
the case of all parties at
2600 One Logan Square
Philadelphia, PA 19103
Attn: Norman V. Edmonson
with required copies to:
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, PA 19103
Attn: Donald A. Scott, Esq.
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017
Attn: Andrew R. Keller, Esq.
-8-
<PAGE>
Dechert Price & Rhoads
4000 Bell Atlantic Tower
1717 Arch Street
Philadelphia, PA 19103-2793
Attn: William G. Lawlor, Esq.
or such other address as shall be furnished in writing by any party to the
others prior to the giving of the applicable notice or communication.
SECTION 6.2 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
SECTION 6.3 Headings. The headings herein are for convenience of
reference only, do not constitute a part of this Agreement, and shall not be
deemed to limit or affect any of the provisions hereof.
SECTION 6.4 Entire Agreement. This Agreement constitutes the entire
agreement and supersedes all prior agreements and understandings, both written
and oral, among the parties, with respect to the subject matter hereof.
SECTION 6.5 Cooperation. Subject to the terms and conditions of this
Agreement, each of the parties hereto shall use its reasonable efforts to take,
or cause to be taken, such action, to execute and deliver, or cause to be
executed and delivered, such governmental notifications and additional documents
and instruments and to do, or cause to be done, all things necessary, proper or
advisable under the provisions of this Agreement and under applicable law to
consummate and make effective the transactions contemplated by this Agreement.
SECTION 6.6 No Rights, Etc.. Nothing in this Agreement express or
implied is intended to confer upon any other person any rights or remedies under
or by reason of this Agreement.
SECTION 6.7 Governing Law. This Agreement shall be governed in all
respects, including validity, interpretation and effect, by the laws of the
State of Delaware applicable to contracts made and to be performed in that
State.
SECTION 6.8 Special Committee. Any determination by the Corporation or
the General Partner that any of the conditions in Article IV hereof have been
satisfied or waived, or any amendment of this Agreement, shall require the
affirmative vote of the Special Committee (as defined in the Registration
Statement).
-9-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement and
Plan of Conversion to be duly executed as of the date first above written.
SUNSOURCE INC.
By_______________________________
Chairman
SUNSOURCE L.P.
By SDI Partners I, L.P.
Its General Partner
By Lehman/SDI, Inc.
Its General Partner
By________________________________
Chairman
PARTSUB INC.
By________________________________
President
LEHMAN/SDI, INC.
By________________________________
President
DOTMAR CORP.
By__________________________
President
JPM CORP.
By___________________________
President
-10-
<PAGE>
NORVED CORP.
By___________________________
President
DIACOR CORP.
By___________________________
President
HJC CORP.
By___________________________
President
MWH CORP.
By___________________________
President
LJC CORP.
By__________________________
President
CELAR CORP.
By__________________________
President
-11-
<PAGE>
ANNEX 1
AGREEMENT OF MERGER
OF
SUNSOURCE L.P.
(a Delaware limited partnership)
AND
PARTSUB INC.
(a Delaware corporation)
WITH AND INTO
SUNSOURCE INC.
(a Delaware corporation)
AGREEMENT OF MERGER, dated as of ___________, 1997, by and among
SunSource L.P., a Delaware limited partnership (the "Partnership"), LPSub
Inc., a Delaware corporation ("LPSub"; and together with the Partnership, the
"Disappearing Entities"), and SunSource Inc., a Delaware corporation (the
"Corporation"), with reference to the following RECITALS:
A. The Partnership is a Delaware limited partnership whose general
partner is LPSub. Its limited partnership interests are publicly held,
consisting of 11,099,573 Class A limited partnership interests ("A Interests")
and 21,675,746 Class B limited partnership interests ("B Interests).
B. LPSub is a Delaware corporation whose authorized and outstanding
stock consists of 1,001 shares of Class A Common Stock, par value $.01 per
share, all of which are owned of record and beneficially by the Partnership, and
1,000 shares of Class B Common Stock, par value $.01 per share, all of which are
owned of record and beneficially by Lehman/SDI, Inc., a Delaware corporation.
C. The Corporation is a Delaware corporation whose authorized capital
stock consists of 1,000,000 shares of Preferred Stock, par value $.01 per share,
of which none are outstanding, and 20,000,000 shares of Common Stock, par value
$.01 per share, of which 1,000 shares are outstanding and owned by the
Partnership.
D. The Corporation has organized SunSource Capital Trust, a Delaware
statutory business trust (the "Trust"), which has authorized and issued
4,217,837 11.6% Trust Preferred Securities (the "Trust Preferred Securities")
and 130,449 Trust Common Securities, all of which are owned by the Corporation.
E. The partners of the Partnership and the Boards of Directors and
stockholder of LPSub and the Corporation have approved and adopted resolutions
approving and adopting this Agreement of Merger in accordance with the General
Corporation Law of the State of Delaware (the "DGCL") and the Delaware Revised
Uniform Limited Partnership Act (the "DRULPA").
NOW, THEREFORE, the parties hereto, in consideration of the mutual
covenants herein contained and intending to be legally bound, agree as follows:
1. Parties to Merger. The Disappearing Entities and the Corporation
(such parties to the merger being hereinafter sometimes collectively referred to
as the "Constituent Entities") shall effect a merger (the "Merger") in
accordance with and subject to the terms and conditions of this Agreement of
Merger (the "Agreement").
-1-
<PAGE>
2. Merger. At the Effective Time (as defined in Section 3 hereof), each
of the Disappearing Entities shall be merged with and into the Corporation
(which latter entity shall be, and is hereinafter sometimes referred to as, the
"Surviving Entity").
3. Filing and Effective Time. A certificate of merger and such other
documents and instruments as are required by, and complying in all respects
with, the DGCL and DRULPA shall be filed in the Office of the Secretary of State
of Delaware. The Merger shall become effective, following the filing of all such
documents and instruments, at 11:59 p.m. on __________, 1997 (the "Effective
Time").
4. Effect of Merger. At the Effective Time, the separate existence of
each of the Disappearing Entities shall cease, the Surviving Entity shall
continue to be a corporation organized and governed by the laws of the State of
Delaware and the Merger shall have the effects provided therefor by the DGCL and
DRULPA.
5. Partnership Interests and Capital Stock. At the Effective Time:
(a) Each A Interest of the Partnership issued and outstanding
immediately prior to the Effective Time shall, by virtue of the Merger and
without any action on the part of the holders thereof, be converted into 0.38
share of Trust Preferred Securities and $1.30 in cash;
(b) Each B Interest of the Partnership issued and outstanding
immediately prior to the Effective Time shall, by virtue of the Merger and
without any action on the part of the holders thereof, be converted into 0.25
share of Common Stock of the Corporation;
(c) The shares of Class B Common Stock of LPSub issued and
outstanding immediately prior to the Effective Time shall, by virtue of the
Merger and without any action on the part of the holder thereof, be converted
into 538,000 shares of Common Stock;
(d) The shares of Class A Common Stock of LPSub issued and
outstanding immediately prior to the Effective Time shall, by virtue of the
Merger and without any action on the part of the holder thereof, be canceled;
and
(e) No fractional interests shall be issued in the Merger but
in lieu thereof each holder of A Interests shall be entitled to receive cash in
an amount equal to the fraction of a share of Trust Preferred Securities to
which the holder is otherwise entitled multiplied by the average closing price
of the Trust Preferred Securities for the five trading days following the
Effective Time and each holder of B Interests shall be entitled to receive cash
in an amount equal to the fraction of a share of Common Stock to which the
holder is otherwise entitled multiplied by the average closing price of the
Common Stock for the five trading days following the Effective Time.
6. Exchange of Certificates. Promptly after the Effective Time, the
Corporation will mail to all limited partners of record a letter of transmittal
containing instructions with respect to the surrender of depositary receipts for
A Interests in exchange for certificates representing shares of Trust Preferred
Securities and cash and the surrender of depositary receipts for B Interests in
exchange for certificates representing shares of Common Stock. Upon surrender to
the Corporation of one or more depositary receipts, together with a properly
completed letter of transmittal, there will be issued and mailed to former
limited partners of record at the Effective Time a certificate or certificates
representing the number of shares of Trust Preferred Securities and cash or a
certificate or certificates for shares of Common Stock to which such holder is
entitled. From and after the Effective Time, each depositary receipt will
evidence only the right to receive shares of Trust Preferred Securities and cash
or shares of Common Stock. No distributions or dividends with respect to the
Trust Preferred Securities or Common Stock payable to the holders of record
thereof after the Effective Time will be paid to the holder of any unsurrendered
depositary receipts until such depositary receipts are surrendered for exchange,
at which time accumulated distributions or dividends will be paid, without
interest, subject to any applicable escheat laws.
-2-
<PAGE>
7. Further Assurances. Each of the Disappearing Entities shall at any
time, or from time to time, as and when requested by the Surviving Entity, or by
its successors and assigns, execute and deliver, or cause to be executed and
delivered in its name by its last acting officers, or by the corresponding
officers of the Surviving Entity, all such conveyances, assignments, transfers,
deeds, or other instruments, and shall take, or cause to be taken, such further
or other action as the Surviving Entity, or its successors and assigns, may deem
required or convenient in order to evidence the transfer, vesting or devolution
of any property, right, privilege, immunity, power or purpose, or to vest or
perfect in or confirm to the Surviving Entity, or its successors and assigns,
title to and possession of all the properties, rights, privileges, immunities,
powers and purposes of the Disappearing Entities and otherwise to carry out the
intent and purposes hereof.
8. Termination. Notwithstanding approval by the partners and
shareholders of the Constituent Entities of this Agreement, this Agreement may
be terminated at any time prior to the Effective Time by action of the General
Partner.
9. Governing Law. This Agreement shall be construed in accordance with
and governed by the laws of the State of Delaware, without giving effect to
principles of conflicts of law.
IN WITNESS WHEREOF, the parties hereto, pursuant to the approval and
authority duly given by resolutions approved and adopted by their respective
partners and Boards of Directors and shareholder, have duly executed this
Agreement of Merger as of the day and year first written above.
SUNSOURCE L.P.
By LPSub Inc.
Its General Partner
By________________________________
President
LPSUB INC.
By________________________________
President
SUNSOURCE INC.
By________________________________
Chairman
-3-
<PAGE>
EXHIBIT C
---------
SMITH BARNEY FAIRNESS OPINION
-----------------------------
C- 1
<PAGE>
December 10, 1996
The Special Committee of the Board of Directors of Lehman/SDI, Inc.
2600 One Logan Square
Philadelphia, PA 19103
Attention: O. Gordon Brewer, Jr. and Ernest L. Ransome, III The Special
Committee of the Board of Directors of Lehman/SDI, Inc.
Gentlemen:
In connection with the proposed conversion of SunSource L.P.
("SunSource" or the "Partnership") to corporate form (the "Conversion"), you
have requested our opinion as to the fairness, from a financial point of view,
to holders of SunSource's Class A Limited Partnership Interests ("Class A
Interests") and Class B Limited Partnership Interests ("Class B Interests") of
the Partnership of (i) the consideration to be received by holders of Class A
Interests and holders of Class B Interests, respectively, and (ii) the General
Partner Consideration (as defined herein) in the Conversion. The terms of the
Conversion are summarized in the Summary Terms of the Conversion Proposal dated
December 9, 1996 (the "Term Sheet") prepared by SDI Partners I, L.P (the
"General Partner"). The Term Sheet provides that (i) holders of Class A
Interests will receive in exchange for each Class A Interest, 0.38 shares of
11.6% Trust Preferred Securities, par value $25.00 per share (the "Preferred
Securities") of SunSource Capital Trust and $1.30 in cash, (ii) holders of Class
B Interests will receive in exchange for each Class B Interest one share of
common stock, par value $.01 per share (the "Common Stock") of a newly formed
Delaware corporation (the "Company"), and (iii) the General Partner will receive
4,000,000 shares of Common Stock in exchange for its general partnership
interests in SunSource and the Operating Partnership (as defined below). The
Common Stock to be received by the General Partner is referred to herein as the
"General Partner Consideration."
In arriving at our opinion, we have reviewed the Term Sheet and the limited
partnership agreements of the Partnership, SDI Operating Partners L.P. (the
p"Operating Partnership"), and the General Partner, and held discussions with
certain senior operating management of the Operating Partnership ("Management")
and representatives and advisors of the Partnership, the Operating Partnership
and the General Partner to discuss the business, operations and prospects of the
Partnership. We have examined certain publicly available business and financial
information relating to the Partnership as well as internal financial
statements, forecasts and other financial and operating data concerning the
Partnership prepared by Management. We have reviewed the financial terms of the
Conversion as set forth in the Term Sheet in relation to, among other things:
current and historical market prices and trading volumes of the Class A
Interests and Class B Interests; historical and projected earnings and operating
data of the Partnership; the capitalization and financial condition of the
Partnership;
<PAGE>
and the pro forma effect of the Conversion. We also considered, to the extent
publicly available, the financial terms of certain other similar transactions
which we considered comparable to the Conversion and analyzed certain financial,
capital market and other publicly available information relating to the business
of other companies whose operations we considered comparable to those of the
Partnership. In addition to the foregoing, we conducted such other analyses and
examinations and considered such other financial, economic and market criteria
as we deemed appropriate in arriving at our opinion.
In rendering our opinion, we have assumed and relied, without independent
verification, upon the accuracy and completeness of all financial and other
information publicly available or furnished to or otherwise reviewed by or
discussed with us. With respect to financial forecasts and other information
furnished to or otherwise reviewed by or discussed with us, we have been advised
by Management that such forecasts and other information were reasonably prepared
on bases reflecting the best currently available estimates and judgments of
Management as to the expected future financial performance of the Partnership or
the Company, as the case may be, and we further relied on the assurances of
management that it is unaware of any facts that would make the information or
forecasts provided to us incomplete or misleading.
We are not expressing any opinion as to what the value of the Preferred
Securities or the Common Stock actually will be when issued to holders of Class
A Interests and Class B Interests, respectively, or the prices at which the
Preferred Securities or Common Stock will trade subsequent to the Conversion. We
have not made or been provided with an independent evaluation or appraisal of
the assets or liabilities (contingent or otherwise) of the Partnership. We have
not been asked to express an opinion as to the relative merits of the Conversion
as compared to any alternative business strategies that might exist for the
Partnership or the effect of any alternative transaction in which the
Partnership might engage. We were not asked to solicit third-party indications
of interest in acquiring all or any part of the Partnership. Our opinion is
necessarily based upon financial, capital market and other conditions and
circumstances existing and disclosed to us as of the date hereof.
We have been engaged to render financial advisory services to the Special
Committee (the "Special Committee") of the Board of Directors of Lehman/SDI,
Inc. in connection with the Conversion and will receive a fee for our services,
including a fee for the delivery of this opinion. In the ordinary course of
business, we and our affiliates may actively trade or hold the Class A Interests
and Class B Interests for our own account or for the account of our customers
and, accordingly, may at any time hold a long or short position in such
securities.
<PAGE>
It is understood that this opinion is for the information of the Special
Committee and the Board of Directors of Lehman/SDI, Inc. only and may not be
used for any other purpose without prior written consent, except that this
opinion may be included in any proxy statement, registration statement or
similar document prepared in connection with a Conversion. Provided however,
that the opinion shall be included in its entirety and any other reference to
Smith Barney shall be accurate and complete and shall not be included without
the consent of Smith Barney, which consent shall not be unreasonably withheld.
Based upon and subject to the foregoing, our experience as investment bankers
and other factors we deemed relevant, we are of the opinion that, as of the date
hereof, (i) the consideration to be received in the Conversion by the holders of
Class A Interests is fair from a financial point of view to such holders, (ii)
the consideration to be received in the Conversion by the holders of Class B
Interests is fair from a financial point of view to such holders, and (iii) the
General Partner Consideration to be received in the Conversion is fair from a
financial point of view to the holders of Class A Interests and to the holders
of the Class B Interests, respectively.
Very truly yours,
SMITH BARNEY INC.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law ("Section
145") permits indemnification of directors, officers, agents and controlling
persons of a corporation under certain conditions and subject to certain
limitations. Article VII of the Registrant's Bylaws, requires the Registrant to
indemnify directors and officers of the Registrant or any other authorized
representative against expenses, judgments and any settlement amounts incurred
in a third party proceeding brought by reason of the fact that the person is an
authorized representative of the Registrant. The Bylaws also permit
indemnification of expenses incurred by an authorized representative in
connection with a proceeding brought in the name of the corporation. The Bylaws
further specify procedures for such indemnification. Section 145 also empowers
the Registrant to purchase and maintain insurance that protects its officers,
directors, employees and agents against any liabilities incurred in connection
with their service in such positions.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -------------
<C> <C>
2.1* Agreement and Plan of Conversion dated as of March __, 1997 among
the Registrant, SunSource L.P., LPSub Inc., Lehman/SDI, Inc.
and the limited partners of SDI Partners I, L.P.
3.1* Amended and Restated Certificate of Incorporation
3.2* Bylaws
4.1** Indenture dated as of ___________, 1997 between the Registrant and Bank of
New York
5.1** Opinion of Morgan, Lewis & Bockius LLP regarding legality of the
shares of common stock being registered
5.2** Opinion of Richards, Layton & Finger regarding legality of the
Trust Preferred Securities being registered
8.1* Opinion of Morgan, Lewis & Bockius LLP regarding certain tax matters
10.1* Registration Rights Agreement dated as of _____________, 1997 among the Registrant,
Lehman Brothers and the Senior Executives
10.2* Stockholders Agreement dated as of _____________, 1997 among the Registrant, Lehman
Brothers and certain stockholders of the Registrant
10.3* Contribution Agreement dated as of _____________, 1997 between the Registrant and Lehman
Brothers
10.4** Deferred Compensation Plan for Key Employees of SDI Operating Partners, L.P.
10.5* Rights Agreement dated as of _____________, 1997 between the Registrant and
_____________, as Rights Agent
23.1* Consent of Coopers & Lybrand L.L.P.
23.2* Consent of Morgan, Lewis & Bockius LLP (included in its opinions filed as Exhibits 5.1 and 8.1
hereto)
23.3** Consent of Richards, Layton & Finger (included in its opinion filed as Exhibit 5.2 hereto)
23.4* Consent of Smith Barney Inc.
24+ Powers of Attorney (included on the signature page)
27.1+ Financial Data Schedule
99.1** Form of Proxy
- ------------------
* Filed herewith.
** To be filed by amendment.
+ Previously filed.
</TABLE>
II-1
<PAGE>
(b) Financial Statement Schedules:
Schedules are omitted because of the absence of conditions under which
they are required or because the required information is given in the financial
statements or notes thereto.
Item 22. Undertakings
(1) The undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by
section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement;
(iii) To include any material information with
respect to the plan of distribution not previously disclosed
in the registration statement or any material change to such
information in the registration statement.
(b) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(c) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(2) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(3) The undersigned registrant hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(4) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE>
(5) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(6) The undersigned registrant hereby undertakes that:
(a) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the prospectus filed as
part of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Philadelphia,
Pennsylvania on March 19, 1997.
SUNSOURCE INC.
By: /s/ Donald T. Marshall
-------------------------------------
Donald T. Marshall
President and Chief Executive Officer
<TABLE>
<CAPTION>
Signature Title Date
---------- ----- -----
<S> <C> <C>
/s/ Donald T. Marshall President, Chief Executive March 19, 1997
- ------------------------------ Officer and Director
Donald T. Marshall (principal executive officer)
/s/ Joseph M. Corvino Vice President - Finance March 19, 1997
- ------------------------------ (principal financial and
Joseph M. Corvino accounting officer)
/s/ Norman V. Edmonson Director March 19, 1997
- ------------------------------
Norman V. Edmonson
- ------------------------------ Director March 19, 1997
Eliot M. Fried
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -------------
<C> <C>
2.1* Agreement and Plan of Conversion dated as of March __, 1997 among
the Registrant, SunSource L.P., LPSub Inc., Lehman/SDI, Inc. and
the limited partners of SDI Partners I, L.P.
3.1* Amended and Restated Certificate of Incorporation
3.2* Bylaws
4.1** Indenture dated as of ___________, 1997 between the Registrant and Bank of
New York
5.1** Opinion of Morgan, Lewis & Bockius LLP regarding legality of the
shares of common stock being registered
5.2** Opinion of Richards, Layton & Finger regarding legality of the
Trust Preferred Securities being registered
8.1* Opinion of Morgan, Lewis & Bockius LLP regarding certain tax matters
10.1* Registration Rights Agreement dated as of _____________, 1997 among the Registrant,
Lehman Brothers and the Senior Executives
10.2* Stockholders Agreement dated as of _____________, 1997 among the Registrant, Lehman
Brothers and certain stockholders of the Registrant
10.3* Contribution Agreement dated as of _____________, 1997 between the Registrant and Lehman
Brothers
10.4** Deferred Compensation Plan for Key Employees of SDI Operating Partners, L.P.
10.5* Rights Agreement dated as of _____________, 1997 between the Registrant and
_____________, as Rights Agent.
23.1* Consent of Coopers & Lybrand L.L.P.
23.2* Consent of Morgan, Lewis & Bockius LLP (included in its opinions filed as Exhibits 5.1 and 8.1
hereto)
23.3** Consent of Richards, Layton & Finger (included in its opinion filed as Exhibit 5.2 hereto)
23.4* Consent of Smith Barney Inc.
24+ Powers of Attorney (included on the signature page)
27.1+ Financial Data Schedule
99.1** Form of Proxy
</TABLE>
- ------------------
* Filed herewith.
** To be filed by amendment.
+ Previously filed.
<PAGE>
EXHIBIT 2.1
AGREEMENT AND PLAN OF CONVERSION
AGREEMENT AND PLAN OF CONVERSION, dated as of March __, 1997, by and
among SunSource Inc., a Delaware corporation (the "Corporation"); SunSource
L.P., a Delaware limited partnership (the "Partnership"); LPSub Inc., a
Delaware corporation ("LPSub"); Lehman/SDI, Inc. a Delaware corporation
("Lehman/SDI"); and the limited partners of SDI Partners I, L.P. ("GP Limited
Partners").
B A C K G R O U N D
The Partnership is a master limited partnership whose general partner
is SDI Partners I, L.P. ("the General Partner") and whose Class A and Class B
limited partnership interests ("A Interests" and "B Interests") are publicly
held. Lehman/SDI is the general partner of the General Partner. The parties
desire to convert the Partnership to corporate form (the "Conversion") and to
that end have newly formed the Corporation and LPSub, a wholly-owned subsidiary
of the Partnership. The Partnership owns the limited partnership interest in SDI
Operating Partners, L.P. (the "Operating Partnership") with the general
partnership interest of the Operating Partnership being owned by the General
Partner.
The parties have also newly formed SunSource Capital Trust, a Delaware
statutory business trust (the "Trust"). The Corporation will contribute Junior
Subordinated Debentures to the Trust in exchange for 11.6% Trust Preferred
Securities (the "Trust Preferred Securities") and Trust Common Securities (the
"Trust Common Securities").
The parties desire to accomplish the Conversion through (i) the
contribution by the Partnership of the limited partnership interest in the
Operating Partnership to LPSub in exchange for shares of Class A Common Stock
of LPSub; (ii) the contribution by Lehman/SDI of its general partnership
interest in the General Partner to LPub in exchange for shares of Class B
Common Stock of LPSub; (iii) the contribution by the GP Limited Partners of
their limited partnership interests in the General Partner to the Corporation in
exchange for shares of Common Stock of the Corporation; and (iv) the merger
provided for herein (the "Merger") by which the Partnership and LPSub will be
merged into the Corporation and the A Interests will receive Trust Preferred
Securities of the Trust and cash and the B Interests and Lehman/SDI will receive
Common Stock of the Corporation.
NOW, THEREFORE, in consideration of the mutual representations,
warranties, covenants, agreements and conditions contained herein, and in order
to set forth the terms and conditions of the Merger and the mode of carrying the
same into effect, the parties hereto, intending to be legally bound, hereby
agree as follows:
ARTICLE I
THE CONVERSION
SECTION 1.1 The Contributions. Immediately prior to the Effective Time
( as hereinafter defined) (i) the Partnership shall contribute the limited
partnership interest in the Operating Partnership to LPSub in exchange for 1,000
shares of Class A Common Stock of LPSub; (ii) Lehman/SDI shall contribute its
general partnership interest in the General Partner to LPSub in exchange for
1,000 shares of Class B Common Stock of LPSub; (iii) the GP Limited Partners
shall contribute their limited partnership interests in the General Partner to
the Corporation in exchange for an aggregate of 468,000 shares of Common Stock
of the Corporation, provided that 75,000 of such shares shall be held in escrow
until the second anniversary of the Effective Time and shall only be distributed
to the GP Limited Partners if the Corporation is then current on distributions
on the Trust Preferred Securities; and (iv) the Corporation shall contribute the
limited partnership interests in the General Partner to a newly formed wholly
owned subsidiary.
SECTION 1.2 The Merger. Subject to the terms and conditions of this
Agreement, at the Effective Time, the Partnership and LPSub shall be merged
with and into the Corporation (such parties to the Merger being sometimes
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<PAGE>
hereinafter collectively referred to as the "Constituent Entities") pursuant to
the Agreement of Merger attached hereto as Annex 1 (the "Merger Agreement") and
the separate existence of the Partnership and LPSub shall cease. The
Corporation shall be the surviving entity in the Merger (sometimes hereinafter
referred to as the "Surviving Entity") and shall continue to be governed by the
laws of the State of Delaware, and all rights, privileges, immunities and
franchises of the Constituent Entities shall vest in the Surviving Entity and
continue unaffected by the Merger.
SECTION 1.3 Terms and Conditions of The Merger. The manner of
converting the securities of the Constituent Entities shall be as set forth in
Section 5 of the Merger Agreement.
SECTION 1.4 Timing
(a) Limited Partner Approval. The Partnership shall submit the
proposal to convert to corporate form (the "Conversion Proposal") to its limited
partners for approval and adoption at a meeting to be held as soon as
practicable. In connection with such meeting, the Partnership shall take such
reasonable steps as shall be necessary for the prompt preparation and filing by
the Partnership of a proxy statement (the "Proxy Statement") under the
Securities Exchange Act of 1934 (the "Exchange Act") and by the Corporation of a
registration statement (the "Registration Statement") and prospectus (the
"Prospectus") under the Securities Act of 1933 (the "Securities Act"), with the
Securities and Exchange Commission ("SEC") and shall cause the Proxy
Statement/Prospectus to be mailed to the limited partners of the Partnership as
soon as practicable. Adoption of the Conversion Proposal requires (i) the
approval of limited partners holding a majority of the outstanding A Interests
and B Interests, each voting separately as a class, and (ii) the approval of
unaffiliated limited partners (limited partners other than affiliates of the
General Partner) holding a majority of the outstanding A Interests and B
Interests held by unaffiliated limited partners, each voting separately as a
class (the "Class Votes").
(b) Approval of Other Parties. The Partnership and Lehman/SDI,
as stockholders of LPSub at the time of the Closing (as hereinafter defined)
approve and adopt the Merger Agreement. The Partnership and the GP Limited
Partners, as stockholders of the Corporation at the time of the Closing approve
and adopt the Merger Agreement. LPSub, as general partner of the General Partner
at the time of the Closing approves and adopts the Merger Agreement on behalf
of the General Partner.
(c) Closing and Effective Time. Subject to the Conversion
Proposal receiving the requisite approval by the limited partners and subject to
the provisions of this Agreement, the parties shall hold a closing (the
"Closing") on (i) the later of (A) the business day following the meeting of the
limited partners of the Partnership to consider and vote upon the Conversion
Proposal or (B) the business day on which the last of the conditions set forth
in Article IV is fulfilled or waived or (ii) such other date as the parties
hereto may agree (the "Closing Date"), at 10:00 A.M. (local time) at the offices
of Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania, or at such other
place or time as the parties hereto may agree. The Merger shall become effective
as set forth in Section 3 of the Merger Agreement (the "Effective Time"). At the
Closing, the contributions provided in Section 1.1 hereof shall be made and
immediately thereafter a certificate of merger shall be filed in the Office the
Secretary of State of Delaware.
(d) Certificate of Incorporation and Bylaws. From and after
the Effective Time, and pursuant to the Merger, the Certificate of Incorporation
and Bylaws of the Corporation as attached as Annexes 2 and 3, respectively,
shall continue to be the Certificate of Incorporation and Bylaws of the
Corporation as the surviving entity without change or amendment until further
amended in accordance with the provisions thereof and applicable law.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
SECTION 2.1 Representations and Warranties by the Partnership. The
Partnership represents and warrants to the other parties that:
(a) Organization and Good Standing of the Partnership, the
Operating Partnership and LPSub. Each of the Partnership and the Operating
Partnership is a limited partnership duly organized, validly existing and in
good standing under the laws of the State of Delaware. LPSub is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware.
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<PAGE>
(b) Capitalization. The sole general partner of the
Partnership is the General Partner and there are issued and outstanding
11,099,573 A Interests and 21,675,746 B Interests of the Partnership. The sole
general partner of the Operating Partnership is the General Partner and the sole
limited partner of the Operating Partnership is the Partnership. The authorized
capital stock of LPSub consists of 1,001 shares of Class A Common Stock, par
value $.01 per share, of which one share is outstanding and owned by the
Partnership, and 1,000 shares of Class B Common Stock, of which no shares are
outstanding.
There is no outstanding option, warrant or other agreement or
commitment to which either the Partnership, the Operating Partnership or LPSub
is a party or by which it is bound providing for the issuance of any additional
securities of the Partnership, the Operating Partnership or LPSub.
(c) Authorization. The execution, delivery and performance of
this Agreement have been duly and validly authorized by all necessary
partnership action on the part of the Partnership other than the approval of the
Conversion Proposal by the limited partners of the Partnership and by all
necessary corporate action on the part of LPSub. This Agreement has been duly
executed and delivered by the Partnership and by LPSub and is enforceable
against each of LPSub and the Partnership in accordance with its terms.
(d) Proxy Statement; Other Information. The Partnership
represents that the Registration Statement, the Proxy Statement, the Schedule
13E-3 and all other filings with the SEC in connection with the Conversion
comply in all material respects with the Securities Act and the Exchange Act, as
the case may be, and that these materials do not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which they were made, not
misleading.
(e) Consents and Approvals; No Violation. Neither the
execution and delivery of this Agreement by the Partnership and LPSub nor the
consummation of the transactions contemplated hereby will (i) conflict with or
result in any breach of any provision of the Agreement of Limited Partnership of
the Partnership (the "Partnership Agreement"); (ii) require any consent,
approval, authorization or permit of, or filing with or notification to, any
governmental or regulatory authority or body, except (A) pursuant to the
Securities Act and the Exchange Act or the rules and requirements of any
national securities exchange or the National Association of Securities Dealers,
Inc., (B) the filing of a certificate of merger pursuant to the Revised Uniform
Limited Partnership Act (the "Delaware RULPA") and the General Corporation Law
of the State of Delaware (the "DGCL"), (C) filings under state securities laws
or in connection with maintaining the good standing and qualification of the
Corporation following the Effective Time, (D) Hart-Scott-Rodino Premerger
Notification Act filings, if any or (E) where the failure to obtain such
consent, approval, authorization or permit, or to make such filing or
notification, would not in the aggregate have a material adverse effect on the
Partnership or the Operating Partnership; (iii) result in a default (or give
rise to any right of termination, unilateral modification or amendment,
cancellation or acceleration) under any of the terms, conditions or provisions
of any note, license, agreement or other instrument or obligation to which the
Partnership or the Operating Partnership is a party or by which the Partnership
or the Operating Partnership or any of their respective assets may be bound,
except for such defaults (or rights of termination, unilateral modification or
amendment, cancellation or acceleration) which in the aggregate would not have a
material adverse effect on the Partnership or the Operating Partnership; or (iv)
violate any order, writ, injunction, decree, judgment, ordinance, statute, rule
or regulation applicable to the Partnership or the Operating Partnership or any
of their respective properties or businesses, except for violations (other than
of orders, writs, injunctions or decrees) which would not in the aggregate have
a material adverse effect on the Partnership or the Operating Partnership.
SECTION 2.2 Representations and Warranties by the Corporation.
The Corporation represents and warrants to the other parties that:
(a) Organization and Good Standing of the Corporation and the
Trust. The Corporation is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware. The Trust is a statutory
business trust duly organized, validly existing and in good standing under the
laws of the State of Delaware.
(b) Capitalization. The authorized capital stock of the Corporation
consists of 1,000,000 shares of Preferred Stock, par value $.01 per share, of
which none are outstanding, and 20,000,000 shares of Common Stock,
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<PAGE>
par value $.01 per share, of which 1,000 shares are outstanding and owned by the
Partnership. The authorized securities of the Trust consist of 4,217,837 shares
of Trust Preferred Securities, of which none are outstanding, and 130,449 shares
of Trust Common Securities, of which 1,000 shares are outstanding and owned by
the Corporation.
There is no outstanding option, warrant or other agreement or
commitment to which either the Corporation or the Trust is a party or by which
it is bound providing for the issuance of any additional securities of the
Corporation or the Trust except for the issuance by the Trust to the Corporation
of 4,217,837 Trust Preferred Securities in exchange for Junior Subordinated
Debentures and 130,449 Trust Common Securities for cash and except pursuant to
this Agreement.
(c) Authorization. The execution, delivery and performance of
this Agreement has been duly and validly authorized by all necessary corporate
action on the part of the Corporation. This Agreement has been duly executed and
delivered by the Corporation and is enforceable against it in accordance with
its terms.
(d) Consents and Approvals; No Violation. Neither the
execution and delivery of this Agreement by the Corporation nor the consummation
of the transactions contemplated hereby will (i) conflict with or result in any
breach of any provision of the Corporation's Certificate of Incorporation or
Bylaws; (ii) require any consent, approval, authorization or permit of, or
filing with or notification to, any governmental or regulatory authority or
body, except (A) pursuant to the Securities Act and the Exchange Act or the
rules and requirements of any national securities exchange or the National
Association of Securities Dealers, Inc., (B) the filing of a certificate of
merger pursuant to the Delaware RULPA and the DGCL, (C) filings under state
securities laws or in connection with maintaining the good standing and
qualification of the Corporation following the Effective Time, (D)
Hart-Scott-Rodino Premerger Notification Act filings, if any or (E) where the
failure to obtain such consent, approval, authorization or permit, or to make
such filing or notification, would not in the aggregate have a material adverse
effect on the Corporation; (iii) result in a default (or give rise to any right
of termination, unilateral modification or amendment, cancellation or
acceleration) under any of the terms, conditions or provisions of any note,
license, agreement or other instrument or obligation to which the Corporation is
a party or by which it or any of its assets may be bound, except for such
defaults (or rights of termination, unilateral modification or amendment,
cancellation or acceleration) which in the aggregate would not have a material
adverse effect on the Corporation; or (iv) violate any order, writ, injunction,
decree, judgment, ordinance, statute, rule or regulation applicable to the
Corporation or any of its properties or businesses, except for violations (other
than of orders, writs, injunctions or decrees) which would not in the aggregate
have a material adverse effect on the Corporation.
SECTION 2.3 Representations and Warranties by Lehman/SDI and the GP
Limited Partners. Each of Lehman/SDI and the GP Limited Partners severally
represents and warrants to the other parties that:
(a) Organization and Good Standing. It is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation.
(b) Authorization. The execution, delivery and performance of
this Agreement have been duly and validly authorized by all necessary corporate
action on its part. This Agreement has been duly executed and delivered by it.
(c) Consents and Approvals; No Violation. Neither the
execution and delivery of this Agreement by it nor the consummation of the
transactions contemplated hereby will (i) conflict with or result in any breach
of any provision of the Agreement of Limited Partnership of the General Partner,
the Partnership Agreement or its certificate of incorporation or bylaws, as the
case may be; (ii) require any consent, approval, authorization or permit of, or
filing with or notification to, any governmental or regulatory authority or
body, except (A) pursuant to the Securities Act and the Exchange Act or the
rules and requirements of any national securities exchange or the National
Association of Securities Dealers, Inc., (B) the filing of a certificate of
merger pursuant to the Delaware RULPA and DGCL, (C) filings under state
securities laws
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<PAGE>
or in connection with maintaining the good standing and qualification of the
Corporation following the Effective Time, (D) Hart-Scott-Rodino Premerger
Notification Act filings, if any or (E) where the failure to obtain such
consent, approval, authorization or permit, or to make such filing or
notification, would not in the aggregate have a material adverse effect on the
General Partner or on it; (iii) result in a default (or give rise to any right
of termination, unilateral modification or amendment, cancellation or
acceleration) under any of the terms, conditions or provisions of any note,
license, agreement or other instrument or obligation to which it or the General
Partner is a party or by which they or any of their assets may be bound, except
for such defaults (or rights of termination, unilateral modification or
amendment, cancellation or acceleration) which in the aggregate would not have a
material adverse effect on it or on the General Partner; or (iv) violate any
order, writ, injunction, decree, judgment, ordinance, statute, rule or
regulation applicable to it or to the General Partner or any of its properties
or businesses, except for violations (other than of orders, writs, injunctions
or decrees) which would not in the aggregate have a material adverse effect on
it or on the General Partner.
(d) Certain Agreements. Except as disclosed in the
Registration Statement, (i) there are no agreements in effect between the
General Partner or any of its affiliates, on the one hand, and the Partnership
and the Operating Partnership, on the other; and (ii) there are no material
written agreements in effect between Lehman Brothers or any of its affiliates,
on the one hand, and any member of management, on the other.
(e) Ownership of Partnership Interests; Title. It is the owner
of record and beneficially of the general or limited partnership interest in the
General Partner. It has not received any notice of any adverse claim to the
ownership of any such interest and does not have any reason to know of any such
adverse claim that may be justified. On the Closing Date, it shall have good and
transferable title to such interest, free and clear of all liens.
ARTICLE III
ADDITIONAL COVENANTS AND AGREEMENTS
SECTION 3.1 Legal Conditions to Conversion. Each of the parties hereto
will take all reasonable actions necessary to comply promptly with all legal
requirements which may be imposed on itself with respect to the Conversion.
SECTION 3.2 Affiliates. Prior to the Closing Date the Partnership shall
deliver to the Corporation a letter identifying all persons who are, at the time
the Conversion Proposal is submitted for approval to the limited partners of the
Partnership, "affiliates" of the Partnership for purposes of Rule 145 under the
Securities Act. The Partnership shall use its best efforts to cause each such
person to deliver to the Corporation on or prior to the Closing Date executed
affiliates' letters in customary form.
SECTION 3.3 Fees and Expenses. Whether or not the Conversion is
consummated, all costs and expenses incurred by the Partnership in connection
with this Agreement and the transactions contemplated hereunder shall be paid by
the Partnership.
SECTION 3.4 Stock Exchange Listing. The Corporation shall use its best
efforts to cause the Trust Preferred Securities and Common Stock to be issued in
the Conversion to be approved for listing on the New York Stock Exchange (the
"NYSE"), subject to official notice of issuance, prior to the Closing Date. The
A Interests and the B Interests will be delisted at or immediately after the
Effective Time.
SECTION 3.5 Indemnification.
(a) The Partnership shall, and from and after the Effective
Time, the Corporation shall, indemnify, defend and hold harmless each person who
is now, or has been at any time prior to the date of this Agreement or who
becomes prior to the Effective Time, an officer, director, partner, shareholder,
agent or fiduciary of the Partnership, the Operating Partnership, the General
Partner, Lehman/SDI or the Corporation (the "Companies") or
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<PAGE>
an affiliate of such person (collectively, the "Indemnified Parties") against
all losses, claims, damages, costs, expenses, liabilities or judgments, or
amounts that are paid in settlement with the approval of the indemnifying party
(which approval shall not be unreasonably withheld) of, or in connection with,
any claim, action, suit, proceeding or investigation ("Proceeding") based in
whole or in part out of the fact that such person is or was an officer,
director, partner or shareholder of one or more of the Companies or an affiliate
of such person, whether pertaining to any matter existing or occurring at or
prior to the Effective Time and whether asserted or claimed prior to, or at or
after, the Effective Time ("Indemnified Liabilities") in each case to the full
extent a partnership or a corporation is permitted under Delaware law to
indemnify such persons or entities; and the Partnership (and after the Effective
Time, the Corporation) will pay or reimburse expenses in advance of the final
disposition of any such Proceeding to each Indemnified Party to the full extent
permitted by law upon receipt of an undertaking to repay such expenses if and
when requested to do so under applicable law. Without limiting the foregoing, in
the event any such Proceeding is brought against any Indemnified Party (whether
arising before or after the Effective Time), (i) the Indemnified Parties may
retain counsel satisfactory to them, (ii) the Partnership (and after the
Effective Time, the Corporation) shall pay all reasonable fees and expenses of
such counsel for the Indemnified Parties promptly as statements therefor are
received, and (iii) the Partnership (and after the Effective Time, the
Corporation) will use all reasonable efforts to assist in the vigorous defense
of any such matter, provided that neither the Partnership nor the Corporation
shall be liable for any settlement of any claim effected without its written
consent, which consent, however, shall not be unreasonably withheld. Any
Indemnified Party wishing to claim indemnification under this Section 3.5, upon
learning of any Proceeding, shall notify the Partnership (and after the
Effective Time, the Corporation) (but the failure so to notify the Partnership
or the Corporation, as the case may be, shall not relieve the Partnership or the
Corporation from any liability which it may have under this Section 3.5 except
to the extent such failure prejudices the indemnifying party) and shall deliver
to the Partnership (and after the Effective Time, the Corporation) the
undertaking referred to above. The Indemnified Parties as a group may retain
only one law firm to represent them with respect to each such matter unless
there is, under applicable standards of professional conduct, a conflict on any
significant issue between the positions of any two or more Indemnified Parties.
(b) The provisions of this Section 3.5 are intended to be for
the benefit of, and shall be enforceable by, each Indemnified Party and the
Indemnified Party's heirs, representatives, successors and assigns.
ARTICLE IV
CONDITIONS TO THE CONVERSION
SECTION 4.1 Conditions to Each Party's Obligation to Effect the
Conversion. The respective obligations of the parties to effect the Conversion
shall be subject to the satisfaction, on or before the Closing Date, of each of
the following conditions:
(a) Representations and Warranties and Performance. The
representations and warranties of each of the other parties herein contained
shall be true and correct on the Closing Date with the same effect as though
made at such time. Each of the other parties shall have performed in all
material respects all obligations and complied in all material respects with all
agreements, undertakings, covenants and conditions required by this Agreement to
be performed or complied with by it at or prior to the Closing Date.
(b) Pending Litigation. There shall not be any litigation or
other proceeding pending or threatened to restrain or invalidate the
transactions contemplated by this Agreement.
(c) Limited Partner Approval. The Conversion Proposal shall
have been approved and adopted by the requisite vote of the holders of the A
Interests and B Interests pursuant to the Class Votes.
(d) Regulatory Approval. All authorizations, consents and
permits required to perform this Agreement and the Merger Agreement shall have
been obtained and the required statutory waiting period under the
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Hart-Scott-Rodino Antitrust Improvements Act of 1976, if applicable, shall have
expired or been terminated.
(e) Registration Statement. The Registration Statement filed
pursuant to Section 1.4 (a) shall have become effective under the Securities Act
and shall not be the subject of any stop order or proceeding seeking a stop
order.
(f) NYSE Listing. The Trust Preferred Securities and the
Common Stock to be issued in the Conversion shall have been approved for listing
on the NYSE upon official notice of issuance.
(g) Blue Sky Compliance. The Corporation shall have complied
with all requirements of state securities or "blue sky" laws with respect to the
issuance of the securities in the Conversion.
(h) Special Committee Determination. The Special Committee
shall not have withdrawn its determination that the Conversion is fair to the
holders of A Interests and B Interests.
(i) Fairness Opinion. The fairness opinion delivered to the
Partnership by Smith Barney Inc. and included as an exhibit to the Proxy
Statement/Prospectus shall not have been rescinded prior to the Closing Date.
(j) Tax Opinion. The tax opinion of Morgan, Lewis & Bockius
LLP delivered to the Partnership and filed as an exhibit to the Registration
Statement shall not have been rescinded prior to the Closing Date.
(k) Validity Opinion. The securities law opinion of Richards,
Layton & Finger regarding the validity of the Trust Preferred Securities
delivered to the Trust and filed as an exhibit to the Registration Statement
shall not have been rescinded prior to the Closing Date.
(l) Available Financing. The Corporation shall have available
financing to refinance existing senior debt on terms acceptable to the
Corporation and the General Partner or shall have received approval of the
Conversion by the existing senior lenders.
(m) Deferred Compensation Plan. The Corporation shall have
received from Donald T. Marshall, John P. McDonnell and Norman V. Edmonson
("Management") undertakings to defer into the Deferred Compensation Plan for Key
Employees of the Operating Partnership all payments due under the previous
Deferred Compensation Plans and Long Term Performance Share Plan of the
Operating Partnership.
(n) Changes in Applicable Law. There shall have been no
material change, in effect or pending, in applicable law , including with
respect to the taxation of the Conversion, the Corporation or the Trust
Preferred Securities.
(o) Contribution Agreement. The Corporation shall have entered
into a Contribution Agreement with Lehman Brothers Inc. on terms satisfactory to
the parties hereto.
(p) Stockholders Agreement. The Corporation, Lehman Brothers
Inc. and Donald T. Marshall, John P. McDonnell, Norman V. Edmonson, Harold J.
Cornelius, Max W. Hillman and Joseph M. Corvino shall have entered into a
Stockholders Agreement on terms satisfactory to the parties hereto.
(q) Registration Rights Agreement. The Corporation, certain
affiliates of Lehman Brothers Inc. and Management shall have entered into a
Registration Rights Agreement on terms satisfactory to the parties hereto.
(r) Escrow Agreement. The Corporation and the Escrow Agent
shall have entered into an Escrow Agreement on terms satisfactory to the parties
hereto.
(s) Resale Agreement. The Corporation, certain affiliates of
Lehman Brothers Inc. and Management shall have entered into an greement
regarding resale of the Corporation's Common Stock.
-7-
<PAGE>
(t) Other Documentation. The parties hereto shall have entered
into such other agreements as are contemplated by the Conversion, including,
without limitation, the Indenture and Declaration of Trust in respect of the
Junior Subordinated Debentures and Trust Preferred Securities, on terms
satisfactory to the parties hereto.
ARTICLE V
TERMINATION AND ABANDONMENT
SECTION 5.1 Termination and Abandonment. This Agreement may be
terminated and the Conversion may be abandoned at any time prior to the
Effective Time, whether before or after approval by the limited partners of the
Partnership, by action of the Board of Directors of Lehman/SDI.
SECTION 5.2 Amendment. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto; provided,
however, that after approval of the Conversion Proposal by the limited partners
of the Partnership, no amendment may be made which decreases the amount or
changes the type of consideration to which the limited partners of the
Partnership are entitled under this Agreement or otherwise materially adversely
affects the rights of the limited partners of the Partnership without the
further approval of the limited partners.
SECTION 5.3 Waiver. Any time prior to the Effective Time, whether
before or after the meeting referred to in Section 1.4(a), any party hereto may
waive compliance with any of the agreements of any other party or with any
conditions to the obligations of such party; provided, however, that after
approval of the Conversion Proposal by the limited partners of the Partnership,
no waiver may be given which materially adversely affects the rights of the
limited partners of the Partnership without the further approval of the limited
partners . Any agreement on the part of a party hereto to any such extension or
waiver shall be valid if set forth in an instrument in writing signed on behalf
of such party by a duly authorized officer.
ARTICLE VI
MISCELLANEOUS
SECTION 6.1 Notices. Any notices or other communications required or
permitted hereunder shall be sufficiently given if sent by telecopy or facsimile
transmission (with hard copy to follow), registered or certified mail, postage
prepaid, or Federal Express or similar overnight delivery services addressed, in
the case of all parties at
2600 One Logan Square
Philadelphia, PA 19103
Attn: Norman V. Edmonson
with required copies to:
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, PA 19103
Attn: Donald A. Scott, Esq.
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017
Attn: Andrew R. Keller, Esq.
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<PAGE>
Dechert Price & Rhoads
4000 Bell Atlantic Tower
1717 Arch Street
Philadelphia, PA 19103-2793
Attn: William G. Lawlor, Esq.
or such other address as shall be furnished in writing by any party to the
others prior to the giving of the applicable notice or communication.
SECTION 6.2 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
SECTION 6.3 Headings. The headings herein are for convenience of
reference only, do not constitute a part of this Agreement, and shall not be
deemed to limit or affect any of the provisions hereof.
SECTION 6.4 Entire Agreement. This Agreement constitutes the entire
agreement and supersedes all prior agreements and understandings, both written
and oral, among the parties, with respect to the subject matter hereof.
SECTION 6.5 Cooperation. Subject to the terms and conditions of this
Agreement, each of the parties hereto shall use its reasonable efforts to take,
or cause to be taken, such action, to execute and deliver, or cause to be
executed and delivered, such governmental notifications and additional documents
and instruments and to do, or cause to be done, all things necessary, proper or
advisable under the provisions of this Agreement and under applicable law to
consummate and make effective the transactions contemplated by this Agreement.
SECTION 6.6 No Rights, Etc.. Nothing in this Agreement express or
implied is intended to confer upon any other person any rights or remedies under
or by reason of this Agreement.
SECTION 6.7 Governing Law. This Agreement shall be governed in all
respects, including validity, interpretation and effect, by the laws of the
State of Delaware applicable to contracts made and to be performed in that
State.
SECTION 6.8 Special Committee. Any determination by the Corporation or
the General Partner that any of the conditions in Article IV hereof have been
satisfied or waived, or any amendment of this Agreement, shall require the
affirmative vote of the Special Committee (as defined in the Registration
Statement).
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement and
Plan of Conversion to be duly executed as of the date first above written.
SUNSOURCE INC.
By
--------------------------------
Chairman
SUNSOURCE L.P.
By SDI Partners I, L.P.
Its General Partner
By Lehman/SDI, Inc.
Its General Partner
By
--------------------------------
Chairman
PARTSUB INC.
By
--------------------------------
President
LEHMAN/SDI, INC.
By
--------------------------------
President
DOTMAR CORP.
By
--------------------------------
President
JPM CORP.
By
--------------------------------
President
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<PAGE>
NORVED CORP.
By
--------------------------------
President
DIACOR CORP.
By
--------------------------------
President
HJC CORP.
By
--------------------------------
President
MWH CORP.
By
--------------------------------
President
LJC CORP.
By
--------------------------------
President
CELAR CORP.
By
--------------------------------
President
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<PAGE>
ANNEX 1
AGREEMENT OF MERGER
OF
SUNSOURCE L.P.
(a Delaware limited partnership)
AND
PARTSUB INC.
(a Delaware corporation)
WITH AND INTO
SUNSOURCE INC.
(a Delaware corporation)
AGREEMENT OF MERGER, dated as of ___________, 1997, by and among
SunSource L.P., a Delaware limited partnership (the "Partnership"), LPSub
Inc., a Delaware corporation ("LPSub"; and together with the Partnership, the
"Disappearing Entities"), and SunSource Inc., a Delaware corporation (the
"Corporation"), with reference to the following RECITALS:
A. The Partnership is a Delaware limited partnership whose general
partner is LPSub. Its limited partnership interests are publicly held,
consisting of 11,099,573 Class A limited partnership interests ("A Interests")
and 21,675,746 Class B limited partnership interests ("B Interests).
B. LPSub is a Delaware corporation whose authorized and outstanding
stock consists of 1,001 shares of Class A Common Stock, par value $.01 per
share, all of which are owned of record and beneficially by the Partnership, and
1,000 shares of Class B Common Stock, par value $.01 per share, all of which are
owned of record and beneficially by Lehman/SDI, Inc., a Delaware corporation.
C. The Corporation is a Delaware corporation whose authorized capital
stock consists of 1,000,000 shares of Preferred Stock, par value $.01 per share,
of which none are outstanding, and 20,000,000 shares of Common Stock, par value
$.01 per share, of which 1,000 shares are outstanding and owned by the
Partnership.
D. The Corporation has organized SunSource Capital Trust, a Delaware
statutory business trust (the "Trust"), which has authorized and issued
4,217,837 11.6% Trust Preferred Securities (the "Trust Preferred Securities")
and 130,449 Trust Common Securities, all of which are owned by the Corporation.
E. The partners of the Partnership and the Boards of Directors and
stockholder of LPSub and the Corporation have approved and adopted resolutions
approving and adopting this Agreement of Merger in accordance with the General
Corporation Law of the State of Delaware (the "DGCL") and the Delaware Revised
Uniform Limited Partnership Act (the "DRULPA").
NOW, THEREFORE, the parties hereto, in consideration of the mutual
covenants herein contained and intending to be legally bound, agree as follows:
1. Parties to Merger. The Disappearing Entities and the Corporation
(such parties to the merger being hereinafter sometimes collectively referred to
as the "Constituent Entities") shall effect a merger (the "Merger") in
<PAGE>
accordance with and subject to the terms and conditions of this Agreement of
Merger (the "Agreement").
2. Merger. At the Effective Time (as defined in Section 3 hereof), each
of the Disappearing Entities shall be merged with and into the Corporation
(which latter entity shall be, and is hereinafter sometimes referred to as, the
"Surviving Entity").
3. Filing and Effective Time. A certificate of merger and such other
documents and instruments as are required by, and complying in all respects
with, the DGCL and DRULPA shall be filed in the Office of the Secretary of State
of Delaware. The Merger shall become effective, following the filing of all such
documents and instruments, at 11:59 p.m. on __________, 1997 (the "Effective
Time").
4. Effect of Merger. At the Effective Time, the separate existence of
each of the Disappearing Entities shall cease, the Surviving Entity shall
continue to be a corporation organized and governed by the laws of the State of
Delaware and the Merger shall have the effects provided therefor by the DGCL and
DRULPA.
5. Partnership Interests and Capital Stock. At the Effective Time:
(a) Each A Interest of the Partnership issued and outstanding
immediately prior to the Effective Time shall, by virtue of the Merger and
without any action on the part of the holders thereof, be converted into 0.38
share of Trust Preferred Securities and $1.30 in cash;
(b) Each B Interest of the Partnership issued and outstanding
immediately prior to the Effective Time shall, by virtue of the Merger and
without any action on the part of the holders thereof, be converted into 0.25
share of Common Stock of the Corporation;
(c) The shares of Class B Common Stock of LPSub issued and
outstanding immediately prior to the Effective Time shall, by virtue of the
Merger and without any action on the part of the holder thereof, be converted
into 538,000 shares of Common Stock;
(d) The shares of Class A Common Stock of LPSub issued and
outstanding immediately prior to the Effective Time shall, by virtue of the
Merger and without any action on the part of the holder thereof, be canceled;
and
(e) No fractional interests shall be issued in the Merger but
in lieu thereof each holder of A Interests shall be entitled to receive cash in
an amount equal to the fraction of a share of Trust Preferred Securities to
which the holder is otherwise entitled multiplied by the average closing price
of the Trust Preferred Securities for the five trading days following the
Effective Time and each holder of B Interests shall be entitled to receive cash
in an amount equal to the fraction of a share of Common Stock to which the
holder is otherwise entitled multiplied by the average closing price of the
Common Stock for the five trading days following the Effective Time.
6. Exchange of Certificates. Promptly after the Effective Time, the
Corporation will mail to all limited partners of record a letter of transmittal
containing instructions with respect to the surrender of depositary receipts for
A Interests in exchange for certificates representing shares of Trust Preferred
Securities and cash and the surrender of depositary receipts for B Interests in
exchange for certificates representing shares of Common Stock. Upon surrender to
the Corporation of one or more depositary receipts, together with a properly
completed letter of transmittal, there will be issued and mailed to former
limited partners of record at the Effective Time a certificate or certificates
representing the number of shares of Trust Preferred Securities and cash or a
certificate or certificates for shares of Common Stock to which such holder is
entitled. From and after the Effective Time, each depositary receipt will
evidence only the right to receive shares of Trust Preferred Securities and cash
or shares of Common Stock. No distributions or dividends with respect to the
Trust Preferred Securities or Common Stock payable to the holders of record
thereof after the Effective Time will be paid to the holder of any unsurrendered
depositary receipts until such depositary receipts are surrendered for exchange,
at which time accumulated distributions or dividends will be paid, without
interest, subject to any applicable escheat laws.
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<PAGE>
7. Further Assurances. Each of the Disappearing Entities shall at any
time, or from time to time, as and when requested by the Surviving Entity, or by
its successors and assigns, execute and deliver, or cause to be executed and
delivered in its name by its last acting officers, or by the corresponding
officers of the Surviving Entity, all such conveyances, assignments, transfers,
deeds, or other instruments, and shall take, or cause to be taken, such further
or other action as the Surviving Entity, or its successors and assigns, may deem
required or convenient in order to evidence the transfer, vesting or devolution
of any property, right, privilege, immunity, power or purpose, or to vest or
perfect in or confirm to the Surviving Entity, or its successors and assigns,
title to and possession of all the properties, rights, privileges, immunities,
powers and purposes of the Disappearing Entities and otherwise to carry out the
intent and purposes hereof.
8. Termination. Notwithstanding approval by the partners and
shareholders of the Constituent Entities of this Agreement, this Agreement may
be terminated at any time prior to the Effective Time by action of the General
Partner.
9. Governing Law. This Agreement shall be construed in accordance with
and governed by the laws of the State of Delaware, without giving effect to
principles of conflicts of law.
IN WITNESS WHEREOF, the parties hereto, pursuant to the approval and
authority duly given by resolutions approved and adopted by their respective
partners and Boards of Directors and shareholder, have duly executed this
Agreement of Merger as of the day and year first written above.
SUNSOURCE L.P.
By LPSub Inc.
Its General Partner
By
--------------------------------
President
LPSUB INC.
By
--------------------------------
President
SUNSOURCE INC.
By
--------------------------------
Chairman
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<PAGE>
Exhibit 3.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
SUNSOURCE INC.
SUNSOURCE INC., a corporation organized and existing under the General
Corporation Law of the State of Delaware (the "Corporation") DOES HEREBY
CERTIFY:
FIRST: The name of the Corporation is SunSource Inc.
SECOND: The Amended and Restated Certificate of Incorporation of the
Corporation in the form attached hereto as Exhibit A has been duly adopted in
accordance with the provisions of Sections 242 and 245 of the General
Corporation Law of the State of Delaware by the directors and stockholders of
the Corporation.
THIRD: The Amended and Restated Certificate of Incorporation so adopted
reads in full as set forth in Exhibit A attached hereto and is hereby
incorporated herein by this reference.
IN WITNESS WHEREOF, SUNSOURCE has caused this Certificate to be signed
by the undersigned this 19th day of March, 1997.
SUNSOURCE INC.
By: /s/ Donald T. Marshall
---------------------------------------
Donald T. Marshall
Chairman and Chief Executive Officer
<PAGE>
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF SUNSOURCE INC.
SunSource Inc., a Delaware corporation, the original Certificate of
Incorporation of which was filed with the Secretary of State of the State of
Delaware on December 30, 1996, HEREBY CERTIFIES that this Amended and Restated
Certificate of Incorporation restating, integrating and amending its Certificate
of Incorporation was duly proposed by its Board of Directors and adopted by its
sole stockholder in accordance with Sections 242 and 245 of the General
Corporation Law of the State of Delaware, as amended (the "GCL").
1. Corporate Name. The name of the corporation is SunSource Inc.
(hereinafter referred to as the "Corporation").
2. Registered Office. The registered office of the Corporation
is located at Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, in the County of New Castle, in the State of Delaware. The name of
its registered agent at that address is The Corporation Trust Company.
3. Corporate Purpose. The purpose of the Corporation is to
engage in any lawful act or activity for which a corporation may now or
hereafter be organized under the GCL.
4. Capital Stock.
4.1 Authorized Amount. The Corporation shall be authorized to
issue 21,000,000 shares of capital stock, of which 20,000,000 shares shall be
Common Stock, par value $0.01 per share, and 1,000,000 shares shall be Preferred
Stock, par value $0.01 per share.
4.2 Authority of Board to Fix Terms of Preferred Stock. The
Board of Directors of the Corporation is hereby expressly authorized at any time
and from time to time to provide for the issuance of all or any shares of the
Preferred Stock in one or more series, and to fix for each such series such
voting powers, full or limited, or no voting powers, and such distinctive
designations, preferences and relative, participating, optional or other special
rights and such qualifications, limitations or restrictions thereof, as shall be
stated and expressed in the resolution or resolutions adopted by the Board of
Directors providing for the issuance of such series and to the fullest extent as
may now or hereafter be permitted by the GCL, including, without limiting the
generality of the foregoing, the authority to provide that any such series may
be (i) subject to redemption at such time or times and at such price or prices;
(ii) entitled to receive dividends (which may be cumulative or non-cumulative)
at such rates, on such conditions, and at such times, and payable in preference
to, or in such relation to, the dividends payable on any other class or classes
or any other series; (iii) entitled to such rights upon the dissolution of, or
upon any distribution of the assets of, the Corporation; or (iv) convertible
into, or exchangeable for, shares of any other class or classes of stock, or of
any other series of the same or any other class or classes of stock, or other
securities or property, of the Corporation at such price or prices or at such
rates of exchange and with such adjustments, all as may be stated in such
resolution or resolutions. Unless otherwise provided in such
<PAGE>
resolution or resolutions, shares of Preferred Stock of any series which shall
be issued and thereafter acquired by the Corporation through purchase,
redemption, exchange, conversion or otherwise shall return to the status of
authorized but unissued Preferred Stock.
5. Section 203. The Corporation shall not be governed by
Section 203 of the Delaware General Corporation Law (pertaining to business
combinations with interested stockholders), or any successor provision or
provisions.
6. Liability of Directors. A director of the Corporation shall
not be liable to the Corporation or its stockholders for monetary damages
(including, without limitation, any judgment, amount paid in settlement, fine,
penalty, punitive damages, excise tax assessed with respect to an employee
benefit plan, or expense of any nature, including attorneys' fees) for breach
of fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders; (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) under Section 174 of the GCL; or (iv) for any
transaction from which the director derived an improper personal benefit.
If the GCL is amended after the date hereof to authorize corporate
action further eliminating or limiting the personal liability of directors, then
the liability of a director of the Corporation shall automatically be eliminated
or limited to the fullest extent permitted by the GCL as so amended. Neither the
amendment nor repeal of this Article 6 nor the adoption of any provision of this
Restated Certificate of Incorporation inconsistent with this Article 6 shall
eliminate or reduce the effect of this Article 7 in respect of any matter
arising or relating to any actions or omissions occurring prior to such
amendment, repeal or adoption of an inconsistent provision.
7. Amendment of Bylaws. The Board of Directors shall have the
power to adopt, amend or repeal the Bylaws of the Corporation. Whenever the
Bylaws of the Corporation shall require for action by the Board of Directors, by
the holders of any class or series of shares or by the holders of any other
securities having voting power, the vote of a greater number or proportion than
is required by any provision of applicable law, the Certificate of Incorporation
or the general amendment provision of the Bylaws requiring such greater vote
shall not be altered, amended or repealed except by such greater vote.
8. Amendment of Certificate of Incorporation. The Corporation
reserves the right to amend, alter, change or repeal any provision contained in
this Certificate of Incorporation in the manner now or hereafter prescribed by
statute, and all rights conferred upon stockholders are granted subject to this
reservation.
<PAGE>
IN WITNESS WHEREOF, SunSource Inc. has caused this Amended and
Restated Certificate of Incorporation to be signed and acknowledged on this 19th
day of March, 1997 in its name by a duly authorized officer.
SUNSOURCE INC.
By: /s/ Donald T. Marshall
------------------------------------
Donald T. Marshall
Chairman and Chief Executive Officer
<PAGE>
B Y L A W S
OF
SUNSOURCE INC.
(a Delaware Corporation)
-----------------------
ARTICLE I
Offices and Fiscal Year
SECTION 1.01. Registered Office.--The registered office of the
corporation shall be in the City of Wilmington, County of New Castle, State of
Delaware until otherwise established by resolution of the board of directors,
and a certificate certifying the change is filed in the manner provided by
statute.
SECTION 1.02. Other Offices.--The corporation may also have offices at
such other places within or without the State of Delaware as the board of
directors may from time to time determine or the business of the corporation
requires.
SECTION 1.03. Fiscal Year.--The fiscal year of the corporation shall
end on the 31st of December in each year.
ARTICLE II
Notice - Waivers - Meetings
SECTION 2.01. Notice, What Constitutes.--Whenever, under the provisions
of the Delaware General Corporation Law ("GCL") or the certificate of
incorporation or these bylaws, notice is required to be given to any director or
stockholder, it shall not be construed to mean personal notice, but such notice
may be given in writing, by mail or by telegram (with messenger service
specified), telex or TWX (with answerback received) or courier service, charges
prepaid, or by facsimile transmission to the address (or to the telex, TWX,
facsimile or telephone number) of the person appearing on the books of the
corporation, or in the case of directors, supplied to the corporation for the
purpose of notice. If the notice is sent by mail, telegraph or courier service,
it shall be deemed to be given when deposited in the United States mail or with
a telegraph office or courier service for delivery to that person or, in the
case of telex or TWX, when dispatched, or in the case of facsimile transmission,
when received.
<PAGE>
SECTION 2.02. Notice of Meetings of Board of Directors.--Notice of a
regular meeting of the board of directors need not be given. Notice of every
special meeting of the board of directors shall be given to each director by
telephone or in writing at least 24 hours (in the case of notice by telephone,
telex, TWX or facsimile transmission) or 48 hours (in the case of notice by
telegraph, courier service or express mail) or five days (in the case of notice
by first class mail) before the time at which the meeting is to be held. Every
such notice shall state the time and place of the meeting. Neither the business
to be transacted at, nor the purpose of, any regular or special meeting of the
board need be specified in a notice of the meeting.
SECTION 2.03. Notice of Meetings of Stockholders.--Written notice of
the place, date and hour of every meeting of the stockholders, whether annual or
special, shall be given to each stockholder of record entitled to vote at the
meeting not less than ten nor more than 60 days before the date of the meeting.
Every notice of a special meeting shall state the purpose or purposes thereof.
If the notice is sent by mail, it shall be deemed to have been given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at the address of the stockholder as it appears on the records of
the corporation.
SECTION 2.04. Waivers of Notice.
(a) Written Waiver.--Whenever notice is required to be given under any
provisions of the GCL or the certificate of incorporation or these bylaws, a
written waiver, signed by the person or persons entitled to the notice, whether
before or after the time stated therein, shall be deemed equivalent to notice.
Neither the business to be transacted at, nor the purpose of, any regular or
special meeting of the stockholders, directors, or members of a committee of
directors need be specified in any written waiver of notice of such meeting.
(b) Waiver by Attendance.--Attendance of a person at a meeting, either
in person or by proxy, shall constitute a waiver of notice of such meeting,
except where a person attends a meeting for the express purpose of objecting at
the beginning of the meeting to the transaction of any business because the
meeting was not lawfully called or convened.
SECTION 2.05. Exception to Requirements of Notice.
(a) General Rule.--Whenever notice is required to be given, under any
provision of the GCL or the certificate of incorporation or these bylaws, to any
person with whom communication is unlawful, the giving of such notice to such
person shall not be required and there shall be no duty to apply to any
governmental authority or agency for a license or permit to give such notice to
such person. Any action or meeting which shall be taken or held without notice
to any such person with whom communication is unlawful shall have the same force
and effect as if such notice had been duly given.
-2-
<PAGE>
(b) Stockholders Without Forwarding Addresses.--Whenever notice is
required to be given, under any provision of the GCL or the certificate of
incorporation or these bylaws, to any stockholder to whom (i) notice of two
consecutive annual meetings, and all notices of meetings or of the taking of
action by written consent without a meeting to such person during the period
between such two consecutive annual meetings, or (ii) all, and at least two,
payments (if sent by first class mail) of dividends or interest on securities
during a 12 month period, have been mailed addressed to such person at the
person's address as shown on the records of the corporation and have been
returned undeliverable, the giving of such notice to such person shall not be
required. Any action or meeting which shall be taken or held without notice to
such person shall have the same force and effect as if such notice had been duly
given. If any such person shall deliver to the corporation a written notice
setting forth the person's then current address, the requirement that notice be
given to such person shall be reinstated.
SECTION 2.06. Conference Telephone Meetings.--One or more directors may
participate in a meeting of the board, or of a committee of the board, by means
of conference telephone or similar communications equipment by means of which
all persons participating in the meeting can hear each other. Participation in a
meeting pursuant to this section shall constitute presence in person at such
meeting.
ARTICLE III
Meetings of Stockholders
SECTION 3.01. Place of Meeting.--All meetings of the stockholders of
the corporation shall be held at the registered office of the corporation, or at
such other place within or without the State of Delaware as shall be designated
by the board of directors in the notice of such meeting.
SECTION 3.02. Annual Meeting.--The board of directors may fix and
designate the date and time of the annual meeting of the stockholders, but if no
such date and time is fixed and designated by the board, the meeting for any
calendar year shall be held on the fourth Tuesday in April in such year, if not
a legal holiday under the laws of Delaware, and, if a legal holiday, then on the
next succeeding business day, not a Saturday, at 10 o'clock A.M., and at said
meeting the stockholders then entitled to vote shall elect directors and shall
transact such other business as may properly be brought before the meeting.
SECTION 3.03. Special Meetings.--Special meetings of the stockholders
of the corporation may be called at any time by the chairman or a majority of
the board of directors, or at the request, in writing, of stockholders entitled
to cast 25% of the votes that all stockholders are entitled to cast at the
particular meeting. At any time, upon the written request of any person or
persons who have duly called a special meeting, which written
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<PAGE>
request shall state the purpose or purposes of the meeting, it shall be the duty
of the secretary to fix the date of the meeting which shall be held at such date
and time as the secretary may fix, not less than ten nor more than 60 days after
the receipt of the request, and to give due notice thereof. If the secretary
shall neglect or refuse to fix the time and date of such meeting and give notice
thereof, the person or persons calling the meeting may do so.
SECTION 3.04. Quorum, Manner of Acting and Adjournment.
(a) Quorum.--The holders of a majority of the shares entitled to vote,
present in person or represented by proxy, shall constitute a quorum at all
meetings of the stockholders except as otherwise provided by the GCL, by the
certificate of incorporation or by these bylaws. If a quorum is not present or
represented at any meeting of the stockholders, the stockholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum is present or represented. At any such adjourned
meeting at which a quorum is present or represented, the corporation may
transact any business which might have been transacted at the original meeting.
If the adjournment is for more than 30 days, or if after the adjournment a new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote at the
meeting.
(b) Manner of Acting.--Directors shall be elected by a plurality of the
votes of the shares present in person or represented by proxy at the meeting and
entitled to vote on the election of directors. In all matters other than the
election of directors, the affirmative vote of the majority of shares present in
person or represented by proxy at the meeting and entitled to vote thereon shall
be the act of the stockholders, unless the question is one upon which, by
express provision of the applicable statute, the certificate of incorporation or
these bylaws, a different vote is required in which case such express provision
shall govern and control the decision of the question. The stockholders present
in person or by proxy at a duly organized meeting can continue to do business
until adjournment, notwithstanding withdrawal of enough stockholders to leave
less than a quorum.
SECTION 3.05. Organization.--At every meeting of the stockholders, the
chairman, if there be one, or in the case of a vacancy in the office or absence
of the chairman, one of the following persons present in the order stated: the
vice chairman, if one has been appointed, the president, the vice presidents in
their order of rank or seniority, a chairman designated by the board of
directors or a chairman chosen by the stockholders entitled to cast a majority
of the votes which all stockholders present in person or by proxy are entitled
to cast, shall act as chairman, and the secretary, or, in the absence of the
secretary, an assistant secretary, or in the absence of the secretary and the
assistant secretaries, a person appointed by the chairman, shall act as
secretary.
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SECTION 3.06. Voting.
(a) General Rule.--Unless otherwise provided in the certificate of
incorporation, each stockholder shall be entitled to one vote, in person or by
proxy, for each share of capital stock having voting power held by such
stockholder.
(b) Voting and Other Action by Proxy.--
(i) A stockholder may execute a writing authorizing another
person or persons to act for the stockholder as proxy. Such execution may be
accomplished by the stockholder or the authorized officer, director, employee or
agent of the stockholder signing such writing or causing his or her signature to
be affixed to such writing by any reasonable means including, but not limited
to, by facsimile signature. A stockholder may authorize another person or
persons to act for the stockholder as proxy by transmitting or authorizing the
transmission of a telegram, cablegram, or other means of electronic transmission
to the person who will be the holder of the proxy or to a proxy solicitation
firm, proxy support service organization or like agent duly authorized by the
person who will be the holder of the proxy to receive such transmission if such
telegram, cablegram or other means of electronic transmission sets forth or is
submitted with information from which it can be determined that the telegram,
cablegram or other electronic transmission was authorized by the stockholder.
(ii) No proxy shall be voted or acted upon after three years
from its date, unless the proxy provides for a longer period.
(iii) A duly executed proxy shall be irrevocable if it states
that it is irrevocable and if, and only so long as, it is coupled with an
interest sufficient in law to support an irrevocable power. A proxy may be made
irrevocable regardless of whether the interest with which it is coupled is an
interest in the stock itself or an interest in the corporation generally.
SECTION 3.07. Consent of Stockholders in Lieu of Meeting.--Any action
required to be taken at any annual or special meeting of stockholders of the
corporation, or any action which may be taken at any annual or special meeting
of such stockholders, may be taken without a meeting, without prior notice and
without a vote, if a consent or consents in writing, setting forth the action so
taken, shall be signed by the holders of outstanding stock having not less than
the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted and shall be delivered to the corporation by delivery to its
registered office in Delaware, its principal place of business, or an officer or
agent of the corporation having custody of the book in which proceedings of
meetings of stockholders are recorded. Every written consent shall bear the date
of signature of each stockholder who signs the consent and no written consent
shall be effective to take the corporate action referred to
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therein unless, within 60 days of the earliest dated consent delivered in the
manner required in this section to the corporation, written consents signed by a
sufficient number of holders to take action are delivered to the corporation by
delivery to its registered office in Delaware, its principal place of business,
or an officer or agent of the corporation having custody of the book in which
proceedings of meetings of stockholders are recorded. Delivery made to a
corporation's registered office shall be by hand or by certified or registered
mail, return receipt requested. Prompt notice of the taking of the corporate
action without a meeting by less than unanimous written consent shall be given
to those stockholders who have not consented in writing.
SECTION 3.08. Voting Lists.--The officer who has charge of the stock
ledger of the corporation shall prepare and make, at least ten days before every
meeting of stockholders, a complete list of the stockholders entitled to vote at
the meeting. The list shall be arranged in alphabetical order, showing the
address of each stockholder and the number of shares registered in the name of
each stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten days prior to the meeting either at a place within the
city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not so specified, at the place where the meeting
is to be held. The list shall also be produced and kept at the time and place of
the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
SECTION 3.09. Inspectors of Election.
(a) Appointment.--All elections of directors shall be by written
ballot, unless otherwise provided in the certificate of incorporation; the vote
upon any other matter need not be by ballot. In advance of any meeting of
stockholders the board of directors may appoint inspectors, who need not be
stockholders, to act at the meeting. If inspectors are not so appointed, the
chairman of the meeting may, and upon the demand of any stockholder or his proxy
at the meeting and before voting begins shall, appoint inspectors. The number of
inspectors shall be either one or three, as determined, in the case of judges
appointed upon demand of a stockholder, by stockholders present entitled to cast
a majority of the votes which all stockholders present are entitled to cast
thereon. No person who is a candidate for office shall act as an inspector. In
case any person appointed as an inspector fails to appear or fails or refuses to
act, the vacancy may be filled by appointment made by the board of directors in
advance of the convening of the meeting, or at the meeting by the chairman of
the meeting.
(b) Duties.--If inspectors are appointed, they shall determine the
number of shares outstanding and the voting power of each, the shares
represented at the meeting, the existence of a quorum and the authenticity,
validity and effect of proxies, shall receive votes or ballots, shall hear and
determine all challenges and questions in any way arising in connection with the
right to vote, shall count and tabulate all votes, shall determine the
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result, and shall do such acts as may be proper to conduct the election or vote
with fairness to all stockholders. If there be three inspectors of election, the
decision, act or certificate of a majority shall be effective in all respects as
the decision, act or certificate of all.
(c) Report.--On request of the chairman of the meeting or of any
stockholder or his proxy, the inspectors shall make a report in writing of any
challenge or question or matter determined by them, and execute a certificate of
any fact found by them.
SECTION 3.10. Notice of Stockholder Business and Nominations.
(a) Annual Meetings of Stockholders.
(i) Nominations of persons for election to the board of
directors of the corporation and the proposal of business to be considered by
the stockholders may be made at an annual meeting of stockholders (A) pursuant
to the corporation's notice of meeting, (B) by or at the direction of the board
of directors or (C) by any stockholder of the corporation who was a stockholder
of record at the time of giving of notice provided for in this bylaw, who is
entitled to vote at the meeting and who complies with the notice procedures set
forth in this bylaw.
(ii) For nominations or other business to be properly brought
before an annual meeting by a stockholder pursuant to clause (C) of paragraph
(a)(i) of this bylaw, the stockholder must have given timely notice thereof in
writing to the secretary of the corporation and such other business must
otherwise be a proper matter for stockholder action. To be timely, a
stockholder's notice shall be delivered to the secretary at the principal
executive offices of the corporation not later than the close of business on the
60th day nor earlier than the close of business on the 90th day prior to the
first anniversary of the preceding year's annual meeting; provided, however,
that in the event that the date of the annual meeting is more than 30 days
before or more than 60 days after such anniversary date, notice by the
stockholder to be timely must be so delivered not earlier than the close of
business on the 90th day prior to such annual meeting and not later than the
close of business on the later of the 60th day prior to such annual meeting or
the l0th day following the day on which public announcement of the date of such
meeting is first made by the corporation. In no event shall the public
announcement of an adjournment of an annual meeting commence a new time period
for the giving of a stockholder's notice as described above. Such stockholder's
notice shall set forth (A) as to each person whom the stockholder proposes to
nominate for election or reelection as a director all information relating to
such person that is required to be disclosed in solicitations of proxies for
election of directors in an election contest, or is otherwise required, in each
case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and Rule 14a-11 thereunder (including such person's
written consent to being named in the proxy statement as a nominee and to
serving as a director if elected); (B) as to any other business that the
stockholder proposes to bring before the meeting, a brief description
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of the business desired to be brought before the meeting, the reasons for
conducting such business at the meeting and any material interest in such
business of such stockholder and the beneficial owner, if any, on whose behalf
the proposal is made; and (C) as to the stockholder giving the notice and the
beneficial owner, if any, on whose behalf the nomination or proposal is made (i)
the name and address of such stockholder, as they appear on the corporation's
books, and of such beneficial owner and (ii) the class or series and number of
shares of the corporation which are owned of record and beneficially by such
stockholder and such beneficial owner.
(iii) Notwithstanding anything in the second sentence of
paragraph (a)(ii) of this bylaw to the contrary, in the event that the number of
directors to be elected to the board of directors of the corporation is
increased and there is no public announcement by the corporation naming all of
the nominees for director or specifying the size of the increased board of
directors at least 70 days prior to the first anniversary of the preceding
year's annual meeting, a stockholder's notice required by this bylaw shall also
be considered timely, but only with respect to nominees for any new positions
created by such increase, if it shall be delivered to the secretary at the
principal executive offices of the corporation not later than the close of
business on the l0th day following the day on which such public announcement is
first made by the corporation.
(b) Special Meetings of Stockholders.--Only such business shall be
conducted at a special meeting of stockholders as shall have been brought before
the meeting pursuant to a proper notice of meeting. Nominations of persons for
election to the board of directors may be made at a special meeting of
stockholders at which directors are to be elected pursuant to a proper notice of
meeting (i) by or at the direction of the board of directors or (ii) provided
that the board of directors has determined that directors shall be elected at
such meeting, by any stockholder of the corporation who is a stockholder of
record at the time of giving of notice provided for in this bylaw, who shall be
entitled to vote at the meeting and who complies with the notice procedures set
forth in this bylaw. In the event the corporation calls a special meeting of
stockholders for the purpose of electing one or more directors to the board of
directors, any stockholder may nominate a person or persons (as the case may
be), for election to such position(s) as specified in a proper notice of meet
ing, if the stockholder's notice required by paragraph (a)(ii) of this bylaw
shall be delivered to the Secretary at the principal executive offices of the
corporation not earlier than the close of business on the 90th day prior to such
special meeting and not later than the close of business on the later of the
60th day prior to such special meeting or the 10th day following the day on
which public announcement is first made of the date of the special meeting and
of the nominees proposed by the board of directors or other stockholders to be
elected at such meeting. In no event shall the public announcement of an
adjournment of a special meeting commence a new time period for the giving of a
stockholder's notice as described above.
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(c) General.
(i) Only such persons who are nominated in accordance with
the procedures set forth in this bylaw shall be eligible to serve as directors
and only such business shall be conducted at a meeting of stockholders as shall
have been brought before the meeting in accordance with the procedures set forth
in this bylaw. Except as otherwise provided by law, the certificate of
incorporation, or these bylaws, the chairman of the meeting shall have the power
and duty to determine whether a nomination or any business proposed to be
brought before the meeting was made or proposed, as the case may be, in
accordance with the procedures set forth in this bylaw and, if any proposed
nomination or business is not in compliance with this bylaw, to declare that
such defective proposal or nomination shall be disregarded.
(ii) For purposes of this bylaw, "public announcement" shall
mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document publicly
filed by the Corporation with the Securities and Exchange Commission pursuant to
Section 13, 14 or 15(d) of the Exchange Act.
(iii) Notwithstanding the foregoing provisions of this bylaw,
a stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in this bylaw. Nothing in this bylaw shall be deemed to affect any rights
(A) of stockholders to request inclusion of proposals in the Corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act or (B) of the holders of
any series of Preferred Stock to elect directors under specified circumstances.
ARTICLE IV
Board of Directors
SECTION 4.01. Powers.--All powers vested by law in the corporation
shall be exercised by or under the authority of, and the business and affairs of
the corporation shall be managed under the direction of, the board of directors.
SECTION 4.02. Number and Term of Office.--The board of directors shall
consist of such number of directors as may be determined from time to time by
resolution of the board of directors. Each director shall hold office until the
expiration of the term for which he or she was selected and until a successor
shall have been elected and qualified or until his or her earlier death,
resignation or removal. Directors need not be residents of Delaware or
stockholders of the corporation.
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SECTION 4.03. Vacancies.--Vacancies and newly created directorships
resulting from any increase in the authorized number of directors elected by all
of the stockholders having a right to vote as a single class may be filled by a
majority of the directors then in office, though less than a quorum, or by a
sole remaining director, and the directors so chosen shall hold office until
their successors are elected and qualified or until their earlier death,
resignation or removal. If there are no directors in office, then an election of
directors may be held in the manner provided by statute. Whenever the holders of
any class or classes of stock or series thereof are entitled to elect one or
more directors by the provisions of the certificate of incorporation, vacancies
and newly created directorships of such class or classes or series may be filled
by a majority of the directors elected by such class or classes or series
thereof then in office, or by a sole remaining director so elected. If, at the
time of filling any vacancy or any newly created directorship, the directors
then in office shall constitute less than a majority of the whole board (as
constituted immediately prior to any such increase), the Court of Chancery may,
upon application of any stockholder or stockholders holding at least ten percent
of the total number of the shares at the time outstanding having the right to
vote for such directors, summarily order an election to be held to fill any such
vacancies or newly created directorships, or to replace the directors chosen by
the directors then in office.
SECTION 4.04. Resignations.--Any director may resign at any time upon
written notice to the corporation. The resignation shall be effective upon
receipt thereof by the corporation or at such subsequent time as shall be
specified in the notice of resignation and, unless otherwise specified in the
notice, the acceptance of the resignation shall not be necessary to make it
effective.
SECTION 4.05. Removal.--Any director or the entire board of directors
may be removed, with or without cause, by the holders of shares entitled to cast
a majority of the votes which all stockholders are entitled to cast at an
election of directors.
SECTION 4.06. Organization.--At every meeting of the board of
directors, the chairman, if there be one, or, in the case of a vacancy in the
office or absence of the chairman, one of the following officers present in the
order stated: the vice chairman, if there be one, the president, the vice
presidents in their order of rank and seniority, or a chairman chosen by a
majority of the directors present, shall preside, and the secretary, or, in the
absence of the secretary, an assistant secretary, or in the absence of the
secretary and the assistant secretaries, any person appointed by the chairman of
the meeting, shall act as secretary.
SECTION 4.07. Place of Meeting.--Meetings of the board of directors
shall be held at such place within or without the State of Delaware as the board
of directors may from time to time determine, or as may be designated in the
notice of the meeting.
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SECTION 4.08. Regular Meetings.--Regular meetings of the board of
directors shall be held without notice at such time and place as shall be
designated from time to time by resolution of the board of directors.
SECTION 4.09. Special Meetings.--Special meetings of the board of
directors shall be held whenever called by the chairman or by two or more of the
directors.
SECTION 4.10. Quorum, Manner of Acting and Adjournment.
(a) General Rule.--At all meetings of the board a majority of the total
number of directors shall constitute a quorum for the transaction of business.
The vote of a majority of the directors present at any meeting at which a quorum
is present shall be the act of the board of directors, except as may be
otherwise specifically provided by the GCL or by the certificate of
incorporation. If a quorum is not present at any meeting of the board of
directors, the directors present thereat may adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum is
present.
(b) Unanimous Written Consent.--Unless otherwise restricted by the
certificate of incorporation, any action required or permitted to be taken at
any meeting of the board of directors may be taken without a meeting, if all
members of the board consent thereto in writing, and the writing or writings are
filed with the minutes of proceedings of the board.
SECTION 4.11. Executive and Other Committees.
(a) Establishment.--The board of directors may, by resolution adopted
by a majority of the whole board, establish an Executive Committee and one or
more other committees, each committee to consist of one or more directors. The
board may designate one or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee. In the absence or disqualification of a member of a committee and the
alternate or alternates, if any, designated for such member, the member or
members of the committee present at any meeting and not disqualified from
voting, whether or not they constitute a quorum, may unanimously appoint another
director to act at the meeting in the place of any such absent or disqualified
member.
(b) Powers.--The Executive Committee, if established, and any such
other committee to the extent provided in the resolution establishing such
committee shall have and may exercise all the power and authority of the board
of directors in the management of the business and affairs of the corporation
and may authorize the seal of the corporation to be affixed to all papers which
may require it; but no such committee shall have the power or authority in
reference to amending the certificate of incorporation (except that a committee
may, to the extent authorized in the resolution or resolutions providing for the
issuance of shares of stock adopted by the board of directors as provided in
Section 151(a)
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of the GCL, fix the designation and any of the preferences or rights of such
shares relating to dividends, redemption, dissolution, any distribution of
assets of the corporation or the conversion into, or the exchange of such shares
for, shares of any other class or classes or any other series of the same or any
other class or classes of stock of the corporation or fix the number of shares
of any series of stock or authorize the increase or decrease of shares of any
series), adopting an agreement of merger or consolidation under Section 251 or
252 of the GCL, recommending to the stockholders the sale, lease or exchange of
all or substantially all of the corporation's property and assets, recommending
to the stockholders a dissolution of the corporation or a revocation of a
dissolution, or amending the bylaws of the corporation. The Executive Committee
shall have the power or authority to declare a dividend, to authorize the
issuance of stock and to adopt a certificate of ownership and merger pursuant to
Section 253 of the GCL. Such committee or committees shall have such name or
names as may be determined from time to time by resolution adopted by the board
of directors. Each committee so formed shall keep regular minutes of its
meetings and report the same to the board of directors when required.
(c) Committee Procedures.--The term "board of directors" or "board,"
when used in any provision of these bylaws relating to the organization or
procedures of or the manner of taking action by the board of directors, shall be
construed to include and refer to the Executive Committee or other committee of
the board.
SECTION 4.12. Approval of Independent Directors for Certain
Actions.--(a) Prior to _____________ 2000, the approval of at least a majority
of the corporation's Independent Directors (as defined below) shall be required
to approve (i) any amendment to the certificate of incorporation or bylaws of
the corporation or any stockholder rights plan of the corporation (including the
redemption of the rights thereunder or waiver of any provision thereof) or any
waiver of, or "opt-out" from, the benefit or effect of any provision thereof) or
other provision applicable to the corporation (including section 203 of the
GCL); or (ii) any agreement binding the corporation in respect of the sale, in a
single transaction or a series of related transactions, of all or a Substantial
Part of the corporation (as defined below), whether by liquidation,
consolidation, dissolution, sale of capital stock or assets, tender or exchange
offer, merger or other business combination.
(b) The approval of at least a majority of the corporation's
Independent Directors shall be required to approve and authorize (i) any
transaction or series of related transactions between the corporation or any of
its subsidiaries, on the one hand, and any Stockholder (as defined below) or any
affiliate of a Stockholder, on the other hand, so long as any of such entities
and its affiliates own, in the aggregate, at least 10% of the outstanding Common
Stock, (ii) any amendment to, or waiver of, any provisions of the Stockholders
Agreement, dated as of March __ , 1997, among the Corporation and certain of its
stockholders, or (iii) notwithstanding the terms of the preceding paragraph (a),
any amendment to the certificate of incorporation or bylaws of the corporation
which would
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amend, repeal, waive, contravene or otherwise alter this paragraph (b),
including amendments of the defined terms used herein.
For purposes of the foregoing:
"Independent Director" means a director of the corporation who is not
(apart from such directorship) (i) an officer, director, affiliate, employee,
principal stockholder, consultant or partner of a Stockholder or any affiliate
of a Stockholder or of any entity that was dependent upon a Stockholder or any
affiliate of a Stockholder for more than 5% of its revenues or earnings in its
most recent fiscal year, or (ii) an officer, employee, consultant or partner of
the corporation or any affiliate of the corporation or an officer, employee,
principal stockholder, consultant or partner of an entity that was dependent
upon the corporation or any affiliate of the corporation for more than 5% of its
revenues or earnings in its most recent fiscal year;
"Stockholder" means SDI Partners I, L.P., Lehman Brothers Capital
Partners I, L.P., Lehman/SDI, Inc., Lehman Brothers Inc. and their respective
affiliates or successors; and
"Substantial Part of the corporation" means, as of any date, thirty
percent (30%) or more of (i) the outstanding capital stock of the corporation
(measured by economic interest or voting power), or (ii) the book value of the
consolidated tangible assets of the corporation and its subsidiaries, taken as a
whole (without regard to any liabilities of the corporation or any of its
subsidiaries), as of the end of its most recent fiscal quarter ending prior to
the time the determination is made.
SECTION 4.13. Compensation of Directors.--Unless otherwise restricted
by the certificate of incorporation, the board of directors shall have the
authority to fix the compensation of directors.
ARTICLE V
Officers
SECTION 5.01. Number, Qualifications and Designation.--The officers of
the corporation shall be chosen by the board of directors and shall be a
chairman, a president, one or more vice presidents, a secretary, a treasurer,
and such other officers as may be elected in accordance with the provisions of
section 5.03 of this Article. Any number of offices may be held by the same
person. Officers may, but need not, be directors or stockholders of the
corporation.
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SECTION 5.02. Election and Term of Office.--The officers of the
corporation, except those elected by delegated authority pursuant to section
5.03 of this Article, shall be elected annually by the board of directors, and
each such officer shall hold office for a term of one year and until a successor
is elected and qualified, or until his or her earlier resignation or removal.
Any officer may resign at any time upon written notice to the corporation.
SECTION 5.03. Subordinate Officers, Committees and Agents.--The board
of directors may from time to time elect such other officers and appoint such
committees, employees or other agents as it deems necessary, who shall hold
their offices for such terms and shall exercise such powers and perform such
duties as are provided in these bylaws, or as the board of directors may from
time to time determine. The board of directors may delegate to any officer or
committee the power to elect subordinate officers and to retain or appoint
employees or other agents, or committees thereof, and to prescribe the authority
and duties of such subordinate officers, committees, employees or other agents.
SECTION 5.04. The Chairman.--The chairman shall be the chief executive
officer of the corporation, shall preside at all meetings of the stockholders
and of the board of directors, and shall perform such other duties as may from
time to time be assigned by the board of directors.
SECTION 5.05. The President.--The president shall be the chief
operating officer of the corporation and shall perform such other duties as from
time to time may be assigned by the board of directors and the chairman.
SECTION 5.06. The Vice Presidents.--The vice presidents shall perform
the duties of the president in the absence of the president and such other
duties as may from time to time be assigned to them by the board of directors or
by the president.
SECTION 5.07. The Secretary.--The secretary, or an assistant secretary,
shall attend all meetings of the stockholders and of the board of directors and
shall record the proceedings of the stockholders and of the directors and of
committees of the board in a book or books to be kept for that purpose; shall
see that notices are given and records and reports properly kept and filed by
the corporation as required by law; shall be the custodian of the seal of the
corporation and see that it is affixed to all documents to be executed on behalf
of the corporation under its seal; and, in general, shall perform all duties
incident to the office of secretary, and such other duties as may from time to
time be assigned by the board of directors or the president.
SECTION 5.08. The Treasurer.--The treasurer, or an assistant treasurer,
shall have or provide for the custody of the funds or other property of the
corporation; shall collect and receive or provide for the collection and receipt
of moneys earned by or in any manner
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due to or received by the corporation; shall deposit all funds in his or her
custody as treasurer in such banks or other places of deposit as the board of
directors may from time to time designate; whenever so required by the board of
directors, shall render an account showing his or her transactions as treasurer
and the financial condition of the corporation; and, in general, shall discharge
such other duties as may from time to time be assigned by the board of directors
or the president.
SECTION 5.09. Officers' Bonds.--No officer of the corporation need
provide a bond to guarantee the faithful discharge of the officer's duties
unless the board of directors shall by resolution so require a bond in which
event such officer shall give the corporation a bond (which shall be renewed if
and as required) in such sum and with such surety or sureties as shall be
satisfactory to the board of directors for the faithful performance of the
duties of office.
SECTION 5.10. Salaries.--The salaries of the officers and agents of the
corporation elected by the board of directors shall be fixed from time to time
by the board of directors.
ARTICLE VI
Certificates of Stock, Transfer, Etc.
SECTION 6.01. Form and Issuance.
(a) Issuance.--The shares of the corporation shall be represented by
certificates unless the board of directors shall by resolution provide that some
or all of any class or series of stock shall be uncertificated shares. Any such
resolution shall not apply to shares represented by a certificate until the
certificate is surrendered to the corporation. Notwithstanding the adoption of
any resolution providing for uncertificated shares, every holder of stock
represented by certificates and upon request every holder of uncertificated
shares shall be entitled to have a certificate signed by, or in the name of the
corporation by, the chairman, or the president or vice president, and by the
treasurer or an assistant treasurer, or the secretary or an assistant secretary,
representing the number of shares registered in certificate form.
(b) Form and Records.--Stock certificates of the corporation shall be
in such form as approved by the board of directors. The stock record books and
the blank stock certificate books shall be kept by the secretary or by any
agency designated by the board of
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directors for that purpose. The stock certificates of the corporation shall be
numbered and registered in the stock ledger and transfer books of the
corporation as they are issued.
(c) Signatures.--Any of or all the signatures upon the stock
certificates of the corporation may be a facsimile. In case any officer,
transfer agent or registrar who has signed, or whose facsimile signature has
been placed upon, any share certificate shall have ceased to be such officer,
transfer agent or registrar, before the certificate is issued, it may be issued
with the same effect as if the signatory were such officer, transfer agent or
registrar at the date of its issue.
SECTION 6.02. Transfer.--Transfers of shares shall be made on the share
register or transfer books of the corporation upon surrender of the certificate
therefor, endorsed by the person named in the certificate or by an attorney
lawfully constituted in writing. No transfer shall be made which would be
inconsistent with the provisions of Article 8, Title 6 of the Delaware Uniform
Commercial Code-Investment Securities.
SECTION 6.03. Lost, Stolen, Destroyed or Mutilated Certificates.--The
board of directors may direct a new certificate of stock or uncertificated
shares to be issued in place of any certificate theretofore issued by the
corporation alleged to have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen or destroyed. When authorizing such issue of a new certificate or
certificates, the board of directors may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed certificate or certificates, or the legal representative of the owner,
to give the corporation a bond sufficient to indemnify against any claim that
may be made against the corporation on account of the alleged loss, theft or
destruction of such certificate or the issuance of such new certificate or
uncertificated shares.
SECTION 6.04. Record Holder of Shares.--The corporation shall be
entitled to recognize the exclusive right of a person registered on its books as
the owner of shares to receive dividends, and to vote as such owner, and to hold
liable for calls and assessments a person registered on its books as the owner
of shares, and shall not be bound to recognize any equitable or other claim to
or interest in such share or shares on the part of any other person, whether or
not it shall have express or other notice thereof, except as otherwise provided
by the laws of Delaware.
SECTION 6.05. Determination of Stockholders of Record.
(a) Meetings of Stockholders.--In order that the corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, the board of directors may fix a record
date, which record date shall not precede the date upon which the resolution
fixing the record date is adopted by the
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board of directors, and which record date shall not be more than 60 nor less
than ten days before the date of such meeting.
If no record date is fixed by the board of directors, the record date
for determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the day next preceding the day
on which notice is given, or, if notice is waived, at the close of business on
the day next preceding the day on which the meeting is held. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting unless the board of
directors fixes a new record date for the adjourned meeting.
(b) Consent of Stockholders.--In order that the corporation may
determine the stockholders entitled to consent to corporate action in writing
without a meeting, the board of directors may fix a record date, which record
date shall not precede the date upon which the resolution fixing the record date
is adopted by the board of directors, and which date shall not be more than ten
days after the date upon which the resolution fixing the record date is adopted
by the board of directors. Any stockholder of record seeking to have the
stockholders authorize or take corporate action by written consent shall, by
written notice to the secretary, request the board of directors to fix a record
date. The board of directors shall promptly, but in all events within 10 days
after the date on which such a request is received, adopt a resolution fixing
the record date. If no record date has been fixed by the board of directors
within 10 days of the date on which such a request is received, the record date
for determining stockholders entitled to consent to corporate action in writing
without a meeting, when no prior action by the board of directors is required by
the GCL, shall be the first date on which a signed written consent setting forth
the action taken or proposed to be taken is delivered to the corporation by
delivery to its registered office in Delaware, its principal place of business,
or an officer or agent of the corporation having custody of the book in which
proceedings of meetings of stockholders are recorded. Delivery made to a
corporation's registered office shall be by hand or by certified or registered
mail, return receipt requested. If no record date has been fixed by the board of
directors and prior action by the board of directors is required by the GCL, the
record date for determining stockholders entitled to consent to corporate action
in writing without a meeting shall be at the close of business on the day on
which the board of directors adopts the resolution taking such prior action.
(c) Dividends.--In order that the corporation may determine the
stockholders entitled to receive payment of any dividend or other distribution
or allotment of any rights of the stockholders entitled to exercise any rights
in respect of any change, conversion or exchange of stock, or for the purpose of
any other lawful action, the board of directors may fix a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted, and which record date shall be not more than 60 days
prior to such action. If no record date is fixed, the record date for
determining stockholders
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for any such purpose shall be at the close of business on the day on which the
board of directors adopts the resolution relating thereto.
ARTICLE VII
Indemnification of Directors, Officers and
Other Authorized Representatives
SECTION 7.01. Indemnification of Authorized Representatives in Third
Party Proceedings.--The corporation shall indemnify, to the fullest extent
permitted by law, any person who was or is an authorized representative of the
corporation, and who was or is a party, or is threatened to be made a party to
any third party proceeding, by reason of the fact that such person was or is an
authorized representative of the corporation, against expenses, judgments, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with such third party proceeding if such person acted in good
faith and in a manner such person reasonably believed to be in, or not opposed
to, the best interests of the corporation and, with respect to any criminal
third party proceeding, had no reasonable cause to believe such conduct was
unlawful. The termination of any third party proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its equivalent,
shall not of itself create a presumption that the authorized representative did
not act in good faith and in a manner which such person reasonably believed to
be in or not opposed to, the best interests of the corporation, and, with
respect to any criminal third party proceeding, had reasonable cause to believe
that such conduct was unlawful.
SECTION 7.02. Indemnification of Authorized Representatives in
Corporate Proceedings.--The corporation shall indemnify, to the fullest extent
permitted by law, any person who was or is an authorized representative of the
corporation and who was or is a party or is threatened to be made a party to any
corporate proceeding, by reason of the fact that such person was or is an
authorized representative of the corporation, against expenses actually and
reasonably incurred by such person in connection with the defense or settlement
of such corporate proceeding if such person acted in good faith and in a manner
reasonably believed to be in, or not opposed to, the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such corporate proceeding was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such authorized representative is
fairly and reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper.
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<PAGE>
SECTION 7.03. Mandatory Indemnification of Authorized
Representatives.--To the extent that an authorized representative or other
employee or agent of the corporation has been successful on the merits or
otherwise in defense of any third party or corporate proceeding or in defense of
any claim, issue or matter therein, such person shall be indemnified, to the
fullest extent permitted by law, against expenses actually and reasonably
incurred by such person in connection therewith.
SECTION 7.04. Determination of Entitlement to Indemnification.--Any
indemnification under section 7.01, 7.02 or 7.03 of this Article (unless ordered
by a court) shall be made by the corporation only as authorized in the specific
case upon a determination that indemnification of the authorized representative
or other employee or agent is proper in the circumstances because such person
has either met the applicable standard of conduct set forth in section 7.01 or
7.02 or has been successful on the merits or otherwise as set forth in section
7.03 and that the amount requested has been actually and reasonably incurred.
Such determination shall be made:
(a) by the board of directors by a majority vote of a quorum consisting
of directors who were not parties to such third party or corporate proceeding;
or
(b) if such a quorum is not obtainable, or even if obtainable, a quorum
of disinterested directors so directs, by independent legal counsel in a written
opinion; or
(c) by the stockholders.
SECTION 7.05. Advancing Expenses.--Expenses actually and reasonably
incurred in defending a third party or corporate proceeding shall be paid on
behalf of an authorized representative by the corporation in advance of the
final disposition of such third party or corporate proceeding upon receipt of an
undertaking by or on behalf of the authorized representative to repay such
amount if it shall ultimately be determined that the authorized representative
is not entitled to be indemnified by the corporation as authorized in this
Article. The financial ability of any authorized representative to make a
repayment contemplated by this section shall not be a prerequisite to the making
of an advance. Expenses incurred by other employees and agents may be so paid
upon such terms and conditions, if any, as the board of directors deems
appropriate.
SECTION 7.06. Definitions.--For purposes of this Article:
(a) "authorized representative" shall mean any and all directors and
officers of the corporation and any person designated as an authorized
representative by the board of directors of the corporation (which may, but need
not, include any person serving at the request of the corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise);
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(b) "corporation" shall include, in addition to the resulting
corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, employees or agents, so that any person who is or was a
director, officer, employee or agent of such constituent corporation, or is or
was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, shall stand in the same position under the provisions
of this Article with respect to the resulting or surviving corporation as such
person would have with respect to such constituent corporation if its separate
existence had continued;
(c) "corporate proceeding" shall mean any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor or investigative proceeding by the corporation;
(d) "criminal third party proceeding" shall include any action or
investigation which could or does lead to a criminal third party proceeding;
(e) "expenses" shall include attorneys' fees and disbursements;
(f) "fines" shall include any excise taxes assessed on a person with
respect to an employee benefit plan;
(g) "not opposed to the best interests of the corporation" shall
include actions taken in good faith and in a manner the authorized
representative reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan;
(h) "other enterprises" shall include employee benefit plans;
(i) "party" shall include the giving of testimony or similar
involvement;
(j) "serving at the request of the corporation" shall include any
service as a director, officer or employee of the corporation which imposes
duties on, or involves services by, such director, officer or employee with
respect to an employee benefit plan, its participants, or beneficiaries; and
(k) "third party proceeding" shall mean any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative,
or investigative, other than an action by or in the right of the corporation.
SECTION 7.07. Insurance.--The corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer,
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employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against the person and incurred
by the person in any such capacity, or arising out of his or her status as such,
whether or not the corporation would have the power or the obligation to
indemnify such person against such liability under the provisions of this
Article.
SECTION 7.08. Scope of Article.--The indemnification of authorized
representatives and advancement of expenses, as authorized by the preceding
provisions of this Article, shall not be deemed exclusive of any other rights to
which those seeking indemnification or advancement of expenses may be entitled
under any agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in an official capacity and as to action in another
capacity while holding such office. The indemnification and advancement of
expenses provided by or granted pursuant to this Article shall, unless otherwise
provided when authorized or ratified, continue as to a person who has ceased to
be an authorized representative and shall inure to the benefit of the heirs,
executors and administrators of such a person.
SECTION 7.09. Reliance on Provisions.--Each person who shall act as an
authorized representative of the corporation shall be deemed to be doing so in
reliance upon rights of indemnification provided by this Article.
ARTICLE VIII
General Provisions
SECTION 8.01. Dividends.--Subject to the restrictions contained in the
GCL and any restrictions contained in the certificate of incorporation, the
board of directors may declare and pay dividends upon the shares of capital
stock of the corporation.
SECTION 8.02. Contracts.--Except as otherwise provided in these bylaws,
the board of directors may authorize any officer or officers, or any agent or
agents, to enter into any contract or to execute or deliver any instrument on
behalf of the corporation and such authority may be general or confined to
specific instances.
SECTION 8.03. Corporate Seal.--The corporation shall have a corporate
seal, which shall have inscribed thereon the name of the corporation, the year
of its organization and the words "Corporate Seal, Delaware". The seal may be
used by causing it or a facsimile thereof to be impressed or affixed or in any
other manner reproduced.
SECTION 8.04. Deposits.--All funds of the corporation shall be
deposited from time to time to the credit of the corporation in such banks,
trust companies, or other depositories as the board of directors may approve or
designate, and all such funds shall be
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withdrawn only upon checks signed by such one or more officers or employees as
the board of directors shall from time to time determine.
SECTION 8.05. Corporate Records.
(a) Examination by Stockholders.--Every stockholder shall, upon written
demand under oath stating the purpose thereof, have a right to examine, in
person or by agent or attorney, during the usual hours for business, for any
proper purpose, the stock ledger, list of stockholders, books or records of
account, and records of the proceedings of the stockholders and directors of the
corporation, and to make copies or extracts therefrom. A proper purpose shall
mean a purpose reasonably related to such person's interest as a stockholder. In
every instance where an attorney or other agent shall be the person who seeks
the right to inspection, the demand under oath shall be accompanied by a power
of attorney or such other writing which authorizes the attorney or other agent
to so act on behalf of the stockholder. The demand under oath shall be directed
to the corporation at its registered office in Delaware or at its principal
place of business. Where the stockholder seeks to inspect the books and records
of the corporation, other than its stock ledger or list of stockholders, the
stockholder shall first establish (i) that the stockholder has complied with the
provisions of this section respecting the form and manner of making demand for
inspection of such documents; and (ii) that the inspection sought is for a
proper purpose. Where the stockholder seeks to inspect the stock ledger or list
of stockholders of the corporation and has complied with the provisions of this
section respecting the form and manner of making demand for inspection of such
documents, the burden of proof shall be upon the corporation to establish that
the inspection sought is for an improper purpose.
(b) Examination by Directors.--Any director shall have the right to
examine the corporation's stock ledger, a list of its stockholders and its other
books and records for a purpose reasonably related to the person's position as a
director.
SECTION 8.06. Amendment of Bylaws.--Subject to Section 4.12 hereof,
these bylaws may be altered, amended or repealed or new bylaws may be adopted
either (a) by vote of the stockholders at a duly organized annual or special
meeting of stockholders (or by their written consent), or (b) by vote of a
majority of the board of directors at any regular or special meeting of
directors if such power is conferred upon the board of directors by the
certificate of incorporation.
<PAGE>
Exhibit 8.1
2000 One Logan Square
Morgan, Lewis
Philadelphia, PA 19103-6993 & Bockius LLP
C O U N S E L O R S A T L A W
215-963-5000
FAX: 215-963-5299
March 19, 1997
SunSource L.P.
2600 One Logan Square
Philadelphia, Pennsylvania 19103
Re: Conversion to Corporate Form
----------------------------
Dear Ladies and Gentlemen:
You have requested our opinion regarding certain federal income tax aspects of
the conversion of SunSource L.P., a Delaware limited partnership (the
"Partnership"), to corporate form, as described in the Registration Statement on
Form S-4 (File No. 333-19077) as amended, filed with the Securities and Exchange
Commission on the date hereof (the "Registration Statement"). This opinion is
based upon review of the Registration Statement and our assumption that the
Conversion will take place in accordance with the description included in the
Registration Statement.
Based on the foregoing and on the Internal Revenue Code of 1986, as amended (the
"Code"), the regulations promulgated thereunder, and judicial and administrative
interpretations thereof, all as in effect on the date of this letter, it is our
opinion that the statements of law and conclusions of law included in the
Registration Statement under the heading "Certain Federal Income Tax
Consequences" are, in all material respects, true, correct and complete. No
opinion is expressed regarding any statements, assumptions or opinions regarding
factual matters contained in the Registration Statement.
Should any of the facts, assumptions or understandings referred to above prove
incorrect, please let us know so that we may consider the effect, if any, on our
opinion. No assurances can be given that any of the foregoing authorities will
not be modified, revoked, supplemented, revised, reversed or overruled or that
any such modification, revocation, supplementation, revision, reversal or
overruling will not adversely affect the opinion set forth above.
We understand that this opinion is to be used in connection with the
registration of Trust Preferred Securities of SunSource Capital Trust and Common
Stock of SunSource Inc. pursuant to the Securities Act of 1933, as amended. We
consent to the filing of this opinion in connection with and as a part of the
Registration Statement on Form S-4 and amendments thereto. We also hereby
consent to the reference to our firm under the caption "Legal Matters" in the
Registration Statement. In giving such consents, however, we do not thereby
admit that we are acting within the category of persons whose consent is
required under Section 7 of the Act and the rules and regulations of the
Securities and Exchange Commission thereunder.
Very truly yours,
/s/ Morgan, Lewis & Bockius LLP
<PAGE>
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made and
entered into as of , 1997, by and among SunSource Inc., a Delaware corporation
(the "Company"), and Lehman Brothers (as defined below) and the Senior
Executives (as defined below) (collectively, the "Stockholders").
RECITALS
A. The Company is issuing shares of Common Stock of the Company to the
Stockholders (collectively, the "Shares") in connection with the conversion of
SunSource L.P. to corporate form (the "Conversion").
B. The Company desires to grant to the Stockholders certain
registration rights with respect to the Shares held by the Stockholders.
C. The parties hereto desire to set forth the terms and conditions of
the Company's covenants and agreements in respect of the registration of the
Shares with the Securities and Exchange Commission and all applicable state
securities agencies.
D. In consideration of the premises and the mutual agreements contained
herein, the parties hereby agree as follows:
AGREEMENT
1. Definitions.
As used in this Agreement, the following capitalized terms shall have
the following meanings:
Advice: As defined in the last paragraph of Section 5 hereof.
Common Stock: Shares of the Company's common stock, $.01 par value, as
the same may be constituted from time to time.
Company Notice: As defined in Section 4(a) hereof.
Demand Registration: As defined in Section 3(a) hereof.
Exchange Act: The Securities Exchange Act of 1934, as amended, and the
rules and regulations thereunder, as in effect from time to time.
Holder: Each of (i) Lehman Brothers and any of its transferees and (ii)
the Senior Executives and their transferees.
Lehman Brothers: LB I Group, Inc., Lehman Ltd. I Inc., Lehman/SDI, Inc.
and Lehman Brothers Capital Partners I, L.P., collectively.
<PAGE>
2
Lock-up Period: As defined in Section 9(a) hereof.
Person: An individual, partnership, corporation, joint venture, trust
or unincorporated organization, or a government or agency or political
subdivision thereof.
Piggyback Notice: As defined in Section 4(a) hereof.
Piggyback Registration Statement: As defined in Section 4(a) hereof.
Prospectus: The prospectus included in any Registration Statement, as
amended or supplemented by any prospectus supplement with respect to the terms
of the offering of any portion of the Registrable Securities covered by the
Registration Statement and all other amendments and supplements to the
Prospectus, including post-effective amendments and all material incorporated by
reference in such Prospectus.
Registrable Securities: (i) all Shares acquired by Lehman Brothers or
any of its affiliates pursuant to the Conversion, (ii) the number of Shares
acquired by the Senior Executives pursuant to the Conversion as set forth on
Schedule 1 hereto and (iii) any securities issued or issuable with respect to
such Shares in clause (i) or (ii) by way of a stock dividend or stock split or
other distribution or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization. A Share ceases
to be a Registrable Security when (a) it has been effectively registered under
the Securities Act and disposed of in accordance with the Registration Statement
covering it or (b) it has otherwise been transferred in accordance with the
Securities Act and no further restriction on transfer remains or (c) it can be
sold without restriction under Rule 145(d)(2) or (3) under the Securities Act.
Registration Expenses: As defined in Section 6 hereof.
Registration Statement: Any registration statement of the Company which
covers Registrable Securities pursuant to the provisions of this Agreement,
including (i) the Prospectus, (ii) amendments and supplements to such
Registration Statement, (iii) post-effective amendments, (iv) all exhibits and
all material incorporated by reference in such Registration Statement, (v) any
registration statement pursuant to a Demand Registration and (vi) any Piggyback
Registration Statement.
Securities Act: The Securities Act of 1933, as amended, and the rules
and regulations thereunder as in effect from time to time.
SEC: The Securities and Exchange Commission.
Senior Executives: Each of Donald T. Marshall, John P. McDonnell and
Norman V. Edmonson and their respective S-corporations parties hereto.
Underwritten Offering: The offering and sale of securities of the
Company covered by any Registration Statement pursuant to a firm commitment
underwriting to an underwriter
<PAGE>
3
at a fixed price for reoffering or pursuant to agency or best efforts
arrangements with an underwriter.
Unless the context otherwise requires: (i) "or" is not exclusive; and (ii) words
in the singular include the plural and words in the plural include the singular.
2. Securities Subject to this Agreement.
The securities entitled to the benefits of this Agreement are the
Registrable Securities but, with respect to any particular Registrable
Securities, only so long as such security continues to be a Registrable
Security.
3. Lehman Brothers' Registration Rights.
(a) Demand Registration. At any time after the effective time of the
Conversion, Lehman Brothers may make a written request to the Company for
registration with the SEC under and in accordance with the provisions of the
Securities Act of all or any part of its Registrable Securities (a "Demand
Registration"). Such request shall specify the number of Registrable Securities
to be registered and the intended methods of disposition thereof. Promptly after
receipt of any such request the Company shall give written notice of such
requested registration to all other Holders of Registrable Securities and
thereupon shall, as expeditiously as possible, use its best efforts to effect
the registration under the Securities Act of (i) the Registrable Securities that
the Company has been so requested to register in the Demand Registration, and
(ii) all other Registrable Securities requested to be registered pursuant to the
following sentence. Upon the receipt of such notice from the Company, each
Holder shall be entitled for a period of 15 days from the date of receipt of
such notice to deliver a written request to the Company specifying the number of
his Registrable Securities to be included in such Demand Registration.
(b) Shelf Registration. At any time after the expiration of the Lock-up
Period with respect to the initial Demand Registration, Lehman Brothers may make
a written request to the Company to file a shelf registration statement covering
the remainder of Lehman Brothers' Registrable Securities. Promptly after receipt
of any such request the Company shall, as expeditiously as possible, use its
best efforts to effect the registration under the Securities Act of such
Registrable Securities and shall use its best efforts to keep such shelf
registration statement continuously effective until all such Registrable
Securities have been sold thereunder.
(c) Registration Expenses. In any registration pursuant to this Section
3, the Company will pay all Registration Expenses.
(d) Selection of Underwriters. If any of the Registrable Securities
covered by a registration pursuant to this Section 3 are to be sold in an
Underwritten Offering, the investment banker or investment bankers and manager
or managers that will administer the offering will be selected by Lehman
Brothers.
<PAGE>
4
(e) Reduction. If a Demand Registration pursuant to this Section 3
involves an underwritten offering and the managing underwriter advises the
Company in writing that, in its opinion, the number of securities requested to
be included in such registration exceeds the number which can be sold in such
offering without having a material adverse effect on the price, timing or
distribution of such securities, the Company will include in such registration
only the Registrable Securities requested to be included in such registration
which, in the opinion of such managing underwriter, can be sold without having
such adverse effect, such amount to be allocated pro rata among all requesting
Holders on the basis of the relative number of shares of Registrable Securities
requested to be included in such registration by each such Holder.
4. Piggyback Registration Rights.
(a) Requests for Piggyback Registration. The Company covenants and
agrees with each Holder that, in the event the Company proposes to file at any
time and from time to time a registration statement on any form for the general
registration of securities under the Securities Act with respect to the offering
of any class of equity security (other than in connection with an offering
solely to the Company's employees pursuant to a registration statement on Form
S-8 under the Securities Act or an offering pursuant to a registration statement
on Form S-4 under the Securities Act, or any successor forms thereto), whether
or not for sale for its own account (a "Piggyback Registration Statement"), then
the Company shall in each such case promptly give written notice (a "Company
Notice") to each Holder of such proposed filing, and such notice shall offer to
each Holder the opportunity to include in such Piggyback Registration Statement
such number of Registrable Securities as each may request. Upon the written
request of any such Holder (a "Piggyback Notice") made within 15 days after the
receipt of any such notice (which request shall specify the Registrable
Securities intended to be sold by such Holder), the Company will use its best
efforts to effect the registration under the Securities Act of all Registrable
Securities which the Company has been so requested to register by the Holders
thereof. Notwithstanding the foregoing, the Company shall not be obligated to
register the Registrable Securities of any Holder (i) unless a Piggyback Notice
shall have been received by the Company within 15 days of receipt of the Company
Notice by such Holder, or (ii) if the Company shall, within 10 calendar days
after receipt of a Piggyback Notice, have delivered to any Holder whose
Registrable Securities shall have been the subject of a Piggyback Notice an
opinion of counsel reasonably satisfactory to said Holder to the effect that the
proposed transfer of all such Registrable Securities can be made at such time
without registration in accordance with Rule 145(d) under the Securities Act or
any other exemption from the registration provisions thereof (other than Rule
144A).
The Company shall use its best efforts to cause the underwriter of a
proposed offering, if any, to permit the Holders holding Registrable Securities
requested to be included in the Piggyback Registration Statement to include such
Registrable Securities in the proposed offering on terms and conditions at least
as favorable to the Holders holding such Registrable Securities as those offered
with respect to the other securities of the Company included therein.
Notwithstanding the foregoing, if the lead managing underwriter shall advise the
Company in writing that, in its opinion, the distribution of the Registrable
Securities requested
<PAGE>
5
to be included in the Piggyback Registration Statement concurrently with the
securities being registered by the Company would materially adversely affect the
price, timing or distribution of such securities by the Company, then the
Company will include in such registration (i) first, 100% of the securities the
Company proposes to sell and (ii) second, to the extent of the number of
Registrable Securities requested to be included in such registration, which, in
the opinion of such managing underwriter, can be sold without having the adverse
effect referred to above, the number of Registrable Securities which the Holders
have requested to be included in such registration, such amount to be allocated
pro rata among all requesting Holders on the basis of the relative number of
shares of Registrable Securities requested to be included in such registration
by each such Holder.
(b) Registration Expenses. In connection with the registration of
Registrable Securities in accordance with Section 4(a) above, the Company agrees
to pay all Registration Expenses.
5. Registration Procedures.
Whenever any Holder has requested that any Registrable Securities be
registered pursuant to this Agreement, the Company will promptly take all such
actions as may be necessary or desirable to permit the sale of such Registrable
Securities in accordance with the intended method or methods of disposition
thereof, and pursuant thereto the Company will as expeditiously as possible:
(a) with respect to a request to file a Registration Statement
covering Registrable Securities made pursuant to Section 3 hereof, use
its best efforts to prepare and file with the SEC, as soon as
practicable, but in no event later than 45 days after receipt of such
request a Registration Statement on a form for which the Company then
qualifies which is satisfactory to the Company and Lehman Brothers
(unless the offering is made on an underwritten basis, including on a
best efforts underwriting basis, in which event the managing
underwriter or underwriters shall determine the form to be used) and
which form shall be available for the sale of the Registrable
Securities in accordance with the intended method or methods of
distribution thereof, and use its best efforts to cause such
Registration Statement to become effective as soon as practicable after
receipt of such request; the Company shall not file any Registration
Statement pursuant to Section 3 hereof or any amendment thereto or any
Prospectus or any supplement thereof (including such documents
incorporated by reference) to which Lehman Brothers or the
underwriters, if any, shall reasonably object in light of the
requirements of the Securities Act or any other applicable laws or
regulations;
(b) before filing a Registration Statement or Prospectus or
any amendments or supplements thereto (including documents to be
incorporated by reference therein), the Company will within five days
of filing, furnish to the Holders and the underwriters, if any, copies
of all such documents in substantially the form proposed to be filed
(including documents incorporated therein by reference), to enable the
Holders and the underwriters, if any, to review such documents prior to
the filing
<PAGE>
6
thereof, and the Company shall make such reasonable changes thereto
(including changes to, or the filing of amendments reflecting such
changes to, documents incorporated by reference) as may be reasonably
requested by the Holders and the managing underwriter or underwriters,
if any;
(c) subject to the five-day review period required by
paragraph (b) above, prepare and file with the SEC such amendments and
post-effective amendments to the Registration Statement as may be
necessary to keep the Registration Statement continuously effective for
a period of not less than 120 days or such longer period as is required
for the intended method of distribution, or such shorter period which
will terminate when all Registrable Securities covered by such
Registration Statement have been sold or withdrawn; cause the
Prospectus to be supplemented by any required Prospectus supplement,
and as so supplemented to be filed pursuant to Rule 424 under the
Securities Act; and comply with the provisions of the Securities Act
with respect to the disposition of all securities covered by such
Registration Statement during the applicable period in accordance with
the intended methods of disposition by the Holders thereof set forth in
such Registration Statement or supplement to the Prospectus;
(d) notify the Holders and the managing underwriters, if any,
promptly, and (if requested by any such Person) confirm such advice in
writing, (1) when the Prospectus or any Prospectus supplement or
post-effective amendment has been filed, and, with respect to the
Registration Statement or any post-effective amendment, when the same
has become effective, (2) of any request by the SEC for amendments or
supplements to the Registration Statement or the Prospectus or for
additional information, (3) of the issuance by the SEC of any stop
order suspending the effectiveness of the Registration Statement or the
initiation of any proceedings for that purpose, (4) if at any time the
representations and warranties of the Company contemplated by paragraph
(o) below cease to be true and correct, (5) of the receipt by the
Company of any notification with respect to the suspension of the
qualification of the Registrable Securities for sale in any
jurisdiction or the initiation or threatening of any proceeding for
such purpose, and (6) of the happening of any event which makes any
statement made in the Registration Statement, the Prospectus or any
document incorporated therein by reference untrue or which requires the
making of any changes in the Registration Statement, the Prospectus or
any document incorporated therein by reference in order to make the
statements therein not misleading;
(e) make every reasonable effort to obtain the withdrawal of
any order suspending the effectiveness of the Registration Statement at
the earliest possible moment;
(f) as promptly as practicable after filing with the SEC of
any document which is incorporated by reference into the Registration
Statement or the Prospectus (after initial filing of the Registration
Statement) provide copies of such document to counsel to the Holders
and to the managing underwriters;
<PAGE>
7
(g) furnish to the Holders and each managing underwriter,
without charge, at least one signed copy of the Registration Statement
and any post-effective amendment thereto, including financial
statements and schedules, all documents incorporated therein by
reference and all exhibits (including those incorporated by reference)
and a reasonable number of conformed copies of all such documents;
(h) deliver to the Holders and the underwriters, if any, as
many copies of the Prospectus (including each preliminary prospectus)
and any amendment or supplement thereto as such Persons may reasonably
request; the Company consents to the use of the Prospectus or any
amendment or supplement thereto by the Holders and the underwriters, if
any, in connection with the offering and sale of the Registrable
Securities covered by the Prospectus or any amendment or supplement
thereto;
(i) prior to the date on which the Registration Statement is
declared effective, use its best efforts to register or qualify or
cooperate with the Holders and the underwriters, if any, and their
respective counsel in connection with the registration or qualification
of such Registrable Securities for offer and sale under the securities
or blue sky laws of such jurisdictions as any seller or underwriter
reasonably requests in writing and do any and all other acts or things
necessary or advisable to enable the disposition in such jurisdictions
of the Registrable Securities covered by the Registration Statement;
provided that the Company will not be required to qualify generally to
do business in any jurisdiction where it is not then so qualified or
take any action which would subject it to general service of process in
any such jurisdiction where it is not then so subject;
(j) cooperate with the Holders and the managing underwriters,
if any, to facilitate the timely preparation and delivery of
certificates representing Registrable Securities to be sold and not
bearing any restrictive legends; and enable such Registrable Securities
to be in such denominations and registered in such names as the
managing underwriters may request at least two business days prior to
any sale of Registrable Securities to the underwriters;
(k) use its best efforts to cause the Registrable Securities
covered by the Registration Statement to be registered with or approved
by such other governmental agencies or authorities within the United
States as may be necessary to enable the seller or sellers thereof or
the underwriters, if any, to consummate the disposition of such
Registrable Securities;
(l) upon the occurrence of any event contemplated by paragraph
(d)(6) above, prepare a supplement or post-effective amendment to the
Registration Statement or the Prospectus or any document incorporated
therein by reference or file any other required document so that, as
thereafter delivered to the purchasers of the Registrable Securities,
the Prospectus will not contain an untrue statement of a material fact
or omit to state any material fact necessary to make the statements
therein not misleading;
<PAGE>
8
(m) use its best efforts to cause all Registrable Securities
covered by the Registration Statement to be listed on each securities
exchange on which similar securities issued by the Company are then
listed if requested by the Holders or the managing underwriters, if
any;
(n) provide a transfer agent and registrar for all Registrable
Securities;
(o) enter into such agreements (including an underwriting
agreement) and take all such other actions in connection therewith as
the Holders or the managing underwriters, if any, reasonably request in
order to expedite or facilitate the disposition of such Registrable
Securities and in such connection, whether or not an underwriting
agreement is entered into and whether or not the registration is an
underwritten registration (1) make such representations and warranties
to the Holders and the underwriters, if any, in form, substance and
scope as are customarily made by issuers to underwriters in primary
underwritten offerings and confirm the accuracy of the same if and when
requested, and matters relating to the compliance of the Registration
Statement and the Prospectus with the Securities Act; (2) obtain
opinions of counsel to the Company and updates thereof (which counsel
and opinions (in form, scope and substance) shall be reasonably
satisfactory to the managing underwriters) addressed to the Holders and
the underwriters, if any, covering the matters customary in
underwritten primary offerings and such other matters as may be
reasonably requested by the Holders and underwriters, if any; (3)
obtain "cold comfort" letters and updates thereof from the Company's
independent certified public accountants addressed to the Holders and
the underwriters, if any, such letters to be in customary form and
covering matters of the type customarily covered in "cold comfort"
letters by underwriters in connection with primary underwritten
offerings; (4) if an underwriting agreement is entered into, the same
shall set forth in full the indemnification and contribution provisions
and procedures of Sections 7 and 8 hereof with respect to all parties
to be indemnified pursuant to said Section; and (5) the Company shall
deliver such documents and certificates as may be requested by the
Holders and the managing underwriters, if any, to evidence compliance
with clause (1) above and with any customary conditions contained in
the underwriting agreement or other agreement entered into by the
Company. The above shall be done at each closing under such
underwriting or similar agreement or as and to the extent required
thereunder;
(p) make available for inspection during normal business hours
by the Holders, any underwriter participating in any disposition
pursuant to such registration statement, and any attorney, accountant
or other agent retained by any such seller or underwriter, all
financial and other records, pertinent corporate documents and
properties of the Company reasonably requested by any such seller,
underwriter, attorney, accountant or agent, and cause the Company's
officers, directors and employees to supply all information reasonably
requested by any such seller, underwriter, attorney, accountant or
agent in connection with such registration statement and otherwise
cooperate in any due diligence investigation in connection with a
public offering of Registrable Securities;
<PAGE>
9
(q) in connection with any underwritten offering of
Registrable Securities, participate, to the extent reasonably requested
by the managing underwriter or the Holders, in efforts to sell the
Registrable Securities under such offering (including, without
limitation, participating in "road show" meetings with prospective
investors) that would be customary in a primary offering of equity
securities of the Company;
(r) otherwise use its best efforts to comply with all
applicable rules and regulations of the SEC, and make generally
available to its security holders, earnings statements satisfying the
provisions of Section 11(a) of the Securities Act, no later than 45
days after the end of any 12-month period (1) commencing at the end of
any fiscal quarter in which Registrable Securities are sold to
underwriters in a firm or best efforts underwriting offering, and (2)
beginning with the first month of the Company's first fiscal quarter
commencing after the effective date of the Registration Statement,
which statements shall cover said 12-month periods.
The Company may require the Holders to furnish to the Company such
information and documents regarding the distribution of such securities and the
seller as the Company may from time to time reasonably request in writing.
The Holders each agree that upon receipt of any notice from the Company
of the happening of any event of the kind described in Section 5(d)(6) hereof,
such Holder will forthwith discontinue disposition of Registrable Securities
until such Holder's receipt of the copies of the supplemented or amended
Prospectus contemplated by Section 5(l) hereof, or until it is advised in
writing (the "Advice") by the Company that the use of the Prospectus may be
resumed, and has received copies of any additional or supplemental filings which
are incorporated by reference in the Prospectus, and, if so directed by the
Company, each Holder will, or will request the underwriters to, deliver to the
Company (at the Company's expense) all copies, other than permanent file copies
then in such Holder's possession, of the Prospectus covering such Registrable
Securities current at the time of receipt of such notice. If the Company shall
give such notice, the time periods mentioned in Section 5(c) hereof shall be
extended by the number of days during the period from and including the date of
the giving of such notice pursuant to Section 5(d)(6) to and including the date
when the Holders shall have received the copies of the supplemented or amended
prospectus contemplated by Section 5(l) hereof or the Advice.
6. Registration Expenses.
Except as otherwise provided herein, "Registration Expenses" include
all expenses incident to the Company's performance of or compliance with this
Agreement, including without limitation all registration and filing fees,
including with respect to filings required to be made with the National
Association of Securities Dealers, fees and expenses of compliance with
securities or blue sky laws (including reasonable fees and disbursements of
counsel for the underwriters in connection with blue sky qualifications of the
Registrable Securities and determination of their eligibility for investment
under the laws of such jurisdictions as the managing underwriters or holders of
a majority of the Registrable Securities being sold may designate), printing
expenses, messenger, telephone and delivery expenses, and fees and
<PAGE>
10
disbursements of counsel for the Company and of its independent certified public
accountants (including the expenses of any "cold comfort" letters required by or
incident to such performance), and the fees and expenses incurred in connection
with the listing of the securities to be registered on each securities exchange
on which similar securities issued by the Company are then listed. The Company
shall, in any event, pay its internal expenses (including, without limitation,
all salaries and expenses of its officers and employees performing legal or
accounting duties) and the expense of any annual audit, which are not
"Registration Expenses" for purposes of this Agreement. In no event shall the
Company be liable for the payment of any discounts, commissions or fees of
underwriters, selling brokers, dealer managers or similar industry professionals
relating to the distribution of the Registrable Securities.
7. Indemnification.
(a) Indemnification by Company. The Company shall indemnify and hold
harmless each Holder, its officers and employees and each person, if any, who
controls any Holder within the meaning of the Securities Act, from and against
any loss, claim, damage or liability, joint or several, or any action in respect
thereof (including, but not limited to, any loss, claim, damage, liability or
action relating to purchases and sales of the Registrable Securities), to which
that Holder, officer, employee or controlling person may become subject, under
the Securities Act or otherwise, insofar as such loss, claim, damage, liability
or action arises out of, or is based upon, (i) any untrue statement or alleged
untrue statement of a material fact contained in any Registration Statement,
Prospectus or preliminary prospectus, or in any amendment or supplement thereto
or (ii) the omission or alleged omission to state in any Registration Statement,
Prospectus or preliminary prospectus, or in any amendment or supplement thereto,
any material fact required to be stated therein or necessary to make the
statements therein not misleading, and shall reimburse each Holder and each such
officer, employee and controlling person promptly upon demand for any legal or
other expenses reasonably incurred by that Holder, officer, employee or
controlling person in connection with investigating or defending or preparing to
defend against any such loss, claim, damage, liability or action as such
expenses are incurred; provided, however, that the Company shall not be liable
in any such case to the extent that any such loss, claim, damage, liability or
action arises out of, or is based upon, any untrue statement or alleged untrue
statement or omission or alleged omission made in any Registration Statement,
Prospectus, preliminary prospectus or in any such amendment or supplement in
reliance upon and in conformity with the written information furnished to the
Company by or on behalf of any Holder specifically for inclusion therein. The
foregoing indemnity agreement shall be in addition to any liability which the
Company may otherwise have to any Holder or to any officer, employee or
controlling person of that Holder. The Company will also indemnify underwriters,
their officers and directors and each Person who controls such Persons (within
the meaning of the Securities Act) (i) to the same extent as provided above with
respect to the indemnification of each Holder of Registrable Securities and (ii)
is customarily required of issuers by such underwriters.
(b) Indemnification by Holders. Each Holder, severally and not jointly,
shall indemnify and hold harmless the Company, its officers and employees, each
of its directors
<PAGE>
11
and each person, if any, who controls the Company within the meaning of the
Securities Act, from and against any loss, claim, damage or liability, joint or
several, or any action in respect thereof, to which the Company or any such
director, officer, employee or controlling person may become subject, under the
Securities Act or otherwise, insofar as such loss, claim, damage, liability or
action arises out of, or is based upon, (i) any untrue statement or alleged
untrue statement of a material fact contained in any Registration Statement,
Prospectus or preliminary prospectus, or in any amendment or supplement thereto,
or (ii) the omission or alleged omission to state in any Registration Statement,
Prospectus, preliminary prospectus or in any amendment or supplement thereto any
material fact required to be stated therein or necessary to make the statements
therein not misleading, but in each case only to the extent that the untrue
statement or alleged untrue statement or omission or alleged omission was made
in reliance upon and in conformity with the written information furnished to the
Company by or on behalf of that Holder specifically for inclusion therein, and
shall reimburse the Company and any such director, officer, employee or
controlling person for any legal or other expenses reasonably incurred by the
Company or any such director, officer, employee or controlling person in
connection with investigating or defending or preparing to defend against any
such loss, claim, damage, liability or action as such expenses are incurred. The
foregoing indemnity agreement shall be in addition to any liability which any
Holder may otherwise have to the Company or any such director, officer, employee
or controlling person. The Holders will also indemnify underwriters, their
officers and directors and each Person who controls such Persons (within the
meaning of the Securities Act) (i) to the same extent as provided above with
respect to the indemnification of the Company and (ii) is customarily required
of selling stockholders by such underwriters. In no event shall the liability of
a Holder hereunder or in the underwriting agreement be greater in amount than
the dollar amount of the proceeds received by such Holder upon the sale of the
Registrable Securities giving rise to such indemnification obligation. The
Company shall be entitled to receive indemnities from underwriters to the same
extent as provided above with respect to information so furnished in writing by
such Persons.
(c) Conduct of Indemnification Proceedings. Promptly after receipt by
an indemnified party under this Section 7 of notice of any claim or the
commencement of any action, the indemnified party shall, if a claim in respect
thereof is to be made against the indemnifying party under this Section 7,
notify the indemnifying party in writing of the claim or the commencement of
that action; provided, however, that the failure to notify the indemnifying
party shall not relieve it from any liability which it may have under this
Section 7 except to the extent it has been materially prejudiced by such failure
and, provided further, that the failure to notify the indemnifying party shall
not relieve it from any liability which it may have to an indemnified party
otherwise than under this Section 7. If any such claim or action shall be
brought against an indemnified party, and it shall notify the indemnifying party
thereof, the indemnifying party shall be entitled to participate therein and, to
the extent that it wishes, jointly with any other similarly notified
indemnifying party, to assume the defense thereof with counsel reasonably
satisfactory to the indemnified party. After notice from the indemnifying party
to the indemnified party of its election to assume the defense of such claim or
action, the indemnifying party shall not be liable to the indemnified party
under this Section 7 for any legal or other expenses subsequently incurred by
the indemnified party in connection with the defense thereof other than
reasonable costs of investigation; provided,
<PAGE>
12
however, that Lehman Brothers shall have the right to employ counsel to
represent jointly Lehman Brothers and those other Holders and their respective
officers, employees and controlling persons who may be subject to liability
arising out of any claim in respect of which indemnity may be sought by the
Holders against the Company under this Section 7 if, in the reasonable judgment
of Lehman Brothers, it is advisable for Lehman Brothers and those Holders,
officers, employees and controlling persons to be jointly represented by
separate counsel, and in that event the fees and expenses of such separate
counsel shall be paid by the Company. Each indemnified party, as a condition of
the indemnity agreements contained in Sections 7(a) and 7(b), shall use its best
efforts to cooperate with the indemnifying party in the defense of any such
action or claim. No indemnifying party shall (i) without the prior written
consent of the indemnified parties (which consent shall not be unreasonably
withheld), settle or compromise or consent to the entry of any judgment with
respect to any pending or threatened claim, action, suit or proceeding in
respect of which indemnification or contribution may be sought hereunder
(whether or not the indemnified parties are actual or potential parties to such
claim or action) unless such settlement, compromise or consent includes an
unconditional release of each indemnified party from all liability arising out
of such claim, action, suit or proceeding, or (ii) be liable for any settlement
of any such action effected without its written consent (which consent shall not
be unreasonably withheld), but if settled with its written consent or if there
be a final judgment of the plaintiff in any such action, the indemnifying party
agrees to indemnify and hold harmless any indemnified party from and against any
loss of liability by reason of such settlement or judgment.
8. Contribution.
(a) If the indemnification provided for in Section 7 shall for any
reason be unavailable to or insufficient to hold harmless an indemnified party
under Section 7(a) or 7(b) in respect of any loss, claim, damage or liability,
or any action in respect thereof, referred to therein, then each indemnifying
party shall, in lieu of indemnifying such indemnified party, contribute to the
amount paid or payable by such indemnified party as a result of such loss,
claim, damage or liability, or action in respect thereof, in such proportion as
is appropriate to reflect the relative fault of the Company on the one hand and
the Holders on the other with respect to the statements or omissions which
resulted in such loss, claim, damage or liability, or action in respect thereof,
as well as any other relevant equitable considerations. The relative fault shall
be determined by reference to whether the untrue or alleged untrue statement of
a material fact or omission or alleged omission to state a material fact relates
to information supplied by the Company or the Holders, the intent of the parties
and their relative knowledge, access to information and opportunity to correct
or prevent such statement or omission.
(b) The Company and the Holders agree that it would not be just and
equitable if contributions pursuant to this Section 8 were to be determined by
pro rata allocation or by any other method of allocation which does not take
into account the equitable considerations referred to herein. The amount paid or
payable by an indemnified party as a result of the loss, claim, damage or
liability, or action in respect thereof, referred to above in this Section 8
shall be deemed to include, for purposes of this Section 8, any legal or other
expenses
<PAGE>
13
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
Section 8, no Holder shall be required to contribute any amount in excess of the
amount of proceeds received by such Holder upon the sale of Registrable
Securities giving rise to such contribution obligation exceeds the amount of any
damages which such Holder has otherwise paid or become liable to pay by reason
of any untrue or alleged untrue statement or omission or alleged omission giving
rise to such contribution obligation. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Holders' obligations to contribute as provided
in this Section 8 are several in proportion to the amount of proceeds received
by each Holder upon the sale of Registrable Securities giving rise to such
obligations and not joint.
9. Lock-up Agreements.
(a) The Company and each Holder agrees that, if any registration
statement is filed by the Company in connection with an underwritten public
offering hereunder, it shall not effect any sale or distribution of shares of
Common Stock during the period ("Lock-up Period") prior to and after the
effective date of such registration statement as may be reasonably requested
(with reasonable prior notice) by the managing underwriter of the underwritten
public offering (except as part of such public offering).
(b) The Company agrees not to effect any primary sale or distribution
of any Common Stock prior to the earlier of (i) the closing of the first
secondary offering of Registrable Securities pursuant to Section 3(a) and (ii)
the nine-month period following the date of the Conversion, except for the
issuance of Common Stock to any person in connection with an acquisition by the
Company or its subsidiaries of any business from such person, provided that such
person agrees not to sell any such Common Stock prior to such date without the
consent of the Holders.
10. Public Information.
For a period of three years after the date of this Agreement, the
Company shall cause "adequate current public information" (as such term is used
in Rule 144 promulgated under the Securities Act) to be maintained and shall
timely file all reports required pursuant to the Exchange Act.
11. Miscellaneous.
(a) Remedies. Without limiting the rights of any Holder to pursue all
other legal and equitable remedies available for any breach of the provisions of
this Agreement, including recovery of damages, each will be entitled to specific
performance of their rights under this Agreement. The Company expressly agrees
that monetary damages would not be adequate compensation for any loss incurred
by any Holder by reason of a breach by the Company of the provisions of this
Agreement and that such Holder would sustain irreparable harm, and therefore the
Company further agrees that any such Holder shall be entitled to
<PAGE>
14
specific performance to prevent any such breach or any continuing breach hereof
and the Company waives the defense in any action for specific performance that a
remedy at law would be adequate.
(b) No Inconsistent Agreements. The Company will not on or after the
date of this Agreement enter into any agreement with respect to its securities
which is inconsistent with the rights granted to the Holders in this Agreement
or otherwise conflicts with the provisions hereof. The Company has not
previously entered into any agreement with respect to its securities granting
any registration rights to any Person.
(c) Notices. All notices, requests, demands and other communications
provided for by this Agreement shall be in writing (including telecopier or
similar writing) and shall be deemed to have been given at the time when mailed
in any general or branch office of the Untied States Postal Service, enclosed in
a registered or certified postpaid envelope, or sent by Federal Express or other
similar overnight courier service, addressed to the address of the parties
stated below or to such changed address as such party may have fixed by notice
or, if given by telecopier, when such telecopy is transmitted and the
appropriate answerback is received.
(i) If to the Company:
SunSource Inc.
2600 One Logan Square
Philadelphia, Pennsylvania 19103
Fax: (215) 665-3662
Attn: Norman V. Edmonson
(ii) If to Lehman Brothers:
c/o Lehman Brothers Inc.
3 World Financial Center
New York, New York 10285
Fax: (212) 526-3838
Attn: Henri Talerman
(iii) If to any Senior Executive:
c/o SunSource Inc.
2600 One Logan Square
Philadelphia, Pennsylvania 19103
Fax: (215) 665-3662
Attn: [Name of Senior Executive]
(d) Successors and Assigns. This Agreement is solely for the benefit of
the parties and their respective successors and assigns, including any Holder.
Nothing herein shall be construed to provide any rights to any other entity or
individual.
<PAGE>
15
(e) Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same document.
(f) Headings. Section headings are for convenience only and do not
control or affect the meaning or interpretation of any terms or provisions of
this agreement.
(g) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York governing contracts to be made
and performed therein without giving effect to principles of conflicts of law,
and, with respect to any dispute arising out of this Agreement, each party
hereby consents to the exclusive jurisdiction of the courts sitting in such
State.
(h) Severability. Should any part, term, condition or provision hereof
or the application thereof be declared illegal, invalid or otherwise
unenforceable or in conflict with any other law by a court of competent
jurisdiction, the validity of the remaining parts, terms, conditions or
provisions of this Agreement shall not be affected thereby, and the illegal,
invalid or unenforceable portions of this Agreement shall be and hereby are
redrafted to conform with applicable law, while leaving the remaining portions
of this Agreement intact, except to the extent necessary to conform to the
redrafted portions hereof.
(i) Entire Agreement. This Agreement and the letter agreement dated
December __, 1996 among the Stockholders set forth the entire agreement and
understanding between the parties and supersedes all proposals, commitments,
writings, negotiations, discussions, agreements and understandings, oral or
written, of every kind and nature among them concerning the subject matter
hereof. This Agreement may not be amended or otherwise modified except in a
writing signed by both parties hereto. No discharge of the terms hereof shall be
deemed valid unless by full performance by the parties or by a writing signed by
the parties. A waiver by any party of any breach or violation of any this
Agreement shall not be deemed or construed as a waiver of any other breach or
violation hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
SUNSOURCE INC.
By:
---------------------------------
Name:
Title:
LB I GROUP INC.
By:
---------------------------------
<PAGE>
16
Name:
Title:
LEHMAN LTD. I INC.
By:
---------------------------------
Name:
Title:
LEHMAN/SDI, INC.
By:
---------------------------------
Name:
Title:
THE SENIOR EXECUTIVES
DOTMAR CORP.
By:
-------------------------- ---------------------------------
Name: Donald T. Marshall
JPM CORP.
By:
-------------------------- ---------------------------------
Name: John P. McDonnell
NORVED CORP.
By:
-------------------------- ---------------------------------
Name: Norman V. Edmonson
<PAGE>
EXHIBIT 10.2
STOCKHOLDERS AGREEMENT
STOCKHOLDERS AGREEMENT, dated as of March __, 1997, among
SunSource Inc., a Delaware corporation (the "Corporation"), Lehman Brothers (as
hereinafter defined), Donald T. Marshall ("Marshall"), John P. McDonnell
("McDonnell"), Norman V. Edmonson ("Edmonson"), Harold J. Cornelius
("Cornelius"), Max W. Hillman ("Hillman"), Joseph M. Corvino ("Corvino") and the
respective S-corporations of Marshall, McDonnell, Edmonson, Cornelius, Hillman
and Corvino listed on the signature page hereto (Marshall, McDonnell, Edmonson,
Cornelius, Hillman and Corvino and their respective S-corporations being
collectively referred to herein as the "Senior Executives").
BACKGROUND
The Corporation has been formed to accomplish the conversion
(the "Conversion") of SunSource L.P. (the "Partnership") to corporate form. In
the Conversion, Lehman/SDI, Inc., which is the general partner of SDI Partners
I, L.P., the general partner of the Partnership (the "General Partner"), and the
Senior Executives, who are the limited partners of the General Partner, will
receive Common Stock of the Corporation (the "Common Stock") in exchange for
their interests in the General Partner. In addition, affiliates of Lehman
Brothers and the Senior Executives presently own Class B limited partnership
interests in the Partnership which will be converted in the Conversion into
Common Stock. For purposes of this Agreement, "Lehman Brothers" shall mean
Lehman Brothers Holdings Inc., Lehman/SDI, Inc., Lehman LTD I, Inc., Lehman
Brothers Capital Partners I (or upon dissolution of Lehman Brothers Capital
Partners I, LB I Group, Inc., its general partner) and any other person
affiliated with the foregoing entities to which they distribute shares of Common
Stock received by them in the Conversion.
The purpose of this Agreement is to provide for certain
restrictions on the sale of Common Stock by the parties after the Conversion,
certain corporate governance matters with respect to the voting of shares of
Common Stock and certain bylaw provisions.
NOW, THEREFORE, in consideration of the consideration to be
received by Lehman Brothers and the Senior Executives in the Conversion and the
mutual promises contained herein, the parties agree as follows:
Section 1. Sale of Shares of Common Stock. Lehman Brothers and
the Senior Executives each agree that they and their respective affiliates will
not sell any shares of Common Stock which they beneficially own, in a single
transaction or series of related transactions, to any third person or persons
which to the knowledge of Lehman Brothers and the Senior Executives after
reasonable inquiry, would beneficially own after such transactions more than 10%
of the then outstanding Common Stock (or more than 15% of the then outstanding
Common Stock if such person or persons are eligible to report the acquisition of
such shares on Schedule 13G
<PAGE>
pursuant to Rule 13d-1(b)(1) under the Securities Exchange Act of 1934, as such
rule is currently in effect).
Section 2. Voting of Shares. On matters submitted to a vote of
stockholders, Lehman Brothers and the Senior Executives each agree to vote (or
cause to be voted), in the same proportion as the shares of outstanding Common
Stock not owned by them ("Unaffiliated Shares") that are voted on any such
matter, that percentage of Excess Voting Shares held by them at such time that
equals the percentage of outstanding Unaffiliated Shares that are voted on such
matter. "Excess Voting Shares" means the shares of Common Stock beneficially
owned by Lehman Brothers or the Senior Executives, as the case may be (and their
respective affiliates), at any time, that represents voting power in excess of
their respective voting powers immediately prior to the Conversion that they
would have had in a vote of the holders of the Class A Interests and the Class B
Interests voting together as a single class. On matters that are the subject of
action by written consent of stockholders in lieu of meeting, Lehman Brothers
and the Senior Executives each agree to deliver (or cause to be delivered)
written consents with respect to a number of shares of Common Stock equal to the
percentage of outstanding Unaffiliated Shares that have delivered written
consents in such matter times the number of Excess Voting Shares held by each of
them.
Section 3. Board of Directors. The Board of Directors of the
Corporation shall consist of nine directors, of whom three directors may be
nominated by management, four will be Independent Directors (as defined in the
provision of the Bylaws of the Corporation attached as Exhibit 1) and two
directors may be nominated by Lehman Brothers if Lehman Brothers holds more than
20% of the outstanding shares of Common Stock or one director may be nominated
by Lehman Brothers if Lehman Brothers holds between 10% and 20% of the
outstanding shares of Common Stock. Lehman Brothers and the Senior Executives
each agree to vote the shares of Common Stock owned by them to carry out the
provisions of this section, subject to the provisions of Section 2.
Section 4. Bylaw Provision. The bylaws of the Corporation
shall include the provision set forth in Exhibit 1 hereto. Lehman Brothers and
the Senior Executives agree to vote the shares of Common Stock owned by them to
carry out the provisions of the Bylaws, subject to the provisions of Section 2.
Section 5. Governing Law. This Agreement shall be governed in
all respects, including validity, interpretation and effect, by the laws of the
State of Delaware applicable to contracts made and to be performed in that
State.
Section 6. Further Assurances. From and after the date of this
Agreement, the parties hereto shall execute and deliver such instruments,
documents and other writings and take such actions as may be reasonably
necessary to effectuate fully the intent and purpose of this Agreement.
-2-
<PAGE>
Section 7. Notices. All notices, requests, demands and other
communications provided for by this Agreement shall be sufficient if given in
writing and delivered personally, by Federal Express or similar overnight
delivery, by telecopy or facsimile transmission, or by registered or certified
mail, return receipt requested, postage prepaid as follows (or to such other
addressee or address as shall be set forth in a notice given in the same
manner):
If to the Corporation:
SunSource Inc.
2600 One Logan Square
Philadelphia, PA 19103
Attn: Norman V. Edmonson
If to Lehman Brothers:
c/o Lehman Brothers Inc.
3 World Financial Center
New York, NY 10285
Attn: Henri Talerman
If to any Senior Executive:
c/o SunSource Inc.
2600 One Logan Square
Philadelphia, PA 19103
Attn: [Name of Senior Executive]
IN WITNESS WHEREOF, the parties hereto have executed this
Stockholders Agreement as of the date first above written.
SUNSOURCE INC.
By
--------------------------------
Title
--------------------------------
LEHMAN/SDI, INC.
By
--------------------------------
Title
--------------------------------
-3-
<PAGE>
LEHMAN LTD I, INC.
By
-------------------------------
Title
-------------------------------
LEHMAN BROTHERS CAPITAL PARTNERS I
By
--------------------------------
Title
--------------------------------
LB I GROUP, INC.
By
--------------------------------
Title
--------------------------------
DOTMAR CORP.
By
- ------------------------------ ---------------------------------
Donald T. Marshall
JPM CORP.
By
- ------------------------------ ---------------------------------
John P. McDonnell
NORVED CORP.
By
- ------------------------------ ---------------------------------
Norman V. Edmonson
HJC CORP.
By
- ------------------------------ ---------------------------------
Harold J. Cornelius
MWH CORP.
By
- ------------------------------ ---------------------------------
Max W. Hillman
DIACOR CORP.
By
- ------------------------------ ---------------------------------
Joseph M. Corvino
-4-
<PAGE>
EXHIBIT 1
SECTION __. Approval of Independent Directors for Certain Actions.--(a)
Prior to the third anniversary of the date of the consummation of the conversion
of SunSource L.P. to corporate form, the approval of at least a majority of the
corporation's Independent Directors (as defined below) shall be required to
approve (i) any amendment to the certificate of incorporation or bylaws of the
corporation or any stockholder rights plan of the corporation (including the
redemption of the rights thereunder or waiver of any provision thereof) or any
waiver of, or "opt-out" from, the benefit or effect of any provision thereof) or
other provision applicable to the corporation including section 203 of the
GCL); or (ii) any agreement binding the corporation in respect of the sale, in a
single transaction or a series of related transactions, of all or a Substantial
Part of the corporation (as defined below), whether by liquidation,
consolidation, dissolution, sale of capital stock or assets, tender or exchange
offer, merger or other business combination.
(b) The approval of at least a majority of the corporation's
Independent Directors shall be required to approve and authorize (i) any
transaction or series of related transactions between the corporation or any of
its subsidiaries, on the one hand, and any Stockholder (as defined below) or any
affiliate of a Stockholder, on the other hand, (ii) any amendment to, or waiver
of, any provisions of the Stockholders Agreement, dated as of March __ , 1997,
among the Corporation and certain of its stockholders, or (iii) notwithstanding
the terms of the preceding paragraph (a), any amendment to the certificate of
incorporation or bylaws of the corporation which would amend, repeal, waive,
contravene or otherwise alter this paragraph (b), including amendments of the
defined terms used herein.
For purposes of the foregoing:
"Independent Director" means a director of the corporation who is not
(apart from such directorship) (i) an officer, director, affiliate, employee,
principal stockholder, consultant or partner of a Stockholder or any affiliate
of a Stockholder or of any entity that was dependent upon a Stockholder or any
affiliate of a Stockholder for more than 5% of its revenues or earnings in its
most recent fiscal year, or (ii) an officer, employee, consultant or partner of
the corporation or any affiliate of the corporation or an officer, employee,
principal stockholder, consultant or partner of an entity that was dependent
upon the corporation or any affiliate of the corporation for more than 5% of its
revenues or earnings in its most recent fiscal year;
"Stockholder" means SDI Partners I, L.P., Lehman Brothers Capital
Partners I, L.P., Lehman/SDI, Inc., Lehman Brothers Inc. and their respective
affiliates or successors, and any officer, director, employee, principal
stockholder or partner of such entities, affiliates or successors; and
"Substantial Part of the corporation" means, as of any date, thirty
percent (30%) or more of (i) the outstanding capital stock of the corporation
(measured by economic interest or voting power), or (ii) the book value of the
consolidated tangible assets of the corporation and its subsidiaries, taken as a
whole (without regard to any liabilities of the corporation or any of its
subsidiaries), as of the end of its most recent fiscal quarter ending prior to
the time the determination is made.
-5-
<PAGE>
EXHIBIT 10.3
CONTRIBUTION AGREEMENT
CONTRIBUTION AGREEMENT, dated as of March__, 1997, between
SunSource Inc., a Delaware corporation (the "Corporation") and Lehman Brothers
Holdings Inc., a Delaware corporation ("Lehman Brothers").
BACKGROUND
The Corporation has been formed to accomplish the conversion
(the "Conversion") of SunSource L.P. (the "Partnership") to corporate form. In
the Conversion, (i) the outstanding Class A limited partnership interests will
be converted into 11.6% Trust Preferred Securities (the "Trust Preferred
Securities") issued by SunSource Capital Trust (the "Trust") and cash and (ii)
the outstanding Class B limited partnership interests will be converted into
Common Stock of the Corporation (the "Common Stock").
Also as part of the Conversion, a subsidiary of Lehman
Brothers, Lehman/SDI, Inc., which is the general partner of SDI Partners I,
L.P., the general partner of the Partnership (the "General Partner"), and
certain members of management (the "Management Employees") who are the limited
partners of the General Partner, will receive Common Stock in exchange for their
interests in the General Partner. 75,000 shares of Common Stock (the "Escrow
Shares") to be received by the Management Employees will be placed in escrow to
be distributed after two years if all distributions on the Trust Preferred
Securities have then been paid.
The Trust's Declaration of Trust provides that, in the case of
the occurrence of a Tax Event (as defined therein), under certain circumstances
the Trust may redeem the Trust Preferred Securities at a redemption price of
101% of liquidation preference ($25.25) if the redemption occurs within five
years of the effective time of the Conversion (an "Initial Tax Redemption") and
$25 thereafter.
The purpose of this Agreement is to provide for contribution
by Lehman Brothers to the Corporation of a portion of the premium payable upon
an Initial Tax Redemption if the Escrow Shares are still held in escrow and
Lehman Brothers and its Affiliates have disposed of some or all of the Common
Stock received by it or its Affiliates in the Conversion. For purposes of this
Agreement "Affiliates" of Lehman Brothers shall mean Lehman LTD I, Inc.,
Lehman/SDI, Inc. and Lehman Brothers Capital Partners I to the extent of the
general partnership interest held in it by LB I Group, Inc.
NOW, THEREFORE, in consideration of the consideration to be
received by Lehman Brothers or its Affiliates in the Conversion, Lehman Brothers
agrees as follows:
Section 1. Contribution. Upon the occurrence of an Initial Tax
Redemption, Lehman Brothers will pay, or cause one of its subsidiaries to pay,
to the Corporation in cash an amount equal to the product obtained by
multiplying: (i) 1% of the per share liquidation
<PAGE>
preference of the Trust Preferred Securities by (ii) the number of shares of
Trust Preferred Securities redeemed under the Initial Tax Redemption by (iii) a
fraction, the numerator of which is equal to the number of Escrow Shares held in
escrow at the time of the Initial Tax Redemption, and the denominator of which
is equal to the number of Escrow Shares held in escrow immediately after the
Conversion by (iv) a fraction, the numerator of which is equal to the number of
shares of Common Stock held by Lehman Brothers and its Affiliates immediately
after the Conversion minus the number of shares of Common Stock held by Lehman
Brothers and its Affiliates at the time of the Initial Tax Redemption, and the
denominator of which is equal to the total number of shares of Common Stock
outstanding immediately after the Conversion. All share numbers shall be
appropriately adjusted for any stock splits or stock dividends. Such payment
will be made within 15 days after the Corporation and Lehman Brothers have
agreed in writing to the calculation of the amount due pursuant to this Section.
Section 2. Term. This Agreement shall terminate upon the
second anniversary of the effective time of the Conversion.
Section 3. Governing Law. This Agreement shall be governed in
all respects by the laws of the State of Delaware applicable to contracts made
and to be performed in that State.
Section 4. Notices. Notices under this Agreement shall be
given:
(i) If to the Corporation:
SunSource Inc.
2600 One Logan Square
Philadelphia, PA 19103
Attn: Norman V. Edmonson
(ii) If to Lehman Brothers:
c/o Lehman Brothers Inc.
3 World Financial Center
New York, NY 10285
Attn: Henri Talerman
or to such other address as a party shall designate in writing to the other
party.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Contribution Agreement to be duly executed as of the date first above written.
SUNSOURCE INC.
By
-------------------------------
Title:
-------------------------------
LEHMAN BROTHERS HOLDINGS INC.
By
-------------------------------
Title:
-------------------------------
<PAGE>
- -------------------------------------------------------------------------------
SUNSOURCE INC.
and
[ ]
as Rights Agent
RIGHTS AGREEMENT
Dated as of March ___, 1997
- -------------------------------------------------------------------------------
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Section Page
<S> <C> <C>
1. Certain Definitions. .........................................................................................2
2. Appointment of Rights Agent. .................................................................................5
3. Issue of Rights Certificates. ................................................................................6
4. Form of Rights Certificates. .................................................................................8
5. Countersignature and Registration.............................................................................9
6. Transfer, Split Up, Combination and Exchange of Rights Certificates; Mutilated,
Destroyed, Lost or Stolen Rights Certificates............................................................9
7. Exercise of Rights; Purchase Price; Expiration Date of Rights................................................10
8. Cancellation and Destruction of Rights Certificates. ........................................................13
9. Reservation and Availability of Capital Stock; Registration of Securities....................................13
10. Capital Stock Record Date. .................................................................................14
11. Adjustment of Purchase Price, Number and Kind of Shares or Number of Rights. ...............................15
12. Certificate of Adjusted Purchase Price or Number of Shares. ................................................25
13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power........................................26
14. Fractional Rights and Fractional Shares.....................................................................29
15. Rights of Action. ..........................................................................................30
16. Agreement of Rights Holders. ...............................................................................30
17. Rights Certificate Holder Not Deemed a Stockholder. .......................................................31
18. Concerning the Rights Agent.................................................................................32
19. Merger or Consolidation or Change of Name of Rights Agent...................................................32
20. Duties of Rights Agent. ....................................................................................33
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
21. Change of Rights Agent. ....................................................................................35
23. Redemption and Termination..................................................................................37
24. Notice of Certain Events....................................................................................39
25. Notices. ...................................................................................................39
26. Supplements and Amendments..................................................................................40
27. Successors. ................................................................................................41
28. Determinations and Actions by the Board of Directors, etc. .................................................41
29. Benefits of this Agreement. ................................................................................42
30. Severability. ..............................................................................................42
31. Governing Law. .............................................................................................43
32. Counterparts. ..............................................................................................43
33. Descriptive Headings. ......................................................................................43
Exhibit A Resolution of the Board of Directors with respect to
Series A Junior Participating Preferred Shares
Exhibit B Form of Rights Certificate
Exhibit C Form of Summary of Rights
</TABLE>
<PAGE>
RIGHTS AGREEMENT
RIGHTS AGREEMENT, dated as of March ___, 1997 (the
"Agreement"), between SUNSOURCE INC., a Delaware corporation (the "Company"),
and [ ] (the "Rights Agent").
W I T N E S S E T H
WHEREAS, on March ___, 1997 (the "Rights Dividend Declaration
Date"), the Board of Directors of the Company authorized and declared a dividend
distribution of one Right for each Common Share (as hereinafter defined) of the
Company outstanding at the close of business on March ___, 1997 (the "Record
Date") (which for these purposes shall include all Common Shares presently
entitled to receive dividends) and has authorized the issuance of one Right (as
such number may hereafter be adjusted pursuant to the provisions of Section
11(p) hereof) for each Common Share of the Company issued between the Record
Date (whether originally issued or delivered from the Company's treasury) and
the Distribution Date (as hereinafter defined), each Right initially
representing the right to purchase one one-hundredth of a Preferred Share (as
hereinafter defined) of the Company having the rights, powers and preferences
set forth in the form of the Resolution of the Board of Directors attached
hereto as Exhibit A, upon the terms and subject to the conditions hereinafter
set forth (the "Rights"); and
WHEREAS, the Rights will be held by the Rights Agent under
this Agreement as trustee for the stockholders of the Company until the
Distribution Date; and
WHEREAS, the Board of Directors of the Company has considered
whether approval of this Agreement and the distribution of the Rights is in the
best interests of the Company and all other pertinent factors; and
WHEREAS, the Board of Directors of the Company has concluded
that approval of this Agreement and the distribution of the Rights is in the
best interests of the Company because the existence of the Rights will help (i)
reduce the risk of coercive two-tiered, front-end loaded or partial offers that
may not offer fair value to all stockholders, (ii) mitigate against market
accumulators who through open market and/or private purchases may achieve a
position of substantial influence or control without paying to selling or
remaining stockholders a fair control premium, (iii) deter market accumulators
who are simply interested in putting the Company into "play," (iv) restrict
self-dealing by a substantial stockholder, and (v) preserve the Board of
Directors' bargaining power and flexibility to deal with third-party acquirors,
to pursue the business strategies of the Company and to otherwise seek to
maximize values for all stockholders.
NOW, THEREFORE, in consideration of the premises and the
mutual agreements herein set forth, and intending to be legally bound hereby,
the parties hereby agree as follows:
-1-
<PAGE>
Section 1. Certain Definitions. For purposes of this
Agreement, the following terms have the meanings indicated:
(a) "Acquiring Person" shall mean any Person who or
which, together with all Affiliates and Associates of such Person, shall be the
Beneficial Owner of 20% or more of the Common Shares then outstanding, but shall
not include (i) the Company, (ii) any Subsidiary of the Company; (iii) any
employee benefit plan of the Company or of any Subsidiary of the Company, or any
Person or entity organized, appointed or established by the Company for or
pursuant to the terms of any such plan; or (iv) Lehman/SDI, Inc. and its
Affiliates to the extent that their Beneficial Ownership results from the
conversion of SunSource L.P. to corporate form. Notwithstanding the foregoing,
no Person shall become an "Acquiring Person" as the result of an acquisition of
Common Shares by the Company which, by reducing the number of Common Shares
outstanding, increases the proportionate number of Common Shares beneficially
owned by such Person to 20% or more of the Common Shares then outstanding;
provided, however, that if a Person shall become the Beneficial Owner of 20% or
more of the then outstanding Common Shares by reason of Common Shares purchased
by the Company and shall, after such share purchases by the Company, become the
Beneficial Owner of any additional Common Shares, then such Person shall be
deemed to be an "Acquiring Person." Notwithstanding the foregoing, if a majority
of the Continuing Directors then in office determines in good faith that a
Person who would otherwise be an "Acquiring Person", as defined pursuant to the
foregoing provisions of this paragraph (a), has become such inadvertently, and
such Person divests as promptly as practicable a sufficient number of Common
Shares so that such Person would no longer be an Acquiring Person, as defined
pursuant to the foregoing provisions of this paragraph (a), then such Person
shall not be deemed to be an "Acquiring Person" for purposes of this Agreement.
(b) "Affiliate" and "Associate" shall have the
respective meanings ascribed to such terms in Rule 12b-2 of the General Rules
and Regulations under the Securities Exchange Act of 1934, as amended and in
effect on the date hereof (the "Exchange Act").
(c) A Person shall be deemed the "Beneficial Owner"
of, and shall be deemed to "beneficially own," any securities:
(i) that such Person or any of such Person's
Affiliates or Associates, directly or indirectly, has the right to
acquire (whether such right is exercisable immediately or only after
the passage of time) pursuant to any agreement, arrangement or
understanding (whether or not in writing) or upon the exercise of
conversion rights, exchange rights, rights, warrants or options, or
otherwise; provided, however, that a Person shall not be deemed the
"Beneficial Owner" of, or to "beneficially own," (A) securities
tendered pursuant to a tender offer or exchange offer made by such
Person or any of such Person's Affiliates or
-2-
<PAGE>
Associates until such tendered securities are accepted for payment,
purchase or exchange, or (B) securities issuable upon exercise of
Rights at any time prior to the occurrence of a Triggering Event, or
(C) securities issuable upon exercise of Rights from and after the
occurrence of a Triggering Event which Rights were acquired by such
Person or any of such Person's Affiliates or Associates prior to the
Distribution Date or pursuant to Section 3(a) or Section 22 hereof (the
"Original Rights") or pursuant to Section 11(i) hereof in connection
with an adjustment made with respect to any Original Rights;
(ii) that such Person or any of such Person's
Affiliates or Associates, directly or indirectly, has the right to vote
or dispose of or has "beneficial ownership" of (as determined pursuant
to Rule 13d-3 of the General Rules and Regulations under the Exchange
Act), including without limitation pursuant to any agreement,
arrangement or understanding, whether or not in writing; provided,
however, that a Person shall not be deemed the "Beneficial Owner" of,
or to "beneficially own," any security under this subparagraph (ii) as
a result of an oral or written agreement, arrangement or understanding
to vote such security if such agreement, arrangement or understanding:
(A) arises solely from a revocable proxy given in response to a public
proxy or consent solicitation made pursuant to, and in accordance with,
the applicable provisions of the General Rules and Regulations under
the Exchange Act, and (B) is not also then reportable by such Person on
Schedule 13D under the Exchange Act (or any comparable or successor
report); or
(iii) that are beneficially owned, directly or
indirectly, by any other Person (or any Affiliate or Associate thereof)
with which such Person (or any of such Person's Affiliates or
Associates) has any agreement, arrangement or understanding (whether or
not in writing), for the purpose of acquiring, holding, voting (except
pursuant to a revocable proxy as described in the proviso to
subparagraph (ii) of this paragraph (c)) or disposing of any voting
securities of the Company;
provided, however, that nothing in this paragraph (c) shall cause a person
engaged in business as an underwriter of securities to be the "Beneficial Owner"
of, or to "beneficially own," any securities acquired through such person's
participation in good faith in a firm commitment underwriting until the
expiration of forty days after the date of such acquisition.
(d) "Business Day" shall mean any day other than a
Saturday, Sunday or a day on which banking institutions in the Commonwealth of
Pennsylvania are authorized or obligated by law or executive order to close.
-3-
<PAGE>
(e) "Close of business" on any given date shall mean
5:00 P.M., Philadelphia, Pennsylvania time, on such date; provided, however,
that if such date is not a Business Day it shall mean 5:00 P.M., Philadelphia,
Pennsylvania time, on the next succeeding Business Day.
(f) "Common Share" shall mean a share of Common
Stock, par value $.01 per share, of the Company and, to the extent that there
are not a sufficient number of Common Shares authorized to permit the full
exercise of the Rights, shares of any other class or series of the Company
designated for such purpose containing terms substantially similar to the terms
of the Common Shares, except that "Common Share" when used with reference to any
Person other than the Company shall mean the shares of capital stock of such
Person with the greatest voting power, or the equity securities or other equity
interest having power to control or direct the management, of such Person.
(g) "Continuing Director" shall mean (i) any member
of the Board of Directors of the Company, while such Person is a member of the
Board, who is not an Acquiring Person, or an Affiliate or Associate of an
Acquiring Person, or a representative of an Acquiring Person or of any such
Affiliate or Associate, and was a member of the Board prior to the date of this
Agreement, or (ii) any Person who subsequently becomes a member of the Board,
while such Person is a member of the Board, who is not an Acquiring Person, or
an Affiliate or Associate of an Acquiring Person, or a representative of an
Acquiring Person or of any such Affiliate or Associate, if such Person's
nomination for election or election to the Board is recommended or approved by a
majority of the Continuing Directors.
(h) "Distribution Date" shall have the meaning set
forth in Section 3 hereof.
(i) "Expiration Date" shall have the meaning set
forth in Section 7(a).
(j) "Person" shall mean any individual, firm,
corporation, partnership or other entity.
(k) "Preferred Share" shall mean a share of Series A
Junior Participating Preferred Stock, par value $.01 per share, of the Company
and, to the extent that there are not a sufficient number of shares of Series A
Junior Participating Preferred Stock authorized to permit the full exercise of
the Rights, shares of any other series of Series Preferred Stock of the Company
designated for such purpose containing terms substantially similar to the terms
of the Series A Junior Participating Preferred Stock.
(l) "Preferred Share Fraction" shall mean one
one-hundredth of a Preferred Share.
-4-
<PAGE>
(m) "Qualifying Offer" shall have the meaning
ascribed to such term in Section 11(a)(ii)(B).
(n) "Section 11(a)(ii) Event" shall mean any event
described in Section 11(a)(ii) (A), (B) or (C) hereof.
(o) "Section 13 Event" shall mean any event
described in clauses (x), (y) or (z) of Section 13(a) hereof.
(p) "Stock Acquisition Date" shall mean the first
date of public announcement (which, for purposes of this definition, shall
include, without limitation, a report filed pursuant to Section 13(d) under the
Exchange Act) by the Company or an Acquiring Person that a Person has become an
Acquiring Person.
(q) "Subsidiary" shall have the meaning ascribed to
such term in Rule 12b-2 of the General Rules and Regulations under the Exchange
Act.
(r) "Trading Day" shall have the meaning set forth
in Section 11(d)(i) hereof.
(s) "Triggering Event" shall mean any Section
11(a)(ii) Event or any Section 13 Event.
Unless otherwise specified, where reference is made
in this Agreement to sections of, and the General Rules and Regulations under,
the Exchange Act, such reference shall mean such sections and rules as amended
from time to time and any successor provisions thereto.
Section 2. Appointment of Rights Agent.
(a) The Company hereby appoints the Rights Agent to
act as agent for the Company and trustee for the beneficial owners of the Rights
(who, in accordance with Section 3 hereof, shall prior to the Distribution Date
also be the holders of the Common Shares) in accordance with the terms and
conditions hereof, and the Rights Agent hereby accepts such appointment. The
Company may from time to time appoint such Co-Rights Agents as it may deem
necessary or desirable.
(b) On the Record Date, the Company will deliver a
Rights Certificate to the Rights Agent, registered in the name of the Rights
Agent as trustee for the beneficial owners of the Rights represented thereby,
for that number of Rights equal to the number of Common Shares issued and
outstanding on the Record Date, and the Rights Agent shall hold the Rights
-5-
<PAGE>
represented thereby in trust for the beneficial owners in accordance with the
provisions of this Agreement.
Section 3. Issue of Rights Certificates.
(a) Until the earlier of (i) the close of business
on the tenth Business Day after a Stock Acquisition Date involving an Acquiring
Person that has become such in a transaction as to which the Board of Directors
has not made the determination referred to in Section 11(a)(ii)(B) hereof, or
(ii) the close of business on the tenth Business Day (or such later date as may
be determined by action of the Board of Directors prior to such time as any
Person becomes an Acquiring Person) after the date that a tender or exchange
offer by any person (other than the Company, any Subsidiary of the Company, any
employee benefit plan of the Company or of any Subsidiary of the Company, or any
Person or entity organized, appointed or established by the Company for or
pursuant to the terms of any such plan) is first published or sent or given
within the meaning of Rule 14d-2(a) of the General Rules and Regulations under
the Exchange Act, if upon consummation thereof, such Person would be the
Beneficial Owner of 20% or more of the Common Shares then outstanding (the
earlier of (i) and (ii) being herein referred to as the "Distribution Date"),
(x) beneficial interests in the Rights will be evidenced (subject to the
provisions of paragraph (b) of this Section 3) by the certificates for the
Common Shares registered in the names of the holders of the Common Shares (which
certificates for Common Shares shall be deemed also to be certificates for
beneficial interests in the Rights) and not by separate certificates, and (y)
the Rights and beneficial interests therein will be transferable only in
connection with the transfer of the underlying Common Shares (including a
transfer to the Company). As soon as practicable after the Distribution Date,
the Rights Agent will send by first-class, insured, postage prepaid mail, to
each record holder of the Common Shares as of the close of business on the
Distribution Date, at the address of such holder shown on the records of the
Company, one or more Rights certificates, in substantially the form of Exhibit B
hereto (the "Rights Certificates"), evidencing one Right for each Common Share
so held, subject to adjustment as provided herein. In the event that an
adjustment in the number of Rights per Common Share has been made pursuant to
Section 11(p) hereof, at the time of distribution of the Rights Certificates,
the Company shall make the necessary and appropriate rounding adjustments (in
accordance with Section 14(a) hereof) so that Rights Certificates representing
only whole numbers of Rights are distributed and cash is paid in lieu of any
fractional Rights. As of and after the Distribution Date, the Rights will be
evidenced solely by such Rights Certificates. Upon the distribution of the
Rights Certificates as provided in this subsection (a), the trust created hereby
shall cease.
(b) As promptly as practicable following the Record
Date, the Company will send a copy of a Summary of Rights, in substantially the
form of Exhibit C hereto (the "Summary of Rights"), by first-class, postage
prepaid mail, to each record holder of the Common Shares as of the close of
business on the Record Date, at the address of such holder shown on the
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records of the Company. With respect to certificates for the Common Shares
outstanding as of the Record Date, until the Distribution Date, beneficial
interests in the Rights will be evidenced by such certificates for the Common
Shares and the registered holders of the Common Shares shall also be the
registered holders of the beneficial interests in the associated Rights. Until
the earlier of the Distribution Date or the Expiration Date (as such term is
defined in Section 7 hereof), the transfer of any certificates representing
Common Shares in respect of which Rights have been issued shall also constitute
the transfer of the Rights associated with such Common Shares. Certificates
issued after the Record Date upon the transfer of Common Shares outstanding on
the Record Date shall bear the legend set forth in subsection (c).
(c) Except as provided in Section 22 hereof, Rights
shall be issued in respect of all Common Shares that are issued (whether
originally issued or delivered from the Company's treasury) after the Record
Date but prior to the earlier of the Distribution Date or the Expiration Date.
Certificates representing such Common Shares shall also be deemed to be
certificates for beneficial interests in the associated Rights, and shall bear
the following legend:
"This certificate also evidences a beneficial
interest in and entitles the holder hereof to certain Rights as set
forth in the Rights Agreement between SunSource Inc. (the "Company")
and [ ] (the "Rights Agent") dated as of March ___, 1997 (the "Rights
Agreement"), and as the same may be amended from time to time, the
terms of which are hereby incorporated herein by reference and a copy
of which is on file at the principal offices of the Company. Under
certain circumstances, as set forth in the Rights Agreement, such
Rights will be evidenced by separate certificates and beneficial
interests therein will no longer be evidenced by this certificate. The
Company will mail to the holder of this certificate a copy of the
Rights Agreement, as in effect on the date of mailing, without charge
promptly after receipt of a written request therefor. Under certain
circumstances set forth in the Rights Agreement, Rights issued to, or
held by, any Person who is, was or becomes an Acquiring Person or any
Affiliate or Associate thereof (as such terms are defined in the Rights
Agreement), whether currently held by or on behalf of such Person or by
any subsequent holder, may become null and void."
With respect to such certificates containing the foregoing legend, until the
earlier of (i) the Distribution Date or (ii) the Expiration Date, beneficial
interests in the Rights associated with the Common Shares represented by such
certificates shall be evidenced by such certificates alone and registered
holders of Common Shares shall also be the registered holders of beneficial
interests in the associated Rights, and the transfer of any of such certificates
shall also constitute the transfer of beneficial interests in the Rights
associated with the Common Shares represented by such certificates.
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Section 4. Form of Rights Certificates.
(a) The Rights Certificates (and the forms of
election to purchase and of assignment to be printed on the reverse thereof)
shall each be substantially in the form set forth in Exhibit B hereto and may
have such marks of identification or designation and such legends, summaries or
endorsements printed thereon as the Company may deem appropriate and as are not
inconsistent with the provisions of this Agreement, or as may be required to
comply with any applicable law or with any rule or regulation made pursuant
thereto or with any rule or regulation of any stock exchange on which the Rights
may from time to time be listed, or to conform to usage. Subject to the
provisions of Section 11 and Section 22 hereof, the Rights Certificates,
whenever distributed, shall entitle the holders thereof to purchase such number
of Preferred Share Fractions as shall be set forth therein at the price set
forth therein (such exercise price per Preferred Share Fraction, the "Purchase
Price"), but the amount and type of securities purchasable upon the exercise of
each Right and the Purchase Price thereof shall be subject to adjustment as
provided herein.
(b) Any Rights Certificate issued pursuant to
Section 3(a) or Section 22 hereof that represents Rights that the Company knows
are beneficially owned by: (i) an Acquiring Person or any Associate or Affiliate
of an Acquiring Person, (ii) a transferee of an Acquiring Person (or of any such
Associate or Affiliate) who becomes a transferee after the Acquiring Person
becomes such, or (iii) a transferee of an Acquiring Person (or of any such
Associate or Affiliate) who becomes a transferee prior to or concurrently with
the Acquiring Person becoming such and receives such Rights pursuant to either
(A) a transfer (whether or not for consideration) from the Acquiring Person to
holders of equity interests in such Acquiring Person or to any Person with whom
such Acquiring Person has any continuing oral or written plan, agreement,
arrangement or understanding regarding the transferred Rights or (B) a transfer
that the Board of Directors of the Company has determined is part of an oral or
written plan, agreement, arrangement or understanding that has as a primary
purpose or effect avoidance of Section 7(e) hereof, and any Rights Certificate
issued pursuant to Section 6 or Section 11 hereof upon transfer, exchange,
replacement or adjustment of any other Rights Certificate referred to in this
sentence, shall contain (to the extent feasible) the following legend:
"The Rights represented by this Rights Certificate are or were
beneficially owned by a Person who was or became an Acquiring Person or
an Affiliate or Associate of an Acquiring Person (as such terms are
defined in the Rights Agreement). Accordingly, this Rights Certificate
and the Rights represented hereby may become null and void in the
circumstances specified in Section 7(e) of such Agreement."
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Section 5. Countersignature and Registration.
(a) The Rights Certificates shall be executed on
behalf of the Company by its Chairman, its President or any Vice President,
either manually or by facsimile signature, and shall have affixed thereto the
Company's seal or a facsimile thereof which shall be attested by the Secretary
or an Assistant Secretary of the Company, either manually or by facsimile
signature. The Rights Certificates shall be manually countersigned by the Rights
Agent and shall not be valid for any purpose unless so countersigned. In case
any officer of the Company who shall have signed any of the Rights Certificates
shall cease to be such officer of the Company before countersignature by the
Rights Agent and issuance and delivery by the Company, such Rights Certificates,
nevertheless, may be countersigned by the Rights Agent and issued and delivered
by the Company with the same force and effect as though the person who signed
such Rights Certificates had not ceased to be such officer of the Company; and
any Rights Certificates may be signed on behalf of the Company by any person
who, at the actual date of the execution of such Rights Certificate, shall be a
proper officer of the Company to sign such Rights Certificate, although at the
date of the execution of this Agreement any such person was not such an officer.
(b) Following the Distribution Date, the Rights
Agent will keep or cause to be kept, at its principal office or offices
designated as the appropriate place for surrender of Rights Certificates upon
exercise or transfer, books for registration and transfer of the Rights
Certificates issued hereunder. Such books shall show the names and addresses of
the respective holders of the Rights Certificates, the number of Rights
evidenced on its face by each of the Rights Certificates, the Certificate number
and the date of each of the Rights Certificates.
Section 6. Transfer, Split Up, Combination and Exchange of
Rights Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates.
(a) Subject to the provisions of Section 4(b),
Section 7(e) and Section 14 hereof, at any time after the close of business on
the Distribution Date, and at or prior to the close of business on the
Expiration Date, any Rights Certificate or Certificates may be transferred,
split up, combined or exchanged for another Rights Certificate or Certificates,
entitling the registered holder to purchase a like number of Preferred Share
Fractions (or, following a Triggering Event, Common Shares or other securities,
cash or other assets, as the case may be, as the Rights Certificate or
Certificates surrendered then entitled such holder or former holder in the case
of a transfer to purchase). Any registered holder desiring to transfer, split
up, combine or exchange any Rights Certificate or Certificates shall make such
request in writing delivered to the Rights Agent, and shall surrender the Rights
Certificate or Certificates to be transferred, split up, combined or exchanged
at the principal office or offices of the Rights Agent designated for such
purpose. Neither the Rights Agent nor the Company shall be obligated to take any
action whatsoever with respect to the transfer of any such surrendered Rights
Certificate until the
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<PAGE>
registered holder shall have completed and signed the certificate contained in
the form of assignment on the reverse side of such Rights Certificate and shall
have provided such additional evidence of the identity of the Beneficial Owner
(or former Beneficial Owner) or Affiliates or Associates thereof as the Company
shall reasonably request. Thereupon the Rights Agent shall, subject to Section
4(b), Section 7(e) and Section 14 hereof, countersign and deliver to the Person
entitled thereto a Rights Certificate or Rights Certificates, as the case may
be, as so requested. The Company may require payment of a sum sufficient to
cover any tax or governmental charge that may be imposed in connection with any
transfer, split up, combination or exchange of Rights Certificates.
(b) Upon receipt by the Company and the Rights Agent
of evidence reasonably satisfactory to them of the loss, theft, destruction or
mutilation of a Rights Certificate, and, in case of loss, theft or destruction,
of indemnity or security reasonably satisfactory to them, and reimbursement to
the Company and the Rights Agent of all reasonable expenses incidental thereto,
and upon surrender to the Rights Agent and cancellation of the Rights
Certificate if mutilated, the Company will execute and deliver a new Rights
Certificate of like tenor to the Rights Agent for countersignature and delivery
to the registered owner in lieu of the Rights Certificate so lost, stolen,
destroyed or mutilated.
Section 7. Exercise of Rights; Purchase Price; Expiration Date
of Rights.
(a) Subject to subsection (e), the registered holder
of any Rights Certificate may exercise the Rights evidenced thereby (except as
otherwise provided herein including, without limitation, the restrictions on
exercisability set forth in Section 9(c), Section 11(a)(iii) and Section 23(a)
hereof) in whole or in part at any time after the Distribution Date upon
surrender of the Rights Certificate, with the form of election to purchase and
the certificate on the reverse side thereof duly executed, to the Rights Agent
at the principal office or offices of the Rights Agent designated for such
purpose, together with payment of the aggregate Purchase Price (except as
provided in Section 11(q) hereof) with respect to the total number of Preferred
Share Fractions (or Common Shares, other securities, cash or other assets, as
the case may be) as to which such surrendered Rights are then exercisable
(except as provided in Section 11(q) hereof), at or prior to the earliest of (i)
the close of business on March 31, 2007 (the "Final Expiration Date"), (ii) the
consummation of a transaction contemplated by Section 13(d) hereof, or (iii) the
time at which the Rights are redeemed or terminated as provided in Section 23
hereof (the earlier of (i), (ii) and (iii) being herein referred to as the
"Expiration Date").
(b) The Purchase Price for each Preferred Share
Fraction pursuant to the exercise of a Right shall initially be $___, and shall
be subject to adjustment from time to time as provided in Sections 11 and 13(a)
hereof and shall be payable in accordance with subsection (c).
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<PAGE>
(c) Upon receipt of a Rights Certificate
representing exercisable Rights, with the form of election to purchase and the
certificate duly executed, accompanied by payment, with respect to each Right so
exercised, of the Purchase Price per Preferred Share Fraction (or Common Shares,
other securities, cash or other assets, as the case may be) to be purchased as
set forth below and an amount equal to any applicable transfer tax, the Rights
Agent shall, subject to Section 20(k) and Section 14(b) hereof, thereupon
promptly (i) (A) requisition from any transfer agent of the Preferred Shares (or
make available, if the Rights Agent is the transfer agent for such Shares)
certificates for the total number of Preferred Shares to be purchased and the
Company hereby irrevocably authorizes its transfer agent to comply with all such
requests, or (B) if the Company shall have elected to deposit some or all of the
total number of Preferred Shares issuable upon exercise of the Rights hereunder
with a depositary agent, requisition from the depositary agent depositary
receipts representing such number of Preferred Share Fractions as are to be
purchased (in which case certificates for the Preferred Shares represented by
such receipts shall be deposited by the transfer agent with the depositary
agent) and the Company will direct the depositary agent to comply with such
request, (ii) requisition from the Company the amount of cash, if any, to be
paid in lieu of fractional shares in accordance with Section 14 hereof, (iii)
after receipt of such certificates or depositary receipts, cause the same to be
delivered to or upon the order of the registered holder of such Rights
Certificate, registered in such name or names as may be designated by such
holder, and (iv) after receipt thereof, deliver such cash, if any, to or upon
the order of the registered holder of such Rights Certificate. The payment of
the Purchase Price (as such amount may be reduced pursuant to Section 11(a)(iii)
hereof) may be made, at the election of the holder of the Rights Certificate,
(x) in cash or by certified bank check or money order payable to the order of
the Company or (y) delivery of Rights if and to the extent authorized by Section
11(q) hereof. In the event that the Company is obligated to issue other
securities of the Company (including Common Shares), pay cash and/or distribute
other property pursuant to Section 11(a) hereof, the Company will make all
arrangements necessary so that such other securities, cash and/or other property
are available for distribution by the Rights Agent, if and when appropriate.
(d) In case the registered holder of any Rights
Certificate shall exercise less than all the Rights evidenced thereby, a new
Rights Certificate evidencing Rights equivalent to the Rights remaining
unexercised shall be issued by the Rights Agent and delivered to, or upon the
order of, the registered holder of such Rights Certificate, registered in such
name or names as may be designated by such holder, subject to the provisions of
Section 14 hereof.
(e) Notwithstanding anything in this Agreement to
the contrary, from and after the first occurrence of a Section 11(a)(ii) Event,
any Rights beneficially owned by (i) an Acquiring Person or an Associate or
Affiliate of an Acquiring Person, (ii) a transferee of an Acquiring Person (or
of any such Associate or Affiliate) who becomes a transferee after the Acquiring
Person becomes such, or (iii) a transferee of an Acquiring Person (or of any
such Associate or Affiliate) who becomes a transferee prior to or concurrently
with the Acquiring
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<PAGE>
Person becoming such and receives such Rights pursuant to either (A) a transfer
(whether or not for consideration) from the Acquiring Person to holders of
equity interests in such Acquiring Person or to any Person with whom the
Acquiring Person has any continuing oral or written plan, agreement, arrangement
or understanding regarding the transferred Rights or (B) a transfer which the
Board of Directors of the Company has determined is part of an oral or written
plan, agreement, arrangement or understanding which has as a primary purpose or
effect the avoidance of this Section 7(e), shall become null and void without
any further action and no holder of such Rights shall have any rights whatsoever
with respect to such Rights, whether under any provision of this Agreement or
otherwise; provided, however, that the Rights held by an Acquiring Person, an
Affiliate or Associate of an Acquiring Person or the transferees of such persons
referred to above shall not be voided unless the Acquiring Person in question or
an Affiliate or Associate of such Acquiring Person shall be involved in the
transaction giving rise to the Section 11(a)(ii) Event. The Company shall use
all reasonable efforts to insure that the provisions of this Section 7(e) and
Section 4(b) hereof are complied with, but neither the Company nor the Rights
Agent shall have any liability to any holder of Rights Certificates or other
Person as a result of the Company's failure to make any determinations with
respect to an Acquiring Person or its Affiliates, Associates or transferees
hereunder.
(f) Notwithstanding anything in this Agreement to
the contrary, neither the Rights Agent nor the Company shall be obligated to
undertake any action with respect to a registered holder upon the occurrence of
any purported exercise as set forth in this Section 7 unless such registered
holder shall have (i) completed and signed the certificate contained in the form
of election to purchase set forth on the reverse side of the Rights Certificate
surrendered for such exercise, and (ii) provided such additional evidence of the
identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or
Associates thereof as the Company shall reasonably request.
Section 8. Cancellation and Destruction of Rights
Certificates. All Rights Certificates surrendered for the purpose of exercise,
transfer, split up, combination or exchange shall, if surrendered to the Company
or any of its agents, be delivered to the Rights Agent for cancellation or in
canceled form, or, if surrendered to the Rights Agent, shall be canceled by it,
and no Rights Certificates shall be issued in lieu thereof except as expressly
permitted by any of the provisions of this Agreement. The Company shall deliver
to the Rights Agent for cancellation and retirement, and the Rights Agent shall
so cancel and retire, any other Rights Certificate purchased or acquired by the
Company otherwise than upon the exercise thereof. The Rights Agent shall deliver
all canceled Rights Certificates to the Company, or shall, at the written
request of the Company, destroy such canceled Rights Certificates, and in such
case shall deliver a certificate of destruction thereof to the Company.
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Section 9. Reservation and Availability of Capital Stock;
Registration of Securities.
(a) The Company covenants and agrees that it will
cause to be reserved and kept available for issuance upon the exercise of
outstanding Rights as many of its authorized and unissued Preferred Shares (and,
following the occurrence of a Triggering Event, out of its authorized and
unissued Common Shares and/or other securities or out of its authorized and
issued shares held in its treasury), which together shall at all times after the
Distribution Date be sufficient to permit the exercise in full of all
outstanding Rights.
(b) So long as the Preferred Shares (and, following
the occurrence of a Triggering Event, Common Shares or other securities)
issuable and deliverable upon the exercise of the Rights may be listed on any
national securities exchange, the Company shall use its best efforts to cause,
from and after such time as the Rights become exercisable, all shares and other
securities reserved for such issuance to be listed on such exchange upon
official notice of issuance upon such exercise.
(c) The Company shall use its best efforts to (i)
file, as soon as practicable following the earliest date after the first
occurrence of a Section 11(a)(ii) Event on which the consideration to be
delivered by the Company upon exercise of the Rights has been determined in
accordance with Section 11(a)(iii) hereof, or as soon as is required by law
following the Distribution Date, as the case may be, a registration statement or
statements under the Securities Act of 1933 (the "Act"), with respect to the
securities purchasable upon exercise of the Rights on an appropriate form or
forms, (ii) cause such registration statement or statements to become effective
as soon as practicable after such filing, and (iii) cause such registration
statement or statements to remain effective (with a prospectus at all times
meeting the requirements of the Act) until the earlier of (A) the date as of
which the Rights are no longer exercisable for such securities, and (B) the date
of the expiration of the Rights. The Company will also take such action as may
be appropriate under, or to ensure compliance with, the securities or "blue sky"
laws of the various states in connection with the exercisability of the Rights.
The Company may temporarily suspend, for a period of time not to exceed ninety
(90) days after the date set forth in clause (i) of the first sentence of this
subsection (c), the exercisability of the Rights in order to prepare and file
such registration statement and permit it to become effective. Upon any such
suspension, the Company shall issue a public announcement stating that the
exercisability of the Rights has been temporarily suspended, as well as a public
announcement at such time as the suspension is no longer in effect.
Notwithstanding any provision of this Agreement to the contrary, the Rights
shall not be exercisable in any jurisdiction unless the requisite qualification
in such jurisdiction shall have been obtained.
(d) The Company covenants and agrees that it will
take all such action as may be necessary to ensure that all Preferred Shares
(and, following a Triggering Event,
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<PAGE>
Common Shares or other securities) delivered upon exercise of Rights shall, at
the time of delivery of the certificates for such shares or other securities
(subject to payment of the Purchase Price), be duly and validly authorized and
issued and, with respect to Preferred Shares, Common Shares or other shares of
capital stock, fully paid and nonassessable.
(e) The Company further covenants and agrees that it
will pay when due and payable any and all federal and state transfer taxes and
charges that may be payable in respect of the issuance or delivery of the Rights
Certificates and of any certificates for a number of Preferred Share Fractions
(or Common Shares or other securities, as the case may be) upon the exercise of
Rights. The Company shall not, however, be required to pay any transfer tax that
may be payable in respect of any transfer or delivery of Rights Certificates to
a Person other than, or the issuance or delivery of a number of Preferred Share
Fractions (or Common Shares or other securities, as the case may be) in respect
of a name other than that of the registered holder of the Rights Certificates
evidencing Rights surrendered for exercise or to issue or deliver any
certificates for a number of Preferred Share Fractions (or Common Shares or
other securities, as the case may be) in a name other than that of the
registered holder upon the exercise of any Rights until such tax shall have been
paid (any such tax being payable by the holder of such Rights Certificate at the
time of surrender) or until it has been established to the Company's
satisfaction that no such tax is due.
Section 10. Capital Stock Record Date. Each person in whose
name any certificate for a number of Preferred Share Fractions (or Common Shares
or other securities, as the case may be) is issued upon the exercise of Rights
shall for all purposes be deemed to have become the holder of record of such
Preferred Share Fractions (or Common Shares or other securities, as the case may
be) represented thereby on, and such certificate shall be dated, the date upon
which the Rights Certificate evidencing such Rights was duly surrendered and
payment of the Purchase Price (and all applicable transfer taxes) was made;
provided, however, that if the date of such surrender and payment is a date upon
which the applicable transfer books of the Company are closed, such Person shall
be deemed to have become the record holder of such shares (fractional or
otherwise) on, and such certificate shall be dated, the next succeeding Business
Day on which the applicable transfer books of the Company are open. Prior to the
exercise of the Rights evidenced thereby, the holder of a Rights Certificate
shall not be entitled to any rights of a stockholder of the Company with respect
to shares for which the Rights shall be exercisable, including, without
limitation, the right to vote, to receive dividends or other distributions or to
exercise any preemptive rights, and shall not be entitled to receive any notice
of any proceedings of the Company, except as provided herein.
Section 11. Adjustment of Purchase Price, Number and Kind of
Shares or Number of Rights. The Purchase Price, the number and kind of shares
and other securities covered by each Right and the number of Rights outstanding
are subject to adjustment from time to time as provided in this Section 11.
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<PAGE>
(a) (i) In the event the Company shall at any time
after the date of this Agreement (A) declare a dividend on any security
of the Company payable in Preferred Shares, (B) subdivide the
outstanding Preferred Shares, (C) combine the outstanding Preferred
Shares into a smaller number of shares, or (D) issue any shares of its
capital stock in a reclassification of the Preferred Shares (including
any such reclassification in connection with a consolidation or merger
in which the Company is the continuing or surviving corporation),
except as otherwise provided in this Section 11(a) and Section 7(e)
hereof, the Purchase Price in effect at the time of the record date for
such dividend or of the effective date of such subdivision, combination
or reclassification, and the number and kind of Preferred Shares or
capital stock, as the case may be, issuable on such date, shall be
proportionately adjusted so that the holder of any Right exercised
after such time shall be entitled to receive, upon payment of the
adjusted Purchase Price, the aggregate number and kind of Preferred
Shares or capital stock, as the case may be, that, if such Right had
been exercised immediately prior to such date and at a time when the
Preferred Share transfer books were open, such holder would have owned
upon such exercise and been entitled to receive by virtue of such
dividend, subdivision, combination or reclassification. If an event
occurs which would require an adjustment under both this Section
11(a)(i) and Section 11(a)(ii) hereof, the adjustment provided for in
this Section 11(a)(i) shall be in addition to, and shall be made prior
to, any adjustment required pursuant to Section 11(a)(ii) hereof.
(ii) In the event:
(A) any Acquiring Person or any Associate or
Affiliate of any Acquiring Person, at any time after the Stock
Acquisition Date, directly or indirectly, (1) shall merge into
the Company or otherwise combine with the Company and the
Company shall be the continuing or surviving corporation of
such merger or combination and the Common Shares of the
Company or other equity securities of the Company shall remain
outstanding, (2) shall, in one transaction or a series of
transactions, transfer any assets to the Company or to any of
its Subsidiaries in exchange (in whole or in part) for Common
Shares, for shares of other equity securities of the Company,
or for securities exercisable for or convertible into shares
of equity securities of the Company (Common Shares or
otherwise) or otherwise obtain from the Company, with or
without consideration, any additional shares of such equity
securities or securities exercisable for or convertible into
shares of such equity securities (other than pursuant to a pro
rata distribution to all holders of Common Shares), (3) shall
sell, purchase, lease, exchange, mortgage, pledge, transfer or
otherwise acquire or dispose of assets in one transaction or a
series of transactions, to, from or with (as the case may be)
the Company or any of its Subsidiaries, on terms and
conditions less favorable to the Company than the Company
would be able to obtain in arm's-length
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<PAGE>
negotiation with an unaffiliated third party, other than
pursuant to a Section 13 Event, (4) shall sell, purchase,
lease, exchange, mortgage, pledge, transfer or otherwise
acquire or dispose of assets having an aggregate fair market
value of more than $5,000,000 in one transaction or a series
of transactions, to, from or with (as the case may be) the
Company or any of the Company's Subsidiaries (other than
incidental to the lines of business, if any, engaged in as of
the date hereof between the Company and such Acquiring Person
or Associate or Affiliate), other than pursuant to a Section
13 Event, (5) shall receive any compensation from the Company
or any of the Company's Subsidiaries other than compensation
for full-time employment as a regular employee at rates in
accordance with the Company's (or its Subsidiaries') past
practices, or (6) shall receive the benefit, directly or
indirectly (except proportionately as a stockholder and except
if resulting from a requirement of law or governmental
regulation), of any loans, advances, guarantees, pledges or
other financial assistance or any tax credits or other tax
advantage provided by the Company or any of its Subsidiaries,
or
(B) any Person (other than the Company, any
Subsidiary of the Company, any employee benefit plan of the
Company or of any Subsidiary of the Company, any Person or
entity organized, appointed or established by the Company for
or pursuant to the terms of any such plan) alone or together
with its Affiliates and Associates, shall, at any time, become
the Beneficial Owner of 20% or more of the Common Shares then
outstanding, unless the event causing the 20% threshold to be
crossed is a Section 13 Event, or is an acquisition of Common
Shares pursuant to a tender offer, share exchange or an
exchange offer for all outstanding Common Shares at a price
and on terms that provide fair value to all stockholders, as
determined by at least a majority of the Continuing Directors,
after receiving advice from one or more nationally recognized
investment banking firms to be in the best interests of the
Company and its stockholders and after taking into
consideration all factors that such members of the Board of
Directors deem relevant, including, without limitation, the
long-term prospects and value of the Company and the prices
and terms that such members of the Board of Directors believe,
in good faith, could reasonably be achieved if the Company or
its assets were sold on an orderly basis designed to realize
maximum value (a "Qualifying Offer"), or
(C) during such time as there is an
Acquiring Person, there shall be any reclassification of
securities (including any reverse stock split), or
recapitalization of the Company, or any merger or
consolidation of the Company with any of its Subsidiaries or
any other transaction or series of transactions involving the
Company or any of its Subsidiaries, other than a Section 13
Event
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<PAGE>
or series of such Events (whether or not with or into or
otherwise involving an Acquiring Person) that has the effect,
directly or indirectly, of increasing by more than 1% the
proportionate share of the outstanding shares of any class of
equity securities of the Company or any of its Subsidiaries
that is directly or indirectly beneficially owned by any
Acquiring Person or any Associate or Affiliate of any
Acquiring Person,
then, promptly following the first occurrence of a Section 11(a)(ii)
Event, proper provision shall be made so that each holder of a Right
(except as provided below and in Section 7(e) hereof) shall thereafter
have the right to receive, upon exercise thereof at the then current
Purchase Price in accordance with the terms of this Agreement, in lieu
of a number of Preferred Share Fractions, such number of Common Shares
of the Company as shall equal the result obtained by (x) multiplying
the then current Purchase Price by the then number of Preferred Share
Fractions for which a Right was exercisable immediately prior to the
first occurrence of a Section 11(a)(ii) Event, and (y) dividing that
product (which, following such first occurrence, shall thereafter be
referred to as the "Purchase Price" for each Right and for all purposes
of this Agreement) by 50% of the current market price (determined
pursuant to Section 11(d) hereof) per Common Share on the date of such
first occurrence (such number of shares, the "Adjustment Shares").
(iii) In the event that the number of Common Shares
that are authorized by the Company's Certificate of Incorporation, but
not outstanding or reserved for issuance for purposes other than upon
exercise of the Rights are not sufficient to permit the exercise in
full of the Rights in accordance with the foregoing subparagraph (ii)
of this Section 11(a), the Company shall: (A) determine the excess of
the value of the Adjustment Shares issuable upon the exercise of a
Right (the "Current Value") over the Purchase Price (such excess, the
"Spread"), and (B) with respect to each Right, make adequate provision
to substitute for the Adjustment Shares, upon payment of the applicable
Purchase Price, (1) cash, (2) a reduction in the Purchase Price, (3)
Common Shares of the same or a different class or other equity
securities of the Company (including, without limitation, preferred
shares or units of preferred shares that a majority of the Continuing
Directors in office at the time has deemed (based, among other things,
on the dividend and liquidation rights of such preferred shares) to
have substantially the same economic value as Common Shares (such
securities, hereinafter referred to as "common share equivalents")),
(4) debt securities of the Company, (5) other assets, or (6) any
combination of the foregoing, having an aggregate value equal to the
Current Value, where such aggregate value has been determined by a
majority of the Continuing Directors in office at the time after
considering the advice of a nationally recognized investment banking
firm selected by the Board of Directors of the Company; provided,
however, if the Company shall not have made adequate provision to
deliver value pursuant to clause (B) above within thirty (30) days
following the later of (x) the first
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occurrence of a Section 11(a)(ii) Event and (y) the date on which the
Company's right of redemption pursuant to Section 23(a) expires (the
later of (x) and (y) being referred to herein as the "Section 11(a)(ii)
Trigger Date"), then the Company shall be obligated to deliver, upon
the surrender for exercise of a Right and without requiring payment of
the Purchase Price, Common Shares (to the extent available) and then,
if necessary, cash, which shares and/or cash have an aggregate value
equal to the Spread. If the Board of Directors of the Company shall
determine in good faith that it is likely that sufficient additional
Common Shares could be authorized for issuance upon exercise in full of
the Rights, the thirty (30) day period set forth above may be extended
to the extent necessary, but not more than ninety (90) days after the
Section 11(a)(ii) Trigger Date, in order that the Company may seek
stockholder approval for the authorization of such additional shares
(such period, as it may be extended, the "Substitution Period"). To the
extent that the Company determines that some action need be taken
pursuant to the first and/or second sentences of this Section
11(a)(iii), the Company shall provide, subject to Section 7(e) hereof,
that such action shall apply uniformly to all outstanding Rights, and
may suspend the exercisability of the Rights until the expiration of
the Substitution Period in order to seek any authorization of
additional shares and/or to decide the appropriate form of distribution
to be made pursuant to such first sentence and to determine the value
thereof. The Company shall make a public announcement when the
exercisability of the Rights has been temporarily suspended, and again
when such suspension is no longer in effect. For purposes of this
Section 11(a)(iii), the value of the Common Shares shall be the current
market price (as determined pursuant to Section 11(d) hereof) per
Common Share on the Section 11(a)(ii) Trigger Date and the value of any
"common share equivalent" shall be deemed to have the same value as the
Common Shares on such date.
(b) In case the Company shall fix a record date for
the issuance of rights, options or warrants to holders of any security of the
Company entitling them to subscribe for or purchase (for a period expiring
within forty-five (45) calendar days after such record date) Preferred Shares
(or shares having the same rights, privileges and preferences as the Preferred
Shares ("equivalent preferred shares")) or securities convertible into Preferred
Shares or equivalent preferred shares at a price per Preferred Share or per
equivalent preferred share (or having a conversion price per share, if a
security convertible into Preferred Shares or equivalent preferred shares) less
than the current market price (as determined pursuant to Section 11(d) hereof)
per Preferred Share on such record date, the Purchase Price to be in effect
after such record date shall be determined by multiplying the Purchase Price in
effect immediately prior to such record date by a fraction, the numerator of
which shall be the number of Preferred Shares outstanding on such record date,
plus the number of Preferred Shares that the aggregate offering price of the
total number of Preferred Shares and/or equivalent preferred shares so to be
offered (and/or the aggregate initial conversion price of the convertible
securities so to be offered) would purchase at such current market price, and
the denominator of which shall be the number of Preferred Shares outstanding on
such record date, plus the number of additional Preferred Shares
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and/or equivalent preferred shares to be offered for subscription or purchase
(or into which the convertible securities so to be offered are initially
convertible). In case such subscription price may be paid by delivery of
consideration part or all of which may be in a form other than cash, the value
of such consideration shall be as determined in good faith by the Board of
Directors of the Company, whose determination shall be described in a statement
filed with the Rights Agent and shall be binding on the Company, the Rights
Agent and the holders of the Rights. Preferred Shares owned by or held for the
account of the Company shall not be deemed outstanding for the purpose of any
such computation. Such adjustment shall be made successively whenever such a
record date is fixed, and in the event that such rights or warrants are not so
issued, the Purchase Price shall be adjusted to be the Purchase Price that would
then be in effect if such record date had not been fixed.
(c) In case the Company shall fix a record date for
a distribution to all holders of Preferred Shares (including any such
distribution made in connection with a consolidation or merger in which the
Company is the continuing corporation) of evidences of indebtedness, cash (other
than a regular quarterly dividend out of the earnings or retained earnings of
the Company), assets (other than a regular quarterly dividend referred to above
or dividend payable in Preferred Shares, but including any dividend payable in
stock other than Preferred Shares) or subscription rights or warrants (excluding
those referred to in Section 11(b) hereof), the Purchase Price to be in effect
after such record date shall be determined by multiplying the Purchase Price in
effect immediately prior to such record date by a fraction, the numerator of
which shall be the current market price (as determined pursuant to Section 11(d)
hereof) per Preferred Share on such record date, less the then fair market value
(as determined in good faith by the Board of Directors of the Company, whose
determination shall be described in a statement filed with the Rights Agent and
shall be conclusive for all purposes) of the portion of the cash, assets or
evidences of indebtedness so to be distributed or of such subscription rights or
warrants applicable to a Preferred Share and the denominator of which shall be
such current market price (as determined pursuant to Section 11(d) hereof) per
Preferred Share. Such adjustments shall be made successively whenever such a
record date is fixed, and in the event that such distribution is not so made,
the Purchase Price shall be adjusted to be the Purchase Price which would have
been in effect if such record date had not been fixed.
(d) (i) For the purpose of any computation hereunder,
other than computations made pursuant to Section 11(a)(iii) hereof, the
"current market price" per Common Share on any date shall be deemed to
be the average of the daily closing prices per Common Share for the
thirty (30) consecutive Trading Days (as such term is hereinafter
defined) immediately prior to such date, and for purposes of
computations made pursuant to Section 11(a)(iii) hereof, the "current
market price" per Common Share on any date shall be deemed to be the
average of the daily closing prices per Common Share for the ten (10)
consecutive Trading Days immediately following such date; provided,
however, that in the event that the current market price per Common
Share is
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determined during a period following the announcement by the issuer of
such Common Share of (A) a dividend or distribution on such Common
Share payable in Common Shares or securities convertible into Common
Shares (other than the Rights), or (B) any subdivision, combination or
reclassification of such Common Shares, and prior to the expiration of
the requisite thirty (30) Trading Day or ten (10) Trading Day period,
as set forth above, after the ex-dividend date for such dividend or
distribution, or the record date for such subdivision, combination or
reclassification, then, and in each such case, the "current market
price" shall be properly adjusted to take into account ex-dividend
trading. The closing price for each Trading Day shall be the last sale
price, regular way, or, in case no such sale takes place on such day,
the average of the closing bid and asked prices, regular way, in either
case as reported in the principal consolidated transaction reporting
system with respect to securities listed or admitted to trading on the
New York Stock Exchange or, if the Common Shares are not listed or
admitted to trading on the New York Stock Exchange, as reported in the
principal consolidated transaction reporting system with respect to
securities listed on the principal national securities exchange on
which the Common Shares are listed or admitted to trading or, if the
Common Shares are not listed or admitted to trading on any national
securities exchange, the last quoted price or, if not so quoted, the
average of the high bid and low asked prices in the over-the-counter
market, as reported by the National Association of Securities Dealers,
Inc. Automated Quotation System ("Nasdaq") or such other system then in
use, or, if on any such date the Common Shares are not quoted by any
such organization, the average of the closing bid and asked prices as
furnished by a professional market maker making a market in the Common
Shares selected by the Board of Directors of the Company. If on any
such date no market maker is making a market in the Common Shares, the
fair value of such shares on such date as determined in good faith by
the Board of Directors of the Company shall be used. The term "Trading
Day" shall mean a day on which the principal national securities
exchange on which the Common Shares are listed or admitted to trading
is open for the transaction of business or, if the Common Shares are
not listed or admitted to trading on any national securities exchange,
a Business Day. If the Common Shares are not publicly held or not so
listed or traded, "current market price" per share shall mean the fair
value per share as determined in good faith by the Board of Directors
of the Company, whose determination shall be described in a statement
filed with the Rights Agent and shall be conclusive for all purposes.
(ii) For the purpose of any computation hereunder,
the "current market price" per Preferred Share shall be determined in
the same manner as set forth above for the Common Shares in clause (i)
of this Section 11(d) (other than the last sentence thereof). If the
current market price per Preferred Share cannot be determined in the
manner provided above or if the Preferred Shares are not publicly held
or listed or traded in a manner described in clause (i) of this Section
11(d), the "current market price" per Preferred Share shall be
conclusively deemed to be an amount equal to one hundred (as
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<PAGE>
such number may be appropriately adjusted for such events as stock
splits, stock dividends and recapitalization with respect to the Common
Shares occurring after the date of this Agreement) multiplied by the
current market price per Common Share. If neither the Common Shares nor
the Preferred Shares are publicly held or so listed or traded, "current
market price" per Preferred Share shall mean the fair value per share
as determined in good faith by the Board of Directors of the Company,
whose determination shall be described in a statement filed with the
Rights Agent and shall be conclusive for all purposes. For all purposes
of this Agreement, the "current market price" of a Preferred Share
Fraction shall be equal to the "current market price" of one Preferred
Share divided by 100.
(e) Anything herein to the contrary notwithstanding,
no adjustment in the Purchase Price shall be required unless such adjustment
would require an increase or decrease of at least one percent (1%) in the
Purchase Price; provided, however, that any adjustments which by reason of this
Section 11(e) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment. All calculations under this Section
11 shall be made to the nearest cent or to the nearest ten-thousandth of a
Common Share or one-millionth of a Preferred Share, as the case may be.
Notwithstanding the first sentence of this subsection (e), any adjustment
required by this Section 11 shall be made no later than the earlier of (i) three
(3) years from the date of the transaction that mandates such adjustment, or
(ii) the Expiration Date.
(f) If as a result of an adjustment made pursuant to
Section 11(a)(ii) or Section 13(a) hereof, the holder of any Right thereafter
exercised shall become entitled to receive any shares of capital stock other
than Preferred Shares, thereafter the number of such other shares so receivable
upon exercise of any Right and the Purchase Price thereof shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Preferred Shares contained in
Sections 11(a), (b), (c), (e), (g), (h), (i), (j), (k), (m) and (q), and the
provisions of Sections 7, 9, 10, 13 and 14 hereof with respect to the Preferred
Shares shall apply on like terms to any such other shares.
(g) All Rights originally issued by the Company
subsequent to any adjustment made to the Purchase Price hereunder shall evidence
the right to purchase, at the adjusted Purchase Price, the number of Preferred
Share Fractions purchasable from time to time hereunder upon exercise of the
Rights, all subject to further adjustment as provided herein.
(h) Unless the Company shall have exercised its
election as provided in Section 11(i), upon each adjustment of the Purchase
Price as a result of the calculations made in subsections (b) and (c), each
Right outstanding immediately prior to the making of such adjustment shall
thereafter evidence the right to purchase, at the adjusted Purchase Price, that
number of Preferred Share Fractions (calculated to the nearest one-millionth of
a Preferred Share) obtained by (i) multiplying (x) the number of Preferred Share
Fractions covered by a
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Right immediately prior to this adjustment, by (y) the Purchase Price in effect
immediately prior to such adjustment of the Purchase Price, and (ii) dividing
the product so obtained by the Purchase Price in effect immediately after such
adjustment of the Purchase Price.
(i) The Company may elect on or after the date of
any adjustment of the Purchase Price to adjust the number of Rights, in lieu of
any adjustment in the number of Preferred Share Fractions purchasable upon the
exercise of a Right. Each of the Rights outstanding after the adjustment in the
number of Rights shall be exercisable for the number of Preferred Share
Fractions for which a Right was exercisable immediately prior to such
adjustment. Each Right held of record prior to such adjustment of the number of
Rights shall become that number of Rights (calculated to the nearest
one-hundredth of a Preferred Share) obtained by dividing the Purchase Price in
effect immediately prior to adjustment of the Purchase Price by the Purchase
Price in effect immediately after adjustment of the Purchase Price. The Company
shall make a public announcement of its election to adjust the number of Rights,
indicating the record date for the adjustment, and, if known at the time, the
amount of the adjustment to be made. The record date for the adjustment may be
the date on which the Purchase Price is adjusted or any day thereafter, but, if
the Rights Certificates have been issued, shall be at least ten (10) days later
than the date of the public announcement. If Rights Certificates have been
issued, upon each adjustment of the number of Rights pursuant to this Section
11(i), the Company shall, as promptly as practicable, cause to be distributed to
holders of record of Rights Certificates on such record date Rights Certificates
evidencing, subject to Section 14 hereof, the additional Rights to which such
holders shall be entitled as a result of such adjustment, or, at the option of
the Company, shall cause to be distributed to such holders of record in
substitution and replacement for the Rights Certificates held by such holders
prior to the date of adjustment, and upon surrender thereof, if required by the
Company, new Rights Certificates evidencing all the Rights to which such holders
shall be entitled after such adjustment. Rights Certificates so to be
distributed shall be issued, executed and countersigned in the manner provided
for herein (and may bear, at the option of the Company, the adjusted Purchase
Price) and shall be registered in the names of the holders of record of Rights
Certificates on the record date specified in the public announcement.
(j) Irrespective of any adjustment or change in the
Purchase Price or the number of Preferred Share Fractions issuable upon the
exercise of the Rights, the Rights Certificates theretofore and thereafter
issued may continue to express the Purchase Price per Preferred Share Fraction
and the number of Preferred Share Fractions that were expressed in the initial
Rights Certificates issued hereunder.
(k) Before taking any action that would cause an
adjustment reducing the Purchase Price below the then stated or par value, if
any, of the number of Preferred Share Fractions issuable upon exercise of the
Rights, the Company shall take any corporate action that may, in the opinion of
its counsel, be necessary in order that the Company may validly and
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legally issue such number of fully paid and nonassessable Preferred Share
Fractions at such adjusted Purchase Price.
(l) In any case in which this Section 11 shall
require that an adjustment in the Purchase Price be made effective as of a
record date for a specified event, the Company may elect to defer until the
occurrence of such event the issuance to the holder of any Right exercised after
such record date the number of Preferred Share Fractions and other capital stock
or securities of the Company, if any, issuable upon such exercise over and above
the number of Preferred Share Fractions and other capital stock or securities of
the Company, if any, issuable upon such exercise on the basis of the Purchase
Price in effect prior to such adjustment; provided, however, that the Company
shall deliver to such holder a due bill or other appropriate instrument
evidencing such holder's right to receive such additional shares (fractional or
otherwise) or securities upon the occurrence of the event requiring such
adjustment.
(m) Anything in this Section 11 to the contrary
notwithstanding, the Company shall be entitled to make such reductions in the
Purchase Price, in addition to those adjustments expressly required by this
Section 11, as and to the extent that in their good faith judgment the Board of
Directors of the Company shall determine to be advisable in order that any (i)
consolidation or subdivision of the Preferred Shares, (ii) issuance wholly for
cash of any Preferred Shares at less than the current market price, (iii)
issuance wholly for cash for Preferred Shares or securities which by their terms
are convertible into or exchangeable for Preferred Shares, (iv) stock dividends
or (v) issuance of rights, options or warrants referred to in this Section 11,
hereafter made by the Company to holders of its Preferred Shares shall not be
taxable to such stockholders.
(n) The Company covenants and agrees that it shall
not, at any time after the Distribution Date, (i) consolidate with any other
Person (other than a Subsidiary of the Company in a transaction which complies
with Section 11(o) hereof), (ii) merge with or into any other Person (other than
a Subsidiary of the Company in a transaction which complies with Section 11(o)
hereof), or (iii) sell or transfer (or permit any Subsidiary to sell or
transfer), in one transaction, or a series of related transactions, assets or
earning power aggregating more than 50% of the assets or earning power of the
Company and its Subsidiaries (taken as a whole) to any other person or persons
(other than the Company and/or any of its Subsidiaries in one or more
transactions each of which complies with Section 11(o) hereof), if (x) at the
time of or immediately after such consolidation, merger or sale there are any
rights, warrants or other instruments or securities outstanding or agreements in
effect that would substantially diminish or otherwise eliminate the benefits
intended to be afforded by the Rights or (y) prior to, simultaneously with or
immediately after such consolidation, merger or sale, the stockholders of the
Person who constitutes, or would constitute, the "Principal Party" for purposes
of Section 13(a) hereof shall have received a distribution of Rights previously
owned by such Person or any of its Affiliates and Associates.
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(o) The Company covenants and agrees that, after the
Distribution Date, it will not, except as permitted by Section 23 or Section 26
hereof, take (or permit any Subsidiary to take) any action if at the time such
action is taken it is reasonably foreseeable that such action will diminish
substantially or otherwise eliminate the benefits intended to be afforded by the
Rights.
(p) Anything in this Agreement to the contrary
notwithstanding, in the event that the Company shall at any time after the
Rights Dividend Declaration Date and prior to the Distribution Date (i) declare
a dividend on the outstanding Common Shares payable in Common Shares, (ii)
subdivide the outstanding Common Shares, or (iii) combine the outstanding Common
Shares into a smaller number of shares, the number of Rights associated with
each Common Share then outstanding, or issued or delivered thereafter but prior
to the Distribution Date, shall be proportionately adjusted so that the number
of Rights thereafter associated with each Common Share following any such event
shall equal the result obtained by multiplying the number of Rights associated
with each Common Share immediately prior to such event by a fraction the
numerator of which shall be the total number of Common Shares outstanding
immediately prior to the occurrence of the event and the denominator of which
shall be the total number of Common Shares outstanding immediately following the
occurrence of such event.
(q) In the event that the Rights become exercisable
following a Section 11(a)(ii) Event, the Company, by action of a majority of the
Continuing Directors in office at the time, may authorize that the Rights,
subject to Section 7(e) hereof, either (i) will only be, or (ii) may, at the
option of the holder entitled to exercise the Rights be, exercisable for, in
either case, 50% of the Common Shares (or cash or other securities or assets to
be substituted for the Adjustment Shares pursuant to subsection (a)(iii)) that
would otherwise be purchasable under subsection (a)(ii), in consideration of the
surrender to the Company of the Rights so exercised and without other payment of
the Purchase Price. Rights exercised under this subsection (q) shall be deemed
to have been exercised in full and shall be canceled.
Section 12. Certificate of Adjusted Purchase Price or Number
of Shares. Whenever an adjustment is made as provided in Section 11 and Section
13 hereof, the Company shall (a) promptly prepare a certificate setting forth
such adjustment and a brief statement of the facts accounting for such
adjustment, (b) promptly file with the Rights Agent, and with each transfer
agent for the Preferred Shares and the Common Shares, a copy of such
certificate, and (c) mail a brief summary thereof to each holder of a Rights
Certificate (or, if prior to the Distribution Date, to each holder of a
certificate representing Common Shares) in accordance with Section 25 hereof.
The Rights Agent shall be fully protected in relying on any such certificate and
on any adjustment therein contained and shall not be deemed to have knowledge of
any such adjustment unless and until it shall have received such a certificate.
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Section 13. Consolidation, Merger or Sale or Transfer of Assets or
Earning Power.
(a) In the event that, following the Stock
Acquisition Date, directly or indirectly, (x) the Company shall consolidate
with, or merge with and into, any other Person (other than a Subsidiary of the
Company in a transaction which complies with Section 11(o) hereof), and the
Company shall not be the continuing or surviving corporation of such
consolidation or merger, (y) any person (other than a Subsidiary of the Company
in a transaction which complies with Section 11(o) hereof) shall consolidate
with, or merge with or into, the Company, and the Company shall be the
continuing or surviving corporation of such consolidation or merger and, in
connection with such consolidation or merger, all or part of the outstanding
Common Shares shall be changed into or exchanged for stock or other securities
of any other Person or cash or any other property, or (z) the Company shall sell
or otherwise transfer (or one or more of its Subsidiaries shall sell or
otherwise transfer), in one transaction or a series of related transactions,
assets or earning power aggregating more than 50% of the assets or earning power
of the Company and its Subsidiaries (taken as a whole) to any Person or Persons
(other than the Company or any Subsidiary of the Company in one or more
transactions each of which complies with Section 11(o) hereof), then, and in
each such case and except as contemplated by subsection (d), proper provision
shall be made so that:
(i) each holder of a Right, except as
provided in Section 7(e) hereof or subsection (e), shall thereafter
have the right to receive, upon the exercise thereof at the then
current Purchase Price in accordance with the terms of this Agreement,
such number of validly authorized and issued, fully paid, non
assessable and freely tradeable Common Shares of the Principal Party
(as such term is hereinafter defined), not subject to any liens,
encumbrances, rights of first refusal or other adverse claims, as shall
be equal to the result obtained by (1) multiplying the then current
Purchase Price by the number of Preferred Share Fractions for which a
Right is exercisable immediately prior to the first occurrence of a
Section 13 Event (or, if a Section 11(a)(ii) Event has occurred prior
to the first occurrence of a Section 13 Event, multiplying the number
of such shares for which a Right was exercisable immediately prior to
the first occurrence of a Section 11(a)(ii) Event by the Purchase Price
in effect immediately prior to such first occurrence), and dividing
that product (which, following the first occurrence of a Section 13
Event, shall be referred to as the "Purchase Price" for each Right and
for all purposes of this Agreement) by (2) 50% of the current market
price (determined pursuant to Section 11(d)(i) hereof) per Common Share
of such Principal Party on the date of consummation of such Section 13
Event;
(ii) such Principal Party shall thereafter
be liable for, and shall assume, by virtue of such Section 13 Event,
all the obligations and duties of the Company pursuant to this
Agreement;
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(iii) the term "Company" shall thereafter be
deemed to refer to such Principal Party, it being specifically intended
that the provisions of Section 11 hereof shall apply only to such
Principal Party following the first occurrence of a Section 13 Event;
(iv) such Principal Party shall take such
steps (including, but not limited to, the reservation of a sufficient
number of its Common Shares) in connection with the consummation of any
such transaction as may be necessary to assure that the provisions
hereof shall thereafter be applicable, as nearly as reasonably may be,
in relation to its Common Shares thereafter deliverable upon the
exercise of the Rights; and
(v) the provisions of Section 11(a)(ii)
hereof shall be of no effect following the first occurrence of any
Section 13 Event.
(b) "Principal Party" shall mean
(i) in the case of any transaction described
in clause (x) or (y) of the first sentence of subsection (a), the
Person that is the issuer of any securities into which Common Shares of
the Company are converted in such merger or consolidation, and if no
securities are so issued, the Person that is the other party to such
merger or consolidation; and
(ii) in the case of any transaction
described in clause (z) of the first sentence of subsection (a), the
Person that is the party receiving the greatest portion of the assets
or earning power transferred pursuant to such transaction or
transactions;
provided, however, that in any such case, (1) if the Common Shares of such
Person are not at such time and have not been continuously over the preceding
twelve (12) month period registered under Section 12 of the Exchange Act, and
such Person is a direct or indirect Subsidiary of another Person the Common
Shares of which are and have been so registered, "Principal Party" shall refer
to such other Person, and (2) in case such Person is a Subsidiary, directly or
indirectly, of more than one Person, the Common Shares of two or more of which
are and have been so registered, "Principal Party" shall refer to whichever of
such Persons is the issuer of the Common Shares having the greatest aggregate
market value.
(c) The Company shall not consummate any such
consolidation, merger, sale or transfer unless the Principal Party shall have a
sufficient number of authorized shares of its Common Shares that have not been
issued or reserved for issuance to permit the exercise in full of the Rights in
accordance with this Section 13 and unless prior thereto the Company and such
Principal Party shall have executed and delivered to the Rights Agent a
supplemental agreement providing for the terms set forth in paragraphs (a) and
(b) of this Section 13 and
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further providing that, as soon as practicable after the date of any Section 13
event, the Principal Party will
(i) prepare and file a registration
statement under the Act, with respect to the Rights and the securities
purchasable upon exercise of the Rights on an appropriate form, and
will use its best efforts to cause such registration statement to (A)
become effective as soon as practicable after such filing and (B)
remain effective (with a prospectus at all times meeting the
requirements of the Act) until the Expiration Date; and
(ii) will deliver to holders of the Rights
historical financial statements for the Principal Party and each of its
Affiliates that comply in all respects with the requirements for
registration on Form 10 under the Exchange Act.
The provisions of this Section 13 shall similarly apply to successive mergers or
consolidations or sales or other transfers. In the event that a Section 13 Event
shall occur at any time after the occurrence of a Section 11(a)(ii) Event, the
Rights that have not theretofore been exercised shall thereafter become
exercisable solely in the manner described in Section 13(a).
(d) Notwithstanding anything in this Agreement to
the contrary, Section 13 (other than this subsection (d)) shall not be
applicable to, and the term "Section 13 Event" shall not include, a transaction
described in subparagraphs (x) and (y) of Section 13(a) if (i) such transaction
is consummated with a Person, or Persons who acquired Common Shares pursuant to
a Qualifying Offer (or a wholly owned Subsidiary of any such Person or Persons),
(ii) the price per Common Share offered in such transaction is not less than the
price per Common Share paid to all holders of Common Shares whose shares were
purchased pursuant to such tender offer, share exchange or exchange offer and
(iii) the form of consideration being offered to the remaining holders of Common
Shares pursuant to such transaction is the same as the form of consideration
paid pursuant to such tender offer, share exchange or exchange offer. Upon
consummation of any such transaction contemplated by this subsection (d), all
Rights hereunder shall expire.
(e) In the event that the Rights become exercisable
under subsection (a) (except as provided in subsection (d)), the Company, by
action of a majority of the Continuing Directors in office at the time, may
authorize that the Rights either (i) will only be, or (ii) may, at the option of
the Principal Party be, exercisable for, 50% of the Common Shares of the
Principal Party that would otherwise be purchasable under subsection (a), in
consideration of the surrender to the Principal Party, as the successor to the
Company under subsection (a)(ii), of the Rights so exercised and without other
payment of the Purchase Price. Rights exercised under this subsection (e) shall
be deemed to have been exercised in full and shall be canceled.
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Section 14. Fractional Rights and Fractional Shares.
(a) The Company shall not be required to issue
fractions of Rights, except prior to the Distribution Date as provided in
Section 11(p) hereof, or to distribute Rights Certificates that evidence
fractional Rights. In lieu of such fractional Rights, there shall be paid to the
registered holders of the Rights Certificates with regard to which such
fractional Rights would otherwise be issuable, an amount in cash equal to the
same fraction of the current market value of a whole Right. For purposes of this
subsection (a), the current market value of a whole Right shall be the closing
price of the Rights for the Trading Day immediately prior to the date on which
such fractional Rights would have been otherwise issuable. The closing price of
the Rights for any day shall be the last sale price, regular way, or, in case no
such sale takes place on such day, the average of the closing bid and asked
prices, regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on the New York Stock Exchange or, if the Rights are not listed or
admitted to trading on the New York Stock Exchange, as reported in the principal
consolidated transaction reporting system with respect to securities listed on
the principal national securities exchange on which the Rights are listed or
admitted to trading, or if the Rights are not listed or admitted to trading on
any national securities exchange, the last quoted price or, if not so quoted,
the average of the high bid and low asked prices in the over-the-counter market,
as reported by Nasdaq or such other system then in use or, if on any such date
the Rights are not quoted by any such organization, the average of the closing
bid and asked prices as furnished by a professional market maker making a market
in the Rights selected by the Board of Directors of the Company. If on any such
date no such market maker is making a market in the Rights the fair value of the
Rights on such date as determined in good faith by the Board of Directors of the
Company shall be used.
(b) The Company shall not be required to issue
fractions of Preferred Shares upon exercise of the Rights or to distribute
certificates which evidence fractional Preferred Shares, except in each case for
fractions which are integral multiples of Preferred Shares. In lieu of
fractional Preferred Shares that are not integral multiples of Preferred Shares,
the Company may pay to the registered holders of Rights Certificates at the time
such Rights are exercised as herein provided an amount in cash equal to the same
fraction of the current market value of a Preferred Share. For purposes of this
subsection (b), the current market value of one Preferred Share shall be the
closing price of a Preferred Share (as determined pursuant to Section 11(d)(ii)
hereof) for the Trading Day immediately prior to the date of such exercise.
(c) Following the occurrence of a Triggering Event,
the Company shall not be required to issue fractions of Common Shares upon
exercise of the Rights or to distribute certificates that evidence fractional
Common Shares. In lieu of fractional Common Shares, the Company may pay to the
registered holders of Rights Certificates at the time such Rights are exercised
as herein provided an amount in cash equal to the same fraction of the current
market
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value of one Common Share. For purposes of this subsection (c), the current
market value of one Common Share shall be the closing price of one Common Share
(as determined pursuant to Section 11(d)(i) hereof) for the Trading Day
immediately prior to the date of such exercise.
(d) The holder of a Right or a beneficial interest
in a Right by the acceptance thereof expressly waives the right to receive any
fractional Rights or any fractional Common Shares upon exercise of a Right,
except as permitted by this Section 14.
Section 15. Rights of Action. All rights of action in respect
of this Agreement are vested in the respective registered holders of the Rights
Certificates (and, prior to the Distribution Date, the registered holders of the
Common Shares); and any registered holder of any Rights Certificate (or, prior
to the Distribution Date, of the Common Shares), without the consent of the
Rights Agent or of the holder of any other Rights Certificate (or, prior to the
Distribution Date, of the Common Shares), may, in the holder's own behalf and
for the holder's own benefit, enforce, and may institute and maintain any suit,
action or proceeding against the Company to enforce, or otherwise act in respect
of, the holder's right to exercise the Rights evidenced by such Rights
Certificate in the manner provided in such Rights Certificate and in this
Agreement. Without limiting the foregoing or any remedies available to the
holders of Rights or beneficial interests therein, it is specifically
acknowledged that the holders of Rights or beneficial interests therein would
not have an adequate remedy at law for any breach of this Agreement and shall be
entitled to specific performance of the obligations hereunder and injunctive
relief against actual or threatened violations of the obligations hereunder of
any Person subject to this Agreement.
Section 16. Agreement of Rights Holders. Every holder of a
Right or a beneficial interest in a Right by accepting the same consents and
agrees with the Company and the Rights Agent and with every other such holder
that:
(a) prior to the Distribution Date, beneficial
interests in the Rights will be transferable only in connection with the
transfer of Common Shares;
(b) after the Distribution Date, the Rights
Certificates are transferable only on the registry books of the Rights Agent if
surrendered at the principal office or offices of the Rights Agent designated
for such purposes, duly endorsed or accompanied by a proper instrument of
transfer and with the appropriate forms and certificates fully executed;
(c) subject to Section 6(a) and Section 7(f) hereof,
the Company and the Rights Agent may deem and treat the person in whose name a
Rights Certificate (or, prior to the Distribution Date, the associated Common
Share certificate) is registered as the absolute owner thereof and of the Rights
evidenced thereby (notwithstanding any notations of ownership or writing on the
Rights Certificates or the associated Common Share certificate made by anyone
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other than the Company or the Rights Agent) for all purposes whatsoever, and
neither the Company nor the Rights Agent, subject to the last sentence of
Section 7(e) hereof, shall be required to be affected by any notice to the
contrary; and
(d) notwithstanding anything in this Agreement to
the contrary, neither the Company nor the Rights Agent shall have any liability
to any holder of a Right or a beneficial interest in a Right or other Person as
a result of its inability to perform any of its obligations under this Agreement
by reason of any preliminary or permanent injunction or other order, decree or
ruling issued by a court of competent jurisdiction or by a governmental,
regulatory or administrative agency or commission, or any statute, rule,
regulation or executive order promulgated or enacted by any governmental
authority, prohibiting or otherwise restraining performance of such obligation;
provided, however, the Company must use its best efforts to have any such order,
decree or ruling lifted or otherwise overturned as soon as possible.
Section 17. Rights Certificate Holder Not Deemed a
Stockholder. No holder, as such, of any Rights Certificate shall be entitled to
vote, receive dividends or be deemed for any purpose the holder of the number of
Preferred Share Fractions or any other securities of the Company (including the
Common Shares) that may at any time be issuable on the exercise of the Rights
represented thereby, nor shall anything contained herein or in any Rights
Certificate be construed to confer upon the holder of any Rights Certificate, as
such, any of the rights of a stockholder of the Company or any right to vote for
the election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action, or to
receive notice of meetings or other actions affecting stockholders (except as
provided in Section 24 hereof), or to receive dividends or subscription rights,
or otherwise, until the Right or Rights evidenced by such Rights Certificate
shall have been exercised in accordance with the provisions hereof.
Section 18. Concerning the Rights Agent.
(a) The Company agrees to pay to the Rights Agent
reasonable compensation for all services rendered by it hereunder and, from time
to time, on demand of the Rights Agent, its reasonable expenses and counsel fees
and disbursements and other disbursements incurred in the administration and
execution of this Agreement and the exercise and performance of its duties
hereunder. The Company also agrees to indemnify the Rights Agent and its
directors, officers, employees and agents, for and to hold each of them harmless
against, any loss, liability, or expense, incurred without negligence, bad faith
or willful misconduct on the part of the Rights Agent, for anything done or
omitted by the Rights Agent or any such indemnified party in connection with the
acceptance or administration of this Agreement or the exercise of its duties
hereunder, including the costs and expenses of defending against any claim of
liability in the premises.
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(b) The Rights Agent shall be protected and shall
incur no liability for or in respect of any action taken, suffered or omitted by
it in connection with its administration of this Agreement or in the exercise of
its duties hereunder in reliance upon any Rights Certificate or certificate for
Common Shares or for other securities of the Company, instrument of assignment
or transfer, power of attorney, endorsement, affidavit, letter, notice,
direction, consent, certificate, statement, or other paper or document believed
by it to be genuine and to be signed, executed and, where necessary, verified or
acknowledged, by the proper Person or Persons.
Section 19. Merger or Consolidation or Change of Name of
Rights Agent.
(a) Any corporation into which the Rights Agent or
any successor Rights Agent may be merged or with which it may be consolidated,
or any corporation resulting from any merger or consolidation to which the
Rights Agent or any successor Rights Agent shall be a party, or any corporation
succeeding to the corporate trust or stock transfer business of the Rights Agent
or any successor Rights Agent, shall be the successor to the Rights Agent under
this Agreement without the execution or filing of any paper or any further act
on the part of any of the parties hereto; provided, however, that such
corporation would be eligible for appointment as a successor Rights Agent under
the provisions of Section 21 hereof. In case at the time such successor Rights
Agent shall succeed to the agency and trust created by this Agreement, any of
the Rights Certificates shall have been countersigned but not delivered, any
such successor Rights Agent may adopt the countersignature of a predecessor
Rights Agent and deliver such Rights Certificates so countersigned; and in case
at that time any of the Rights Certificates shall not have been countersigned,
any successor Rights Agent may countersign such Rights Certificates either in
the name of the predecessor or in the name of the successor Rights Agent; and in
all such cases such Rights Certificates shall have the full force provided in
the Rights Certificates and in this Agreement.
(b) In case at any time the name of the Rights Agent
shall be changed and at such time any of the Rights Certificates shall have been
countersigned but not delivered the Rights Agent may adopt the countersignature
under its prior name and deliver Rights Certificates so countersigned; and in
case at that time any of the Rights Certificates shall not have been
countersigned, the Rights Agent may countersign such Rights Certificates either
in its prior name or in its changed name; and in all such cases such Rights
Certificates shall have the full force provided in the Rights Certificates and
in this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent
undertakes the duties and obligations imposed by this Agreement upon the
following terms and conditions, by all of which the Company and the holders of
Rights Certificates or beneficial interests in the Rights, by their acceptance
thereof, shall be bound:
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(a) The Rights Agent may consult with legal counsel
(who may be legal counsel for the Company), and the written opinion of such
counsel shall be full and complete authorization and protection to the Rights
Agent as to any action taken or omitted by it in good faith and in accordance
with such opinion.
(b) Whenever in the performance of its duties under
this Agreement the Rights Agent shall deem it necessary or desirable that any
fact or matter (including, without limitation, the identity of any Acquiring
Person and the determination of "current market price") be proved or established
by the Company prior to taking or suffering any action hereunder, such fact or
matter (unless other evidence in respect thereof be herein specifically
prescribed) may be deemed to be conclusively proved and established by a
certificate signed by the Chairman, the President, any Vice President, the
Treasurer, any Assistant Treasurer, the Secretary or any Assistant Secretary of
the Company and delivered to the Rights Agent; and such certificate shall be
full authorization to the Rights Agent for any action taken or suffered in good
faith by it under the provisions of this Agreement in reliance upon such
certificate.
(c) The Rights Agent shall be liable hereunder only
for its own negligence, bad faith or willful misconduct.
(d) The Rights Agent shall not be liable for or by
reason of any of the statements of fact or recitals contained in this Agreement
or in the Rights Certificates or be required to verify the same (except as to
its countersignature on such Rights Certificates), but all such statements and
recitals are and shall be deemed to have been made by the Company only.
(e) The Rights Agent shall not be under any
responsibility in respect of the validity of any provision of this Agreement or
the execution and delivery hereof (except the due execution hereof by the Rights
Agent) or in respect of the validity or execution of any Rights Certificate
(except its countersignature thereof); nor shall it be responsible for any
breach by the Company of any covenant or condition contained in this Agreement
or in any Rights Certificate; nor shall it be responsible for any change in the
exercisability of the Rights or any adjustment required under the provisions of
this Agreement or responsible for the manner, method or amount of any such
adjustment or the ascertaining of the existence of facts that would require any
such adjustment (except with respect to the exercise of Rights evidenced by
Rights Certificates after actual notice of any such adjustment); nor shall it by
any act hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any Common Shares to be issued pursuant to this
Agreement or any Rights Certificate or as to whether any Common Shares or
Preferred Shares will, when so issued, be validly authorized and issued, fully
paid and nonassessable.
(f) The Company agrees that it will perform,
execute, acknowledge and deliver or cause to be performed, executed,
acknowledged and delivered all such further and
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other acts, instruments and assurances as may reasonably be required by the
Rights Agent for the carrying out or performing by the Rights Agent of the
provisions of this Agreement.
(g) The Rights Agent is hereby authorized and
directed to accept instructions with respect to the performance of its duties
hereunder from the Chairman, the President, any Vice President, the Secretary,
any Assistant Secretary, the Treasurer or any Assistant Treasurer of the
Company, and to apply to such officers for advice or instructions in connection
with its duties, and it shall not be liable for any action taken or suffered to
be taken by it in good faith in accordance with instructions of any such
officer. Any application by the Rights Agent for written instructions from the
Company may, at the option of the Rights Agent, set forth in writing any action
proposed to be taken or omitted by the Rights Agent under this Agreement and the
date on or after which such action shall be taken or such omission shall be
effective. The Rights Agent shall not be liable for any action taken by, or
omission of, the Rights Agent in accordance with a proposal included in any such
application on or after the date specified in such application (which date shall
not be less than five Business Days after the date any officer of the Company
actually receives such application, unless any such officer shall have consented
in writing to an earlier date) unless, prior to taking any such action (or the
effective date in the case of an omission), the Rights Agent shall have received
written instructions in response to such application specifying the action to be
taken or omitted.
(h) The Rights Agent and any stockholder, director,
officer or employee of the Rights Agent may buy, sell or deal in any of the
Rights or other securities of the Company or become pecuniarily interested in
any transaction in which the Company may be interested, or contract with or lend
money to the Company or otherwise act as fully and freely as though it were not
the Rights Agent under this Agreement and none of such actions shall constitute
a breach of trust. Nothing herein shall preclude the Rights Agent from acting in
any other capacity for the Company or for any other legal entity.
(i) The Rights Agent may execute and exercise any of
the rights or powers hereby vested in it or perform any duty hereunder either
itself or by or through its attorneys or agents, and the Rights Agent shall not
be answerable or accountable for any act, default, neglect or misconduct of any
such attorneys or agents or for any loss to the Company resulting from any such
act, default, neglect or misconduct; provided, however, that the Rights Agent
was not negligent in the selection and continued employment thereof.
(j) No provision of this Agreement shall require the
Rights Agent to expend or risk its own funds or otherwise incur any financial
liability in the performance of any of its duties hereunder or in the exercise
of its rights if there shall be reasonable grounds for believing that repayment
of such funds or adequate indemnification against such risk or liability is not
reasonably assured to it.
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(k) If, with respect to any Rights Certificate
surrendered to the Rights Agent for exercise or transfer, the certificate
attached to the form of assignment or form of election to purchase, as the case
may be, has either not been completed or indicates an affirmative response to
clause 1 and/or 2 thereof, the Rights Agent shall not take any further action
with respect to such requested exercise or transfer without first consulting
with the Company.
(l) The Rights Agent undertakes only the express
duties and obligations imposed on it by this Agreement and no implied duties or
obligations shall be read into this Agreement against the Rights Agent.
(m) Anything in this Agreement to the contrary
notwithstanding, in no event shall the Rights Agent be liable for special,
indirect or consequential loss or damage of any kind whatsoever (including but
not limited to lost profits).
Section 21. Change of Rights Agent. The Rights Agent or any
successor Rights Agent may resign and be discharged from its duties under this
Agreement upon thirty (30) days' prior written notice mailed to the Company and
to each transfer agent of the Common Shares and Preferred Shares by registered
or certified mail, and to the holders of the Rights Certificates by first- class
mail. The Company may remove the Rights Agent or any successor Rights Agent upon
thirty (30) days' prior written notice mailed to the Rights Agent or successor
Rights Agent, as the case may be, and to each transfer agent of the Common
Shares and Preferred Shares, by registered or certified mail, and to the holders
of the Rights Certificates by first-class mail. If the Rights Agent shall resign
or be removed or shall otherwise become incapable of acting, the Company shall
appoint a successor to the Rights Agent. If the Company shall fail to make such
appointment within a period of thirty (30) days after giving notice of such
removal or after it has been notified in writing of such resignation or
incapacity by the resigning or incapacitated Rights Agent or by the holder of a
Rights Certificate (who shall, with such notice, submit his Rights Certificate
for inspection by the Company), then any registered holder of any Rights
Certificate may apply to any court of competent jurisdiction for the appointment
of a new Rights Agent. Any successor Rights Agent, whether appointed by the
Company or by such a court, shall be (a) a corporation organized, doing business
and in good standing under the laws of the United States or of any state, having
a principal office in the State of New York or the Commonwealth of Pennsylvania,
that is authorized by law to exercise corporate trust and stock transfer powers
and is subject to supervision or examination by federal or state authority and
that has at the time of its appointment as Rights Agent a combined capital and
surplus adequate in the judgment of a majority of Continuing Directors in office
at the time to assure the performance of its duties hereunder and the protection
of the interests of the Company and the holders of Rights or beneficial
interests therein, or (b) an Affiliate of a corporation described in clause (a)
of this sentence. After appointment, the successor Rights Agent shall be vested
with the same powers, rights, duties and responsibilities as if it had been
originally named as Rights Agent without
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further act or deed; but the predecessor Rights Agent shall deliver and transfer
to the successor Rights Agent any property at the time held by it hereunder, and
execute and deliver any further assurance, conveyance, act or deed necessary for
the purpose. Not later than the effective date of any such appointment, the
Company shall file notice thereof in writing with the predecessor Rights Agent
and each transfer agent of the Common Shares and Preferred Shares and mail a
notice thereof in writing to the registered holders of the Rights Certificates
or, prior to the Distribution Date, to the registered holders of the Common
Shares. Failure to give any notice provided for in this Section 21, however, or
any defect therein, shall not affect the legality or validity of the resignation
or removal of the Rights Agent or the appointment of the successor Rights Agent,
as the case may be.
Section 22. Issuance of New Rights Certificates.
Notwithstanding any of the provisions of this Agreement or of the Rights to the
contrary, the Company may, at its option, issue new Rights Certificates
evidencing Rights in such form as may be approved by its Board of Directors to
reflect any adjustment or change in the Purchase Price and the number or kind or
class of shares or other securities or property purchasable under the Rights
Certificates made in accordance with the provisions of this Agreement. In
addition, in connection with the issuance, sale or delivery of Common Shares
following the Distribution Date and prior to the redemption or expiration of the
Rights, the Company (a) shall, with respect to Common Shares so issued, sold or
delivered pursuant to the exercise of stock options, stock appreciation rights,
grants or awards outstanding on the Distribution Date under any benefit plan or
arrangement for employees or directors, or upon the exercise, conversion or
exchange of securities outstanding on the Record Date or hereinafter issued by
the Company, and (b) may, in any other case, if deemed necessary or appropriate
by the Board of Directors of the Company, issue Rights Certificates representing
the appropriate number of Rights in connection with such issuance or sale;
provided, however, that (i) no such Rights Certificate shall be issued if, and
to the extent that, the Company shall be advised by counsel that such issuance
would create a significant risk of material adverse tax consequences to the
Company or the Person to whom such Rights Certificate would be issued, and (ii)
no such Rights Certificate shall be issued if, and to the extent that,
appropriate adjustment shall otherwise have been made in lieu of the issuance
thereof.
Section 23. Redemption and Termination.
(a) The Board of Directors of the Company may, at
its option, at any time prior to the earlier of (i) the close of business on the
tenth day following a Stock Acquisition Date, or (ii) the Final Expiration Date,
redeem all but not less than all the then outstanding Rights at a redemption
price of $.005 per Right, as such amount may be appropriately adjusted to
reflect any stock split, stock dividend or similar transaction occurring after
the date hereof (such redemption price being hereinafter referred to as the
"Redemption Price") and the Company may, at its option, pay the Redemption Price
either in Common Shares (based on the "current market
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price", as defined in Section 11(d)(i) hereof, of the Common Shares at the time
of redemption) or cash; provided, however, if the Board of Directors of the
Company authorizes redemption of the Rights in either of the circumstances set
forth in clauses (i) and (ii) of this proviso, then there must be Continuing
Directors then in office and such authorization shall require the concurrence of
a majority of such Continuing Directors: (i) such authorization occurs on or
after the time a Person becomes an Acquiring Person, or (ii) such authorization
occurs on or after the date of a change (resulting from a proxy or consent
solicitation) in a majority of the directors in office at the commencement of
such solicitation if any Person who is a participant in such solicitation has
stated (or, if upon the commencement of such solicitation, a majority of the
Board of Directors of the Company has determined in good faith) that such Person
(or any of its Affiliates or Associates) intends to take, or may consider
taking, any action that would result in such Person becoming an Acquiring Person
or that would cause the occurrence of a Triggering Event unless, concurrent with
such solicitation, such Person (or one or more of its Affiliates or Associates)
is making a cash tender offer pursuant to a Schedule 14D-1 (or any successor
form) filed with the Securities and Exchange Commission for all outstanding
Common Shares not beneficially owned by such Person (or by its Affiliates or
Associates); provided further, however, that if, following the occurrence of a
Stock Acquisition Date and following the expiration of the right of redemption
hereunder but prior to any Triggering Event, (i) an Acquiring Person shall have
transferred or otherwise disposed of a number of Common Shares in one
transaction or series of transactions, not directly or indirectly involving the
Company or any of its Subsidiaries, which did not result in the occurrence of a
Triggering Event or the Company (with the approval of the majority of Continuing
Directors) shall have issued additional equity securities, in either instance
such that such Person is thereafter a Beneficial Owner of 10% or less of the
outstanding Common Shares, and (ii) there is no other Acquiring Person
immediately following the occurrence of the event described in clause (i), then
the right of redemption shall be reinstated and thereafter be subject to the
provisions of this Section 23. Notwithstanding anything contained in this
Agreement to the contrary, the Rights shall not be exercisable after the first
occurrence of a Section 11(a)(ii) Event until such time as the Company's right
of redemption hereunder has expired.
(b) Immediately upon the action of the Board of
Directors of the Company ordering the redemption of the Rights, evidence of
which shall have been filed with the Rights Agent and without any further action
and without any notice, the right to exercise the Rights will terminate and the
only right thereafter of the holders of Rights shall be to receive the
Redemption Price for each Right so held. Promptly after the action of the Board
of Directors ordering the redemption of the Rights, the Company shall give
notice of such redemption to the Rights Agent and the holders of the then
outstanding Rights by mailing such notice to all such holders at each holder's
last address as it appears upon the registry books of the Rights Agent or, prior
to the Distribution Date, on the registry books of the Transfer Agent for the
Common Shares. Any notice that is mailed in the manner herein provided shall be
deemed given, whether
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or not the holder receives the notice. Each such notice of redemption will state
the method by which the payment of the Redemption Price will be made.
(c) In deciding whether or not to exercise the
Company's right of redemption hereunder, the directors of the Company shall act
in good faith, in a manner they reasonably believe to be in the best interests
of the Company and with such care, including reasonable inquiry, skill and
diligence, as a person of ordinary prudence would use under similar
circumstances.
Section 24. Notice of Certain Events.
(a) In case the Company shall propose, at any time
after the Distribution Date, (i) to pay any dividend payable in stock of any
class to the holders of Preferred Shares or to make any other distribution to
the holders of Preferred Shares (other than a regular quarterly dividend out of
earnings or retained earnings of the Company), or (ii) to offer to the holders
of Preferred Shares rights or warrants to subscribe for or to purchase any
additional Preferred Shares or shares of stock of any class or any other
securities, rights or options, or (iii) to effect any reclassification of its
Preferred Shares (other than a reclassification involving only the subdivision
of outstanding Preferred Shares), or (iv) to effect any consolidation or merger
into or with any other Person (other than a Subsidiary of the Company in a
transaction which complies with Section 11(o) hereof), or to effect any sale or
other transfer (or to permit one or more of its Subsidiaries to effect any sale
or other transfer), in one transaction or a series of related transactions, of
more than 50% of the assets or earning power of the Company and its Subsidiaries
(taken as a whole) to any other Person or Persons (other than the Company and/or
any of its Subsidiaries in one or more transactions each of which complies with
Section 11(o) hereof), or (v) to effect the liquidation, dissolution or winding
up of the Company, then, in each such case, the Company shall give to each
holder of a Rights Certificate, to the extent feasible and in accordance with
Section 25 hereof, a notice of such proposed action, which shall specify the
record date for the purposes of such stock dividend, distribution of rights or
warrants, or the date on which such reclassification, consolidation, merger,
sale, transfer, liquidation, dissolution, or winding up is to take place and the
date of participation therein by the holders of Preferred Shares, if any such
date is to be fixed, and such notice shall be so given in the case of any action
covered by clause (i) or (ii) above at least twenty (20) days prior to the
record date for determining holders of Preferred Shares for purposes of such
action, and in the case of any such other action, at least twenty (20) days
prior to the date of the taking of such proposed action or the date of
participation therein by the holders of Preferred Shares, whichever shall be the
earlier.
(b) Upon the occurrence of a Section 11(a)(ii)
Event, (i) the Company shall as soon as practicable thereafter give to each
holder of a Right, to the extent feasible and in accordance with Section 25
hereof, a notice of the occurrence of such event, which shall specify the event
and the consequences of the event to holders of Rights under Section 11(a)(ii)
hereof,
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and (ii) all references in the preceding paragraph to Preferred Shares shall be
deemed thereafter to refer to Common Shares and/or, if appropriate, other
securities.
Section 25. Notices. Notices or demands authorized by this
Agreement to be given or made by the Rights Agent or by the holder of any Rights
Certificate to or on the Company shall be sufficiently given or made if sent by
first-class mail, postage prepaid, addressed (until another address is filed in
writing with the Rights Agent) as follows:
SunSource Inc.
2600 One Logan Square
Philadelphia, PA 19103
Attention: Corporate Secretary
Subject to the provisions of Section 21, any notice or demand authorized by this
Agreement to be given or made by the Company or by the holder of any Rights
Certificate to or on the Rights Agent shall be sufficiently given or made if
sent by first-class mail, postage prepaid, addressed (until another address is
filed in writing with the Company) as follows:
[ ]
Philadelphia, PA
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Rights Certificate (or, if
prior to the Distribution Date to the holder of certificates representing Common
Shares) shall be sufficiently given or made if sent by first-class mail, postage
prepaid, addressed to such holder at the address of such holder as shown on the
registry books of the Company.
Section 26. Supplements and Amendments.
(a) Prior to the Distribution Date and subject to
the penultimate sentence of this Section 26, the Company may and the Rights
Agent shall, if the Company so directs, supplement or amend any provision of
this Agreement without the approval of any holders of certificates representing
Common Shares. From and after the Distribution Date and subject to the
penultimate sentence of this Section 26, the Company may and the Rights Agent
shall, if the Company so directs, supplement or amend this Agreement without the
approval of any holders of Rights Certificates in order (i) to cure any
ambiguity, (ii) to correct or supplement any provision contained herein which
may be defective or inconsistent with any other provisions herein, (iii) to
shorten or lengthen any time period hereunder, or (iv) to change or supplement
the provisions hereunder in any manner that the Company may deem necessary or
desirable and that shall not
-38-
<PAGE>
adversely affect the interests of the holders of Rights Certificates; provided,
this Agreement may not be supplemented or amended to lengthen, pursuant to
clause (iii) of this sentence, (A) a time period relating to when the Rights may
be redeemed at such time as the Rights are not then redeemable, or (B) any other
time period unless such lengthening is for the purpose of protecting, enhancing
or clarifying the rights of, and/or the benefits to, the holders of Rights. Upon
the delivery of a certificate from an appropriate officer of the Company that
states that the proposed supplement or amendment is in compliance with the terms
of this Section 26, the Rights Agent shall execute such supplement or amendment.
Notwithstanding anything contained in this Agreement to the contrary, (i) no
supplement or amendment shall be made that changes the Redemption Price, the
Final Expiration Date, the Purchase Price or the number of Preferred Share
Fractions for which a Right is exercisable, (ii) any supplement or amendment
shall be effective only if there are Continuing Directors and shall require the
concurrence of a majority of such Continuing Directors if: (x) such supplement
or amendment occurs on or after the time a Person becomes an Acquiring Person,
or (y) such supplement or amendment occurs on or after the date of a change
(resulting from a proxy or consent solicitation) in a majority of the directors
in office at the commencement of such solicitation if any Person who is a
participant in such solicitation has stated (or, if upon the commencement of
such solicitation, a majority of the Board of Directors of the Company has
determined in good faith) that such Person (or any of its Affiliates or
Associates) intends to take, or may consider taking, any action that would
result in such Person becoming an Acquiring Person or that would cause the
occurrence of a Triggering Event unless, concurrent with such solicitation, such
Person (or one or more of its Affiliates or Associates) is making a cash tender
offer pursuant to a Schedule 14D-1 (or any successor form) filed with the
Securities and Exchange Commission for all outstanding Common Shares not
beneficially owned by such Person (or by its Affiliates or Associates), and
(iii) no supplement or amendment that changes the rights and duties of the
Rights Agent under this Agreement shall be effective without the consent of the
Rights Agent. Prior to the Distribution Date, the interests of the beneficial
owners of Rights shall be deemed coincident with the interests of the holders of
Common Shares.
(b) In deciding whether or not to supplement or
amend this Agreement, the directors of the Company shall act in good faith, in a
manner they reasonably believe to be in the best interests of the Company and
with such care, including reasonable inquiry, skill and diligence, as a person
of ordinary prudence would use under similar circumstances, and they may
consider the effects of any action upon employees, suppliers and customers of
the Company and upon communities in which offices or other establishments of the
Company are located, and all other pertinent factors.
Section 27. Successors. All the covenants and provisions of
this Agreement by or for the benefit of the Company or the Rights Agent shall
bind and inure to the benefit of their respective successors and assigns
hereunder.
-39-
<PAGE>
Section 28. Determinations and Actions by the Board of
Directors, etc. For all purposes of this Agreement, any calculation of the
number of Common Shares outstanding at any particular time, including for
purposes of determining the particular percentage of such outstanding Common
Shares of which any Person is the Beneficial Owner, shall be made in accordance
with the last sentence of Rule 13d-3(d)(1)(i) of the General Rules and
Regulations under the Exchange Act. The Board of Directors of the Company (with,
where specifically provided for herein, the concurrence of the Continuing
Directors) shall have the exclusive power and authority to administer this
Agreement and to exercise all rights and powers specifically granted to the
Board (with, where specifically provided for herein, the concurrence of the
Continuing Directors) or to the Company, or as may be necessary or advisable in
the administration of this Agreement, including, without limitation, the right
and power to (i) interpret the provisions of this Agreement, and (ii) make all
determinations deemed necessary or advisable for the administration of this
Agreement (including a determination to redeem or not redeem the Rights or to
amend or supplement the Agreement). All such actions, calculations,
interpretations and determinations (including, for purposes of clause (y) below,
all omissions with respect to the foregoing) that are done or made by the Board
(with, where specifically provided for herein, the concurrence of the Continuing
Directors) in good faith, shall (x) be final, conclusive and binding on the
Company, the Rights Agent, the holders of the Rights and all other parties, and
(y) not subject the Board or the Continuing Directors to any liability to the
holders of the Rights.
Section 29. Benefits of this Agreement. Nothing in this
Agreement shall be construed to give to any Person other than the Company, the
Rights Agent and the registered holders of the Rights Certificates (and, prior
to the Distribution Date, registered holders of the Common Shares) any legal or
equitable right, remedy or claim under this Agreement; but this Agreement shall
be for the sole and exclusive benefit of the Company, the Rights Agent and the
registered holders of the Rights Certificates (and, prior to the Distribution
Date, registered holders of the Common Shares).
Section 30. Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable for any purpose or under
any set of circumstances or as applied to any Person, such invalid, void or
unenforceable term, provision, covenant or restriction shall continue in effect
to the maximum extent possible for all other purposes, under all other
circumstances and as applied to all other Persons; and the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated;
provided, however, that notwithstanding anything in this Agreement to the
contrary, if any such term, provision, covenant or restriction is held by such
court or authority to be invalid, void or unenforceable and the Board of
Directors of the Company determines in its good faith judgment that severing the
invalid language from this Agreement would adversely affect the purpose or
effect of this Agreement, the right of
-40-
<PAGE>
redemption set forth in Section 23 hereof shall be reinstated and shall not
expire until the close of business on the tenth day following the date of such
determination by the Board of Directors. Without limiting the foregoing, if any
provisions requiring that a determination be made by less than the entire Board
(or at a time or with the concurrence of a group of directors consisting of less
than the entire Board) is held by a court of competent jurisdiction or other
authority to be invalid, void or unenforceable, such determination shall then be
made by the Board in accordance with applicable law and the Company's
Certificate of Incorporation, and Bylaws.
Section 31. Governing Law. This Agreement, each Right and each
Rights Certificate issued hereunder shall be deemed to be a contract made under
the laws of the State of Delaware and for all purposes shall be governed by and
construed in accordance with the laws of such jurisdiction applicable to
contracts made and to be performed entirely within such jurisdiction.
Section 32. Counterparts. This Agreement may be executed in
any number of counterparts and each of such counterparts shall for all purposes
be deemed to be an original, and all such counterparts shall together constitute
but one and the same instrument.
Section 33. Descriptive Headings. Descriptive headings of the
several Sections of this Agreement are inserted for convenience only and shall
not control or affect the meaning or construction of any of the provisions
hereof.
-41-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
SUNSOURCE INC.
By
-------------------------------
Name:
Title:
[ ]
By
-------------------------------
Name:
Title:
-42-
<PAGE>
EXHIBIT A
RESOLUTION OF THE BOARD OF DIRECTORS OF
SUNSOURCE INC.
ESTABLISHING AND DESIGNATING
SERIES A JUNIOR PARTICIPATING PREFERRED SHARES
AS A SERIES OF THE SERIES PREFERRED STOCK
RESOLVED, that pursuant to the authority expressly vested in
the Board of Directors of SunSource Inc. (the "Corporation") by Article ___ of
the Amended and Restated Certificate of Incorporation of the Corporation, the
Board of Directors hereby fixes and determines the voting rights, designations,
preferences, qualifications, privileges, limitations, restrictions, options,
conversion rights and other special or relative rights of the first series of
the Series Preferred Stock, par value $.01 per share, which shall consist of
__________ shares and shall be designated as Series A Junior Participating
Preferred Shares (the "Series A Preferred Shares").
Special Terms of the Series A Preferred Shares
Section 1. Dividends and Distributions.
(a) Dividends shall be payable on the Series A Preferred
Shares on such payment date as shall be specified by the Board of Directors
(each such date being referred to herein as a "Dividend Payment Date"), in an
amount (rounded to the nearest cent) equal to 100 times the aggregate per share
amount of all cash dividends and 100 times the aggregate per share amount
(payable in cash, based upon the fair market value at the time the non-cash
dividend or other distribution is declared or paid as determined in good faith
by the Board of Directors) of all non-cash dividends or other distributions
other than a dividend payable in shares of Common Stock or a subdivision of the
outstanding shares of Common Stock (by reclassification or otherwise), declared
on the Common Stock of the Corporation since the immediately preceding Dividend
Payment Date, or, with respect to the first Dividend Payment Date, since the
first issuance of any share or fraction of a share of the Series A Preferred
Shares. Dividends on the Series A Preferred Shares shall be paid out of funds
legally available for such purpose. In the event the Corporation shall at any
time (i) declare any dividend on Common Stock payable in shares of Common Stock,
(ii) subdivide the outstanding shares of Common Stock, or (iii) combine the
outstanding shares of Common Stock into a smaller number of shares, then in each
such case the amounts to which holders of Series A Preferred Shares were
entitled immediately prior to such event under clause (ii) of the preceding
sentence shall be adjusted by multiplying each such amount by a fraction the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
A-1
<PAGE>
(b) Dividends shall begin to accrue and be cumulative on
outstanding Series A Preferred Shares from the Dividend Payment Date next
preceding the date of issue of such Series A Preferred Shares, unless the date
of issue of such shares is prior to the record date for the first Dividend
Payment Date, in which case dividends on such shares shall begin to accrue from
the date of issue of such shares, or unless the date of issue is a Dividend
Payment Date or is a date after the record date for the determination of holders
of Series A Preferred Shares entitled to receive a quarterly dividend and before
such Dividend Payment Date, in either of which events such dividends shall begin
to accrue and be cumulative from such Dividend Payment Date. Accrued but unpaid
dividends shall not bear interest. Dividends paid on the Series A Preferred
Shares in an amount less than the total amount of such dividends at the time
accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding.
Section 2. Voting Rights. In addition to any other voting
rights required by law, the holders of Series A Preferred Shares shall have the
following voting rights:
(a) Subject to the provision for adjustment hereinafter set
forth, each Series A Preferred Share shall entitle the holder thereof to 100
votes on all matters submitted to a vote of the stockholders of the Corporation.
In the event the Corporation shall at any time after the Rights Declaration Date
(i) declare any dividend on Common Stock payable in shares of Common Stock, (ii)
subdivide the outstanding shares of Common Stock, or (iii) combine the
outstanding shares of Common Stock into a smaller number of shares, then in each
such case the number of votes per share to which holders of Series A Preferred
Shares were entitled immediately prior to such event shall be adjusted by
multiplying such number by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(b) In the event that dividends upon the Series A Preferred
Shares shall be in arrears to an amount equal to six full quarterly dividends
thereon, the holders of such Series A Preferred Shares shall become entitled to
the extent hereinafter provided to vote noncumulatively at all elections of
directors of the Corporation, and to receive notice of all stockholders'
meetings to be held for such purpose. At such meetings, to the extent that
directors are being elected, the holders of such Series A Preferred Shares
voting as a class shall be entitled solely to elect two members of the Board of
Directors of the Corporation; and all other directors of the Corporation shall
be elected by the other stockholders of the Corporation entitled to vote in the
election of directors. Such voting rights of the holders of such Series A
Preferred Shares shall continue until all accumulated and unpaid dividends
thereon shall have been paid or funds sufficient therefor set aside, whereupon
all such voting rights of the holders of shares of such series shall cease,
subject to being again revived from time to time upon the reoccurrence of the
conditions above described as giving rise thereto.
A-2
<PAGE>
At any time when such right to elect directors separately as a
class shall have so vested, the Corporation may, and upon the written request of
the holders of record of not less than 20% of the then outstanding total number
of shares of all the Series A Preferred Shares having the right to elect
directors in such circumstances shall, call a special meeting of holders of such
Series A Preferred Shares for the election of directors. In the case of such a
written request, such special meeting shall be held within 90 days after the
delivery of such request, and, in either case, at the place and upon the notice
provided by law and in the Bylaws of the Corporation; provided, that the
Corporation shall not be required to call such a special meeting if such request
is received less than 120 days before the date fixed for the next ensuing annual
or special meeting of stockholders of the Corporation. Upon the mailing of the
notice of such special meeting to the holders of such Series A Preferred Shares,
or, if no such meeting be held, then upon the mailing of the notice of the next
annual or special meeting of stockholders for the election of directors, the
number of directors of the Corporation shall, ipso facto, be increased to the
extent, but only to the extent, necessary to provide sufficient vacancies to
enable the holders of such Series A Preferred Shares to elect the two directors
hereinabove provided for, and all such vacancies shall be filled only by vote of
the holders of such Series A Preferred Shares as hereinabove provided. Whenever
the number of directors of the Corporation shall have been increased, the number
as so increased may thereafter be further increased or decreased in such manner
as may be permitted by the Bylaws and without the vote of the holders of Series
A Preferred Shares, provided that no such action shall impair the right of the
holders of Series A Preferred Shares to elect and to be represented by two
directors as herein provided.
So long as the holders of Series A Preferred Shares are
entitled hereunder to voting rights, any vacancy in the Board of Directors
caused by the death or resignation of any director elected by the holders of
Series A Preferred Shares, shall, until the next meeting of stockholder for the
election of directors, in each case be filled by the remaining director elected
by the holders of Series A Preferred Shares having the right to elect directors
in such circumstances.
Upon termination of the voting rights of the holders of any
series of Series A Preferred Shares the terms of office of all persons who shall
have been elected directors of the Corporation by vote of the holders of Series
A Preferred Shares or by a director elected by such holders shall forthwith
terminate.
(c) Except as otherwise provided herein, in the Certificate of
Incorporation of the Corporation or Bylaws, the holders of Series A Preferred
Shares and the holders of Common Stock (and the holders of shares of any other
series or class entitled to vote thereon) shall vote together as one class on
all matters submitted to a vote of stockholders of the Corporation.
Section 3. Reacquired Shares. Any Series A Preferred Shares
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and canceled promptly after the acquisition thereof. All such
shares shall upon their cancellation become
A-3
<PAGE>
authorized but unissued Series Preferred Stock and may be reissued as part of a
new series of Series Preferred Stock to be created by resolution or resolutions
of the Board of Directors.
Section 4. Liquidation, Dissolution or Winding Up. In the
event of any voluntary or involuntary liquidation, dissolution or winding up of
the Corporation, the holders of Series A Preferred Shares shall be entitled to
receive the greater of (a) $1.00 per share, plus accrued dividends to the date
of distribution, whether or not earned or declared, or (b) an amount per share,
subject to the provision for adjustment hereinafter set forth, equal to 100
times the aggregate amount to be distributed per share to holders of Common
Stock. In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding shares of Common Stock, or (iii)
combine the outstanding shares of Common Stock into a smaller number of shares,
then in each such case the amount to which holders of Series A Preferred Shares
were entitled immediately prior to such event pursuant to clause (b) of the
preceding sentence shall be adjusted by multiplying such amount by a fraction
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
Section 5. Consolidation, Merger, etc. In case the Corporation
shall enter into any consolidation, merger, combination or other transaction in
which the shares of Common Stock are exchanged for or changed into other stock
or securities, cash and/or any other property, then in any such case the Series
A Preferred Shares shall at the same time be similarly exchanged or changed in
an amount per share (subject to the provision for adjustment hereinafter set
forth) equal to the aggregate amount of stock, securities, cash and/or any other
property (payable in kind), as the case may be, into which or for which each
share of Common Stock is changed or exchanged. In the event the Corporation
shall at any time (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding shares of Common Stock, or (iii)
combine the outstanding shares of Common Stock into a smaller number of shares,
then in each such case the amount set forth in the preceding sentence with
respect to the exchange or change of shares of Series A Preferred Shares shall
be adjusted by multiplying such amount by a fraction the numerator of which is
the number of shares of Common Stock outstanding immediately after such event
and the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 6. No Redemption. The Series A Preferred Shares shall
not be redeemable.
Section 7. Ranking. The Series A Preferred Shares shall rank
junior to all other series of the Corporation's Series Preferred Stock as to the
payment of dividends and the distribution of assets, unless the terms of any
such series shall provide otherwise.
Section 8. Fractional Shares. Series A Preferred Shares may be
issued in fractions of a share which shall entitle the holder, in proportion to
such holder's fractional shares,
A-4
<PAGE>
to exercise voting rights, receive dividends, participate in distributions and
to have the benefit of all other rights of holders of Series A Preferred Shares.
A-5
<PAGE>
EXHIBIT B
[Form of Rights Certificate]
Certificate No. R- ___________ Rights
NOT EXERCISABLE AFTER MARCH 31, 2007 OR AFTER EARLIER REDEMPTION BY THE
COMPANY. THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF THE
COMPANY, AT $.____ PER RIGHT ON THE TERMS SET FORTH IN THE RIGHTS
AGREEMENT. UNDER CERTAIN CIRCUMSTANCES, RIGHTS BENEFICIALLY OWNED BY AN
ACQUIRING PERSON (AS SUCH TERM IS DEFINED IN THE RIGHTS AGREEMENT) AND
ANY SUBSEQUENT HOLDER OF SUCH RIGHTS MAY BECOME NULL AND VOID.
B-1
<PAGE>
SUNSOURCE INC.
RIGHTS CERTIFICATE
This certifies that _______________________, or registered
assigns, is the registered owner of the number of Rights set forth above, each
of which entitles the owner thereof, subject to the terms, provisions and
conditions of the Rights Agreement, dated as of March ___, 1997 (the "Rights
Agreement"), between SunSource Inc., a Delaware corporation (the "Company"), and
[ ] (the "Rights Agent"), to purchase from the Company at any time prior to 5:00
P.M. (Philadelphia, Pennsylvania time) on March 31, 2007 at the office or
offices of the Rights Agent designated for such purpose, or its successors as
Rights Agent, one one-hundredth of a fully paid, nonassessable share of Series A
Junior Participating Preferred Stock (the "Preferred Share") of the Company, at
a purchase price (the "Purchase Price") of $____ per one one-hundredth of a
Preferred Share (such fraction, a "Preferred Share Fraction"), upon presentation
and surrender of this Rights Certificate with the Form of Election to Purchase
and related Certificate duly executed. Except as provided in Sections 11(q) and
13(e) of the Rights Agreement, the Purchase Price shall be paid, at the election
of the holder, in cash or Common Stock of the Company (the "Common Shares")
having an equivalent value. The number of Rights evidenced by this Rights
Certificate (and the number of Preferred Share Fractions that may be purchased
upon exercise thereof) set forth above, and the Purchase Price per Preferred
Share Fraction set forth above, are the number and Purchase Price as of March
___, 1997, based on the Preferred Shares as constituted at such date.
Except as otherwise provided in the Rights Agreement, upon the
occurrence of any Section 11(a)(ii) Event (as such term is defined in the Rights
Agreement), if the Rights evidenced by this Rights Certificate are beneficially
owned by (i) an Acquiring Person or an Affiliate or Associate of any such
Acquiring Person (as such terms are defined in the Rights Agreement), (ii) a
transferee of any such Acquiring Person, Associate or Affiliate, or (iii) under
certain circumstances specified in the Rights Agreement, a transferee of a
person who, after such transfer, became an Acquiring Person, or an Affiliate or
Associate of an Acquiring Person, such Rights shall become null and void and no
holder hereof shall have any right with respect to such Rights from and after
the occurrence of any such Section 11(a)(ii) Event.
As provided in the Rights Agreement, the Purchase Price and
the number and kind of Preferred Shares or other securities that may be
purchased upon the exercise of the Rights evidenced by this Rights Certificate
are subject to modification and adjustment upon the happening of certain events,
including Triggering Events.
This Rights Certificate is subject to all of the terms,
provisions and conditions of the Rights Agreement, which terms, provisions and
conditions are hereby incorporated herein by reference and made a part hereof
and to which Rights Agreement reference is hereby made for a full description of
the rights, limitations of rights, obligations, duties and immunities hereunder
B-2
<PAGE>
of the Rights Agent, the Company and the holders of the Rights Certificates,
which limitations of rights include the temporary suspension of the
exercisability of such Rights under the specific circumstances set forth in the
Rights Agreement. Copies of the Rights Agreement are on file at the
above-mentioned office of the Rights Agent and are also available upon written
request to the Company.
This Rights Certificate, with or without other Rights
Certificates, upon surrender at the principal office or offices of the Rights
Agent designated for such purpose, may be exchanged for another Rights
Certificate or Rights Certificates of like tenor and date evidencing Rights
entitling the holder to purchase a like aggregate number of Preferred Share
Fractions as the Rights evidenced by the Rights Certificate or Rights
Certificates surrendered shall have entitled such holder to purchase. If this
Rights Certificate shall be exercised in part, the holder shall be entitled to
receive upon surrender hereof another Rights Certificate or Rights Certificates
for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights
evidenced by this Certificate may be redeemed by the Company at its option at a
redemption price of $___ per Right at any time prior to the earlier of the close
of business on (i) the tenth day following the Stock Acquisition Date (as such
time period may be extended pursuant to the Rights Agreement), and (ii) the
Final Expiration Date. Under certain circumstances set forth in the Rights
Agreement, the decision to redeem shall require the concurrence of a majority of
the Continuing Directors.
No fractional Preferred Shares will be issued upon the
exercise of any Right or Rights evidenced hereby (other than fractions which are
integral multiples of a Preferred Share, which may, as the election of the
Company, be evidenced by depositary receipts), but in lieu thereof a cash
payment will be made, as provided in the Rights Agreement.
No holder of this Rights Certificate shall be entitled to vote
or receive dividends or be deemed for any purpose the holder of Preferred Shares
or of any other securities of the Company (including Common Shares) that may at
any time be issuable on the exercise hereof, nor shall anything contained in the
Rights Agreement or herein be construed to confer upon the holder hereof, as
such, any of the rights of a stockholder of the Company or any right to vote for
the election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action, or, to
receive notice of meetings or other actions affecting stockholders (except as
provided in the Rights Agreement), or to receive dividends or subscription
rights, or otherwise, until the Right or Rights evidenced by this Rights
Certificate shall have been exercised as provided in the Rights Agreement.
This Rights Certificate shall not be valid or obligatory for
any purpose until it shall have been countersigned by the Rights Agent.
B-3
<PAGE>
WITNESS the facsimile signature of the proper officers of the
Company and its corporate seal.
Dated as of ____________, 1997
ATTEST SUNSOURCE INC.
By
- ---------------------------------- -------------------------------
Secretary Title:
Countersigned
[ ]
By
------------------------
Authorized Signature
B-4
<PAGE>
[Form of Reverse Side of Rights Certificate]
FORM OF ASSIGNMENT
(To be executed by the registered holder if such
holder desires to transfer the Rights Certificate.)
FOR VALUE RECEIVED ________________________________________ hereby sells,
assigns and transfers unto ____________________________________________________
(Please print name and address of transferee)
- -----------------------------------------------------------
this Rights Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ___________________ Attorney,
to transfer the within Rights Certificate on the books of the within-named
Company, with full power of substitution.
Dated: -------------------------
-----------------, ---- Signature
Signature Guaranteed:
Certificate
The undersigned hereby certifies by checking the appropriate
boxes that:
(1) this Rights Certificate [ ] is [ ] is not being sold,
assigned and transferred by or on behalf of a Person who is or was an Acquiring
Person or an Affiliate or Associate of any such Acquiring Person (as such terms
are defined pursuant to the Rights Agreement);
(2) after due inquiry and to the best knowledge of the
undersigned, it [ ] did [ ] did not acquire the Rights evidenced by this Rights
Certificate from any Person who is, was or subsequently became an Acquiring
Person or an Affiliate or Associate of an Acquiring Person.
Dated: -------------------------
-----------------, ---- Signature
Signature Guaranteed:
NOTICE
The signatures to the foregoing Assignment and Certificate must
correspond to the name as written upon the face of this Rights Certificate in
every particular, without alteration or enlargement or any change whatsoever.
B-5
<PAGE>
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to exercise
Rights represented by the Rights Certificate.)
TO: SUNSOURCE INC.
The undersigned hereby irrevocably elects to exercise ________
Rights represented by this Rights Certificate to purchase the Preferred Shares
issuable upon the exercise of the Rights (or Common Shares or such other
securities of the Company or of any other person that may be issuable upon the
exercise of the Rights) and requests that certificates for such shares be issued
in the name of and delivered to:
Please insert social security
or other identifying number
- -------------------------------------------------------------------------------
(Please print name and address)
- -------------------------------------------------------------------------------
If such number of Rights shall not be all the Rights evidenced
by this Rights Certificate, a new Rights Certificate for the balance of such
Rights shall be registered in the name of and delivered to:
Please insert social security
or other identifying number
- -------------------------------------------------------------------------------
(Please print name and address)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Dated: -------------------------
-----------------, ---- Signature
Signature Guaranteed:
B-6
<PAGE>
Certificate
The undersigned hereby certifies by checking the appropriate boxes that
(1) the Rights evidenced by this Rights Certificate [ ] are [
] are not being exercised by or on behalf of a Person who is or was an Acquiring
Person or an Affiliate or Associate of any such Acquiring Person (as such terms
are defined pursuant to the Rights Agreement);
(2) after due inquiry and to the best knowledge of the
undersigned, it [ ] did [ ] did not acquire the Rights evidenced by this Rights
Certificate from any Person who is, was or became an Acquiring Person or an
Affiliate or Associate of an Acquiring Person.
Dated: -------------------------
-----------------, ---- Signature
Signature Guaranteed:
NOTICE
The signatures to the foregoing Election to Purchase and
Certificate must correspond to the name as written upon the face of this Rights
Certificate in every particular, without alteration or enlargement or any change
whatsoever.
B-7
<PAGE>
EXHIBIT C
SUMMARY OF RIGHTS TO PURCHASE
PREFERRED SHARES
On March ___, 1997, the Board of Directors of SunSource Inc.
(the "Company") declared a dividend distribution of one Right for each
outstanding share of Common Stock (each, a "Common Share"), of the Company to
stockholders of record at the close of business on March ___, 1997. Each Right
entitles the registered holder to purchase from the Company a unit consisting of
one one-hundredth of a share (a "Unit") of the Series A Junior Participating
Preferred Stock, par value $.01 per share, of the Company (the "Preferred
Shares"), or a combination of securities and assets of equivalent value, at a
Purchase Price of $___ per Unit, subject to adjustment. The Purchase Price may
be paid, at the option of the holder, in cash or Common Shares having a value at
the time of exercise equal to the Purchase Price. The description and terms of
the Rights are set forth in a Rights Agreement (the "Rights Agreement") between
the Company and [ ], as Rights Agent.
Initially, ownership of the Rights will be evidenced by the
Common Share certificates representing shares then outstanding, and no separate
Rights Certificates will be distributed. The Rights will separate from the
Common Shares and a Distribution Date will occur upon the earlier of (i) 10
business days following a public announcement that a person or group of
affiliated or associated persons (an "Acquiring Person") has acquired, or
obtained the right to acquire, beneficial ownership of 20% or more of the
outstanding Common Shares (the "Stock Acquisition Date"), or (ii) within ten
(10) business days (or such later date as may be determined by the Board of
Directors prior to such time as any person or group of affiliated persons
becomes an Acquiring Person) following the commencement of a tender offer or
exchange offer that would result in a person or group beneficially owning 20% or
more of the outstanding Common Shares. Until the Distribution Date, (i) the
Rights will be evidenced by the Common Share certificates and will be
transferred with and only with such Common Share certificates, (ii) new Common
Share certificates issued after March ___, 1997 will contain a notation
incorporating the Rights Agreement by reference and (iii) the surrender for
transfer of any certificates for Common Shares outstanding will also constitute
the transfer of the Rights associated with the Common Shares represented by such
certificate.
The Rights are not exercisable until the Distribution Date and
will expire at the close of business on March 31, 2007, unless earlier redeemed
by the Company as described below or unless a transaction under Section 13(d) of
the Rights Agreement has occurred.
As soon as practicable after the Distribution Date, Rights
Certificates will be mailed to holders of record of the Common Shares as of the
close of business on the Distribution Date and, thereafter, the separate Rights
Certificates alone will represent the Rights. Except as
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otherwise determined by the Board of Directors only Common Shares issued after
March ___, 1997 will be issued with Rights.
Except in the circumstances described below, after the
Distribution Date each Right will be exercisable into one one-hundredth of a
Preferred Share (a "Preferred Share Fraction"). Each Preferred Share Fraction
carries voting and dividend rights that are intended to produce the equivalent
of one Common Share. The voting and dividend rights of the Preferred Shares are
subject to adjustment in the event of dividends, subdivisions and combinations
with respect to the Common Shares of the Company. In lieu of issuing
certificates for Preferred Share Fractions which are less than an integral
multiple of one Preferred Share (i.e. 100 Preferred Share Fractions), the
Company may pay cash representing the current market value of the Preferred
Share Fractions.
In the event that at any time following the Stock Acquisition
Date, (i) the Company is the surviving corporation in a merger with an Acquiring
Person and its Common Shares remain outstanding, (ii) a Person becomes the
beneficial owner of more than 20% of the then outstanding Common Shares other
than pursuant to a tender offer, share exchange or exchange offer that provides
fair value to all stockholders, (iii) an Acquiring Person engages in one or more
"self-dealing" transactions as set forth in the Rights Agreement, or (iv) during
such time as there is an Acquiring Person an event occurs that results in such
Acquiring Person's ownership interest being increased by more than 1% (e.g., a
reverse stock split), each holder of a Right will thereafter have the right to
receive, upon exercise, Common Shares (or, in certain circumstances, cash,
property or other securities of the Company) having a value equal to two times
the exercise price of the Right. In lieu of requiring payment of the Purchase
Price upon exercise of the Rights following any such event, the Company may
permit the holders simply to surrender the Rights, in which event they will be
entitled to receive Common Shares (and other property, as the case may be) with
a value of 50% of what could be purchased by payment of the full Purchase Price.
Notwithstanding any of the foregoing, following the occurrence of any of the
events set forth in clauses (i), (ii), (iii) or (iv) of this paragraph, all
Rights that are, or (under certain circumstances specified in the Rights
Agreement) were, beneficially owned by any Acquiring Person who was involved in
the transaction giving rise to any such event will be null and void. However,
Rights are not exercisable following the occurrence of any of the events set
forth above until such time as the Rights are no longer redeemable by the
Company as set forth below.
For example, at an exercise price of $___ per Right, each
Right not otherwise voided following an event set forth in the preceding
paragraph would entitle its holder to purchase $___ worth of Common Shares (or
other consideration, as noted above) for $___. Assuming that the Common Shares
had a per share value of $___ at such time, the holder of each valid Right would
be entitled to purchase ten Common Shares for $___. Alternatively, the Company
could elect to issue Common Shares (with a value of $___) without the payment of
any consideration other than the surrender of the Right.
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In the event that, at any time following the Stock Acquisition
Date, (i) the Company is acquired in a merger or other business combination
transaction in which the Company is not the surviving corporation (other than a
merger that is described in, or that follows a tender offer, share exchange or
exchange offer described in, the second preceding paragraph), or (ii) 50% or
more of the Company's assets or earning power is sold or transferred, each
holder of a Right (except Rights that previously have been voided as set forth
above) shall thereafter have the right to receive, upon exercise, common shares
of the acquiring company having a value equal to two times the exercise price of
the Right. Again, provision is made to permit surrender of the Rights in
exchange for one-half of the value otherwise purchasable. The events set forth
in this paragraph and in the second preceding paragraph are referred to as the
"Triggering Events."
The Purchase Price payable, and the number of Units of
Preferred Shares or other securities or property issuable upon exercise of the
Rights are subject to adjustment from time to time to prevent dilution (i) in
the event of a stock dividend on, or a subdivision, combination or
reclassification of, the Preferred Shares, (ii) if holders of the Preferred
Shares are granted certain rights or warrants to subscribe for Preferred Shares
or convertible securities at less than the current market price of the Preferred
Shares, or (iii) upon the distribution to holders of the Preferred Shares of
evidences of indebtedness or assets (excluding regular quarterly dividends) or
of subscription rights or warrants (other than those referred to above).
With certain exceptions, no adjustment in the Purchase Price
will be required until cumulative adjustments amount to at least 1% of the
Purchase Price. No fractional Units will be issued and, in lieu thereof, an
adjustment in cash will be made based on the market price of the Preferred
Shares on the last trading date prior to the date of exercise.
At any time until ten days following the Stock Acquisition
Date, the Company may redeem the Rights in whole, but not in part, at a price of
$____ per Right. That ten day redemption period may be extended by the Board of
Directors so long as the Rights are still redeemable. Under certain
circumstances set forth in the Rights Agreement, the decision to redeem will
require the concurrence of a majority of the Continuing Directors. Immediately
upon the action of the Board of Directors ordering redemption of the Rights,
with, where required, the concurrence of the Continuing Directors, the Rights
will terminate and the only right of the holders of Rights will be to receive
the $____ redemption price.
The term "Continuing Directors" means any member of the Board
of Directors of the Company who was a member of the Board prior to the date of
the Rights Agreement, and any person who is subsequently elected to the Board if
such person is recommended or approved by a majority of the Continuing
Directors, but shall not include an Acquiring Person, or an affiliate or
associate of an Acquiring Person, or any representative of the foregoing
entities.
Until a Right is exercised, the holder thereof, as such, will
have no rights as a stockholder of the Company, including, without limitation,
the right to vote or to receive
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dividends. While the distribution of the Rights will not be taxable to
stockholders or to the Company, stockholders may, depending upon the
circumstances, recognize taxable income in the event that the Rights become
exercisable for Preferred Shares (or other consideration) of the Company or for
common shares of the acquiring company as set forth above.
Other than those provisions relating to the principal economic
terms of the Rights, any of the provisions of the Rights Agreement may be
amended by the Board of Directors of the Company prior to the Distribution Date.
After the Distribution Date, the provisions of the Rights Agreement may be
amended by the Board in order to cure any ambiguity, to make changes that do not
adversely affect the interests of holders of Rights (excluding the interests of
any Acquiring Person), or to shorten or lengthen any time period under the
Rights Agreement; provided, however, that no amendment to adjust the time period
governing redemption shall be made at such time as the Rights are not
redeemable. Under certain circumstances set forth in the Rights Agreement,
amendments will require the concurrence of a majority of the Continuing
Directors.
A copy of the Rights Agreement is being filed with the
Securities and Exchange Commission as an Exhibit to the Registration Statement
on Form S-4. This summary description of the Rights does not purport to be
complete and is qualified in its entirety by reference to the Rights Agreement,
which is incorporated herein by reference.
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Exhibit 23.1
Consent of Independent Accountants
We consent to the incorporation by reference and inclusion in this registration
statement on Form S-4 (File No. 333-19077) of our report dated March 8, 1996,
on our audits of the consolidated financial statements and financial statement
schedules of Sun Distributors L.P. We also consent to the reference to our firm
under the caption "Experts."
COOPERS & LYBRAND L.L.P.
Philadelphia, Pennsylvania
March 21, 1997
<PAGE>
CONSENT OF SMITH BARNEY
The Special Committee of the Board of Directors
Lehman/SDI, Inc.
2600 One Logan Square
Philadelphia, PA 19103
Attention: O. Gordon Brewer, Jr. and Ernest L. Ransome, III
Members of the Special Committee
We hereby consent to the (i) inclusion of our opinion letter to the
Special Committee of the Board of Directors of Lehman/SDI, Inc. as Exhibit C to
the Proxy Statement/Prospectus of SunSource Inc. and SunSource Capital Trust
relating to the proposed corporate conversion and merger of SunSource, L.P. into
SunSource, Inc., and (ii) reference made to our firm and such opinion in such
Proxy Statement/Prospectus. In giving such consent, we do not admit that we come
within the category of persons whose consent is required under, and we do not
admit that we are "experts" for purposes of, the Securities Act of 1933, as
amended, and the rules and regulations promulgated thereunder.
By: /s/
-----------------------------------
Smith Barney Inc.
New York, NY
March 24, 1997
