<PAGE>
As filed with the Securities and Exchange Commission on August 14, 1997
Registration No. 333-19077
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-----------------------
Amendment No. 5
to
Form S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
-----------------------
SunSource Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
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, including 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)
<TABLE>
<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>
501 Silverside Road
Suite 17
Wilmington, Delaware 19809
(302) 798-6665
(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)
-----------------------
<PAGE>
Copies to:
<TABLE>
<S> <C> <C>
DONALD A. SCOTT GEORGE R. KROUSE 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>
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") and a wholly owned subsidiary of the Partnership with
and into the Registrant pursuant to the Agreement and Plan of Conversion dated
as of July 31, 1997 among the Registrant, the Partnership, LPSub 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 [ ].
-----------------------
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
August __, 1997
NOTICE OF SPECIAL MEETING OF LIMITED
PARTNERS To Be Held On
September 25, 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 The Warwick, 1701 Locust Street, Philadelphia, Pennsylvania on Thursday,
September 25, 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") through a merger with and into SunSource Inc., a newly formed
Delaware corporation (the "Corporation"). 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 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 then due on the Trust Preferred Securities have
then been paid, and the contribution by the Corporation of those
limited partnership interests to a wholly owned subsidiary of the
Corporation.
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.
<PAGE>
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 Trust Preferred Securities 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). 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).
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 August 4, 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 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 September 25, 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 (as defined herein). 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 common stock of LPSub, which will be converted into 538,000 shares
of Common Stock in the Merger. 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 August__, 1997.
<PAGE>
Considerations for Holders of A Interests
(references are to page numbers
in this Proxy Statement/Prospectus)
o You will receive in exchange for each of your A Interests:
- $1.30 in cash and
- 0.38 of a $25 Trust Preferred Security
o 0.38 of a $25 Trust Preferred Security will entitle you to:
- $1.10 distribution each year, payable monthly, the same amount and timing
as the Priority Return on your A Interests
- a liquidation preference of $9.50 compared to a liquidation preference for
your A Interest of $10.
o The Trust Preferred Security will be redeemable at $9.50 after five years (or
earlier at $9.595 if certain conditions are met and there is a change in the
applicable tax law affecting the deductibility of interest on the Junior
Subordinated Debentures) whereas the A Interest may only be cashed out in a
liquidation. See page 23.
o Distributions on the Trust Preferred Securities may be deferred for up to
five years. The unpaid distributions will accrue interest at 11.6%, but you
will be required to pay tax on the distributions as they are due. See page
25.
o The debentures underlying the Trust Preferred Securities are subordinate to
the senior indebtedness of the Corporation and its subsidiaries, which is
substantially the case now with the A Interests. See page 27.
o Your receipt of cash and the Trust Preferred Security will be a taxable
event. This effect is described on page 27.
o You presently have the right to vote on mergers, dissolution, the sale of
substantially all of the assets of the Partnership and the removal of the
General Partner. The Trust Preferred Securities will not have those voting
rights. See page 29.
(continued on next page)
<PAGE>
Considerations for Holders of B Interests
(references are to page numbers
in this Proxy Statement/Prospectus)
o You will receive in exchange for each of your B Interests 0.25 share of
Common Stock (effectively a one-for-four reverse split).
o The partners of the General Partner (which has a 1% interest in the
Partnership, a 1% interest in the Operating Partnership and the right to
receive an annual management fee of $3,330,000 (the "Management Fee")) will
receive 1,000,000 shares of Common Stock. This will increase the interests
currently held by the partners and their affiliates from 46% of the B
Interests to 54% of the Common Stock.
o After the Conversion you will not be entitled to receive the B Tax
Distribution. However, you will not have any taxable income allocated to you
as has been done in the past.
o We will consider the possibility of paying dividends on the Common Stock
after the Effective Time of the Conversion. The payment of dividends will be
at the discretion of the Corporation's Board of Directors and will depend,
among other things, on earnings, financial condition, capital requirements,
availability of acquisition candidates, level of indebtedness, contractual
restrictions with respect to the payment of dividends and other factors that
the Corporation's Board of Directors deems relevant.
o You should be aware that:
- - there are conflicts of interest between the General Partner and the A
Interests and you. You were not independently represented in the
negotiations. See page 23.
- - you have no right to dissent and demand appraisal in connection with the
Conversion. See page 24.
- - there is no assurance as to the price at which the Common Stock will trade.
The price could be adversely affected if a large number of stockholders sell
their shares immediately after the Conversion. In this regard the Corporation
has agreed to file registration statements for the sale by Lehman Brothers
and management of their shares. See page 25.
(continued on next page)
ii
<PAGE>
Considerations for Holders of A Interests
(references are to page numbers
in this Proxy Statement/Prospectus)
o You should be aware that:
- - there are conflicts of interest between the General Partner and the B
Interests and you. You were not independently represented in the
negotiations. See page 23.
- - you have no right to dissent and demand appraisal in connection with the
Conversion. See page 29.
- - there is no assurance as to the price at which the Trust Preferred Securities
will trade although, in view of the cash you will receive, it is likely that
the price will be below the price of the A Interests before the Conversion.
See page 30.
- - the directors of the Corporation will not havbe fiduciary duties to the
holders of Trust Preferred Securities. See page 30.
o Other important considerations are set forth on pages 4 to 7 and 23 to 31.
The reasons for the Conversion are set forth on pages 7 and 41.
Before you make your decision on how to vote, we urge you to read the Proxy
Statement/Prospectus carefully.
Considerations for Holders of B Interests
(references are to page numbers
in this Proxy Statement/Prospectus)
- - the fiduciary duties of the directors of the Corporation may be less than
those owed by the General Partner. See page 27.
- - the Corporation will have a stockholders' deficit which could affect the
ability to pay dividends if that action is ultimately decided upon. See
page 23.
- - there will be certain provisions in place which may reduce the likelihood of
a takeover that, if successful, would permit stockholders to receive a
premium over market. See page 26.
o Other important considerations are set forth on pages 4 to 7 and 23 to 31.
The reasons for the conversion are set forth on pages 7 and 41.
Before you make your decision on how to vote, we urge you to read the
Proxy Statement/Prospectus carefully.
<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 August ___, 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.
iii
<PAGE>
TABLE OF CONTENTS
SUMMARY ................................................................3
The Partnership, the Corporation and the Trust.......................3
Overview of the Conversion...........................................3
Existing Economic Interests of the Partners..........................4
Risk Factors .......................................................5
Reasons to Convert to Corporate Form.................................9
Alternatives to the Conversion......................................10
Structure of the Conversion.........................................11
Control of SunSource................................................11
Special Committee...................................................11
Recommendation of General Partner and
Fairness Determination..........................................12
Summary Description of Trust Preferred
Securities......................................................12
Comparative Rights of the Interests and the
Securities to be Issued.........................................14
Summary of Certain Federal Income
Tax Consequences................................................14
Conditions to the Conversion........................................14
No Appraisal Rights.................................................15
Consequences if Conversion Is Not Approved..........................15
Limited Partner Litigation..........................................15
Voting at the Special Meeting.......................................15
List of Partners....................................................16
Delivery of Depositary Receipts.....................................16
Reverse Stock Split.................................................16
Summary Financial Information.......................................17
Recent Developments.................................................19
RISK FACTORS, CONFLICTS OF INTEREST
AND OTHER IMPORTANT CONSIDERATIONS..................................20
RISKS TO HOLDERS OF A INTERESTS.........................................20
Conflicts of Interest...............................................20
No Independent Representation.......................................20
Optional Redemption.................................................20
Reduction in Liquidation Preference.................................20
Special Event Redemption or Distribution;
Shortening of Stated Maturity...................................20
Loss of Contractual Right to Distributions..........................23
Option to Extend Interest Payment Period;
Tax Impact of Extension.............................................23
Ranking of Subordinated Obligations
Under Preferred Securities Guarantee
and Junior Subordinated Debentures;
Dependence on the Corporation...................................25
Adverse Tax Implications............................................26
Enforcement of Certain Rights by Holders
of Trust Preferred Securities...................................26
Limited Voting Rights...............................................27
No Dissenters', Appraisal or Similar Rights
for Nonconsenting Limited Partners..............................27
Uncertainty Regarding Market Price for
Trust Preferred Securities......................................28
No Fiduciary Duties.................................................28
<PAGE>
Elimination of General Partner Liability for
Corporation Obligations.........................................28
Payments Under Deferred Compensation Plans..........................30
Transaction Costs...................................................30
Change in Ownership Rights..........................................30
Other Considerations................................................30
RISKS TO HOLDERS OF B INTERESTS
Conflicts of Interest...............................................21
No Independent Representation.......................................21
Loss of Contractual Right to Distributions..........................21
Certain Delaware Law Considerations.................................21
No Dissenters', Appraisal or Similar Rights
for Nonconsenting Limited Partners..............................22
Adverse Tax Implications............................................22
Uncertainty Regarding Market Price of
Common Stock; Possible Reduction Due to
Sales by Lehman Brothers or Management..........................23
Future Dilution of Common Stock.....................................23
Addition of Provisions that May Discourage
Changes of Control..............................................24
Possible Reduction in Fiduciary Standards...........................25
Elimination of General Partner Liability for
Corporation Obligations.........................................25
Payments Under Deferred Compensation Plans..........................25
Transaction Costs...................................................25
Change in Ownership Rights..........................................25
Other Considerations................................................26
VOTING AND PROXY INFORMATION............................................30
Voting Procedures...................................................30
Revocation of Proxies...............................................30
Vote Required; Quorum...............................................31
Solicitation of Proxies.............................................31
Independent Auditors................................................31
No Appraisal Rights.................................................31
Other Matters.......................................................31
SPECIAL FACTORS.........................................................31
Background of the Conversion........................................31
Existing Partnership Structure......................................33
Existing Economic Interests of the Partners.........................33
Alternatives to the Conversion......................................34
Reasons to Convert to Corporate Form................................40
Terms of the Conversion.............................................41
Consequences if Conversion is Not Approved..........................43
Allocation of Interests in the Conversion...........................45
Distributions and Compensation......................................47
Limited Partner Litigation..........................................47
Determinations of the Special Committee.............................47
Opinion of Smith Barney.............................................61
Recommendation of the General Partner and
Fairness Determination..........................................66
iv
<PAGE>
Source and Amount of Funds..........................................68
Accounting Treatment................................................68
Fees and Expenses...................................................68
Exchange of Depositary Receipts.....................................68
Treatment of Fractional Shares......................................69
COMPARISON OF INTERESTS AND SECURITIES
TO BE ISSUED........................................................70
Fiduciary Duties....................................................78
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES........................................................78
Partnership Status and Taxation of the
Partnership....................................................79
General Tax Treatment of the Conversion.............................79
Certain Tax Consequences of the Conversion
to Holders of B Interests.......................................80
Certain Tax Consequences of the Conversion
to Holders of A Interests.......................................82
Other Tax Issues Affecting Limited Partners.........................84
Tax Consequences to the Corporation and
the Partnership.................................................85
Unrelated Business Taxable Income...................................85
Other Tax Aspects...................................................85
MARKET PRICES AND DISTRIBUTIONS.........................................86
CAPITALIZATION..........................................................88
SELECTED HISTORICAL
FINANCIAL INFORMATION .............................................89
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..............................................90
BUSINESS...............................................................104
General............................................................104
Acquisition Strategy...............................................105
Products and Services..............................................106
Marketing..........................................................107
Competition........................................................107
Insurance Arrangements.............................................107
Investment and Borrowing Policies..................................108
Employees..........................................................108
Backlog............................................................108
Federal Income Tax Considerations..................................108
Properties.........................................................109
Legal Proceedings..................................................109
MANAGEMENT.............................................................111
Executive Officers and Directors...................................111
Executive Officers and Directors
after the Conversion...........................................112
Compensation.......................................................112
Deferred Compensation Plans........................................113
<PAGE>
Change in Control Arrangements.....................................114
Management Fee.....................................................114
Certain Business Relations.........................................114
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS
AND MANAGEMENT.....................................................115
Security Ownership of Certain Beneficial
Owners.........................................................115
Security Ownership of Certain Beneficial
Owners and Management..........................................115
SUNSOURCE CAPITAL TRUST................................................116
DESCRIPTION OF TRUST PREFERRED
SECURITIES.........................................................118
General............................................................118
Distributions......................................................118
Mandatory Redemption...............................................120
Special Event Redemption or Distribution;
Shortening of Stated Maturity..................................120
Redemption Procedures..............................................122
Subordination of Trust Common Securities...........................123
Liquidation Distribution Upon Dissolution..........................123
No Merger, Consolidation or Amalgamation of
the Trust......................................................123
Declaration Events of Default......................................123
Voting Rights......................................................124
Modification and Amendment of the
Declaration....................................................126
Book-Entry; Delivery and Form......................................127
Expenses and Taxes.................................................128
Registrar, Transfer Agent and Paying Agent.........................128
Information Concerning the Property Trustee........................128
Governing Law......................................................129
Miscellaneous......................................................129
DESCRIPTION OF PREFERRED
SECURITIES GUARANTEE...........................................129
General............................................................129
Certain Covenants of the Corporation...............................130
Amendments and Assignment..........................................130
Termination of the Preferred Securities
Guarantee......................................................130
Status of the Preferred Securities Guarantee.......................130
Governing Law......................................................130
DESCRIPTION OF JUNIOR SUBORDINATED
DEBENTURES.........................................................131
General............................................................131
Optional Redemption................................................131
Interest...........................................................132
Option to Extend Interest Payment Period...........................133
Compounded Interest................................................133
Certain Covenants of the Corporation Applicable
to the Junior Subordinated Debentures..........................133
v
<PAGE>
Subordination......................................................134
Indenture Events of Default........................................134
Modification of the Indenture......................................135
Book-Entry and Settlement..........................................135
Consolidation, Merger and Sale.....................................136
Defeasance and Discharge...........................................136
Governing Law......................................................136
Information Concerning the Indenture Trustee.......................136
Miscellaneous......................................................136
RELATIONSHIP AMONG THE TRUST
PREFERRED SECURITIES, THE JUNIOR
SUBORDINATED DEBENTURES AND
THE PREFERRED SECURITIES
GUARANTEE..........................................................137
DESCRIPTION OF CAPITAL STOCK...........................................138
Preferred Stock....................................................138
Common Stock.......................................................138
Stockholders Agreement.............................................138
Anti-takeover Provisions...........................................138
Limitation of Liability............................................140
Transfer Agent and Registrar.......................................141
RESALE OF SECURITIES...................................................141
Securities Act Restrictions........................................141
Resales by Lehman Brothers and Management..........................141
LEGAL MATTERS..........................................................141
EXPERTS................................................................142
AVAILABLE INFORMATION..................................................142
INCORPORATION OF CERTAIN DOCUMENTS
BY REFERENCE.......................................................142
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
EXHIBIT D MANAGEMENT PROJECTIONS D-1
<PAGE>
ORGANIZATION CHART
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Lehman Brothers Holdings Inc.
|
|
100%
|
|
Lehman/SDI, Management
Inc. (including Norman V.
Edmonson, Donald T.
Marshall and John
P. McDonnell)
53.8% 46.2% A Holders Public B Lehman Management
GP LP Holders Affiliates (including Norman V.
(including Lehman Edmonson, Donald T.
Brothers Capital Marshall and John
Partners I, L.P., P. McDonnell)
LBI Group Inc.
and Lehman
Ltd. I Inc.
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
Lehman Brothers Holding Inc.
|
|
Former Public Former Lehman Management
A Holders B Holders Affiliates (including Norman V.
(including Lehman Edmonson, Donald T.
Brothers Capital Marshall and John
Partners I, L.P., P. McDonnell)
LBI Group Inc.
and Lehman
Ltd. I Inc.
| | | |
| | | |
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
99% 46.2% 53.8%
LP LP GP
(interest formerly (interest formerly
held by Management) held by Lehman/SDI,
Inc.)
| | |
| |----------------- SDI Partners I, L.P.
| (The General Partner)
|
SDI Operating Partners, L.P.
(The Operating Partnership) ------- GP
1% and
Fee
</TABLE>
2
<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 Proxy Statement/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, projected revenue and profit growth, 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,"
and Exhibit D 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 19809 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 $25 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 will be exchanged for
1,000,000 shares of
3
<PAGE>
Common Stock, of which 75,000 shares will be held in escrow to be
distributed after two years if all distributions then due on the Trust
Preferred Securities have then been paid.
o As a result of the Conversion, subsidiaries of the Corporation (SunSub A
and SunSub B) 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. The existing credit
agreements (existing senior notes and bank credit revolver) provide
available financing of $113.9 million, of which $84.9 million is
outstanding as of June 30, 1997. The new credit facilities provide for $150
million of available financing, of which approximately $100.0 million is
expected to be outstanding upon consummation of the Conversion. Prepayment
of the Partnership's long-term debt will result in the payment of a
make-whole penalty of approximately $4 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
B Interests 11,633,603 53.7 2,908,401 45.3
General Partner Interest 46,200 0.7
----------- -----
2,954,601 46.0
Lehman/SDI and Affiliates
B Interests 5,896,678 27.2 1,474,169 23.0
General Partner Interest 538,000 8.4
----------- -----
2,012,169 31.4
Executive Officers and Directors
B Interests 4,145,465 19.1 1,036,366 16.1
General Partner Interest 415,800 6.5
---------- ----- ----------- -------
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 ("Cash Available for Distribution"), 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 (the
"Priority Return"), which has historically been paid on a monthly basis to
holders of record on the first day of the month.
4
<PAGE>
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 (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 of the Partnership as of and for
the three years ended December 31, 1996. The Partnership suspended the payment
of monthly advance B Tax Distributions effective January 1, 1997 through March
31, 1997, pending the Conversion. Due to the delay in completion of the proposed
Conversion, the Partnership resumed payment of monthly advance B Tax
Distributions in April 1997 in the amount of $.03 per B Interest. The
Partnership intends to pay this monthly rate to holders of B Interests until the
effective date of the Conversion, since it expects to allocate sufficient
taxable income on the B Interests in the shortened tax year from January 1, 1997
through the effective date to require the B Tax Distribution payment. The
balance of the required 1997 B Tax Distribution, if any, will be paid on or
before March 31, 1998.
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 and the holders of B Interests in accordance
with their respective capital 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 of the Partnership as of and for the
three years ended December 31, 1996.
Risk Factors
5
<PAGE>
- --------------------------------------------------------------------------------
RISKS TO HOLDERS OF A INTERESTS
- --------------------------------------------------------------------------------
The proposed Conversion necessitates the allocation of the total value of
the Partnership among the holders of the A Interests, the holders of the B
Interests and the General Partner. It would be in the General Partner's interest
to have its partners receive maximum consideration, undertake the least possible
responsibilities and assume minimum risk, all at the limited partners' expense.
Also, it would be in the interest of the holders of A Interests to receive the
maximum consideration for their A Interests, at the expense of the General
Partner and the holders of the B Interests.
o Holders of A Interests 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 material respects from those described
herein.
o Unlike 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 September 30, 2002 or, if certain
conditions are met, earlier at 101% of the principal amount plus accrued
- -------------------------------------------------------------------------------
RISKS TO HOLDERS OF B INTERESTS
- -------------------------------------------------------------------------------
The proposed Conversion necessitates the allocation of the total value of
the Partnership among the holders of the B Interests, the holders of the A
Interests and the General Partner. It would be in the General Partner's interest
to have its partners receive maximum consideration, undertake the least possible
responsibilities and assume minimum risk, all at the limited partners' expense.
Also, it would be in the interest of the holders of B Interests to receive the
maximum consideration for their B Interests, at the expense of the General
Partner and the holders of the A Interests.
o Holders of B Interests 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 material respects from those described
herein.
o 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 since they will no longer be taxed with
respect to income of the corporation.
6
<PAGE>
- --------------------------------------------------------------------------------
RISKS TO HOLDERS OF A INTERESTS
- --------------------------------------------------------------------------------
and unpaid interest upon the occurrence of a Tax Event. See "DESCRIPTION OF
JUNIOR SUBORDINATED DEBENTURES -- Optional Redemption." This redemption will
result in the redemption of the Trust Preferred Securities.
o Upon the occurrence of a Tax Event, if certain conditions are met, the
Corporation shall have the right under certain circumstances to shorten the
maturity of the Junior Subordinated Debentures to a date not earlier than
September 30, 2002. See "DESCRIPTION OF TRUST PREFERRED SECURITIES -- Special
Event Redemption or Distribution; Shortening of Stated Maturity." If the
Corporation exercises such right, there can be no assurance that the
shortening of the maturity of the Junior Subordinated Debentures will not
have an effect on the market price of the Trust Preferred Securities or
Junior Subordinated Debentures that may be distributed in exchange for Trust
Preferred Securities.
o The liquidation preference for 0.38 of a Trust Preferred Security will be
$9.50 compared to a liquidation preference for an A Interest of $10.00.
However, holders of A Interests will also receive a cash payment of $1.30.
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. 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.
o 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 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 the Operating
Partnership and will be structurally subordinated to all liabilities and
obligations of the Operating Partnership and the Corporation's other
subsidiaries. As of March 31, 1997 (on a pro forma basis, assuming the
Merger had occured on such date), the Corporation and the Operating
Partnership would have had approximately
<PAGE>
- -------------------------------------------------------------------------------
RISKS TO HOLDERS OF B INTERESTS
- -------------------------------------------------------------------------------
o The Board of Directors has not yet established a policy regarding the payment
of dividends on the Common Stock after the Effective Time of the Conversion.
The payment of dividends will be at the discretion of the Corporation's Board
of Directors and will depend, among other things, on earnings, financial
condition, capital requirements, availability of acquisition candidates,
level of indebtedness, contractual restrictions with respect to the payment
of dividends and other factors that the Corporation's Board of Directors
deems relevant. It should be noted that the Corporation's unaudited pro forma
balance sheet at March 31, 1997 reflects a stockholders' deficit of
approximately $7.4 million and a negative net book value per common share of
$1.16. 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 and/or the preceding
fiscal year. In evaluating the fairness of the proposed Conversion, the
Special Committee did not consider the pro forma stockholders' deficit and
negative book value to be a significant negative factor, because the
accounting measures of stockholders' equity and net book value were not
viewed by the Special Committee's financial advisor, Smith Barney, as
primary determinants of value for ongoing industrial concerns like the
Corporation or the Partnership.
o If distributions on the Trust Preferred Securities are in arrears, the Board
of Directors will not be able to declare and pay dividends on the Common
Stock.
o Holders of B Interests have no dissenters' or appraisal rights in the
Conversion. Therefore, holders of B Interests 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 Common
Stock. The Common Stock received by the holders of the B Interests may trade
at prices below
7
<PAGE>
- --------------------------------------------------------------------------------
RISKS TO HOLDERS OF A INTERESTS
- --------------------------------------------------------------------------------
$105.4 million principal amount of senior indebtedness outstanding, and the
Operating Partneship and the Corporation's other subsidiaries would have had
approximately $92.4 million of indebtedness and other liabilities.
o 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.
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.
o Holders of A Interests currently have the right to vote as a class on mergers
and together with the holders of B Interests on the sale of substantially all
the assets of the Partnership, amendment of the Partnership Agreement,
dissolution and removal of the General Partner. The Trust Preferred
Securities will not have these voting rights.
o Holders of A Interests have no dissenters' or appraisal rights in the
Conversion. Therefore, holders of A Interests 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. Because the consideration received by the holders of A
Interests includes $1.30 in cash for each A Interest, it is likely that 0.38
of a Trust Preferred Security received in respect of each A Interest will
trade at prices below the market price of the A Interest immediately prior to
the Conversion.
o The Corporation intends to list the Trust Preferred Securities on the New
York Stock Exchange ("NYSE"). The Trust Preferred Securities may trade at
prices that do not fully reflect the value of accrued but unpaid interest
with respect to the underlying Junior Subordinated Debentures. A holder of
Trust Preferred Securities that disposes of its Trust Preferred Securities
between record dates for payments of distribtuions (and consequently does not
receive a distribution from the Trust for the period prior to such
disposition) will nevertheless be required to include as ordinary income,
accrued but
<PAGE>
- --------------------------------------------------------------------------------
RISKS TO HOLDERS OF B INTERESTS
- --------------------------------------------------------------------------------
the historical trading levels of the B Interests.
o If a large number of holders of Common Stock were to offer their securities
for sale immediately after consummation of the Conversion, the market could
decline.
o The Corporation has agreed to file a registration statement 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 the issuance of unregistered
shares in connection with acquisitions. In addition, Lehman Brothers Capital
Partners I, L.P., an affiliate of Lehman/SDI holding 5,788,124 B Interests,
may distribute to its partners the shares of Common Stock it receives as a
result of the Conversion (a majority of which shares would be freely
tradeable immediately after such distribution). See "RESALE OF SECURITIES --
Resales by Lehman Brothers and Management."
o Certain provisions of Delaware law and the Corporation's organizational
documents, as well as provisions of the Stockholders Agreement dated as of
July 31, 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." Such
provisions could also have a negative effect on the market price of the
Common Stock.
o 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, if any,
of the partners of the General Partner for obligations and liabilities of
SunSource which occur after the Conversion.
o 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.
8
<PAGE>
- --------------------------------------------------------------------------------
RISKS TO HOLDERS OF A INTERESTS
- --------------------------------------------------------------------------------
unpaid interest on the Junior Subordinated Debentures through the date of
disposition. Such holder will recognize a capital loss to the extent the
amount realized with respect to the Trust Preferred Securities is less than
its adjusted tax basis. Subject to certain limited exceptions, capital losses
cannot be applied to offset ordinary income for United States federal income
tax purposes. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES--Certain Tax
Consequences of the Conversion to Holders of A Interests."
o If a large number of holders of Trust Preferred Securities were to offer
their securities for sale immediately after consummation of the Conversion,
the market price of the Trust Preferred Securities could decline.
o 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, if any,
of the partners of the General Partner for obligations and liabilities of
SunSource which occur after the Conversion.
o The directors of the Corporation will not have fiduciary duties to the
holders of Trust Preferred Securities after the Conversion.
o Certain members of management will receive accelerated payments under certain
deferred compensation plans of the Operating Partnership as a result of the
Conversion. See "MANAGEMENT--Change in Control Arrangements."
o 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 market conditions.
- --------------------------------------------------------------------------------
RISKS TO HOLDERS OF B INTERESTS
- --------------------------------------------------------------------------------
o Certain members of management will receive accelerated payments under certain
deferred compensation plans of the Operating Partnership as a result of the
Conversion. See "MANAGEMENT -- Change in Control Arrangements."
o 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." All of these reasons are for the benefit of the holders of B
Interests. Other than as described herein under "SPECIAL FACTORS -- Alternatives
to the Conversion," the primary benefit of the Conversion to holders of A
Interests is the simplification of tax reporting, although the General Partner
believes that several of the benefits listed below will increase the likelihood
of timely distributions on the Trust Preferred Securities.
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.
9
<PAGE>
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 be
reduced for years beginning after December 31, 1997. For such taxable
periods, existing publicly traded partnerships have the option of (i)
being taxed as corporations or (ii) being taxed as partnerships by
electing to be subject to tax at the rate of 3.5% on their gross income.
Although the Corporation will also have to pay tax on its income, the
Conversion will allow SunSource to conserve additional cash 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. See "CERTAIN FEDERAL
INCOME TAX CONSEQUENCES -- Partnership Status and Taxation of the
Partnership."
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 but is
currently pursuing discussions with a number of prospective sellers of
businesses complementary to SunSource's existing businesses. These
discussions may lead to acquisitions, one of which may be material.
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. The
Corporation's access to equity capital markets will be limited during the
period from the date of the Conversion to the earlier of an initial
secondary offering of shares held by Lehman Brothers and management and
the nine-month anniversary of the Conversion. See "RESALE OF SECURITIES --
Resales by Lehman Brothers and Management."
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 and may be enhanced by the decision to convert.
o A 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 and its stockholders with
respect to the income of SunSource and its stockholders with respect to
any dividends received. This federal income tax benefit will be reduced
under current law on December 31, 1997. See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES -- Partnership Status and Taxation of Partnership." Although
holders of A Interests would still be entitled to the Priority Return, the
Partnership's ability to pay the Priority Return could be impeded over
time by the payment of corporate income tax or the 3.5% gross income tax.
In addition, the effect of paying the Priority Return from after-tax
income would have a significant adverse effect upon the holders of B
Interests.
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
10
<PAGE>
winding up the Partnership, including taxes on the sale of the assets. The
A Interests would receive only $10 upon liquidation. 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."
As set forth under "SPECIAL FACTORS -- Background of the Conversion,"
management made a presentation to the Board of Directors of Lehman/SDI on June
12, 1996 concerning alternatives to the Conversion. The Board of Directors of
Lehman/SDI again examined the alternatives on June 18, 1997 during a special
meeting, using as the basis for its analysis the management projections
furnished to Smith Barney. See Management Projections included as Exhibit D to
this Proxy Statement/Prospectus, noting particularly the "Qualifications with
Respect to Projections." The Board of Directors of Lehman/SDI considered the
estimated impact upon the limited partners and the General Partner of three
alternatives: 1) conversion to corporate form; 2) continuation as a master
limited partnership taxable as a corporation; and 3) liquidation.
The following tables set forth management's estimates with respect to
values that would be received under the three alternatives. These estimates
should not be relied on as indicators of the actual values of the Interests or
the consideration to be received in respect of Interests in the Conversion. The
estimates are based on the following assumptions.
Assumptions Relating to Alternatives to the Conversion
A Interests
The reference price for the conversion to corporate form alternative
was determined by discounting the expected monthly cash flows of the Trust
Preferred Securities by a rate that was based on current Treasury Strip Yields
for the same maturities plus an appropriate credit spread as adjusted for the
substantial probability of a call at par five years from the date of the
Conversion.
The reference price for the continuation as a master limited
partnership alternative was determined by discounting the expected A Interest
cash flows in perpetuity by a rate that was based upon current Treasury Forward
rates plus the mean of the historical A Interests credit spread.
B Interests
The reference prices for both the conversion to corporate form and the
continuation as a master limited partnership alternatives were determined by
applying a price/earnings ("P/E") ratio to the appropriate projected net income
figure in each case. The projected P/E ratio was determined by analyzing the
Partnership's historical last twelve months' P/E ratio on a pro forma
tax-adjusted basis, and comparing the results (over five-year and
two-and-a-half-year periods) to the similar ratios of the Partnership's
comparable industrial distribution corporations comprised of Barnes Group, Inc.,
Applied Industrial Technologies, Inc. (formerly Bearings, Inc.), Genuine Parts
Company, W.W. Grainger, Hughes Supply, Inc., Lawson Products, Inc. and NCH
Corporation. The results were compared to comparable industrial distribution
corporations because there are no industrial distribution master limited
partnerships comparable to the Partnership. It was determined that the
Partnership historically traded at a P/E ratio discount of 18% to 25% to the
comparables. The discount was then applied to the mean of the comparables
resulting in a P/E ratio for the Partnership of 11x to 12x. For the 17 months
between January 1, 1996 and June 1, 1997, the P/E ratio averaged 12.0x. The mean
of the P/E ratio for comparable industrial distribution corporations as
described herein was 14.6x, which was utilized to determine the reference price
in the conversion to corporate form alternative. While the General Partner
believes that the Conversion will lead to a reduction in the market discount,
there can be no assurance that this will occur.
General Partner Interest
The value of the Management Fee used for the continuation of the master
limited partnership alternative was determined by applying a proposed
capitalization factor of 8.0x the annual Management Fee of $3,330,000 paid to
the General Partner. The proposed capitalization factor was based on an analysis
of trading multiples of earnings before interest, taxes and amortization (EBITA)
of comparable industrial distribution corporations comprised of Barnes Group,
Inc., Applied Industrial Technologies, Inc. (formerly Bearings, Inc.), Genuine
Parts Company, W.W. Grainger, Hughes Supply, Inc., Lawson Products, Inc. and NCH
Corporation. Comparable industrial distribution corporations were used because
there are no distribution master limited partnerships comparable to the
Partnership. The trading multiples of EBITA were used to determine the
capitalization factor since the Management Fee is a deduction from the
Partnership's EBITA. The mean of the multiples of EBITA for the comparable
industrial distribution corporations as described herein was 8.5x based on the
last twelve months financial results publicly available at the commencement of
negotiations. Based on the 8.5x mean, the General Partner proposed a range of
values of 8.0x to 9.0x the Management Fee to the Special Committee at the
commencement of negotiations. The value in the table represents the low end of
this range.
The estimated effect of the three alternatives upon the A Interests is
shown in the following table. The table assumes for purposes of comparison that
the $1.10 distributions start in 1998.
<TABLE>
<CAPTION>
PER A INTEREST
Conversion to Corporate Form 1997 1998 1999 2000 2001 2002
- ---------------------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Reference Price $10.78 $10.65 $10.47 $10.29 $10.09 $ 9.86
Proceeds at First Call Date -- -- -- -- -- $ 9.50
Anticipated Cumulative Cash Receipts(1) $ 1.30 $ 2.40 $ 3.50 $ 4.60 $ 5.70 $ 6.80
Continuation as Master Limited Partnership
Taxable as a Corporation
- ------------------------
Reference Price $11.00 $11.00 $10.98 $10.96 $10.92 $10.90
Anticipated Cumulative Cash Receipts
Starting in 1998 -- $ 1.10 $ 2.20 $ 3.30 $ 4.40 $ 5.50
Liquidation
Liquidation Value $10.00 $10.00 $10.00 $10.00 $10.00 $10.00
Anticipated Cumulative Cash Receipts
Starting in 1998 -- $ 1.10 $ 2.20 $ 3.30 $ 4.40 $ 5.50
</TABLE>
- --------------------
(1) Includes $1.30 in cash received at the time of Conversion.
The above table shows three estimated outcomes for a current holder of
an A Interest. For example, if a current A Interest holder were to sell the
investment at the end of 1998:
o If the Conversion takes place, an A Interest holder is estimated to receive
$10.65 from the sale of 0.38 of a Trust Preferred Security, plus $1.30 in
cash at the time of Conversion, plus $1.10 in distributions for 1998.
Total cash received is estimated to be $13.05.
o If the Conversion does not take place, an A interest holder is estimated to
receive $11.00 from the sale of the A Interest, plus $1.10 of Priority
Return for 1998. Total cash received is estimated to be $12.10.
o If the Partnership were to be liquidated at the end of 1998, the A Interest
holder would receive $10.00 in liquidation preference plus $1.10 of
Priority Return for 1998. Total cash is estimated to be $11.10.
The General Partner believes the estimated values shown in the above table
support the conclusion that the proposed Conversion is advantageous to the
holders of A Interests.
The estimated effect upon the holders of B Interests is shown in the
following table:
<TABLE>
<CAPTION>
PER B INTEREST
Conversion to Corporate Form 1997 1998 1999 2000 2001 2002
- ---------------------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Reference Price(1)(2) $6.28 $7.59 $9.49 $11.68 $14.02 $16.35
Continuation as Master Limited Partnership
Taxable as a Corporation
- ------------------------
Reference Price(3) $2.40 $3.87 $6.07 $7.85 $ 9.84 $12.18
Liquidation
- -----------
Liquidation Value at 5.0x EBITA $2.73 $3.22 $4.09 $5.08 $ 6.19 $ 7.47
Liquidation Value at 6.0x EBITA $4.15 $4.76 $5.79 $6.95 $ 8.24 $ 9.72
Liquidation Value at 7.0x EBITA $5.58 $6.30 $7.50 $8.82 $10.30 $11.98
</TABLE>
- --------------------
(1) Assumes a P/E multiple of 14.6x net income after tax. See "-- Assumptions
Relating to Alternatives to the Conversion."
(2) Before the 1-for-4 reverse stock split.
(3) Assumes a P/E multiple of 12.0x net income after tax. See "-- Assumptions
Relating to Alternatives to the Conversion."
The above table shows, subject to the assumptions and caveats set forth
above under " -- Assumptions Relating to Alternatives to the Conversion" and in
Exhibit D, the derived outcomes for a current holder of B Interests under the
three alternatives. The derived values shown under the conversion to corporate
form alternative are significantly better than those shown under the alternative
of continuing as a master limited partnership in all years. With respect to
liquidation, the 5.0x EBITA case is inferior to remaining as a master limited
partnership in all years except 1997. Liquidation at 6.0x EBITA is also inferior
to remaining as a master limited partnership in all years except 1997 and 1998.
However, the 1997 and 1998 liquidation values of $4.15 and $4.76, respectively,
at 6.0x EBITA are below the market price of $5.00 at the time of the meeting of
the Board of Directors of Lehman/SDI on June 18, 1997. Liquidation at 7.0x EBITA
is superior in all years shown relative to the alternative of continuing as a
master limited partnership except 2002, but inferior to the alternative of
converting to corporate form for all years.
The liquidation values derived above were based upon the Management
Projections set forth in Exhibit D, and are subject to all of the assumptions
and caveats described therein. The EBITA figures used to calculate liquidation
values for each year are approximately $13 million higher than the EBITA figures
shown in Exhibit D due to the elimination of the Management Fee and the
administrative expenses of SunSource's home office organization.
The liquidation values shown above also reflect the payment of income taxes
by the Partnership on the gain from sale of assets upon liquidation as required
by present tax law, since the Partnership would be taxed as a corporation after
December 31, 1997 unless the election to pay the 3.5% tax on gross income were
made. The combined effective income tax rate for federal, state and local income
taxes is approximately 40%. If the Partnership were to elect to pay the 3.5%
gross income tax and to remain taxable as a partnership, the proceeds to holders
of B Interests would increase by the amount of income taxes not paid at the
Partnership level. The increase (decrease) in proceeds due to potential
elimination of Partnership income taxes upon liquidation are shown below:
<TABLE>
<CAPTION>
Taxes Paid per B Interest on Liquidation at End of 1997
Liquidation Value At Taxable as Partnership Taxable as Corporation (1)
-------------------- ---------------------- --------------------------
<S> <C> <C>
5.0x EBITA 0 $ (0.36)
6.0x EBITA 0 $ 0.59
7.0x EBITA 0 $ 1.53
</TABLE>
- --------------------
(1) The incremental proceeds would be taxable to holders of B Interests.
The holders of A Interests would be entitled to vote on the advisability
of liquidation although the vote required is a majority of the outstanding
A Interests and B Interests voting as a single class. As of July 18, 1997,
there were 11,099,573 A Interests outstanding (representing approximately
33.9% of the total Interests) and 21,675,746 B Interests outstanding
(representing approximately 66.1% of the total Interests). See "SPECIAL
FACTORS -- Alternatives to the Conversion," "-- Reasons to Convert to
Corporate Form" and "-- Consequences if Conversion is Not Approved."
Based on the foregoing, the General Partner believes that conversion to
corporate form is advantageous to the holders of B Interests.
The estimated effect upon the General Partner's Interest is shown in the
following table.
<TABLE>
<CAPTION>
GENERAL PARTNER INTEREST
Conversion to Corporate Form 1997 1998 1999 2000 2001 2002
- ---------------------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Reference Price per Common Share(1)(2) $6.28 $7.59 $9.49 $11.68 $14.02 $16.35
Derived Value of Common $25,120 $30,360 $37,960 $46,720 $56,080 $65,400
Stock Owned(3)(000)
Continuation as Master Limited Partnership
Taxable as a Corporation (000)
Derived Value of GP's Effective 1.99% $3,535 $4,183 $5,147 $5,927 $6,790 $7,817
Equity Interest(4)
Value of Management Fee (5) $26,640 $26,640 $26,640 $26,640 $26,640 $26,640
Total Derived Value of GP Interest $30,175 $30,823 $31,787 $32,567 $33,430 $34,457
Anticipated Cumulative Cash Receipts
Starting in 1998(6) -- $3,578 $7,156 $10,734 $14,312 $17,890
Liquidation (000)
Liquidation Value at 5.0x EBITA(7) $3,296 $36,57 $4,296 $5,016 $5,832 $6,768
Liquidation Value at 6.0x EBITA(7) $4,340 $4,784 $5,541 $6,384 $7,335 $8,417
Liquidation Value at 7.0x EBITA(7) $5,385 $5,910 $6,786 $7,753 $8,837 $10,066
Anticipated Cumulative Cash Receipts -- $3,578 $7,156 $10,734 $14,312 $17,890
Starting in 1998(6)
</TABLE>
- --------------------
(1) Assumes a P/E multiple of 14.6x net income after tax. See "-- Assumptions
Relating to Alternatives to the Conversion."
(2) Before 1-for-4 reverse stock split.
(3) Equals the pre-split reference price per share of Common Stock multiplied by
the 4,000,000 shares of Common Stock (before the 1-for-4 reverse stock split) to
be received by the partners of the General Partner in the Conversion.
(4) Based on business enterprise value derived from the reference prices of the
A and B Interests shown above.
(5) Represents the low end of the estimated value range for the Management Fee
proposed by the General Partner to the Special Committee at the commencement of
negotiations. The estimated value reflects a proposed capitalization factor of
8.0x the annual Management Fee of $3,330,000 paid to the General Partner based
on an analysis of the multiples of EBITA of comparable industrial distribution
companies. See "-- Assumptions Relating to Alternatives to the Conversion"
above.
(6) Includes Management Fee of $3,330 per year plus the General Partner's 1.99%
share of the Priority Return paid to holders of A Interests.
(7) Represents liquidation value of General Partner's 1.99% effective percentage
equity interest as of the end of each year shown.
The above table shows, subject to the caveats and assumptions set forth
above under " -- Assumptions Relating to Alternatives to the Conversion" and in
Exhibit D, the derived values for the GP Interest under the three alternatives.
For 2000 and thereafter, the derived values shown for the alternative of
converting to corporate form are more attractive than those shown under the
alternative of continuing as a master limited partnership, including the
anticipated cumulative cash receipts. Liquidation is the least attractive of the
three alternatives for the General Partner in all years.
However, in view of the substantial ownership of B Interests by affiliates
of the General Partner, it might become in the General Partner's economic
interest to reassess its alternatives if a liquidation alternative of more than
7.0x EBITA were to become available. In 1994 and 1995, the Partnership sold its
electrical business for 6.32x EBITA, its Dorman division for 13.42x EBITA, and
its Downey division for 12.23x EBITA. For all three units, the combined sales
price was 9.49x EBITA. As noted above however, the Board of Directors of
Lehman/SDI believes that there is substantial doubt at this time that it could
realize as much as 6.0x EBITA for all of its remaining business units within a
reasonable time frame.
For a more complete description of the impact of the three alternatives on
the holders of A Interests, holders of B Interests and the General Partner, see
"SPECIAL FACTORS -- Alternatives to the Conversion."
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 LPSub, a newly formed
subsidiary of the Partnership, in exchange for common stock of LPSub.
Current and former members of management who hold limited partnership
interests in 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 be distributed after two years if all distributions on the Trust
Preferred Securities then due have then been paid, and the Corporation
will contribute such limited partnership interests to SunSub A, a wholly
owned subsidiary. The Partnership and LPSub 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 contribute the limited partnership
interest in the Operating Partnership to SunSub A and the general
partnership interest in the General Partner to SunSub B, also 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
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 after 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 consideration for the exchange ratios for the exchange of partnership
interests, 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
consideration to be received by them in the Conversion. 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.
11
<PAGE>
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, plus
reimbursement of expenses. 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 in the past two
years 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 its partners will no longer have any liability for
the liabilities of SunSource after the Conversion. See "SPECIAL FACTORS --
Determinations of the Special Committee."
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") and the filing of a certificate of
trust with the Secretary of State of Delaware. 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 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 -- Risks 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
12
<PAGE>
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 first day
following the Effective Time (the "Accrual Date") 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 October 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 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 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 -- Risks 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 September 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 NYSE or on such other exchange as Trust Preferred Securities are then
listed. In the case of a Tax Event, the Corporation
13
<PAGE>
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; Shortening of Stated
Maturity."
The Junior Subordinated Debentures will be issued pursuant to an indenture
(the "Indenture"), between the Corporation and The Bank of New York, as trustee
(the "Indenture Trustee"). See "DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES."
The Junior Subordinated Debentures will mature on September 30, 2027; provided,
that in the case of a Tax Event, the Corporation will have the right in certain
circumstances to shorten the stated maturity of the Junior Subordinated
Debentures to a date not earlier than September 30, 2002 (and thereby cause the
Trust Preferred Securities to be redeemed on such earlier date). See
"DESCRIPTION OF TRUST PREFERRED SECURITIES -- Special Event Redemption or
Distribution; Shortening of Stated Maturity." 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, commencing on October 31, 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 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 -- Risks 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 September 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 the holders of 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
14
<PAGE>
applicable law, including with respect to the taxation of the Conversion, the
Partnership, 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. 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 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 alleged 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 cases have been
consolidated and an amended complaint was filed on April 16, 1997 which added
claims for breach of contract and breach of a covenant of good faith and fair
dealing. For a fuller description of the allegations of the amended complaint
see "SPECIAL FACTORS -- Limited Partner Litigation." The defendants believe the
complaints are without merit and intend to vigorously defend the action.
Voting at the Special Meeting
<TABLE>
<CAPTION>
<S> <C>
The Special Meeting......................... The Special Meeting will be held at The Warwick, 1701 Locust Street, Philadelphia,
Pennsylvania on Thursday, September 25, 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. August 4, 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>
15
<PAGE>
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 and cash 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 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. 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.
16
<PAGE>
Summary Financial Information of the Partnership
and Summary Unaudited Pro Forma Financial Information of the Corporation
(dollars in thousands, except for per unit and per share 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 historical financial information
set forth below for the Partnership as of and for the three months ended March
31, 1997 and 1996 is derived from unaudited financial statements included
elsewhere herein. The historical financial information set forth below for the
Partnership as of December 31, 1996 and 1995 and for each of the three years in
the period ended December 31, 1996 are derived from the audited financial
statements included elsewhere herein. The historical financial information set
forth below for the Partnership as of December 31, 1994, 1993 and 1992 and for
each of the two years in the period ended December 31, 1993 are derived from the
financial statements not included elsewhere herein. The summary unaudited pro
forma financial information gives effect to the Conversion as if it occurred at
the beginning of the period presented for the data on pro forma statements of
income and cash flow and as of the date presented with respect to the balance
sheet data. The pro forma financial information is also presented excluding
non-recurring income tax benefits. 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
------------------------------------------------------------------------------------------
Three Months Ended
March 31, Years Ended December 31,
----------------------- -------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---------- ----------- ---------- ---------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales $169,016 $154,892 $649,254 $628,935 $735,861 $655,707 $612,052
Income from operations 6,266 5,557 24,452 31,302 37,759 28,975 29,712
Gain on sale of divisions -- -- -- 20,644 3,523 -- --
Provision (benefit) for income taxes (28) (76) (1,140) 537 100 869 493
Income before extraordinary loss and
cumulative effect of change in
accounting principle 4,576 4,010 19,267 44,745 29,544 18,506 17,691
Extraordinary loss -- -- -- (629) -- -- (3,434)
Cumulative effect on prior years of
change in accounting principle -- -- -- -- -- -- 822
Net income $ 4,576 $ 4,010 $19,267 $44,116 $29,544 $18,506 $15,079
Earnings per limited partnership interest:
Income before extraordinary loss and
cumulative effect of change in
accounting principle
- Class A $ 0.27 $ 0.27 $ 1.10 $ 1.10 $ 1.10 $ 1.10 $ 1.10
- Class B $ 0.07 $ 0.04 $ 0.32 $ 1.48 $ 0.79 $ 0.28 $ 0.25
Extraordinary loss
- Class A -- -- -- -- -- -- --
- Class B -- -- -- $ (0.03) -- -- $ (0.16)
Cumulative effect on prior years of
change in accounting principle
- Class A -- -- -- -- -- -- --
- Class B -- -- -- -- -- -- $ 0.04
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31, Years Ended December 31,
----------------------- -------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---------- ----------- ---------- ---------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net income per limited partner interest:
- Class A $ 0.27 $ 0.27 $ 1.10 $ 1.10 $ 1.10 $ 1.10 $ 1.10
- Class B $ 0.07 $ 0.04 $ 0.32 $ 1.45 $ 0.79 $ 0.28 $ 0.13
Cash distributions declared per limited
partnership interest:
- Class A $ 0.27 $ 0.27 $ 1.10 $ 1.10 $ 1.10 $ 1.10 $ 1.10
- Class B $ 0.03 $ 0.06 $ 0.33 $ 0.67 $ 0.49 $ 0.27 $ 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
BALANCE SHEET DATA
(AT MARCH 31 AND
DECEMBER 31):
Cash and cash equivalents $ 3,096 $ 633 $ 1,666 $ 5,900 $ 4,903 $ 1,327 $ 745
Total assets 276,039 253,950 262,555 254,591 266,186 273,493 261,588
Short-term debt financing $26,395 6,395 6,395 6,395 19,357 6,319 6,319
Long-term debt and capitalized lease
obligations 58,186 67,934 69,043 63,934 74,781 104,185 115,503
Total liabilities 180,924 159,287 167,936 159,648 186,967 200,611 189,013
General partner capital 969 959 960 963 791 729 726
Limited partners' capital:
Class A 67,642 67,642 67,642 67,642 67,642 67,642 67,642
Class B 29,868 28,869 29,040 29,252 12,300 6,025 5,721
Class B held in treasury (1,514) (1,514) (1,514) (1,514) (1,514) (1,514) (1,514)
Cumulative foreign translation
adjustment (1,850) (1,293) (1,509) (1,400) (1,338) (694) (254)
Total partners' capital 95,115 94,633 94,619 94,913 79,219 72,882 72,575
OTHER DATA:
Ratio of earnings to fixed charges 1.13(i) .85 .91(i) 1.13 1.25 1.17 1.11
Cash distributions, excluding
distributions on capital gains $ 3,690 $ 4,886 $19,982 $20,745 $20,357 $14,940 $15,384
Cash provided by (used for) operating
activities (2,081) 2,088 23,298 17,050 17,704 23,571 27,056
Net increase (decrease) in cash and
cash equivalents 1,430 (5,267) (4,234) 997 3,576 582 69
Net book value per Class A interest 6.09 6.09 6.09 6.09 6.09 6.09 6.09
Net book value per Class B interest 1.22 1.20 1.20 1.22 .50 .21 .19
(i) Excluding non-recurring items recorded in 1997 and 1996, the ratio is 1.20 and 1.21, respectively.
</TABLE>
18
<PAGE>
C O R P O R A T I O N - P R O F O R M A
-----------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, 1997 December 31, 1996
------------------ -----------------
<S> <C> <C>
INCOME STATEMENT DATA:
Net sales $169,016 $649,254
Income from operations 7,344 29,562
Distribution on guaranteed preferred beneficial
interest in the Corporation's junior
subordinated debentures (3,057) (12,232)
Income before income taxes 2,297 9,928
Provision for income taxes 1,173 4,701
Net income 1,124 5,227
Net income (loss) after transaction expenses
of the conversion (2,298) 1,805
Net income per common share $ .18 $ .81(ii)
Net income (loss) after transaction expenses
per common share $ (.36) $ .28(ii)
Weighted average number of
outstanding common shares 6,418,936 6,418,936
(ii) Including non-recurring restructuring charges of $5,950 or $0.56 per common share on an after-tax basis.
As of
BALANCE SHEET DATA: March 31, 1997
--------------
Cash and cash equivalents $ --
Total assets 295,835
Senior Notes 60,000
Bank revolving credit 45,415
Total liabilities 197,588
Trust preferred securities 105,446
Stockholders' deficit (7,399)
OTHER DATA: Three Months Ended Year Ended
March 31, 1997 December 31, 1996
------------------ -----------------
Ratio of earnings to fixed charges 1.41 1.45 (iii)
Cash provided by (used for) operations $ (5,409) $ 8,365
Net increase (decrease) in cash and cash
equivalents $ -- $ --
Book value per common share (1.16)
(iii) Excluding non-recurring items recorded in 1996, the ratio is 1.75.
</TABLE>
Recent Developments
Summary financial results for the second quarter of 1997 compared to the
second quarter of 1996 and for the first six months of 1997 compared to the
first six months of 1996 are as follows:
<TABLE>
<CAPTION>
(dollars in thousands except per Interest amounts)
Quarter Ended June 30 Six Months Ended June 30
--------------------- ------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $181,643 $167,500 $350,659 $322,392
Net Income $9,193(1) $8,313 $13,769(1) $12,323
Net Income Per Class B
Limited Partnership Interest $0.28 $0.24 $0.35 $0.28
</TABLE>
- ---------------------
(1) Includes non-recurring charge for transaction costs related to the proposed
Conversion of $275 for the second quarter of 1997 and $625 for the first six
months of 997.
No material trends events or transactions which arose after March 31, 1997
would affect the financial condition or results of operations of the
Partnership, as described herein.
19
<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, 1996 and the
other documents incorporated herein by reference, and should give particular
attention to the following considerations.
20
<PAGE>
- --------------------------------------------------------------------------------
RISKS OF HOLDERS OF A INTERESTS
- --------------------------------------------------------------------------------
Conflicts of Interest
The proposed Conversion necessitates the allocation of the total value of the
Partnership among the holders of the A Interests, the holders of the B Interests
and the General Partner. It would be in the General Partner's interest to have
its partners receive maximum consideration, undertake the least possible
responsibilities and assume minimum risk, all at the limited partners'
expense. Also, it would be in the interest of the holders of A Interests to
receive the maximum consideration for their A Interests, at the expense of the
General Partner and the holders of the B Interests.
No Independent Representation
Holders of A Interests 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.
Optional Redemption
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 September 30, 2002. In that
case, the Trust Preferred Securities will be redeemed in the same amount.
Reduction in Liquidation Preference
The liquidation preference for 0.38 of a Trust Preferred Security will be $9.50
compared to a liquidation preference for an A Interest of $10.00. However,
holders of A Interests will also receive a cash payment of $1.30.
Special Event Redemption or Distribution; Shortening of Stated Maturity
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.
<PAGE>
- --------------------------------------------------------------------------------
RISKS TO HOLDERS OF B INTERESTS
- --------------------------------------------------------------------------------
Conflicts of Interest
The proposed Conversion necessitates the allocation of the total value of the
Partnership among the holders of the B Interests, the holders of the A Interests
and the General Partner. It would be in the General Partner's interest to have
its partners receive maximum consideration, undertake the least possible
responsibilities and assume minimum risk, all the limited partners' expense.
Also, it would be in the interest of the holders of B Interests to receive the
maximum consideration for their B Interests, at the expense of the General
Partner and the holders of the A Interests.
No Independent Representation
Holders of B Interests 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.
Loss of Contractual Right to Distributions
The Partnership Agreement requires the Partnership to distribute Cash Available
for Distribution 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, holders of B Interests will lose this contractual right.
The Board of Directors of the Corporation will have complete discretion as to
the distribution of dividends on the Common Stock. The payment of dividends
will be at the discretion of the Corporation's Board of Directors and will
depend, among other things, on earnings, financial condition, capital
requirements, availability of acquisiton candidates, level of indebtedness,
contractual restrictions with respect to the payment of dividends and other
factors that the Corporation's Board of Directors deems relevant. If
distributions on the Trust Preferred Securities are in arrears, the Board of
Directors will not be able to declare and pay dividends on the Common Stock.
Certain Delaware Corporate Law Considerations
The Corporation's unaudited pro forma balance sheet at March 31, 1997 reflects
a stockholders' deficit of approximately $7.4 million and a negative net book
value per common share of $1.16. Counsel has advised the Partnership and the
Corporation that under Delaware law, dividends or
21
<PAGE>
- --------------------------------------------------------------------------------
RISKS TO HOLDERS OF A INTERESTS
- --------------------------------------------------------------------------------
In the case of a Tax Event, the Corporation will have the right in certain
circumstances to shorten the stated maturity of the Junior Subordinated
Debentures to a date not earlier than September 30, 2002 (and thereby cause the
Trust Preferred Securities to be redeemed on such earlier date) if such Tax
Event would continue even after terminating the Trust and distributing the
Junior Subordinated Debentures in exchange for the Trust Preferred Securities.
See "DESCRIPTION OF TRUST PREFERRED SECURITIES -- Special Event Redemption or
Distribution; Shortening of Stated Maturity." If the Corporation exercises such
right, there can be no assurance that the shortening of the maturity of the
Junior Subordinated Debentures will not have an effect on the market price of
the Trust Preferred Securities or the Junior Subordinated Debentures that may be
distributed in exchange for the Trust Preferred Securities.
In addition, 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 plus, in each case, accrued and
unpaid distributions to the date of redemption. There can be no assurance as to
the market prices 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 receive on dissolution and liquidation of the
Trust, may trade at a discount. See "DESCRIPTION OF TRUST PREFERRED SECURITIES
- -- Special Event Redemption or Distribution; Shortening of Stated Maturity" and
"DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES -- General."
Under current United States federal income tax law and interpretations 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
<PAGE>
- --------------------------------------------------------------------------------
RISKS TO HOLDERS OF B INTERESTS
- --------------------------------------------------------------------------------
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.
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 ."
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. Income earned by
partnerships generally is subject to a single layer of tax. For taxable periods
beginning after December 31, 1997, however, the tax benefits of being taxed as a
partnership are reduced for existing publicly traded partnerships. See "CERTAIN
FEDERAL INCOME TAX CONSEQUENCES."
The Conversion will be a taxable transaction to holders of B Interests also
holding A Interests, who will recognize gain equal to the difference between the
cash and the fair market value of the Trust Preferred Securities and Common
Stock received in the Conversion and their aggregate tax basis in the A
Interests and B Interests, which gain will likely be recognized only to the
extent of the fair market value of the Trust Preferred Securities and the cash
received in the Conversion. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES."
22
<PAGE>
- --------------------------------------------------------------------------------
RISKS TO HOLDERS OF A INTERESTS
- --------------------------------------------------------------------------------
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."
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RISKS TO HOLDERS OF B INTERESTS
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recognize gain equal to the difference between the cash and the fair market
value of the Trust Preferred Securities and Common Stock received in the
Conversion and their aggregate tax basis in the A Interests and B Interests,
which gain will likely be recognized only to the extent of the fair market value
of the Trust Preferred Securities and the cash received in the Conversion. See
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES."
Uncertainty Regarding Market Price of Common Stock; Possible Reduction Due to
Sales by Lehman Brothers or Management
At present there is no trading market for the Common Stock. Application has been
made to list the Common Stock on the NYSE under the trading symbol SDPB. 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 B 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 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. 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.
Lehman Brothers Capital Partners I, L.P., an affiliate of Lehman/SDI holding
5,788,124 B Interests, may distribute to its partners the shares of Common Stock
it receives in the Merger (a majority of which shares would be freely tradeable
immediately after such distribution). This might tend to depress the market
price of the securities. See "RESALES OF SECURITIES -- Resales by Lehman
Brothers and Management." 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 the issuance of
unregistered shares in connection with acquisition.
The closing price on the NYSE on August 11, 1997 for B Interests was $5 5/16.
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
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RISKS TO HOLDERS OF A INTERESTS
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Efforts have been made in the past to change the taxability under federal income
tax law of securities similar to the Junior Subordinated Debentures and the
Trust Preferred Securities. Such efforts have not been successful to date. There
can be no assurance that future legislative proposals will not adversely affect
the ability of the Corporation to deduct interest on the Junior Subordinated
Debentures or otherwise affect the tax treatment described herein.
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.
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.
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
<PAGE>
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RISKS TO HOLDERS OF B INTERESTS
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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.
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 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 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.
24
<PAGE>
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RISKS TO HOLDERS OF A INTERESTS
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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."
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.
<PAGE>
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RISKS TO HOLDERS OF B INTERESTS
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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."
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
their liability, if any, 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.
Payments Under Deferred Compensation Plans
Certain members of management will receive accelerated payments under certain
deferred compensation plans of the Operating Partnership. See "MANAGEMENT --
Change in Control Arrangements."
Transaction Costs
Transaction costs of approximately $4,500,000 will be incurred by the
Partnership, of which $3,900,000 will be paid by the Partnership whether or not
the Conversion is completed.
Change in Ownership Rights
As a result of the Conversion, holders of B Interests will lose certain rights
associated with their ownership of B Interests and will acquire certain rights
associated with their ownership of 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."
25
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RISKS TO HOLDERS OF A INTERESTS
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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."
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 and the Declaration provide 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.
<PAGE>
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RISKS TO HOLDERS OF B INTERESTS
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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.
26
<PAGE>
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RISKS TO HOLDERS OF A INTERESTS
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Adverse Tax Implications
The Conversion will be 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
who will recognize gain equal to the difference between the cash and the fair
market value of the Trust Preferred Securities and Common Stock received in the
Conversion and their aggregate tax basis in the A Interests and B Interests,
which gain will likely be recognized only to the extent of the fair market value
of the Trust Preferred Securities and the cash received in the Conversion.
See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES."
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, to the fullest extent permitted by law, institute legal
proceedings directly against the Corporation (a "Direct Action") 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 connection with such Direct Action, the Corporation will be subrogated to the
rights of such holder of Trust Preferred Securities 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
<PAGE>
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RISKS TO HOLDERS OF B INTERESTS
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27
<PAGE>
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RISKS TO HOLDERS OF A INTERESTS
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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.
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.
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.
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
<PAGE>
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RISKS TO HOLDERS OF B INTERESTS
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28
<PAGE>
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RISKS TO HOLDERS OF A INTERESTS
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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
At present there is no trading market for the Trust Preferred Securities.
Application has been made to list these securities on the NYSE under the trading
symbol SDP. 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 price of the securities.
The Trust Preferred Securities may trade at prices that do not fully reflect
the value of accrued but unpaid interest with respect to the underlying Junior
Subordinated Debentures. A holder of Trust Preferred Securities that disposes of
its Trust Preferred Securities between record dates for payments of
distributions (and consequently does not receive a distribution from the Trust
for the period prior to such disposition) will nevertheless be required to
include as ordinary income, accrued but unpaid interest on the Junior
Subordinated Debentures through the date of disposition. Such holder will
recognize a capital loss to the extent the amount realized with respect to the
Trust Preferred Securities is less than its adjusted tax basis. Subject to
certain limited exceptions, capital losses cannot be applied to offset ordinary
income for United States federal income tax purposes. See "CERTAIN FEDERAL
INCOME TAX CONSEQUENCES."
The closing price on the NYSE on August 11, 1997 for A Interests was $11 15/16.
No Fiduciary Duties
The General Partner currently owes fiduciary duties to the limited partners. See
"COMPARISON OF INTERESTS AND SECURITIES TO BE ISSUED -- Fiduciary Duties". After
the Conversion the directors of the Corporation will not have fiduciary duties
to the holders of the Trust Preferred Securities.
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
their liability, if any, 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.
<PAGE>
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RISKS TO HOLDERS OF B INTERESTS
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29
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RISKS TO HOLDERS OF A INTERESTS
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Payments Under Deferred Compensation Plans
Certain members of management will receive accelerated payments under certain
deferred compensation plans of the Operating Partnership. See "MANAGEMENT --
Change in Control Arrangements."
Transaction Costs
Transaction costs of approximately $4,500,000 will be incurred by the
Partnership, of which $3,900,000 will be paid by the Partnership whether or not
the Conversion is completed.
Change in Ownership Rights
As a result of the Conversion, holders of A Interests will lose certain rights
associated with their ownership of A Interests and will acquire certain rights
associated with their ownership of Trust Preferred Securities. 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."
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
market conditions.
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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 August 4, 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)
30
<PAGE>
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 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.
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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 ("MLPs"), 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. This meant that, at
the outset, 38.75% (125% x 31%, the then maximum tax rate) 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 1990s 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.
<PAGE>
On September 13, 1993, the Partnership publicly announced that the Board
of Directors of Lehman/SDI 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 of Directors of
Lehman/SDI 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 of Directors of Lehman/SDI
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.
32
<PAGE>
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 42.3% at December 31, 1995 compared with 54.5% 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 of Directors of Lehman/SDI
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 of Directors of Lehman/SDI 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 of Directors of Lehman/SDI 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
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. 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 of the
Partnership as of and for the three years ended December 31, 1996. The
Partnership suspended the payment of monthly advance B Tax Distributions
effective January 1, 1997, but resumed the payments in April because it did not
expect to effect the Conversion until the summer of 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.
33
<PAGE>
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 of the Partnership as of and for the
three years ended December 31, 1996.
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.
A 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 tax benefit will end under current tax law on
December 31, 1997 unless the Partnership elects to be subject to a 3.5% tax on
gross income or other bills pending in Congress to eliminate the December 31,
1997 deadline were to be adopted. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES
- -- Partnership Status and Taxation of Partnership." The Partnership will not
make the tax election since, in addition to payment by the Partnership of tax on
3.5% of its gross income, the partners of the Partnership would remain subject
to federal income tax on their pro rata share of the Partnership taxable income
and the continued payment of the B Tax Distribution, together with the 3.5%
gross income tax, would result in a significant erosion of the Partnership's
cash flow. Under current tax law, if the Corporation does not elect to pay the
3.5% tax on gross income, the Partnership will be taxed as a corporation after
December 31, 1997 so that the Partnership will 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 onerous gross income tax election
or the potential 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. The
Corporation will be subject to taxation at the corporate level and individual
stockholders will be subject to tax on any dividends received, but payments in
respect of the Junior Subordinated Debentures will be deductible by the
Corporation for income tax purposes. See "-- Consequences if Conversion is Not
Approved."
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 while 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 the amount by which the liquidation
proceeds received by the stockholders exceeded their basis in the shares.
As set forth above under " -- Background of the Conversion," management
made a presentation to the Board of Directors of Lehman/SDI on June 12, 1996
concerning alternatives to the Conversion. The Board of Directors of Lehman/SDI
again examined the alternatives on June 18, 1997 during a special meeting, using
as the basis for its analysis the management projections furnished to Smith
Barney. See Management Projections included as Exhibit D to this Proxy
Statement/Prospectus, noting particularly the "Qualifications with Respect to
Projections." The Board of Directors of Lehman/SDI considered the estimated
impact upon the limited partners and the General Partner of three alternatives:
1) conversion to corporate form; 2) continuation as a master limited partnership
taxable as a corporation; and 3) liquidation.
The following tables set forth management's estimates with respect to
values that would be received under the three alternatives. These estimates
should not be relied on as indicators of the actual values of the Interests or
the consideration to be received in respect of Interests in the Conversion. The
estimates are based on the following assumptions.
34
<PAGE>
Assumptions Relating to Alternatives to the Conversion
A Interests
The reference price for the conversion to corporate form alternative was
determined by discounting the expected monthly cash flows of the Trust Preferred
Securities by a rate that was based on current Treasury Strip Yields for the
same maturities plus an appropriate credit spread as adjusted for the
substantial probability of a call at par five years from the date of the
Conversion.
The reference price for the continuation as a master limited partnership
alternative was determined by discounting the expected A Interest cash flows in
perpetuity by a rate that was based upon current Treasury Forward rates plus the
mean of the historical A Interests credit spread.
B Interests
The reference prices for both the conversion to corporate form and the
continuation as a master limited partnership alternatives were determined by
applying a price/earnings ("P/E") ratio to the appropriate projected net income
figure in each case. The projected P/E ratio was determined by analyzing the
Partnership's historical last twelve months' P/E ratio on a pro forma
tax-adjusted basis, and comparing the results (over five-year and
two-and-a-half-year periods) to the similar ratios of the Partnership's
comparable industrial distribution corporations comprised of Barnes Group, Inc.,
Applied Industrial Technologies, Inc. (formerly Bearings, Inc.), Genuine Parts
Company, W.W. Grainger, Hughes Supply, Inc., Lawson Products, Inc. and NCH
Corporation. The results were compared to comparable industrial distribution
corporations because there are no industrial distribution master limited
partnerships comparable to the Partnership. It was determined that the
Partnership historically traded at a P/E ratio discount of 18% to 25% to the
comparables. The discount was then applied to the mean of the comparables
resulting in a P/E ratio for the Partnership of 11x to 12x. For the 17 months
between January 1, 1996 and June 1, 1997, the P/E ratio averaged 12.0x. The mean
of the P/E ratio for comparable industrial distribution corporations as
described herein was 14.6x, which was utilized to determine the reference price
in the conversion to corporate form alternative. While the General Partner
believes that the Conversion will lead to a reduction in the market discount,
there can be no assurance that this will occur.
General Partner Interest
The value of the Management Fee used for the continuation of the master
limited partnership alternative was determined by applying a proposed
capitalization factor of 8.0x the annual Management Fee of $3,330,000 paid to
the General Partner. The proposed capitalization factor was based on an analysis
of trading multiples of earnings before interest, taxes and amortization (EBITA)
of comparable industrial distribution corporations comprised of Barnes Group,
Inc., Applied Industrial Technologies, Inc. (formerly Bearings, Inc.), Genuine
Parts Company, W.W. Grainger, Hughes Supply, Inc., Lawson Products, Inc. and NCH
Corporation. Comparable industrial distribution corporations were used because
there are no distribution master limited partnerships comparable to the
Partnership. The trading multiples of EBITA were used to determine the
capitalization factor since the Management Fee is a deduction from the
Partnership's EBITA. The mean of the multiples of EBITA for the comparable
industrial distribution corporations as described herein was 8.5x based on the
last twelve months financial results publicly available at the commencement of
negotiations. Based on the 8.5x mean, the General Partner proposed a range of
values of 8.0x to 9.0x the Management Fee to the Special Committee at the
commencement of negotiations. The value in the table represents the low end of
this range.
The estimated effect of the three alternatives upon the A Interests is
shown in the following table. The table assumes for purposes of comparison that
the $1.10 distributions start in 1998.
35
<PAGE>
<TABLE>
<CAPTION>
PER A INTEREST
Conversion to Corporate Form 1997 1998 1999 2000 2001 2002
- ---------------------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Reference Price $10.78 $10.65 $10.47 $10.29 $10.09 $ 9.86
Proceeds at First Call Date -- -- -- -- -- $ 9.50
Anticipated Cumulative Cash Receipts(1) $ 1.30 $ 2.40 $ 3.50 $ 4.60 $ 5.70 $ 6.80
Continuation as Master Limited Partnership
Taxable as a Corporation
Reference Price $11.00 $11.00 $10.98 $10.96 $10.92 $10.90
Anticipated Cumulative Cash Receipts
Starting in 1998 -- $ 1.10 $ 2.20 $ 3.30 $ 4.40 $ 5.50
Liquidation
Liquidation Value $10.00 $10.00 $10.00 $10.00 $10.00 $10.00
Anticipated Cumulative Cash Receipts
Starting in 1998 -- $ 1.10 $ 2.20 $ 3.30 $ 4.40 $ 5.50
</TABLE>
- --------------------
(1) Includes $1.30 in cash received at the time of Conversion.
The above table shows three estimated outcomes for a current holder of an
A Interest. For example, if a current A Interest holder were to sell the
investment at the end of 1998:
o If the Conversion takes place, an A Interest holder is estimated to receive
$10.65 from the sale of 0.38 of a Trust Preferred Security, plus $1.30 in
cash at the time of Conversion, plus $1.10 in distributions for 1998. Total
cash received is estimated to be $13.05.
o If the Conversion does not take place, an A interest holder is estimated to
receive $11.00 from the sale of the A Interest, plus $1.10 of Priority
Return for 1998. Total cash received is estimated to be $12.10.
o If the Partnership were to be liquidated at the end of 1998, the A Interest
holder would receive $10.00 in liquidation preference plus $1.10 of
Priority Return for 1998. Total cash is estimated to be $11.10.
The General Partner believes the estimated values shown in the above table
support the conclusion that the proposed Conversion is advantageous to the
holders of A Interests.
The estimated effect upon the holders of B Interests is shown in the
following table:
36
<PAGE>
<TABLE>
<CAPTION>
PER B INTEREST
Conversion to Corporate Form 1997 1998 1999 2000 2001 2002
- ---------------------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Reference Price(1)(2) $6.28 $7.59 $9.49 $11.68 $14.02 $16.35
Continuation as Master Limited Partnership
Taxable as a Corporation
Reference Price(3) $2.40 $3.87 $6.07 $7.85 $ 9.84 $12.18
Liquidation
Liquidation Value at 5.0x EBITA $2.73 $3.22 $4.09 $5.08 $ 6.19 $ 7.47
Liquidation Value at 6.0x EBITA $4.15 $4.76 $5.79 $6.95 $ 8.24 $ 9.72
Liquidation Value at 7.0x EBITA $5.58 $6.30 $7.50 $8.82 $10.30 $11.98
</TABLE>
- --------------------
(1) Assumes a P/E multiple of 14.6x net income after tax. See "-- Assumptions
Relating to Alternatives to the Conversion."
(2) Before the 1-for-4 reverse stock split.
(3) Assumes a P/E multiple of 12.0x net income after tax. See "-- Assumptions
Relating to Alternatives to the Conversion."
The above table shows, subject to the assumptions and caveats set forth
above under " -- Assumptions Relating to Alternatives to the Conversion" and in
Exhibit D, the derived outcomes for a current holder of B Interests under the
three alternatives. The derived values shown under the conversion to corporate
form alternative are significantly better than those shown under the alternative
of continuing as a master limited partnership in all years. With respect to
liquidation, the 5.0x EBITA case is inferior to remaining as a master limited
partnership in all years except 1997. Liquidation at 6.0x EBITA is also inferior
to remaining as a master limited partnership in all years except 1997 and 1998.
However, the 1997 and 1998 liquidation values of $4.15 and $4.76, respectively,
at 6.0x EBITA are below the market price of $5.00 at the time of the meeting of
the Board of Directors of Lehman/SDI on June 18, 1997. Liquidation at 7.0x EBITA
is superior in all years shown relative to the alternative of continuing as a
master limited partnership except 2002, but inferior to the alternative of
converting to corporate form for all years.
The liquidation values derived above were based upon the Management
Projections set forth in Exhibit D, and are subject to all of the assumptions
and caveats described therein. The EBITA figures used to calculate liquidation
values for each year are approximately $13 million higher than the EBITA figures
shown in Exhibit D due to the elimination of the Management Fee and the
administrative expenses of SunSource's home office organization.
The liquidation values shown above also reflect the payment of income taxes
by the Partnership on the gain from sale of assets upon liquidation as required
by present tax law, since the Partnership would be taxed as a corporation after
December 31, 1997 unless the election to pay the 3.5% tax on gross income were
made. The combined effective income tax rate for federal, state and local income
taxes is approximately 40%. If the Partnership were to elect to pay the 3.5%
gross income tax and to remain taxable as a partnership, the proceeds to holders
of B Interests would increase by the amount of income taxes not paid at the
Partnership level. The increase (decrease) in proceeds due to potential
elimination of Partnership income taxes upon liquidation are shown below:
37
<PAGE>
<TABLE>
<CAPTION>
Taxes Paid per B Interest on Liquidation at End of 1997
Liquidation Value At Taxable as Partnership Taxable as Corporation (1)
-------------------- ---------------------- --------------------------
<S> <C> <C>
5.0x EBITA 0 $ (0.36)
6.0x EBITA 0 $ 0.59
7.0x EBITA 0 $ 1.53
</TABLE>
- --------------------
(1) The incremental proceeds would be taxable to holders of B Interests.
It should be noted that pursuant to the Taxpayer Relief Act of 1997, the
tax treatment of master limited partnerships has been adjusted for taxable
periods beginning after December 31, 1997. For such taxable periods, existing
publicly traded partnerships have the option of (i) being taxed as corporations
and (ii) being taxed as partnerships by electing to be subject to tax at the
rate of 3.5% on their gross income. The General Partner believes the principal
advantage afforded by the recent tax law change is the elimination of
Partnership level income tax upon liquidation. The General Partner believes
that, even considering the election for existing publicly traded partnerships
provided by the Taxpayer Relief Act of 1997 (to pay tax of 3.5% of gross income
and remain subject to tax as a partnership as described above under) it is still
desirable to convert to corporate form for the reasons set forth under " --
Reasons to Convert to Corporate Form." See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES -- Partnership Status and Taxation of the Partnership."
In discussing the liquidation alternative, the Board of Directors of
Lehman/SDI noted that previous efforts by the Partnership's investment bankers
in 1994 and 1995 had resulted neither in a bid for the entire partnership nor
bids as high as 6.0x 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 6.0x EBITA for all of its business
units within a reasonable time frame.
Liquidation requires approval of a majority of all the A Interests and all
the B Interests outstanding, voting together as a single class. Because there
are 11.1 million A Interests and 21.7 million B Interests outstanding, the
holders of B Interests would be entitled to cast votes equal to approximately
66.1% of the total votes entitled to be cast on a vote on liquidation if a
liquidation value superior to the alternative of continuing as a master limited
partnership were to become available. In any vote on liquidation, affiliates of
the General Partner, as substantial holders of B Interests, would be entitled to
cast approximately 46.3% of the total votes entitled to be cast. For an analysis
of the impact of liquidation on the General Partner, see the "General Partner
Interest" table below.
Based on the foregoing, the General Partner believes that conversion to
corporate form is advantageous to the holders of B Interests.
The estimated effect upon the General Partner's Interest is shown in the
following table.
38
<PAGE>
<TABLE>
<CAPTION>
GENERAL PARTNER INTEREST
Conversion to Corporate Form 1997 1998 1999 2000 2001 2002
- ---------------------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Reference Price per Common Share(1)(2) $6.28 $7.59 $9.49 $11.68 $14.02 $16.35
Derived Value of Common $25,120 $30,360 $37,960 $46,720 $56,080 $65,400
Stock Owned(3)(000)
Continuation as Master Limited Partnership
Taxable as a Corporation (000)
- ------------------------------------------
Derived Value of GP's Effective 1.99% $3,535 $4,183 $5,147 $5,927 $6,790 $7,817
Equity Interest(4)
Value of Management Fee (5) $26,640 $26,640 $26,640 $26,640 $26,640 $26,640
Total Derived Value of GP Interest $30,175 $30,823 $31,787 $32,567 $33,430 $34,457
Anticipated Cumulative Cash Receipts
Starting in 1998(6) -- $3,578 $7,156 $10,734 $14,312 $17,890
Liquidation (000)
- -----------------
Liquidation Value at 5.0x EBITA(7) $3,296 $36,57 $4,296 $5,016 $5,832 $6,768
Liquidation Value at 6.0x EBITA(7) $4,340 $4,784 $5,541 $6,384 $7,335 $8,417
Liquidation Value at 7.0x EBITA(7) $5,385 $5,910 $6,786 $7,753 $8,837 $10,066
Anticipated Cumulative Cash Receipts -- $3,578 $7,156 $10,734 $14,312 $17,890
Starting in 1998(6)
</TABLE>
- --------------------
(1) Assumes a P/E multiple of 14.6x net income after tax. See "-- Assumptions
Relating to Alternatives to the Conversion."
(2) Before 1-for-4 reverse stock split.
(3) Equals the pre-split reference price per share of Common Stock multiplied by
the 4,000,000 shares of Common Stock (before the 1-for-4 reverse stock split) to
be received by the partners of the General Partner in the Conversion.
(4) Based on business enterprise value derived from the reference prices of the
A and B Interests shown above.
(5) Represents the low end of the estimated value range for the Management Fee
proposed by the General Partner to the Special Committee at the commencement of
negotiations. The estimated value reflects a proposed capitalization factor of
8.0x the annual Management Fee of $3,330,000 paid to the General Partner based
on an analysis of the multiples of EBITA of comparable industrial distribution
corporations. See " -- Assumptions Relating to Alternatives to the Conversion"
above.
(6) Includes Management Fee of $3,330 per year plus the General Partner's 1.99%
share of the Priority Return paid to holders of A Interests.
(7) Represents liquidation value of General Partner's 1.99% effective percentage
equity interest as of the end of each year shown.
The above table shows, subject to the caveats and assumptions set forth
above under " -- Assumptions Relating to Alternatives to the Conversion" and in
Exhibit D, the derived values for the GP Interest under the three alternatives.
For 2000 and thereafter, the derived values shown for the alternative of
converting to corporate form are more attractive than those shown under the
alternative of continuing as a master limited partnership, including the
anticipated cumulative cash receipts. Liquidation is the least attractive of the
three alternatives for the General Partner in all years.
However, in view of the substantial ownership of B Interests by affiliates
of the General Partner, it might become in the General Partner's economic
interest to reassess its alternatives if a liquidation alternative of more than
7.0x EBITA were to become available. In 1994 and 1995, the Partnership sold its
electrical business for 6.32x EBITA, its Dorman division for 13.42x EBITA, and
its Downey division for 12.23x EBITA. For all three units, the combined sales
price was 9.49x EBITA. As noted above however, the Board of Directors of
Lehman/SDI believes that there is substantial doubt at this time that it could
realize as much as 6.0x EBITA for all of its remaining business units within a
reasonable time frame.
39
<PAGE>
In addition, there are a number of serious risks in pursuing a strategy
of complete liquidation. A risk in the liquidation proposal is the amount of
time it could take to dispose of multiple businesses on satisfactory terms.
Management is 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.
The failure to sell all units would prevent the Partnership from
liquidating. In that event, the requirement to pay the A Interest Priority
Return would place an onerous cash burden upon the remaining operating units.
The Board of Directors of Lehman/SDI 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.
The Board of Directors of Lehman/SDI 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 above, the Board of Directors of
Lehman/SDI 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 of Directors of Lehman/SDI also rejected the liquidation
alternative because liquidation would not provide the holders of B Interests and
the General Partner with any continuing equity interest in the Partnership and
would be unlikely to be accomplished on a tax-advantaged basis. 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 holders of B
Interests 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
a party to any agreement regarding a significant transaction involving the
Partnership or SunSource's business, but is pursuing discussions with a number
of prospective sellers of businesses.
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. All of these reasons are for the benefit of the holders of B
Interests. Other than as described above under " -- Alternatives to the
Conversion," the primary benefit of the Conversion to holders of A Interests is
the simplification of tax reporting, although the General Partner believes that
several of the benefits listed below will increase the likelihood of timely
distributions on the Trust Preferred Securities.
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
40
<PAGE>
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 be reduced
for years beginning after December 31, 1997. For such taxable periods,
existing publicly traded partnerships have the option of (i) being taxed as
corporations or (ii) being taxed as partnerships by electing to be subject to
tax at the rate of 3.5% on their gross income. Although the Corporation will
also have to pay tax on its income, the Conversion will allow SunSource to
conserve additional cash 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. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES -- Partnership Status
and Taxation of the Partnership."
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, but is pursuing discussions with a number of prospective
sellers of businesses. These discussions may lead to acquisitions, one of
which may be material.
o Greater Access to Equity Markets. The General Partner expects that the
Corporation will have greater access, after the expiration of the nine-month
lock-up period, 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. The Corporation's access to equity capital
markets will be limited during the period from the date of the Conversion to
the earlier of an initial secondary offering of shares held by Lehman Brothers
and management and the nine-month anniversary of the Conversion. See "RESALE
OF SECURITIES -- Resales by Lehman Brothers and Management."
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 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:
The Partnership will contribute its limited partnership interest in the
Operating Partnership and Lehman/SDI will contribute its general partnership
interest in the General Partner to LPSub in exchange for common stock of LPSub.
Certain current and former 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 be distributed after two years if all
distributions on the Trust Preferred Securities have then been paid, and the
Corporation will contribute such limited partnership interests to SunSub A, a
wholly owned subsidiary. The Partnership and LPSub 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 contribute the limited partnership interests in the Operating
Partnership to SunSub A and the general partnership interest in the General
Partner to SunSub B, also a wholly owned subsidiary.
41
<PAGE>
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.
The Operating Partnership will be managed by the General Partner, whose
general partner will be SunSub 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, LPSub, Lehman/SDI and the limited
partners of the General Partner (the "Conversion Agreement").
As set forth under "SPECIAL FACTORS --Limited Partner Litigation," the
amended complaint filed in the Delaware Chancery Court alleges that the
Conversion is in breach of the provisions of the partnership agreements
governing the Partnership and the Operating Partnership. While the General
Partner disagrees strongly with these allegations, the Conversion Agreement
provides that, to the extent any of the terms of the Conversion Agreement may be
inconsistent with any of the provisions of the partnership agreements, the
adoption of the Conversion Proposal by the limited partners and the General
Partner shall be deemed to be (i) an amendment and waiver of any such provisions
in order to effectuate the Conversion and (ii) a ratification and approval of
the General Partner's actions in connection with the adoption and implementation
of the Conversion Agreement. Amendments to the partnership agreements are
permitted with the approval of a majority of the unaffiliated holders of A
Interests and B Interests voting as a single class so that approval by the
unaffiliated holders of the Conversion Proposal as set forth in this Proxy
Statement/Prospectus will satisfy that requirement. Such vote is also sufficient
to approve the above-referenced ratification and approval of the General
Partner's actions, since under the Partnership Agreement of the Partnership, the
affirmative vote of unaffiliated limited partners owning more than 50% of the
Class A and Class B Interests voting on the matter may ratify and approve any
action taken by the General Partner.
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 September 30, 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 the holders of 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 Partnership, the Corporation
or the Trust Preferred Securities.
Indemnification. Pursuant to the terms of the Conversion Agreement, the
Partnership prior to the Effective Time, and the Corporation after the Effective
Time, agree to indemnify officers, directors, partners, stockholders, agents or
fiduciaries of the Partnership, the Operating Partnership, the General Partner,
Lehman/SDI or the Corporation and their respective affiliates (collectively,
"Indemnified Parties") for damages paid pursuant to claims based on the fact
that such person was an officer, director, partner or shareholder of one or more
of such entities. The Partnership and the Corporation also agree to reimburse
the Indemnified Parties for expenses (including attorneys' fees) incurred in
defending such claims.
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 rights of the holders of Interests
without the approval of a majority of such holders.
42
<PAGE>
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,
subject to corporate taxation after December 31, 1997. 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 consummate the conversion 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. For a discussion of proposed revisions to current tax law that may affect
the taxation of the Partnership if the Conversion is not approved, see "CERTAIN
FEDERAL INCOME TAX CONSEQUENCES -- Partnership Status and Taxation of the
Partnership."
The following table shows the pro forma results for the three months ended
March 31, 1997 and for the year ended December 31, 1996 if the Conversion were
not approved and the Partnership were to be taxed as a Corporation compared to
the Partnership being converted to corporate form in accordance with the terms
of the proposed Conversion.
For the three months ended March 31, 1997, the Partnership's operations
would result in a net loss of $0.031 per existing B Interest if the Partnership
were taxed as a corporation compared to net income of $0.044 per existing B
Interest if the Partnership were to have converted to corporate form. Of the
$0.075 increase in earnings per B Interest in the pro forma results for the
Conversion, $0.063 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 $0.012 is
attributable to retention 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).
For the year ended December 31, 1996, the Partnership's operations would
result in a net loss of $0.076 per existing B Interest if the Partnership were
taxed as a corporation compared with net income of $0.204 per existing B
Interest if the Partnership were to have converted to corporate form. Of the
$0.28 increase in earnings per B Interest in the pro forma results for the
Conversion, $0.232 is attributable to exchange of A Interests for Trust
Preferred Securities and cash (and related tax benefits as previously discussed)
and $0.048 is attributable to the retention of the General Partner's Management
Fee and the exchange of General Partner ownership interests as discussed above.
43
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Results
(dollars in thousands)
Pro Forma Partnership
Taxable as a Corporation Pro Forma Corporation
------------------------- ----------------------
Three Months Twelve Months Three Months Twelve Months
Ended 3/31/97 Ended 12/31/96 Ended 3/31/97 Ended 12/31/96
<S> <C> <C> <C> <C>
Income from Operations $7,437(2) $29,932(1)(2) $ 7,344 $29,562(1)
Management Fee 821 3,330 -- --
Interest Expense, Net 1,831 6,875 2,149 8,147
Other Income, Net 159 745 159 745
Distributions on Trust Preferred
Securities -- -- (3,057) (12,232)
------ ------- ------- -------
Income Before Taxes 4,944 20,472 2,297 9,928
Income Tax Provision 2,525 9,693 1,173 4,701
------ ------- ------- -------
Net Income 2,419 10,779 1,124 5,227
General Partner Income Allocations 48 215 -- --
A Interest Priority Return Payments 3,052 12,210 -- --
------ ------- ------- -------
Net Income (Loss) to Holders of B
Interests $ (681) $ (1,646) $ 1,124 $ 5,227
------ ------- ------- -------
Number of B Interests Outstanding
(Before reverse stock split) 21,675,746 21,675,746 25,675,746 25,675,746
Earnings (loss) per B Interest
(Before reverse stock split) $ (0.031) $ (0.076) $ 0.044 $ 0.204
------ ------- ------- -------
</TABLE>
- ---------------------
(1) Includes non-recurring charges of $5,950 related to restructuring.
(2) Excludes amortization costs directly related to purchase accounting on
exchange of the minority interest in the Operating Partnership in the amount of
$93 for the three months ended March 31, 1997 and $370 for the twelve months
ended December 31, 1996.
Tax distributions to B Interest holders would be discontinued after
December 31, 1997 even if the Conversion is not approved, because after that
date the Partnership would elect to be taxed as a corporation and income taxes
on the Partnership's income will be paid by the Partnership (rather than the
partners).
Failure to consummate 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
in corporate form of $1.1 million and $5.2 million to holders of corporate B
Interests for the three months ended March 31, 1997 and for the year ended
December 31, 1996, respectively, versus a loss of $.7 million and $1.6 million,
respectively, 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.
44
<PAGE>
Allocation of Interests in the Conversion
As set forth under " -- Determinations of the Special Committee --
Negotiations with the General Partner," the terms of the Trust Preferred
Securities and the exchange ratio for the A Interests of 0.38 of a Trust
Preferred Security and $1.30 in cash and the number of shares to be allocated to
the partners of the General Partner were the product of negotiations between the
General Partner and the Special Committee and their respective advisors. These
negotiations between the General Partner and the Special Committee took into
account the existing economic interests of the General Partner and the limited
partners, as well as their respective rights under various provisions of the
Partnership Agreement and the Operating Partnership Agreement, including the
General Partner's right to receive the Management Fee under the terms of the
Operating Partnership Agreement. See "-- Existing Economic Interests of the
Partners;" " -- Determinations of the Special Committee." In its deliberations
during these negotiations, the Special Committee considered a number of factors
affecting the terms of the Trust Preferred Securities, the exchange ratio and
amount of cash to be exchanged for the A Interests, and the number of shares of
Common Stock to be allocated to the partners of the General Partner, and the
Special Committee obtained a fairness opinion from its financial advisor with
respect to the terms of the Conversion. For a discussion of the factors
considered by the Special Committee during its deliberations, see "--
Determinations of the Special Committee -- Factors Considered by the Special
Committee." For a discussion of the fairness opinion of Smith Barney, see "--
Opinion of Smith Barney."
The values set forth in the tables below do not fully reflect the
negotiating process by which the allocation of interests was determined nor
should limited partners rely on them as indicators of the actual values of the
Interests or the consideration to be received in respect of Interests in the
Conversion. The information has been prepared by the General Partner based on
preannouncement market prices, the General Partner's estimated value of the
Management Fee and the reference prices determined in the Conversion. See "--
Alternatives to the Conversion."
CALCULATION OF VALUE OF PARTNERSHIP INTERESTS BEFORE CONVERSION
<TABLE>
<CAPTION>
# Interests
Investment Type Outstanding Value Per Interest Total Value ($000) % of Total Value
--------------- ------------- ------------------ ------------------ ----------------
<S> <C> <C> <C> <C>
A Interests 11,099,573 $10.50(1) $116,546 48.2
B Interests 21,675,746 $ 4.35(1) 94,289 39.0
GP Interests 30,921(2) 12.8
-------- -----
TOTAL $241,756 100.0
======== =====
</TABLE>
- ---------------------
(1) Average closing market price on the five trading days immediately preceding
the public announcement of the terms of the Conversion on December 11, 1996.
(2) Estimated value of General Partner's 1.99% effective equity ownership
interest of $4,281,000 based on business enterprise value derived from the
pre-announcement market prices of the A and B Interests shown herein, plus the
estimated value of the General Partner's Management Fee of $26,640,000 as
calculated by applying a proposed capitalization factor of 8.0x the annual
Management Fee of $3,330,000. See "-- Assumptions Relating to Alternatives to
the Conversion --General Partner Interest."
The table below shows the value of the total consideration for each type
of partnership interest based on the 1997 reference price for each of the A and
B Interests as derived in the Conversion alternative. See " -- Alternatives to
the Conversion."
45
<PAGE>
CALCULATION OF AGGREGATE VALUE OF POST-CONVERSION CONSIDERATION
<TABLE>
<CAPTION>
# Interests Value Per
Interest Exchanged Outstanding Former Interest Total Value ($000) % of Total Value
------------------ ------------- --------------- ------------------ ----------------
<S> <C> <C> <C> <C>
A Interests 11,099,573(1) $12.08(2) $134,083 45.4
B Interests 21,675,746(3) $ 6.28(4) 136,124 46.1
GP Interests 4,000,000(5) $ 6.28(4) 25,120 8.5
------- ----
TOTAL $295,327 100.0
======== =====
</TABLE>
- ---------------------
(1) The 11,099,573 A Interests will be exchanged for $14,429,445 of cash and
4,217,837 11.6% Trust Preferred Securities having a liquidation preference of
$25.00.
(2) Based on the 1997 reference price per A Interest derived in the Conversion
alternative, plus $1.30 per A Interest in cash to be received in the Conversion.
See "-- Alternatives to the Conversion -- Per A Interest."
(3) Each B Interest will be exchanged for 0.25 shares of Common Stock. B
Interests shown are before 1-for-4 reverse stock split.
(4) Based on the 1997 reference price per Class B Interest derived in the
Conversion alternative. See "-- Alternatives to the Conversion -- Per B
Interest."
(5) The general partnership interests will be exchanged for 4,000,000 shares of
Common Stock (before giving effect to the 1-for- 4 reverse stock split).
The table set forth below compares the percentages of total value
allocated to each of the A Interests, B Interests and the general partnership
interests pre- and post-Conversion, using the methodologies described above.
<TABLE>
<CAPTION>
% of Total % of Total
Interest Exchanged Value Pre-Conversion Value Post-Conversion
- ------------------ -------------------- ---------------------
<S> <C> <C>
A Interests 48.2 45.4
B Interests 39.0 46.1
General Partner Interests 12.8 8.5
----- -----
100.0 100.0
===== =====
</TABLE>
Although the percentage of total Partnership value for the A Interests
declines in this table, the total value for the A Interests increases from
$116,546,000 to $134,083,000. The principal reason for the increase in value for
the B Interests is the elimination of the market discount applicable to the B
Interests. See "-- Alternatives to the Conversion."
The terms of the Conversion were the product of negotiations between the
General Partner and the Special Committee and their respective advisors. The
negotiations between the General Partner and the Special Committee and the
deliberations of the Special Committee are described in more detail in "--
Determinations of the Special Committee." Limited partners are strongly urged to
read carefully "-- Factors Considered by the Special Committee" for a discussion
of the material factors considered by the Special Committee during its
deliberations and "-- Opinion of Smith Barney" for a discussion of Smith
Barney's fairness opinion.
The consideration paid in 1987 by the General Partner for its interest in
the Partnership and the Operating Partnership was a capital contribution of
assets of Sun Distributors, Inc. having a stated value of $1,226,364.
46
<PAGE>
Distributions and Compensation
The following table sets forth the actual amounts of distributions and
compensation paid by the Partnership to the General Partner, affiliates of
Lehman Brothers and senior management for the Partnership's last three fiscal
years and the amounts of distributions and compensation that would have been
paid if the Conversion had been in effect during such period.
<TABLE>
<CAPTION>
Amounts that would
have been paid if
Actual Distributions and Actual Compensation Conversion had been
Year Management Fee Paid(1) Paid(2) Total Paid in effect(1)(3)
---- ---------------------- --------- ----------------------- ---------------
<S> <C> <C> <C> <C>
1996 $ 9,826,054(4) $1,309,206(3) $11,135,260 $1,360,918
1995 $10,608,167(5) $1,330,719(3) $11,938,886 $1,388,730
1994 $ 7,376,257(6) $1,474,071(3) $ 8,850,328 $1,532,082
</TABLE>
- --------------------
(1) Actual amounts include distributions on A Interests and B Interests held by
senior management. Amounts that would have been paid are distributions on Trust
Preferred Securities to be held by senior management and compensation to senior
management.
(2) Represents amounts paid to Donald T. Marshall, John P. McDonnell and Norman
V. Edmonson as set forth in "MANAGEMENT -- Compensation."
(3) The affiliates of Lehman Brothers and senior management will receive Common
Stock for their B Interests. The partners of the General Partner will receive
Common Stock in place of distributions on the general partnership interests and
the Management Fee. No policy has been established with respect to dividends on
the Common Stock and therefore no amount for such dividends is included in this
column.
(4) Represents $511,752 distributed to the General Partner, $3,535,058
distributed to affiliates of Lehman Brothers, $2,449,244 distributed to senior
management and $3,330,000 for the Management Fee.
(5) Represents $544,780 distributed to the General Partner, $3,977,663
distributed to affiliates of Lehman Brothers, $2,755,724 distributed to senior
management and $3,330,000 for the Management Fee.
(6) Represents $407,983 distributed to the General Partner, $2,144,209
distributed to affiliates of Lehman Brothers and $1,494,065 distributed to
senior management.
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. A second complaint containing substantially identical
allegations was filed by a limited partner in the Delaware Court of Chancery on
February 11, 1997. The cases have been consolidated and an amended complaint was
filed on April 16, 1997.
Count I of the amended complaint alleges that the transfer of substantial equity
to the General Partner to the detriment of the B Interests constitutes a breach
of fiduciary duty because (i) the amount of the transfer is an overpayment to
gain the General Partner's cooperation in the implementation of the Conversion
although the General Partner already deemed the Conversion to be in the best
interests of the Partnership and its limited partners; (ii) the approximate
aggregate value of the General Partner's percentage interests in the Partnership
and the Operating Partnership is estimated to be no greater than between $4.1
million and $5.6 million and the General Partner is not entitled to any
additional amount for the Management Fee because it will terminate upon the
Conversion and the payment would be in violation of the partnership agreements;
(iii) the limited partners had no independent representation in the negotiations
and the proposed terms were not the result of arms-length negotiations and were
not based on a valid or independent appraisal of the value of the General
Partner's interests; (iv) the proxy material (as then on file with the SEC) was
misleading because (a) the members of the Special Committee, Messrs. Brewer and
Ransome, were not disinterested because, as directors of Lehman/SDI, they owed
47
<PAGE>
fiduciary duties to it and its parent, Lehman Brothers; (b) the presentation of
the methodology employed by Smith Barney was misleading and confusing; (c) the
statement that the Conversion constituted a "change of control" within the
meaning of the Officers' Deferred Compensation Plan is false; and (d) the
statement that SunSource has had no relationship with Smith Barney is a
misrepresentation because Smith Barney acquired a portion of the business of
Shearson Lehman Brothers, Lehman Brothers' predecessor, and had sold 175,000
shares as part of the selling group in the underwritten public offering of the
Partnership in February 1987.
Count II of the amended complaint alleges that the proposed terms
constitute a breach of the partnership agreements governing the Partnership and
the Operating Partnership because (i) the agreements provide only for the
payment of an annual management fee and do not authorize any payments to the
General Partner after the management fee is terminated; (ii) the agreements do
not provide for payment to the General Partner for the present value of future
management services; (iii) the agreements prohibit the payment of additional
consideration to the General Partner for its services and cooperation in
managing the partnerships except with respect to the management fee; (iv) the
distribution of 1,000,000 shares of Common Stock for the General Partner
Interest constitutes a material modification of the order and/or method of
allocation set forth in the Partnership Agreement without the consent of the
public holders of Class B Interests; and (v) the distribution of 1,000,000
shares is in breach of the section which provides that any services rendered to
the Partnership shall be on terms that are fair and reasonable to the
Partnership because the value of the General Partner's future management fees is
zero.
Count III alleges that the conduct described in the amended complaint
constitutes a breach of the covenant of good faith and fair dealing implied in
the SunSource partnership agreement. The amended complaint requests a
preliminary and permanent injunction against the solicitation of proxies and
other steps in consummating the Conversion or rescission if it is completed, an
order that any compensation received by the General Partner or its affiliates be
held in constructive trust pending an independent valuation; and compensatory
damages.
The defendants believe the amended complaint is without merit and
intend to vigorously defend the action.
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. When it created the Special Committee, the Board of
Directors of Lehman/SDI undertook the responsibility of considering 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."
Accordingly, the Special Committee was instructed not to consider the effects of
any such alternatives and, consistent with the resolution establishing the
Special Committee, the Special Committee did not consider the effects of such
alternatives in its deliberations.
<PAGE>
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. Between June 12, 1996
and the date hereof, 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.
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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 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 share of Common Stock1, 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 the General Partner. 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 $10 liquidation preference, and that the
terms of the Conversion should reflect the taxable nature of the exchange of A
- --------
(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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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 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. For a discussion of the Special Committee's
consideration of these corporate governance issues and the provisions negotiated
by the Special Committee, see "-- Certain Corporate Governance Matters" below.
From September 10 to 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 the
General Partner 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.
<PAGE>
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").
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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 determined to advise the
General Partner 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 not
acceptable to the Special Committee. 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.
Later on October 24, the Special Committee and its advisors met with Lehman
Brothers, management, and counsel to the General Partner and counsel to 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 and 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 the General Partner 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 exchanged 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 exchanged for the General
Partnership Interests. 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.
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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 a written fairness
opinion, dated December 10, 1996.
Upon receipt of Smith Barney's written fairness opinion, the Special
Committee unanimously determined to recommend to the Board of Directors of
Lehman/SDI 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 holders of the general and limited partnership interests in
the General Partner (the "General Partner Consideration") in exchange for their
general and limited partnership interests in the General Partner was 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.
On December 11, 1996, the Special Committee and its financial and legal
advisors met with the Board of Directors of Lehman/SDI and advised the Board of
Directors of Lehman/SDI 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 of Lehman/SDI 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 of Lehman/SDI 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 -- Results of
Operations -- Restructuring Charges." The Special Committee informed the Board
of Directors of Lehman/SDI 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.
On June 19, 1997, the Special Committee met with its financial and legal
advisors to review the terms of the Conversion as described herein. At this
meeting, Smith Barney reviewed with the Special Committee the effects of the
previously announced restructuring charge, the Partnership's recent operating
results, the Partnership's most recent financial projections and forecasts, and
the terms of the Conversion. Smith Barney made a presentation to the Special
Committee updating its analysis of the fairness from a financial point of view
of the consideration to be received in the Conversion by 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. Smith Barney rendered a written
fairness opinion, dated June 19, 1997, to the effect that, as of such date based
upon and subject to certain matters 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 A Interests and to the holders of B Interests, respectively. See "SPECIAL
FACTORS -- Opinion of Smith Barney." A copy of the June 19, 1997 fairness
opinion is attached as Exhibit C to this Proxy Statement/Prospectus.
Upon receipt of Smith Barney's written fairness opinion, the Special
Committee unanimously determined to reaffirm its recommendation to the Board of
Directors of Lehman/SDI that, as of such date, (i) the terms of the Conversion
were (x) fair to the holders of A Interests and (y) fair to the holders of B
Interests, and (ii) the General Partner Consideration was fair to the holders of
the A Interests and the holders of the B Interests, respectively. Consistent
with its instructions from the Board of Directors of Lehman/SDI (which undertook
the responsibility of considering alternatives to the Conversion), the Special
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Committee 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 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 or the liquidation of
the Partnership. 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." For a discussion of the scope of the Special
Committee's authority, see "Determinations of the Special Committee--
Appointment of the Special Committee and its Independent Advisors." The Special
Committee then delivered to the Board of Directors of Lehman/SDI a letter of
recommendation as described above with respect to the Conversion.
Management Projections
A description of the projections provided by management to the Special
Committee and its advisors and to prospective lenders is included as Exhibit D
to this Proxy Statement/Prospectus. The projections provided to the Special
Committee and its advisors are filed as exhibits to the Schedule 13E-3 filed
with the SEC in connection with the Conversion.
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 (including the restructuring charge announced
by the Partnership in December 1996) and the pro forma effects of the
Conversion, the information and analyses relating to the Partnership and the
Corporation (including their respective values as going concerns), 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. In reviewing Smith Barney's fairness opinion, the Special Committee
was aware that, in reaching its fairness conclusion, Smith Barney took into
consideration, without precisely quantifying, certain factors which detract
from the value of the Management Fee. In addition, the Special Committee was
aware that Smith Barney was relying, among other things, on operating
projections prepared by management which are described in Exhibit D to the
Proxy Statement/Prospectus. As described in Exhibit D, the Partnership
instructed the Special Committee and its advisors not to use in their analyses
certain refinancing projections prepared by the Partnership for prospective
lenders in connection with the Conversion. See Exhibit D and "SPECIAL FACTORS
-- 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
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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 market
price of the A Interests prior to the public announcement of the proposed
terms of the Conversion (which was $10 1/2 at December 9, 1996; 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 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 to Holders of A Interests -- Uncertainty Regarding Market Price for
Trust Preferred Securities" and " -- Risks to Holders of B Interests --
Uncertainty Regarding Market Price of Common Stock; Possible Reduction Due to
Sales by Lehman Brothers or Management." 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 ($4 3/8 at December 9, 1996; see also "MARKET PRICES AND
DISTRIBUTIONS") 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 "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 -- Risks to Holders of A
Interests -- Option to Extend Interest Payment Period; Tax Impact of
Extension"); (ii) the subordination of the Management Fee to the Priority
Return on A Interests; (iii) the Corporation's ability to redeem at par the
Junior Subordinated Debentures on or after September 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 -- Risks to Holders of A
Interests -- Special Event Redemption or Distribution; Shortening of Stated
Maturity;" (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").
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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 viewed as a negative factor the Corporation's right, for any
reason or no reason, to defer payments on the Junior Subordinated Debentures.
Also, the Special Committee considered that the monetization of the General
Partner's interest in the Management Fee is a negative factor for the holders
of the Trust Preferred Securities to the extent it would eliminate to some
degree the discipline afforded by the subordination feature of the Management
Fee to keep current any due payments on the Trust Preferred Securities.
However, the unfettered deferral right and the absence of an effective
Management Fee subordination feature were viewed as counterbalanced to some
extent by (a) the adverse consequences any unpaid distributions on the Trust
Preferred Securities 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 distributions 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 of the optional redemption feature of the Junior
Subordinated Debentures 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 and the provisions of the Indenture
restricting such Tax Event redemptions to circumstances where shortening the
maturity of the Junior Subordinated Debentures does not preserve the tax
deductibility of interest payments on the Junior Subordinated Debentures. The
Special Committee also noted 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 Debentures or the Trust Preferred Securities. See "RISK FACTORS,
CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Risks to Holders
of A Interests -- Special Event Redemption or Distribution; Shortening of
Stated Maturity." The Special Committee's recommendation as to the fairness of
the Conversion was based upon existing tax laws. For a discussion of possible
tax law changes that may affect the taxation of Trust Preferred Securities,
see "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS.
Risks to Holders of A Interests -- Special Event Redemption or Distribution;
Shortening of Stated Maturity." 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 11.6% distribution rate of the Trust Preferred Securities (as opposed to
the 11.0% annual distribution rate on the A Interests), which higher rate
equates to the $1.10 per annum distribution currently received by holders of A
Interests, 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 loss of such voting and other rights as negative factors.
However, the Special Committee noted that both the A Interests and Trust
Preferred Securities are principally yield-oriented preferred securities (with
fixed rates of distribution and the right to participate in liquidating
distributions to the extent of their liquidation preference) with attributes
similar to preferred stock, as opposed to common stock or similar equity
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.
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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 and the deductibility of interest on the
Junior Subordinated Debentures. See "-- Reasons to Convert to Corporate Form
-- Tax Consequences." The Special Committee's recommendation as to the
fairness of the Conversion was based upon existing tax laws. For a
discussion of possible tax law changes that may affect the taxation of the
Trust Preferred Securities, see "RISK FACTORS, CONFLICTS OF INTEREST AND
OTHER IMPORTANT CONSIDERATIONS -- Risks to Holders of A Interests -- Special
Event Redemption or Distribution; Shortening of Stated Maturity."
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 to Holders
of 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. The Special Committee was aware of recent attempts to amend
existing federal income tax laws to permit certain publicly traded
partnerships, such as the Partnership, to continue to be taxed as
partnerships after December 31, 1997 under certain circumstances. The
Special Committee's recommendation as to the fairness of the Conversion was
based upon existing tax laws. There can be no assurance that future changes
in tax law would not materially affect the Partnership, the Corporation or
their securities or security holders. In August 1997, the Taxpayer Relief
Act of 1997 (the "1997 Tax Act") was enacted, which provides that existing
publicly traded partnerships have the option of (i) being taxed as
corporations or (ii) being taxed as partnerships by electing to be subject
to tax at the rate of 3.5% on their gross income for tax years beginning
after December 31, 1997. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES --
Partnership Status and Taxation of the Partnership." The Partnership has
advised the Special Committee that if the Conversion is not approved and
implemented, the Partnership will not make an election to be taxed as a
partnership under the 1997 Tax Act, and therefore will become subject to
federal income tax as a corporation beginning in 1998. See " -- Alternatives
to the Conversion." As a result, Smith Barney advised the Special Committee
that the provisions of the 1997 Tax Act would not affect Smith Barney's
analyses in connection with its fairness opinion since such analyses had
assumed the Partnership would be taxed as a corporation beginning in 1998.
o Exchange of A Interests 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 regarding the payment of
cash dividends on the Common Stock. The Special Committee noted that the
purpose of the B Tax Distribution was to provide 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
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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 -- Risks to Holders of A Interests -- No Fiduciary Duties."
"RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS --
Risks 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 to Holders of A Interests -- Transaction
Costs" and "-- Risks to Holders of 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."
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 of Common Stock (in the case of the Corporation) or per
partnership interest (in the case of the Partnership) were not viewed by Smith
Barney as primary determinants of value for ongoing industrial concerns like
the Corporation or the Partnership. 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 to
Holders of A Interests -- Loss of Contractual Right to Distributions" and
"RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS --
Risks to Holders of 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 -- Risks to Holders of B
Interests -- Future Dilution of Common Stock."
o 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 partners of the General Partner, including: (i) the elimination
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of the partners 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 to Holders of A Interests
-- Elimination of General Partner Liability for Corporation Obligations" and "
-- Risks to Holders of B Interests -- Elimination of General Partner Liability
for Corporation Obligations"); (ii) the ability of the partners of the General
Partner to convert their 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 partners of the General Partner of monetizing the Management Fee and
receiving most of their shares of Common Stock immediately upon consummation
of the Conversion; (iv) the potential for the partners of the General Partner
to treat as capital gain income some or all of the income realized by them 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 A Interests and B Interests prior to the
Conversion, including the going concern value of the Partnership, and the
value of the shares of Common Stock after the Conversion, including the going
concern value of the Corporation. 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, and
placed particular weight on, 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. See "-- Alternatives to the Conversion." 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 ongoing
participation of the General Partner was required for the Conversion. In this
regard, the Special Committee had been advised by the General Partner that it
is the General Partner's belief that it has no duty to advocate and pursue a
transaction that does not provide the General Partner fair value for all of
the economic components of its General Partnership Interest, including the
fair value for its otherwise continuing right to receive 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
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concluded that continuation of the Management Fee in corporate form would be
unduly burdensome to the Corporation and that the 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. As to the matters noted in (ix) above, the Special Committee placed
particular weight on the presentations and analyses of Smith Barney and its
fairness opinion. See "-- Opinion of Smith Barney." During its deliberations,
the Special Committee did not attach any weight to the General Partner's
request for 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 Board of Directors.
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 the 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 12.6%,
respectively, to 31.4% and 22.6%, 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 77% 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."
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."
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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 partners of the General Partner in exchange for their General Partnership
Interests and Lehman Brothers' expression of interest in possibly liquidating
some or all of its Common Stock holdings after the Conversion. 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."
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.
The Special Committee was aware that the Corporation's Certificate of
Incorporation provides that it shall not be subject to Section 203 of the
Delaware General Corporation Law and considered this a negative factor
mitigated to some extent by the other corporate governance provisions
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
-- Risks to Holders of A Interests -- Conflicts of Interest" and " -- Risks to
Holders of B Interests -- 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 stockholder of Lehman/SDI; and (vi)
the designation of the Special Committee as a committee of the Board of
Directors of Lehman/SDI (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 to Holders
of A Interests -- No Independent Representation" and "-- Risks to Holders of 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 "-- Determinations of the Special Committee -- 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
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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 and counsel
to Lehman/SDI and the Partnership. The Special Committee believed that it had
significant leverage in 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 -- Risks to Holders of A Interests -- Special Event
Redemption or Distribution; Shortening of Stated Maturity."
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 and accordingly has not recommended the Conversion
as opposed to any alternative strategy or transaction. 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." For a discussion of the
scope of the Special Committee's authority, see "-- Determinations of the
Special Committee -- Appointment of the Special Committee and its Independent
Advisors." 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 opinions, dated December 10, 1996 and June 19, 1997, to
the effect that, as of such dates 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. The description set forth below pertains to Smith
Barney's June 19, 1997 opinion.
In rendering its opinion Smith Barney reviewed the Registration Statement
on Form S-4 of SunSource Inc. and SunSource Capital Trust filed with the
Securities and Exchange Commission, as amended on May 12, 1997 (the
"Registration Statement") 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,
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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
Registration Statement in relation to 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 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
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, including current tax laws, existing and disclosed
to Smith Barney as of the date of its opinion. No limitation was imposed by the
Special Committee, Lehman/SDI, the Partnership, the Operating Partnership or the
General Partner 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 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.
<PAGE>
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 contains the material analyses, but 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.
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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
retirement of the A Interests. 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 A Interests are retired at
June 30, 2037, which approximates valuing it in perpetuity. In this analysis,
discount rates of 9.5%, 10.5% and 11.5% were used. These discount rates were
based on the trading yield of the A Interests immediately prior to the public
announcement of the terms of the Conversion. The implied valuation range for the
A Interests resulting from this analysis was $106.2 million ($9.57 per A
Interest) to $128.1 million ($11.54 per A Interest). The mid-point of the
implied valuation range was then calculated to be $117.2 million ($10.56 per A
Interest).
Valuation of the A Consideration. Upon consummation of the Merger, each A
Interest will be exchanged for 0.38 share 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.
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 (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 differences in voting and other
rights. 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 in 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 9.5% to 12.5% 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 $10.48 to
$11.59. 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 (discounts) /
premiums of such implied values over such average market price for an A Interest
was (0.2%) to 10.4%. The range of implied values of the A Consideration was also
compared to the mid-point of the discounted cash flow valuation range of the A
Interests and the range of (discounts) / premiums over such valuation was (0.7%)
to 9.8%. The conclusion that the value of the consideration to be received for
an A Interest is likely to be greater than the value of an A Interest supports
Smith Barney's fairness conclusion.
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 for the five fiscal years ended December 31, 2001 assuming the
Partnership begins paying corporate income taxes in 1998. Smith Barney was
unable to value the B Interests based on trading values of comparable companies
as was done in valuing the B Consideration (as defined below), since there are
no publicly traded limited partnership interests for companies comparable to the
Partnership. See "Valuation of the B Consideration -- Comparable Company
Analysis." In its discounted cash flow analyses, 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).
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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 $88.9 million ($4.10 per B Interest) to
$166.4 million ($7.68 per B Interest). The mid-point of the implied valuation
range was then calculated to be $127.7 million ($5.89 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., Applied Industrial
Technologies, Inc. (formerly 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 historical net income
and projected 1997 and projected 1998 net income. The multiples of the latest
twelve months ended March 31, 1997 ("LTM") net income and projected 1997 and
projected 1998 net income of the Comparable Companies were between the following
ranges: (i) LTM net income: 10.9x to 17.3x (with a mean of 14.3x and a median of
14.3x); (ii) projected 1997 net income: 9.3x to 16.9x (with a mean of 13.2x and
a median of 13.9x); and (iii) projected 1998 net income: 8.1x to 13.6x (with a
mean of 11.7x and a median of 12.5x). Smith Barney also compared market values
as multiples of historical EBITDA and projected 1997 and projected 1998 EBITDA.
The multiples of LTM EBITDA and projected 1997 and projected 1998 EBITDA of the
Comparable Companies were between the following ranges: (i) LTM EBITDA: 5.5x to
9.2x (with a mean of 7.4x and a median of 7.1x); (ii) projected 1997 EBITDA:
5.4x to 8.1x (with a mean of 6.8x and a median of 6.8x); and (iii) projected
1998 EBITDA: 5.1x to 7.4x (with a mean of 6.2x and a median of 6.3x).
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 June 16, 1997.
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 14.3x and 14.3x to LTM net income, and 13.2x and 13.9x to projected 1997 net
income, and 11.7x and 12.5x to projected 1998 net income. Based on these
multiples, Smith Barney arrived at an implied valuation range of $23.28 to
$27.89 per share of Common Stock or $5.82 to $6.97 for the B Consideration.
Smith Barney also applied the Comparable Companies' mean and median multiples of
7.4x and 7.1x to LTM EBITDA, 6.8x and 6.8x to projected 1997 EBITDA, and 6.2x
and 6.3x to projected 1998 EBITDA. Based on these multiples of EBITDA, Smith
Barney arrived at an implied valuation range of $13.08 to $16.42 per share of
Common Stock or $3.27 to $4.11 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 are 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 33.8% to 60.2%. 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 using
the discounted cash flow analysis methodology ($5.89 per B Interest) and the
range of (discounts)/ premiums over such valuation was (1.2%) to 18.3%.
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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 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 distributions 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 $18.36 to $33.19 or $4.59 to
$8.30 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 5.5% to
90.8%. The above-described range of implied values for the B Consideration was
also compared to $5.89, the mid-point of the implied valuation range of a B
Interest, and the range of (discounts)/premiums over such valuation was (22.1%)
to 40.9%.
The conclusion that the range of values of B Consideration is greater than
(i) the average closing market price of a B Interest on the five trading days
immediately preceding the Announcement Date and (ii) the implied valuation range
of a B Interest based on the discounted cash flow analyses supports Smith
Barney's fairness conclusion.
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 9.5%, 10.5% and 11.5%. Based on these net present value calculations,
Smith Barney estimated the range of the total potential value of the Management
Fee to be $29.0 million to $35.1 million. Since the Management Fee does not have
a fixed redemption value, Smith Barney also estimated the range of values by
capitalizing the Management Fee based on the Comparable Companies' mean and
median LTM EBITDA multiples (7.4x and 7.1x) and capitalizing the after-tax
equivalent of the Management Fee based on the Comparable Companies' mean and
median LTM net income multiples (14.3x and 14.3x). This method of valuation was
used to show the impact of the Management Fee on the LTM net income and the LTM
EBITDA available to the Partnership. On the basis of this analysis, a range of
values for the Management Fee was calculated. The capitalization of the
Management Fee resulted in a range of total potential value (without regard to
the factors set forth in the succeeding paragraph) of $23.6 million to $28.6
million. The two methodologies produced a composite total potential valuation
range for the Management Fee of $23.6 million to $35.1 million.
In addition to looking at the valuation methodologies described in the
preceding paragraph, Smith Barney took into consideration in reaching its
fairness conclusion 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 $27.7 million to $40.7
million with a resulting mid-point of $34.2 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, since such factors are not
precisely quantifiable.
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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 $20.82 to $30.54 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
$20.8 million to $30.5 million. Since the value to be paid for the General
Partner Consideration is less than the total potential value of the General
Partnership Interests, it supports Smith Barney's fairness conclusion.
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) certain pro forma effects on the
Partnership resulting from the Conversion and (iv) 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.
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.
The reports of Smith Barney on December 10, 1996 and June 19, 1997 are
filed as exhibits to the Rule 13e-3 Transaction Statement on Schedule 13E-3, as
amended, filed with the Commission by the Partnership, the General Partner,
Lehman Brothers Capital Partners I, L.P., LB I Group, Inc., Lehman Ltd. I, Inc.,
Norman V. Edmonson, Donald T. Marshall, John P. McDonnell 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.
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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 determining the fairness of the Conversion to the A Interests, the
General Partner considered the factors considered by the Special Committee
discussed above under "--Factors Considered by Special Committee." It considered
the current and historical market prices of the A Interests, noting particularly
the fact that the market price of the A Interests has fluctuated in accordance
with market changes in interest yields. In this respect, fairness is provided by
the establishment of a distribution rate on the Trust Preferred Securities equal
to the $1.10 Priority Return currently being paid on the A Interests. The
General Partner also considered liquidation value as it applied to the A
Interests and the fact that the holders would only be entitled to $10 on
liquidation. The liquidation preference on the Trust Preferred Securities is
being reduced to $9.50 but this is offset by the cash payment of $1.30 in the
Conversion. Although the A Interests are not callable and the Trust Preferred
Securities will be callable at liquidation value after five years, the General
Partner believes that the cash received is adequate to compensate holders of A
Interests for this change in call protection. The General Partner also
considered, as discussed below, the opinion of Smith Barney in determining the
fairness of the Conversion to the A Interests. The comparative effects upon the
A Interests of the three alternatives of Conversion, remaining a master limited
partnership taxable as a corporation, or liquidation are shown in the "Per A
Interest" table under "-- Alternatives to the Conversion."
The General Partner believes that the reference prices shown in the "Per A
Interest" table under "-- Alternatives to the Conversion" and allocation of
values information support its conclusion that the Conversion is fair to the
holders of A Interests. See "-- Allocation of Interests in the Conversion." The
General Partner did not consider net book value or going concern value because
it believed that the fixed return on the A Interests made these factors not
significant. The General Partner also did not consider purchases of A Interests
in the preceding two years or offers during the preceding 18 months for a
merger, acquisition, tender offer or change of control because no purchases or
offers occurred during those periods.
In determining the fairness of the Conversion to the B Interests, the
General Partner again considered the factors discussed under "-- Factors
Considered by Special Committee." It took into account the current and
historical market prices of the B Interests and its belief that conversion to
corporate form would provide substantially greater coverage of the Company by
financial analysts and expand the potential investor base to include mutual
funds and other entities that currently do not invest in limited partnerships.
It also took into account its belief that the Common Stock will constitute a
more attractive acquisition currency. The General Partner also believes that the
elimination of the relatively burdensome tax reporting requirements of the
partnership form would remove a current impediment to investing in the
Partnership. As noted under "-- Alternatives to the Conversion," the B Interests
have traded at a price/earnings ratio discount of 18% to 25% to comparable
industrial distribution companies. The General Partner believes that expansion
of the potential investor base and the other benefits of the Conversion would
enhance the market price of the Common Stock to be issued for the B Interests.
Liquidation value was considered based upon the previous experience of the
Partnership as discussed under "-- Alternatives to the Conversion." The General
Partner also considered the going concern value of the business and concluded
that the elimination of the Management Fee and the General Partner distribution
would enhance that value. The General Partner, as discussed below, considered
the opinion of Smith Barney in determining the fairness of the conversion to the
B Interests. The comparative effects upon the B Interests of the three
alternatives of Conversion, remaining a master limited partnership taxable as a
corporation, or liquidation are shown in the "Per B Interest" table under "--
Alternatives to the Conversion."
The General Partner believes that the reference prices shown in the "Per B
Interest" table under "-- Alternatives to the Conversion" and allocation of
values information support its conclusion that the Conversion is fair to the
holders of B Interests. See "-- Allocation of Interests in the Conversion." The
General Partner did not consider net book value because it believed this was not
a true determinant of value. As noted above, there were no purchases of B
Interests during the preceding two years or offers for a merger, acquisition,
tender offer or change of control during the preceding 18 months.
67
<PAGE>
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 was aware that, in reaching its
fairness conclusion, Smith Barney took into consideration, without precisely
quantifying, certain factors which detract from the value of the Management Fee.
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 minimized the extent to
which the consideration of the Conversion was subject to conflicts of interest
of 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 $19,500,000. 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 of the Partnership as of and for the three years ended
December 31, 1996. 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. See "BUSINESS -- Investment and
Borrowing Policies." Prepayment of the Partnership's long-term debt will result
in the payment of a make-whole penalty of approximately $4 million.
Accounting Treatment
For financial accounting purposes, the Conversion will be treated as a
recapitalization except for the exchange of the General Partner's 1% minority
interest (the "Minority Interest") in the Operating Partnership for Common Stock
of the Corporation which is subject to purchase accounting in accordance with
Accounting Principles Bulletin ("APB") No. 16, "Business Combinations".
Accordingly, the assets and liabilities of the Partnership will be recorded by
the Corporation at their historical cost basis, except for the excess of fair
value of the consideration received for the Minority Interest over the book
value of the General Partner's 1% interest in the Operating Partnership which
will be recorded as goodwill of the Corporation. 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 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 federal, state and local
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 of the
Partnership as of and for the three years ended December 31, 1996. For financial
reporting purposes, the Corporation will record distributions payable on the
Trust Preferred Securities as an expense in its consolidated statements of
income.
68
<PAGE>
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..................................... 1,300,000
Financial advisory fees and expenses........................ 1,525,000
Accounting fees and expenses................................ 1,100,000
Solicitation fees and expenses.............................. 200,000
Printing and engraving expenses............................. 225,000
Miscellaneous .............................................. 23,000
----------
Total ............................................ $4,500,000
==========
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 Trust Preferred Securities or 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 of
record at the Effective Time a certificate or certificates representing the
number of Trust Preferred Securities or shares of 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 Trust Preferred Securities and shares of 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 Trust Preferred Securities or shares of Common Stock
and cash in the case of A Interests.
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.
69
<PAGE>
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
------------ -------------- ----------------------------
<S> <C> <C>
Issuer
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 The Corporation is a taxable Each holder of Trust
does not pay tax on its net entity with respect to its Preferred Securities
income. However, in order to income after allowable will be considered to
remain a Partnership for tax deductions and credits. own a pro rata portion
purposes for periods beginning Stockholders will have of the Junior
after December 31, 1997, it will taxable income from the Subordinated
have to pay tax at a rate of 3.5% Corporation's operations Debentures held by the
of gross income. Each holder of only to the extent that trust and will be
Interests includes the holder's taxable dividends and other required to include in
share of the income and gain and, distributions are declared and gross income the pro
subject to certain limitations, paid on the Common Stock. rata share of income
the losses, deductions and credits See "CERTAIN FEDERAL accrued on the Junior
of the Partnership in computing INCOME TAX Subordinated
taxable income without regard to CONSEQUENCES." Debentures and any
the cash distributed to the original issue discount
limited partner. Generally, cash attributable to the
distributions to holders of Junior Subordinated
Interests are not taxable, unless Debentures. See
distributions exceed the limited "CERTAIN FEDERAL
partner's basis in the Interests. INCOME TAX
See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES."
CONSEQUENCES."
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
Interests Common Stock Trust Preferred Securities
------------ -------------- ----------------------------
<S> <C> <C>
A tax-exempt limited No portion of the earnings No portion of the
partner's share of the of, or any dividends received income accrued or
Partnership's taxable income from, the Corporation will distributions received
constitutes unrelated constitute unrelated business on the Trust Preferred
business taxable income to taxable income to tax-exempt Securities will
the tax-exempt unitholder. stockholders, except to the constitute unrelated
See "CERTAIN FEDERAL extent their investment in business taxable income
INCOME TAX stock of the Corporation is to tax-exempt
CONSEQUENCES." considered debt-financed. stockholders, except to
See "CERTAIN FEDERAL the extent their
INCOME TAX investment in the Trust
CONSEQUENCES." Preferred Securities is
considered debt-
financed. See
CERTAIN FEDERAL
INCOME TAX
CONSEQUENCES."
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
Interests Common Stock Trust Preferred Securities
------------ -------------- ----------------------------
<S> <C> <C>
Distributions and Dividends
The Partnership is required The Board of Directors of The holders of Trust
under the Partnership the Corporation has the Preferred Securities
Agreement to make discretion to determine will be entitled to
distributions of the whether or not and when to monthly distributions at
Partnership's Cash Available declare and pay dividends the rate of $2.90 per
for Distribution, less certain and the amount of any annum (11.6% of the
permitted retentions to the A dividend. Holders of $25 liquidation
Interests for the Priority Common Stock will have no amount) to the extent
Return of $1.10 per annum contractual right to receive interest is paid by the
and to the B Interests for the dividends. Corporation on the
Tax Distribution. Cash Junior Subordinated
Available for Distribution Debentures. The
generally means the Corporation has the
Partnership's cash receipts right to defer payment
less (i) cash operating of interest on the Junior
expenses and other Subordinated
expenditures, and (ii) Debentures for a period
reserves, established by the up to 60 consecutive
General Partner in its sole months in which case
discretion for working no distributions will be
capital, capital expenditures, paid on the Trust
debt service and other Preferred Securities.
purposes and contingencies. Any unpaid
distributions will
cumulate and must be
paid prior to any
dividends on the
Common Stock.
</TABLE>
<TABLE>
<CAPTION>
Management
<S> <C> <C>
The business and affairs of The business and affairs of The Trust is managed
the Partnership are managed the Corporation are managed by five trustees
by the General Partner. by or under the direction of appointed by the
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.
The General Partner may be The holders of Common The holders of Trust
removed only by vote of Stock of the Corporation will Preferred Securities
80% of the Interests held by have the ability to elect will have no rights to
unaffiliated limited partners. members of the Board of elect or remove
See "DESCRIPTION OF Directors with a plurality of management of the
CAPITAL STOCK -- the votes cast for such Corporation. The
Stockholders Agreement." election and to remove the holders will be entitled
Board of Directors with a to elect a Special
majority vote of the Regular Trustee if the
Common Stock outstanding Trust fails to make
and entitled to vote. distributions for 18
consecutive months or
there is an Event of
Default.
[ ]
</TABLE>
72
<PAGE>
<TABLE>
<CAPTION>
Interests Common Stock Trust Preferred Securities
------------ -------------- ----------------------------
<S> <C> <C>
Voting Rights
Under Delaware law and the Holders of Common Stock The holders of Trust
Partnership Agreement, will have the right to vote on Preferred Securities
limited partners have voting matters specified by will have no voting
rights with respect to (i) the Delaware law affecting the rights except to elect a
removal and replacement of corporate structure of the Special Regular
the General Partner, (ii) the Corporation, including Trustee as described
merger of the Partnership, election of the Board of above and with respect
(iii) the sale of all or Directors. Stockholders of to certain modifications
substantially all of the assets the Corporation will have the and amendments.
owned, directly or indirectly, right to vote on all matters
by the Partnership, (iv) the on which stockholders must
dissolution of the Partnership be permitted to vote
or the Operating Partnership, including, as a general
and (v) material amendments matter, election of directors,
to the Partnership Agreement fundamental changes in the
and the Operating Corporation, sale of all or
Partnership Agreement, substantially all of the assets
subject to certain limitations. of the Corporation and
amendments to the
Certificate of Incorporation.
Each Interest entitles each Each share of Common Each of the Trust
holder thereof who is Stock entitles its holder to Preferred Securities
admitted as a limited partner cast one vote on each matter entitles its holder to
to the Partnership to cast one presented to stockholders. cast one vote on each
vote on all matters presented matter presented to the
to limited partners. holders of Trust
Preferred Securities.
Approval of any matter Approval of any matter Approval on any matter
submitted to limited partners submitted to stockholders on which holders of
generally requires the generally requires the Trust Preferred
affirmative vote of limited affirmative vote of holders of Securities are entitled
partners holding more than more than 50% of the to vote requires the
50% of the Interests then Common Stock outstanding affirmative vote of a
outstanding. The removal of and entitled to vote. majority of the
the General Partner requires outstanding Trust
the affirmative vote of 80% Preferred Securities
of the unaffiliated limited except that certain
partners. modifications and
amendments of the
Declaration require a
66 2/3% vote.
</TABLE>
73
<PAGE>
<TABLE>
<CAPTION>
Interests Common Stock Trust Preferred Securities
------------ -------------- ----------------------------
<S> <C> <C>
Holders of 25% of the Amendment of the certificate The holders of the
Interests held by limited of incorporation or bylaws Trust Preferred
partners may propose requires approval of a Securities may [ ] approve
amendments to the majority of the members of certain amendments
partnership agreement. the Board of Directors and, of the Declaration with
in certain cases, approval by the approval of at least
the stockholders. The 66 2/3% in liquidation
Stockholders Agreement has amount of Trust
certain requirements with Preferred Securities.
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 Stockholders may act by Holders of Trust
at a meeting of limited written consent in lieu of a Preferred Securities
partners may be taken by meeting with a number of may act by written
written consent in lieu of a votes sufficient for such consent in lieu of a
meeting executed by limited action. meeting with a number
partners sufficient to of votes sufficient for
authorize such action at a such action.
meeting of limited partners.
</TABLE>
<TABLE>
<CAPTION>
Special Meetings
<S> <C> <C>
Special meetings of Limited Stockholders are permitted Holders of Trust
Partners may be called by the to call a special meeting or Preferred Securities
General Partner or by require that the board of may call a special
Limited Partners holding at directors call a special meeting of the Trust
least 25% of the outstanding meeting of stockholders if only to elect a Special
Interests. such meeting is called by Regular Trustee.
holders of at least 25% of
outstanding Common Stock.
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
Interests Common Stock Trust Preferred Securities
------------ -------------- ----------------------------
<S> <C> <C>
Conversion Rights
The Interests are not The Common Stock is not The Trust Preferred
convertible into any other convertible into any other Securities are not
securities. securities. convertible into any
other securities.
</TABLE>
<TABLE>
<CAPTION>
Redemption
<S> <C> <C>
Interests are not subject to The Common Stock is not The Trust Preferred
mandatory or optional subject to mandatory or Securities will be
redemption. optional redemption. redeemed upon maturity
or earlier redemption of the
Junior Subordinated
Debentures at 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 September 30, 2002.
Liquidation Rights
In the event of the liquidation In the event of a liquidation In the event of a
of the Partnership the assets of the Corporation, the liquidation of the Trust,
of the Partnership remaining holders of Common Stock the holders of Trust
after the satisfaction of all would be entitled to share Preferred Securities
debts and liabilities of the ratably in any assets would be entitled to
Partnership are distributed to remaining after satisfaction receive a preferential
holders of A Interests in an of obligations to creditors distribution of $25 per
amount equal to their capital and any liquidation Trust Preferred
account ($10) plus any preferences on any series of Security plus accrued
unpaid Priority Return and preferred stock of the and unpaid distributions
the remainder is distributed Corporation that may then be except that, upon the
to the General Partner and outstanding. occurrence of a Special
the B Interests in accordance Event, the Trust will be
with their capital accounts. liquidated and, after
satisfaction of creditors
of the Trust, the
holders will receive
Junior Subordinated
Debentures.
</TABLE>
75
<PAGE>
<TABLE>
<CAPTION>
Interests Common Stock Trust Preferred Securities
------------ -------------- ----------------------------
<S> <C> <C>
Right to Compel Dissolution
Under the Partnership Under Delaware law, holders Under the Declaration,
Agreement, limited partners of Common Stock may holders of Trust
may compel dissolution of compel dissolution of the Preferred Securities
the Partnership by the Corporation, absent prior may not compel
affirmative vote of the action by the board of dissolution of the
holders of a majority 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.
Limited Liability
In general, holders of Shares of Common Stock Holders of Trust
Interests are limited partners will be fully paid and Preferred Securities
in a Delaware limited nonassessable. Stockholders will be entitled to the
partnership, and do not have generally will not have same limitation of
personal liability for personal liability for personal liability
obligations of the obligations of the extended to
Partnership. Corporation. stockholders of private
corporations for profit
organized under the
general corporation law
of the State of
Delaware.
Liquidity and Marketability
The Interests are freely The Common Stock will be The Trust Preferred
transferable and are currently freely transferable and Securities will be freely
listed and traded on the NYSE. application has been made transferable and
After the Effective Time, the for listing the Common application has been
Interests will cease to be Stock on the NYSE. made for listing the
traded. Trust Preferred
Securities on the NYSE.
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Continuity of Existence
[ ]The Partnership Agreement The Corporation's The Trust will dissolve
provides for the Partnership Certificate of Incorporation on September 30, 2027 or
to continue in existence until provides for perpetual upon the earlier
December 31, 2086, unless existence, subject to redemption of the Trust
earlier terminated in Delaware law. Preferred Securities or
accordance with the the distribution to the
Partnership Agreement. holders of the Junior
Subordinated
Debentures.
Financial Reporting
The Partnership is subject to The Corporation will be The Corporation will
the reporting requirements of subject to the reporting provide annual and
the Exchange Act and files requirements of the quarterly reports of the
annual and quarterly reports Exchange Act and will file Corporation to the
thereunder. The Partnership annual and quarterly reports holders of the Trust
also provides annual and thereunder. The Corporation Preferred Securities.
quarterly reports to its also will provide annual and For the reasons set
limited partners. quarterly reports to its forth under "Available
stockholders. Information," the Trust
will not issue any
separate reports.
</TABLE>
76
<PAGE>
<TABLE>
<CAPTION>
Interests Common Stock Trust Preferred Securities
------------ -------------- ----------------------------
<S> <C> <C>
Certain Legal Rights
<S> <C> <C>
Delaware law allows a Delaware law affords Delaware law allows a
limited partner to institute stockholders of a corporation beneficial owner of the
legal action on behalf of the rights to bring stockholder Trust to institute legal
Partnership (a partnership derivative actions when the action on behalf of the
derivative action) to recover board of directors has failed Trust (a trust derivative
damages from a third party to institute an action against action) to recover
or a general partner where third parties or directors of damages from a third
the general partner has failed the corporation, and class party or a trustee where
to institute the action. In actions to recover damages the trustees with
addition, a limited partner from directors for violations authority to do so have
may have rights to institute of their fiduciary duties. failed to institute the
legal action on behalf of the Stockholders may also have action. In addition, a
limited partner or all other rights to bring actions in beneficial owner of the
similarly situated limited federal courts to enforce Trust may have rights
partners (a class action) to federal rights. These rights to institute legal action
recover damages from a are comparable to the rights on behalf of himself or
general partner for violations of the limited partners in the all other similarly
of fiduciary duties to the Partnership. situated beneficial
limited partners. Limited owners (a class action)
partners may also have rights to recover damages
to bring actions in federal from a trustee for
courts to enforce federal violations of fiduciary
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 Under Delaware law, upon Upon reasonable
the limited partner's own written request, at reasonable demand and for a
expense and for a purpose times and for a proper purpose reasonably
reasonably related to his purpose reasonably related to related to his interest as
interest in the Partnership, a a stockholder's interest as a a beneficial owner of
limited partner may have stockholder, any stockholder the Trust, a Holder of
access, at reasonable times, of record shall have the right Trust Preferred
to certain information to examine and copy the Securities may have
regarding the status of the Corporation's stock ledger, a access, at reasonable
business and financial list of its stockholders and its times, to certain
condition of the Partnership, other books and records. In information regarding
tax returns, governing certain circumstances under the status of the
instruments of the Delaware law, stockholders business and financial
Partnership and a current list may not have the same right condition of the Trust,
of the partners of the to information regarding the governing instruments
Partnership, provided that Corporation that they of the Trust and a
the General Partner may currently have under the current list of the
keep confidential any trade Partnership Agreement with beneficial owners and
secrets or any other respect to information trustees of the Trust,
information the disclosure of regarding the Partnership. provided that the
which could damage the trustees of the Trust
Partnership or violate any may keep confidential
agreement or applicable law. any trade secrets or
other information the
disclosure of which could
damage the Trust or violate
any agreement or applicable
law.
</TABLE>
77
<PAGE>
<TABLE>
<CAPTION>
Interests Common Stock Trust Preferred Securities
------------ -------------- ----------------------------
Subordination
<S> <C> <C>
Subordinated to claims of Subordinated to claims of Subordinated to
creditors of the Partnership creditors of the Corporation creditors of the Trust,
and Operating Partnership. and the Operating 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. 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. After the Conversion the directors
of the Corporation will not have fiduciary duties to the holders of the Trust
Preferred Securities.
The Partnership Agreement 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 of the General Partner will be
SunSub B, a subsidiary of the Corporation.
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
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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,
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, would 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
would be taxed as a corporation no later than its taxable year beginning on
January 1, 1998. However, pursuant to the Taxpayer Relief Act of 1997, for such
taxable periods, existing publicly traded partnerships have the option of (i)
being taxed as corporations and (ii) being taxed as partnerships by electing to
be subject to tax at the rate of 3.5% on their gross income. Upon classification
as a corporation for tax purposes, the Partnership would be subject to federal
income tax on its earnings at corporate tax rates.
In addition to the Taxpayer Relief Act of 1997, which was enacted in August
1997, there are two bills pending in Congress which would eliminate the
transition rule so that publicly-traded partnerships would continue to be taxed
as partnerships after December 31, 1997. It is not possible to predict at this
time if one of these bills will ultimately be adopted, although the fact that
the Taxpayer Relief Act of 1997 dealt with this issue makes adoption unlikely.
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 a subsidiary of the
Partnership will be merged with and into the Corporation 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,
except that a portion of this gain
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would be treated as ordinary income pursuant to the rules of section 751 of the
Code. Legislation has been passed by the House and Senate, however, that, if
enacted prior to the Conversion, would result in a portion of the gain being
treated as ordinary income pursuant to Section 751 of the Code. Specifically,
any amount received by a holder of A Interests that is attributable to inventory
items would be treated as an amount realized from the sale or exchange of
property that is not a capital asset and would result in ordinary income to the
exchanging holder of A Interests. 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" at the Effective Time
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 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 except that, as noted earlier pursuant to section 751 of the
Code, a portion of this gain would be treated as ordinary. 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.
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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
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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.
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
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.
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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 Interests exchanged. Under current law, 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,
except that, as noted earlier, a portion of this gain would be treated as
ordinary income pursuant to Section 751 of the Code. Specifically, any amount
received by a holder of A Interests that is attributable to inventory items
would be treated as an amount realized from the sale or exchange of property
that is not a capital asset and would result in ordinary income to the
exchanging holder of A Interests.
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 at the Effective Time (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.
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 at the Effective Time (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
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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 August 1997, the applicable federal rate is 6.39%.
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; Shortening of Stated Maturity," 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.
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 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 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 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:
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(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.
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.
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 1997 reflecting the
income and deductions allocated to the partner during the period in 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.
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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
Corporation. 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.
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.
85
<PAGE>
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 NYSE 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
Second Quarter 12 11 1/8 5 1/8 4
Third Quarter
(to August 11) 12 1/4 11 7/16 5 7/16 4 3/4
The closing sales prices on August __, 1997, the date 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 August 11, 1997, 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 August 11, 1997 was 1,586 and 907, 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.
86
<PAGE>
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 distributed 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 through March 31, 1997, pending the
conversion to corporate form. Due to the delay in completion of the proposed
corporate conversion, the Partnership resumed payment of monthly advance B Tax
Distributions in April 1997 in the amount of $.03 per B Interest. The
Partnership intends to pay this monthly rate to holders of B Interests until the
effective date of the conversion, since it expects to allocate sufficient
taxable income on the B Interests in the shortened tax year from January 1, 1997
through the effective date to require the B Tax Distribution payment. The
balance of the required 1997 B Tax Distribution, if any, will be paid on or
before March 31, 1998. 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 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. The payment of dividends
will be at the discretion of the Corporation's Board of Directors and will
depend, among other things, on earnings, financial condition, capital
requirements, availability of acquisition candidates, level of indebtedness,
contractual restrictions with respect to the payment of dividends and other
factors that the Corporation's Board of Directors deems relevant.
87
<PAGE>
CAPITALIZATION
The following table sets forth the historical capitalization of the
Partnership at March 31, 1997, and the pro forma capitalization of the
Corporation as if the conversion had occurred on March 31, 1997. 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)
March 31, 1997
--------------
Pro Forma
Partnership Corporation
----------- -----------
<S> <C> <C>
Current portion of senior notes $ 6,395 $ --
============ ==========
Current portion of bank revolving credit facility 20,000 --
------------ ----------
Total short-term debt $ 26,395 $ --
============ ==========
Long-term portion of senior notes $ 57,539 $ 60,000
------------ ----------
Long-term portion of bank revolving credit facility -- 45,415
------------ ----------
Guaranteed preferred beneficial interests
in the Corporation's Junior Subordinated Debentures -- 105,446
------------ ----------
General Partner's minority interest in the
operating partnership 979 --
------------ ----------
Partners' capital:
General partner 969 --
Limited partners:
A interests 67,642 --
B interests 29,868 --
B interest held in treasury (1,514) --
Cumulative foreign currency
translation adjustment (1,850) --
------------ ----------
Total partners' capital 95,115 --
------------ ----------
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 -- (5,613)
Cumulative foreign currency
translation adjustment -- (1,850)
------------ ----------
Total stockholders' deficit -- (7,399)
------------ ----------
Total capitalization $ 153,633 $ 203,462
============ ==========
</TABLE>
88
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION
(dollars in thousands, except for partnership interest data)
The following table sets forth selected consolidated historical financial
data of the Partnership as of the dates and for the periods indicated. The
selected financial information set forth below for the Partnership as of and for
the three months ended March 31, 1997 and 1996 is derived from unaudited
financial statements included elsewhere herein. The selected financial
information set forth below for the Partnership as of December 31, 1996 and 1995
and for each of the three years in the period ended December 31, 1996 are
derived from the audited financial statements included elsewhere herein. The
selected financial information set forth below for the Partnership as of
December 31, 1994, 1993 and 1992 and for each of the two years in the period
ended December 31, 1993 are derived from the financial statements not included
elsewhere herein. 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>
Three Months Ended Years Ended December 31,
March 31,
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Net sales $169,016 $154,892 $649,254 $628,935 $735,861 $655,707 $612,052
Income from operations 6,266 5,557 24,452 31,302 37,759 28,975 29,712
Gain on Sale of Divisions -- -- -- 20,644 3,523 -- --
Provision (benefit) for income taxes (28) (76) (1,140) 537 100 869 493
Income before extraordinary loss and
cumulative effect of change in
accounting principle 4,576 4,010 19,267 44,745 29,544 18,506 17,691
Extraordinary loss -- -- -- (629) -- -- (3,434)
Cumulative effect on prior years of
change in accounting principle -- -- -- -- -- -- 822
Net income $ 4,576 $ 4,010 $19,267 $44,116 $29,544 $18,506 $15,079
Earnings per limited partnership interest:
Income before extraordinary loss and
cumulative effect of change in
accounting principle
- Class A $ 0.27 $ 0.27 $1.10 $1.10 $1.10 $1.10 $1.10
- Class B $ 0.07 $ 0.04 $0.32 $1.48 $0.79 $0.28 $0.25
Extraordinary loss
- Class A -- -- -- -- -- -- --
- Class B -- -- -- $(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 $ 0.27 $ 0.27 $1.10 $1.10 $1.10 $1.10 $1.10
- Class B $ 0.07 $ 0.04 $0.32 $1.45 $0.79 $0.28 $0.13
Cash distributions declared per limited
partnership interest
- Class A $ 0.27 0.27 $1.10 $1.10 $1.10 $1.10 $1.10
- Class B $ 0.03 0.06 $0.33 $0.67 $0.49 $0.27 $0.13
Weighted average number of outstanding
limited partnership 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>
89
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31, Years Ended December 31,
------------------- ------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (AT MARCH 31 AND
DECEMBER 31):
Cash and cash equivalents $ 3,096 $ 633 $ 1,666 $ 5,900 $ 4,903 $ 1,327 $ 745
Total assets 276,039 253,950 262,555 254,591 266,186 273,493 261,588
Short-term debt financing 26,395 6,395 6,395 6,395 19,357 6,319 6,319
Long-term debt and capitalized lease
obligations 58,186 67,934 69,043 63,934 74,781 104,185 115,503
Total liabilities 180,924 159,287 167,936 159,648 186,967 200,611 189,013
General partner capital 969 959 960 963 791 729 726
Limited partners' capital:
Class A 67,642 67,642 67,642 67,642 67,642 67,642 67,642
Class B 29,868 28,869 29,040 29,252 12,300 6,025 5,721
Class B held in treasury (1,514) (1,514) (1,514) (1,514) (1,514) (1,514) (1,514)
Cumulative foreign translation
adjustment (1,850) (1,293) (1,509) (1,400) (1,338) (694) (254)
Total partners' capital 95,115 94,633 94,619 94,913 79,219 72,882 72,575
OTHER DATA:
Ratio of earnings to fixed charges 1.13(i) .85 .91(i) 1.13 1.25 1.17 1.11
Cash distributions paid, excluding
distributions on capital gains $ 3,690 $ 4,886 $19,982 $20,745 $20,357 $14,940 $15,384
Cash provided by (used for) operating
activities (2,081) 2,088 23,298 17,050 17,704 23,571 27,056
Net increase (decrease) in cash and
cash equivalents 1,430 (5,267) (4,234) 997 3,576 582 69
Net book value per Class A interest 6.09 6.09 6.09 6.09 6.09 6.09 6.09
Net book value per Class B interest 1.22 1.20 1.20 1.22 .50 .21 .19
</TABLE>
(i) Excluding non-recurring items recorded in 1997 and 1996, the ratio is 1.20
and 1.21, respectively.
90
<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, 1994,
1995 and 1996 (audited) and for the three months ended March 31, 1997
(unaudited) and the consolidated balance sheets dated December 31, 1995 and 1996
(audited) and March 31, 1997 (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 a publicly held master limited partnership operating in
the wholesale industrial 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,
SIMCO/Special-T-Metals and SIMCO de Mexico. 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 de 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.
<PAGE>
Conversion to Corporate Form
The Partnership has recorded $2.5 million of transaction costs related to
the proposed Conversion as of March 31, 1997 ($2.1 million in the fourth quarter
of 1996 and $.4 million in the first quarter of 1997) and anticipates incurring
an additional $2.0 million of transaction costs to complete the conversion
process. See Note 1 of Notes to Consolidated Financial Statements of the
Partnership as of and for the three years ended December 31, 1996, for a
discussion of the accounting recognition of these costs.
Recent Developments
Summary financial results for the second quarter of 1997 compared to the
second quarter of 1996 and for the first six months of 1997 compared to the
first six months of 1996 are as follows:
<TABLE>
<CAPTION>
(dollars in thousands except per interest amounts)
--------------------------------------------------
Quarter Ended June 30 Six Months Ended June 30
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $181,643 $167,500 $350,659 $322,392
Net Income $ 9,193(1) $ 8,313 $ 13,769(1) $ 12,323
Net Income per Class B limited
partnership interest $ 0.28 $ 0.24 $ 0.35 $ 0.28
</TABLE>
- -----------
(1) Includes non-recurring charge for transaction costs related to the
proposed Conversion of $275 for the second quarter of 1997 and $625 for the
first six months of 1997.
No material trends, events or transactions which arose after March 31, 1997
would affect the financial condition or results of operation of the
Partnership, as described herein.
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 and $177.1 million for the year ended December 31, 1994.
Income contributions from these divisions aggregated $.3 million or $.01 per
Class B interest in 1995 and $8.6 million or $.39 per Class B interest in 1994.
91
<PAGE>
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 $8.0
million and the assumption of certain liabilities. The Curtis Retail operation
was integrated with the Hillman division. Curtis' sales were $1.6 million from
the acquisition date through December 31, 1995 and approximately $11.0 million
for the twelve months ended December 31, 1996.
Results of Operations
Market Developments
In 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 served and competitive
pressures from major glass manufacturers who have more aggressively pursued the
wholesale distribution business in recent years. This decline has been partially
offset by real growth in Harding's retail glass business, it's primary strategic
focus. Growth in the retail glass business is expected to continue, complemented
by internal expansion and acquisition growth opportunities.
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 will continue to respond to changing
market conditions.
Restructuring Charges
On December 11, 1996, the Board of Directors of Lehman/SDI 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, of which only $.2 million was paid
by December 31, 1996, 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 upon its
completion. See Note 1 of Notes to Consolidated Financial Statements of the
Partnership as of and for the three years ended December 31, 1996 for the
accounting recognition of the restructuring charges.
Pro Forma Results
As shown in the accompanying Pro Forma Consolidated Financial Statements
included herein, net income on a pro forma corporate basis for the three months
ended March 31, 1997, is $1.1 million resulting in $0.18 per common share or
approximately $0.05 per Class B interest (before the reverse stock split).
Net income on a pro forma corporate basis for the year ended December 31,
1996 is $5.2 million resulting in $0.81 per common share or approximately $0.20
per Class B interest (before the reverse stock split). Excluding the
aforementioned restructuring charge of $6.0 million, net income on a pro forma
corporate basis for the year ended December 31, 1996, would have amounted to
$8.8 million resulting in $1.37 per common share or approximately $0.34 per
Class B interest (before the reverse stock split).
Three Months Ended March 31, 1997 and March 31, 1996
Net income for the quarter ended March 31, 1997, was $4.6 million compared
with $4.0 million in 1996. The results for the first quarter of 1997 included a
$.4 million charge for transaction costs associated with the proposed conversion
to a C corporation. Excluding this non-recurring item, net income increased $.9
million or 22.8% over the first quarter of 1996.
92
<PAGE>
Net sales increased $14.1 million or 9.1% over the first quarter of 1996
resulting primarily from an increase in the volume of products sold due to
continued strengthening in existing product markets as well as additional market
penetration from new product lines and value-added services. Sales recorded in
the first quarter of 1997 were $169.0 million compared with the first quarter of
1996 of $154.9 million.
Sales increases (decreases) by business segment are as follows:
Sales Increase (Decrease)
-------------------------
Amount %
------ -
Industrial Services
Technology Services 5.9 million 8.1 %
Inventory Management 5.5 million 14.5 %
-----
Total Industrial Services 11.4 million 10.3 %
Hardware Merchandising 4.1 million 18.5 %
Glass Merchandising (1.4) million (6.6)%
-----
Total Partnership $14.1 million 9.1 %
=====
The sales increase in the Hardware Merchandising segment is due primarily
to an expansion of Hillman's customer base and market penetration from new
product lines associated with the Curtis acquisition. The increase in sales in
the Inventory Management divisions is comprised of sales growth primarily from
new inventory management programs of $4.2 million and in maintenance products of
$1.3 million.
The decline in sales volume in the Glass Merchandising Segment is
attributable to decreases in retail flat glass, wholesale glass and other
product line sales aggregating $1.8 million, offset by an increase in retail
automotive glass sales of $.4 million.
Cost of sales increased $8.4 million or 9.1% from the first quarter of
1996, due primarily to increased sales levels in the comparison period. The 1996
period also reflects a reclassification of $.6 million in costs from selling,
warehouse and delivery and general and administrative expense ("S,G&A") to cost
of sales.
Gross margins were 40.0% in the first quarter of 1997 and 1996, comprised
by business segment as follows:
First Quarter
-------------
1997 1996
---- ----
Industrial Services
Technology Services 25.8% 25.7%
Inventory Management 58.5% 63.0%
Total Industrial Services 37.3% 38.4%
Hardware Merchandising 51.8% 50.6%
Glass Merchandising 40.8% 36.9%
The erosion in gross margin in the Industrial Services segment is due
mainly to competitive pricing pressures and changes in sales mix, primarily in
the Inventory Management divisions.
Gross margins in the Hardware Merchandising segment increased due to
reduced packaging costs from the comparable 1996 period.
The increase in gross margins in the Glass Merchandising segment is due
primarily to improved purchasing management in retail glass and exiting from
low-margin product lines.
93
<PAGE>
S,G&A expenses increased by $4.5 million or 8.3% over the first quarter of
1996, comprised as follows: increased selling expenses of $2.0 million or 7.5%,
supporting increased 1997 sales levels; increased warehouse and delivery
expenses of $.9 million or 9.2% due to the addition of five large in-plant
accounts in the Industrial Services segment and expansion programs by certain
operating units; and increased general and administrative expenses of $1.6
million or 9.2% to support the increased number of system accounts in the
Industrial Services segment and the overall increase in 1997 sales levels.
S,G&A expenses as a percentage of sales, were as follows:
First Quarter
1997 1996
---- ----
Selling Expenses
Warehouse and Delivery Expenses 16.7% 17.0%
General and Administrative Expenses 6.2% 6.2%
Total S,G&A Expenses 11.8% 11.8%
----- -----
34.7% 35.0%
===== =====
Overall, as a percentage of sales, total S,G&A expense decreased due mainly
to the increase in sales levels in relation to the fixed cost component of S,G&A
expenses.
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 expense increased $.2 million in the comparison period due
primarily to increased borrowing levels under the Partnership's revolving credit
facility to support working capital requirements, offset by reduced financing
costs from the scheduled principal repayment on senior notes in the amount of
$6.4 million on December 1, 1996.
Other income increased by $.1 million in the comparison period due
primarily to gains from the sale of fixed assets.
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
("SFAS #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 allocation of net income to the GP is based on the GP'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 $.27 of
income per Class A limited partnership interest for the quarters ended March 31,
1997 and March 31, 1996; and $.07 of income per Class B limited partnership
interest in the first quarter of 1997 compared with $.04 of income per Class B
interest for the first quarter of 1996. Income per Class B interest in 1997
includes non-recurring transaction costs related to the proposed conversion to
corporate form of $.01. Excluding the transaction costs, income per Class B
limited partnership interest amounted to $.08 in the first quarter of 1997
compared with $.04 in the first quarter of 1996.
Operating Results Excluding Divisions Sold
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 of the three years ended December 31, 1996:
94
<PAGE>
<TABLE>
<CAPTION>
(dollars in thousands)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales $649,254 $599,865 $558,754
Cost of sales 386,251 355,004 331,609
-------- -------- --------
Gross profit 263,003 244,861 227,145
-------- -------- --------
Operating expenses:
Selling, general and admin. expenses 221,574 205,180 189,252
Management fee to general partner 3,330 3,330 3,330
Depreciation 3,623 3,358 3,249
Amortization 1,924 1,961 2,143
-------- -------- --------
Total operating expenses 230,451 213,829 197,974
-------- -------- --------
Restructuring charges 5,950 -- --
Transaction costs 2,150 -- --
-------- -------- --------
Income from operations $24,452 $31,032 $29,171
======== ======= =======
</TABLE>
Years Ended December 31, 1996 and 1995
--------------------------------------
Net income for the year ended December 31, 1996 was $19.3 million compared
with $44.1 million in 1995. As previously mentioned, 1996 results included a
$4.9 million charge (net of $1.1 million in deferred tax benefits), related to
the restructuring of the Technology Services and Glass Merchandising divisions
and a $2.1 million charge for transaction costs associated with the conversion
to a C corporation. The 1995 results included 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. Results for 1995 also included a $.6 million
charge related to the early retirement of debt and $.3 million of operating
income from Downey Glass. Excluding these non-recurring items, net income for
1996 amounted to $26.3 million or 10.5% above the comparable 1995 earnings of
$23.8 million.
Net sales increased $49.4 million or 8.2% over 1995 resulting primarily
from an increase in the volume of products sold due to continued strengthening
in existing product markets as well as additional market penetration from new
product lines and value-added services. Sales recorded in 1996 were $649.3
million compared with 1995 sales of $599.9 million, excluding divisions sold.
Sales increases (decreases) by business segment are as follows:
Sales Increase (Decrease)
Amount %
------ -
Industrial Services
Technology Services 13.6 million 4.8 %
Inventory Management 18.2 million 13.1 %
-----
Total Industrial Services 31.8 million 7.5 %
Hardware Merchandising 18.8 million 22.2 %
Glass Merchandising (1.2) million (1.3)%
------
Total Partnership $49.4 million 8.2 %
=====
The sales increase in the Hardware Merchandising segment includes
approximately $11.0 million which is due to the Curtis acquisition and the
balance of $7.8 million in growth from new accounts, expansion of existing
product lines and market penetration of new product lines. The increase in sales
in the SIMCO divisions is comprised of sales growth from new inventory
management programs of $10.5 million or 42.9% and in maintenance products of
$7.7 million or 6.7%.
95
<PAGE>
The decline in sales volume in the Glass Merchandising segment is
attributable to the discontinuation of certain product lines and markets served,
accounting for $.2 million of the sales decline and a decrease in wholesale
glass, brokerage and other product line sales of $2.8 million, offset by an
increase in retail glass sales of $1.8 million, or 4.2%.
Cost of sales increased $31.2 million or 8.8% from the twelve months ended
December 31, 1995, due primarily to increased sales levels in the comparison
period.
Gross margins were 40.5% in 1996 compared with 40.8% in 1995, excluding
divisions sold, comprised by business segment as follows:
Year Ended December 31,
-----------------------
1996 1995
---- ----
Industrial Services
Technology Services 26.7% 27.4%
Inventory Management 61.1% 64.5%
Total Industrial Services 38.6% 39.5%
Hardware Merchandising 50.8% 52.4%
Glass Merchandising 38.8% 35.9%
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 integration costs for the Curtis acquisition
and other business expansion programs.
Gross margins in the Glass Merchandising segment increased due primarily to
improved purchasing management and better sales in retail glass which carries
higher margins than the other product lines in this segment.
S,G&A expenses increased by $16.4 million or 8.0% over 1995, excluding
divisions sold, comprised as follows: increased selling expenses of $7.4 million
or 7.5%, supporting increased 1996 sales levels; increased warehouse and
delivery expenses of $6.3 million or 17.2% due to the integration of the Curtis
retail division, expansion programs by certain operating units, and the addition
of seven large in-plant accounts in the SIMCO divisions; and increased general
and administrative expenses of $2.8 million or 3.9% due primarily to cost
containment efforts.
Excluding divisions sold, S,G&A expenses as a percentage of sales, were as
follows:
Year Ended December 31,
-----------------------
1996 1995
---- ----
Selling Expenses 16.3% 16.4%
Warehouse and Delivery Expenses 6.6% 6.1%
General and Administrative Expenses 11.2% 11.7%
----- -----
Total S,G&A Expenses 34.1% 34.2%
===== =====
The Management Fee due the General Partner is accrued in the amount of $3.3
million, as previously discussed.
Depreciation expense increased $.3 million in the comparison period due
primarily to an increase in the depreciable fixed asset base.
Interest income decreased $.3 million in 1996 due primarily to the reduced
investment of excess cash that was generated during the fourth quarter of 1994
and the first quarter of 1995 from divisions sold.
96
<PAGE>
Interest expense decreased $.4 million in 1996 due primarily to reduced
financing costs from the prepayment of senior notes on March 14, 1995, offset by
higher interest expense from increased borrowing levels under the Partnership's
revolving credit facility.
Other income increased $.3 million in the comparison period due primarily
to lowered minority interest expense.
As previously stated, the Partnership incurs state, local and foreign
income taxes and provides for deferred income taxes as determined in accordance
with SFAS #109. The Partnership's provision for income taxes in 1996 decreased
$1.7 million from 1995 due to the recording of the following: $.5 million
deferred income tax benefit relating to book/tax differences in the
Partnership's casualty loss insurance program, a $1.1 million deferred income
tax benefit relating to book/tax differences from restructuring costs and a $.1
million favorable adjustment to prior year's state income tax provisions. See
"Income Taxes" below for a discussion of the effect of the proposed conversion
to corporate form on deferred income taxes.
The allocation of net income, which was previously discussed, resulted in
$1.10 of income per Class A limited partnership interest for the years ended
December 31, 1996 and December 31, 1995; and $.32 of income per Class B limited
partnership interest in 1996 compared with $1.45 of income per B Interest for
the year ended December 31, 1995. Income per B Interest in 1996 was reduced by
the restructuring charge, net of deferred tax benefits and transaction costs
amounting to $.22 and $.10, respectively. Income per B Interest for the twelve
months ended December 31, 1995 included a combined gain of $.94 from the sale of
the Dorman Products and Downey Glass divisions, an extraordinary loss of $.03
from the early extinguishment of debt and $.01 of income from the divested
Downey Glass division. Excluding these non-recurring items, income per B
Interest was $.64 compared with $.53 in 1995, an increase of approximately 21%.
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 Dorman Products and Downey
Glass 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 in December
1994. Results for 1995 also included 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, and from Downey Glass of
$1.7 million. Excluding income contributions and gains from divisions sold, as
well as the extraordinary loss on 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. Substantially all of the Partnership's growth in revenues
is related to increases in the volume of products sold. 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:
Sales Increase (Decrease)
Amount %
------ -
Industrial Services
Technology Services 25.0 million 9.6 %
Inventory Management 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 %
=====
97
<PAGE>
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%, due primarily to increased
sales levels in the existing businesses 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:
Year Ended December 31,
-----------------------
1995 1994
---- ----
Industrial Services
Technology Services 27.4% 27.7%
Inventory Management 64.5% 65.9%
Total Industrial Services 39.5% 40.3%
Hardware Merchandising 2.4% 51.0%
Glass Merchandising 35.9% 34.4%
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.
Excluding divisions sold, S,G&A expenses, as a percentage of sales were as
follows:
Year Ended December 31,
-----------------------
1995 1994
---- ----
Selling Expenses 16.4% 16.1%
Warehouse and Delivery Expenses 6.1% 5.7%
General and Administrative Expenses 11.7% 12.1%
----- -----
Total S,G&A Expenses 34.2% 33.9%
===== =====
The increase in S, G&A expenses as a percentage of sales was 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 the comparison period 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.
98
<PAGE>
Interest expense decreased $2.6 million in the comparison period due 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
with SFAS #109. The Partnership's provision for income taxes in 1995 increased
$0.4 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.
Liquidity and Capital Resources
Net cash used for operations in the first quarter of 1997 was $2.1 million
compared with net cash provided by operations in the first quarter of 1996 of
$2.1 million, a change of $4.2 million. This change was due primarily to
increased working capital investment in operations in the comparison period of
approximately $4.8 million offset by increased net income of $.6 million. The
Partnership's net interest coverage ratio (earnings before interest, taxes and
gain on sale of divisions over net interest expense) improved to 3.68x in the
first quarter of 1997 from 3.42x in the comparable prior year period.
Net cash provided by operations for the twelve months ended December 31,
1996 was $23.3 million, an increase of $6.2 million from the prior year level of
$17.1 million. The Partnership's net interest coverage ratio (earnings before
interest, taxes, gain on sale of divisions, and 1996 restructuring charges and
transaction costs over net interest expense) improved to 4.81x in 1996 from the
1995 level of 4.56x.
The Partnership's cash position of $3.1 million as of March 31, 1997,
decreased $1.4 million from the balance at December 31, 1996. Cash was provided
during this period primarily from borrowings under the bank credit agreement of
$9.0 million and proceeds from the sale of property and equipment of $.3
million. Cash was used during this period predominantly for operations,
distributions to the general and limited partners, capital expenditures,
repayments under other credit facilities and other items in the amounts of $2.1
million, $3.7 million, $1.0 million, $1.0 million and $.1 million, respectively.
The Partnership's cash position of $1.7 million as of December 31, 1996,
decreased $4.2 million from the balance at December 31, 1995. Cash was provided
during 1996 primarily from operations of $23.3 and borrowings under the bank
credit agreement of $11.0 million. Cash was used during this period
predominantly for distributions to the general and limited partners ($25.6
million), repayment of debt obligations ($6.4 million), acquisitions ($.7
million), capital expenditures ($4.3 million), repayments under other credit
facilities($.1 million) and the purchase of life insurance ($1.4 million).
The Partnership's working capital position of $90.8 million at March 31,
1997, represents a decrease of $10.0 million from the December 31, 1996 level of
$100.8 million. The decrease is attributable to an increase in current
liabilities of $20.0 million as a result of the classification of bank revolver
debt as current at March 31, 1997, an increase in interest payable on senior
notes of $1.4 million, and an increase in distributions payable to partners of
$.1 million; offset by reinvestment in working capital of $7.6 million, an
increase in cash balance of $1.4 million and a decrease in Management Fee
payable to the General Partner of $2.5 million. The Partnership's current ratio
decreased to 1.82 at March 31, 1997 from the December 31, 1996 level of 2.16,
primarily as a result of the classification of bank revolver debt as current at
March 31, 1997, compared with long-term at December 31, 1996.
99
<PAGE>
The Partnership's working capital position of $100.2 million at December
31, 1996, represents an increase of $4.4 million from the December 31, 1995
level of $95.8 million. The increase is primarily attributable to reinvestment
in working capital of $2.7 million, a decrease in distributions payable of $5.4
million and acquired working capital of $.5 million related to the Hydraulic
Depot acquisition, offset by a decrease in cash of $4.2 million. The
Partnership's current ratio increased to 2.16 at December 31, 1996 from the
December 31, 1995 level of 2.11.
As of March 31, 1997, the Partnership's total debt as a percentage of its
consolidated capitalization is 46.6% compared with 43.7% as of March 31, 1996.
On December 1, 1996 and 1995, the Operating Partnership paid scheduled
principal repayments on its senior notes aggregating $6.4 million and $4.8
million, respectively. On March 14, 1995, the Partnership prepaid a portion of
its senior notes in the amount of $14.2 million, including accrued interest
thereon of $.4 million and a make-whole penalty of $.6 million. As of December
31, 1996, the Partnership's total debt as a percentage of its consolidated
capitalization is 43.9% compared with 42.3% as of December 31, 1995.
The Partnership anticipates spending approximately $4.7 million for capital
expenditures in 1997, primarily for machinery and equipment.
The Partnership's existing bank credit facility of $50 million expires
December 31, 1997. Financing commitments of $150 million are available to the
Partnership until September 30, 1997, to fund costs related to its conversion to
corporate form, prepay its existing senior notes and provide capital for
internal and acquisition growth. The new financing arrangements will provide
capital for a five-year term from the date of conversion to corporate form. If
the Conversion is not consummated, an extension of the Partnership's existing
bank credit facility beyond December 31, 1997, will be requested. See Note 4 of
Notes to Consolidated Financial Statements of the Partnership as of and for the
three months ended March 31, 1997.
As of March 31, 1997, the Operating Partnership had $24.4 million available
under its $50.0 million Bank Credit Agreement which provides revolving credit
for working capital purposes and acquisitions. The $25.6 million outstanding
under the Bank Credit Agreement consisted of bank borrowings totaling $20.0
million and Letter of Credit commitments aggregating $5.6 million. 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 no amount was outstanding at March 31, 1997.
The Partnership was restricted from making acquisition investments in 1994
under the Senior Note and Bank Credit Agreements. The acquisition restriction in
1994 was a result of an amendment to the credit agreements executed in the first
quarter of 1994 that eased certain coverage ratios and other financial
requirements of the credit agreements. Acquisition spending amounted to $.7
million and $8.0 million in 1996 and 1995, respectively. Management intends to
continue its acquisition strategy in 1997, with authorized spending of up to
$15.0 million per year in the aggregate, to complement internal growth.
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 certain operating divisions. However, the
banks have waived this permanent reduction and maintained the existing bank
credit commitment of $50.0 million. 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 Partnership suspended the payment of monthly advance B tax
distributions effective January 1, 1997 through March 31, 1997, pending the
conversion to corporate form. Due to the delay in completion of the proposed
corporate conversion, the Partnership resumed payment of monthly advance Class B
tax distributions in April 1997 in the amount of $.03 per B Interest.
The Partnership intends to pay this monthly rate to Class B holders until the
effective date of the conversion since it expects to allocate sufficient Class B
taxable income in the shortened tax year from January 1, 1997, through the
effective date to require the B tax distribution payment. The balance of the
required 1997 Class B tax distribution, if any will be paid on or before March
31, 1998. 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.
On March 31, 1997, the Partnership distributed the balance of the tax
distribution due of $.0265 per Class B Interest to holders of record for the
entire year of 1996 which amounted to $.6 million in the aggregate. The 1996
Class 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.
100
<PAGE>
The taxable gain from the sale of the Dorman Products and Downey Glass
divisions in 1995 amounted to $.927 and $.232 per B Interest, respectively. The
sale of the Electrical Group divisions in December 1994 resulted in a taxable
gain of $.408 per B Interest. With respect to the sale of Dorman Products on
January 3, 1995, the Operating Partnership paid a partial tax distribution on
April 10, 1995 to holders of B Interests of record as of December 30, 1994, in
the amount of $.15 per B Interest. The remaining balance of the tax distribution
for the taxable gain on the sale of Dorman Products in the amount of $.175 per B
Interest was paid on March 29, 1996, along with a tax distribution in the amount
of $.081 per B Interest to holders of record as of September 29, 1995 related to
the sale of the Downey Glass division on October 27, 1995. Related to the sale
of the Electrical Group divisions, the Partnership made a tax distribution on
March 31, 1995 to holders of B Interests of record as of December 30, 1994,
equal to approximately $.143 per B Interest.
See "SPECIAL FACTORS -- Limited Partner Litigation" and "BUSINESS -- Legal
Proceedings" and Note 14 of Notes to Consolidated Financial Statements of the
Partnership as of and for the three years ended December 31, 1996 and Note 5 of
Notes to Consolidated Financial Statements of the Partnership as of and for the
three months ended March 31, 1997, included herein, for the description of a
lawsuit with respect to the sale of the Partnership's Dorman Products division
and recent lawsuits involving the Partnership's General Partner related to the
proposed Conversion. 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.
Pro Forma Liquidity and Capital Resources
In connection with the proposed Conversion, SunSource's cash flow is
expected to improve due to the following: (i) retention of the General Partner's
Management Fee 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 $.4 million 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 current 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 the
SunSource's option and the interest on the Junior Subordinated Debentures is
deductible for income tax purposes. SunSource's fixed charge to its Class A
holders will remain at $12.2 million annually 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 Class 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 of $84.9
million as of June 30, 1997, with a combination of new long-term fixed rate debt
of $60 million at 7.66% and a bank revolver of $90 million, of which
approximately $105.4 million would be outstanding on a pro forma basis as a
corporation at March 31, 1997. Borrowing rates on the five-year revolver will be
determined according to the Corporation's consolidated funded debt to EBITDA
ratio which will result in interest rates based on the London Interbank Offered
Rate ("LIBOR") plus 1.0% to 1.5%. 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 $4.0
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 Class A holders as part of the exchange
previously discussed and $4.5 million in transaction costs. Also, debt will
increase due to the prepayment of the senior notes previously mentioned
resulting in an expected make-whole payment of about $4.0 million. Interest
expense, net for the year ended December 31, 1996, is $8.1 million on a
pro-forma corporate basis compared with $6.9 million as a partnership. The
increase in interest expense is the result of incremental debt incurred directly
related to the conversion as noted herein.
101
<PAGE>
The Partnership's consolidated capitalization (including the current
portion of bank revolving credit and senior notes) as of March 31, 1997, was
$180.0 million in its current partnership form compared to $203.5 million as a
corporation on a pro forma basis. Total debt as a percentage of SunSource's
consolidated capitalization is expected to increase to 51.8% as a corporation on
a pro forma basis from its current 46.6% as of March 31, 1997.
Income Taxes
As a result of the Partnership's adoption of SFAS No. 109 in 1992, the
Partnership has a deferred tax asset aggregating $5.0 million as of December 31,
1996. Management believes that the Partnership's deferred tax asset 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 to a C corporation or after December 31,
1997, between the financial statement and tax bases, are composed of prepayment
penalties in the amount of $.8 million, insurance casualty loss liabilities in
the amount of $1.4 and deferred compensation liabilities in the amount of $8.3
million, net of a valuation allowance of $.2 million. See Note 13 of Notes to
Consolidated Financial Statements of the Partnership as of and for the three
years ended December 31, 1996.
The minimum level of future taxable income necessary to realize the
Partnership's recorded deferred tax asset at December 31, 1996, is approximately
$12.5 million. For the three years ended December 31, 1996, the Partnership'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,
------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Consolidated Net Income per the
Financial Statements ("Book") $19,267 $44,116 $29,544
Tax Adjustments to Book Income:
- -------------------------------
Goodwill & Other Amortization 1,013 1,252 1,634
Depreciation 607 467 506
Deferred Compensation, net (96) 942 2,917
Self-Insurance Accrued Expenses, net (943) (776) 844
Tax gain in excess of book gain from sale of Divisions -- 1,977 1,216
Restructuring Charges 5,783 -- --
Transaction Costs 2,150 -- --
Other Increase (Decrease) to Book Income, net 853 1,893 451
------- ------- -------
Federal Taxable Income $28,634 $49,871 $37,112
======= ======= =======
</TABLE>
Partnership Tax Status
As previously noted, for taxable periods beginning after December 31, 1997,
if the partnership does not convert to corporate form, it would have the option
of (i) being taxed as a corporation, or (ii) electing to be subject to tax at
the rate of 3.5% on its gross income in order to continue to be taxed as a
partnership.
If the Partnership were not to convert to corporate form, and not elect to
continue to be taxed as a 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 will not be allocated for tax purposes to
the partners as is currently being done, and limited partners will 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
102
<PAGE>
whether any other distribution will be made with respect to the B Interests is
solely 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, payment of the Priority Return distribution is
expected to continue to the A Interests in the amount of $.0917 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 on competitive
market conditions.
103
<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 (current and former executive
officers, the "Management Employees").
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>
SunSource 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
Mexico
- Hydra Power de Mexico Tlalnepantla, C.P., 1992
Mexico
- SIMCO de Mexico Mexico City, Mexico 1992
Hardware Merchandising Segment
- Hillman Cincinnati, OH 1982
Glass Merchandising Segment
- Harding Glass Kansas City, MO 1980
</TABLE>
On December 11, 1996, the Board of Directors of Lehman/SDI, 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, through integration
of its finance, administration, purchasing, warehousing and service center
functions. Redeployment of the Partnership's assets in its Glass business will
focus management's attention on the strategic growth in the retail sector. See
Note 1 of Notes to Consolidated Financial Statements of the Partnership as of
and for the three years ended December 31, 1996.
104
<PAGE>
In November 1995, the Operating Partnership's Hillman division acquired the
retail hardware business of Curtis Industries for $8.0 million. Annual sales of
Curtis' Retail division are approximately $11 million. The acquisition of Curtis
significantly expanded 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.
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 $0.7 million. Annual
sales of Hydraulic Depot, Inc., are approximately $2.5 million. This acquisition
expands Warren's previous geographic markets.
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, 1996, the Partnership had net sales of
approximately $649 million, with the largest operating division contributing
approximately $164 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. Prior to most
acquisitions, certain agreed upon procedures are performed by internal and
external auditors.
105
<PAGE>
In accordance with the terms of its credit agreements, the Partnership was
not permitted to make acquisitions in 1994. Acquisition spending amounted to
$8.0 million and $0.7 million in 1995 and 1996, respectively. See Notes 5, 8 and
9 of Notes to Consolidated Financial Statements of the Partnership as of and for
the three years ended December 31, 1996.
As the result of an analysis of strategic alternatives by the Partnership,
the Partnership sold the non-strategic businesses described above in 1994 and
1995. Through the sale, the Partnership strengthened its balance sheet and
positioned itself to resume its acquisition program by focusing on businesses
which fit its current strategic plan. The Partnership has authorized spending of
up to $15.0 million per year for acquisitions in accordance with the terms of
its current credit agreements. Its new financing commitments will not limit the
amount of acquisition spending by the Corporation, provided compliance with the
terms of the new credit facilities is maintained. See "-- Investment and
Borrowing Policies."
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. The Partnership recognizes revenue upon shipment of products
to customers, net of any allowances for return merchandise and credits. 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,
1996, 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 three months ended March
31, 1997 and for the year ended December 31, 1996.
The following table shows the percentages of consolidated net sales
reported for the years ended December 31, 1996, 1995 and 1994 derived from the
Partnership's current business segments, excluding divisions sold:
<TABLE>
<CAPTION>
Percentage of Consolidated Net Sales for
Three
Months
Ended
March 31 Year Ended December 31,
Business Segment 1997 1996 1995 1994
- ---------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Industrial Services
Technology Services divisions 46.9% 46.1% 47.6% 46.6%
SIMCO divisions 25.6% 24.1% 23.0% 22.9%
----- ----- ----- -----
Total Industrial Services 72.5% 70.2% 70.6% 69.5%
Hardware Merchandising 15.7% 15.9% 14.1% 13.1%
Glass Merchandising 11.8% 13.9% 15.3% 17.4%
----- ----- ----- -----
100.0% 100.0% 100.0% 100.0%
</TABLE>
106
<PAGE>
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:
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 180,000 customers, the largest of which accounted
for less than 5% of net sales for the three months ended March 31, 1997 and for
the year ended December 31, 1996. 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 740 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 of the Partnership as of and for the three
years ended December 31, 1996.
107
<PAGE>
Investment and Borrowing Policies
The Partnership invests in cash equivalents consisting of commercial paper,
U.S. Treasury obligations and other liquid securities purchased with initial
maturities less than 90 days. If the Conversion is approved, the Corporation
expects no material change in its cash investment policy.
Currently, the Partnership has financing capacity of $113.9 million
consisting of $63.9 million in outstanding senior notes at a weighted average
borrowing rate of 8.9% and a $50 million bank revolving credit facility at
borrowing rates based on LIBOR plus 1.75% and prime. The existing senior note
and bank credit agreements require the maintenance of specific coverage ratios
and levels of financial position and restricts the incurrence of additional
debt, the sale of assets and distributions from the Operating Partnership.
On March 4, 1997, the Operating Partnership received the last of two
financing commitments which together aggregate $150.0 million from lenders.
These commitments are available to the Partnership until September 30, 1997. The
Operating Partnership intends to utilize the debt capacity to fund transaction
costs and other payments related to the Conversion, refinance its current
outstanding senior notes of $63.9 million as of June 30, 1997, including
interest thereon and related make-whole amount of approximately $4.0 million,
and outstanding bank revolver borrowings of $21.0 million as of June 30, 1997.
Also, the new credit facilities will provide for working capital for
reinvestment in its businesses and acquisition capital for future growth. The
new financing commitments consist of a $60.0 million five year fixed rate note
at 7.66% and $90.0 million five year bank revolver with terms and conditions
more favorable than the Partnership's existing senior notes and bank credit
lines including fewer restrictive covenants and an effective interest rate
reduction of approximately 1.00%. Borrowings under the new bank credit facility
will be based on LIBOR plus 1.0% to 1.5% and prime. The new financing
arrangements will limit the Corporation's ability to incur additional
indebtedness, distribute dividends and repurchase either Common Stock or the
Trust Preferred Securities.
Employees
As of July 1, 1997, the Partnership, through the Operating Partnership,
employed 4,060 employees. As of December 31, 1996, the Partnership, through the
Operating Partnership, employed 3,984 employees, of which 1,675 are sales
personnel, 1,308 are employed as warehouse and delivery personnel, and 1,001
hold administrative positions. The Operating Partnership has collective
bargaining agreements with five unions representing a total of 80 employees. In
the opinion of management, employee relations are good.
Backlog
The Partnership's sales backlog excluding divested operations was
$59,531,000 as of December 31, 1996, and $54,935,000 as of December 31, 1995.
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 Taxpayer Relief Act
of 1997 (H.R. 2014) permanently extended the effective date of the amendment if
such partnerships elect to pay tax at a rate of 3.5% of their gross income and
do not add any substantial new lines of business. The Partnership does not
currently intend to add any substantial new lines of business during the period
when it otherwise qualifies for delayed effectiveness under Section 7704. See
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES."
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
108
<PAGE>
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 and
assuming it does not elect to remain a partnership by electing to be taxed on
its gross income, 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.
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 NYSE
will not impair the status of the Partnership as an "existing partnership" that
qualifies for a delayed effective date under Section 7704.
Properties
The Partnership currently has approximately 200 warehouse and stocking
facilities located throughout the United States, Canada and Mexico. Most of
these include sales offices. Approximately 16% of these facilities are owned and
the remainder are leased. The Partnership's principal properties are warehouse
facilities used by the Operating Partnership, as follows:
Division Location Description
-------- -------- -----------
Hillman Cincinnati, Ohio 190,000 sq. ft. (leased)
Harding Glass Denver, Colorado 184,000 sq. ft. (owned)
Kar Products Itasca, Illinois 80,000 sq. ft. (owned)
In the opinion of management, the Partnership's existing facilities are in
good condition.
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.
See "SPECIAL FACTORS -- Limited Partner Litigation" for a description of
litigation instituted by two limited partners with respect to the Conversion.
109
<PAGE>
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.
110
<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, April 2, 1997 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
Ikon Office Solutions Alco Standard Corporation (distributor of office and
P. O. Box 834 paper products); Executive Officer, Alco Standard
Valley Forge, PA 19482 Corporation from 1970 to present; Director, Corporate
Insurance and Reinsurance Limited.
Norman V. Edmonson, 57 Executive Vice President of the Partnership since
2600 One Logan Square December 1994; Group Vice President of the
Philadelphia, PA 19103 Partnership prior to December 1994.
Eliot M. Fried, 64 Managing Director, Lehman Brothers Inc.; Director,
Lehman Brothers Axysis Technologies, Inc. ; Bridgeport Machines, Inc.;
American Express Tower - 17th Energy Ventures, Inc.; Walter Industries.
Floor
World Financial Center
New York, NY 10285
Arnold S. Hoffman, 61 Senior Managing Director, Legg Mason Wood Walker,
Legg Mason Wood Walker Incorporated; Director, Intelligent Electronics
Incorporated Incorporated.
Mellon Bank Center, Suite 1100
1735 Market Street
Philadelphia, PA 19103
Donald T. Marshall, 63 Chairman and Chief Executive Officer of the
2600 One Logan Square Partnership.
Philadelphia, PA 19103
John P. McDonnell, 62 President of the Partnership since December 1994;
2600 One Logan Square Group Vice President of the Partnership prior to
Philadelphia, PA 19103 December 1994.
Ernest L. Ransome, III, 71 Chairman, Giles & Ransome, Inc. (distributor of
Giles & Ransome construction equipment).
2975 Galloway Road
Bensalem, PA 19020
Donald A. Scott, 67 Senior Partner, Morgan, Lewis & Bockius LLP;
2000 One Logan Square Director, Provident Mutual Life Insurance Company.
Philadelphia, PA 19103
Henri I. Talerman, 40 Managing Director, Lehman Brothers Inc. from June
Lehman Brothers 1992 to present; Senior V.P., Lehman Brothers prior to
American Express Tower - 18th 1992; Director, McBride plc from May 1993 to present;
Floor Financier Gerflor SA, 1992 to present; Advisory
World Financial Center Director, Europe Capital Partners.
New York, NY 10285
</TABLE>
111
<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
Employment History; Other
Name, Age and Address Directorships
---------------------- ---------------------------------
<S> <C>
Richard J. Brus, 59 President, Sun Technology Services since 1995;
153 W. Valley Avenue President, Activation Division 1992 to 1995; and
Birmingham, AL 35259 Vice President-Sales & Marketing, Activation
Division, prior to 1992.
Harold J. Cornelius, 48 Group Vice President.
Harding Glass Industries
7201 W. 110th Street
Overland Park, KS 66210
Joseph M. Corvino, 43 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, 57 Executive Vice President since December 1994; Group Vice
2600 One Logan Square President prior to December 1994.
Philadelphia, PA 19103
Max W. Hillman, Jr., 50 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, 62 President and Chief Operating Officer since
2600 One Logan Square December 1994; Group Vice President prior to
Philadelphia, PA 19103 December 1994.
</TABLE>
All executive officers hold office at the pleasure of the board of
directors.
<PAGE>
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 and Chief Executive
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.
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, 1996, 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.
112
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
---------------------------------------------- All Other
Name and Principal Position Year Salary Bonus(1) Compensation
- --------------------------- ---- ------ -------- ------------
<S> <C> <C> <C> <C>
Donald T. Marshall 1996 $452,509 $45,230 $11,749 (2)
Chairman and Chief Executive Officer 1995 488,688 4,347 10,234 (2)
1994 454,043 221,144 8,185 (2)
John P. McDonnell 1996 358,105 22,692 3,273 (2)
President and Chief Operating Officer 1995 374,451 32,812 2,500 (2)
1994 295,354 96,915 2,135 (2)
Norman V. Edmonson 1996 308,125 105,600 1,923 (2)
Executive Vice President 1995 333,849 82,200 1,638 (2)
1994 300,477 94,400 1,418 (2)
Harold J. Cornelius 1996 280,107 7,101 19,000 (3)
Group Vice President 1995 291,609 27,400 --
1994 275,375 102,729 90,128 (3)
Max W. Hillman, Jr. 1996 269,816 -- 29,000 (3)
Group Vice President 1995 268,920 36,250 50,186 (3)
1994 294,793 104,898 107,632 (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" below.
(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 through 1996
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 as of December 31, 1996, for each executive officer are as
follows: Donald T. Marshall, $1,126,486; Norman V. Edmonson, $740,261; John P.
McDonnell, $354,036; Harold J. Cornelius, $354,036; and Max W. Hillman,
$354,036.
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.
As described under "SPECIAL FACTORS -- Determinations of the Special Committee,"
Messrs. Brewer and Ransome as members of the Special Committee also received a
retainer of $20,000 plus a meeting fee of $1,000 per meeting for their work on
the Special Committee.
Deferred Compensation Plans
The Partnership's deferred compensation plans are described in Note 11 to
Consolidated Financial Statements of the Partnership as of and for the three
years ended December 31, 1996. 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.
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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 (including its reorganization), 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 of
the Partnership as of and for the three years ended December 31, 1996. As a
result of the proposed conversion, the change of control provisions of the Plans
will be triggered because a majority of the directors of Lehman/SDI will not
continue as directors of Lehman/SDI after the Conversion. 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, 1997 with respect to 1996, was $3,329,872. The amount of Management
Fee paid in 1996 with respect to 1995 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 1996 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 1996.
The Partnership and the Corporation propose to have these firms perform
similar services as needed during the current fiscal year.
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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) each executive
officer, (iii) certain persons known to the Company to own beneficially more
than 5% of the outstanding interests and (iv) all officers and directors as a
group, the beneficial ownership of A and B Interests of the Partnership as of
July 1, 1997. 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 --(2) 27,138 --(2)
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 --(2) 250 --(2)
Richard J. Brus 1,186 2,500 --(2) 625 --(2)
Harold J. Cornelius 200 200 --(2) 27,770 --(2)
Joseph M. Corvino 1,415 105,546 --(2) 35,626 --(2)
Norman V. Edmonson 4,900 1,300,916 6.0% 440,729 6.9%
Eliot M. Fried -- -- (3) --(3) -- --(4)
Max W. Hillman, Jr. 4,000 10,000 --(2) 30,220 --(2)
Arnold S. Hoffman 13,000(3)(5) 13,000(3)(5) --(2) 3,250 --(4)
Donald T. Marshall 30,311 2,075,232 9.6% 698,988 10.9%
John P. McDonnell 7,711 623,071 2.9%(2) 211,208 3.3%
Ernest L. Ransome, III 5,000(6) 5,000 --(2) 1,250 --(2)
Donald A. Scott 9,000 9,000 --(2) 2,250 --(2)
Henri I. Talerman -- --(3) --(3) -- --(2)
All directors and 79,723 4,145,465 19.1% 1,452,166 22.6%
executive officers as a
group (13 persons)
</TABLE>
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- --------------------
(1) In addition to the Interests listed, Lehman/SDI owns the general partnership
interest, and the Management Employees beneficially own limited partnership
interests, in the General Partner (the "GP Interests"). The GP Interests held by
Lehman/SDI represents 53.8% of the GP Interests and the GP Interests held by the
Management Employees collectively represent 46.2% of the GP Interests. 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) Represents less than 1% of the outstanding B Interests or shares of Common
Stock.
(3) 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.
(4) Does not include 1,447,031 shares of Common Stock expected to be owned by
Capital Partners after the Conversion.
(5) 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.
(6) 2,500 of these A and B Interests are held in a trust, of which Mr. Ransome
is a trustee.
SUNSOURCE CAPITAL TRUST
The Trust is a statutory business trust that was formed under the Business
Trust Act pursuant to the filing of a certificate of trust with the Secretary of
State of the State of Delaware and the entering into of 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 The 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 a segregated non-interest bearing
account (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 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.
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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 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."
<PAGE>
If an Indenture Event of Default occurs and is continuing with respect to
the 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
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<PAGE>
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 certificate for 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 Indenture and 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 501 Silverside Road, Suite 17,
Wilmington, DE 19809, telephone number (302) 798-6665.
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
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
set forth below contains all material elements of the Trust Preferred
Securities, but 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.
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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.
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 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 October 31, 1997, but only if, and to the extent that, interest
payments are made in respect of Junior Subordinated Debentures held by the
Property Trustee.
<PAGE>
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 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 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.
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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 Trust 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; Shortening of Stated Maturity
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
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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. In addition, if a Tax Event
shall occur and be continuing and in the opinion of nationally recognized
independent tax counsel to the Trust, there would in all cases, after effecting
the termination of Trust and the distribution of the Debentures to the holders
of the Trust Preferred Securities in exchange therefor upon liquidation of the
Trust, be more than an insubstantial risk that the Tax Event would continue,
then the Corporation shall have the right to shorten the stated maturity of the
Junior Subordinated Debentures to the latest date permissible without adversely
affecting the deductibility of interest payable on the Junior Subordinated
Debentures, but not earlier than September 30, 2002 (and thereby cause the Trust
Preferred Securities to be redeemed on such earlier date) such that, in the
opinion of nationally recognized independent tax counsel to the Trust, after
advancing the stated maturity of the Debentures, interest paid on the Junior
Subordinated Debentures will be deductible by the Corporation for federal income
tax purposes. 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 if the Corporation shortened the
stated maturity of the Junior Subordinated Debentures 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.
<PAGE>
"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
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.
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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; Shortening of Stated Maturity."
"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
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 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.
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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 September 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 "Regular Trustees elect to dissolve the Trust
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 or the equivalent with respect to the Corporation, the consent of at
least a majority in liquidation amount of the Trust Securities, voting together
as a single class, to dissolve the Trust, 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.
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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.
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."
<PAGE>
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
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
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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.
<PAGE>
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.
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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 materially adversely affect the material 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
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 materially adversely affects the material 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 and their rights under the Declaration to vote on the election
of Successor Trustees and Property Trustees 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
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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.
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.
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).
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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 and the Declaration, the Company, as borrower, has agreed
to pay all debts and other obligations (other than with respect to the Trust
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.
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.
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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,
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.
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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 (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.
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.
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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 (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; Shortening of Stated Maturity."
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 September 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.
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 September 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 September 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; Shortening of Stated Maturity." 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.
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If the Corporation gives a notice of redemption in respect of Junior
Subordinated Debentures (which notice will be irrevocable) then, by 10:00 a.m.,
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.
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; Shortening of Stated Maturity."
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 October 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.
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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.
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.
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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 Junior 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.
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 December 31, 1996, the
Operating Partnership had outstanding indebtedness of $85,244,000, 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:
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(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 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.
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.
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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
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.
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.
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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
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; Shortening of
Stated Maturity." The Trust Preferred Securities represent preferred undivided
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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
to the Corporation 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.
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 $.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 the persons who will become stockholders
upon the Conversion have entered into a Stockholders Agreement dated as of July
31, 1997, 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 " -- Anti-takeover Provisions --
Bylaws 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
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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.
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 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 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, L.P., Lehman Ltd. I, Inc., LB I Group, Inc., Lehman/SDI,
Lehman Brothers Holdings 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.
<PAGE>
Stockholder Rights Plan. The Corporation has adopted a Stockholder Rights
Plan pursuant to a Rights Agreement, effective as of the Effective Time, between
the Corporation and Registrar and Transfer Company. 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 Stock, 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 $75, 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.
139
<PAGE>
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) ten 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 September 30,
2007, unless earlier redeemed by the Corporation as described below. The
percentage ownership of shares of Common Stock held by Lehman Brothers after the
Conversion will not cause a Distribution Date to occur.
Except in the circumstances described below, after the Distribution Date
each Right will be exercisable for 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 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 $75 worth of shares of Common Stock for $37.50. 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, defined as (i) the receipt of securities from the
Corporation; (ii) the sale of assets by the 20% stockholder to, from or
with the Corporation having a value of more than $5,000,000 or on terms
and conditions less favorable to the Corporation than the Corporation
would be able to obtain in an arm's length negotiation with an
unaffiliated third party; (iii) the receipt by the 20% stockholder of
compensation other than for full time employment at regular rates; and
(iv) the receipt by the 20% stockholder of the benefit of any loans,
guarantees or other financial assistance or tax credits from the
Corporation. The Board of Directors of the Corporation has the power to
administer and interpret the Plan.
If a "Flip-over" event occurs, the holder of Rights is entitled to purchase
$75 worth of the Acquiror's stock for $37.50 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 $.005 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 September 30, 2007.
<PAGE>
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.
140
<PAGE>
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Common Stock is Registrar and
Transfer Company.
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 Brothers 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 the issuance of unregistered shares 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 Lehman/SDI and
of the Corporation.
141
<PAGE>
EXPERTS
The consolidated balance sheets of the Partnership at December 31, 1996 and
1995 and the consolidated statements of income, changes in partners' capital and
cash flows for the three years in the period ended December 31, 1996 included
and incorporated by reference in this prospectus and the balance sheet of
SunSource, Inc. at December 31, 1996 included in this prospectus, have been
included and incorporated herein in reliance on the reports of Coopers & Lybrand
L.L.P., independent accountants, given on the authority of that 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, Lehman/SDI, Lehman Brothers Holdings
Inc., Lehman Brothers Capital Partners I, L.P., LB I Group Inc., Lehman Ltd. I
Inc., Norman V. Edmonson, Donald T. Marshall and John P. McDonnell 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 September 5, 1997.
142
<PAGE>
The following document of the Partnership has been filed with the SEC and
is incorporated herein by reference:
(a) Annual Report on Form 10-K for the fiscal year ended December 31, 1996.
(b) Quarterly Report on Form 10-Q for the quarterly period ended March 31,
1997.
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.
143
<PAGE>
INDEX TO FINANCIAL STATEMENTS
SunSource L.P. and Subsidiaries
<TABLE>
<CAPTION>
Page
----
<S> <C>
Unaudited Pro Forma Consolidated Financial Statements
Introduction to Unaudited Pro Forma Consolidated Financial Statements .................. F-2
Unaudited Pro Forma Consolidated Balance Sheet as of March 31, 1997 ..................... F-3
Unaudited Pro Forma Consolidated Statements of Income:
for the three months ended March 31, 1997 ............................................. F-4
for the twelve months ended December 31, 1996 .......................................... F-5
Unaudited Pro Forma Consolidated Statements of Cash Flows:
for the three months ended March 31, 1997 ............................................. F-6
for the twelve months ended December 31, 1996 .......................................... F-7
Notes to Unaudited Pro Forma Consolidated Financial Statements ......................... F-8:14
Unaudited Historical Consolidated Financial Statements
Unaudited Consolidated Balance Sheets as of March 31, 1997, March 31, 1996 and December
31, 1996 (Audited) ..................................................................... F-15
Unaudited Consolidated Statements of Income for the three months ended March 31, 1997 and
1996 ................................................................................. F-16
Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 1997
and 1996 .............................................................................. F-17
Unaudited Consolidated Statements of Changes in Partners' Capital for the years ended
December 31, 1995 and 1996 and for the three months ended March 31, 1997 ................ F-18
Notes to Unaudited Consolidated Financial Statements ..................................... F-19:20
Audited Historical Consolidated Financial Statements
SunSource Inc.
Report of Independent Accountants ...................................................... F-21
Balance Sheet as of December 31, 1996 ................................................... F-22
Notes to Balance Sheet .................................................................. F-23:24
SunSource L.P.
Report of Independent Accountants ...................................................... F-25
Consolidated Balance Sheets as of December 31, 1996 and 1995 ........................... F-26
Consolidated Statements of Income for the Years ended December 31, 1996, 1995 and 1994 .. F-27
Consolidated Statements of Cash Flows for the Years ended December 31, 1996, 1995 and F-28
1994.................................................................................... F-28
Consolidated Statements of Changes in Partners' Capital for the Years ended December 31,
1996, 1995 and 1994 .................................................................... F-29
Notes to Consolidated Financial Statements ............................................. F-30:46
Unaudited Historical Financial Statements
SunSource Inc.
Balance Sheet as of June 30, 1997 ....................................................... F-47
Notes to Unaudited Balance Sheet ........................................................ F-48
</TABLE>
F-1
<PAGE>
SunSource L.P. and Subsidiaries
Pro Forma Consolidated Financial Statements
The following unaudited pro forma consolidated financial statements of
SunSource L.P. ("the Partnership"), give effect to the proposed conversion of
the Partnership to corporate form. In connection with the conversion, the
Partnership intends to recapitalize its existing credit facilities. The
Conversion and recapitalization ("the transaction") will be effected through
the formation of a new corporation, SunSource Inc.
The pro forma balance sheet assumes the transaction occurred on March 31,
1997. The pro forma consolidated statements of income and cash flows for the
three months ended March 31, 1997 and twelve months ended December 31, 1996,
assume the transaction occurred at the beginning of the periods presented.
The pro forma consolidated financial statements are not necessarily
indicative of operating results, cash flows, 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, cash
flows, 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 Statement/Prospectus.
F-2
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
March 31, 1997
------------------------------------------------------
Pro Forma
Adjustments
-----------------------
ASSETS Partnership Amount Note* Corporation
------ ----------- ----------- --------- ------------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents .................................... $ 3,096 $ (3,096) 2A $ --
Accounts and notes receivable, net ........................ 91,710 -- 91,710
Inventories ................................................ 101,379 101,379
Deferred income taxes ....................................... -- 10,520 2B 10,520
Other current assets ....................................... 4,819 -- 4,819
--------- --------- ---------
Total current assets ....................................... 201,004 7,424 208,428
Property and equipment, net ................................. 21,442 -- 21,442
Goodwill ................................................... 42,661 14,797 2C 57,458
Deferred income taxes ....................................... 5,331 (2,804) 2B 2,527
Other assets ................................................ 5,601 379 2D 5,980
--------- --------- ---------
Total assets ............................................. $ 276,039 $ 19,796 $ 295,835
========= ========= =========
LIABILITIES AND EQUITY
----------------------
Current liabilities:
Accounts and notes payable, trade ........................... $ 56,462 $ -- $ 56,462
Current portion of senior notes .............................. 6,395 (6,395) 2E --
Distributions payable ....................................... 1,944 (925) 2F 1,019
Bank revolving credit ....................................... 20,000 (20,000) 2E
Accrued expenses:
Interest on senior notes .................................... 1,892 (1,892) 2E --
Management fee due the general partner ..................... 821 (821) 2G --
Other accrued expenses .................................... 22,666 -- 22,666
--------- --------- ---------
Total current liabilities ................................. 110,180 (30,033) 80,147
Senior notes ................................................ 57,539 2,461 2E 60,000
Bank revolving credit ....................................... -- 45,415 2E 45,415
Other liabilities ............................................. 13,205 (979) 2H 12,226
--------- --------- ---------
Total liabilities .......................................... 180,924 16,864 197,788
--------- --------- ---------
Guaranteed preferred beneficial interests in the Corporation's
junior subordinated debentures .............................. -- 105,446 2H 105,446
--------- --------- ---------
Partners' Capital:
General partner ............................................. 969 (969) 2H --
Limited partners:
Class A interests .......................................... 67,642 (67,642) 2H --
Class B interests .......................................... 29,868 (29,868) 2H --
Class B interests held in treasury ........................ (1,514) 1,514 2H --
Cumulative foreign currency translation adjustment ......... (1,850) 1,850 2H --
--------- --------- ---------
Total partners' capital .................................... 95,115 (95,115) --
--------- --------- ---------
Stockholders' deficit:
Preferred stock, $.01 par, 1,000,000 shares authorized, none
issued ................................................... -- -- 2H --
Common stock $0.01 par, 20,000,000 shares authorized;
6,418,936 shares issued and outstanding ..................... -- 64 2H 64
Accumulated deficit ....................................... -- (5,613) 2H (5,613)
Cumulative foreign currency translation adjustment ......... -- (1,850) 2H (1,850)
--------- --------- ---------
Total stockholders' deficit .............................. -- (7,399) (7,399)
--------- --------- ---------
Total liabilities, partners' capital, preferred beneficial
interests and stockholders' deficit ........................ $ 276,039 $ 19,796 $ 295,835
========= ========= =========
Pro forma net book value per common share: .................. $ (1.16)
=========
</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>
Three Months Ended March 31, 1997
------------------------------------------------------
Pro Forma
Partnership Adjustments Note* Corporation
------------- ------------- ------- ------------
<S> <C> <C> <C> <C>
Net sales .......................................... $ 169,016 $ -- $ 169,016
Cost of sales ....................................... 101,416 -- 101,416
---------- --------- ---------
Gross profit .................................... 67,600 -- 67,600
---------- --------- ---------
Operating expenses:
Selling, general and administrative expenses ...... 58,690 -- 58,690
Management fee to general partner .................. 821 (821) 3A --
Depreciation ....................................... 1,018 -- 1,018
Amortization .................................... 455 93 3B 548
---------- --------- ---------
Total operating expenses ........................ 60,984 (728) 60,256
---------- --------- ---------
Transaction costs ................................. 350 (350) 3C --
---------- --------- ---------
Income from operations ........................... 6,266 1,078 7,344
Interest expense, net .............................. 1,831 318 3D 2,149
Other income, net ................................. 113 46 3E 159
Distribution on guaranteed preferred beneficial
interests in Corporation's junior subordinated
debentures ....................................... -- (3,057) 3F (3,057)
---------- --------- ---------
Income before income taxes ........................ 4,548 (2,251) 2,297
Provision (benefit) for income taxes ............... (28) 1,201 3G 1,173
---------- --------- ---------
Net income ....................................... $ 4,576 $ (3,452) 1,124
========== =========
Estimated after-tax transaction costs of the
conversion ....................................... (3,422)
---------
Net loss after transaction costs of the conversion $ (2,298)
=========
Net income allocated to partners:
General partner ................................. $ 46
----------
Class A limited partners ........................... $ 3,052
----------
Class B limited partners ........................ $ 1,478
----------
Earnings per limited partnership interest:
- Class A interest .............................. $ 0.27
- Class B interest .............................. $ 0.07
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 ........................ $ .18
Net loss per common share after transaction costs of
the conversion .................................... $ (.36)
Weighted average number of outstanding common
shares .......................................... 6,418,936
Ratio of earnings to fixed charges ............... 1.13 1.41
</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>
Twelve Months Ended December 31, 1996
------------------------------------------------------
Pro Forma
Partnership Adjustments Note* Corporation
------------- ------------- ------- ------------
<S> <C> <C> <C> <C>
Net sales .......................................... $ 649,254 $ -- $ 649,254
Cost of sales ....................................... 386,251 -- 386,251
---------- ---------- ---------
Gross profit .................................... 263,003 -- 263,003
---------- ---------- ---------
Operating expenses:
Selling, general and administrative expenses ...... 221,574 -- 221,574
Management fee to general partner .................. 3,330 (3,330) 3A --
Depreciation ....................................... 3,623 -- 3,623
Amortization ....................................... 1,924 370 3B 2,294
---------- ---------- ---------
Total operating expenses ........................ 230,451 (2,960) 227,491
---------- ---------- ---------
Restructuring charges .............................. 5,950 5,950
Transaction costs ................................. 2,150 (2,150) 3C --
---------- ---------- ---------
Income from operations ........................... 24,452 5,110 29,562
Interest expense, net .............................. 6,875 1,272 3D 8,147
Other income, net ................................. 550 195 3E 745
Distribution on guaranteed preferred beneficial
interests in Corporation's junior subordinated
debentures ....................................... -- (12,232) 3F (12,232)
---------- ---------- ---------
Income before income taxes ........................ 18,127 (8,199) 9,928
Provision (benefit) for income taxes ............... (1,140) 5,841 3G 4,701
---------- ---------- ---------
Net income ....................................... $ 19,267 $ (14,040) 5,227
========== ========== =========
Estimated after-tax transaction costs of the
conversion ....................................... (3,422)
---------
Net income after transaction costs of the
conversion .................................... $ 1,805
==========
Net income allocated to partners:
General partner .................................... $ 193
----------
Class A limited partners ........................... $ 12,210
----------
Class B limited partners ........................... $ 6,864
----------
Earnings per limited partnership interest:
- Class A interest .............................. $ 1.10
- Class B interest .............................. $ 0.32
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 ........................ $ .81
Net income per common share after transaction costs
of the conversion ................................. $ .28
Weighted average number of outstanding common
shares ............................................. 6,418,936
Ratio of earnings to fixed charges .................. .91 1.45
</TABLE>
*SEE ACCOMPANYING NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
F-5
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,1997
-------------------------------------------------------
Pro Forma
Adjustments
------------------------
Partnership Amount Note* Corporation
------------- -------------- ------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income .................................... $ 4,576 $ (3,452) $ 1,124
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ............... 1,473 93 1,566
Decrease in cash value of life insurance . 129 -- 129
Transaction costs ........................... 350 (350) --
Provision for deferred compensation ......... 817 -- 817
Deferred income tax benefit .................. (324) (3) (327)
Changes in current operating items:
Increase in accounts and notes receiv-
able (13,132) -- (13,132)
Decrease in inventories ..................... 1,017 -- 1,017
Increase in other current assets ............ (147) -- (147)
Increase in accounts payable ............... 6,188 -- 6,188
Increase in accrued interest ............... 1,419 -- 1,419
Decrease in accrued restructuring
charges and transaction costs ............ (719) 345 (374)
Decrease in other accrued liabilities ...... (3,276) 39 (3,237)
Other items, net .............................. (452) -- (452)
-------- ---------- --------
Net cash used for operating activities (2,081) (3,328) 4A (5,409)
-------- ---------- --------
Cash flows from investing activities:
Proceeds from sale of property and equip-
ment 252 -- 252
Capital expenditures ........................... (1,016) -- (1,016)
Other, net .................................... (52) -- (52)
-------- ---------- --------
Net cash used for investing activities (816) -- (816)
-------- ---------- --------
Cash flows from financing activities:
Cash distributions to partners ............... (3,690) 3,690 4B --
Borrowings under the bank credit agreement,
net .......................................... 9,000 (3,458) 4C 5,542
Repayments under other credit facilities, net (953) -- (953)
Principal payments under capitalized lease
obligations ................................. (30) -- (30)
-------- ---------- --------
Net cash provided by financing
activities .............................. 4,327 232 4,559
-------- ---------- --------
Net increase (decrease) in cash and cash
equivalents .................................... 1,430 (3,096) (1,666)
Cash and cash equivalents at beginning of
period ....................................... 1,666 -- 1,666
-------- ---------- --------
Cash and cash equivalents at end of period ...... $ 3,096 $ (3,096) $ --
======== ========== ========
</TABLE>
*SEE ACCOMPANYING NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
F-6
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Twelve Months Ended December 31, 1996
----------------------------------------------------
Pro Forma
Adjustments
---------------------
Partnership Amount Note* Corporation
------------- ----------- ------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income .................................... $ 19,267 $ (14,040) $ 5,227
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization .................. 5,547 370 5,917
Increase in cash value of life insurance ...... (157) -- (157)
Restructuring charges ........................... 5,950 -- 5,950
Transaction costs .............................. 2,150 (2,150) --
Provision for deferred compensation ............ 1,071 -- 1,071
Deferred income tax benefit ..................... (2,163) (979) (3,142)
Changes in current operating items:
Increase in accounts and notes receivable (2,465) -- (2,465)
Increase in inventories ........................ (7,572) -- (7,572)
Decrease (increase) in other current assets 70 -- 70
Increase in accounts payable .................. 6,062 -- 6,062
Decrease in accrued interest .................. (47) -- (47)
Decrease in accrued restructuring charges
and transaction costs ........................ (1,899) 1,732 (167)
Decrease in other accrued liabilities ......... (2,769) 134 (2,635)
Other items, net .............................. 253 -- 253
-------- --------- -------
Net cash provided by operating
activities .............................. 23,298 (14,933) 4A 8,365
-------- --------- -------
Cash flows from investing activities:
Proceeds from sale of property and equip-
ment 62 -- 62
Payment for purchase of assets .................. (683) -- (683)
Capital expenditures ........................... (4,341) -- (4,341)
Investment in life insurance policies ......... (1,400) -- (1,400)
Other, net .................................... (39) -- (39)
-------- --------- -------
Net cash used for investing activities (6,401) -- (6,401)
-------- --------- -------
Cash flows from financing activities:
Cash distributions to partners .................. (25,641) 25,641 4B --
Repayment of senior notes ..................... (6,395) -- (6,395)
Borrowings (repayments) under the bank
credit agreement, net ........................ 11,000 (12,374) 4C (1,374)
Repayments under other credit facilities, net (83) -- (83)
Principal payments under capitalized lease
obligations .................................... (12) -- (12)
-------- --------- -------
Net cash used for financing activities (21,131) 13,267 (7,864)
-------- --------- -------
Net decrease in cash and cash equivalents ...... (4,234) (1,666) (5,900)
Cash and cash equivalents at beginning of
period .......................................... 5,900 -- 5,900
-------- --------- -------
Cash and cash equivalents at end of period ...... $ 1,666 $ (1,666) $ --
======== ========= =======
</TABLE>
*SEE ACCOMPANYING NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
F-7
<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"), and Lehman
Brothers Holdings, Inc. ("Lehman Holdings") and affiliates, 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 (see Note 2E). The conversion and refinancing ("the transaction") will be
effected through the formation of a new corporation, SunSource Inc. ("the
Corporation").
The exchange of the General Partner's 1% interest in the Operating
Partnership (the "Minority Interest") for common stock of the Corporation is
subject to purchase accounting in accordance with Accounting Principles
Bulletin ("APB") No. 16, "Business Combinations". Accordingly, the excess of
fair value of the consideration received for the Minority Interest over the
book value of the General Partner's 1% interest in the Operating Partnership,
which amounts to $14,797, has been recorded as goodwill by the Corporation (see
Note 2C). Ownership of the General Partner's 1% Minority Interest and 1%
General Partnership Interest in the Partnership will be exchanged for 1,000,000
shares of the Corporation's Common Stock (the "GP Exchange") whose recipients
will be Lehman/SDI, the general partner of the General Partner and current and
former officers of the Partnership, the limited partners of the General Partner
(reference "Exchange of Partnership Interests", below). The Corporation will
also record incremental deferred tax assets in accordance with Statement of
Financial Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for Income
Taxes", relating to the temporary differences for certain assets and
liabilities at the date of conversion to corporate form (see note 2B below).
The incremental deferred tax benefits have not been included in the pro forma
income statement due to their non-recurring nature. The Corporation will also
record a tax provision on its taxable income for federal and state corporate
income taxes. Transaction costs of the conversion are estimated to be $4,500,
of which $2,500 has been recorded by the Partnership through March 31, 1997 and
$2,000 will be recorded by the Partnership in the consolidated statement of
income prior to the conversion. Concurrent with the conversion, the Corporation
will incur a make-whole penalty, estimated at $4,000, related to the repayment
of its existing senior notes with borrowing under new credit facilities.
See Notes 2, 3 and 4 for a description of the other 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.
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 March 31, 1997 as follows:
11,099,573 Class A Limited Partnership Interests in the Partnership will
be exchanged for 4,217,837 Trust Preferred Securities with a liquidation
value of $25.00 per interest. Accordingly, the Preferred Securities have
been recorded at estimated fair value of $105,446.
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)
Class A Limited Partnership Interests will also receive $14,429 in cash,
which has been recorded as a charge to the Class A Partners' Capital Account.
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 has been recorded at
the historical amounts of the Class B Limited Partnership Interests and the
General Partnership Interest in the Partnership and at estimated fair value with
respect to the Minority Interest (see note 2C).
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 2,954,601 46.0%
Lehman/SDI and
Affiliates ............ 5,896,678 27.2% 1,474,169 27.2% 538,000 2,012,169 31.4%
Executive Officers and
Directors ............ 4,145,465 19.1% 1,036,366 19.1% 415,800 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-9
<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 as of
March 31, 1997:
<TABLE>
<CAPTION>
Pro forma
Partnership Adjustments Corporation
------------- ------------------- ------------
<S> <C> <C> <C>
Accumulated deficit
Minority interest of the GP in the Operating Partnership ...... $ --(a) $ 979 $ 979
Partner's Capital:
General Partner ............................................. 969 -- 969
Class A Interests .......................................... 67,642 (119,875)(b) (52,233)
Class B Interests .......................................... 29,868 (64)(c) 29,804
Conversion (charges) credits:
Goodwill-minority interest ................................. -- 14,797(d) 14,797
Transaction costs .......................................... -- (2,000)(e) (2,000)
Make-whole penalty .......................................... -- (4,000)(e) (4,000)
Deferred financing fees .................................... -- (131)(e) (131)
Deferred tax assets .......................................... -- 7,716(f) 7,716
Class B Interests held in treasury ........................... (1,514) -- (1,514)
---------
Total accumulated deficit .................................... -- -- (5,613)
Common stock ................................................ -- 64(c) 64
Cumulative foreign currency translation adjustment ............ (1,850) -- (1,850)
--------- ------------ ---------
Total Partners' capital /Stockholders' deficit ............... $ 95,115 $ (102,514) $ (7,399)
========= ============ =========
</TABLE>
(a) Minority interest of $979 is classified by the Partnership as Other
liabilities in the Consolidated Balance Sheet.
(b) Valuation of the Class A exchange package (see Note 2H).
(c) Charge for par value of common stock - classified as a separate component
of stockholder's deficit (see Note 2H).
(d) Goodwill related to exchange of GP minority interest (see Note 2C).
(e) Estimated charges to be recognized at the time of conversion, including
unpaid transaction costs of $2,000, make-whole penalty on the prepayment
of Senior Notes of $4,000, and write-off of deferred financing fees on
existing debt of $131 (see Note 2D).
(f) Credit for recognition of incremental deferred tax assets upon conversion
(see Note 2B).
2. Pro Forma Adjustments to Balance Sheet Dated March 31, 1997:
A. Reclassify cash to new bank revolver; 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
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 March 31, 1997: -- (Continued)
reverse before December 31, 1997. The net incremental deferred tax asset of
$7,716 (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 March 31, 1997:
<TABLE>
<CAPTION>
Pro Forma
Current deferred tax assets: Partnership Adjustment Corporation
------------- ------------ ------------
<S> <C> <C> <C>
Inventory ................................................... $ -- $ 4,386 $ 4,386
Self-insurance liability .................................... -- 1,813 1,813
Accounts receivable ....................................... -- 837 837
Vacation pay liability .................................... -- 772 772
Deferred compensation ....................................... -- 997 997
Other current liabilities ................................. -- 798 798
Other current items, net .................................... -- 917 917
------- --------- ---------
Net current deferred tax assets ........................... $ -- $ 10,520 $ 10,520
======= ========= =========
Long-term gross deferred tax assets:
Deferred compensation ....................................... $ 3,615 $ (1,088) $ 2,527
Restructuring charges ....................................... 1,034 (1,034) --
Other items, net ............................................. 853 (853) --
------- --------- ---------
5,502 (2,975) 2,527
Valuation allowance for long- term deferred tax assets ...... (171) 171 --
------- --------- ---------
Net long-term deferred tax assets ........................... $ 5,331 $ (2,804) $ 2,527
======= ========= =========
</TABLE>
C. To record the excess of fair value over book value related to the exchange
of the GP's Minority Interest for Common Stock of the Corporation, as
follows:
Fair value of Minority Interest (i) .................. $15,776
Less book value of the GP Minority Interest (ii) ...... 979
--------
Excess over book value recorded as goodwill ......... $14,797
========
(i) Represents 92.8% of the GP Exchange (the portion allocable to the
Minority Interest) valued at $17,000 in the aggregate for 1,000,000
shares of common stock, based on the closing price of the Class B
interest on the New York Stock Exchange at December 11, 1996, the date
of the announcement of the Corporate Conversion, adjusted for reverse
stock split (see Note 1).
(ii) As reported on the balance sheet of the Partnership at March 31, 1997.
D. Write-off historical balance of deferred financing fees of $131, 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 replacement credit facilities.
E. Record the proposed refinancing of existing credit facilities. On March 4,
1997, the Operating Partnership received the last of two financing
commitments, which together aggregate $150,000, from lenders. These
F-11
<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 March 31, 1997: -- (Continued)
commitments are available to the Partnership until September 30, 1997. The
new financing commitments consist of a $60,000 five-year fixed rate note at
7.66% and a $90,000 five-year bank revolver based on the London Interbank
Offered Rate ("LIBOR") plus 1% to 1.5% resulting in an effective interest
rate reduction of approximately 1% on a combined basis.
Reclassify $20,000 balance of existing revolver debt from current to
long-term liabilities and record incremental pro forma debt requirements
and related adjustments to the existing credit facilities which are
summarized in the following table as of March 31, 1997, based on the
proposed refinancing commitments (see related note disclosures):
<TABLE>
<S> <C>
Reclassification of available cash (Note 2A) ........................ $ (3,096)
Accrued interest on senior notes .................................... 1,892
Make-whole penalty on pre-payment of existing senior notes (Note 1) ... 4,000
New bank credit facility commitment fees (Note 2D) .................. 510
Transaction costs (unpaid) (Note 1) ................................. 2,000
Distribution to Class A interests ($1.30 per interest)(Note 2H) ...... 14,429
Payment of management fee due (Note 2G) .............................. 821
Payment of distributions payable (Note 2F) ........................... 925
---------
Net incremental pro-forma debt requirement ........................ 21,481
Less pro-forma adjustments for new $60,000 7.66% senior note:
Elimination of current portion of existing senior notes ............... 6,395
Increase in long-term portion of senior notes ........................ (2,461)
---------
Required pro-forma increase in bank revolving credit ............ $ 25,415
=========
</TABLE>
F. Record payment of $925 of the historical liability of $1,944 for
distributions payable as of March 31, 1997, 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 March 31, 1997.
H. Issue 4,217,837 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 Securities for each Class A
interest. The Trust Preferred Securities have been credited at estimated
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 initial 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 March 31, 1997 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 21,675,746 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, 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
F-12
<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 March 31, 1997: -- (Continued)
Class B capital account for the newly issued shares. The Cumulative Foreign
Currency Translation Adjustment of $1,850 will be classified as a separate
component of accumulated deficit of the Corporation. See Note 1 for a
description of additional charges and credits which make up the initial
accumulated deficit of the Corporation at March 31, 1997 in the amount of
$6,413.
3. Pro Forma Adjustments to Consolidated Statements of Income:
A. To eliminate, in consolidation, the management fee paid to the GP.
B. To record the amortization of the goodwill associated with the exchange of
the Minority Interest using the Partnership's current estimated useful life
of goodwill.
C. To eliminate transaction costs related entirely to the proposed conversion
which have been recorded by the Partnership through each period presented.
D. Adjust interest expense, net, to reflect incremental debt incurred directly
related to the conversion (the Class A exchange distribution of $1.30 per A
interest, or $14,429, and the transaction costs of $4,500). The interest
rate utilized to calculate the pro forma interest expense adjustment was
based on current average LIBOR rates of 5.54% (1997 year-to-date through
June 27) plus 125 basis points or 6.79%, which reflects pricing under the
new revolving credit facility on the incremental debt. Each 1/8 percent
(.00125) change in interest rate represents a $24 increase or decrease in
the pro forma interest expense adjustment.
E. Eliminate minority interest expense as a result of the conversion.
F. Record an expense for the monthly distributions on Trust Preferred
Securities; the annual yield is 11.6% on the liquidation amount of the
securities of $105,446, resulting in an approximate charge of $1,019 per
month.
G. Adjust the 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.
The following table summarizes the pro forma adjustment required to record
a provision for income taxes on a corporate basis:
<TABLE>
<CAPTION>
Three Months
Ended Year Ended
Pro forma adjustments to provision (benefit) for income taxes 3/31/97 12/31/96
- --------------------------------------------------------------- ------------- -----------
<S> <C> <C>
Eliminate state partnership taxes ........................... $ (126) $ (418)
Record current tax provision based on taxable income ......... 1,330 7,238
Adjustment to deferred portion .............................. (3) (979)
-------- -------
Total pro forma adjustments ................................. $ 1,201 $ 5,841
======== =======
</TABLE>
F-13
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(UNAUDITED)
(dollars in thousands)
4. Pro Forma Adjustments to Consolidated Statements of Cash Flows:
A. Record changes in cash flows from operations to reflect the elimination, in
consolidation, of the management fee, elimination of the transaction costs
related to the Conversion and inclusion of the payment of the distribution
on trust preferred securities, the goodwill amortization associated with
the GP exchange, and the change in tax status.
B. Eliminate cash distributions to partners which would not be paid under
corporate form.
C. Adjust cash flows from financing activities to reflect a reduction in
required borrowings based on the net cash flow impact of all cash flow
related pro forma adjustments.
F-14
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1997 1996 1996
------------- -------------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .............................. $ 3,096 $ 1,666 $ 633
Accounts and notes receivable, net ..................... 91,710 78,578 82,199
Inventories ............................................. 101,379 102,396 93,847
Other current assets .................................... 4,819 4,672 5,435
--------- --------- ---------
Total current assets ................................. 201,004 187,312 182,114
Property and equipment, net .............................. 21,442 21,409 20,156
Goodwill ................................................ 42,661 43,036 43,915
Other intangibles ....................................... 524 667 1,141
Deferred income taxes .................................... 5,331 5,007 3,098
Cash surrender value of life insurance policies ......... 4,437 4,566 2,999
Other assets ............................................. 640 558 527
--------- --------- ---------
Total assets .......................................... $ 276,039 $ 262,555 $ 253,950
========= ========= =========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable, trade ................................. $ 54,745 $ 48,557 $ 46,428
Notes payable .......................................... 1,717 2,670 2,815
Current portion of senior notes ........................ 6,395 6,395 6,395
Current portion of capitalized lease obligations ......... 135 107 --
Distributions payable to partners ........................ 1,944 1,857 1,715
Bank revolving credit .................................... 20,000 -- --
Accrued expenses:
Salaries and wages .................................... 4,287 5,696 3,879
Interest on senior notes .............................. 1,892 473 2,081
Management fee due the general partner .................. 821 3,330 821
Income and other taxes ................................. 3,310 2,695 3,429
Other accrued expenses ................................. 14,934 14,751 14,505
--------- --------- ---------
Total current liabilities ........................... 110,180 86,531 82,068
Senior notes ............................................. 57,539 57,539 63,934
Bank revolving credit .................................... -- 11,000 4,000
Capitalized lease obligations .............................. 647 504 --
Deferred compensation .................................... 8,837 8,644 7,949
Other liabilities ....................................... 3,721 3,718 1,336
--------- --------- ---------
Total liabilities .................................... 180,924 167,936 159,287
--------- --------- ---------
Commitments and contingencies
Partners' capital:
General partner .......................................... 969 960 959
Limited partners:
Class A interests; 11,099,573 outstanding ............... 67,642 67,642 67,642
Class B interests; 21,675,746 outstanding ............... 29,868 29,040 28,869
Class B interests held in treasury ..................... (1,514) (1,514) (1,514)
Cumulative foreign currency translation adjustment ...... (1,850) (1,509) (1,293)
--------- --------- ---------
Total partners' capital .............................. 95,115 94,619 94,663
--------- --------- ---------
Total liabilities and partners' capital ............... $ 276,039 $ 262,555 $ 253,950
========= ========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-15
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
FOR THE THREE MONTHS ENDED
(dollars in thousands, except for partnership interest amounts)
<TABLE>
<CAPTION>
March 31, March 31,
1997 1996
------------- -------------
<S> <C> <C>
Net sales ......................................................... $ 169,016 $ 154,892
Cost of sales ...................................................... 101,416 92,992
----------- -----------
Gross profit ...................................................... 67,600 61,900
----------- -----------
Operating expenses:
Selling, general and administrative expenses ..................... 58,690 54,169
Management fee to general partner ................................. 821 821
Depreciation ...................................................... 1,018 868
Amortization ...................................................... 455 485
----------- -----------
Total operating expenses ....................................... 60,984 56,343
----------- -----------
Transaction costs ................................................... 350 --
----------- -----------
Income from operations ....................................... 6,266 5,557
Interest income ................................................... 36 32
Interest expense ................................................... 1,867 1,659
Other income, net ................................................... 113 4
----------- -----------
Income before provision for income taxes ..................... 4,548 3,934
Income tax benefit ................................................ (28) (76)
----------- -----------
Net income ................................................... $ 4,576 $ 4,010
=========== ===========
Net income allocated to partners:
General partner ................................................... $ 46 $ 40
----------- -----------
Class A limited partners .......................................... $ 3,052 $ 3,052
----------- -----------
Class B limited partners .......................................... $ 1,478 $ 918
----------- -----------
Earnings per Limited partnership interest:
Net Income
-- Class A interest .......................................... $ 0.27 $ 0.27
-- Class B interest .......................................... $ 0.07 $ 0.04
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 THREE MONTHS ENDED
(dollars in thousands)
<TABLE>
<CAPTION>
March 31, March 31,
1997 1996
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................................ $ 4,576 $ 4,010
Adjustments to reconcile net income to net cash (used for)
provided by operating activities:
Depreciation and amortization ....................................... 1,473 1,353
Decrease in cash value of life insurance ........................... 129 --
Transaction costs ................................................... 350 --
Provision for deferred compensation ................................. 817 707
Deferred income tax benefit ....................................... (324) (254)
Changes in current operating items:
Increase in accounts and notes receivable ........................ (13,132) (6,375)
Decrease in inventories .......................................... 1,017 2,175
Increase in other current assets ................................. (147) (693)
Increase in accounts payable .................................... 6,188 3,991
Increase in accrued interest .................................... 1,419 1,561
Decrease in accrued restructuring charges and transaction costs ... (719) --
Decrease in other accrued liabilities ........................... (3,276) (4,483)
Other items, net ................................................... (452) 96
-------- --------
Net cash (used for) provided by operating activities ............... (2,081) 2,088
-------- --------
Cash flows from investing activities:
Proceeds from sale of property and equipment ........................ 252 4
Capital expenditures ................................................ (1,016) (834)
Other, net ......................................................... (52) (42)
-------- --------
Net cash used for investing activities .............................. (816) (872)
-------- --------
Cash flows from financing activities:
Cash distributions to partners ....................................... (3,690) (10,545)
Borrowing under the bank credit agreement, net ..................... 9,000 4,000
Borrowings (repayments) under other credit facilities, net ......... (953) 62
Principal payments under capitalized lease obligations ............... (30) --
-------- --------
Net cash provided by (used for) financing activities ............... 4,327 (6,483)
-------- --------
Net increase (decrease) in cash and cash equivalents .................. 1,430 (5,267)
Cash and cash equivalents at beginning of period ..................... 1,666 5,900
-------- --------
Cash and cash equivalents at end of period ........................... $ 3,096 $ 633
======== ========
</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)
PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Cumulative
Foreign
Class A Class B Class B Translation
General Limited Limited Treasury Adjustment TOTAL
--------- ---------- ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 ...... $ 963 $67,642 $29,252 $ (1,514) $ (1,400) $ 94,943
Net income ..................... 40 3,052 918 -- -- 4,010
Cash distributions paid and/or
declared to partners ......... (44) (3,052) (1,301) -- -- (4,397)
Change in cumulative foreign
translation adjustment ...... -- -- -- -- 107 107
----- -------- -------- --------- --------- --------
Balance, March 31, 1996 ......... 959 67,642 28,869 (1,514) (1,293) 94,663
Net income ..................... 153 9,158 5,946 -- -- 15,257
Cash distributions paid and/or
declared to partners ......... (152) (9,158) (5,775) -- -- (15,085)
Change in cumulative foreign
translation adjustment ...... -- -- -- -- (216) (216)
----- -------- -------- --------- --------- --------
Balance, December 31, 1996 ...... 960 67,642 29,040 (1,514) (1,509) 94,619
Net income ..................... 46 3,052 1,478 -- -- 4,576
Cash distributions paid and/or
declared to partners ......... (37) (3,052) (650) -- -- (3,739)
Change in cumulative foreign
translation adjustment ...... -- -- -- -- (341) (341)
----- -------- -------- --------- --------- --------
Balance, March 31, 1997 ......... $ 969 $67,642 $29,868 $ (1,514) $ (1,850) $ 95,115
===== ======== ======== ========= ========= ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-18
<PAGE>
SUNSOURCE 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
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, 1996; 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, 1996.
2. Related Party Transaction:
In March 1997, the Operating Partnership paid the 1996 management fee of
$3,330 due the General Partner, SDI Partners I, L.P. (the "GP").
3. Distributions:
On December 19, 1996, the Partnership in anticipation of its conversion to
corporate form, suspended payment of the monthly tax-related distributions to
Class B interest holders effective January 1, 1997, through March 31, 1997. Due
to the delay in completion of the proposed corporate conversion, the
Partnership resumed payment of monthly advance Class B tax distributions in
April 1997. On April 30, 1997, the Partnership paid a B tax distribution in the
amount of $.03 per B Interest to holders of record April 1, 1997. On April 18,
1997, the Partnership declared a B tax distribution in the amount of $.03 per B
interest payable May 30, 1997, to holders of record May 1, 1997. The
Partnership intends to pay this monthly rate to Class B holders until the
effective date of the conversion since it expects to allocate sufficient Class
B taxable income in the shortened tax year from January 1, 1997, through the
effective date to require the B tax distribution payment. The balance of the
required 1997 Class B tax distribution, if any will be paid on or before March
31, 1998.
4. Lines of Credit and Long-Term Debt:
As of March 31, 1997, the Operating Partnership had $24,399 available
under its $50,000 Bank Credit Agreement which provides revolving credit for
working capital purposes and acquisitions through December 31, 1997. The
$25,601 outstanding under the Bank Credit Agreement consisted of bank
borrowings amounting to $20,000 as reflected on the Partnership's consolidated
balance sheet at March 31, 1997, and letter of credit commitments aggregating
$5,601. The $20,000 in bank borrowings is included in the Partnership's current
liabilities as of March 31, 1997.
The Operating Partnership has another credit facility available in the
amount of $500 for letter of credit commitments only, of which no amount was
outstanding as of March 31, 1997. 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 no amount was
outstanding at March 31, 1997.
F-19
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(dollars in thousands)
4. Lines of Credit and Long-Term Debt: -- (Continued)
On March 4, 1997, the Operating Partnership received the last of two
financing commitments which together aggregate $150,000 from lenders. These
commitments are available to the Partnership until June 30, 1997. The
Partnership intends to utilize the debt capacity to fund transaction costs and
other payments related to its conversion to corporate form, refinance its
current outstanding senior notes of $63,934 as of March 31, 1997, including
interest thereon and related make-whole amount of approximately $5,000, and
outstanding bank revolver borrowings of $20,000 as of March 31, 1997. Also, the
new credit facilities will provide working capital for reinvestment in the
Partnership's businesses and acquisition capital for future growth. The new
financing commitments consist of a $60,000 five-year fixed rate note at 7.66%
and a $90,000 five-year bank revolver with terms and conditions more favorable
than the Partnership's existing senior notes and bank credit lines including
less restrictive covenants and an effective interest rate reduction of
approximately 1.00%.
Consummation of the refinancing with the new credit facilities is
contingent upon approval of the Partnership's conversion into corporate form
and certain other terms and conditions of closing being satisfied in a manner
acceptable to the lenders.
5. Contingencies:
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 Partnership upon which the buyer
allegedly based its offer to purchase Dorman. The complaint seeks damages of
approximately $21,000.
On January 16, 1997, a holder of B Interests filed a purported class
action alleging 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 on February
11, 1997. The cases have been consolidated and an amended complaint was filed
on April 16, 1997, which added claims for breach of contract and breach of
covenant of good faith and fair dealing.
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.
F-20
<PAGE>
Report of Independent Accountants
To the Board of Directors
SunSource Inc.
We have audited the accompanying balance sheet of SunSource Inc. as of December
31, 1996. This financial statement is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and the significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit of the balance sheet provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material aspects, the financial position of SunSource Inc. as of December 31,
1996 in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
May 1, 1997
F-21
<PAGE>
SUNSOURCE INC.
BALANCE SHEET
as of DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS
Receivable from SunSource L.P. ................................................... $ 1,000
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Commitments and Contingencies (Note 4) ..........................................
Stockholders' Equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized, no shares issued or $ --
outstanding
Common stock, $.01 par value, 20,000,000 shares authorized, 1,000 shares issued and 10
outstanding
Paid-In-Capital .................................................................. 990
--------
Total liabilities and stockholders' equity ....................................... $ 1,000
========
</TABLE>
SEE ACCOMPANYING NOTES TO BALANCE SHEET
F-22
<PAGE>
SUNSOURCE INC.
NOTES TO BALANCE SHEET
as of DECEMBER 31, 1996
1. Organization and Operation:
SunSource Inc. (the "Corporation") is a Delaware corporation which was
formed in December 1996 to accomplish the conversion of SunSource L.P. (the
"Partnership") to corporate form (the "Conversion"). 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.
The outstanding shares of the Corporation are presently owned by the
Partnership. In the Conversion, the Partnership and a subsidiary of the
Partnership will merge with and into the Corporation (the "Merger"). In the
Merger, the Class A limited partnership interests in the Partnership will be
exchanged for Trust Preferred Securities of SunSource Capital Trust, a newly
formed Delaware statutory business trust (the "Trust"), affiliated with the
Corporation, and the Class B limited partnership interests in the Partnership
will be exchanged for common stock of the Corporation. As a result of the
Merger, the interests of the general and limited partners of the General
Partner in the Partnership and the Operating Partnership will be indirectly
exchanged for common stock of the Corporation.
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. 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 Corporation's only asset at December 31, 1996 is a receivable from the
Partnership (see Note 3). The Corporation has not conducted any operations and
all activities related to the Conversion and the Merger have been conducted by
the Partnership and its General Partner.
2. Summary of Significant Accounting Policies:
Income Taxes:
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes", requires the Corporation to recognize deferred tax assets
and liabilities for expected future tax consequences of events that have been
recognized in the 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 Corporation currently has no deferred taxes.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
periods. Actual results could differ from those estimates; however, management
does not believe these differences would have a material effect on operating
results.
3. Related Party Transactions:
On December 30, 1996, the Corporation recorded a receivable from the
Partnership for the capital contribution to establish the Corporation. On March
11, 1997 the Partnership paid $1,000 to the Corporation to satisfy the
receivable due from the Partnership.
F-23
<PAGE>
SUNSOURCE INC.
NOTES TO BALANCE SHEET
as of DECEMBER 31, 1996 -- (Continued)
4. Commitments and Contingencies:
On January 16, 1997, a holder of Class B Interests in the Partnership,
filed a purported class action which alleged that the terms of the Conversion
unfairly transfer substantial equity to the General Partner of the Partnership
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 on February 11, 1997. The cases have been consolidated and an
amended complaint was filed on April 16, 1997 which added claims for breach of
contract and breach of a covenant of good faith and fair dealing. The
Corporation was named as a defendant in these actions.
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 or the Corporation.
F-24
<PAGE>
Report of Independent Accountants
The Board of Directors
Lehman/SDI, Inc.
We have audited the accompanying consolidated balance sheets of SunSource
L.P. and subsidiary as of December 31, 1996 and 1995, 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, 1996. 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 SunSource L.P.
and subsidiary as of December 31, 1996 and 1995, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996, 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.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center Philadelphia, Pennsylvania
January 29, 1997, except for Note 9 as to which the date
is March 21, 1997 and Note 19 as to which the date
is March 4, 1997
F-25
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
December 31, December 31,
Assets 1996 1995
- ------ ------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................................. $ 1,666 $ 5,900
Accounts and notes receivable, net of allowance for doubtful accounts of
$2,208 and $1,827, respectively ....................................... 78,578 75,824
Inventories ............................................................ 102,396 96,022
Other current assets ................................................... 4,672 4,742
--------- ---------
Total current assets ................................................ 187,312 182,488
Property and equipment, net ............................................. 21,409 20,181
Goodwill (net of accumulated amortization of $12,879 and $11,739,
respectively) ......................................................... 43,036 44,250
Other intangibles (net of accumulated amortization of $14,372
and $13,724, respectively) ............................................. 667 1,312
Deferred income taxes ................................................... 5,007 2,844
Cash surrender value of life insurance policies ........................ 4,566 3,009
Other assets ............................................................ 558 507
--------- ---------
Total assets ...................................................... $ 262,555 $ 254,591
========= =========
Liabilities and Partners' Capital
- ---------------------------------
Current liabilities:
Accounts payable ...................................................... $ 48,557 $ 42,437
Notes payable ......................................................... 2,670 2,753
Current portion of senior notes ....................................... 6,395 6,395
Current portion of capitalized lease obligations ..................... 107 --
Distributions payable to partners .................................... 1,857 7,819
Accrued expenses:
Salaries and wages ................................................... 5,696 5,022
Management fee due the general partner .............................. 3,330 3,330
Income and other taxes ................................................ 2,695 3,398
Other accrued expenses ................................................ 15,224 15,493
--------- ---------
Total current liabilities .......................................... 86,531 86,647
Senior notes ............................................................ 57,539 63,934
Bank revolving credit ................................................... 11,000 --
Capitalized lease obligations .......................................... 504 --
Deferred compensation ................................................... 8,644 7,829
Other liabilities ...................................................... 3,718 1,238
--------- ---------
Total liabilities ................................................... 167,936 159,648
--------- ---------
Commitments and contingencies
Partners' capital:
General partner ...................................................... 960 963
Limited partners:
Class A interests ................................................... 67,642 67,642
Class B interests ................................................... 29,040 29,252
Class B interests held in treasury .................................... (1,514) (1,514)
Cumulative foreign currency translation adjustment ..................... (1,509) (1,400)
--------- ---------
Total partners' capital ............................................. 94,619 94,943
--------- ---------
Total liabilities and partners' capital .............................. $ 262,555 $ 254,591
========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-26
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except for partnership interest amounts)
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- ------------
<S> <C> <C> <C>
Net sales ............................................. $ 649,254 $ 628,935 $ 735,861
Cost of sales ....................................... 386,251 375,425 451,785
---------- ---------- ----------
Gross profit ....................................... 263,003 253,510 284,076
---------- ---------- ----------
Operating expenses:
Selling, general and administrative expenses ...... 221,574 213,221 235,845
Management fee to general partner .................. 3,330 3,330 3,330
Depreciation ....................................... 3,623 3,661 4,502
Amortization ....................................... 1,924 1,996 2,640
---------- ----------- -----------
Total operating expenses ........................ 230,451 222,208 246,317
---------- ----------- -----------
Restructuring charges ................................. 5,950 -- --
Transaction costs .................................... 2,150 -- --
---------- ----------- -----------
Income from operations ........................... 24,452 31,302 37,759
Interest income ....................................... 69 412 66
Interest expense .................................... 6,944 7,332 9,956
Other income (expense), net ........................... 550 256 (1,748)
Gain on sale of division (note 5) ..................... -- 20,644 3,523
---------- ----------- -----------
Income before provision for income taxes ......... 18,127 45,282 29,644
Provision (benefit) for income taxes .................. (1,140) 537 100
---------- ----------- -----------
Income before extraordinary loss ............... 19,267 44,745 29,544
Extraordinary loss from early extinguishment of debt
(note 4) ............................................. -- (629) --
---------- ----------- -----------
Net income ....................................... $ 19,267 $ 44,116 $ 29,544
========== =========== ===========
Net income allocated to partners:
General partner .................................... $ 193 $ 441 $ 295
---------- ----------- -----------
Class A limited partners ........................... $ 12,210 $ 12,210 $ 12,210
---------- ----------- -----------
Class B limited partners ........................... $ 6,864 $ 31,465 $ 17,039
---------- ----------- -----------
Earnings per Limited partnership interest:
Income before extraordinary loss
-- Class A interest .............................. $ 1.10 $ 1.10 $ 1.10
-- Class B interest .............................. $ 0.32 $ 1.48 $ 0.79
Extraordinary loss
-- Class A interest .............................. -- -- --
-- Class B interest .............................. -- $ (0.03) --
Net income
-- Class A interest .............................. $ 1.10 $ 1.10 $ 1.10
-- Class B interest .............................. $ 0.32 $ 1.45 $ 0.79
Weighted average number of outstanding limited partner-
ship 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-27
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ............................................. $19,267 $44,116 $ 29,544
Adjustments to reconcile net income to net cash pro-
vided by operating activities:
Depreciation and amortization:
-- Existing divisions .............................. 5,547 5,319 5,392
-- Divested divisions .............................. -- 338 1,750
Decrease (increase) in cash value of life insur-
ance (157) 58 --
Gain on sale of divisions ........................... -- (20,644) (3,523)
Extraordinary loss .................................... -- 629 --
Restructuring charges ................................. 5,950 -- --
Transaction costs .................................... 2,150 -- --
Provision for deferred compensation .................. 1,071 2,340 3,187
Deferred income tax benefit ........................... (2,163) (700) (734)
Changes in current operating items:
Increase in accounts and notes receivable . (2,465) (3,666) (11,783)
Increase in inventories ........................... (7,572) (8,209) (9,436)
Decrease in other current assets .................. 70 857 347
Increase in accounts payable ..................... 6,062 2,531 1,865
Decrease in accrued interest ..................... (47) (141) (42)
Decrease in accrued restructuring charges
and transaction costs ........................... (1,899) -- --
Increase (decrease) in other accrued liabili-
ties (2,769) (6,062) 4,836
Other items, net .................................... 253 284 (3,699)
-------- -------- --------
Net cash provided by operating activities .................. 23,298 17,050 17,704
-------- -------- --------
Cash flows from investing activities:
Proceeds from sale of divisions ........................ -- 44,873 26,561
Proceeds from sale of property and equipment ............ 62 757 724
Payment for purchase of assets ........................... (683) (7,385) --
Capital expenditures .................................... (4,341) (4,299) (4,263)
Investment in life insurance policies .................. (1,400) (3,067) --
Other, net ............................................. (39) (93) 228
-------- -------- --------
Net cash provided by (used for) investing
activities ....................................... (6,401) 30,786 23,250
-------- -------- --------
Cash flows from financing activities:
Cash distributions to partners ........................... (25,641) (27,218) (20,357)
Repayment of senior notes .............................. (6,395) (18,971) (5,700)
Borrowings (repayments) under the bank credit agree-
ment, net 11,000 -- (10,000)
Prepayment penalties and related costs .................. -- (629) --
Borrowings (repayments) under other credit facilities,
net ................................................... (83) 44 (702)
Principal payments under capitalized lease obligations (12) (65) (619)
-------- -------- --------
Net cash used for financing activities ..................... (21,131) (46,839) (37,378)
-------- -------- --------
Net (decrease) increase in cash and cash equivalents ...... (4,234) 997 3,576
Cash and cash equivalents at beginning of period ......... 5,900 4,903 1,327
-------- -------- --------
Cash and cash equivalents at end of period ............... $ 1,666 $ 5,900 $ 4,903
======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-28
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED
(dollars in thousands)
PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Cumulative
Foreign
Class A Class B Class B Translation
General Limited Limited Treasury Adjustment Total
--------- ---------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
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
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
translation adjustment ......... -- -- -- -- (62) (62)
----- -------- -------- --------- --------- --------
Balance, December 31, 1995 ...... 963 67,642 29,252 (1,514) (1,400) 94,943
Net income ..................... 193 12,210 6,864 -- -- 19,267
Cash distributions paid and/or
declared to partners ......... (196) (12,210) (7,076) -- -- (19,482)
Change in cumulative foreign
translation adjustment ......... -- -- -- -- (109) (109)
----- -------- -------- --------- --------- --------
Balance, December 31, 1996 ...... $ 960 $ 67,642 $ 29,040 $ (1,514) $ (1,509) $ 94,619
===== ======== ======== ========= ========= ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-29
<PAGE>
SUNSOURCE 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
SunSource L.P. (the "Partnership") and its subsidiary partnership, SDI
Operating Partners, L.P. (the "Operating Partnership"). All significant
inter-company balances and transactions have been eliminated.
Nature of Operations:
The Partnership is one of the largest wholesale distributors of industrial
products and related services in the United States. The Partnership's three
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) retail merchandising products and services, primarily fasteners
and related products sold to retail hardware stores; and (3) retail glass
products and services sold to construction and retail markets. Based on net
sales of existing divisions for the year ended December 31, 1996, the
Industrial Services Segment provides approximately 70% of the Partnership's
sales through its Sun Technology Services divisions (46% of net sales) and the
Sun Inventory Management Company ("SIMCO") divisions (24% of net sales). The
Hardware Merchandising and Glass Merchandising segments provide approximately
16% and 14%, respectively, of the Partnership's net sales.
Although its sales are primarily industrially-based, the Partnership has
over 180,000 customers, the largest of which accounted for less than 5% of net
sales for the year ended December 31, 1996. The Partnership'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, 1996 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.
Restructuring Charges:
On December 11, 1996 (the "commitment date"), the Board of Directors of
Lehman/SDI, Inc. ("Lehman/SDI"), the general partner of the Partnership's
General Partner, approved the Partnership's plan to restructure its Technology
Services divisions and its Glass Merchandising business. The Partnership
recorded a provision for these charges on the commitment date in the amount of
$5,950, of which $4,400 related to Technology Services and $1,550 to Glass
Merchandising. The following disclosures are made in accordance with the
provisions of Emerging Issues Task Force ("EITF") Abstract No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity."
The following is a summary of the balance sheet classification of the
accrued restructuring charges in the accompanying balance sheet at December 31,
1996:
<TABLE>
<CAPTION>
Termination Other
Balance Sheet Classification Benefits Exit Costs Total
- ---------------------------- ------------- ------------ -------
<S> <C> <C> <C>
Current -- other accrued expenses ...... $ 829 $896 $1,725
Long-term -- other liabilities ......... $2,014 $573 $2,587
</TABLE>
Restructuring Charges -- Technology Services Divisions
The restructuring charges for the Technology Services Divisions include
termination benefits of $2,955 covering 175 employees, including sales (40),
warehouse (27), purchasing (16), branch operations (56) and accounting (36).
Other exit costs for Technology Services include legal and consulting costs of
$525 to develop severance agreements and to conduct employee meetings and lease
termination and related costs of $920 to close ten leased warehouse and office
facilities. The Board's approval on the commitment date provided the
Partnership's management with the authority to involuntarily terminate
employees. The Partnership has established the levels of benefits that the
terminated employees would receive and informed the employees of their
termination benefits prior to December 31, 1996.
F-30
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(dollars in thousands)
1. Basis of Presentation: -- (Continued)
The following table summarizes the restructuring costs charged, the
balance sheet classification, and payments or adjustments between the
commitment date and December 31, 1996:
<TABLE>
<CAPTION>
Termination Other
Balance Sheet Classification Benefits Exit Costs Total
- ----------------------------------------- ------------- ------------ -------
<S> <C> <C> <C>
Opening Balance at December 11, 1996:
Current -- other accrued expense ...... $ 941 $ 872 $ 1,813
Long-term -- other liabilities ......... $ 2,014 $ 573 $ 2,587
Payments during period:
Current -- other accrued expense* ...... $ (112) $ (55) $ (167)
Ending Balance at December 31, 1996:
Current -- other accrued expense ...... $ 829 $ 817 $ 1,646
Long-term -- other liabilities ......... $ 2,014 $ 573 $ 2,587
</TABLE>
- ------------
* Termination benefits paid to 9 employees; other exit costs for legal and
consulting charges paid.
Restructuring Charges -- Glass Merchandising Divisions
The restructuring charges for the Glass Merchandising division represent
primarily costs to withdraw from certain geographic markets as part of the
Partnership's restructuring plan. The largest component of these charges is the
write-off of unamortized goodwill from purchase business combinations in the
amount of $1,321, which is not recoverable. The remaining charges represent the
excess of undepreciated fixed assets over their fair value, in the amount of
$150, with fair value determined using the estimated prices of similar assets.
The Partnership applied the provisions of SFAS No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
in connection with the determination of these charges. The decision to withdraw
from these markets was primarily strategic based on an overall review of the
operations of the Glass Merchandising segment; in the Partnership's view, any
recognition of asset impairment prior to the commitment date would not have
been appropriate under SFAS No. 121., since the specific locations to be closed
were decided upon only in the process of finalizing the restructuring plan.
These amounts are included as restructuring charges since they were recognized
at the commitment date as part of the overall plan of restructuring. Also
included are $79 of lease termination costs recognized in accordance with EITF
No. 94-3 as exit costs.
The following table summarizes other exit costs charged, the balance sheet
classification, and payments or adjustments between the commitment date and
December 31, 1996:
Balance Sheet Classification Total
- ---------------------------- -----
Opening Balance at December 11, 1996
- ------------------------------------
Unamortized Goodwill ........................ $ 1,321
Excess of undepreciated fixed assets ...... $ 150
Current -- other accrued expenses ......... $ 79
Charges during period:
- ----------------------
Unamortized Goodwill ..................... $ (1,321)
Excess of undepreciated fixed assets ...... $ (150)
Ending Balance at December 31, 1996:
- ------------------------------------
Current -- other accrued expenses ......... $ 79
F-31
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(dollars in thousands)
1. Basis of Presentation: -- (Continued)
Transaction Costs:
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, each voting separately as a class.
In connection with the proposed conversion, the Partnership has incurred
certain costs related to the transaction which are included as a separate
component of income from operations, due to the infrequent nature of the
conversion transaction.
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.
Income Taxes:
As a partnership, taxable income and losses are included on the federal
tax returns of the partners; accordingly, the Partnership incurs no liability
for U.S. federal income taxes. Accordingly, no current provision for federal
income taxes is reflected in the accompanying consolidated financial
statements. However, the Partnership 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 Partnership, 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.
F-32
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(dollars in thousands)
2. Summary of Significant Accounting Policies: -- (Continued)
Statement of Financial Accounting Standards ("SFAS") No. 109 requires the
Partnership 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 Partnership's deferred taxes are determined from temporary differences
expected to reverse after December 31, 1997, or the date of conversion, if
earlier, when the Partnership 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.
The Partnership has elected to amortize the accumulated post-retirement benefit
liability (transition obligation) resulting in delayed recognition. The impact
of the adoption on the Partnership's financial position and results of
operations is immaterial.
Fair Value of Financial Instruments:
Cash, accounts receivable, short-term borrowings, accounts payable,
accrued liabilities and bank revolving credit are reflected in the consolidated
financial statements at fair value because of the short-term maturity or
revolving nature of these instruments. The fair values of the Partnership'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, 1996.
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 Partnership and the Operating Partnership is
SDI Partners I, L.P. (the "GP"), a Delaware limited partnership whose sole
general partner is Lehman/SDI, 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.
F-33
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(dollars in thousands)
3. Ownership Structure: -- (Continued)
The Partnership's Class A and Class B limited partnership interests
outstanding, as of December 31, 1996, are held as follows:
<TABLE>
<CAPTION>
Class A Class B
Interests Interests
--------- ---------
<S> <C> <C>
Public Investors ........................... 11,019,850 (99.3%) 11,633,603 (53.7%)
Lehman Holdings And Affiliates ............ -- 5,896,678 (27.2%)
Executive Officers and Directors (a) ...... 79,723 (0.7%) 4,145,465 (19.1%)
---------- ----------
Total .................................... 11,099,573 (100.0%) 21,675,746 (100.0%)(b)
========== ==========
</TABLE>
- ------------
(a) Executive officers of the Partnership and the Operating Partnership and
Directors of Lehman/SDI, including beneficial ownership.
(b) Net of 523,400 Class B interests held in the Partnership's treasury as of
December 31, 1996.
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 Partnership 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 Partnership or the Operating
Partnership or dissolution of the Partnership.
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 19, 1996, the Partnership declared
a priority return distribution for the month of January 1997 in the amount of
$1,038 or $.091666 per Class A interest payable January 31, 1997, to holders of
record December 31, 1996. The Class A capital account as of December 31, 1996
and 1995, 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 Partnership and l% to the GP. The GP is
allocated l% of the Partnership'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 1996, 1995, and 1994, 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 1996, 1995 and 1994, federal taxable income amounted to $.70, $1.6923
and $1.1146 per Class B interest, respectively. In 1996, federal taxable income
consisted of ordinary income only. Federal taxable income in 1995 consisted 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. The Class B capital account as of December
31, 1996 and 1995, was approximately $2.89 and $2.54 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 1996,
the
F-34
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(dollars in thousands)
3. Ownership Structure: -- (Continued)
Class B Tax Distribution amounted to $7,663 or $.3465 per Class B interest
which was partially paid in the amount of $.02 per Class B interest per month
for the period January through April 1996 and $.03 for the period May through
December 1996. On March 31, 1997, the Partnership intends to distribute the
balance of the tax distribution due of $.0265 per Class B interest to holders
of record for the entire year.
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 distributed the
balance of the tax distribution 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 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.)
On December 19, 1996, the Partnership in anticipation of its conversion to
corporate form, suspended payment of the monthly tax-related distributions to
Class B interest holders effective January 1, 1997, through March 31, 1997. Due
to the delay in completion of the proposed corporate conversion, the
Partnership intends to resume payment of monthly advance Class B tax
distributions in April 1997 in the amount of $.03 per B Interest. On March 20,
1997, the Partnership declared a B tax distribution in the amount of $.03 per B
Interest payable April 30, 1997, to holders of record April 1, 1997. The
Partnership intends to pay this monthly rate to Class B holders until the
effective date of the conversion since it expects to allocate sufficient Class
B taxable income in the shortened tax year from January 1, 1997, through the
effective date to require the B tax distribution payment. The balance of the
required 1997 Class B tax distribution, if any will be paid on or before March
31, 1998.
4. Extraordinary Loss:
In 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 Operating Partnership's Series A 9.08% and
Series B 8.44% Senior Notes (See Note 9, Long-Term Debt).
5. 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.
F-35
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(dollars in thousands)
5. Acquisitions/Divestitures: -- (Continued)
In November 1995, the Partnership's Hillman Fastener division purchased
certain assets of the Retail division of Curtis Industries of Eastlake, Ohio,
for an aggregate purchase price of $8,011 and the assumption of certain
liabilities. The aggregate purchase price includes goodwill of $3,442. The
purchase price and goodwill amounts include post-closing adjustments recorded
in 1996. 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.
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.
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 Partnership
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 1996, 1995 and
1994 were $3,330. The management fees for the years 1995 and 1994 were paid in
full in March 1996 and 1995, respectively. Management expects to pay in full
the 1996 management fee due March 31, 1997.
7. Property and Equipment:
Property and equipment consist of the following at December 31, 1996 and
1995:
1996 1995
--------- --------
Land ....................................... $ 3,289 $ 3,319
Buildings and leasehold improvements ...... 18,642 18,048
Machinery and equipment .................. 18,680 16,290
Furniture and fixtures ..................... 10,368 9,208
-------- --------
50,979 46,865
Less accumulated depreciation ............ 29,570 26,684
-------- --------
$21,409 $20,181
======== ========
F-36
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(dollars in thousands)
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. As of December 31, 1996,
the Operating Partnership had $33,152 available under this Credit Agreement.
The $16,848 outstanding consists of bank borrowings amounting to $11,000 as
reflected on the Partnership's consolidated balance sheet at December 31, 1996,
and letter of credit commitments aggregating $5,848.
The bank credit agreement contains covenants restricting distributions
from the Operating Partnership to the Partnership and the GP. Amounts available
for distribution in accordance with the bank credit agreement at December 31,
1996, were $4,164. 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 Partnership to consummate acquisitions in 1994. 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, 1996. The letters of credit commitments are issued at varying
rates. This facility, renewable annually, is not subject to compensating
balance requirements or unused commitment fees.
An indirect, wholly-owned Canadian subsidiary of the Operating Partnership
has a $2,500 Canadian dollar line of credit with a local lender for working
capital purposes of which $557 USD was outstanding at December 31, 1996. 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, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Short-term bank borrowings drawn on working capital
lines of credit ........................................ $ 557 $ 463
Trade notes payable in accordance with glass inventory
financing arrangements .................................. 1,193 1,474
Notes payable in accordance with insurance financing
arrangements ........................................... 920 816
------- -------
$2,670 $2,753
======= =======
</TABLE>
F-37
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(dollars in thousands)
8. Lines of Credit: -- (Continued)
The weighted average interest rate on the outstanding notes payable
borrowings at December 31, 1996 and 1995 was 3.05% and 3.01%, 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 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 $4,375, $3,282 and $3,900 in
Series A notes, and $2,020, $1,514 and $1,800 in Series B notes in 1996, 1995
and 1994, respectively. Principal repayments required on the senior notes
during each of the five years subsequent to December 31, 1996, are as follows:
Series A Series B
---------- ---------
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
December 1, 2001 ...... 9,297 4,290
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.
If the Partnership 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 Partnership 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
Partnership to consummate acquisitions in 1994. For 1994 and future years, the
senior noteholders have agreed to ease certain coverage ratios and other
financial requirements.
Provisions made during the year for restructuring charges and transaction
costs (Note 7) rendered the Operating Partnership unable to comply with certain
financial covenants of the bank credit agreement and the senior note agreement.
On March 21, 1997, the Partnership received the final consent in which the
banks and senior note holders agreed to a modification of these covenants
effective for the fiscal quarters ending December 31, 1996 through: (i) June
30, 1997 for the bank credit agreement; and (ii) September 30, 1997 for the
senior note agreement. The Partnership is in compliance with the modified
covenants.
As of December 31, 1996, the fair value estimate of the Partnership's
senior notes is approximately $65,000 as determined in accordance with SFAS No.
107. The Partnership discounted the future cash flows of its senior notes based
on borrowing rates for debt with similar terms and remaining maturities. The
fair value estimate is made at a specific point in time and is subjective in
nature and involves uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimate.
F-38
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(dollars in thousands)
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,
1996:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
--------- ----------
<S> <C> <C>
1997 ....................................... $ 151 $ 9,210
1998 ....................................... 151 7,696
1999 ....................................... 151 5,475
2000 ....................................... 151 4,204
2001 ....................................... 134 2,875
Later years ................................. -- 10,692
----- --------
Total minimum lease payments .......... $ 738 $40,152
========
Less amounts representing interest ......... (127)
-----
Present value of Net Minimum Lease payments
(including $107 currently payable) ....... $ 611
=====
</TABLE>
Total rental expenses for all operating leases amounted to $15,239 in
1996, $14,232 in 1995, and $15,153 in 1994.
11. Deferred Compensation Plans:
Certain officers and employees earn performance-based compensation,
payment of which is deferred until future periods.
The Partnership 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 $378 in 1996, $1,186 in 1995 and $850 in 1994. The portion of
the Operating Partnership's deferred compensation liability attributable to
this plan is $2,414 as of December 31, 1996.
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 investment earnings 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 $677, $1,135 and $2,295 in 1996, 1995 and 1994, respectively. During the
three years ended December 31, 1996, distributions from the plan amounted to
$1,160 in 1996, $1,422 in 1995, and $240 in 1994. The deferred compensation
liability attributable to the plan amounted to $5,998 at December 31, 1996 of
which $564 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
F-39
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(dollars in thousands)
11. Deferred Compensation Plans: -- (Continued)
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, 1996 were immaterial. The portion of the Operating
Partnership's deferred compensation liability attributable to this plan is $796
at December 31, 1996.
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 $4,566 at December 31, 1996.
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 including its reorganization or a change, other than due to death or
retirement, in a majority of the directors of Lehman/SDI during any one-year
period.
The Partnership adopted a new deferred compensation plan effective
December 1, 1996, to offer key employees an opportunity to defer a portion of
their compensation including bonuses and any amounts credited to the accounts
of such employees which otherwise may become payable to such employees under
other incentive compensation programs maintained by the Partnership. This new
plan would allow participants eligible for accelerated payments under the
change in control provision of the Partnership's deferred compensation plans an
election to continue to defer their balances.
Net periodic pension cost (income) in 1996, 1995, and 1994 for
non-contributory defined benefit plans consists of:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Service cost during the period ..................... $ 879 $ 675 $ 1,102
Interest cost on projected benefit obligations ...... 1,656 1,578 1,534
Actual return on assets .............................. (3,432) (3,503) (2,100)
Net amortization and deferral ........................ 917 1,509 (270)
------- ------- -------
Net periodic pension cost ........................ $ 20 $ 259 $ 266
======= ======= =======
</TABLE>
Significant assumptions used in determining pension cost (income) include:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- ------
<S> <C> <C> <C>
Discount rate .......................................... 7.25% 8.25% 7.00%
Rates of increase in compensation levels ............... 6.50% 6.50% 6.50%
Expected long-term rate of return on plan assets ...... 9.75% 8.50% 9.50%
</TABLE>
F-40
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(dollars in thousands)
11. Deferred Compensation Plans: -- (Continued)
The following table sets forth the defined benefit plans' funded status
and amounts recognized in the Partnership's balance sheets at December 31, 1996
and 1995:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------------------- ----------------------------
Assets Accumulated Assets Accumulated
Exceed Benefit Exceed Benefit
Accumulated Obligations Accumulated Obligations
Actuarial present value of Benefit Exceed Benefit Exceed
beneficial obligations: Obligations Assets Obligations Assets
- -------------------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Vested benefit obligation .................. $ 19,019 $ -0- $ 17,304 $ 1,016
======== ====== ======== =======
Accumulated benefit obligation ............ $ 19,290 $ -0- $ 17,450 $ 1,016
======== ====== ======== =======
Projected benefit obligation ............... $ 23,716 $ -0- $ 21,467 $ 1,016
Plan assets at fair value .................. 26,519 -0- 24,220 897
-------- ------ -------- -------
Projected benefit obligation less than (in
excess of) plan assets ..................... 2,803 -0- 2,753 (119)
Unrecognized net loss ..................... (1,247) -0- (668) 161
Prior service cost not yet recognized in net
periodic pension cost ..................... (328) -- (352) --
Unamortized balance of unrecognized net
transition asset established at January 1,
1987 ....................................... (1,648) -0- (1,693) (189)
-------- ------ -------- -------
Prepaid pension cost (pension liability) rec-
ognized in the balance sheet $ (420) $ -0- $ 40 $ (469)
======== ====== ======== =======
</TABLE>
The discount rate assumptions used in determining actuarial present value
of benefit obligations at December 31, 1996 and 1995 was 7.25%.
Certain employees of the Partnership'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:
1996 1995 1994
-------- -------- -------
Defined contribution plans ......... $1,327 $2,693 $3,498
Multi-employer pension plans ...... 189 374 362
Defined benefit plans ............ 20 259 266
------- ------- -------
Total ........................... $1,536 $3,326 $4,126
======= ======= =======
Management estimates that its share of unfunded vested liabilities under
multi-employer pension plans is not material.
For the years ended December 31, 1996, 1995 and 1994, the costs of
post-retirement benefits charged to income were $87, $81 and $115,
respectively. The 1996 and 1995 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 Partnership's unrecognized accumulated
post-retirement benefit liability as of December 31, 1996, 1995 and 1994 was
$477, $516 and $744, respectively.
F-41
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(dollars in thousands)
13. Income Taxes:
Deferred tax assets are comprised of the following at December 31, 1996
and 1995:
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Gross deferred tax assets:
Deferred compensation .............................. $3,292 $2,936
Deferred restructuring changes ..................... 1,034 --
Casualty Loss Insurance Program ..................... 548 --
Prepayment penalties related to early extinguishment
of debt .......................................... 304 299
------ ------
5,178 3,235
Valuation allowance for deferred tax assets ......... (171) (391)
------ ------
Net deferred tax asset .............................. $5,007 $2,844
====== ======
</TABLE>
Management has determined, based on the Partnership's history of prior
operating earnings and its expectations for the future, that operating income
of the Partnership will more likely than not be sufficient to recognize fully
these net deferred tax assets. The Partnership has no deferred tax liability at
December 31, 1996 or December 31, 1995.
As of December 31, 1996, the Partnership's tax basis of its assets and
liabilities was greater than its financial statement basis by approximately
$77,000.
The provision (benefit) for income taxes consists of the following:
1996 1995 1994
----------- ------- ---------
Current income taxes
State and local ...... $ 605 $ 608 $ 276
Foreign ............... 418 629 558
-------- ----- -----
1,023 1,237 834
-------- ----- -----
Deferred income taxes
Federal ............... (1,897) (627) (657)
State and local ...... (266) (73) (77)
-------- ----- -----
(2,163) (700) (734)
-------- ----- -----
Total income taxes ...... $ (1,140) $ 537 $ 100
======== ===== =====
14. Commitments and Contingencies:
Performance and bid bonds are issued on the Partnership's behalf during
the ordinary course of business through surety bonding companies as required by
certain contractors. As of December 31, 1996, the Partnership had outstanding
performance and bid bonds aggregating $234. As required by sureties, the
Partnership has standby letters of credit outstanding in the amount of $650 as
of December 31, 1996.
Letters of credit are issued by the Partnership 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,
1996, the Partnership had outstanding letters of credit in the aggregate amount
of $1,872 related to these activities.
As of December 31, 1996 the Partnership has guaranteed approximately
$1,181 worth of lease obligations, principally relating to businesses
previously divested. The Partnership is not currently aware of any existing
conditions which would cause a financial loss related to these guarantees.
F-42
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(dollars in thousands)
14. Commitments and Contingencies: -- (Continued)
Under the Partnership's insurance programs, commercial umbrella coverage
is obtained for catastrophic exposure and aggregate losses in excess of normal
claims. Beginning in 1991, the Partnership 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, 1996, the Partnership has provided
insurers letters of credit aggregating $3,326 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 Partnership upon which the buyer
allegedly based its offer to purchase Dorman. The complaint seeks damages of
approximately $21,000.
On January 16, 1997, a holder of B Interests filed a purported class
action alleging 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 on February
11, 1997.
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.
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.
15. Statements of Cash Flows:
Supplemental disclosures of cash flow information are presented below:
<TABLE>
<CAPTION>
1996 1995 1994
-------- --------- --------
<S> <C> <C> <C>
Cash paid during the period for:
Interest ............................................. $6,769 $ 7,304 $10,097
------- -------- --------
Income taxes .......................................... $1,189 $ 1,190 $ 792
------- -------- --------
Supplemental schedule of non-cash investing activities:
Assumed liabilities in connection with the purchase of
assets (See Note 5, Acquisitions/Divestitures) ...... $ -- $ 232 $ --
------- -------- --------
</TABLE>
F-43
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(dollars in thousands)
16. Quarterly Data (unaudited):
<TABLE>
<CAPTION>
1996 First Second Third Fourth
---- ----- ------ ----- ------
<S> <C> <C> <C> <C>
Net sales ....................................... $154,892 $167,500 $167,125 $159,737
Gross profit .................................... 62,464 67,104 68,029 65,406
Net income ....................................... 4,010 8,313 8,286 (1,342)*
Net income (loss) per limited partnership interest
-- Class A ................................. $.27 $.28 $.27 $.28
-- Class B ................................. $.04 $.24 $.24 ($.20)
</TABLE>
- ------------
* Includes non-recurring restructuring charges and transaction costs of $5,950
and $2,150, respectively.
<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
Net income per limited partnership interest:
Income before extranordinary 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
</TABLE>
- ------------
** Includes gain on sale of Dorman Products divison of $16,500.
*** Includes gain on sale of Downey Glass division of $4,144.
17. Concentration of Credit Risk:
Financial instruments which potentially subject the Partnership to
concentration of credit risk consist principally of cash and cash equivalents
and trade receivables. The Partnership 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 Partnership's customer base, and their dispersion
across many different industries and geographies. The Partnership performs
periodic credit evaluations of its customers' financial condition and generally
does not require collateral.
F-44
<PAGE>
SUNSOURCE 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,
"Financial Reporting for Segments of a Business Enterprise," with respect to
the Partnership's reportable segments as identified in Note 1, "Basis of
Presentation" under "Nature of Operations":
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
Industry Segment Data: 1996 1995 1994
- ---------------------- ---- ---- ----
<S> <C> <C> <C>
Net Sales
Industrial Services ..................... $ 456,798 $424,978 $532,719
Hardware Merchandising .................. 103,503 84,720 72,841
Glass Merchandising ..................... 90,369 120,650 132,063
Adjustments and eliminations ............ (1,416) (1,413) (1,762)
--------- -------- --------
Consolidated Net Sales .................. $ 649,254 $628,935 $735,861
- -------------------------------------------------------------------------------------
Income from Operations
Industrial Services ..................... $ 33,437 $ 31,834 $ 39,773
Hardware Merchandising .................. 9,074 9,592 7,096
Glass Merchandising ..................... 3,037 3,387 5,756
Corporate Expenses ........................ (21,096)* (13,511) (14,866)
--------- -------- --------
Consolidated Income from Operations ...... $ 24,452 $ 31,302 $ 37,759
- -------------------------------------------------------------------------------------
Identifiable Assets
Industrial Services ..................... $ 166,849 $162,681 $181,545
Hardware Merchandising .................. 46,331 36,340 24,357
Glass Merchandising ..................... 37,734 42,041 53,058
Corporate Assets ........................ 13,140 13,635 7,352
Adjustments and Eliminations ............ (1,499) (106) (126)
--------- -------- --------
Consolidated Assets ..................... $ 262,555 $254,591 $266,186
- -------------------------------------------------------------------------------------
Capital Expenditures
Industrial Services ..................... $ 2,180 $ 2,315 $ 2,736
Hardware Merchandising .................. 1,985 539 339
Glass Merchandising ..................... 640 1,254 1,094
Corporate ................................. 159 191 94
--------- -------- --------
Consolidated Capital Expenditures ......... $ 4,964 $ 4,299 $ 4,263
- -------------------------------------------------------------------------------------
Depreciation and Amortization
Industrial Services ..................... $ 3,448 $ 3,339 $ 4,458
Hardware Merchandising .................. 639 401 364
Glass Merchandising ..................... 1,355 1,839 2,271
Corporate ................................. 105 78 49
--------- -------- --------
Consolidated Total ........................ $ 5,547 $ 5,657 $ 7,142
=====================================================================================
</TABLE>
* Includes non-recurring restructuring charges and transaction costs of $5,950
and $2,150, respectively.
19. Subsequent Event:
On March 4, 1997, the Operating Partnership received the last of two
financing commitments which together aggregate $150,000 from lenders. These
commitments are available to the Partnership until May 30, 1997. The
Partnership intends to utilize the debt capacity to fund transaction costs and
other payments related to its conversion to corporate form, refinance its
current outstanding senior notes of $63,934 as of December 31, 1996, including
interest thereon and related make-whole amount of approximately $5,000, and
outstanding bank
F-45
<PAGE>
SUNSOURCE L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(dollars in thousands)
19. Subsequent Event: -- (Continued)
revolver borrowings of $11,000 as of December 31, 1996. Also, the new credit
facilities will provide working capital for reinvestment in its businsses and
acquisition capital for future growth. The new financing commitments consist of
a $60,000 five-year fixed rate note at 7.66% and a $90,000 five-year bank
revolver with terms and conditions more favorable than the Partnership's
existing senior notes and bank credit lines including less restrictive
covenants and an effective interest rate reduction of approximately 1.00%.
Consummation of the refinancing with the new credit facilities is
contingent upon approval of the Partnership's conversion into corporate form
and certain other terms and conditions of closing being satisfied in a manner
acceptable to the lenders.
F-46
<PAGE>
SUNSOURCE INC.
BALANCE SHEET (Unaudited)
as of JUNE 30, 1997
<TABLE>
<S> <C>
ASSETS
Cash ............................................................................. $ 1,000
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Commitments and Contingencies (Note 4) ..........................................
Stockholders' Equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized, no shares issued or $ --
outstanding
Common stock, $.01 par value, 20,000,000 shares authorized, 1,000 shares issued and 10
outstanding
Paid-In-Capital .................................................................. 990
--------
Total liabilities and stockholders' equity ....................................... $ 1,000
========
</TABLE>
SEE ACCOMPANYING NOTES TO BALANCE SHEET
F-47
<PAGE>
SUNSOURCE INC.
NOTES TO BALANCE SHEET
as of JUNE 30, 1997
1. Organization and Operation:
SunSource Inc. (the "Corporation") is a Delaware corporation which was
formed in December 1996 to accomplish the conversion of SunSource L.P. (the
"Partnership") to corporate form (the "Conversion"). 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.
The outstanding shares of the Corporation are presently owned by the
Partnership. In the Conversion, the Partnership and a subsidiary of the
Partnership will merge with and into the Corporation (the "Merger"). In the
Merger, the Class A limited partnership interests in the Partnership will be
exchanged for Trust Preferred Securities of SunSource Capital Trust, a newly
formed Delaware statutory business trust (the "Trust"), affiliated with the
Corporation, and the Class B limited partnership interests in the Partnership
will be exchanged for common stock of the Corporation. As a result of the
Merger, the interests of the general and limited partners of the General
Partner in the Partnership and the Operating Partnership will be indirectly
exchanged for common stock of the Corporation.
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. 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 accompanying balance sheet and notes are unaudited. The Corporation's
only asset at June 30, 1997 is a cash contribution from the Partnership (see
Note 2). The Corporation has not conducted any operations and all activities
related to the Conversion and the Merger have been conducted by the Partnership
and its General Partner.
2. Related Party Transactions:
On March 11, 1997 the Partnership paid $1,000 to the Corporation to satisfy
the receivable due from the Partnership on the balance sheet as of December 31,
1996.
3. Commitments and Contingencies:
On January 16, 1997, a holder of Class B Interests in the Partnership,
filed a purported class action which alleged that the terms of the Conversion
unfairly transfer substantial equity to the General Partner of the Partnership
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 on February 11, 1997. The cases have been consolidated and an
amended complaint was filed on April 16, 1997 which added claims for breach of
contract and breach of a covenant of good faith and fair dealing. The
Corporation was named as a defendant in these actions.
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 or the Corporation.
F-48
<PAGE>
EXHIBIT A
GLOSSARY OF DEFINED TERMS
---------------------------
A Interests Class A limited partnership interests in the
Partnership including depositary receipts
therefor.
Accrual Date First day following the Effective time.
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 as of July 31,
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 as of
July 31, 1997, among the Partnership, the
Corporation, LPSub, Lehman/SDI and the limited
partners of the General Partner.
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 The Bank of New York (Delaware), an affiliate
of the Indenture Trustee.
DGCL Delaware General Corporation Law.
Direct Action A proceeding by a holder of Trust Preferred
Securities to enforce payment of principal or
interest on the Junior Subordinated Debentures.
A - 1
<PAGE>
Direct Participants 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
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.
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 September 1, 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 The 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.
Interest Payment Date The last day of each calendar month of each
year.
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, including
Lehman Brothers Holdings Inc.
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.
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Merger Merger of the Partnership and LPSub with and
into the Corporation 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.
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 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 Account Account maintained by the Property Trustee to
hold all payments in respect of the Junior
Subordinated Debentures for the benefit of the
holders of the Trust Preferred Securities.
Property Trustee The Bank of New York.
Record Date Close of business on August 4, 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 Preferred Shares and, in
certain cases, Common Stock of the Corporation,
as described in the Rights Agreement.
Rights Agreement Rights Agreement between the Corporation and
Registrar and Transfer Company, as Rights
Agent.
SEC Securities and Exchange Commission.
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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 The Warwick, 1701
Locust Street, Philadelphia, Pennsylvania on
September 25, 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.
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 Trust Common Securities, representing common
undivided beneficial interests in the assets of
the Trust.
Trust Preferred Securities 11.6% Trust Preferred Securities, representing
preferred undivided beneficial interests in the
assets of the Trust.
Trust Preferred Securities Certificate representing interests in Trust
Global Certificate Preferred Securities registered in the name of
DTC or its nominee.
Trust Securities Trust Preferred Securities and Trust Common
Securities.
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EXHIBIT B
AGREEMENT AND PLAN OF CONVERSION
AGREEMENT AND PLAN OF CONVERSION, dated as of July 31, 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
The Corporation has 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, representing preferred undivided beneficial interests in
the assets of the Trust (the "Trust Preferred Securities") and cash in exchange
for Trust Common Securities, representing common undivided beneficial interests
in the assets of the Trust (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 Conversion 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
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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 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 Approvals and 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) at 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 of
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.
(e) Amendment to Partnership Agreements and Ratification. To
the extent that any terms of this Article I may be inconsistent with the
provisions of the Amended and Restated Agreement of Limited Partnership of the
Partnership dated February 1, 1987 or the Amended and Restated Agreement of
Limited
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Partnership of the Operating Partnership dated February 1, 1987, the approval
and adoption of the Conversion Proposal by the limited partners as set forth in
subsection 1.4(a) and by LPSub on behalf of the General Partner shall be deemed
to be (i) an amendment and waiver of any such provisions in order to effectuate
the Conversion and (ii) a ratification and approval of the General Partner's
actions in connection with the adoption and implementation of the Conversion
Agreement.
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 formed, 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.
(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 action on
the part of the Partnership and LPSub other than the approval of the Conversion
Proposal by the limited partners of the Partnership. This Agreement has been
duly executed and delivered by the Partnership and 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 Delaware 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
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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 created, 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, 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 Trust
Preferred Securities, of which none are outstanding, and 130,449 Trust Common
Securities, of which 100 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 130,349 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.
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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 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, Inc. 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 a limited partnership interest in
the General Partner described opposite its name on Exhibit A hereto and that the
information in such exhibit relating to the ultimate beneficial ownership of
such interests is true and correct. 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.
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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
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.
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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
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 Delaware 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.
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(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 Partnership, the Corporation or the Trust
Preferred Securities.
(o) Contribution Agreement. The Corporation shall have entered
into a Contribution Agreement with Lehman Brothers Holdings Inc. on terms
satisfactory to the parties hereto.
(p) Stockholders Agreement. The Corporation, SDI Partners I,
L.P., Lehman Brothers Holdings, Inc., Lehman/SDI, Inc., Lehman Ltd. I, Inc.,
Lehman Brothers Capital Partners I, L.P., LB I Group 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,
Lehman/SDI, Inc., Lehman Ltd. I, Inc., Lehman Brothers Capital Partners I, L.P.,
LB I Group, 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, Lehman/SDI, Inc.,
Lehman Ltd. I, Inc., Lehman Brothers Capital Partners I, L.P., LB I Group, 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.
B-8
<PAGE>
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: George R. Krouse, Esq.
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.
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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 /s/ Donald T. Marshall
--------------------------------
Chairman
SUNSOURCE L.P.
By SDI Partners I, L.P.
Its General Partner
By Lehman/SDI, Inc.
Its General Partner
By /s/ Donald T. Marshall
--------------------------------
Chairman
LPSUB INC.
By /s/ Donald T. Marshall
--------------------------------
President
LEHMAN/SDI, INC.
By /s/ Donald T. Marshall
--------------------------------
Chairman
DOTMAR CORP.
By /s/ Donald T. Marshall
--------------------------------
President
JPM CORP.
By /s/ John P. McDonnell
--------------------------------
President
B-10
<PAGE>
NORVED CORP.
By /s/ Norman V. Edmonson
--------------------------------
President
DIACOR CORP.
By /s/ Joseph M. Corvino
--------------------------------
President
HJC CORP.
By /s/ Harold J. Cornelius
--------------------------------
President
MWH CORP.
By /s/ Max W. Hillman, Jr.
--------------------------------
President
LJC CORP.
By /s/ Louis J. Cissone
--------------------------------
President
CELAR CORP.
By /s/ C. Eric Larson
--------------------------------
President
B-11
<PAGE>
EXHIBIT A
Entity Interests Held in the General Partner
General Partner
Lehman/SDI, Inc. 100.0% general partnership interest
Limited Partners
Dotmar Corp. 39.00% limited partnership interest
JPM Corp. 12.00% limited partnership interest
Norved Corp. 25.00% limited partnership interest
Diacor Corp. 2.00% limited partnership interest
HJC Corp. 6.00% limited partnership interest
MWH Corp. 6.00% limited partnership interest
LJC Corp. 5.00% limited partnership interest
Celar Corp. 5.00% limited partnership interest
B-12
<PAGE>
ANNEX 1
AGREEMENT OF MERGER
OF
SUNSOURCE L.P.
(a Delaware limited partnership)
AND
LPSUB 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 SDI Partners I, L.P. 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.
LPSub is the general partner of SDI Partners I, L.P.
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 created SunSource Capital Trust, a Delaware
statutory business trust (the "Trust"), which has authorized and issued
4,217,837 11.6% Trust Preferred Securities, representing preferred undivided
beneficial interests in the assets of the Trust (the "Trust Preferred
Securities") and 130,449 Trust Common Securities, representing common undivided
beneficial interests in the assets of the Trust, 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
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<PAGE>
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").
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 of the Corporation;
(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 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 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 former limited partners of the Partnership of
record at the Effective Time a letter of transmittal containing instructions
with respect to the surrender of depositary receipts for A Interests in exchange
for certificates representing 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 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
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
stockholder of the Constituent Entities of this Agreement, this Agreement may be
terminated at any time prior to the Effective Time by action of SDI Partners I,
L.P.
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 stockholder, have duly executed this
Agreement of Merger as of the day and year first written above.
SUNSOURCE L.P.
By SDI Partners I, L.P.,
Its General Partner
By LPSub Inc.,
Its General Partner
By________________________________
Chairman
LPSUB INC.
By________________________________
President
SUNSOURCE INC.
By________________________________
Chairman
B-15
<PAGE>
ANNEX 2
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 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
B-16
<PAGE>
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 6 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 provisions of the Bylaws, the 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.
IN WITNESS WHEREOF, SunSource Inc. has caused this Amended and Restated
Certificate of Incorporation to be signed and acknowledged on this 2nd day of
June, 1997 in its name by a duly authorized officer.
SUNSOURCE INC.
By: /s/ Donald T. Marshall
-------------------------------------
Donald T. Marshall
Chairman and Chief Executive Officer
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<PAGE>
ANNEX 3
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.
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
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<PAGE>
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.
(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.,
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<PAGE>
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 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.
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
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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 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
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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 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 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
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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) 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 a special meeting of
stockholders is called 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 meeting, 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.
(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.
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
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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.
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,
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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) 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 September 30, 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; 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 July 31, 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
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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 Ltd I, Inc., LB I Group, Inc., Lehman/SDI, Inc., Lehman
Brothers Holdings 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.
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
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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 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 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.
B-27
<PAGE>
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 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
B-28
<PAGE>
is fixed, the record date for determining stockholders 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.
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.
B-29
<PAGE>
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);
(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, 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
B-30
<PAGE>
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 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-31
<PAGE>
(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.
B-32
<PAGE>
EXHIBIT C
SMITH BARNEY FAIRNESS OPINION
<PAGE>
SMITH BARNEY
- ------------
A Member of Travelers Group
June 19, 1997
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 set forth in the Registration Statement on Form S-4, as amended, of
SunSource Inc. and SunSource Capital Trust filed with the Securities and
Exchange Commission on May 12, 1997 (the "Registration Statement"). The
Registration Statement 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 0.25 share of common stock,
par value $.01 per share (the "Common Stock") of a newly formed Delaware
corporation (the "Company"), and (iii) the holders of the general and limited
partner interests in SDI Partners I, L.P. (the "General Partner") will receive
1,000,000 shares of Common Stock in exchange for their general and limited
partnership interests in the General Partner. The Common Stock to be received by
the holders of such interests in the General Partner is referred to herein as
the "General Partner Consideration."
In arriving at our opinion, we have reviewed the Registration Statement and
exhibits thereto and the limited partnership agreements of the Partnership, SDI
Operating Partners L.P. (the "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 Registration Statement 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;
SMITH BARNEY INC. 388 Greenwich Street, New York, NY 10013 212-816-6000
C-1
<PAGE>
and the pro forma effect of the Conversion. We also 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, including current tax laws, 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 have received 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.
C-2
<PAGE>
It is understood that this opinion is for the information of the Special
Committee and the Board of Directors of Lehman/SDI, Inc. 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.
C-3
<PAGE>
EXHIBIT D
MANAGEMENT PROJECTIONS
Management Projections Furnished to Smith Barney
To assist the Special Committee and its advisors in their due
diligence, SunSource management prepared financial projections for the
Partnership through the year 2001. The first set of projections was provided in
July 1996, adjustments were provided in November 1996 and a second set of
projections was provided in April 1997. These documents have been filed as
exhibits to the Schedule 13E-3 filed with the SEC in connection with the
Conversion.
SunSource does not make multi-year projections in the ordinary course
of running its business. Instead, the business is managed by measuring the
performance of each of its twelve divisions versus the one-year projections
which form the basis for their annual operating plans. The annual plan
objectives are also used to determine the amount of incentive compensation
earned by all levels of SunSource management for the calendar year covered by
the plan, and should not be used to predict actual results. SunSource does not
make its internal projections public because it considers such forecasts
unreliable and to be increasingly unreliable the further in the future they
extend.
The July 1996 Projection was based on the actual unaudited results of
operations for the six months ended June 30, 1996 and estimated results of
operations for the six months ended December 31, 1996 and projections of sales
growth and profit margins for the five years ended December 31, 2001.
The July 1996 Projection was as follows:
July 1996 Projection
(dollars in millions)
<TABLE>
<CAPTION>
5 Yr.
Compound
1996 1997 1998 1999 2000 2001 Growth Rate
---- ---- ---- ---- ---- ---- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales* ($) 648.2 705.8 766.5 832.2 903.4 981.4 8.6%
Annual Growth, %/yr -- 8.89 8.60 8.57 8.56 8.63
EBITDA** ($) 43.1 49.1 56.3 63.4 70.9 78.5 12.7%
% of Sales 6.65 6.96 7.34 7.62 7.85 8.00
</TABLE>
- --------------------
* Includes commission income of $0.2 million in all years.
** Earnings before Interest, Taxes, Depreciation and Amortization
SunSource sells its products and services across an extremely broad
spectrum of the economy -- manufacturing, forest products, agriculture, mining,
construction, energy and many other segments. As a result, SunSource's sales are
broadly influenced by macroeconomic factors. It is not possible to predict with
accuracy the timing or magnitude of a recession or other major economic
disruption. Therefore, projections have been made on the basis of average sales
growth rates expected to be realized across an economic cycle.
Sales were projected to grow at a compound growth rate of 8.6% per year
through 2001, generally in the range of SunSource's historical growth rates as
shown below.
5 year compound growth, 1991-1995 7.02% (1990 as base year)
5 year compound growth, 1992-1996 9.09% (1991 as base year)
6 year compound growth, 1991-1996 7.30% (1990 as base year)
D-1
<PAGE>
While the overall sales growth rate was projected at 8.6%, the growth
rates of the individual business segments varied significantly. Hillman was
projected to have the highest average sales growth rate of approximately 12% per
year due to the introduction of new product lines from the Curtis acquisition
into existing Hillman accounts, introduction of Hillman products into former
Curtis accounts, and additional penetration of Hillman products into existing
accounts who currently buy only an estimated 60% of the full Hillman line.
Sales of the six divisions comprising the Technology Services Group
were projected to grow at an average rate of 8% per year. The Activation and
Air-Dreco divisions, serving primarily the southeastern U.S. plus Texas and
Oklahoma, showed the slowest growth rates (2%-5% per year) due to the expected
cyclical slowness in the next few years of the timber and energy markets which
comprise much of their demand base. The highest projected sales growth rate (7%
per year) for a domestic division within the Group was expected for the
Warren/Air-Draulics division which services the rapidly expanding commercial
economy of Colorado, Utah, Nevada and Arizona. This region has been the
beneficiary of the out-migration of business from California during much of this
decade. The Group's only foreign division, Hydra Power de Mexico, was expected
to grow at approximately 25% per year from its 1996 sales of $1.6 million by
adding product lines and an expanded range of technical services.
The Inventory Management Group is comprised of two divisions: Kar
Products/A&H and Special-T Metals/SIMCO. The Group was projected to grow in the
range of 9%-10% per year, with Kar/A&H projected at 6%-7% and Special-T
Metals/SIMCO at 17%-22%. Kar/A&H sells across the entire commercial/industrial
market spectrum of the United States and Canada. There is a very large service
component to their product sales, and this is reflected in the premium pricing
strategy followed by this division. Sales growth has historically been limited
primarily by the division's ability to recruit and retain a highly motivated
full commission sales force. Special-T Metals/SIMCO is pursuing twin strategies
of becoming either a single source provider to industrial facilities for their
maintenance, repair and operating (MRO) supplies, or an exclusive provider of
fasteners and related products to the operations of original equipment
manufacturers (OEM's). The division's strategies are expected to enjoy
good success as the result of the current trend toward outsourcing of
non-critical functions by the division's principal customer base.
Harding Glass was projected to grow at only 4.2% per year to reflect
the continued erosion of sales to the less-profitable wholesale business as
glass manufacturers were expected to continue their incursions into that market.
Also, the forecast reflected Harding's modest success to date in growing its
full service retail glass shops.
In July, SunSource's consolidated EBITDA as a percentage of sales (the
"EBITDA Margin" ) was projected to increase from 6.65% in 1996 to 8.00% in 2001.
Each of SunSource's three business segments had materially different projections
for EBITDA Margin. At the divisional level (excluding home office administrative
expenses), Hillman's EBITDA margin was projected to increase from 9.5% in 1996
to 12.1% in 2001. All of this margin improvement was due to the impact of lower
operating expenses as a percentage of sales as Hillman was projected to realize
positive operating leverage by selling more products through its existing
distribution system and no longer having to incur the extraordinary expenses of
building a national sales force.
The EBITDA margin of the Technology Services Group was projected to
improve from 6.9% in 1996 to 7.9% in 2001. Gross project margins were projected
to improve by 0.3% of sales due to an increasing contribution from the sales of
value-added services such as systems design and repair work, which tend to have
higher than average gross margins. Operating expenses were expected to decrease
by 0.7% of sales due to increased consolidation and centralization of
administrative and logistic functions.
The Inventory Management Group was projected to have a decrease in
EBITDA margin from 13.1% in 1996 to 12.6% in 2001. The larger division of this
Group (Kar Products/A&H Bolt) was projected to maintain its EBITDA margin at
15.6% throughout the projection period. The smaller division (Special-T
Metals/SIMCO) was
D-2
<PAGE>
projected to improve its EBITDA margin from 3.5% in 1996 to 5.5% in 2001, due
entirely to expected operating leverage from spreading its overhead from a sales
base of $31 million in 1996 to $73 million in 2001. However, sales growth for
Special-T Metals/SIMCO is projected to average approximately 18% per year during
the period, versus only 7% or so for Kar/A&H. As a result, Special-T
Metals/SIMCO was expected to account for 30.0% of the Inventory Management
Group's sales in 2001 versus only 20.2% in 1996. This change in sales mix was
expected to produce the lower EBITDA margin for the Group in 2001 versus 1996.
The principal contributor to Harding's improvement in EBITDA margin
from 5.0% in 1996 to 5.7% in 2001 was expected to be lower operating expenses as
a percentage of sales due to consolidation of administrative expenses as a
result of centralization made possible by an improved information system.
In November 1996, SunSource concluded that the EBITDA Margins in the
July Projection were too ambitious. A projection of significant improvement in
EBITDA Margin is an appropriate goal when negotiating performance standards for
purposes of incentive compensation for a given year. However, SunSource has
never achieved the consistent year-to-year improvement for each year of a
five-year projection. Therefore, management decided to apply a " consolidated
risk adjustment" to the portfolio of divisional projections because of the
improbability that the projected performance levels would be achieved by all
twelve divisions in each year of the projection. The purpose of the consolidated
risk adjustment was to adjust the consolidated projected performance to reflect
more closely the Partnership's actual historical performance.
The consolidated risk adjustments furnished to the Special Committee
and its advisors in November are shown below:
November Consolidated Risk Adjustments to EBITDA
(dollars in millions)
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000 2001
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Reductions in EBITDA($) 0.3 2.5 6.0 8.6 11.0 13.0
</TABLE>
The November 1996 Projection as adjusted was as follows:
November 1996 Projection
(dollars in millions)
<TABLE>
<CAPTION>
5 Yr.
Compound
1996 1997 1998 1999 2000 2001 Growth Rate
---- ---- ---- ---- ---- ---- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales* ($) 648.2 705.8 766.5 832.2 903.4 981.4 8.6%
Annual Growth, %/yr -- 8.89 8.60 8.57 8.56 8.63
EBITDA ($) 42.8 46.6 50.3 54.8 59.9 65.5 8.9%
% of Sales 6.60 6.60 6.56 6.58 6.63 6.67
</TABLE>
- --------------------
* Includes commission income of $0.2 mllion in all years.
D-3
<PAGE>
The EBITDA Margins in the November Projection show an increase from
6.60% in 1996 to only 6.67% in 2001. SunSource's actual EBITDA Margins in the
past five years have varied from a low of 6.4% to a high of 6.9%, with the
average being 6.6%.
The April 1997 Projection was based on actual audited results of
operations for the year ended December 31, 1996, actual unaudited results of
operations for the three months ended March 31, 1997 and estimated results of
operations for the nine months ended December 31, 1997 and projections of sales
growth and profit margins for the four years ended December 31, 2001.
The April 1997 Projection was as follows:
April 1997 Projection
(dollars in millions)
<TABLE>
<CAPTION>
5 Yr.
Actual Compound
1996 1997 1998 1999 2000 2001 Growth Rate
---- ---- ---- ---- ---- ---- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales ($) 649.3 705.8 766.5 832.2 903.4 981.4 8.6%
Annual Growth, %/yr -- 8.70 8.60 8.57 8.56 8.63
EBITDA ($) 41.4 46.6 51.5 57.2 63.1 69.5 10.9%
% of Sales 6.38 6.60 6.72 6.87 6.98 7.08
</TABLE>
The sales projections for 1997 and thereafter are the same as used for
the July and November Projections. The EBITDA Margins are the same as used in
the November Projection, adjusted to reflect the expected profit improvements
due to the restructuring of the Partnership's Technology Services Business. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Restructuring Charges."
The April Projection assumes that 80% of the net benefits expected from
the restructuring will be converted to profit. This reduction is intended to
take account of the probability that SunSource's competitors will also be
successful in lowering their costs of doing business, thereby enabling them to
lower selling prices while maintaining their current profit margins. In that
environment, SunSource would not realize the full amount of restructuring cost
savings as improved profits.
Management Projection Furnished to Prospective Lenders
In January 1997, the Partnership also prepared a projection for
prospective lenders in order to meet the requirement of the proposed Conversion
that SunSource refinance its existing bank loans and long term debt. The primary
issue to be addressed in this process was to determine the amount of financing
required to support SunSource's operations during the next five years. In
addition, SunSource's goal was to establish the financial capacity to support
the internal growth of its core businesses, resume its acquisition program on a
scale similar to its past experience, and to provide for the possibility of
paying dividends on the Common Stock at some future time. It was in SunSource's
interest to be optimistic in its growth assumptions underlying the Refinancing
Projections to ensure that SunSource would have sufficient financial capacity to
support a broad range of future possibilities.
The Refinancing Projection provided to the lenders was as follows:
D-4
<PAGE>
Refinancing Projection
(dollars in millions)
<TABLE>
<CAPTION>
5 Yr.
Actual Compound
1996 1997 1998 1999 2000 2001 Growth Rate
---- ---- ---- ---- ---- ---- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales* ($) 649.3 738.1 809.9 881.7 953.6 1,031.2 9.7%
Annual Growth, %/yr -- 13.36 9.73 8.87 8.15 8.14
EBITDA ($) 41.4 47.9 56.5 64.5 71.6 79.5 13.9%
% of Sales 6.38 6.49 6.98 7.32 7.51 7.71
</TABLE>
- --------------------
* For years 1997 through 2001, includes commission income of $0.3 million.
The Refinancing Projection used as its starting point SunSource's 1997
Operating Plan. This plan represented the consolidation of divisional plans
negotiated by the senior executives of SunSource with the management of the
twelve operating divisions. 1997 management incentive compensation plans are
tied to the performance levels imbedded in the 1997 Operating Plan.
With respect to sales, the assumption was that the sales growth rate
would decline from the 13.36% reflected in the 1997 Operating Plan toward
SunSource's long term historical growth rate in the 8% range. With respect to
EBITDA Margin, the projections assumed the successful completion of all of the
initiatives being undertaken by the operating divisions to improve
profitability, plus realization of 100% of the benefits contemplated by
restructuring of the Technology Services divisions.
Senior management did not make a consolidated risk adjustment to the
EBITDA percentages in the Refinancing Projection to bring them to the levels of
historical experience because they did not believe doing so would have a
material impact on the lenders' decision processes. The amount that SunSource
will actually borrow will rise and fall with the level of sales since more than
80% of SunSource's tangible assets are current assets, such as accounts
receivable and inventory, which tend to closely follow sales. The agreement with
the lenders provides that the interest rate paid on borrowed money varies as a
function of the ratio of debt to EBITDA. As the actual ratio increases or
decreases relative to the Refinancing Projection, the interest rate paid by
SunSource will vary accordingly.
The Refinancing Projection was provided to the Special Committee and
its advisors in February 1997. The Partnership instructed the Special Committee
and its advisors not to use such projections in their analysis because such
projections were to be used to establish sufficient financial capacity to
support a broad range of future corporate possibilities as described above.
In April 1997, the lenders were furnished with the April Projection
given to Smith Barney, plus additional projections based on the possibility of
acquisitions and dividend payments.
Qualifications with Respect to Projections
The projections furnished to the Special Committee and its advisors
were intended solely for their use in evaluating the fairness of the Conversion.
Similarly, the projections furnished to the lenders were intended solely for
their use in determining the terms for the refinancing. The recipients
understand the limitations inherent in five year projections.
D-5
<PAGE>
The projections were not intended for use by public investors and
should not be relied upon by them. The information was not prepared with a view
to compliance with published guidelines established by the American Institute of
Certified Public Accountants regarding projections or forecasts. The projections
are forward looking statements which depend upon a number of important factors
which could cause actual results to differ materially from those set forth.
These factors include (a) a slowing of the economy or a recession which could
adversely affect sales and reduce profit margins due to the inability to reduce
fixed costs; (b) a reduction in sales which could cause an inventory buildup
resulting in reduced cash flow and increased financing charges; (c) action by
competitors which could adversely affect profit margins; (d) the failure to
achieve the expense reductions contemplated by the restructuring; and (e) the
failure of SunSource to convert to corporate form and realize the financial
benefits from the Conversion.
SunSource does not intend to update, revise or correct any of these
projections after the Conversion.
D-6
<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, employees and agents of a
corporation under certain conditions and subject to certain limitations. Article
VII of the 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 require 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
- ------ -----------
<S> <C>
2.1* Agreement and Plan of Conversion dated as of July 31, 1997 among SunSource Inc.,
SunSource L.P., LPSub Inc., Lehman/SDI, Inc. and the limited partners of SDI Partners I, L.P.
is Exhibit B to the Proxy Statement/Prospectus included in Part I and is incorporated herein by
reference
3.1* Amended and Restated Certificate of Incorporation of SunSource Inc. is Annex 2 to Exhibit B to the Proxy
Statement/Prospectus included in Part I and is incorporated herein by reference
3.2* Bylaws of SunSource Inc., are Annex 3 to Exhibit B to the Proxy Statement/Prospectus included in Part I and are
incorporated herein by reference
4.1* Form of Amended and Restated Declaration of Trust
4.2* Form of Indenture between SunSource Inc. and The Bank of New York
4.3* Form of Preferred Securities Guarantee
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 validity of the Trust Preferred Securities
being registered
8.1+ Opinion of Morgan, Lewis & Bockius LLP regarding certain tax matters
10.1+ Form of Registration Rights Agreement among SunSource Inc., Lehman/SDI, Inc., Lehman Ltd. I, Inc., Lehman Brothers
Capital Partners I, L.P., LB I Group, Inc. and Management
10.2* Stockholders Agreement dated as of July 31, 1997 among SunSource Inc., LB I Group, Inc., Lehman Ltd. I, Inc.
Lehman/SDI, Inc. and Lehman Brothers Capital Partners I, L.P. and Senior executives of SunSource L.P.
10.3* Contribution Agreement dated as of July 31, 1997 between SunSource Inc., and Lehman
Brothers Holdings Inc.
</TABLE>
II-1
<PAGE>
<TABLE>
<S> <C>
10.4+ Deferred Compensation Plan for Key Employees of SDI Operating Partners, L.P.
10.5+ Form of Rights Agreement between SunSource Inc. and Registrar and Transfer Company
10.6++ Financing Commitments
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)
25+ Statement of eligibility of trustee
27+ Financial Data Schedule
99.1+ Form of Proxy
99.2* Selected Questions and Answers Booklet
- ------------------
* Filed herewith.
** To be filed by amendment.
+ Previously filed.
++ Incorporated by reference to Exhibit 17(a) of the Schedule 13E-3 (File No. 5-40201) of SunSource L.P.
</TABLE>
(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.
II-2
<PAGE>
(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.
(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 "Securities Act"), the registrant has duly caused this Amendment No. 5 to
Registration Statement ("Amendment No. 5") to be signed on its behalf by the
undersigned, thereunto duly authorized, in Philadelphia, Pennsylvania on August
12, 1997.
SUNSOURCE INC.
By: *
-------------------------------------
Donald T. Marshall
President and Chief Executive Officer
Pursuant to the Securities Act, this Amendment No. 5 has been signed by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Chairman, Chief Executive
- ----------------------------- Officer and Director
Donald T. Marshall (principal executive officer)
/s/ Joseph M. Corvino Vice President - Finance, Chief August 12, 1997
- ----------------------------- Financial Officer, Treasurer
Joseph M. Corvino and Secretary (principal
financial and accounting
officer)
/s/ Norman V. Edmonson Executive Vice President and August 12, 1997
- ----------------------------- Director
Norman V. Edmonson
* President, Chief Operating
- ----------------------------- Officer and Director
John P. McDonnell
* Director
- -----------------------------
O. Gordon Brewer, Jr.
* Director
- -----------------------------
Eliot M. Fried
* Director
- -----------------------------
Arnold S. Hoffman
* Director
- -----------------------------
Ernest L. Ransome, III
* Director
- -----------------------------
Donald A. Scott
* Director
- -----------------------------
Henri I. Talerman
By /s/ Norman V. Edmonson August 12, 1997
--------------------------
As Attorney-in-Fact
</TABLE>
S-1
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended
(the "Securities Act"), the registrant has duly caused this Amendment No. 5 to
Registration Statement ("Amendment No. 5") to be signed on its behalf by the
undersigned, thereunto duly authorized, in Philadelphia, Pennsylvania on August
12, 1997.
SUNSOURCE CAPITAL TRUST
By: SUNSOURCE INC., as Sponsor
By: /s/ Donald T. Marshall
-------------------------------------
Donald T. Marshall
President and Chief Executive Officer
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
2.1* Agreement and Plan of Conversion dated as of July 31, 1997 among SunSource Inc.,
SunSource L.P., LPSub Inc., Lehman/SDI, Inc. and the limited partners of SDI Partners I, L.P.
is Exhibit B to the Proxy Statement/Prospectus included in Part I and is incorporated herein by
reference
3.1* Amended and Restated Certificate of Incorporation is Annex 2 to Exhibit B to the Proxy
Statement/Prospectus included in Part I and is incorporated herein by reference
3.2* Bylaws are Annex B to Exhibit B to the Proxy Statement/Prospectus included in Part I and are
incorporated herein by reference
4.1* Form of Amended and Restated Declaration of Trust
4.2* Form of Indenture between SunSource Inc. and The Bank of New York
4.3* Form of Preferred Securities Guarantee
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 validity of the Trust Preferred Securities
being registered
8.1+ Opinion of Morgan, Lewis & Bockius LLP regarding certain tax matters
10.1+ Form of Registration Rights Agreement among SunSource Inc., Lehman/SDI, Inc., Lehman Ltd. I, Inc.,
Lehman Brothers Capital Partners I, L.P., LB I Group, Inc. and Management
10.2* Stockholders Agreement dated as of July 31, 1997 among SunSource Inc., LB I Group, Inc., Lehman Ltd. I, Inc.,
Lehman/SDI, Inc. and Lehman Brothers Capital Partners I, L.P. and Senior executives of SunSource L.P.
10.3* Contribution Agreement dated as of July 31, 1997 between SunSource Inc. and Lehman
Brothers Holdings Inc.
10.4+ Deferred Compensation Plan for Key Employees of SDI Operating Partners, L.P.
10.5+ Form of Rights Agreement between SunSource Inc. and Registrar and Transfer Company
10.6++ Financing Commitments
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)
25+ Statement of eligibility of trustee
27.1+ Financial Data Schedule
99.1+ Form of Proxy
99.2* Selected Questions and Answers Booklet
- ------------------
<PAGE>
* Filed herewith.
** To be filed by amendment.
+ Previously filed.
++ Incorporated by reference to Exhibit 17(a) of the Schedule 13E-3 (File No. 5-40201) of SunSource L.P.
</TABLE>
<PAGE>
AMENDED AND RESTATED
DECLARATION OF TRUST
of
SUNSOURCE CAPITAL TRUST
___________, 1997
<PAGE>
<TABLE>
<CAPTION>
CROSS-REFERENCE TABLE*/
Trust Indenture Act Section Indenture Section
<S> <C>
310(a)(1).......................................................................................................5.1
310(a)(2).......................................................................................................5.1
310(a)(3)......................................................................................................N.A.
310(a)(4)......................................................................................................N.A.
310(a)(5)....................................................................................................5.1(c)
310(b).......................................................................................................5.1(c)
310(c).........................................................................................................N.A.
311(a)..........................................................................................................2.2
311(b)..........................................................................................................2.2
311(c)..........................................................................................................2.2
312(a)..........................................................................................................2.2
312(b)..........................................................................................................2.2
312(c)..........................................................................................................2.7
313(a)..........................................................................................................2.3
313(b).....................................................................................................2.3;14.1
313(c)..........................................................................................................2.3
313(d).....................................................................................................2.3;14.1
314(a)..........................................................................................................2.4
314(b).........................................................................................................N.A.
314(c)(1).......................................................................................................2.5
314(c)(2).......................................................................................................2.5
314(c)(3).......................................................................................................2.5
314(d).........................................................................................................N.A.
314(e)..........................................................................................................2.5
314(f).........................................................................................................N.A.
315(a).........................................................................................................3.10
315(b).......................................................................................................3.8(g)
315(c)......................................................................................................3.10(a)
315(d).........................................................................................................3.10
315(e).........................................................................................................14.2
316(a)(last sentence).......................................................................(Exhibit B (Section 5))
316(a)(1)(A).................................................................................................2.6(a)
316(a)(1)(B).................................................................................................2.6(a)
316(a)(2)......................................................................................................N.A.
316(b).......................................................................................................2.6(a)
</TABLE>
- --------
*/ This Cross-Reference Table does not constitute part of the Indenture and
should not have any bearing upon the interpretation of any of its terms or
provisions.
<PAGE>
<TABLE>
<CAPTION>
Trust Indenture Act Section Indenture Section
<S> <C>
316(c)...............................................................................................3.6(e);12.2(b)
317(a)(1)....................................................................................................3.8(e)
317(a)(2)....................................................................................................3.8(e)
317(b).......................................................................................................3.8(i)
318(a)..........................................................................................................2.1
318(b)..........................................................................................................2.1
318(c)..........................................................................................................2.1
</TABLE>
N.A. means not applicable.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS**/
Page
<S> <C> <C>
ARTICLE I - DEFINITIONS
SECTION 1.1 Definitions...................................................................1
ARTICLE II - TRUST INDENTURE ACT
SECTION 2.1 Trust Indenture Act; Application..............................................7
SECTION 2.2 Lists of Holders of Preferred Securities......................................7
SECTION 2.3 Reports by the Property Trustee...............................................7
SECTION 2.4 Periodic Reports to Property Trustee..........................................8
SECTION 2.5 Evidence of Compliance with Conditions Precedent..............................8
SECTION 2.6 Events of Default; Waiver.....................................................8
SECTION 2.7 Disclosure of Information....................................................10
ARTICLE III - ORGANIZATION
SECTION 3.1 Name.........................................................................10
SECTION 3.2 Office.......................................................................10
SECTION 3.3 Purpose......................................................................11
SECTION 3.4 Authority....................................................................11
SECTION 3.5 Title to Property of the Trust...............................................11
SECTION 3.6 Powers and Duties of the Regular Trustees....................................11
SECTION 3.7 Prohibition of Actions by Trust and Trustees.................................14
SECTION 3.8 Powers and Duties of the Property Trustee....................................15
SECTION 3.9 Delaware Trustee.............................................................17
SECTION 3.10 Certain Rights and Duties of the Property Trustee............................17
SECTION 3.11 Preferential Collection of Claims Against Depositor or Trust.................19
SECTION 3.12 Registration Statement and Related Matters...................................20
SECTION 3.13 Filing of Amendments to Certificate of Trust.................................21
SECTION 3.14 Calculation of Original Issue Discount.......................................21
SECTION 3.15 Execution of Documents by Regular Trustees...................................21
SECTION 3.16 Trustees Not Responsible for Recitals or Issuance of Securities..............22
SECTION 3.17 Duration of Trust............................................................22
ARTICLE IV - SPONSOR
SECTION 4.1 Purchase of Common Securities by Sponsor.....................................22
SECTION 4.2 Covenants of the Sponsor.....................................................22
SECTION 4.3 Expenses.....................................................................22
ARTICLE V - TRUSTEES
SECTION 5.1 Number of Trustees; Qualifications...........................................23
- --------
**/ This Table of Contents does not constitute part of the Indenture and should
not have any bearing upon the interpretation of any of its terms or
provisions.
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 5.2 Appointment, Removal and Resignation of Trustees............................26
SECTION 5.3 Vacancies Among Trustees....................................................27
SECTION 5.4 Effect of Vacancies.........................................................28
SECTION 5.5 Meetings....................................................................28
SECTION 5.6 Delegation of Power.........................................................28
ARTICLE VI - DISTRIBUTIONS
SECTION 6.1 Distributions...............................................................29
ARTICLE VII - ISSUANCE OF SECURITIES
SECTION 7.1 General Provisions Regarding Securities......................................29
ARTICLE VIII - DISSOLUTION OF TRUST
SECTION 8.1 Dissolution of Trust.........................................................30
ARTICLE IX - TRANSFER OF INTERESTS
SECTION 9.1 Transfer of Securities.......................................................31
SECTION 9.2 Transfer of Certificates.....................................................31
SECTION 9.3 Deemed Security Holders......................................................32
SECTION 9.4 Book Entry Interests.........................................................32
SECTION 9.5 Notices to Holders of Certificates...........................................32
SECTION 9.6 Appointment of Successor Clearing Agency.....................................33
SECTION 9.7 Definitive Preferred Securities Certificates.................................33
SECTION 9.8 Mutilated, Destroyed, Lost or Stolen Certificates............................33
ARTICLE X - LIMITATION OF LIABILITY; INDEMNIFICATION
SECTION 10.1 Exculpation..................................................................34
SECTION 10.2 Indemnification..............................................................34
ARTICLE XI - ACCOUNTING
SECTION 11.1 Fiscal Year..................................................................35
SECTION 11.2 Certain Accounting Matters...................................................35
SECTION 11.3 Banking......................................................................36
SECTION 11.4 Withholding..................................................................36
ARTICLE XII - AMENDMENTS AND MEETINGS
SECTION 12.1 Amendments...................................................................36
SECTION 12.2 Meetings of the Holders of Securities; Action by Written
Consent.............................................................38
ARTICLE XIII - REPRESENTATIONS OF PROPERTY TRUSTEE AND DELAWARE
TRUSTEE
SECTION 13.1 Representations and Warranties of Property Trustee..........................39
ARTICLE XIV - MISCELLANEOUS
SECTION 14.1 Notices......................................................................41
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 14.2 Undertaking for Costs..........................................................42
SECTION 14.3 Governing Law..................................................................42
SECTION 14.4 Headings.......................................................................42
SECTION 14.5 Partial Enforceability.........................................................43
SECTION 14.6 Counterparts...................................................................43
SECTION 14.7 Intention of the Parties.......................................................43
SECTION 14.8 Successors and Assigns.........................................................43
</TABLE>
iii
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THIS AMENDED AND RESTATED DECLARATION OF TRUST ("Declaration")
is dated and effective as of June ___, 1997 by the undersigned trustees
(together with all other Persons from time to time duly appointed and serving as
trustees in accordance with the provisions of this Declaration, the "Trustees"),
SunSource Inc., a Delaware corporation, as trust sponsor ("SunSource" or the
"Sponsor"), and by the holders, from time to time, of undivided beneficial
interests in the assets of the Trust to be issued pursuant to this Declaration.
WHEREAS, the Sponsor and the Trustees entered into a
Declaration of Trust dated as of ______________________, 1997 (the "Original
Declaration") and filed a Certificate of Trust (the "Certificate of Trust") of
the Trust with the office of the Secretary of State of the State of Delaware on
______________________, 1997 in order to establish a statutory business trust
(the "Trust") under the Business Trust Act (as hereinafter defined);
WHEREAS, the Trustees and the Sponsor desire to amend and
restate the Original Declaration in its entirety as set forth herein and to
continue the Trust pursuant to the Business Trust Act for the purpose of, as
described more fully in Section 3.3 hereof, (i) issuing Preferred Securities (as
defined herein) representing preferred undivided beneficial interests in the
assets of the Trust in exchange for Debentures (as hereinafter defined) pursuant
to the Conversion (as hereinafter defined) and delivering such Preferred
Securities to SunSource in consideration for the deposit by SunSource as trust
assets of Debentures issued under the Indenture (as hereinafter defined) and
(ii) issuing and selling Common Securities (as defined herein) representing
common undivided beneficial interests in the assets of the Trust to SunSource in
exchange for cash and investing the proceeds thereof in additional Debentures;
and
NOW, THEREFORE, it being the intention of the parties hereto
that the Trust constitute a business trust under the Business Trust Act and that
this Declaration constitute the governing instrument of such business trust, the
Trustees declare that all assets referred to in clauses (i) and (ii) of the
previous Whereas clause contributed to or purchased by the Trust will be held in
trust for the benefit of the Holders (as defined herein) from time to time, of
the Certificates (as defined herein) representing undivided beneficial interests
in the assets of the Trust issued hereunder, subject to the provisions of the
Business Trust Act and this Declaration.
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ARTICLE I
DEFINITIONS
<S> <C> <C>
SECTION 1.1 Definitions.
(a) Capitalized terms used in this Declaration but not defined in the preamble
above have the respective meanings assigned to them in this Section 1.1;
(b) a term defined anywhere in this Declaration has the same meaning
throughout;
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(c) all references to "the Declaration" or "this Declaration"
are to this Amended and Restated Declaration of Trust (including Exhibits A, B
and C hereto (the "Exhibits")) as modified, supplemented or amended from time to
time;
(d) all references in this Declaration to Articles and
Sections and Exhibits areto Articles and Sections of and Exhibits to this
Declaration unless otherwise specified;
(e) a term defined in the Trust Indenture Act has the same
meaning when used in this Declaration unless otherwise defined in this
Declaration or unless the context otherwise requires; and
(f) a reference to the singular includes the plural and
vice versa.
"Affiliate" has the same meaning as given to that term in Rule
405 of the Securities Act or any successor rule thereunder.
"Appointment Event" means an event defined in the terms of the
Preferred Securities set forth in Exhibit B which entitles the Holders of a
Majority in liquidation amount of the Preferred Securities to appoint a Special
Regular Trustee.
"Book Entry Interest" means a beneficial interest in a
Certificate registered in the name of a Clearing Agency or a nominee thereof,
ownership and transfers of which shall be maintained and made through book
entries by such Clearing Agency as described in Section 9.4.
"Business Day" means any day other than a day on which banking
institutions in New York, New York are authorized or required by law to close.
"Business Trust Act" means Chapter 38 of Title 12 of the
Delaware Code, 12 Del. Code Section 3801 et seq., as it may be amended from time
to time.
"Certificate" means a Common Security Certificate or a
Preferred Security Certificate.
"Certificate of Trust" has the meaning set forth in the first
Whereas clause above.
"Clearing Agency" means an organization registered as a
"Clearing Agency" pursuant to Section 17A of the Exchange Act that is acting as
depository for the Preferred Securities and in whose name or in the name of a
nominee of that organization shall be registered a Global Certificate and which
shall undertake to effect book entry transfers and pledges of the Preferred
Securities.
"Clearing Agency Participant" means a broker, dealer, bank,
other financial institution or other Person for whom from time to time the
Clearing Agency effects book entry transfers and pledges of securities deposited
with the Clearing Agency.
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"Code" means the Internal Revenue Code of 1986, as amended
from time to time or any successor legislation. A reference to a specific
section ((Sec.)) of the Code refers not only to such specific section but also
to any corresponding provision of any federal tax statute enacted after the date
of this Declaration, as such specific section or corresponding provision is in
effect on the date of application of the provisions of this Declaration
containing such reference.
"Commission" means the Securities and Exchange Commission.
"Common Security" has the meaning specified in Section 7.1(b).
"Common Security Certificate" means a definitive certificate
in fully registered form representing a Common Security substantially in the
form of Annex I to Exhibit C.
"Conversion" means the conversion of SunSource L.P. to
corporate form asgenerally described in the Proxy Statement/Prospectus and
related transactions entered into pursuant to the Conversion Agreement.
"Conversion Agreement" means the Agreement and Plan of
Conversion, dated __________, 1997, among SunSource Inc., SunSource L.P., LPSub
Inc., Lehman/SDI, Inc. and the limited partners of SDI Partners I, L.P.
"Covered Person" means (i) any officer, director, shareholder,
partner, member, representative, employee or agent of the Trust or its
Affiliates, (ii) any officer, director, shareholder, employee, representative or
agent of SunSource or its Affiliates and (iii) the Holders from time to time of
the Securities.
"Debenture Trustee" means The Bank of New York, as trustee
under the Indenture until a successor is appointed thereunder and thereafter
means such successor trustee.
"Debentures" means the Junior Subordinated Debentures issued
by SunSource under the Indenture to the Property Trustee and entitled the
"Junior Subordinated Debentures."
"Declaration" means this Amended and Restated Declaration of
Trust, as amended from time to time.
"Delaware Trustee" has the meaning set forth in Section 5.1(a)
(3).
"Distribution" means a distribution payable to Holders of
Securities in accordance with Section 6.1.
"DTC" means The Depository Trust Company, the initial Clearing
Agency.
"Effective Time" has the meaning set forth in the Conversion
Agreement.
"Event of Default" in respect of the Securities means an
Indenture Event of Default has occurred and is continuing in respect of the
Debentures.
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"Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time or any successor legislation.
"Fiscal Year" has the meaning specified in Section 11.1.
"Global Certificate" means certificate representing interests
in Trust Preferred Securities held in the name of the Depository Trust Company
or its nominee.
"Holder" means a Person in whose name a Certificate
representing a Security is registered, such Person being a beneficial owner
within the meaning of the Business Trust Act.
"Indemnified Person" means any Trustee, any Affiliate of any
Trustee, any officers, directors, shareholders, members, partners, employees,
representatives or agents of any Trustee, or any employee or agent of the Trust
or its Affiliates.
"Indenture" means the Indenture dated as of ____________, 1997
between SunSource and the Debenture Trustee pursuant to which the Debentures are
to be issued.
"Indenture Event of Default" means any event or condition
defined as an "Event of Default" with respect to the Debentures under Section
6.01(a) of the Indenture has occurred and is continuing.
"Investment Company" means an investment company as defined in
the Investment Company Act.
"Investment Company Act" means the Investment Company Act of
1940, as amended from time to time or any successor legislation.
"Legal Action" has the meaning specified in Section 3.6(g).
"Liquidation Distribution" has the meaning set forth in
Exhibits B and C hereto establishing the terms of the Securities.
"Majority in liquidation amount of the Securities" means,
except as otherwise required by the Trust Indenture Act and except as provided
in Section 5 of Exhibit B hereto, Holder(s) of outstanding Securities voting
together as a single class or, as the context may require, Holder(s) of
outstanding Preferred Securities or Common Securities voting separately as a
class, who are the record owners of a relevant class of Securities whose
liquidation amount (including the stated amount that would be paid on
redemption, liquidation or otherwise, plus accrued and unpaid Distributions to
the date upon which the voting percentages are determined) represents more than
50% of the liquidation amount of all outstanding Securities of such class.
"Ministerial Action" has the meaning set forth in the terms of
the Securities as set forth in Exhibits B and C hereto.
"Paying Agent" has the meaning specified in Section 3.8(i).
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"Person" means a legal person, including any individual,
corporation, estate, partnership, joint venture, association, joint stock
company, limited liability company, trust, unincorporated association, or
government or any agency or political subdivision thereof, or any other entity
of whatever nature.
"Preferred Guarantee" means the Guarantee Agreement to be
dated as of __________________________, 1997 of SunSource in respect of the
Preferred Securities.
"Preferred Security" has the meaning specified in Section 7.1
(b).
"Preferred Security Beneficial Owner" means, with respect to a
Book Entry Interest, a Person who is the beneficial owner of such Book Entry
Interest, as reflected on the books of the Clearing Agency, or on the books of a
Person maintaining an account with such Clearing Agency (directly as a Clearing
Agency Participant or as an indirect participant, in each case in accordance
with the rules of such Clearing Agency).
"Preferred Security Certificate" means a definitive
certificate in fully registered form representing a Preferred Security
substantially in the form of Annex I to Exhibit B.
"Property Trustee" means the Trustee meeting the eligibility
requirements set forth in Section 5.1(c) and having the duties set forth for the
Property Trustee herein.
"Property Account" has the meaning specified in Section 3.8(c)
(i).
"Proxy Statement/Prospectus" means the Proxy
Statement/Prospectus dated May __, 1997 relating to the Conversion.
"Quorum" means a majority of the Regular Trustees or, if there
are only two Regular Trustees, both such Regular Trustees.
"Regular Trustee" means any Trustee other than the Property
Trustee and the Delaware Trustee.
"Related Party" means any direct or indirect wholly owned
subsidiary of SunSource or any other Person which owns, directly or indirectly,
98% of the outstanding voting securities of SunSource.
"Resignation Request" has the meaning specified in Section 5.2
(d).
"Responsible Officer" means, with respect to the Property
Trustee, the chairman of the board of directors, the president, any vice
president, any assistant vice president, the secretary, any assistant secretary,
the treasurer, any assistant treasurer, any trust officer or assistant trust
officer or any other officer of the Property Trustee customarily performing
functions similar to those performed by any of the above designated officers and
also means, with respect to a particular corporate trust matter, any other
officer to whom such matter is referred because of that officer's knowledge of
and familiarity with the particular subject.
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"Rule 3a-5" means Rule 3a-5 under the Investment Company Act
or any successor rule thereunder.
"Securities" means the Common Securities and the Preferred
Securities.
"Securities Act" means the Securities Act of 1933, as amended
from time to time or any successor legislation.
"66-2/3% in liquidation amount of the Securities" means,
except as otherwise required by the Trust Indenture Act and except as provided
in Section 5 of Exhibit B hereto, Holder(s) of outstanding Securities voting
together as a single class or, as the context may require, Holder(s) of
outstanding Preferred Securities or Common Securities, voting separately as a
class, who are the record owners of a relevant class of Securities whose
liquidation amount (including the stated amount that would be paid on
redemption, liquidation or otherwise, plus accrued and unpaid Distributions to
the date upon which the voting percentages are determined) represents 66-2/3% or
more of the liquidation amount of all outstanding Securities of such class.
"Special Event" has the meaning set forth in the terms of the
Securities as set forth in Exhibits B and C hereto.
"Special Regular Trustee" means a Regular Trustee appointed by
the Holders of a Majority in liquidation amount of the Preferred Securities in
accordance with Section 5.2(a)(ii)(B).
"Sponsor" or "SunSource" means SunSource Inc., a Delaware
corporation, or any successor entity in a merger, in its capacity as sponsor of
the Trust.
"Successor Delaware Trustee" has the meaning specified in
Section 5.2(b)(ii).
"Successor Property Trustee" means a successor Trustee
possessing the qualifications to act as Property Trustee under Section 5.1(c).
"10% in liquidation amount of the Securities" means, except as
otherwise required by the Trust Indenture Act and except as provided in the
penultimate paragraph of paragraph 5 of Exhibit B hereto, Holder(s) of
outstanding Securities voting together as a single class or, as the context may
require, Holder(s) of outstanding Preferred Securities or Common Securities,
voting separately as a class, who are the record owners of a relevant class of
Securities whose liquidation amount (including the stated amount that would be
paid on redemption, liquidation or otherwise, plus accrued and unpaid
Distributions to the date upon which the voting percentages are determined)
represents 10% or more of the liquidation amount of all outstanding Securities
of such class.
"Treasury Regulations" means the income tax regulations
including temporary and proposed regulations, promulgated under the Code by the
United States Treasury, as such regulations may be amended from time to time
(including corresponding provisions of succeeding regulations).
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"Trustee" or "Trustees" means each Person who has signed this
Declaration as a trustee, so long as such Person shall continue in office in
accordance with the terms hereof, and all other Persons who may from time to
time be duly appointed, qualified and serving as Trustees in accordance with the
provisions hereof, and references herein to a Trustee or the Trustees shall
refer to such Person or Persons solely in their capacity as trustees hereunder.
"Trust Indenture Act" means the Trust Indenture Act of 1939,
as amended from time to time or any successor legislation.
ARTICLE II
TRUST INDENTURE ACT
SECTION 2.1 Trust Indenture Act; Application.
(a) This Declaration is subject to the provisions of the Trust
Indenture Act that are required to be part of this Declaration and shall, to the
extent applicable, be governed by such provisions;
(b) if and to the extent that any provision of this
Declaration limits, qualifies or conflicts with the duties imposed by Sections
310 to 317, inclusive, of the Trust Indenture Act, such imposed duties shall
control;
(c) the Property Trustee shall to the extent permitted by
applicable law and/or the rules and regulations of the Commission be the only
Trustee which is a trustee for the purposes of the Trust Indenture Act; and
(d) the application of the Trust Indenture Act to this
Declaration shall not affect the nature of the Securities as equity securities
representing undivided beneficial interests in the assets of the Trust.
SECTION 2.2 Lists of Holders of Preferred Securities.
(a) Each of the Sponsor and the Regular Trustees on behalf of
the Trust shall provide the Property Trustee with such information as is
required under Section 312(a) of the Trust Indenture Act within one business day
after each June 1 and December 1 of each year and in the manner provided in
Section 312(a); and
(b) the Property Trustee shall comply with its obligations
under Sections 310(b), 311 and 312(b) of the Trust Indenture Act.
SECTION 2.3 Reports by the Property Trustee.
Within 60 days after June 1 of each year, the Property Trustee
shall provide to the Holders of the Securities such reports as are required by
Section 313 of the Trust Indenture Act, if any, in the form, in the manner and
at the times provided by Section 313 of the Trust Indenture
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Act. The Property Trustee shall also comply with the requirements of Section
313(d) of the Trust Indenture Act.
SECTION 2.4 Periodic Reports to Property Trustee.
Each of the Sponsor and the Regular Trustees on behalf of the
Trust shall provide to the Property Trustee, the Commission and the Holders of
the Securities, as applicable, such documents, reports and information as
required by Section 314(a)(1)-(3) (if any) of the Trust Indenture Act and the
compliance certificates required by Section 314(a)(4) and (c) of the Trust
Indenture Act, any such certificates to be provided in the form, in the manner
and at the times required by Section 314(a)(4) and (c) of the Trust Indenture
Act (provided that any certificate to be provided pursuant to Section 314(a)(4)
of the Trust Indenture Act shall be provided within 120 days of the end of each
Fiscal Year).
SECTION 2.5 Evidence of Compliance with Conditions Precedent.
Each of the Sponsor and the Regular Trustees on behalf of the
Trust shall provide to the Property Trustee such evidence of compliance with any
conditions precedent, if any, provided for in this Declaration which relate to
any of the matters set forth in Section 314(c) of the Trust Indenture Act. Any
certificate or opinion required to be given pursuant to Section 314(c) shall
comply with Section 314(e) of the Trust Indenture Act.
SECTION 2.6 Events of Default; Waiver.
(a) Subject to Section 2.6(c), Holders of Preferred Securities
may by vote of at least a Majority in liquidation amount of the Preferred
Securities (A) in accordance with the terms of the Preferred Securities, 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 including the right to direct the Property Trustee, as
the holder of the 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 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 Debentures shall be due and payable or (B) on behalf of the Holders
of all Preferred Securities waive any past Event of Default in respect of the
Preferred Securities and its consequences, provided that if the Event of Default
arises out of an Indenture Event of Default:
(i) which is not waivable under the Indenture, the Event
of Default under this Declaration shall also not be waivable; or
(ii) which requires the consent or vote of (1) holders of
Debentures representing a specified percentage greater than a majority
in principal amount of the Debentures, or (2) each holder of Debentures
affected thereby, the Event of Default under this Declaration may only
be waived by, in the case of clause (1) above, the vote of Holders of
Preferred Securities representing such specified percentage of the
aggregate
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liquidation amount of the Preferred Securities, or, in the case of
clause (2) above, each Holder of Preferred Securities affected thereby.
Upon such waiver, any such default shall cease to exist, and any Event of
Default with respect to the Preferred Securities arising therefrom shall be
deemed to have been cured, for every purpose of this Declaration, but no such
waiver shall extend to any subsequent or other default or Event of Default with
respect to the Preferred Securities or impair any right consequent thereon. The
Property Trustee shall not revoke any action previously authorized or approved
by a vote of the Holders of Trust Preferred Securities.
(b) Subject to Section 2.6(c), Holders of Common Securities
may by vote of at least a Majority in liquidation amount of the Common
Securities, (A) in accordance with the terms of the Common Securities, 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 or (B) on behalf of the Holders of all of the Common
Securities, waive any past Event of Default with respect to the Common
Securities and its consequences, provided that, if the Event of Default arises
out of an Indenture Event of Default:
(i) which is not waivable under the Indenture, except where
the Holders of the Common Securities are deemed to have waived such
Event of Default under the Declaration as provided below, the Event of
Default under this Declaration shall also not be waivable; or
(ii) which requires the consent or vote of (1) holders of
Debentures representing a specified percentage greater than a majority
in principal amount of the Debentures or (2) each holder of Debentures,
except where the holders of the Common Securities are deemed to have
waived such Event of Default under this Declaration as provided below,
the Event of Default under this Declaration may only be waived by, in
the case of clause (1) above, the vote of Holders of Common Securities
representing such specified percentage of the aggregate liquidation
amount of the Common Securities, or, in the case of clause (2) above,
each holder of Common Securities; and
provided, further that, each Holder of Common Securities will be deemed to have
waived any Event of Default with respect to the Common Securities and its
consequences until all Events of Default with respect to the Preferred
Securities have been cured, waived by the Holders of Preferred Securities as
provided in this Declaration or otherwise eliminated and until all Events of
Default with respect to the Preferred Securities have been so cured, waived or
otherwise eliminated, the Property Trustee will be deemed to be acting solely on
behalf of the Holders of the Preferred Securities and only the Holders of the
Preferred Securities will have the right to direct the Property Trustee in
accordance with the terms of this Declaration or the Securities. In the event
that any Event of Default with respect to the Preferred Securities is waived by
the Holders of Preferred Securities as provided in this Declaration, the Holders
of Common Securities agree that such waiver shall also constitute the waiver of
such Event of Default with respect to the Common Securities for all purposes
under this Declaration without any further act, vote or consent of the Holders
of the Common Securities. Subject to the foregoing provisions of this Section
2.6(b), upon such waiver, any such default shall cease to exist and any Event of
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Default with respect to the Common Securities arising therefrom shall be deemed
to have been cured, for every purpose of this Declaration, but no such waiver
shall extend to any subsequent or other default or Event of Default with respect
to the Common Securities or impair any right consequent thereon.
(c) The right of any Holder of Securities to receive payment
of Distributions on the Securities in accordance with this Declaration and the
terms of the Securities set forth in Exhibits B and C on or after the respective
payment dates therefor, or to institute suit for the enforcement of any such
payment on or after such payment dates, shall not be impaired without the
consent of each such Holder.
(d) As provided in the terms of the Securities set forth in
Exhibits B and C hereto, a waiver of an Indenture Event of Default by the
Property Trustee at the written direction of the Holders of the Preferred
Securities constitutes a waiver of the corresponding Event of Default under this
Declaration in respect of the Securities.
SECTION 2.7 Disclosure of Information.
The disclosure of information as to the names and addresses of
the Holders of the Securities in accordance with Section 312 of the Trust
Indenture Act, regardless of the source from which such information was derived,
shall not be deemed to be a violation of any existing law, or any law hereafter
enacted which does not specifically refer to Section 312 of the Trust Indenture
Act, nor shall the Property Trustee be held accountable by reason of mailing any
material pursuant to a request made under Section 312(b) of the Trust Indenture
Act.
ARTICLE III
ORGANIZATION
SECTION 3.1 Name.
The Trust continued by this Declaration is named "SunSource
Capital Trust" as such name may be modified from time to time by the Regular
Trustees following written notice to the Holders of Securities. The Trust's
activities may be conducted under the name of the Trust or any other name deemed
advisable by the Regular Trustees.
SECTION 3.2 Office.
The address of the principal office of the Trust is 501
Silverside Road, Suite 17, Wilmington, DE 19809. Upon ten days written notice to
the Holders, the Regular Trustees may change the location of the Trust's
principal office. The name of the registered agent and office of the Trust in
the State of Delaware is The Bank of New York (Delaware), White Clay Center,
Route 273, Newark, DE 19711 Attention: Corporate Trust Administration. At any
time, the Regular Trustees may designate another registered agent and/or
registered office.
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SECTION 3.3 Purpose.
The exclusive purposes and functions of the Trust are: (a)(i)
to issue Preferred Securities in consideration for the deposit by SunSource as
trust assets of Debentures issued under the Indenture having an aggregate
principal amount equal to the aggregate liquidation amount of the Preferred
Securities so delivered; (ii) to enter into such agreements and arrangements as
may be necessary in connection with the Conversion and to take all action, and
exercise such discretion, as may be necessary or desirable in connection with
the Conversion and to file such registration statements or make such other
filings under the Securities Act, the Exchange Act or state securities or "Blue
Sky" laws as may be necessary or desirable in connection with the Conversion and
the issuance of the Preferred Securities; and (iii) to issue and sell Common
Securities to SunSource for cash and use the proceeds of such sale to purchase
as trust assets an equal aggregate principal amount of Debentures issued under
the Indenture; and (b) except as otherwise limited herein, to engage in only
those other activities necessary, or incidental thereto. The Trust shall not
borrow money, issue debt or reinvest proceeds derived from investments, pledge
any of its assets or at any time while the Securities are outstanding, otherwise
undertake (or permit to be undertaken) any activity that would result in or
cause the Trust to be treated as anything other than a grantor trust for United
States federal income tax purposes.
SECTION 3.4 Authority.
Subject to the limitations provided in this Declaration and to
the specific duties of the Property Trustee, the Regular Trustees shall have
exclusive and complete authority to carry out the purposes of the Trust. An
action taken by the Regular Trustees in accordance with their powers shall
constitute the act of and serve to bind the Trust and an action taken by the
Property Trustee in accordance with its powers shall constitute the act of and
serve to bind the Trust. In dealing with the Trustees acting on behalf of the
Trust, no Person shall be required to inquire into the authority of the Trustees
to bind the Trust. Persons dealing with the Trust are entitled to rely
conclusively on the power and authority of the Trustees as set forth in this
Declaration.
SECTION 3.5 Title to Property of the Trust.
Except as provided in Section 3.8 with respect to the
Debentures and the Property Account or unless otherwise provided in this
Declaration, legal title to all assets of the Trust shall be vested in the
Trust. The Holders of Certificates shall not have legal title to any part of the
assets of the Trust, but shall have an individual undivided beneficial interest
in the assets of the Trust.
SECTION 3.6 Powers and Duties of the Regular Trustees.
The Regular Trustees shall have the exclusive power, authority
and duty to cause the Trust, and shall cause the Trust, to engage in the
following activities:
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(a) to issue Preferred Securities and Common Securities, in
each case in accordance with this Declaration; provided, however, that the Trust
may issue no more than one series of Preferred Securities and no more than one
series of Common Securities, and provided further that there shall be no
interests in the Trust other than the Securities and the issuance of Securities
shall be limited to a one-time, simultaneous issuance of both Preferred
Securities and Common Securities;
(b) in connection with the Conversion and the issuance of the
Preferred Securities, at the direction of the Sponsor, to effect or cause to be
effected the filings, and to execute or cause to be executed, the documents, set
forth in Section 3.11;
(c) to acquire as trust assets Debentures upon consummation of
the Conversion and to acquire as trust assets additional Debentures with the
proceeds of the sale of the Common Securities; provided, however, the Regular
Trustees shall cause legal title to all of the Debentures to be vested in, and
the Debentures to be held of record in the name of, the Property Trustee for the
benefit of the Holders of the Preferred Securities and the Common Securities;
(d) to give the Sponsor and the Property Trustee prompt
written notice of the occurrence of a Special Event provided, that the Regular
Trustees shall consult with the Sponsor and the Property Trustee before taking
or refraining to take any Ministerial Action in relation to a Special Event;
(e) to establish a record date with respect to all actions to
be taken hereunder that require a record date be established, including for the
purposes of Section 316(c) of the Trust Indenture Act and with respect to
Distributions, voting rights, redemptions, and exchanges, and to issue relevant
notices to Holders of the Preferred Securities and Common Securities as to such
actions and applicable record dates;
(f) to give prompt notice to the Holders of the Securities of
any notice received from the Sponsor of the Sponsor's election not to make a
current monthly interest payments on the Debentures under the Indenture;
(g) to bring or defend, pay, collect, compromise, arbitrate,
resort to legal action, or otherwise adjust claims or demands of or against the
Trust ("Legal Action"), unless pursuant to Section 3.8(e), the Property Trustee
has the exclusive power to bring such Legal Action;
(h) to employ or otherwise engage employees and agents (who
may be designated as officers with titles) and managers, contractors, advisors,
and consultants and pay reasonable compensation for such services;
(i) to cause the Trust to comply with the Trust's
obligations under the Trust Indenture Act;
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(j) to give the certificate to the Property Trustee required
by Section 314(a)(4)of the Trust Indenture Act which certificate may be executed
by any Regular Trustee;
(k) to incur expenses which are necessary or incidental to
carry out any of the purposes of the Trust;
(l) to act as, or appoint another Person to act as, registrar
and transfer agent for the Securities, the Regular Trustees hereby initially
appointing the Property Trustee for such purposes;
(m) to execute all documents or instruments, perform all
duties and powers, and do all things for and on behalf of the Trust in all
matters necessary or incidental to the foregoing;
(n) to take all action which may be necessary or appropriate
for the preservation and the continuation of the Trust's valid existence,
rights, franchises and privileges as a statutory business trust under the laws
of the State of Delaware and of each other jurisdiction in which such existence
is necessary to protect the limited liability of the Holders of the Securities
or to enable the Trust to effect the purposes for which the Trust has been
created;
(o) to take all action, not inconsistent with this Declaration
or with applicable law, which the Regular Trustees determine in their discretion
to be reasonable and necessary or desirable in carrying out the activities of
the Trust as set out in this Section 3.6, in order that:
(i) the Trust will not be deemed to be an Investment Company
required to be registered under the Investment Company Act;
(ii) 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; and
(iii) the Trust will comply with any requirements imposed by
any taxing authority on holders of instruments treated as indebtedness
for United States federal income tax purposes;
provided that such action does not adversely affect the interests of Holders;
(p) to take all action necessary to cause all applicable tax
returns and tax information reports that are required to be filed with respect
to the Trust to be duly prepared and filed by the Regular Trustees, on behalf of
the Trust;
(q) subject to the requirements of Rule 3a-5 and Section
317(b) of the Trust Indenture Act, to appoint one or more Paying Agents in
addition to the Property Trustee; and
(r) to take all actions and perform such duties as may be
required of the Regular Trustees pursuant to the terms of the Securities set
forth in Exhibits B and C hereto.
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The Regular Trustees must exercise the powers set forth in
this Section 3.6 in a manner which is consistent with the purposes and functions
of the Trust set out in Section 3.3 and the Regular Trustees shall not take any
action which is inconsistent with the purposes and functions of the Trust set
forth in Section 3.3.
Subject to this Section 3.6, the Regular Trustees shall have
none of the powers nor any of the authority of the Property Trustee set forth in
Section 3.8.
SECTION 3.7 Prohibition of Actions by Trust and Trustees.
The Trust shall not, and the Trustees (including the Property
Trustee) shall cause the Trust not to, engage in any activity other than as
required or authorized by this Declaration. In particular, the Trust shall not
and the Trustees (including the Property Trustee) shall not cause the Trust to:
(a) invest any proceeds received by the Trust from holding
the Debentures but shall promptly distribute all such proceeds to Holders of
Securities pursuant to the terms of this Declaration and of the Securities;
(b) acquire any assets (including any securities) other
than as expressly provided herein;
(c) possess Trust property for other than a Trust purpose;
(d) make any loans, other than loans represented by the
Debentures;
(e) possess any power or otherwise act in such a way as to
vary the Trust assets or the terms of the Securities in any way whatsoever;
(f) issue any securities or other evidences of beneficial
ownership of, or beneficial interests in, the Trust other than the Securities;
(g) incur any indebtedness for borrowed money;
(h) (i) direct the time, method and place of exercising any
trust or power conferred upon the Debenture Trustee with respect to the
Debentures, (ii) waive any past default that is waivable under Section 6.06 of
the Indenture, (iii) exercise any right to rescind or annul any declaration that
the principal of all of the Debentures shall be due and payable or (iv) consent
to any amendment, modification or termination of the Indenture or the
Debentures, 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 United States federal income tax purposes as an association taxable as a
corporation or partnership and that the Trust will continue to be classified as
a grantor trust for United States federal income tax purposes;
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(i) acquire any investments or engage in any activities not
authorized by this Declaration;
(j) sell, assign, transfer, exchange, mortgage, pledge,
set-off or otherwise dispose of any of the Trust Property or interests therein,
including to the Holders of the Securities, except as expressly provided herein;
or
(k) take any action that would cause the Trust to fail or
cease to qualify as a "grantor trust" for United States federal income tax
purposes.
SECTION 3.8 Powers and Duties of the Property Trustee.
(a) The legal title to the Debentures shall be owned by and
held of record in the name of the Property Trustee in trust for the benefit of
the Holders of the Securities. The right, title and interest of the Property
Trustee to the Debentures shall vest automatically in each Person who may
hereafter be appointed as Property Trustee in accordance with Article V. Such
vesting and cessation of title shall be effective whether or not conveyancing
documents have been executed and delivered.
(b) The Property Trustee shall not transfer its right, title
and interest in the Debentures to the Regular Trustees or, if the Property
Trustee does not also act as the Delaware Trustee, the Delaware Trustee.
(c) The Property Trustee shall:
(i) establish and maintain a segregated non-interest bearing
bank account (the "Property Account") in the name of and under the
exclusive control of the Property Trustee on behalf of the Holders of
the Securities and on the receipt of payments of funds made in respect
of the Debentures held by the Property Trustee, deposit such funds into
the Property Account and, without any further acts of the Delaware
Trustee or the Regular Trustees, promptly make distributions to the
Holders of the Preferred Securities and Common Securities from the
Property Account in accordance with Section 6.1. Funds in the Property
Account shall be held uninvested, and without liability for interest
thereon, until disbursed in accordance with this Declaration. The
Property Account shall be an account which is maintained with a banking
institution whose long term unsecured indebtedness is rated by a
"nationally recognized statistical rating organization", as such term
is defined for purposes of Rule 436(g)(2) under the Securities Act, at
least equal to (but in no event less than "A" or the equivalent) the
rating assigned to the Preferred Securities by a nationally recognized
statistical rating organization;
(ii) engage in such ministerial activities as shall be
necessary or appropriate to effect promptly the redemption of the
Preferred Securities and the Common Securities to the extent the
Debentures are redeemed or mature;
(iii) upon notice of distribution issued by the Regular
Trustees in accordance with the terms of the Preferred Securities and
the Common Securities, engage in such
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ministerial activities as shall be necessary or appropriate to effect
promptly the distribution pursuant to terms of the Securities or
Debentures to Holders of Securities upon the occurrence of a Special
Event; and
(iv) have the legal power to exercise all of the rights,
powers and privileges of a holder of the Debentures under the Indenture
and, if an Event of Default occurs and is continuing, the Property
Trustee, subject to Section 2.6(b), shall for the benefit of the
Holders of the Securities, enforce its rights as holder of the
Debentures under the Indenture, including without limitation enforcing
the provisions of the Preferred Guarantee, subject to the rights of the
Holders of the Preferred Securities pursuant to the terms of this
Declaration and the Trust Indenture Act.
(d) The Property Trustee shall take all actions and perform
such duties as may be specifically required of the Property Trustee pursuant to
the terms of the Securities set forth in Exhibits B and C hereto.
(e) Subject to Section 3.10(a) hereof, the Property Trustee
shall take any Legal Action which arises out of or in connection with an Event
of Default or the Property Trustee's duties and obligations under this
Declaration or the Trust Indenture Act.
(f) All moneys deposited in the Property Account, and all
Debentures held by the Property Trustee for the benefit of the Holders of the
Securities will not be subject to any right, charge, security interest, lien or
claim of any kind in favor of, or for the benefit of that Property Trustee or
its agents or their creditors.
(g) The Property Trustee shall, within 90 days after the
occurrence of a default with respect to the Securities, transmit by mail, first
class postage prepaid, to the Holders of the Securities, as their names and
addresses appear upon the register, notice of all defaults with respect to the
Securities known to the Property Trustee, unless such defaults shall have been
cured before the giving of such notice (the term "defaults" for the purposes of
this Section 3.8(g) being hereby defined to be an Indenture Event of Default,
not including any periods of grace provided for in the Indenture and
irrespective of the giving of any notice provided therein); provided, that,
except in the case of default in the payment of the principal of (or premium, if
any) or interest on any of the Debentures, the Property Trustee shall be
protected in withholding such notice if and so long as the board of directors,
the executive committee, or a trust committee of directors and/or Responsible
Officers, of the Property Trustee in good faith determine that the withholding
of such notice is in the interests of the Holders of the Securities. The
Property Trustee shall not be deemed to have knowledge of any default, except
(i) a default in the payment of principal, premium or interest on the Debentures
or (ii) any default as to which the Property Trustee shall have received written
notice or a Responsible Officer charged with the administration of this
Declaration shall have obtained written notice.
(h) The Property Trustee shall not resign as a Trustee unless
either:
(i) the Trust has been completely liquidated and the proceeds
therof distributed to the Holders of Securities pursuant to the terms of the
Securities; or
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(ii) a Successor Property Trustee has been appointed and
accepted that appointment in accordance with Article V.
(i) The Property Trustee shall act as paying agent in respect
of the Securities and, subject to Section 3.6(q), may authorize one or more
Persons (each, a "Paying Agent") to pay Distributions, redemption payments or
liquidation payments on behalf of the Trust with respect to the Preferred
Securities. Any such Paying Agent shall comply with Section 317(b) of the Trust
Indenture Act. Any Paying Agent may be removed by the Property Trustee, after
consultation with the Regular Trustees, at any time and a successor Paying Agent
or additional Paying Agents may be appointed at any time by the Property
Trustee, subject to Section 3.6(q).
(j) The Property Trustee shall give prompt written notice to
the Holders of the Securities of any notice received by it from SunSource of its
election to defer payments of interest on the Debentures by extending the
interest payment period with respect thereto.
(k) Subject to this Section 3.8, the Property Trustee shall
have none of the powers or the authority of the Regular Trustees set forth in
Section 3.6.
(l) The Property Trustee shall exercise the powers, duties and
rights set forth in this Section 3.8 and Section 3.10 in a manner which is
consistent with the purposes and functions of the Trust set out in Section 3.3
and the Property Trustee shall not take any action which is inconsistent with
the purposes and functions of the Trust set forth in Section 3.3.
SECTION 3.9 Delaware Trustee.
Notwithstanding any other provision of this Declaration other
than Section 5.1(a)(3), the Delaware Trustee shall not be entitled to exercise
any powers, nor shall the Delaware Trustee have any of the duties and
responsibilities of the Regular Trustees and the Property Trustee described in
this Declaration. Except as set forth in Section 5.1(a)(3), the Delaware Trustee
shall be a Trustee for the sole and limited purpose of fulfilling the
requirements of Section 3807 of the Business Trust Act. No implied covenants or
obligations shall be read into this Declaration against the Delaware Trustee.
SECTION 3.10 Certain Rights and Duties of the Property Trustee.
(a) The Property Trustee, before the occurrence of an Event of
Default and after the curing of all Events of Default that may have occurred,
shall undertake to perform only such duties as are specifically set forth in
this Declaration, and no implied covenants shall be read into this Declaration
against the Property Trustee. In case an Event of Default has occurred (that has
not been cured or waived pursuant to Section 2.6), the Property Trustee shall
exercise such of the rights and powers vested in it by this Declaration, and use
the same degree of care and skill in their exercise, as a prudent person would
exercise or use under the circumstances in the conduct of his or her own
affairs.
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(b) No provision of this Declaration shall be construed to
relieve the Property Trustee from liability for its own negligent action, its
own negligent failure to act or its own willful misconduct, except that:
(i) prior to the occurrence of an Event of Default and after
the curing or waiving of all such Events of Default that may have
occurred:
(A) the duties and obligations of the Property Trustee
shall be determined solely by the express provisions
of this Declaration, and the Property Trustee shall
not be liable except for the performance of such
duties and obligations as are specifically set forth
in this Declaration, and no implied covenants or
obligations shall be read into this Declaration
against the Property Trustee; and
(B) in the absence of bad faith on the pa Property
Trustee, the Property Trustee may conclusively rely,
as to the truth of the statements correctness of the
opinions expressed therein, upon any certificates of
opinions furnished to the Property Trustee and
conforming to the requirements of this Declaration;
but in the case of any such certificates or opinions
that by any provision hereof are specifically
required to be furnished to the Property Trustee, the
Property Trustee shall be under a duty to examine the
same to determine whether or not they conform to the
requirements of this Declaration;
(ii) the Property Trustee shall not be liable for any error of
judgment made in good faith by a Responsible Officer of the Property
Trustee, unless it shall be proved that the Property Trustee was
negligent in ascertaining the pertinent facts;
(iii) the Property Trustee shall not be liable with respect to
any action taken or omitted to be taken by it in good faith in
accordance with the direction of the Holders as provided herein
relating to the time, method and place of conducting any proceeding for
any remedy available to the Property Trustee hereunder or under the
Indenture, or exercising any trust or power conferred upon the Property
Trustee under this Declaration; and
(iv) no provision of this Declaration shall require the
Property Trustee to expend or risk its own funds or otherwise incur
personal financial liability in the performance of any of its duties or
in the exercise of any of its rights or powers, if it shall have
reasonable ground for believing that the repayment of such funds or
liability is not reasonably assured to it under the terms of this
Declaration or adequate indemnity against such risk or liability is not
reasonably assured to it.
(c) Subject to the provisions of Section 3.10(a) and (b):
(i) whenever in the administration of this Declaration,
the Property Trustee shall deem it desirable that a matter be proved or
established prior to taking, suffering or
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omitting any action hereunder, the Property Trustee (unless other
evidence is herein specifically prescribed) may, in the absence of bad
faith on its part and, if the Trust is excluded from the definition of
Investment Company solely by means of Rule 3a-5, subject to the
requirements of Rule 3a-5, request and rely upon a certificate, which
shall comply with the provisions of Section 314(e) of the Trust
Indenture Act, signed by any two of the Regular Trustees or by an
authorized officer of the Sponsor, as the case may be;
(ii) The Property Trustee (A) may consult with counsel (which
may be counsel to the Sponsor or any of its Affiliates and may include
any of its employees) selected by it in good faith and with due care
and the written advice or opinion of such counsel with respect to legal
matters shall be full and complete authorization and protection in
respect of any action taken, suffered or omitted by it hereunder in
good faith and in reliance thereon and in accordance with such advice
and opinion and (B) shall have the right at any time to seek
instructions concerning the administration of this Declaration from any
court of competent jurisdiction;
(iii) The Property Trustee may execute any of the trusts or
powers hereunder or perform any duties hereunder either directly or by
or through agents or attorneys and the Property Trustee shall not be
responsible for any misconduct or negligence on the part of any agent
or attorney appointed by it in good faith and with due care;
(iv) The Property Trustee shall be under no obligation to
exercise any of the rights or powers vested in it by this Declaration
at the request or direction of any Holders, unless such Holders shall
have offered to the Property Trustee reasonable security and indemnity
against the costs, expenses (including attorneys' fees and expenses)
and liabilities that might be incurred by it in complying with such
request or direction; provided that nothing contained in this clause
(iv) shall relieve the Property Trustee of the obligation, upon the
occurrence of an Event of Default (which has not been cured or waived)
to exercise such of the rights and powers vested in it by this
Declaration, and to use the same degree of care and skill in this
exercise, as a prudent person would exercise or use under the
circumstances in the conduct of his or her own affairs; and
(v) Any action taken by the Property Trustee or its agents
hereunder shall bind the Holders of the Securities and the signature of
the Property Trustee or its agents alone shall be sufficient and
effective to perform any such action; and no third party shall be
required to inquire as to the authority of the Property Trustee to so
act, or as to its compliance with any of the terms and provisions of
this Declaration, both of which shall be conclusively evidenced by the
Property Trustee's or its agent's taking such action.
SECTION 3.11 Preferential Collection of Claims Against Depositor or Trust.
In case of the pendency of any receivership, insolvency,
liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or
other similar judicial proceeding relative to the Trust or any other obligor
upon the Securities or the property of the Trust or of such other obligor or
their creditors, the Property Trustee (irrespective of whether any
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Distributions on the Securities shall then be due and payable as therein
expressed or by declaration or otherwise and irrespective of whether the
Property Trustee shall have made any demand on the Trust for the payment of any
past due Distributions) shall be entitled and empowered, to the fullest extent
permitted by law, by intervention in such proceeding or otherwise:
(a) to file and prove a claim for the whole amount of any
Distributions owing and unpaid in respect of the Securities and to file such
other papers or documents as may be necessary or advisable in order to have the
claims of the Property Trustee (including any claim for the reasonable
compensation, expenses, disbursements and advances of the Property Trustee, its
agents and counsel) and of the Holders allowed in such judicial proceeding, and
(b) to collect and receive any moneys or other property
payable or deliverablb on any such claims and to distribute the same;
and any custodian, receiver, assignee, trustee, liquidator, sequestrator or
other similar official in any such judicial proceeding is hereby authorized by
each Holder to make such payments to the Property Trustee and, in the event the
Property Trustee shall consent to the making of such payments directly to the
Holders, to pay to the Property Trustee any amount due it for the reasonable
compensation, expenses, disbursements and advances of the Property Trustee, its
agents and counsel, and any other amounts due the Property Trustee.
Nothing herein contained shall be deemed to authorize the Property
Trustee to authorize or consent to or accept or adopt on behalf of any Holder
any plan of reorganization, arrangement, adjustment or compensation affecting
the Securities or the rights of any Holder thereof or to authorize the Property
Trustee to vote in respect of the claim of any Holder in any such proceeding.
SECTION 3.12 Registration Statement and Related Matters.
The Trust and the Trustees hereby authorize and direct
SunSource, as the sponsor of the Trust, (i) to file with the Commission and
execute, in each case on behalf of the Trust, (a) the Registration Statement on
Form S-4 (File No. 333-19077) (the "1933 Act Registration Statement") and any
further pre-effective or post-effective amendments to such Registration
Statement, relating to the registration under the Securities Act of the
Preferred Securities of the Trust, (b) a Registration Statement on Form 8-A or
other appropriate form (the "1934 Act Registration Statement") (including all
pre-effective and post-effective amendments thereto) relating to the
registration of the Preferred Securities of the Trust under Section 12(b) of the
Exchange Act and (c) a Transaction Statement on Schedule 13E-3 (the "Schedule
13E-3") and any amendment or supplement thereto; (ii) to file with the New York
Stock Exchange and execute on behalf of the Trust a listing application and all
other applications, statements, certificates, agreements and other instruments
as shall be necessary or desirable to cause the Preferred Securities to be
listed on the New York Stock Exchange and (iii) to file and execute on behalf of
the Trust such applications, reports, surety bonds, irrevocable consents,
appointments of attorney for service of process and other papers and documents
as shall be necessary or desirable to register the Preferred Securities under
the securities or "Blue Sky" laws of such
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jurisdictions as SunSource on behalf of the Trust, may deem necessary or
desirable. In the event that any filing referred to in clauses (i)-(iii) above
is required by the rules and regulations of the Commission, the New York Stock
Exchange or state securities or blue sky laws, to be executed on behalf of the
Trust by the Trustees, the Regular Trustees, in their capacities as Trustees of
the Trust, are hereby authorized and directed to join in any such filing and to
execute on behalf of the Trust any and all of the foregoing, it being understood
that the Property Trustee and the Delaware Trustee, in their capacities as
Trustees of the Trust, shall not be required to join in any such filing or
execute on behalf of the Trust any such document unless required by the rules
and regulations of the Commission, the New York Stock Exchange or state
securities or blue sky laws. In connection with all of the foregoing, SunSource
and each Trustee, solely in its capacity as Trustee of the Trust, have
constituted and appointed, and hereby confirm the appointment of, Joseph M.
Corvino, John J. Dabrowski and Norman V. Edmonson, and each of them, as his, her
or its, as the case may be, true and lawful attorneys-in-fact, and agents, with
full power of substitution and resubstitution, for SunSource or such Trustee or
in SunSource's or such Trustee's name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to the 1933 Act Registration Statement, the 1934 Act Registration Statement and
the Schedule 13E-3 and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as SunSource or such Trustee might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them, or their or his or her substitute or substitutes,
shall do or cause to be done by virtue hereof.
SECTION 3.13 Filing of Amendments to Certificate of Trust.
The Certificate of Trust as filed with the Secretary of State
of the State of Delaware on June 17, 1997 is attached hereto as Exhibit A. On or
after the date of execution of this Declaration, the Trustees shall cause the
filing with the Secretary of State of the State of Delaware of such amendments
to the Certificate of Trust as the Trustees shall deem necessary or desirable.
SECTION 3.14 Calculation of Original Issue Discount.
SunSource shall file with the Trustee promptly at the end of
each calendar year (i) a written notice specifying the amount of original issue
discount (including daily rates and accrual periods) accrued on outstanding
Preferred Securities as of the end of such year and (ii) such other specific
information relating to such original issue discount as may then be relevant
under the Code.
SECTION 3.15 Execution of Documents by Regular Trustees.
Unless otherwise determined by the Regular Trustees and except
as otherwise provided in this Declaration or required by the Business Trust Act
with respect to the Certificate of Trust or otherwise, a majority of, or if
there are only two, both of, the Regular Trustees are
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authorized to execute and deliver on behalf of the Trust any documents which the
Regular Trustees have the power and authority to execute or deliver pursuant to
this Declaration.
SECTION 3.16 Trustees Not Responsible for Recitals or Issuance of
Securities.
The recitals contained in this Declaration and the Securities
shall be taken as the statements of the Sponsor and the Trustees do not assume
any responsibility for their correctness. The Trustees make no representations
as to the value or condition of the property of the Trust or any part thereof.
The Trustees make no representations as to the validity or sufficiency of this
Declaration or the Securities.
SECTION 3.17 Duration of Trust.
The Trust, absent termination pursuant to the provisions of
Article VIII hereof, shall have existence until __________, 2027.
ARTICLE IV
SPONSOR
SECTION 4.1 Purchase of Common Securities by Sponsor.
The Sponsor will purchase Common Securities issued by the
Trust at the same time as the Preferred Securities are issued in exchange for
the Debentures, such purchase to be in an amount equal to 3% of the sum of (i)
the aggregate stated liquidation amount of the Preferred Securities issued in
exchange for the Debentures and (ii) the proceeds derived from the sale of the
Common Securities.
SECTION 4.2 Covenants of the Sponsor.
For so long as the Preferred Securities remain outstanding,
the Sponsor will covenant (i) to maintain directly 100 percent ownership of the
Common Securities, (ii) to cause the Trust to remain a statutory business trust
and not to voluntarily dissolve, wind up, liquidate, or be terminated, except as
permitted by this Declaration, (iii) to use its commercially reasonable efforts
to ensure that the Trust will not be an investment company for purposes of the
1940 Act, and (iv) to take no action which would be reasonably likely to cause
the Trust to be classified as an association or a publicly traded partnership
taxable as a corporation for United States federal income tax purposes.
SECTION 4.3 Expenses.
(a) The Sponsor shall be responsible for and shall pay for all
debts and obligations (other than with respect to the Preferred Securities) and
all costs and expenses of the Trust including without limitation costs and
expenses relating to the organization of the Trust, the issuance of the
Preferred Securities pursuant to the Conversion, the fees and expenses
(including reasonable counsel fees and expenses) of the Trustees, which
compensation shall not
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be limited by any provision of law with regard to the compensation of a trustee
of an express trust (including any amounts payable under Article X), the costs
and expenses relating to the operation of the Trust, including without
limitation costs and expenses of accountants, attorneys, statistical or
bookkeeping services, expenses for printing and engraving and computing or
accounting equipment, paying agent(s), registrar(s), transfer agent(s),
duplicating, travel and telephone and other telecommunications expenses and
costs and expenses incurred in connection with the disposition of Trust assets.
(b) The Sponsor will pay any and all taxes (other than United
States withholding taxes attributable to the Trust or its assets) and all
liabilities, costs and expenses with respect to such taxes of the Trust.
(c) The Sponsor's obligations under this Section 4.2 shall be
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 the
Sponsor's obligations under this Section 4.2 directly against the Sponsor and
the Sponsor irrevocably waives any right or remedy to require that any such
Creditor take any action against the Trust or any other Person before proceeding
against the Sponsor. The Sponsor agrees to execute such additional agreements as
may be necessary or desirable in order to give full effect to the provisions of
this Section 4.2.
(d) As security for the performance of the obligations of the
Sponsor under this Section, the Property Trustee shall have a lien prior to the
Debentures upon all property and funds held or collected by the Property Trustee
as such, except funds held in trust for the payment of principal of and premium
(if any) or interest on, particular Debentures. Should the Property Trustee
incur expenses or render services in connection with an Event of Default
specified in Section 6.01 of the Indenture, those expenses (including the
reasonable charges and expenses of its counsel) and the compensation for the
services are intended to constitute expenses of administration under any
applicable federal or state bankruptcy, insolvency, reorganization or other
similar law.
The provisions of this Section shall survive the termination
of this Declaration.
ARTICLE V
TRUSTEES
SECTION 5.1 Number of Trustees; Qualifications.
(a) The number of Trustees initially shall be five. At any
time (i) before the issuance of the Securities, the Sponsor may, by written
instrument, increase or decrease the number of, and appoint, remove and replace
the, Trustees, and (ii) after the issuance of the Securities and except as
provided in clause (5) below and Section 5.2(a)(ii)(B) with respect to the
Special Regular Trustee, the number of Trustees may be increased or decreased
solely by, and Trustees may be appointed, removed or replaced solely by, vote of
Holders of Common
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Securities representing a Majority in liquidation amount of the Common
Securities voting as a class; provided that in any case:
(i) the number of Trustees shall be at least five unless the
Trustee that acts as the Property Trustee also acts as the Delaware
Trustee, in which case the number of Trustees shall be at least four
(4);
(ii) unless a Special Regular Trustee has been appointed
(which appointment shall not impair the right of the Holders of Common
Securities to increase or decrease the number of, or to appoint, remove
or replace, Trustees (other than the Special Regular Trustee) as
provided above), at least a majority of the Trustees shall at all times
be officers, directors or employees of SunSource;
(iii) if required by the Business Trust Act, one Trustee (the
"Delaware Trustee") shall be either a natural person who is a resident
of the State of Delaware or, if not a natural person, an entity which
has its principal place of business in the State of Delaware and
otherwise is permitted to act as a Trustee hereunder under the laws of
the State of Delaware, except that if the Property Trustee has its
principal place of business in the State of Delaware and otherwise is
permitted to act as a Trustee hereunder under the laws of the State of
Delaware, then the Property Trustee shall also be the Delaware Trustee
and Section 3.9 shall have no application;
(iv) there shall at all times be a Property Trustee
hereunder which shall satisfy the requirements of Section 5.1(c); and
(v) the number of Trustees shall be increased automatically by
one (1) if an Appointment Event has occurred and is continuing and the
Holders of a Majority in liquidation amount of the Preferred Securities
appoint a Special Regular Trustee in accordance with Section
5.2(a)(ii)(B) and the terms of the Preferred Securities.
Each Trustee shall be either a natural person at least 21 years of age or a
legal entity which shall act through one or more duly appointed representatives.
(b) The initial Regular Trustees shall be:
Joseph M. Corvino
John J. Dabrowski
Norman V. Edmonson
c/o SunSource Inc.
2600 One Logan Square
Philadelphia, PA 19103
(c) There shall at all times be one Trustee which shall
act as Property Trustee. In order to act as Property Trustee hereunder, such
Trustee shall:
(i) not be an Affiliate of the Sponsor;
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(ii) be a corporation organized and doing business under the
laws of the United States of America or any State or Territory thereof
or of the District of Columbia, or a corporation or Person permitted by
the Commission to act as an institutional trustee under the Trust
Indenture Act, authorized under such laws to exercise corporate trust
powers, having a combined capital and surplus of at least $50,000,000,
and subject to supervision or examination by Federal, State,
Territorial or District of Columbia authority. If such corporation
publishes reports of condition at least annually, pursuant to law or to
the requirements of the supervising or examining authority referred to
above, then for the purposes of this Section 5.1(c)(ii), the combined
capital and surplus of such corporation shall be deemed to be its
combined capital and surplus as set forth in its most recent report of
condition so published; and
(iii) if the Trust is excluded from the definition of an
Investment Company solely by reason of Rule 3a-5 and to the extent Rule
3a-5 requires a trustee having certain qualifications to hold title to
the "eligible assets" (as defined in Rule 3a-5) of the Trust, the
Property Trustee shall possess those qualifications.
If at any time the Property Trustee shall cease to satisfy the
requirements of clauses (i)-(iii) above, the Property Trustee shall immediately
resign in the manner and with the effect set out in Section 5.2(d). If the
Property Trustee has or shall acquire any "conflicting interest" within the
meaning of Section 310(b) of the Trust Indenture Act, the Property Trustee and
the Holders of the Common Securities (as if such Holders were the obligor
referred to in Section 310(b) of the Trust Indenture Act) shall in all respects
comply with the provisions of Section 310(b) of the Trust Indenture Act. The
Preferred Guarantee shall be deemed to be specifically described in this
Declaration for the purposes of clause (i) of the first proviso contained in
Section 310(b) of the Trust Indenture Act.
The initial Trustee which shall serve as the Property Trustee
is The Bank of New York, whose address is as set forth in Section 14.1(b).
(d) The initial Trustee which shall serve as the Delaware
Trustee is The Bank of New York (Delaware), whose address is as set forth in
Section 14.1(c).
(e) Any action taken by (i) Holders of Common Securities
pursuant to this Article V or (ii) Holders of Preferred Securities pursuant to
this Article V to appoint or remove a Special Regular Trustee upon the
occurrence of an Appointment Event, shall be taken at a meeting of Holders of
Common Securities or Preferred Securities, as the case may be, convened for such
purpose or by written consent as provided in Section 12.2.
(f) No amendment may be made to this Section 5.1 which would
change any rights with respect to the number, existence or appointment and
removal of Trustees (other than any Special Regular Trustee), except with the
consent of each Holder of Common Securities.
(g) No amendment may be made to this Section 5.1 or Section
5.2(a)(ii)(B), which would change the rights of Holders of Preferred Securities
to appoint, remove or replace a Special Regular Trustee except with the consent
of each Holder of Preferred Securities.
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SECTION 5.2 Appointment, Removal and Resignation of Trustees.
(a) Subject to Section 5.2(b), Trustees may be appointed
or removed without cause at any time:
(i) until the issuance of the Securities, by written
instrument executed by the Sponsor; and
(ii) after the issuance of the Securities,
(A) other than with respect to the Special Regular
Trustee, by vote of the Holders of a Majority in
liquidation amount of the Common Securities voting as
a class; and
(B) if an Appointment Event has occurred and is
continuing, one (1) additional Regular Trustee (the
"Special Regular Trustee") may be appointed, who need
not be an Affiliate of the Sponsor, by vote of the
Holders of a Majority in liquidation amount of the
Preferred Securities, voting as a class and such
Special Regular Trustee may be removed (otherwise
than by the operation of Section 5.2(c)), only by
vote of the Holders of a Majority in liquidation
amount of the Preferred Securities voting as a class.
(iii) notwithstanding any other provision to the contrary in
this Declaration, if an Indenture Event of Default shall have occurred
and be continuing, such removal of the Property Trustee or the Delaware
Trustee and such election of the Successor Property Trustee or
Successor Delaware Trustee shall require the affirmative vote of the
Holders of a majority in liquidation amount of the Preferred Securities
voting as a class.
(b) (i) The Trustee that acts as Property Trustee shall not be
removed in accordance with Section 5.2(a) until a Successor Property Trustee
possessing the qualifications to act as Property Trustee under Section 5.1(c)
has been appointed and has accepted such appointment by written instrument
executed by such Successor Property Trustee and delivered to the Regular
Trustees, the Sponsor and the Property Trustee being removed; and
(ii) the Trustee that acts as Delaware Trustee shall not be
removed in accordance with Section 5.2(a) until a successor Trustee
possessing the qualifications to act as Delaware Trustee under Section
5.1(a)(3) (a "Successor Delaware Trustee") has been appointed and has
accepted such appointment by written instrument executed by such
Successor Delaware Trustee and delivered to the Regular Trustees, the
Sponsor and the Delaware Trustee being removed.
(c) A Trustee appointed to office shall hold office until his
successor shall have been appointed or until his death, removal or resignation,
provided that a Special Regular Trustee shall only hold office while an
Appointment Event is continuing and shall cease to hold
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office immediately after the Appointment Event pursuant to which the Special
Regular Trustee was appointed and all other Appointment Events cease to be
continuing.
(d) Any Trustee may resign from office (without need for prior
or subsequent accounting) by an instrument (a "Resignation Request") in writing
signed by the Trustee and delivered to the Sponsor and the Trust, which
resignation shall take effect upon such delivery or upon such later date as is
specified therein; provided, however, that:
(i) no such resignation of the Trustee that acts as the
Property Trustee shall be effective until:
(A) a Successor Property Trustee possessing the
qualifications to act as Property Trustee under
Section 5.1(c) has been appointed and has accepted
such appointment by instrument executed by such
Successor Property Trustee and delivered to the
Trust, the Sponsor and the resigning Property
Trustee; or
(B) if the Trust is excluded from the definition of an
Investment Company solely by reason of Rule 3a-5,
until the assets of the Trust have been completely
liquidated and the proceeds thereof distributed to
the Holders of the Securities;
(ii) no such resignation of the Trustee that acts as the
Delaware Trustee shall be effective until a Successor Delaware Trustee
has been appointed and has accepted such appointment by instrument
executed by such Successor Delaware Trustee and delivered to the Trust,
the Sponsor and the resigning Delaware Trustee; and
(iii) no such resignation of a Special Regular Trustee shall
be effective until the 60th day following delivery of the Resignation
Request to the Sponsor and the Trust or such later date specified in
the Resignation Request during which period the Holders of the
Preferred Securities shall have the right to appoint a successor
Special Regular Trustee as provided in this Article V.
(e) If no Successor Property Trustee or Successor Delaware
Trustee shall have been appointed and accepted appointment as provided in this
Section 5.2 within 60 days after delivery to the Sponsor and the Trust of a
Resignation Request or within 60 days after completion of the vote referred to
in 5.2(a)(ii)(A) or 5.2(a)(ii)(B) hereof, the resigning or removed Property
Trustee or Delaware Trustee may petition any court of competent jurisdiction for
appointment of a Successor Property Trustee or Successor Delaware Trustee. Such
court may thereupon after such notice, if any, as it may deem proper and
prescribe, appoint a Successor Property Trustee or Successor Delaware Trustee,
as the case may be.
SECTION 5.3 Vacancies Among Trustees.
If a Trustee ceases to hold office for any reason and the
number of Trustees is not reduced pursuant to Section 5.1 or if the number of
Trustees is increased pursuant to Section 5.1,
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a vacancy shall occur. A resolution certifying the existence of such vacancy by
a majority of the Regular Trustees shall be conclusive evidence of the existence
of such vacancy. The vacancy shall be filled with a Trustee appointed in
accordance with the requirements of this Article V.
SECTION 5.4 Effect of Vacancies.
The death, resignation, retirement, removal, bankruptcy,
dissolution, liquidation, incompetence or incapacity to perform the duties of a
Trustee, or any one of them, shall not operate to annul the Trust. Whenever a
vacancy in the number of Regular Trustees shall occur until such vacancy is
filled as provided in this Article V, the Regular Trustees in office, regardless
of their number, shall have all the powers granted to the Regular Trustees and
shall discharge all the duties imposed upon the Regular Trustees by this
Declaration.
SECTION 5.5 Meetings.
Meetings of the Regular Trustees shall be held from time to
time upon the call of any Trustee. Regular meetings of the Regular Trustees may
be held at a time and place fixed by resolution of the Regular Trustees. Notice
of any in-person meetings of the Regular Trustees shall be hand delivered or
otherwise delivered in writing (including by facsimile, with a hard copy by
overnight courier) not less than 48 hours before such meeting. Notice of any
telephonic meetings of the Regular Trustees or any committee thereof shall be
hand delivered or otherwise delivered in writing (including by facsimile, with a
hard copy by overnight courier) not less than 24 hours before a meeting. Notices
shall contain a brief statement of the time, place and anticipated purposes of
the meeting. The presence (whether in person or by telephone) of a Regular
Trustee at a meeting shall constitute a waiver of notice of such meeting except
where a Regular Trustee attends a meeting for the express purpose of objecting
to the transaction of any activity on the ground that the meeting has not been
lawfully called or convened. Unless provided otherwise in this Declaration, any
action of the Regular Trustees may be taken at a meeting by vote of a majority
of the Regular Trustees present (whether in person or by telephone) and eligible
to vote with respect to such matter, provided that a Quorum is present, or
without a meeting by the unanimous written consent of the Regular Trustees.
SECTION 5.6 Delegation of Power.
(a) Any Regular Trustee may, by power of attorney consistent
with applicable law, delegate to any other natural person over the age of 21 his
or her power for the purpose of executing any registration statement or
amendment thereto or other document or schedule filed with the Commission or
making any other governmental filing (including without limitation to filings
referred to in Section 3.11).
(b) The Regular Trustees shall have power to delegate from
time to time to such of their number or to officers of the Trust the doing of
such things and the execution of such instruments either in the name of the
Trust or the names of the Regular Trustees or otherwise as the Regular Trustees
may deem expedient, to the extent such delegation is not prohibited by
applicable law or contrary to the provisions of the Trust, as set forth herein.
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ARTICLE VI
DISTRIBUTIONS
SECTION 6.1 Distributions.
Holders shall receive periodic distributions, redemption
payments and liquidation distributions in accordance with the applicable terms
of the relevant Holder's Securities ("Distributions"). Distributions shall be
made to the Holders of Preferred Securities and Common Securities in accordance
with the terms of the Securities as set forth in Exhibits B and C hereto. If and
to the extent that SunSource makes a payment of interest (including Compounded
Interest (as defined in the Indenture)), premium and principal on the Debentures
held by the Property Trustee (the amount of any such payment being a "Payment
Amount"), the Property Trustee shall and is directed to promptly make a
Distribution of the Payment Amount to Holders in accordance with the terms of
the Securities as set forth in Exhibits B and C hereto.
ARTICLE VII
ISSUANCE OF SECURITIES
SECTION 7.1 General Provisions Regarding Securities.
(a) The Regular Trustees shall issue on behalf of the Trust
securities in fully registered form representing undivided beneficial interests
in the assets of the Trust in accordance with Section 7.1(b) and for the
consideration specified in Section 3.3.
(b) The Regular Trustees shall issue on behalf of the Trust
one class of preferred securities representing preferred undivided beneficial
interests in the assets of the Trust having such terms as are set forth in
Exhibit B (the "Preferred Securities") which terms are incorporated by reference
in, and made a part of, this Declaration as if specifically set forth herein,
and one class of common securities representing common undivided beneficial
interests in the assets of the Trust having such terms as are set forth in
Exhibit C (the "Common Securities") which terms are incorporated by reference
in, and made a part of, this Declaration as if specifically set forth herein.
The Trust shall have no securities or other interests in the assets of the Trust
other than the Preferred Securities and the Common Securities.
(c) The Certificates shall be signed on behalf of the Trust by
the Regular Trustees (or if there are more than two Regular Trustees by any two
of the Regular Trustees). Such signatures may be the manual or facsimile
signatures of the present or any future Regular Trustee. A Security shall not be
valid until authenticated by the manual signature of an authorized signatory of
the Property Trustee. The signature shall be conclusive evidence that the
Security has been authenticated under this Declaration. Upon a written order of
the Trust signed by one Regular Trustee, the Property Trustee shall authenticate
the Security for original issue. Typographical and other minor errors or defects
in any such reproduction of any such signature shall not affect the validity of
any Security. In case any Regular Trustee of the Trust who shall have signed any
of the Certificates shall cease to be such Regular Trustee before the
Certificate so signed shall be delivered by the Trust, such Certificate
nevertheless may be delivered as
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though the person who signed such Certificate had not ceased to be such Regular
Trustee; and any Certificate may be signed on behalf of the Trust by such
persons as, at the actual date of the execution of such Security, shall be the
Regular Trustees of the Trust, although at the date of the execution and
delivery of the Declaration any such person was not such a Regular Trustee.
Certificates shall be printed, lithographed or engraved or may be produced in
any other manner as is reasonably acceptable to the Regular Trustees, as
evidenced by their execution thereof, and may have such letters, numbers or
other marks of identification or designation and such legends or endorsements as
the Regular Trustees may deem appropriate, or as may be required to comply with
any law or with any rule or regulation made pursuant thereto or with any rule or
regulation of any stock exchange on which Securities may be listed, or to
conform to usage.
(d) The consideration received by the Trust for the issuance
of the Securities shall constitute a contribution to the capital of the Trust
and shall not constitute a loan to the Trust.
(e) Upon issuance of the Securities as provided in this
Declaration, the Securities so issued shall be deemed to be validly issued,
fully paid and non-assessable.
(f) Every Person, by virtue of having become a Holder or a
Preferred Security Beneficial Owner in accordance with the terms of this
Declaration, shall be deemed to have expressly assented and agreed to the terms
of, and shall be bound by this Declaration.
(g) The Sponsor shall use its best efforts to cause the
Preferred Securities to be, and to remain at all times, listed for qualification
on the New York Stock Exchange.
ARTICLE VIII
DISSOLUTION OF TRUST
SECTION 8.1 Dissolution of Trust.
The Trust shall dissolve when:
(i) all of the Securities shall have been called for
redemption and the amounts necessary for redemption thereof shall have
been paid to the Holders of Securities in accordance with the terms of
the Securities; or
(ii) the Regular Trustees elect to dissolve the Trust and
distribute Debentures to Holders of Securities in exchange for all of
the Securities in accordance with the terms of the Securities; or
(iii) upon the expiration of the term of the Trust as set
forth in Section 3.17; or
(iv) upon bankruptcy of the Sponsor or the Trust; or
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(v) upon (i) the filing of a certificate of dissolution or the
equivalent with respect to the Sponsor, (ii) the consent of at least a
majority in liquidation amount of the Securities, voting together as a
single class to dissolve the Trust, or (iii) the revocation of the
charter of the Sponsor 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 Sponsor or the trust.
The provisions of Sections 3.10 and 4.2 and Article X shall
survive the termination of the Trust. As soon as practicable after the
occurrence of an event referred to in this Section 8.1 and after satisfaction of
liabililties to creditors, and subject to the terms of the Securities, the
Trustees shall execute and the Regular Trustees shall file a certificate of
cancellation with the Secretary of State of the State of Delaware.
ARTICLE IX
TRANSFER OF INTERESTS
SECTION 9.1 Transfer of Securities.
(a) Securities may only be transferred, in whole or in part,
in accordance with the terms and conditions set forth in this Declaration. Any
transfer or purported transfer of any Security not made in accordance with this
Declaration shall be null and void.
(b) Subject to this Article IX, Preferred Securities
shall be freely transferable.
(c) Subject to this Article IX, SunSource and any Related
Party may only transfer Common Securities to SunSource or a Related Party,
provided that any such transfer shall be subject to the condition that the
transferor shall have obtained (1) either a ruling from the Internal Revenue
Service or an unqualified written opinion addressed to the Trust and delivered
to the Trustees of nationally recognized independent tax counsel experienced in
such matters to the effect that such transfer will not (i) cause the Trust to be
treated as issuing a class of interests in the Trust differing from the class of
interests represented by the Common Securities originally issued to SunSource,
(ii) result in the Trust acquiring or disposing of, or being deemed to have
acquired or disposed of, an asset, or (iii) result in or cause the Trust to be
treated as anything other than a grantor trust for United States federal income
tax purposes and (2) an unqualified written opinion addressed to the Trust and
delivered to the Trustees of a nationally recognized independent counsel
experienced in such matters that such transfer will not cause the Trust to be an
Investment Company or controlled by an Investment Company.
SECTION 9.2 Transfer of Certificates.
The Regular Trustees shall provide for the registration of
Certificates and of transfers of Certificates, which will be effected without
charge but only upon payment (with such indemnity as the Regular Trustees may
require) in respect of any tax or other government
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charges which may be imposed in relation to it. Upon surrender for registration
of transfer of any Certificate, the Regular Trustees shall cause one or more new
Certificates to be issued in the name of the designated transferee or
transferees. Every Certificate surrendered for registration of transfer shall be
accompanied by a written instrument of transfer in form satisfactory to the
Regular Trustees duly executed by the Holder or such Holder's attorney duly
authorized in writing. Each Certificate surrendered for registration of transfer
shall be canceled by the Regular Trustees. A transferee of a Certificate shall
be entitled to the rights and subject to the obligations of a Holder hereunder
upon the receipt by such transferee of a Certificate. By acceptance of a
Certificate, each transferee shall be deemed to have agreed to be bound by this
Declaration.
SECTION 9.3 Deemed Security Holders.
The Trustees may treat the Person in whose name any
Certificate shall be registered on the books and records of the Trust as the
sole holder of such Certificate and of the Securities represented by such
Certificate for purposes of receiving Distributions and for all other purposes
whatsoever and, accordingly, shall not be bound to recognize any equitable or
other claim to or interest in such Certificate or in the Securities represented
by such Certificate on the part of any Person, whether or not the Trustees shall
have actual or other notice thereof.
SECTION 9.4 Book Entry Interests.
The Preferred Securities Certificates, on original issuance,
will be issued in fully registered form. With respect to any Certificates
registered on the books and records of the Trust in the name of a Clearing
Agency or the nominee of a Clearing Agency:
(i) the Trust and the Trustees shall be entitled to deal with
the Clearing Agency for all purposes of this Declaration (including the
payment of Distributions on such Certificates and receiving approvals,
votes or consents hereunder) as the Preferred Security Holder and the
sole holder of such Certificates and, except as set forth herein or in
Rule 3a-5 with respect to the Property Trustee, shall have no
obligation to the Preferred Security Beneficial Owners;
(ii) to the extent that the provisions of this Section 9.4
conflict with any other provisions of this Declaration, the provisions
of this Section 9.4 shall control; and
(iii) the rights of the Preferred Security Beneficial Owners
shall be exercised only through the Clearing Agency and shall be
limited to those established by law and agreements between such
Preferred Security Beneficial Owners and the Clearing Agency and/or the
Clearing Agency Participants. The Clearing Agency will make book entry
transfers among Clearing Agency Participants and receive and transmit
payments of Distributions on such Certificates to such Clearing Agency
Participants.
SECTION 9.5 Notices to Holders of Certificates.
Whenever a notice or other communication to the Holders is
required to be given under this Declaration, the relevant Trustees shall give
such notices and communications to the
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Holders and, with respect to any Preferred Security Certificate registered in
the name of a Clearing Agency or the nominee of a Clearing Agency, the Trustees
shall, except as set forth herein or in Rule 3a-5 with respect to the Property
Trustee, have no obligations to the Preferred Security Beneficial Owners.
SECTION 9.6 Appointment of Successor Clearing Agency.
If any Clearing Agency elects to discontinue its services as
securities depository with respect to the Preferred Securities, the Regular
Trustees may, in their sole discretion, appoint a successor Clearing Agency with
respect to the Preferred Securities.
SECTION 9.7 Definitive Preferred Securities Certificates.
If (i) a Clearing Agency elects to discontinue its services as
securities depository with respect to the Preferred Securities and a successor
Clearing Agency is not appointed within 90 days after such discontinuance
pursuant to Section 9.6, (ii) the Regular Trustees elect after consultation with
the Sponsor to terminate the book entry system through the Clearing Agency with
respect to the Preferred Securities or (iii) there is an Event of Default, then
upon surrender of the Certificates representing the Book Entry Interests with
respect to the Preferred Securities by the Clearing Agency, accompanied by
registration instructions, the Regular Trustees shall cause definitive Preferred
Security Certificates to be delivered to Preferred Security Beneficial Owners in
accordance with the instructions of the Clearing Agency. Neither the Trustees
nor the Trust shall be liable for any delay in delivery of such instructions and
each of them may conclusively rely on and shall be protected in relying on, such
instructions.
SECTION 9.8 Mutilated, Destroyed, Lost or Stolen Certificates.
If (a) any mutilated Certificates should be surrendered to the
Regular Trustees, or if the Regular Trustees shall receive evidence to their
satisfaction of the destruction, loss or theft of any Certificate; and (b) there
shall be delivered to the Regular Trustees such security or indemnity as may be
required by them to keep each of them harmless, then in the absence of notice
that such Certificate shall have been acquired by a bona fide purchaser, any two
Regular Trustees on behalf of the Trust shall execute and make available for
delivery, in exchange for or in lieu of any such mutilated, destroyed, lost or
stolen Certificate, a new Certificate of like denomination. In connection with
the issuance of any new Certificate under this Section 9.8, the Regular Trustees
may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in connection therewith. Any duplicate
Certificate issued pursuant to this Section shall constitute conclusive evidence
of an ownership interest in the relevant Securities, as if originally issued,
whether or not the lost, stolen or destroyed Certificate shall be found at any
time. An indemnity bond must be provided by the Holder which, in the judgment of
the Property Trustee, is sufficient to protect the Regular Trustees, the Sponsor
or any authenticating agent from any loss which any may suffer if a security is
replaced. The Trust may charge such Holder for its expenses in replacing a
Security.
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ARTICLE X
LIMITATION OF LIABILITY; INDEMNIFICATION
SECTION 10.1 Exculpation.
(a) No Indemnified Person shall be liable, responsible or
accountable in damages or otherwise to the Trust or any Covered Person for any
loss, damage or claim incurred by reason of any act or omission performed or
omitted by such Indemnified Person in good faith on behalf of the Trust and in a
manner such Indemnified Person reasonably believed to be within the scope of the
authority conferred on such Indemnified Person by this Declaration or by law,
except that an Indemnified Person shall be liable for any such loss, damage or
claim incurred by reason of such Indemnified Person's gross negligence (or, in
the case of the Property Trustee, negligence) or willful misconduct with respect
to such acts or omissions.
(b) An Indemnified Person shall be fully protected in relying
in good faith upon the records of the Trust and upon such information, opinions,
reports or statements presented to the Trust by any Person as to matters the
Indemnified Person reasonably believes are within such other Person's
professional or expert competence and who has been selected with reasonable care
by or on behalf of the Trust, including information, opinions, reports or
statements as to the value and amount of the assets, liabilities, profits,
losses, or any other facts pertinent to the existence and amount of assets from
which Distributions to Holders of Securities might properly be paid.
(c) Pursuant to Section 3803 (a) of the Business Trust Act,
the Holders of Securities, in their capacities as Holders, shall be entitled to
the same limitation of liability extended to stockholders of private
corporations for profit organized under the General Corporation Law of the State
of Delaware.
SECTION 10.2 Indemnification.
(a) To the fullest extent permitted by applicable law, the
Sponsor shall indemnify and hold harmless each Indemnified Person from and
against any loss, damage or claim incurred by such Indemnified Person by reason
of any act or omission performed or omitted by such Indemnified Person in good
faith on behalf of the Trust and in a manner such Indemnified Person reasonably
believed to be within the scope of authority conferred on such Indemnified
Person by this Declaration, except that no Indemnified Person shall be entitled
to be indemnified in respect of any loss, damage or claim incurred by such
Indemnified Person by reason of gross negligence (or, in the case of the
Property Trustee, negligence) or willful misconduct with respect to such acts or
omissions.
(b) To the fullest extent permitted by applicable law,
expenses (including legal fees) incurred by an Indemnified Person in defending
any claim, demand, action, suit or proceeding shall, from time to time, be
advanced by the Sponsor prior to the final disposition of such claim, demand,
action, suit or proceeding upon receipt by the Sponsor of an undertaking by
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or on behalf of the Indemnified Person to repay such amount if it shall be
determined that the Indemnified Person is not entitled to be indemnified as
authorized in Section 10.2(a).
ARTICLE XI
ACCOUNTING
SECTION 11.1 Fiscal Year.
The fiscal year ("Fiscal Year") of the Trust shall be the
calendar year, or such other year as is required by the Code.
SECTION 11.2 Certain Accounting Matters.
(a) At all times during the existence of the Trust, the
Regular Trustees shall keep, or cause to be kept, full books of account, records
and supporting documents, which shall reflect in reasonable detail, each
transaction of the Trust. The books of account shall be maintained on the
accrual method of accounting, in accordance with generally accepted accounting
principles, consistently applied. The Trust shall use the accrual method of
accounting for United States federal income tax purposes. The books and records
of the Trust, together with a copy of this Declaration and a certified copy of
the Certificate of Trust, or any amendment thereto, shall at all times be
maintained at the principal office of the Trust and shall be available upon
written request for inspection by any Holder or its duly authorized
representative for any purpose reasonably related to its interest in the Trust.
(b) The Regular Trustees shall, as soon as available after the
end of each Fiscal Year of the Trust, cause to be prepared and mailed to each
Holder of Securities unaudited financial statements of the Trust for such Fiscal
Year, prepared in accordance with generally accepted accounting principles,
provided that if the Trust is required to comply with the periodic reporting
requirements of Sections 13(a) or 15(d) of the Exchange Act, such financial
statements for such Fiscal Year shall be examined and reported on by a firm of
independent certified public accountants selected by the Regular Trustees (which
firm may be the firm used by the Sponsor).
(c) The Regular Trustees shall cause to be prepared and mailed
to each Holder of Securities, an annual United States federal income tax
information statement, on such form as is required by the Code, containing such
information with regard to the Securities held by each Holder as is required by
the Code and the Treasury Regulations. Notwithstanding any right under the Code
to deliver any such statement at a later date, the Regular Trustees shall
endeavor to deliver all such statements within 30 days after the end of each
Fiscal Year of the Trust.
(d) The Regular Trustees shall cause to be prepared and filed
with the appropriate taxing authority, an annual United States federal income
tax return, on such form as is required by the Code, and any other annual income
tax returns required to be filed by the Regular Trustees on behalf of the Trust
with any state or local taxing authority, such returns to be filed as soon as
practicable after the end of each Fiscal Year of the Trust.
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SECTION 11.3 Banking.
The Trust shall maintain one or more bank accounts in the name
and for the sole benefit of the Trust; provided, however, all payments of funds
in respect of the Debentures held by the Property Trustee shall be made directly
to the Property Account and no other funds from the Trust shall be deposited in
the Property Account. The sole signatories for such accounts shall be designated
by the Regular Trustees provided, however, the Property Trustee shall designate
the sole signatories for the Property Account.
SECTION 11.4 Withholding.
The Trust and the Trustees shall comply with all withholding
requirements under United States federal, state and local law. The Trust shall
request, and the Holders shall provide to the Trust, such forms or certificates
as are necessary to establish an exemption from withholding with respect to each
Holder, and any representations and forms as shall reasonably be requested by
the Trust to assist it in determining the extent of, and in fulfilling, its
withholding obligations. The Trust shall file required forms with applicable
jurisdictions and, unless an exemption from withholding is properly established
by a Holder, shall remit amounts withheld with respect to the Holder to
applicable jurisdictions. To the extent that the Trust is required to withhold
and pay over any amounts to any authority with respect to distributions or
allocations to any Holder, the amount withheld shall be deemed to be a
distribution in the amount of the withholding to the Holder. In the event of any
claimed overwithholding, Holders shall be limited to an action against the
applicable jurisdiction. If the amount to be withheld was not withheld from a
Distribution, the Trust may reduce subsequent Distributions by the amount of
such withholding.
ARTICLE XII
AMENDMENTS AND MEETINGS
SECTION 12.1 Amendments.
(a) Except as otherwise provided in this Declaration or by any
applicable terms of the Securities, this Declaration may be amended by, and only
by, a written instrument executed by a majority of the Regular Trustees;
provided, however, that (i) no amendment to this Declaration shall be made
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 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
Investment Company Act, (ii) at such time after the Trust has issued any
Securities which remain outstanding, any amendment which would adversely affect
the rights, privileges or preferences of any Holder of Securities may be
36
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effected only with such additional requirements as may be set forth in the terms
of such Securities, (iii) Section 4.2, Section 9.1(c) and this Section 12.1
shall not be amended without the consent of all of the Holders of the
Securities, (iv) no amendment which adversely affects the rights, powers and
privileges of the Property Trustee shall be made without the consent of the
Property Trustee, (v) Article IV shall not be amended without the consent of the
Sponsor, (vi) the rights of Holders of Common Securities under Article V 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 Common Securities and (vii) the rights of Holders of Preferred
Securities to appoint or remove a Special Regular Trustee and the rights of
Holders of Preferred Securities pursuant to Section 5.2(a)(iii) shall not be
amended without the consent of each Holder of Preferred Securities.
(b) No amendment shall be made, and any such purported
amendment shall be void and ineffective:
(i) unless, in the case of any proposed amendment, the
Property Trustee shall have first received an Officer's Certificate
from each of the Trust and the Sponsor that such amendment is permitted
by, and conforms to, the terms of this Declaration (including the terms
of the Trust Securities);
(ii) unless, in the case of any proposed amendment which
affects the rights, powers, duties, obligations or immunities of the
Property Trustee, the Property Trustee shall have first received an
opinion of counsel (who may be counsel to the Sponsor or the Trust)
that such amendment is permitted by, and conforms to, the terms of this
Declaration (including the terms of the Trust Securities); and
(iii) to the extent the result of such amendment would be
to:
(A) cause the Trust to fail to continue to be classified
for purposes of United States federal income taxation as a grantor
trust;
(B) reduce or otherwise adversely affect the powers of
the Property Trustee in contravention of the Trust Indenture Act; or
(C) cause the Trust to be deemed to be an Investment
Company required to be registered under the 1940 Act.
(c) Notwithstanding Section 12.1(a)(ii), this Declaration may
be amended without the consent of the Holders of the Securities to (i) cure any
ambiguity, (ii) correct or supplement any provision in this Declaration that may
be defective or inconsistent with any other provision of this Declaration, (iii)
to add to the covenants, restrictions or obligations of the Sponsor, and (iv) to
conform to any changes in Rule 3a-5 or any change in interpretation or
application of Rule 3a-5 by the Commission, which amendment does not adversely
affect the rights, preferences or privileges of the Holders.
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SECTION 12.2 Meetings of the Holders of Securities; Action by Written Consent.
(a) Meetings of the Holders of Preferred Securities and/or
Common Securities may be called at any time by the Regular Trustees (or as
provided in the terms of the Securities) to consider and act on any matter on
which Holders of such class of Securities are entitled to act under the terms of
this Declaration, the terms of the Securities or the rules of any stock exchange
on which the Preferred Securities are listed or admitted for trading. The
Regular Trustees shall call a meeting of Holders of Preferred Securities or
Common Securities, if directed to do so by Holders of at least 10% in
liquidation amount of such class of Securities. Such direction shall be given by
delivering to the Regular Trustees one or more calls in a writing stating that
the signing Holders of Securities wish to call a meeting and indicating the
general or specific purpose for which the meeting is to be called. Any Holders
of Securities calling a meeting shall specify in writing the Certificates held
by the Holders of Securities exercising the right to call a meeting and only
those specified Certificates shall be counted for purposes of determining
whether the required percentage set forth in the second sentence of this
paragraph has been met.
(b) Except to the extent otherwise provided in the terms of
the Securities, the following provision shall apply to meetings of Holders of
Securities:
(i) Notice of any such meeting shall be given by mail to all
the Holders of Securities having a right to vote thereat not less than
7 days nor more than 60 days prior to the date of such meeting.
Whenever a vote, consent or approval of the Holders of Securities is
permitted or required under this Declaration or the rules of any stock
exchange on which the Preferred Securities are listed or admitted for
trading, such vote, consent or approval may be given at a meeting of
the Holders of Securities. Any action that may be taken at a meeting of
the Holders of Securities may be taken without a meeting if a consent
in writing setting forth the action so taken is signed by Holders of
Securities owning not less than the minimum aggregate liquidation
amount of Securities that would be necessary to authorize or take such
action at a meeting at which all Holders of Securities having a right
to vote thereon were present and voting. Prompt notice of the taking of
action without a meeting shall be given to the Holders of Securities
entitled to vote who have not consented in writing. The Regular
Trustees may specify that any written consent submitted to the Holders
of Securities for the purpose of taking any action without a meeting
shall be returned to the Trust within the time specified by the Regular
Trustees.
(ii) Each Holder of a Security may authorize any Person to act
for it by proxy on all matters in which a Holder of a Security is
entitled to participate, including waiving notice of any meeting, or
voting or participating at a meeting. No proxy shall be valid after the
expiration of 11 months from the date thereof unless otherwise provided
in the proxy. Every proxy shall be revocable at the pleasure of the
Holder of the Security executing it. Except as otherwise provided
herein or in the terms of the Securities, all matters relating to the
giving, voting or validity of proxies shall be governed by the General
Corporation Law of the State of Delaware relating to proxies, and
judicial
38
<PAGE>
interpretations thereunder, as if the Trust were a Delaware corporation
and the Holders of the Securities were stockholders of a Delaware
corporation.
(iii) Each meeting of the Holders of the Securities shall be
conducted by the Regular Trustees or by such other Person that the
Regular Trustees may designate.
(iv) Unless otherwise provided in the Business Trust Act, this
Declaration or the rules of any stock exchange on which the Preferred
Securities are then listed or admitted for trading, the Regular
Trustees, in their sole discretion, shall establish all other
provisions relating to meetings of Holders of Securities, including
notice of the time, place or purpose of any meeting at which any matter
is to be voted on by any Holders of Securities, waiver of any such
notice, action by consent without a meeting, the establishment of a
record date, quorum requirements, voting in person or by proxy or any
other matter with respect to the exercise of any such right to vote.
ARTICLE XIII
REPRESENTATIONS OF PROPERTY TRUSTEE
AND DELAWARE TRUSTEE
SECTION 13.1 Representations and Warranties of Property Trustee.
(a) The Trustee which acts as initial Property Trustee
represents and warrants to the Trust and to the Sponsor at the date of this
Declaration, and each Successor Property Trustee represents and warrants to the
Trust and the Sponsor at the time of the Successor Property Trustee's acceptance
of its appointment as Property Trustee that:
(i) The Property Trustee is a banking corporation with trust
powers, duly organized, validly existing and in good standing under the
laws of the State of its incorporation, with trust power and authority
to execute and deliver, and to carry out and perform its obligations
under the terms of, this Declaration.
(ii) The execution, delivery and performance by the Property
Trustee of this Declaration has been duly authorized by all necessary
corporate action on the part of the Property Trustee. The Declaration
has been duly executed and delivered by the Property Trustee, and
constitutes a legal, valid and binding obligation of the Property
Trustee, enforceable against it in accordance with its terms, subject
to applicable bankruptcy, reorganization, moratorium, insolvency, and
other similar laws affecting creditors' rights generally and to general
principles of equity and the discretion of the court (regardless of
whether the enforcement of such remedies is considered in a proceeding
in equity or at law).
(iii) The execution, delivery and performance of this
Declaration by the Property Trustee does not conflict with or
constitute a breach of the Charter or By-laws of the Property Trustee.
39
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(iv) No consent, approval or authorization of, or registration
with or notice to, any banking authority which supervises or regulates
the Property Trustee is required for the execution, delivery or
performance by the Property Trustee, of this Declaration.
(v) The Property Trustee satisfies the qualifications set
forth in Section 5.1(c).
(vi) The Property Trustee, pursuant to this Declaration, shall
hold legal title to, and a valid ownership interest on behalf of the
Holders of the Securities, in the Debentures and agrees that, except as
expressly provided or contemplated by this Declaration, it will not
create, incur or assume, or suffer to exist any mortgage, pledge,
hypothecation, encumbrance, lien or other charge or security interest
upon the Debentures.
(b) The Trustee which acts as initial Delaware Trustee
represents and warrants to the Trust and the Sponsor at the date of this
Declaration, and each Successor Delaware Trustee represents and warrants to the
Trust and the Sponsor at the time of the Successor Delaware Trustee's acceptance
of its appointment as Delaware Trustee, that it satisfies the qualifications set
forth in Section 5.1(a)(3) and that:
(i) The Delaware Trustee is a Delaware corporation, duly
organized, validly existing and in good standing under the laws of the
State of Delaware, with power and authority to execute and deliver, and
to carry out and perform its obligations under the terms of, the
Declaration;
(ii) The Delaware Trustee has been authorized to perform its
obligations under the Certificate of Trust and the Declaration. The
Declaration, under Delaware law, constitutes a legal, valid and binding
obligation of the Delaware Trustee, enforceable against it in
accordance with its terms, subject to applicable bankruptcy,
reorganization, moratorium, insolvency, and other similar laws
affecting creditors' rights generally and to general principles of
equity and the discretion of the court (regardless of whether the
enforcement of such remedies is considered in a proceeding in equity or
at law);
(iii) No consent, approval or authorization of, or
registration with or notice to, any State or Federal banking authority
is required for the execution, delivery or performance by the Delaware
Trustee of the Declaration; and
(iv) The Delaware Trustee is an entity which has its
principal place of business in the State of Delaware.
40
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ARTICLE XIV
MISCELLANEOUS
SECTION 14.1 Notices.
All notices provided for in this Declaration shall be in
writing, duly signed by the party giving such notice, and shall be delivered,
telecopied or mailed by first class mail, as follows:
(a) if given to the Trust, in care of the Regular Trustees at
the Trust's mailing address set forth below (or such other address as the
Regular Trustees on behalf of the Trust may give notice of to the Holders of the
Securities):
SunSource Capital Trust
501 Silverside Road
Suite 17
Wilmington, DE 19809
Attention: Joseph M. Corvino
Facsimile No: (302) 792-0777
(b) if given to the Property Trustee, at the mailing address
of the Property Trustee set forth below (or such other address as the Property
Trustee may give notice of to the Holders of the Securities):
The Bank of New York
101 Barclay Street
Floor 21 West
New York, NY 10286
Attention: Corporate Trust Administration
Facsimile No: (212) 815-5915
(c) if given to the Delaware Trustee, at the mailing address
of the Delaware Trustee set forth below (or such other address as the Delaware
Trustee may give notice of to the Holders of the Securities):
The Bank of New York (Delaware)
White Clay Center
Route 273
Newark, DE 19711
Attention: Corporate Trust Administration
Facsimile No: (212) 815-5915
(d) if given to the Holder of the Common Securities, at the
mailing address of the Sponsor set forth below (or such other address as the
Holder of the Common Securities may give notice to the Trust):
41
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SunSource Inc.
2600 One Logan Square
Philadelphia, PA 19130
Attention: Joseph M. Corvino
Facsimile No: (215) 665-3662
(e) if given to any other Holder, at the address set
forth on the books and records of the Trust.
A copy of any notice to the Property Trustee or the Delaware
Trustee shall also be sent to the Trust. All notices shall be deemed to have
been given, when received in person, telecopied with receipt confirmed, or
mailed by first class mail, postage prepaid except that if a notice or other
document is refused delivery or cannot be delivered because of a changed address
of which no notice was given, such notice or other document shall be deemed to
have been delivered on the date of such refusal or inability to deliver.
SECTION 14.2 Undertaking for Costs.
All parties to this Declaration agree, and each Holder of any
Securities by his or her acceptance thereof shall be deemed to have agreed, that
any court may in its discretion require, in any suit for the enforcement of any
right or remedy under this Declaration, or in any suit against the Property
Trustee for any action taken or omitted by it as Property Trustee, the filing by
any party litigant in such suit of an undertaking to pay the costs of such suit,
and that such court may in its discretion assess reasonable costs, including
reasonable attorneys' fees, against any party litigant in such suit, having due
regard to the merits and good faith of the claims or defenses made by such party
litigant; but the provisions of this Section 14.2 shall not apply to any suit
instituted by the Property Trustee, to any suit instituted by any Holder of
Preferred Securities, or group of Holders of Preferred Securities, holding more
than 10% in aggregate liquidation amount of the outstanding Preferred
Securities, or to any suit instituted by any Holder of Preferred Securities for
the enforcement of the payment of the principal of (or premium, if any) or
interest on the Debentures, on or after the respective due dates expressed in
such Debentures.
SECTION 14.3 Governing Law.
This Declaration and the rights of the parties hereunder shall
be governed by and interpreted in accordance with the laws of the State of
Delaware and all rights and remedies shall be governed by such laws without
regard to principles of conflict of laws.
SECTION 14.4 Headings.
Headings contained in this Declaration are inserted for
convenience of reference only and do not affect the interpretation of this
Declaration or any provision hereof.
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SECTION 14.5 Partial Enforceability.
If any provision of this Declaration, or the application of
such provision to any Person or circumstance, shall be held invalid, the
remainder of this Declaration, or the application of such provision to persons
or circumstances other than those to which it is held invalid, shall not be
affected thereby.
SECTION 14.6 Counterparts.
This Declaration may contain more than one counterpart of the
signature pages and this Declaration may be executed by the affixing of the
signature of the Sponsor and each of the Trustees to one of such counterpart
signature pages. All of such counterpart signature pages shall be read as though
one, and they shall have the same force and effect as though all of the signers
had signed a single signature page.
SECTION 14.7 Intention of the Parties.
It is the intention of the parties hereto that the Trust not
be classified for United States federal income tax purposes an association
taxable as a corporation or partnership but that the Trust be treated as a
grantor trust for United States federal income tax purposes. The provisions of
this Declaration shall be interpreted to further this intention of the parties.
SECTION 14.8 Successors and Assigns.
Whenever in this Declaration any of the parties hereto is
named or referred to, the successors and assigns of such party shall be deemed
to be included, and all covenants and agreements in this Declaration by the
Sponsor and the Trustees shall bind and inure to the benefit of their respective
successors and assigns, whether so expressed.
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<PAGE>
IN WITNESS WHEREOF, the undersigned has caused these presents
to be executed as of the day and year first above written.
SUNSOURCE INC.,
as Sponsor
By:________________________________
Name:
Title:
--------------------------------
as Trustee
--------------------------------
as Trustee
--------------------------------
as Trustee
THE BANK OF NEW YORK,
as Property Trustee
By:________________________________
Name:
Title:
THE BANK OF NEW YORK (DELAWARE)
as Delaware Trustee
By:________________________________
Name:
Title:
44
<PAGE>
EXHIBIT A
CERTIFICATE OF TRUST
OF
SUNSOURCE CAPITAL TRUST
THIS Certificate of Trust of SunSource Capital Trust (the
"Trust"), dated June ___, 1997, is being duly executed and filed by the
undersigned, as trustees, to form a business trust under the Delaware Business
Trust Act (12 Del. Code Section 3801 et seq.).
1. Name. The name of the business trust being formed
hereby is SunSource Capital Trust.
2. Delaware Trustee. The name and business address of
the trustee of the Trust with a principal place of business in the State of
Delaware is: The Bank of New York (Delaware), White Clay Center, Route 273,
Newark, Delaware 19711 Attention: Corporate Trust Administration.
3. Effective Time. This Certificate of Trust shall be
effective upon filing with the Office of the Secretary of State.
IN WITNESS WHEREOF, the undersigned, being the trustees of the
Trust, have executed this Certificate of Trust as of the date first above
written.
THE BANK OF NEW YORK (DELAWARE)
as Delaware Trustee
By:________________________________
Name:
Title:
Norman V. Edmonson, not in his individual capacity but solely as trustee of the
Trust
-----------------------------------
as Trustee
A-1
<PAGE>
EXHIBIT B
TERMS OF
PREFERRED SECURITIES
Pursuant to Section 7.1 of the Amended and Restated
Declaration of Trust of SunSource Capital Trust, dated as of
_____________________ (as amended from time to time, the "Declaration"), the
designations, rights, privileges, restrictions, preferences and other terms and
provisions of the Preferred Securities are set forth below (each capitalized
term used but not defined herein having the meaning set forth in the
Declaration):
1. Designation and Number. Preferred Securities of the Trust
with an aggregate liquidation amount with respect to the assets of the Trust of
_________ ($______) and a liquidation amount with respect to the assets of the
Trust of $25 per Preferred Security, are hereby designated as "11.6% Trust
Preferred Securities." The Preferred Security Certificates evidencing the
Preferred Securities shall be substantially in the form attached hereto as Annex
I, with such changes and additions thereto or deletions therefrom as may be
required by ordinary usage, custom or practice or to conform to the rules of any
stock exchange on which the Preferred Securities are listed. The Preferred
Securities shall be issued to SunSource and distributed to former holders of
Class A Interests in SunSource L.P. upon conversion of such Class A Interests
pursuant to the Conversion. In connection with such issuance to SunSource and
the purchase by SunSource of the Common Securities, SunSource will deposit in
the Trust as trust assets Debentures of SunSource having an aggregate principal
amount equal to $_________, and bearing interest at an annual rate equal to the
annual Distribution rate on the Preferred Securities and Common Securities and
having payment and redemption provisions which correspond to the payment and
redemption provisions of the Preferred Securities and Common Securities.
2. Distributions. (a) Periodic distributions payable on each
Preferred Security will be fixed at a rate per annum of 11.6% (the "Coupon
Rate") of the stated liquidation amount of $25 per Preferred Security.
Distributions in arrears will bear interest at the rate per annum of 11.6%
thereof, compounded monthly. The term "Distributions" as used in these terms
means such periodic cash distributions and any such interest payable unless
otherwise stated. A Distribution will be made by the Property Trustee only to
the extent that interest payments are made in respect of the Debentures held by
the Property Trustee and only to the extent the Property Trustee has funds
available therefor. The amount of Distributions payable for any period will be
computed for any full monthly Distribution period on the basis of a 360-day year
of twelve 30-day months, and for any period shorter than a full monthly
Distribution period for which Distributions are computed, Distributions will be
computed on the basis of the actual number of days elapsed in such a 30-day
month.
(b) Distributions on the Preferred Securities will be
cumulative, will accrue from (*) , 1997 and will be payable monthly in arrears,
on the last day of each calendar month,
- ---------------
(*) Insert first day following the Effective Time.
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<PAGE>
commencing on _____________, 1997, except as otherwise described below, but
only if and to the extent that interest payments are made in respect of the
Debentures held by the Property Trustee. So long as SunSource shall not be in
default in the payment of interest on the Debentures, SunSource has the right
under the Indenture for the Debentures to defer payments of interest by
extending the interest payment period from time to time on the Debentures for a
period not exceeding 60 consecutive monthly interest periods (each, an
"Extension Period") and, as a consequence, Distributions will continue to accrue
with interest thereon (to the extent permitted by applicable law) at the rate of
11.6% per annum, compounded monthly during any such Extension Period. Prior to
the termination of any such Extension Period, SunSource 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 monthly
interest periods. Upon the termination of any Extension Period and the payment
of all amounts then due, SunSource may commence a new Extension Period, subject
to the above requirements. Payments of accrued Distributions will be payable to
Holders of Preferred Securities as they appear on the books and records of the
Trust on the first record date after the end of the Extension Period.
(c) Distributions on the Preferred Securities will be payable
promptly by the Property Trustee (or other Paying Agent) upon receipt of
immediately available funds 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 date, which record and
payment dates correspond to the record and interest payment dates on the
Debentures. Distributions payable on any Preferred Securities that are not
punctually paid on any Distribution payment date as a result of SunSource having
failed to make the corresponding interest payment on the Debentures will
forthwith cease to be payable to the Person in whose name such Preferred
Security is registered on the relevant record date, and such defaulted
Distribution will instead be payable to the Person in whose name such 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 SunSource has elected to make a
full or partial payment of interest accrued on the Debentures on such
Distribution payment date. Subject to any applicable laws and regulations and
the provisions of the Declaration, each payment in respect of the Preferred
Securities will be made as described in paragraph 9 hereof. If any date on which
Distributions are payable on the Preferred Securities is not a Business Day,
then payment of the Distribution 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.
(d) All Distributions paid with respect to the Preferred
Securities and the Common Securities will be paid Pro Rata to the Holders
thereof entitled thereto. If an Event of Default has occurred and is continuing,
the Preferred Securities shall have a priority over the Common Securities with
respect to Distributions.
B-3
<PAGE>
(e) In the event that there is any money or other property
held by or for the Trust that is not accounted for under the Declaration, such
money or property shall be distributed Pro Rata among the Holders of the
Preferred Securities and Common Securities.
3. Liquidation Distribution Upon Dissolution. In the event of
any dissolution of the Trust, the Holders of the Preferred Securities and Common
Securities will be entitled to receive Pro Rata solely out of the assets of the
Trust available for distribution to Holders of Preferred Securities and Common
Securities, after satisfaction of liabilities to creditors, an amount (subject
to Section 4(c) hereof) equal to the aggregate of the stated liquidation amount
of $25 per Preferred Security and Common Security (or in the case of dissolution
prior to September 30, 2002, $25.25) plus accrued and unpaid Distributions
thereon to the date of payment (such amount being the "Liquidation
Distribution"), unless the Trust is dissolved pursuant to Section 8.1(ii) of the
Declaration upon the occurrence of a Special Event, and, in connection with such
dissolution and after satisfaction of liabilities to creditors, Debentures in an
aggregate principal amount equal to the aggregate stated liquidation amount of
such Preferred Securities and Common Securities and bearing accrued and unpaid
interest in an amount equal to the accrued and unpaid Distributions on, such
Preferred Securities and Common Securities, shall be distributed Pro Rata to the
Holders of the Preferred Securities and Common Securities in exchange for such
Securities.
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 Preferred Securities and Common Securities shall be
paid, subject to the next paragraph, on a Pro Rata basis.
Holders of Common Securities will be entitled to receive
Liquidation Distributions upon any such dissolution Pro Rata with Holders of
Preferred Securities, except that if an Event of Default has occurred and is
continuing, the Preferred Securities shall have a priority over the Common
Securities with respect to such Liquidation Distribution.
4. Redemption and Distribution of Debentures. The Preferred
Securities and Common Securities may only be redeemed if Debentures having an
aggregate principal amount equal to the aggregate liquidation amount of the
Preferred Securities and Common Securities are repaid, redeemed or distributed
as set forth below:
(a) Upon the repayment of the Debentures, in whole or in part,
whether at maturity, upon redemption at any time or from time to time on or
after ______________, 2002, the proceeds of such repayment will be promptly
applied to redeem Pro Rata Preferred Securities and Common Securities having an
aggregate liquidation amount equal to the aggregate principal amount of the
Debentures so repaid or redeemed, upon not less than 30 nor more than 60 days
notice, at a redemption price of $25 per Preferred and Common Security plus an
amount equal to accrued and unpaid Distributions thereon to the date of
redemption, payable in cash (the "Redemption Price"). The date of any such
repayment or redemption of Preferred Securities and Common Securities shall be
established to coincide with the repayment or redemption date of the Debentures.
(b) If fewer than all the outstanding Preferred Securities and
Common Securities are to be so redeemed, the Preferred Securities and the Common
Securities will be redeemed Pro Rata and the Preferred Securities to be redeemed
will be redeemed as described in paragraph 4(f)(ii) below;
B-4
<PAGE>
provided that if an Event of Default has occurred and is continuing, the
Preferred Securities shall have a priority over the Common Securities with
respect to the payment of the Redemption Price. If a partial redemption would
result in the delisting of the Preferred Securities by any national securities
exchange or other organization on which the Preferred Securities are then
listed, SunSource pursuant to the Indenture will only redeem Debentures in whole
and, as a result, the Trust may only redeem the Preferred Securities in whole.
(c) If, at any time a Tax Event or an Investment Company Event
(each as hereinafter defined, and each a "Special Event") shall occur and be
continuing after receipt of a Dissolution Tax Option (as defined below), the
Regular Trustees shall, unless the Debentures are redeemed in the limited
circumstances described below, dissolve the Trust and, after satisfaction of
creditors, cause Debentures held by the Property Trustee having an aggregate
principal amount equal to the aggregate stated liquidation amount of the
Preferred Securities and Common Securities and having an aggregate amount of and
accrued and unpaid interest equal to accrued and unpaid Distributions on the
Preferred Securities and Common Securities, and having the same record date for
payment as the Preferred Securities and Common Securities, to be distributed to
the Holders of the Preferred Securities and Common Securities on a Pro Rata
basis in liquidation of such Holders' interests in the Trust, within 90 days
following the occurrence of such Special Event (the "90 Day Period"), 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 a No
Recognition Opinion (as defined below); and provided, further, that, if and as
long as at the time there is available to SunSource or the Trustees on behalf of
the Trust the opportunity to eliminate, within the 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 that has no adverse
effect on the Trust, SunSource, or the Holders of the Preferred Securities
("Ministerial Action"), the Trust will pursue such measure in lieu of
dissolution.
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 (which
may be counsel to SunSource) that, as a result of a Tax Event, there is more
than an insubstantial risk that SunSource would be precluded from deducting the
interest on the Debentures for United States federal income tax purposes even if
(a) the Debentures were distributed to the Holders of Preferred Securities and
Common Securities in liquidation of such Holder's interest in the Trust as
described in this paragraph 4(c) or (b) the Corporation shortened the stated
maturity of the Debentures as described in the penultimate sentence of this
paragraph, and (ii) the Regular Trustees shall have been informed by such tax
counsel that a No Recognition Opinion cannot be delivered to the Trust,
SunSource shall have the right at any time, upon not less than 30 nor more than
60 days notice, to redeem the Debentures in whole or in part for cash at the
Redemption Price within 90 days following the occurrence of such Tax Event, and
promptly following such redemption Preferred Securities and Common Securities
with an aggregate liquidation amount equal to the aggregate principal amount of
the Debentures so redeemed will be redeemed by the Trust at the Redemption Price
(which Redemption Price shall be $25.25 if such redemption occurs on or before
_______, 2002 and shall be $25.00 thereafter) on a Pro Rata basis; provided,
however, that, if at the time there is available to SunSource or the Regular
Trustees on behalf of the Trust the opportunity to eliminate, within such 90 day
period, the Tax Event by taking some Ministerial Action, SunSource or the
Regular Trustees on behalf of the Trust will pursue such measure in lieu of
redemption and provided further that SunSource shall have no right to redeem the
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Debentures while the Regular Trustees on behalf of the Trust are pursuing such
Ministerial Action. In addition to taking any Ministerial Action, if a Tax Event
occurs and is continuing and in the opinion of nationally recognized independent
tax counsel to the Trust, there would in all cases, after effecting the
termination of the Trust and the distribution of the Debentures to the holders
of the Trust Preferred Securities in exchange therefor upon liquidation of the
Trust, be more than an insubstantial risk that the Tax Event would continue,
then the Corporation shall have the right to shorten the stated maturity of the
Debentures (and thereby cause the Trust Preferred Securities to be redeemed on
such earlier date) to the latest date (which date shall in no event be earlier
than September 30, 2002) permissible without adversely affecting the
deductibility of interest under federal income tax law payable on the
Debentures, such that, in the opinion of nationally recognized independent tax
counsel to the Trust, after advancing the stated maturity of the Debentures,
interest paid on the Debentures will be deductible by the Corporation for
federal income tax purposes. The Common Securities will be redeemed Pro Rata
with the Preferred Securities, except if an Event of Default under the Indenture
has occurred and is continuing, the Preferred Securities will have a priority
over the Common Securities with respect to payment of the Redemption Price.
"Tax Event" means that the Regular Trustees shall have
obtained an opinion of nationally recognized independent tax counsel experienced
in such matters (a "Dissolution Tax Opinion") to the effect that on or after
______________, 1997 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 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
announced or which interpretation or pronouncement is issued or announced or
which action is taken, in each case on or after ________________, 1997, 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 Debentures, (ii) the Trust is, or will be
within 90 days of the date thereof, subject to more than a de minimis amount of
taxes, duties or other governmental charges or (iii) interest payable by
SunSource to the Trust on the Debentures is not, or within 90 days of the date
thereof will not be, deductible by SunSource for United States federal income
tax purposes.
"No Recognition Opinion" means an opinion of a nationally
recognized independent tax counsel experienced in such matters, which opinion
may rely on any then applicable published revenue ruling of the Internal Revenue
Service, to the effect that the holders of the Preferred Securities will not
recognize any gain or loss for United States federal income tax purposes as a
result of a dissolution of the Trust and distribution of the Debentures as
provided herein.
"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 (which may be counsel
to SunSource) 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 Investment Company Act, which Change in 1940 Act Law
becomes effective on or after ______________, 1997.
On and from the date fixed for any distribution of Debentures,
upon dissolution of the Trust, (i) the Preferred Securities will no longer be
deemed to be outstanding and (ii) certificates representing Preferred Securities
will be deemed to represent beneficial interests in the 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 Preferred Securities until such certificates are presented to SunSource
or its agent for transfer or reissuance.
(d) The Trust may not redeem fewer than all the outstanding
Preferred Securities unless all accrued and unpaid Distributions have been paid
on all Preferred Securities for all monthly Distribution periods terminating on
or prior to the date of redemption.
(e) If Debentures are distributed to Holders of the Preferred
Securities, SunSource, pursuant to the terms of the Indenture, will use its best
efforts to have the Debentures listed on the New
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York Stock Exchange or on such other exchange as the Preferred Securities were
listed immediately prior to the distribution of the Debentures.
(f) (i) Notice of any redemption of, or notice of distribution
of Debentures in exchange for, the Preferred Securities and Common Securities (a
"Redemption/Distribution Notice") will be given by the Regular Trustees on
behalf of the Trust by mail to each Holder of Preferred Securities and Common
Securities to be redeemed or exchanged not less than 30 nor more than 60 days
prior to the date fixed for redemption or exchange thereof. For purposes of the
calculation of the date of redemption or exchange and the dates on which notices
are given pursuant to this paragraph (f)(i), a Redemption/Distribution Notice
shall be deemed to be given on the day such notice is first mailed by
first-class mail, postage prepaid, to Holders of Preferred Securities and Common
Securities. Each Redemption/ Distribution Notice shall be addressed to the
Holders of Preferred Securities and Common Securities at the address of each
such Holder appearing in the books and records of the Trust. No defect in the
Redemption/Distribution Notice or in the mailing of either thereof with respect
to any Holder shall affect the validity of the redemption or exchange
proceedings with respect to any other Holder.
(ii) In the event that fewer than all the outstanding
Preferred Securities are to be redeemed, the Preferred Securities to be redeemed
will be redeemed Pro Rata from each Holder of Preferred Securities and, in
respect of Preferred Securities registered in the name of and held of record by
DTC (or successor Clearing Agency) Pro Rata from each Clearing Agency
Participant (subject to adjustment to eliminate fractional Preferred
Securities).
(iii) If the Trust gives a Redemption/ Distribution Notice in
respect of a redemption of Preferred Securities as provided in this paragraph 4
(which notice will be irrevocable) then immediately prior to the close of
business on the redemption date, provided that SunSource has paid to the
Property Trustee in immediately available funds a sufficient amount of cash in
connection with the related redemption or maturity of the Debentures,
Distributions will cease to accrue on the Preferred Securities called for
redemption, such Preferred Securities will no longer be deemed to be outstanding
and all rights of Holders of such Preferred Securities so called for redemption
will cease, except the right of the Holders of such 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 Preferred Securities which have been so called
for redemption. If any date fixed for redemption of 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 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 Preferred Securities is improperly withheld or refused and not
paid either by the Property Trustee or by SunSource pursuant to the Preferred
Securities Guarantee, Distributions on such Preferred Securities will continue
to accrue, 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 Redemption Price.
(iv) Redemption/Distribution Notices shall be sent by the
Regular Trustees on behalf of the Trust to the Holders of the Preferred
Securities.
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(v) Upon the date of distribution of Debentures after
dissolution of the Trust as a result of the occurrence of a Special Event,
Preferred Security Certificates shall be deemed to represent beneficial
interests in the Debentures so distributed, and the Preferred Securities will no
longer be deemed outstanding and may be canceled by the Regular Trustees. The
Debentures so distributed shall have an aggregate principal amount equal to the
aggregate liquidation amount of the Preferred Securities so distributed.
(vi) Subject to the foregoing and applicable law (including
without limitation United States federal securities laws), SunSource or any of
its subsidiaries may at any time and from time to time purchase outstanding
Preferred Securities by tender, in the open market or by private agreement.
5. Voting Rights. (a) Except as provided under
paragraph 5(b) below and as otherwise required by law and the Declaration, the
Holders of the Preferred Securities will have no voting rights.
(b) If (i) the Trust fails to make Distributions in full on
the Preferred Securities for 18 consecutive months; or (ii) an Event of Default
occurs and is continuing (each, an "Appointment Event"), then the Holders of the
Preferred Securities, acting as a single class, will be entitled by the vote of
Holders of Preferred Securities representing a Majority in liquidation amount of
the Preferred Securities to appoint a Special Regular Trustee in accordance with
paragraph 5.2(a)(ii)(B) of the Declaration. Any Holder of Preferred Securities
(other than the Sponsor or any Affiliate of the Sponsor) will 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
Preferred Securities representing 10% in liquidation amount of the outstanding
Preferred Securities will be entitled to convene such meeting in accordance with
Section 12.2 of the Declaration. The record date for such meeting will be the
close of business on the Business Day next preceding the day on which notice of
the meeting is sent to Holders of Preferred Securities. 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 liquidation amount of 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 the Holders of Preferred Securities
representing a Majority in liquidation amount of the Preferred Securities in
accordance with Section 5.2(a)(ii)(B) of the Declaration. The Holders of 10% in
liquidation amount of the Preferred Securities will be entitled to convene such
a meeting in accordance with Section 12.2 of the Declaration. The record date
for such meeting will be the close of business on the Business Day next
preceding the day on which notice of the meeting is sent to Holders of Preferred
Securities. Any Special Regular Trustee appointed shall cease to be a Special
Regular Trustee as provided in Section 5.2(c) of the Declaration.
Notwithstanding the appointment of any such Special Regular Trustee, SunSource
shall retain all rights under the Indenture, including the right to extend the
interest payment period on Debentures, and any
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<PAGE>
extension for a period not exceeding 60 monthly interest periods will not
constitute an Event of Default under the Indenture.
If any proposed amendment to the Declaration 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 Securities,
whether by way of amendment to the Declaration or otherwise, or (ii) the
dissolution of the Trust, other than in connection with the distribution of
Debentures held by the Property Trustee, upon the occurrence of a Special Event
or in connection with the redemption of Preferred Securities as a consequence of
a redemption of Debentures, then the Holders of outstanding Securities will be
entitled to vote on such amendment or proposal as a class and such amendment or
proposal shall not be effective except with the approval of the Holders of
Securities representing 66-2/3% in liquidation amount of such Securities,
provided, however, (A) if any amendment or proposal referred to in clause (i)
above would adversely affect only the Preferred Securities or the 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, (B) the rights of Holders of Preferred Securities under Article V of
the Declaration to appoint and remove a Special Regular Trustee shall not be
amended without the consent of each Holder of Preferred Securities, and (C)
amendments to the Declaration shall be subject to such further requirements as
are set forth in Sections 12.1 and 12.2 of the Declaration.
In the event the consent of the Property Trustee, as the
holder of the Debentures, is required under the Indenture with respect to any
amendment, modification or termination of the Indenture or the Debentures, the
Property Trustee shall request the written direction of the Holders of the
Securities with respect to such amendment, modification or termination. The
Property Trustee shall vote with respect to such amendment, modification or
termination as directed by a Majority in liquidation amount of the Securities
voting together as a single class; provided that where such amendment,
modification or termination of the Indenture requires the consent or vote of (1)
holders of Debentures representing a specified percentage greater than a
majority in principal amount of the Debentures or (2) each holder of Debentures
thereby affected, the Property Trustee may only vote with respect to that
amendment, modification or termination as directed by, in the case of clause (1)
above, the vote of Holders of Securities representing such specified percentage
of the aggregate liquidation amount of the Securities, or, in the case of clause
(2) above, each Holder of Securities thereby affected; and provided, further,
that the Property Trustee shall be under no obligation to take any action in
accordance with the directions of the Holders of Securities unless the Property
Trustee shall have received, at the expense of the Sponsor, 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.
Subject to Section 2.6 of the Declaration, and the provisions
of this and the next succeeding paragraph, the Holders of a Majority in
liquidation amount of the Preferred Securities, voting separately as a class
shall have the right to (A) on behalf of all Holders of Preferred Securities,
waive any past default that is waivable under the Declaration (subject to, and
in accordance with the Declaration) and (B) direct the time, method, and place
of conducting any proceeding for any remedy
B-9
<PAGE>
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 Debentures, to (i) direct the time,
method and place of conducting any proceeding for any remedy available to the
Debenture Trustee, or exercising any trust or power conferred on the Debenture
Trustee with respect to the Debentures, (ii) exercise the remedies available to
it under the Indenture as a Holder of the Debentures, (iii) waive any past
default that is waivable under Section 6.06 of the Indenture, (iv) consent to
any amendment, modification, or termination of the Indenture of the Debentures
where such consent shall be required, or (v) exercise any right to rescind or
annul a declaration that the principal of all the Debentures shall be due and
payable; provided that where the taking of any action under the Indenture
requires the consent or vote of (1) holders of Debentures representing a
specified percentage greater than a majority in principal amount of the
Debentures or (2) each holder of Debentures thereby affected, the Property
Trustee may only take such action if directed by, in the case of clause (1)
above, the vote of Holders of Preferred Securities representing such specified
percentage of the aggregate liquidation amount of the Preferred Securities, or,
in the case of clause (2) above, each Holder of Preferred Securities thereby
affected. The Property Trustee shall not revoke any action previously authorized
or approved by a vote of the Holders of the Preferred Securities. 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 Debenture
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 Preferred
Securities unless the Property Trustee shall have received, at the expense of
the Sponsor, 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 Debentures under the Indenture), any Holder of Preferred
Securities may, to the fullest extent permitted by law, institute a legal
proceeding directly against SunSource 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
Sponsor's payment obligations on the Debentures.
A waiver of an Indenture Event of Default by the Property
Trustee at the direction of the Holders of the Preferred Securities will
constitute a waiver of the corresponding Event of Default under the Declaration
in respect of the Securities.
Any required approval or direction of Holders of Preferred
Securities may be given at a separate meeting of Holders of Preferred Securities
convened for such purpose, at a meeting of all of the Holders of Securities of
the Trust or pursuant to written consent. The Regular Trustees will cause a
notice of any meeting at which Holders of 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 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.
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<PAGE>
No vote or consent of the Holders of Preferred Securities will
be required for the Trust to redeem and cancel Preferred Securities in
accordance with the Declaration.
Notwithstanding that Holders of Preferred Securities are
entitled to vote or consent under any of the circumstances described above, any
of the Preferred Securities at such time that are owned by SunSource or by any
entity directly or indirectly controlling or controlled by or under direct or
indirect common control with SunSource 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.
Except as provided in this paragraph 5, Holders of the
Preferred Securities will have no rights to increase or decrease the number of
Trustees or to appoint, remove or replace a Trustee, which voting rights are
vested solely in the Holders of the Common Securities.
6. Pro Rata Treatment. A reference in these terms of the
Preferred Securities to any payment, distribution or treatment as being "Pro
Rata" shall mean pro rata to each Holder of Securities according to the
aggregate liquidation amount of the Securities held by the relevant Holder in
relation to the aggregate liquidation amount of all Securities outstanding
unless, in relation to a payment, an Event of Default has occurred and is
continuing, in which case any funds available to make such payment shall be paid
first to each Holder of the Preferred Securities pro rata according to the
aggregate liquidation amount of Preferred Securities held by the relevant Holder
relative to the aggregate liquidation amount of all Preferred Securities
outstanding, and only after satisfaction of all amounts owed to the Holders of
the Preferred Securities, to each Holder of Common Securities pro rata according
to the aggregate liquidation amount of Common Securities held by the relevant
Holder relative to the aggregate liquidation amount of all Common Securities
outstanding.
7. Ranking. The Preferred Securities rank pari passu and
payment thereon will be made Pro Rata with, the Common Securities except that
where an Event of Default occurs and is continuing, the rights of Holders of
Preferred Securities to payment in respect of Distributions and payments upon
liquidation, redemption or otherwise rank in priority to the rights of Holders
of the Common Securities.
8. Mergers, Consolidations or Amalgamations. 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
body.
9. Transfer, Exchange, Method of Payments. Payment of
Distributions and payments on redemption of the Preferred Securities will be
payable, the transfer of the Preferred Securities will be registrable, and
Preferred Securities will be exchangeable for 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 Preferred Security will be
made only upon surrender of such Preferred Security to the Property Trustee.
10. Acceptance of Indenture and Preferred Guarantee. Each
Holder of Preferred Securities, by the acceptance thereof, agrees to the
provisions of (i) the Preferred Guarantee, including
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the subordination provisions therein and (ii) the Indenture and the Debentures,
including the subordination provisions of the Indenture.
11. No Preemptive Rights. The Holders of Preferred Securities
shall have no preemptive rights to subscribe to any additional Preferred
Securities or Common Securities.
12. Miscellaneous. These terms shall constitute a part of the
Declaration. The Trust will provide a copy of the Declaration and the Indenture
to a Holder without charge on written request to the Trust at its principal
place of business.
B-12
<PAGE>
Annex I
Certificate Number Number of Trust Preferred Securities
___-1
CUSIP NO. 867949 20 8
Certificate Evidencing Trust Preferred Securities
of
SunSource Capital Trust
11.6% Trust Preferred Securities
(liquidation amount $25 per Preferred Security)
SunSource Capital Trust, a statutory business trust formed
under the laws of the State of Delaware (the "Trust"), hereby certifies that
_________ (the "Holder") is the registered owner of _____ (______) preferred
securities of the Trust representing preferred undivided beneficial interests in
the assets of the Trust designated the 11.6% Trust Preferred Securities
(liquidation amount $25 per Trust Preferred Security) (the "Trust Preferred
Securities"). The Trust Preferred Securities are transferable on the books and
records of the Trust, in person or by a duly authorized attorney, upon surrender
of this certificate duly endorsed and in proper form for transfer. The
designations, rights, privileges, restrictions, preferences and other terms and
provisions of the Trust Preferred Securities are set forth in, and this
certificate and the Trust Preferred Securities represented hereby are issued and
shall in all respects be subject to the terms and provisions of, the Amended and
Restated Declaration of Trust of the Trust dated as of _________, 1997, as the
same may be amended from time to time (the "Declaration") including the
designation of the terms of Trust Preferred Securities as set forth in Exhibit B
thereto. The Trust Preferred Securities and the Common Securities issued by the
Trust pursuant to the Declaration represent undivided beneficial interests in
the assets of the Trust, including the Debentures (as defined in the
Declaration) issued by SunSource Inc., a Delaware corporation ("SunSource"), to
the Trust pursuant to the Indenture referred to in the Declaration. The Holder
is entitled to the benefits of the Guarantee Agreement of SunSource dated as of
_________, 1997 (the "Guarantee") to the extent provided therein. The Trust will
furnish a copy of the Declaration, the Guarantee and the Indenture to the Holder
without charge upon written request to the Trust at its principal place of
business or registered office.
The Holder of this Certificate, by accepting this Certificate,
is deemed to have (i) agreed to the terms of the Indenture and the Debentures,
including that the Debentures are subordinate and junior in right of payment to
all Senior Indebtedness (as defined in the Indenture) as and to the extent
provided in the Indenture and (ii) agreed to the terms of the Guarantee,
including that the Guarantee is subordinate and junior in right of payment to
all other liabilities of SunSource, including the Debentures, except those made
pari passu or subordinate by their terms, and senior to all capital stock
1
<PAGE>
now or hereafter issued by SunSource and to any guarantee now or hereafter
entered into by SunSource in respect of any of its capital stock.
Upon receipt of this certificate, the Holder is bound by the
Declaration and is entitled to the benefits thereunder.
IN WITNESS WHEREOF, the Trustees of the Trust have executed
this certificate this ____ day of _________, 1997.
SUNSOURCE CAPITAL TRUST
By:_________________________, as trustee
Name:
Title:
By:_________________________, as trustee
Name:
Title:
PROPERTY TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Preferred Securities referred to in the
within-mentioned Declaration.
Dated: _______ __, ____
THE BANK OF NEW YORK,
as Property Trustee
By:_________________________
Name:
Title:
2
<PAGE>
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned assigns and transfers this Trust Preferred
Security to:
- ----------------------------------------------------------------
- ----------------------------------------------------------------
(Insert assignee's social security or tax identification number)
- ----------------------------------------------------------------
- ----------------------------------------------------------------
(Insert address and zip code of assignee)
and irrevocably appoints
- ----------------------------------------------------------------
- ----------------------------------------------------------------
agent to transfer this Trust Preferred Security Certificate on the books of the
Trust. The agent may substitute another to act for him or her.
Date: _______________________________
Signature: __________________________
(Sign exactly as your name appears on the other side of this Trust Preferred
Security Certificate)
1
<PAGE>
EXHIBIT C
TERMS OF
COMMON SECURITIES
Pursuant to Section 7.1 of the Amended and Restated
Declaration of Trust of SunSource Capital Trust dated as of ______________, 1997
(as amended from time to time, the "Declaration"), the designations, rights,
privileges, restrictions, preferences and other terms and provisions of the
Common Securities are set forth below (each capitalized term used but not
defined herein having the meaning set forth in the Declaration):
1. Designation and Number. Common Securities of the Trust with
an aggregate liquidation amount with respect to the assets of the Trust of
______ ($____) and a liquidation amount with respect to the assets of the Trust
of $25 per Common Security, are hereby designated as "11.6% Trust Common
Securities." The Common Security Certificates evidencing the Common Securities
shall be substantially in the form attached hereto as Annex I, with such changes
and additions thereto or deletions therefrom as may be required by ordinary
usage, custom or practice. The Common Securities are to be issued and sold to
SunSource Inc. ("SunSource") in consideration of $_____ in cash. In connection
with the Conversion and the purchase by SunSource of the Common Securities,
SunSource will deposit in the Trust, and the Trust will purchase, respectively,
as trust assets Debentures of SunSource having an aggregate principal amount
equal to $_______, and bearing interest at an annual rate equal to the annual
Distribution rate on the Preferred Securities and Common Securities and having
payment and redemption provisions which correspond to the payment and redemption
provisions of the Preferred Securities and Common Securities.
2. Distributions. (a) Periodic distributions payable on each
Common Security will be fixed at a rate per annum of 11.6% (the "Coupon Rate")
of the stated liquidation amount of $25 per Common Security. Distributions in
arrears for more than one month will bear interest at the rate per annum of
11.6% thereof (to the extent permitted by applicable law), compounded monthly.
The term "Distributions" as used in these terms means such periodic cash
distributions and any such interest payable unless otherwise stated. A
Distribution will be made by the Property Trustee only to the extent that
interest payments are made in respect of the Debentures held by the Property
Trustee and only to the extent the Property Trustee has funds available
therefor. The amount of Distributions payable for any period will be computed
for any full monthly Distribution period on the basis of a 360-day year of
twelve 30-day months, and for any period shorter than a full monthly
Distribution period for which Distributions are computed, Distributions will be
computed on the basis of the actual number of days elapsed in such a 30-day
month.
(b) Distributions on the Common Securities will be cumulative,
will accrue from the first day following (**) , 1997 and will be payable monthly
in arrears, on the last day of each
- ---------------
(**) Insert Effective Time.
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<PAGE>
calendar month, commencing on May 31, 1997, except as otherwise described
below, but only if and to the extent that interest payments are made in respect
of the Debentures held by the Property Trustee. So long as SunSource shall not
be in default in the payment of interest on the Debentures, SunSource has the
right under the Indenture for the Debentures to defer payments of interest by
extending the interest payment period from time to time on the Debentures for a
period not exceeding 60 consecutive months (each, an "Extension Period") and, as
a consequence Distributions will continue to accrue with interest thereon (to
the extent permitted by applicable law) at the rate of 11.6% per annum,
compounded monthly during any such Extension Period. Prior to the termination of
any such Extension Period, SunSource 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 monthly interest periods. Upon
the termination of any Extension Period and the payment of all amounts then due,
SunSource may commence a new Extension Period, subject to the above
requirements. Payments of accrued Distributions will be payable to Holders of
Common Securities as they appear on the books and records of the Trust on the
first record date after the end of the Extension Period.
(c) Distributions on the Common Securities will be payable
promptly by the Property Trustee (or other Paying Agent) upon receipt of
immediately available funds 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 prior to the relevant Distribution date which record
and payment dates correspond to the record and interest payment dates on the
Debentures. Distributions payable on any Common Securities that are not
punctually paid on any Distribution date as a result of SunSource having failed
to make the corresponding interest payment on the Debentures will forthwith
cease to be payable to the Person in whose name such Common Security is
registered on the relevant record date, and such defaulted Distribution will
instead be payable to the Person in whose name such Common 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 SunSource has elected to make a full
or partial payment of interest accrued on the Debentures on such Distribution
payment date. Subject to any applicable laws and regulations and the provisions
of the Declaration, each payment in respect of the Common Securities will be
made as described in paragraph 9 hereof. If any date on which Distributions are
payable on the Common Securities is not a Business Day, then payment of the
Distribution 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.
(d) All Distributions paid with respect to the Common
Securities and the Preferred Securities will be paid Pro Rata to the Holders
thereof entitled thereto. If an Event of Default has occurred and is continuing,
the Preferred Securities shall have a priority over the Common Securities with
respect to Distributions.
C-2
<PAGE>
(e) In the event that there is any money or other property
held by or for the Trust that is not accounted for under the Declaration, such
money or property shall be distributed Pro Rata among the Holders of the
Preferred Securities and Common Securities.
3. Liquidation Distribution Upon Dissolution. In the event of
any dissolution of the Trust, the Holders of the Preferred Securities and Common
Securities will be entitled to receive Pro Rata solely out of the assets of the
Trust available for distribution to Holders of Preferred Securities and Common
Securities, after satisfaction of liabilities to creditors, an amount equal to
the aggregate of the stated liquidation amount of $25 per Preferred Security and
Common Security plus accrued and unpaid Distributions thereon to the date of
payment (such amount being the "Liquidation Distribution"), unless the Trust is
dissolved pursuant to Section 8.1(ii) of the Declaration upon the occurrence of
a Special Event, and, in connection with such dissolution, and after
satisfaction of liabilities to creditors, Debentures in an aggregate principal
amount equal to the aggregate stated liquidation amount of such Preferred
Securities and Common Securities bearing accrued and unpaid interest in an
amount equal to the accrued and unpaid Distributions on, such Preferred
Securities and Common Securities, shall be distributed Pro Rata to the Holders
of the Preferred Securities and Common Securities in exchange for such
Securities.
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 Preferred Securities and Common Securities shall be
paid, subject to the next paragraph, on a Pro Rata basis.
Holders of Common Securities will be entitled to receive
Liquidation Distributions upon any such dissolution Pro Rata with Holders of
Preferred Securities, except that if an Event of Default has occurred and is
continuing, the Preferred Securities shall have a priority over the Common
Securities with respect to such Liquidation Distribution.
4. Redemption and Distribution of Debentures. The Preferred
Securities and Common Securities may only be redeemed if Debentures having an
aggregate principal amount equal to the aggregate liquidation amount of the
Preferred Securities and Common Securities are repaid, redeemed or distributed
as set forth below:
(a) Upon the repayment of the Debentures, in whole or in part,
whether at maturity, upon redemption at any time or from time to time on or
after _____________, 2002, the proceeds of such repayment will be promptly
applied to redeem Pro Rata Preferred Securities and Common Securities having an
aggregate liquidation amount equal to the aggregate principal amount of the
Debentures so repaid or redeemed, upon not less than 30 nor more than 60 days
notice, at a redemption price of $25 per Preferred and Common Security plus an
amount equal to accrued and unpaid Distributions thereon to the date of
redemption, payable in cash (the "Redemption Price"). The date of any such
repayment or redemption of Preferred Securities and Common Securities shall be
established to coincide with the repayment or redemption date of the Debentures.
(b) If fewer than all the outstanding Preferred Securities and
Common Securities are to be so redeemed, the Preferred Securities and the Common
Securities will be redeemed Pro Rata and the Common Securities to be redeemed
will be redeemed as described in paragraph 4(e)(ii) below. If a
C-3
<PAGE>
partial redemption would result in the delisting of the Preferred Securities by
any national securities exchange or other organization on which the Preferred
Securities are then listed, SunSource pursuant to the Indenture will only redeem
Debentures in whole and, as a result, the Trust may only redeem the Common
Securities in whole.
(c) If, at any time, a Tax Event or an Investment Company
Event (each as hereinafter defined, and each a "Special Event") shall occur and
be continuing, the Regular Trustees shall, unless the Debentures are redeemed in
the limited circumstances described below, dissolve the Trust and, after
satisfaction of creditors, cause Debentures held by the Property Trustee having
an aggregate principal amount equal to the aggregate stated liquidation amount
of and accrued and unpaid interest equal to accrued and unpaid Distributions on,
and having the same record date for payment as the Preferred Securities and
Common Securities, to be distributed to the Holders of the Preferred Securities
and Common Securities on a Pro Rata basis in liquidation of such Holders'
interests in the Trust, within 90 days following the occurrence of such Special
Event (the "90 Day Period"), 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 a 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
Preferred Securities will not recognize any gain or loss for United States
federal income tax purposes as a result of the dissolution of the Trust and
distribution of Debentures; and provided, further, that, if and as long as at
the time there is available to the Trust the opportunity to eliminate, within
the 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 that has no adverse effect on the Trust, SunSource, or the Holders of
the Preferred Securities ("Ministerial Action") the Trust will pursue such
measure in lieu of dissolution.
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
SunSource would be precluded from deducting the interest on the Debentures for
United States federal income tax purposes even if the Debentures were
distributed to the Holders of Preferred Securities and Common Securities in
liquidation of such Holder's interest in the Trust as described in this
paragraph 4(c) or (ii) the Regular Trustees shall have been informed by such tax
counsel that a No Recognition Opinion cannot be delivered to the Trust,
SunSource shall have the right at any time, upon not less than 30 nor more than
60 days notice, to redeem the Debentures in whole or in part for cash at the
Redemption Price within 90 days following the occurrence of such Tax Event, and
promptly following such redemption Preferred Securities and Common Securities
with an aggregate liquidation amount equal to the aggregate principal amount of
the Debentures so redeemed will be redeemed by the Trust at the Redemption Price
on a Pro Rata basis: provided, however, that, if at the time there is available
to SunSource or the Regular Trustees on behalf of the Trust the opportunity to
eliminate, within such 90 day period, the Tax Event by taking some Ministerial
Action, SunSource or the Regular Trustees on behalf of the Trust will pursue
such measure in lieu of redemption, and provided further that SunSource shall
have no right to redeem the Debentures while the Regular Trustees on behalf of
the Trust are pursuing such Ministerial Action. The Common Securities will be
redeemed Pro Rata with the Preferred Securities, except if an Event of Default
under the Indenture has occurred and is
C-4
<PAGE>
continuing, the Preferred Securities will have a priority over the Common
Securities with respect to payment of the Redemption Price.
"Tax Event" means that the Regular Trustees shall have
obtained an opinion of nationally recognized independent tax counsel experienced
in such matters (a "Dissolution Tax Opinion") to the effect that on or after
(***) , 1997 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 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
announced or which interpretation or pronouncement is issued or announced or
which action is taken, in each case on or after (***) , 1997, 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 Debentures, (ii) the Trust is, or will be within 90
days of the date thereof, subject to more than a de minimis amount of taxes,
duties or other governmental charges or (iii) interest payable by SunSource to
the Trust on the Debentures is not, or within 90 days of the date thereof will
not be, deductible by SunSource for United States federal income tax purposes.
"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 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 Investment Company Act,
which Change in 1940 Act Law becomes effective on or after (***) , 1997.
On and from the date fixed for any distribution of Debentures,
upon dissolution of the Trust, (i) the Common Securities will no longer be
deemed to be outstanding and (ii) any certificates representing Common
Securities will be deemed to represent beneficial interests in the 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 Common Securities until such certificates are presented
to SunSource or its agent for transfer or reissuance.
(d) The Trust may not redeem fewer than all the outstanding
Common Securities unless all accrued and unpaid Distributions have been paid on
all Common Securities for all monthly Distribution periods terminating on or
prior to the date of redemption.
- ---------------
(***) Insert Effective Time.
C-5
<PAGE>
(e) (i) Notice of any redemption of, or notice of distribution
of Debentures in exchange for, the Preferred Securities and Common Securities (a
"Redemption/Distribution Notice") will be given by the Regular Trustees on
behalf of the Trust by mail to each Holder of Preferred Securities and Common
Securities to be redeemed or exchanged not less than 30 nor more than 60 days
prior to the date fixed for redemption or exchange thereof. For purposes of the
calculation of the date of redemption or exchange and the dates on which notices
are given pursuant to this paragraph (e)(i), a Redemption/Distribution Notice
shall be deemed to be given on the day such notice is first mailed by
first-class mail, postage prepaid, to Holders of Preferred Securities and Common
Securities. Each Redemption/Distribution Notice shall be addressed to the
Holders of Preferred Securities and Common Securities at the address of each
such Holder appearing in the books and records of the Trust. No defect in the
Redemption/Distribution Notice or in the mailing of either thereof with respect
to any Holder shall affect the validity of the redemption or exchange
proceedings with respect to any other Holder.
(ii) In the event that fewer than all the outstanding Common
Securities are to be redeemed, the Common Securities to be redeemed will be
redeemed Pro Rata from each Holder of Common Securities (subject to adjustment
to eliminate fractional Common Securities).
(iii) If the Trust gives a Redemption/ Distribution Notice in
respect of a redemption of Common Securities as provided in this paragraph 4
(which notice will be irrevocable) then immediately prior to the close of
business on the redemption date, provided that SunSource has paid to the
Property Trustee in immediately available funds a sufficient amount of cash in
connection with the related redemption or maturity of the Debentures,
Distributions will cease to accrue on the Common Securities called for
redemption, such Common Securities will no longer be deemed to be outstanding
and all rights of Holders of such Common Securities so called for redemption
will cease, except the right of the Holders of such Common 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 Common Securities which have been so called for redemption.
If any date fixed for redemption of Common 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 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
Common Securities is improperly withheld or refused and not paid by the Property
Trustee, Distributions on such Common Securities will continue to accrue, 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 Redemption Price.
(iv) Redemption/Distribution Notices shall be sent by the
Regular Trustees on behalf of the Trust to the Holders of the Common Securities.
(v) Upon the date of distribution of Debentures after
dissolution of the Trust as a result of the occurrence of a Special Event,
Common Security Certificates shall be deemed to represent beneficial interests
in the Debentures so distributed, and the Common Securities will no longer be
deemed outstanding and may be canceled by the Regular Trustees. The Debentures
so distributed shall
C-6
<PAGE>
have an aggregate principal amount equal to the aggregate liquidation amount of
the Common Securities so distributed.
5. Voting Rights.
(a) Except as provided under paragraph 5(b) below and as
otherwise required by law and the Declaration, the Holders of the Common
Securities will have no voting rights.
(b) Except as provided in the Declaration with respect to a
Special Regular Trustee, Holders of Common Securities have the sole right under
the Declaration to increase or decrease the number of Trustees, and to appoint,
remove or replace a Trustee, any such increase, decrease, appointment, removal
or replacement to be approved by Holders of Common Securities representing a
Majority in liquidation amount of the Common Securities.
If any proposed amendment to the Declaration provides for, or
the Regular Trustees otherwise propose to effect, (i) any action that would
materially adversely affect the material powers, preferences or special rights
of the Securities, whether by way of amendment to the Declaration or otherwise,
or (ii) the dissolution of the Trust, other than in connection with the
distribution of Debentures held by the Property Trustee, upon the occurrence of
a Special Event or in connection with the redemption of Common Securities as a
consequence of a redemption of Debentures, then the Holders of outstanding
Securities will be entitled to vote on such amendment or proposal as a class and
such amendment or proposal shall not be effective except with the approval of
the Holders of Securities representing 66-2/3% in liquidation amount of such
Securities; provided, however, (A) if any amendment or proposal referred to in
clause (i) above would materially adversely affect only the Preferred Securities
or the 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, (B) the rights of Holders of 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 Common Securities,
and (C) amendments to the Declaration shall be subject to such further
requirements as are set forth in Sections 12.1 and 12.2 of the Declaration.
In the event the consent of the Property Trustee as the holder
of the Debentures, is required under the Indenture with respect to any
amendment, modification or termination of the Indenture or the Debentures, the
Property Trustee shall request the written direction of the Holders of the
Securities with respect to such amendment, modification or termination. The
Property Trustee shall vote with respect to such amendment, modification or
termination as directed by a Majority in liquidation amount of the Securities
voting together as a single class; provided that where such amendment,
modification or termination of the Indenture requires the consent or vote of (1)
holders of Debentures representing a specified percentage greater than a
majority in principal amount of the Debentures or (2) each holder of Debentures,
the Property Trustee may only vote with respect to that amendment, modification
or termination as directed by, in the case of clause (1) above, the vote of
Holders of Securities representing such specified percentage of the aggregate
liquidation amount of the Securities, or, in the case of clause (2) above, each
Holder of Securities; and provided, further, that the Property Trustee shall be
under no obligation to take any action in accordance with the directions of the
C-7
<PAGE>
Holders of the Securities unless the Property Trustee shall have received, at
the expense of the Sponsor, an opinion of nationally recognized independent tax
counsel recognized as an 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.
Subject to Section 2.6 of the Declaration, and the provisions
of this and the next succeeding paragraph, the Holders of a Majority in
liquidation amount of the Common Securities, voting separately as a class shall
have the right to (A) on behalf of all Holders of Common Securities, waive any
past default that is waivable under the Declaration (subject to, and in
accordance with the Declaration) and (B) 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 holder of
the Debentures, to (i) direct the time, method and place of conducting any
proceeding for any remedy available to the Debenture Trustee, or exercising any
trust or power conferred on the Debenture Trustee with respect to the
Debentures, (ii) waive any past default and its consequences that is waivable
under Section 6.06 of the Indenture, or (iii) exercise any right to rescind or
annul a declaration that the principal of all the Debentures shall be due and
payable; provided that where the taking of any action under the Indenture
requires the consent or vote of (1) holders of Debentures representing a
specified percentage greater than a majority in principal amount of the
Debentures or (2) each holder of Debentures, the Property Trustee may only take
such action if directed by, in the case of clause (1) above, the vote of Holders
of Common Securities representing such specified percentage of the aggregate
liquidation amount of the Common Securities, or, in the case of clause (2)
above, each Holder of Common Securities. Pursuant to this paragraph, the
Property Trustee shall not revoke, or take any action inconsistent with, any
action previously authorized or approved by a vote of the Holders of the
Preferred Securities, and shall not take any action in accordance with the
direction of the Holders of the Common Securities under this paragraph if the
action is prejudicial to the Holders of Preferred Securities. 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 Debenture 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 Common Securities
unless the Property Trustee shall have received, at the expense of the Sponsor,
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 income tax purposes following such action.
Notwithstanding any other provision of these terms, each
Holder of Common Securities will be deemed to have waived any Event of Default
with respect to the Common Securities and its consequences until all Events of
Default with respect to the Preferred Securities have been cured, waived by the
Holders of Preferred Securities as provided in the Declaration or otherwise
eliminated, and until all Events of Default with respect to the Preferred
Securities have been so cured, waived by the Holders of Preferred Securities or
otherwise eliminated, the Property Trustee will be deemed to be acting solely on
behalf of the Holders of Preferred Securities and only the Holders of the
Preferred Securities will have the right to direct the Property Trustee in
accordance with the terms of the Declaration or of the Securities. In the event
that any Event of Default with respect to the Preferred Securities is waived by
the Holders of Preferred Securities as provided in the Declaration, the Holders
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<PAGE>
of Common Securities agree that such waiver shall also constitute the waiver of
such Event of Default with respect to the Common Securities for all purposes
under the Declaration without any further act, vote or consent of the Holders of
the Common Securities.
A waiver of an Indenture Event of Default by the Property
Trustee at the direction of the Holders of the Preferred Securities will
constitute a waiver of the corresponding Event of Default under the Declaration
in respect of the Securities.
Any required approval of Holders of Common Securities may be
given at a separate meeting of Holders of Common Securities convened for such
purpose, at a meeting of all of the Holders of Securities of the Trust or
pursuant to written consent. The Regular Trustees will cause a notice of any
meeting at which Holders of Common 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 Common 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 Common Securities will be
required for the Trust to redeem and cancel Common Securities in accordance with
the Declaration.
6. Pro Rata Treatment. A reference in these terms of the
Common Securities to any payment, distribution or treatment as being "Pro Rata"
shall mean pro rata to each Holder of Securities according to the aggregate
liquidation amount of the Securities held by the relevant Holder in relation to
the aggregate liquidation amount of all Securities outstanding unless, in
relation to a payment, an Event of Default has occurred and is continuing, in
which case any funds available to make such payment shall be paid first to each
Holder of the Preferred Securities pro rata according to the aggregate
liquidation amount of Preferred Securities held by the relevant Holder relative
to the aggregate liquidation amount of all Preferred Securities outstanding, and
only after satisfaction of all amounts owed to the Holders of the Preferred
Securities, to each Holder of Common Securities pro rata according to the
aggregate liquidation amount of Common Securities held by the relevant Holder
relative to the aggregate liquidation amount of all Common Securities
outstanding.
7. Ranking. The Common Securities rank pari passu with the
Preferred Securities except that where an Event of Default occurs and is
continuing, the rights of Holders of Common Securities to payment in respect of
Distributions and payments upon liquidation, redemption or otherwise are
subordinate to the rights of Holders the Preferred Securities.
8. Mergers, Consolidations or Amalgamations. 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 body.
9. Transfers, Exchanges, Method of Payments. Payment of
Distributions and payments on redemption of the Common Securities will be
payable, the transfer of the Common Securities will be registrable, and Common
Securities will be exchangeable for Common Securities ofother denominations of a
like aggregate liquidation amount, at the principal corporate trust office of
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<PAGE>
the Property Trustee in The City of New York; provided that payment of
Distributionsmay 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 Common Security will be made only upon
surrender of suchCommon Security to the Property Trustee. Notwithstanding the
foregoing, transfers of Common Securities are subject to conditions set forth in
Section 9.1(c) of the Declaration.
10. Acceptance of Indenture. Each Holder of Common Securities,
by the acceptance thereof, agrees to the provisions of the Indenture and the
Debentures, including the subordination provisions thereof.
11. No Preemptive Rights. The Holders of Common Securities
shall have no preemptive rights to subscribe to any additional Common Securities
or Preferred Securities.
12. Miscellaneous. These terms shall constitute a part of the
Declaration. The Trust will provide a copy of the Declaration and the Indenture
to a Holder without charge on written requestto the Trust at its principal place
of business.
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<PAGE>
Annex I
TRANSFER OF THIS CERTIFICATE
IS SUBJECT TO THE CONDITIONS
SET FORTH IN THE DECLARATION
REFERRED TO BELOW
Certificate Number Number of Trust Common Securities
C-1
Certificate Evidencing Trust Common Securities
of
SunSource Capital Trust
11.6% Trust Common Securities
(liquidation amount $25 per Common Security)
SunSource Capital Trust, a statutory business trust formed
under the laws of the State of Delaware (the "Trust"), hereby certifies that
SunSource Inc. (the "Holder") is the registered owner of _____ (______) common
securities of the Trust representing common undivided beneficial interests in
the assets of the Trust designated the 11.6% Trust Common Securities
(liquidation amount $25 per Common Security) (the "Trust Common Securities").
The Trust Common Securities are transferable on the books and records of the
Trust, in person or by a duly authorized attorney, upon surrender of this
certificate duly endorsed and in proper form for transfer and satisfaction of
the other conditions set forth in the Declaration (as defined below) including
without limitation Section 9.1(c) thereof. The designations, rights, privileges,
restrictions, preferences and other terms and provisions of the Trust Common
Securities are set forth in, and this certificate and the Trust Common
Securities represented hereby are issued and shall in all respects be subject to
the terms and provisions of, the Amended and Restated Declaration of Trust of
the Trust dated as of _________, 1997, as the same may be amended from time to
time (the "Declaration") including the designation of the terms of Trust Common
Securities as set forth in Exhibit C thereto. The Trust Common Securities and
the Preferred Securities issued by the Trust pursuant to the Declaration
represent undivided beneficial interests in the assets of the Trust, including
the Debentures (as defined in the Declaration) issued by SunSource Inc., a
Delaware corporation, to the Trust pursuant to the Indenture referred to in the
Declaration. The Trust will furnish a copy of the Declaration and the Indenture
to the Holder without charge upon written request to the Trust at its principal
place of business or registered office.
The Holder of this Certificate, by accepting this Certificate,
is deemed to have agreed to the terms of the Indenture and the Debentures,
including that the Debentures are subordinate and junior
1
<PAGE>
in right of payment to all Senior Indebtedness (as defined in the Indenture) as
and to the extent provided in the Indenture.
Upon receipt of this certificate, the Holder is bound by the
Declaration and is entitled to the benefits thereunder.
IN WITNESS WHEREOF, the Trustees of the Trust have executed
this certificate this _____ day of _________, 1997.
SUNSOURCE CAPITAL TRUST
By:_________________________, as trustee
Name:
Title:
By:_________________________, as trustee
Name:
Title:
PROPERTY TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Common Securities referred to in the
within-mentioned Declaration.
Dated: _______ __, ____
THE BANK OF NEW YORK,
as Property Trustee
By:_________________________
Name:
Title:
2
<PAGE>
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned assigns and transfer this Trust Common
Security Certificate to:
____________________________________________________________
____________________________________________________________
(Insert assignee's social security or tax identification number)
____________________________________________________________
____________________________________________________________
(Insert address and zip code of assignee)
and irrevocably appoints
____________________________________________________________
____________________________________________________________
_____________________________________________________ agent to transfer this
Trust Common Security Certificate on the books of the Trust. The agent may
substitute another to act for him or her.
Date: ________________________
Signature: _________________________________
(Sign exactly as your name appears on the other side of this Trust Common
Security Certificate)
1
<PAGE>
SUNSOURCE INC.
AND
THE BANK OF NEW YORK
AS TRUSTEE
INDENTURE
Dated as of ___________, 1997
11.6% Junior Subordinated Debentures
<PAGE>
<TABLE>
<CAPTION>
CROSS-REFERENCE TABLE*/
Trust Indenture Act Section Indenture Section
- --------------------------- -----------------
<S> <C>
310(a)(1)......................................................................................................7.09
310(a)(2)......................................................................................................7.09
310(a)(3)......................................................................................................N.A.
310(a)(4)......................................................................................................N.A.
310(a)(5)......................................................................................................7.08
310(b).........................................................................................................7.08
310(c).........................................................................................................N.A.
311(a).........................................................................................................7.14
311(b).........................................................................................................7.14
311(c).........................................................................................................N.A.
312(a).........................................................................................................5.01
312(b).........................................................................................................5.02
312(c).........................................................................................................5.02
313(a).........................................................................................................5.04
313(b).........................................................................................................5.04
313(c)..................................................................................................5.04; 13.04
313(d).........................................................................................................5.04
314(a)..................................................................................................5.03; 13.04
314(b).........................................................................................................N.A.
314(c)(1)...............................................................................................5.03; 13.06
314(c)(2).....................................................................................................13.06
314(c)(3)......................................................................................................N.A.
314(d).........................................................................................................N.A.
314(e)........................................................................................................13.06
314(f).........................................................................................................N.A.
315(a)...................................................................................................7.01(b)(1)
315(b)..................................................................................................6.07; 13.04
315(c)......................................................................................................7.01(a)
315(d)......................................................................................................7.01(b)
315(e).........................................................................................................6.08
316(a)(last sentence)..........................................................................................8.04
316(a)(1)(A)...................................................................................................6.06
316(a)(1)(B)...................................................................................................6.06
316(a)(2)......................................................................................................N.A.
316(b).........................................................................................................6.04
316(c)...................................................................................................2.03; 8.01
- --------
</TABLE>
*/ This Cross-Reference Table does not constitute part of the Indenture and
should not have any bearing upon the interpretation of any of its terms or
provisions.
<PAGE>
<TABLE>
<CAPTION>
Trust Indenture Act Section Indenture Section
- --------------------------- -----------------
<S> <C>
317(a)(1)...................................................................................................6.02(b)
317(a)(2)...................................................................................................6.02(c)
317(b).........................................................................................................4.03
318(a)........................................................................................................13.08
318(b).........................................................................................................N.A.
318(c)........................................................................................................13.08
</TABLE>
N.A. means not applicable.
<PAGE>
TABLE OF CONTENTS**/
<TABLE>
<CAPTION>
Page
ARTICLE ONE - DEFINITIONS
<S> <C> <C>
SECTION 1.01. Definitions............................................................................2
ARTICLE TWO - ISSUE, DESCRIPTION, TERMS, EXECUTION,
REGISTRATION AND EXCHANGE OF DEBENTURES
SECTION 2.01 Designation and Maturity...............................................................7
SECTION 2.02 Form of Debentures.....................................................................8
SECTION 2.03 Interest Payments......................................................................8
SECTION 2.04 Extension of Interest Payment Period...................................................8
SECTION 2.05 Notice of Shortening of Stated Maturity or Extension of Interest
Payment Period.........................................................................9
SECTION 2.06 Date and Denomination; Payment of Interest.............................................9
SECTION 2.07 Execution and Authentication..........................................................11
SECTION 2.08 Exchange of Debentures................................................................12
SECTION 2.09 Temporary Debentures..................................................................13
SECTION 2.10 Replacement of Debentures.............................................................13
SECTION 2.11 Cancellation of Surrendered Debentures................................................14
SECTION 2.12 No Rights of Third Parties............................................................14
SECTION 2.13 Authenticating Agent..................................................................14
SECTION 2.14 Global Debenture......................................................................15
SECTION 2.15 CUSIP Numbers.........................................................................16
ARTICLE THREE - OPTIONAL REDEMPTION OF DEBENTURES
SECTION 3.01 Optional Redemption...................................................................16
SECTION 3.02 Redemption upon Tax Event; Shortening of Stated Maturity..............................16
SECTION 3.03 Notice of Redemption..................................................................18
SECTION 3.04 Surrender of Debentures...............................................................19
ARTICLE FOUR - PARTICULAR COVENANTS OF THE COMPANY
SECTION 4.01 Payments of Principal and Interest....................................................19
SECTION 4.02 Maintain Office or Agency.............................................................20
SECTION 4.03 Appointment of Paying Agent...........................................................20
SECTION 4.04 Appointment of Trustee................................................................21
SECTION 4.05 Restrictions upon Dividends, Redemptions, etc.........................................21
SECTION 4.06 Listing of Debentures.................................................................21
SECTION 4.07 Compliance with Declaration...........................................................21
SECTION 4.08 Transfer of Trust Common Securities...................................................21
</TABLE>
- --------
**/ This Table of Contents does not constitute part of the Indenture and should
not have any bearing upon the interpretation of any of its terms or
provisions.
i
<PAGE>
<TABLE>
<CAPTION>
ARTICLE FIVE - DEBENTUREHOLDERS' LISTS AND REPORTS BY
THE COMPANY AND THE TRUSTEE
<S> <C> <C>
SECTION 5.01 List of Debentureholders..............................................................22
SECTION 5.02 Preservation and Disclosure of List...................................................22
SECTION 5.03 Documents Provided to Trustee.........................................................23
SECTION 5.04 Information to Debentureholders.......................................................24
ARTICLE SIX - REMEDIES OF THE TRUSTEE AND DEBENTUREHOLDERS ON EVENT
OF DEFAULT
SECTION 6.01 Events of Default.....................................................................26
SECTION 6.02 Payment by the Company................................................................28
SECTION 6.03 Application of Payments...............................................................29
SECTION 6.04 Limitation on Suits...................................................................30
SECTION 6.05 Remedies Cumulative; Waivers..........................................................30
SECTION 6.06 Direction by Debentureholders.........................................................31
SECTION 6.07 Notice of Defaults....................................................................31
SECTION 6.08 Undertaking to Pay Costs..............................................................32
SECTION 6.09 Waiver of Usury, Stay or Extension Laws...............................................32
ARTICLE SEVEN - CONCERNING THE TRUSTEE
SECTION 7.01 Duties of Trustee.....................................................................33
SECTION 7.02 Reliance; Consultation with Counsel...................................................34
SECTION 7.03 Absence of Reliance upon Trustee......................................................35
SECTION 7.04 Ownership of Debentures...............................................................35
SECTION 7.05 Moneys Held in Trust..................................................................36
SECTION 7.06 Compensation..........................................................................36
SECTION 7.07 Officers' Certificates................................................................36
SECTION 7.08 Conflicting Interests.................................................................36
SECTION 7.09 Trustee...............................................................................42
SECTION 7.10 Resignation and Removal of Trustee....................................................42
SECTION 7.11 Successor Trustee.....................................................................43
SECTION 7.12 Merger, Consolidation of Trustee......................................................44
SECTION 7.13 Trustee's Application for Instructions from the Company...............................44
SECTION 7.14 Trustee as Creditor...................................................................45
ARTICLE EIGHT - CONCERNING THE DEBENTUREHOLDERS
SECTION 8.01 Action by Debentureholders............................................................48
SECTION 8.02 Proof of Action by Debentureholder....................................................49
SECTION 8.03 Registered Holder.....................................................................49
SECTION 8.04 Determination of Requisite Debentureholders...........................................49
SECTION 8.05 Revocation of Action; Binding Effect..................................................50
ARTICLE NINE - SUPPLEMENTAL INDENTURES
SECTION 9.01 Supplemental Indentures...............................................................50
SECTION 9.02 Approval of Supplemental Indentures...................................................51
SECTION 9.03 Effect of Supplemental Indenture......................................................53
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 9.04 Affected Debentures...................................................................53
SECTION 9.05 Opinion of Counsel....................................................................53
ARTICLE TEN - CONSOLIDATION, MERGER, SALE OR CONVEYANCE
SECTION 10.01 Consolidation, Merger, etc. of Company................................................53
SECTION 10.02 Successor Corporation.................................................................54
SECTION 10.03 Opinion of Counsel Provided to Trustee................................................54
ARTICLE ELEVEN - SATISFACTION AND DISCHARGE OF INDENTURE; UNCLAIMED
MONEYS
SECTION 11.01 Satisfaction and Discharge............................................................54
SECTION 11.02 Deposits held in Trust................................................................56
SECTION 11.03 Moneys held by Paying Agent...........................................................56
SECTION 11.04 Repayment to Company..................................................................57
SECTION 11.05 Indemnification of Trustee............................................................57
ARTICLE TWELVE - IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS
AND DIRECTORS
SECTION 12.01 Immunity..............................................................................57
ARTICLE THIRTEEN - MISCELLANEOUS PROVISIONS
SECTION 13.01 Successors and Assigns................................................................58
SECTION 13.02 Actions by Predecessor................................................................58
SECTION 13.03 Surrender of Power....................................................................58
SECTION 13.04 Notices...............................................................................58
SECTION 13.05 Governing Law.........................................................................58
SECTION 13.06 Officers' Certificate from Company....................................................58
SECTION 13.07 Date of Payments......................................................................59
SECTION 13.08 Certain Duties under Trust Indenture Act..............................................59
SECTION 13.09 Counterparts..........................................................................59
SECTION 13.10 Severability..........................................................................59
SECTION 13.11 Assignment by Company.................................................................60
SECTION 13.12 Holders of Preferred Securities as Third Party Beneficiaries..........................60
ARTICLE FOURTEEN - SUBORDINATION OF DEBENTURES
SECTION 14.01 Subordination.........................................................................60
SECTION 14.02 Payments upon Liquidation, etc. ......................................................60
SECTION 14.03 Receipt of Payments; Subrogation......................................................61
SECTION 14.04 Application of Payments to Debentures.................................................63
SECTION 14.05 Banking Effect........................................................................63
SECTION 14.06 Knowledge of Trustee..................................................................63
SECTION 14.07 Rights of Trustee as Holder of Senior Indebtedness....................................63
SECTION 14.08 Paying Agent..........................................................................64
EXHIBIT A - FORM OF DEBENTURE
</TABLE>
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THIS INDENTURE, is dated as of the ____ day of ___________, 1997,
between SunSource Inc., a corporation duly organized and existing under the laws
of the State of Delaware (hereinafter sometimes referred to as the "Company"),
and The Bank of New York, a New York banking corporation, as Trustee
(hereinafter sometimes referred to as the "Trustee"):
WHEREAS, for its lawful corporate purposes, the Company has fully
authorized the execution and delivery of this Indenture to provide for the
issuance of junior subordinated debentures (hereinafter referred to as the
"Debentures"), in an aggregate principal amount of $___________ to be issued as
in this Indenture provided, as registered Debentures without coupons, to be
authenticated by the certificate of the Trustee;
WHEREAS, to provide the terms and conditions upon which the Debentures
are to be authenticated, issued and delivered, the Company has duly authorized
the execution of this Indenture;
WHEREAS, the Debentures and the certificate of authentication to be
borne by the Debentures (the "Certificate of Authentication") are to be
substantially in such forms as may be approved by the Board of Directors (as
defined below);
WHEREAS, the Company has caused to be formed SunSource Capital Trust
(the "Trust") as a statutory business trust under the Business Trust Act of the
State of Delaware (12 Del. Code Section 3801 et seq.) pursuant to a declaration
of trust dated __________, 1997 (as amended and restated, the "Declaration") and
the filing of a certificate of trust with the Secretary of State of the State of
Delaware on __________, 1997; and
WHEREAS, in the merger of SunSource L.P. (the "Partnership") and a
subsidiary of the Partnership with and into SunSource Inc., each Class A limited
partnership interest in the Partnership will be exchanged for $1.30 in cash and
0.38 of an 11.6% Trust Preferred Security of the Trust; and
WHEREAS, in connection with such exchange and the purchase by the
Company of the Common Securities (as defined in the Declaration) of the Trust,
the Company will deposit as trust assets Junior Subordinated Debentures; and
WHEREAS, pursuant to the Declaration, the legal title to the Debentures
shall be owned and held of record in the name of The Bank of New York, as
Trustee or its successor under the Declaration (the "Trustee") in trust for the
benefit of holders of the Preferred Securities and the Common Securities; and
AND WHEREAS, all acts and things necessary to make the Debentures
issued pursuant hereto, when executed by the Company and authenticated and
delivered by the Trustee as in this Indenture provided, the valid, binding and
legal obligations of the Company, and to constitute these presents a valid
indenture and agreement according to its terms, have been done and
<PAGE>
performed or will be done and performed prior to the issuance of such
Debentures, and the execution of this Indenture has been and the issuance
hereunder of the Debentures has been or will be prior to issuance in all
respects duly authorized, and the Company, in the exercise of the legal right
and power in it vested, executes this Indenture and proposes to make, execute,
issue and deliver the Debentures:
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
That in order to declare the terms and conditions upon which the
Debentures are and are to be authenticated, issued and delivered, and in
consideration of the premises and of the acquisition and acceptance of the
Debentures by the holders thereof, the Company covenants and agrees with the
Trustee, for the equal and proportionate benefit (subject to the provisions of
this Indenture) of the respective holders from time to time of the Debentures,
without any discrimination, preference or priority of any one Debenture over any
other by reason of priority in the time of issue, sale or negotiation thereof,
or otherwise, except as provided herein, as follows:
ARTICLE ONE
DEFINITIONS
SECTION 1.01. Definitions. The terms defined in this Section (except as
in this Indenture otherwise expressly provided or unless the context otherwise
requires) for all purposes of this Indenture, and any resolution of the Board of
Directors of the Company shall have the respective meanings specified in this
Section. All other terms used in this Indenture which are defined in the Trust
Indenture Act of 1939, as amended, or which are by reference in such Act defined
in the Securities Act of 1933, as amended (except as herein otherwise expressly
provided or unless the context otherwise requires), shall have the meanings
assigned to such terms in the Trust Indenture Act and in the Securities Act as
in force at the date of this instrument.
"Accrual Date" means the first day following the Effective Time.
"Affiliate" of the Company means any company at least a majority of
whose outstanding voting stock shall at the time be owned by the Company, or by
one or more direct or indirect subsidiaries of the Company or by the Company and
one or more direct or indirect subsidiaries of the Company. For the purposes
only of this definition of the term "Affiliate", the term "voting stock", as
applied to the stock of any company, shall mean stock of any class or classes
having ordinary voting power for the election of a majority of the directors of
such company, other than stock having such power only by reason of the
occurrence of a contingency.
"Authenticating Agent" means an authenticating agent with respect to
all or any of the series of Debentures, as the case may be, appointed with
respect to all or any series of the
2
<PAGE>
Debentures, as the case may be, by the Trustee pursuant to Section 2.13.
"Board of Directors" means the Board of Directors of the Company, or
any committee of such Board duly authorized to act hereunder.
"Board Resolution" means a copy of one or more resolutions, certified
by the secretary or an assistant secretary of the Company to have been adopted
or consented to by the Board of Directors and to be in full force and effect,
and delivered to the Trustee.
"Business Day," means any day other than a day on which banking
institutions in New York, are authorized or required by law to close.
"Certificate" means a certificate signed by the principal executive
officer, the principal financial officer or the principal accounting officer of
the Company. The Certificate need not comply with the provisions of Section
13.06.
"Common Securities" means the common undivided beneficial interests in
the assets of the Trust.
"Company" means SunSource Inc., a corporation duly organized and
existing under the laws of the State of Delaware, and, subject to the provisions
of Article Ten, shall also include its successors and assigns.
"Conversion " means the conversion of SunSource L.P. to corporate form
as generally described in the Proxy Statement/Prospectus and related
transactions entered into pursuant to the Conversion Agreement.
"Conversion Agreement " means the Agreement and Plan of Conversion,
dated __________, 1997, among SunSource Inc., SunSource L.P., LPSub Inc.,
Lehman/SDI, Inc. and the limited partners of SDI Partners I, L.P.
"Corporate Trust Office" means the office of the Trustee at which at
any particular time its corporate trust business shall be principally
administered, which office at the date of the execution of this Indenture is
located at 101 Barclay Street, Floor 21 West, New York, New York 10286,
Attention: Corporate Trust Administration.
"Debenture" or "Debentures" means any Debenture or Debentures, as the
case may be, authenticated and delivered under this Indenture.
"Debentureholder", "holder of Debentures", "registered holder", or
other similar term, means the person or persons in whose name or names a
particular Debenture shall be registered on the books of the Company kept for
the purpose in accordance with the terms of this Indenture.
3
<PAGE>
"Declaration" means the Amended and Restated Declaration of Trust of
the Trust.
"Default" means any event, act or condition which with notice or lapse
of time, or both, would constitute an Event of Default.
"Depository" means, with respect to any Debentures, for which the
Company shall determine that such Debentures will be issued as a Global
Debenture, The Depository Trust Company, New York, New York, another clearing
agency, or any successor registered as a clearing agency under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or other applicable
statute or regulation, which, in each case, shall be designated by the Company
pursuant to Section 2.14.
"Effective Time " means the effective date of the Conversion.
"Event of Default" means any event specified in Section 6.01(a),
continued for the period of time, if any, therein designated.
"Global Debenture" means a Debenture executed by the Company and
delivered by the Trustee to the Depository or pursuant to the Depository's
instruction, all in accordance with the Indenture, which shall be registered in
the name of the Depository or its nominee.
"Governmental Obligations" means securities that are (i) direct
obligations of the United States of America for the payment of which its full
faith and credit is pledged or (ii) obligations of a person controlled or
supervised by and acting as an agency or instrumentality of the United States of
America, the payment of which is unconditionally guaranteed as a full faith and
credit obligation by the United States of America, which, in either case, are
not callable or redeemable at the option of the issuer thereof, and shall also
include a depository receipt issued by a bank (as defined in Section 3(a) (2) of
the Securities Act of 1933, as amended) as custodian with respect to any such
Governmental Obligation or a specific payment of principal of or interest on any
such Governmental Obligation held by such custodian for the account of the
holder of such depository receipt; provided that (except as required by law)
such custodian is not authorized to make any deduction from the amount payable
to the holder of such depository receipt from any amount received by the
custodian in respect of the Governmental Obligation or the specific payment of
principal of or interest on the Governmental Obligation evidenced by such
depository receipt.
"Guarantee Agreement" means the guarantee, dated as of ___________,
1997, of the Company for the benefit of holders of Preferred Securities issued
by the Trust.
"Indenture" means this instrument as originally executed, or, if
amended as herein provided, as so amended.
"Interest Payment Date" when used with respect to any installment of
interest on a
4
<PAGE>
Debenture means the last day of each calendar month, commencing _____________,
1997.
"Officers' Certificate" means a certificate signed by the Chairman, the
President or a Vice President and by the Treasurer or an Assistant Treasurer or
the Controller or an Assistant Controller or the Secretary or an Assistant
Secretary of the Company and who shall be satisfactory to the Trustee. Each such
certificate shall include the statements provided for in Section 13.06, if and
to the extent required by the provisions thereof.
"Opinion of Counsel" means an opinion in writing signed by legal
counsel, who may be an employee of or counsel for the Company and who shall be
satisfactory to the Trustee. Each such opinion shall include the statements
provided for in section 13.06, if and to the extent required by the provisions
thereof.
"Outstanding," when used with reference to Debentures, subject to the
provisions of Section 8.01, means, as of any particular time, all Debentures
theretofore authenticated and delivered by the Trustee under this Indenture,
except (a) Debentures theretofore canceled by the Trustee or any paying agent,
or delivered to the Trustee or any paying agent for cancellation or which have
previously been canceled; (b) Debentures or portions thereof for the payment or
redemption of which moneys or Governmental Obligations in the necessary amount
shall have been deposited in trust with the Trustee or with any paying agent
(other than the Company) or shall have been set aside and segregated in trust
for the holders of such Debentures by the Company (if the Company shall act as
its own paying agent); provided, however, that if such Debentures or portions of
such Debentures are to be redeemed prior to the maturity thereof, notice of such
redemption shall have been given as in Article Three provided, or provision
satisfactory to the Trustee shall have been made for giving such notice; and (c)
Debentures in lieu of or in substitution for which other Debentures shall have
been authenticated and delivered pursuant to the terms of Section 2.07.
"Person" means a legal person, including any individual, corporation,
estate, partnership, joint venture, association, joint stock company, limited
liability company, trust, unincorporated association, or government or any
agency or political subdivision thereof, or any other entity of whatever nature.
"Predecessor Debenture" of any particular Debenture means every
previous Debenture evidencing all or a portion of the same debt as that
evidenced by such particular Debenture; and, for the purposes of this
definition, any Debenture authenticated and delivered under Section 2.07 in lieu
of a lost, destroyed or stolen Debenture shall be deemed to evidence the same
debt as the lost, destroyed or stolen Debenture.
"Preferred Securities" means the preferred undivided beneficial
interests in the assets of the Trust.
"Property Trustee" means the entity performing the function of the
Property Trustee
5
<PAGE>
under the Declaration.
"Responsible Officer" when used with respect to the Trustee means the
chairman of the board of directors, the president, any vice president, any
assistant vice president, the secretary, any assistant secretary, the treasurer,
any assistant treasurer, any trust officer, or assistant trust officer or any
other officer of the Trustee customarily performing functions similar to those
performed by any of the above designated officers and also means, with respect
to a particular corporate trust matter, any other officer to whom such matter is
referred because of that officer's knowledge of and familiarity with the
particular subject.
"Security Exchange" when used with respect to the Debentures which are
held as trust assets of the Trust pursuant to the Declaration of the Trust,
means the distribution of the Debentures of such series by the Trust in exchange
for the Preferred Securities and Common Securities of the Trust in dissolution
of the Trust pursuant to the Declaration of Trust of the Trust.
"Senior Indebtedness" means the principal of and premium, if any, and
interest on (a) all indebtedness of the Company, whether outstanding on the date
of this Indenture or thereafter created, (i) for money borrowed by the Company,
(ii) for money borrowed by, or obligations of, others and either assumed or
guaranteed, directly or indirectly, by the Company, (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 Company at the time of the
acquisition of such property by the Company, for the payment of which the
Company 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 Company.
Notwithstanding anything to the contrary in this Indenture or the Debentures,
Senior Indebtedness shall not include (i) amounts owed to trade creditors in the
ordinary course of business, (ii) any indebtedness of the Company 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 Debentures, as the case may be,
and, in particular, the Debentures shall rank pari passu with all other debt
securities and guarantees in respect of those debt securities, issued to any
other trusts, partnerships or any other entity affiliated with the Company which
is a financing vehicle of the Company ("Financing Entity") in connection with an
issuance of preferred securities by such Financing Entity, or (iii) any
indebtedness of the Company to a Subsidiary.
"Subsidiary" means any corporation at least a majority of whose
outstanding voting stock shall at the time be owned, directly or indirectly, by
the Company or by one or more subsidiaries or by the Company and one or more
Subsidiaries. For the purposes only of this definition of the
6
<PAGE>
term "Subsidiary", the term "voting stock", as applied to the stock of any
corporation, shall mean stock of any class or classes having ordinary voting
power for the election of a majority of the directors of such corporation, other
than stock having such power only by reason of the occurrence of a contingency.
"Trust" means SunSource Capital Trust, a statutory business trust
created under the laws of the State of Delaware.
"Trustee" means The Bank of New York and, subject to the provisions of
Article Seven, shall also include its successors and assigns, and, if at any
time there is more than one person acting in such capacity hereunder, "Trustee"
shall mean each such person.
"Trust Indenture Act", subject to the provisions of Section 9.01 and
9.02, means the Trust Indenture Act of 1939, as amended.
ARTICLE TWO
ISSUE, DESCRIPTION, TERMS, EXECUTION,
REGISTRATION AND EXCHANGE OF DEBENTURES
SECTION 2.01 Designation and Maturity. (a) There shall be and is hereby
authorized a series of Debentures designated the "11.6% Junior Subordinated
Debentures," limited in aggregate principal amount to the sum of (i) the stated
liquidation amount of the Trust Preferred Securities issued by the Trust in the
Conversion, plus (ii) a dollar amount equal to the principal amount of
Debentures purchased by the Trust with the proceeds received by the Trust from
the purchase by the Company of the Common Securities of the Trust, which amount
shall be as set forth in any written order of the Company for the authentication
and delivery of Debentures. (b) The Debentures shall be issued in the form of
registered Debentures without coupons. The Debentures shall mature and the
principal shall be due and payable together with all accrued and unpaid interest
thereon, including Compounded Interest (as hereinafter defined) on ___________,
2027; provided, however, if a Tax Event shall occur and be continuing and in the
opinion of nationally recognized independent tax counsel to the Trust, there
would in all cases, after effecting the termination of Trust and the
distribution of the Debentures to the holders of the securities in exchange
therefor upon liquidation of the Trust, be more than an insubstantial risk that
the Tax Event would continue, then the Company shall have the right to shorten
the stated maturity of the Junior Subordinated Debentures to a date not earlier
than _______, 2002 such that, in the opinion of nationally recognized
independent tax counsel to the Trust, after advancing the stated maturity of the
Debentures, interest paid on the Junior Subordinated Debentures will be
deductible by the Company for federal income tax purposes.
7
<PAGE>
SECTION 2.02 Form of Debentures. The Debentures shall be issued in
certificated form in substantially the form attached hereto as Exhibit A.
Principal and interest on the Debentures issued in certificated form will be
payable, the transfer of such Debentures will be registrable and such Debentures
will be exchangeable for Debentures bearing identical terms and provisions at
the office or agency of the Trustee in the Borough of Manhattan, The City and
State of New York; provided, however, that payment of interest may be made at
the option of the Company by check mailed to the registered holder at such
address as shall appear in the Debenture register and that the payment of
principal with respect to the Debentures will only be made upon surrender of the
Debentures to the Trustee. Notwithstanding the foregoing, so long as the Trustee
is the legal owner and record holder of the Debentures, the payment of the
principal of and interest on (including Compounded Interest, if any) on the
Debentures held by the Trustee will be made by the Company in immediately
available funds on the payment date therefor at such place and to the Property
Account (as defined in the Declaration) established and maintained by the
Trustee pursuant to the Declaration.
SECTION 2.03 Interest Payments. Each Debenture will bear interest at
the rate of 11.6% per annum from the Accrual Date until the principal thereof
becomes due and payable, and on any overdue principal and (to the extent that
payment of such interest is enforceable under applicable law) on any overdue
installment of interest at the same rate per annum, compounded monthly, payable
(subject to the provisions of Article Three) monthly in arrears on each Interest
Payment Date commencing on ____________, 1997, to the person in whose name such
Debenture or any predecessor Debenture is registered, at the close of business
on the regular record date for such interest installment, which, except as set
forth below, shall be the close of business on the first day of the month in
which such Interest Payment Date occurs. Any such interest installment not
punctually paid or duly provided for shall forthwith cease to be payable to the
registered holders on such regular record date, and may be paid to the person in
whose name the Debenture (or one or more Predecessor Debentures) is registered
at the close of business on a special record date to be fixed by the Trustee for
the payment of such defaulted interest, notice whereof shall be given to the
registered holders of the Debentures not less than ten days prior to such
special record date, or may be paid at any time in any other lawful manner not
inconsistent with the requirements of any securities exchange on which the
Debentures may be listed, and upon such notice as may be required by such
exchange.
SECTION 2.04 Extension of Interest Payment Period. So long as the
Company is not in default in the payment of interest on the Debentures, the
Company shall have the right, at any time during the term of the Debentures,
from time to time to extend the interest payment period of such Debentures for
up to 60 consecutive months (the "Extension Period"), at the end of which period
the Company shall pay all interest accrued and unpaid thereon (together with
interest thereon at the rate of 11.6% per annum to the extent permitted by
applicable law, compounded monthly ("Compounded Interest")). During such
Extension Period the Company shall not declare or pay any dividend 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
8
<PAGE>
guarantee payments with respect thereto. Prior to the termination of any such
Extension Period, the Company may pay all or any portion of the interest accrued
on the Debentures on any Interest Payment Date to holders of record on the
regular record date for such Interest Payment Date or from time to time further
extend such Period, provided that such Extension Period together with all such
further extensions thereof shall not exceed 60 consecutive months. Upon the
termination of any Extension Period and upon the payment of all accrued and
unpaid interest then due, together with Compounded Interest, the Company may
select a new Extension Period, subject to the foregoing requirements. No
interest shall be due and payable during an Extension Period, except at the end
thereof. At the end of the Extension Period the Company shall pay all interest
accrued and unpaid on the Debentures including any Compounded Interest which
shall be payable to the holders of the Debentures in whose names the Debentures
are registered in the Debenture register on the first record date after the end
of the Extension Period.
SECTION 2.05 Notice of Shortening of Stated Maturity or Extension of
Interest Payment Period. (a) So long as the Property Trustee is the legal owner
and holder of record of the Debentures, at the time the Company elects to
shorten the stated maturity of the Debentures or selects an Extension Period,
the Company shall give both the Property Trustee and the Trustee written notice
of such change ten business days prior to the earlier of (i) the next succeeding
date on which distributions on the Trust Preferred Securities are payable or
(ii) the date the Trust is required to give notice of the record date or the
date such distributions are payable to the New York Stock Exchange or other
applicable self-regulatory organization or to holders of the Trust Preferred
Securities, but in any event not less than one business day prior to such record
date. The Company shall cause the Trust to give notice of the Company's election
to shorten the stated maturity or selection of such Extension Period to the
holders of the Preferred Securities.
(b) If Debentures have been distributed to holders of
Preferred Securities and Common Securities, at the time the Company elects to
shorten the stated maturity of the Debentures or selects an Extension Period,
the Company shall give the holders of the Debentures and the Trustee written
notice of such change ten business days prior to the earlier of (i) the next
succeeding Interest Payment Date or (ii) the date the Company is required to
give notice of the record or payment date of such interest payment to the New
York Stock Exchange or other applicable self-regulatory organization or to
holders of the Debentures.
SECTION 2.06 Date and Denomination; Payment of Interest. The Debentures
shall be issuable as registered Debentures and in the denominations of $25 or
any integral multiple thereof. Each Debenture shall be dated the date of its
authentication. Interest on the Debentures shall be computed on the basis of a
360-day year composed of twelve 30-day months.
The interest installment on any Debenture which is payable, and is
punctually paid or duly provided for, on any Interest Payment Date shall be paid
to the person in whose name said Debenture (or one or more Predecessor
Debentures) is registered at the close of business on the regular record date
for such interest installment. In the event that any Debenture or portion
thereof is called for redemption and the redemption date is subsequent to a
regular record date
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with respect to any Interest Payment Date and prior to such Interest Payment
Date, interest on such Debenture will be paid upon presentation and surrender of
such Debenture as provided in Section 3.03.
Any interest on any Debenture which is payable, but is not punctually
paid or duly provided for, on any Interest Payment Date (herein called
"Defaulted Interest") shall forthwith cease to be payable to the registered
holder on the relevant regular record date by virtue of having been such holder;
and such Defaulted Interest shall be paid by the Company, at its election, as
provided in clause (1) or clause (2) below:
(1) The Company may make payment of any Defaulted Interest on
Debentures to the persons in whose names such Debentures (or their respective
Predecessor Debentures) are registered at the close of business on a special
record date for the payment of such Defaulted Interest, which shall be fixed in
the following manner: the Company shall notify the Trustee in writing of the
amount of Defaulted Interest proposed to be paid on each such Debenture and the
date of the proposed payment, and at the same time the Company shall deposit
with the Trustee an amount of money equal to the aggregate amount proposed to be
paid in respect of such Defaulted Interest or shall make arrangements
satisfactory to the Trustee for such deposit prior to the date of the proposed
payment, such money when deposited to be held in trust for the benefit of the
persons entitled to such Defaulted Interest as in this clause provided.
Thereupon the Trustee shall fix a special record date for the payment of such
Defaulted Interest which shall not be more than 15 nor less than ten days prior
to the date of the proposed payment and not less than ten days after the receipt
by the Trustee of the notice of the proposed payment. The Trustee shall promptly
notify the Company of such special record date and, in the name and at the
expense of the Company, shall cause notice of the proposed payment of such
Defaulted Interest and the special record date therefor to be mailed, first
class postage prepaid, to each Debentureholder at his or her address as it
appears in the Debenture Register (as hereinafter defined), not less than ten
days prior to such special record date. Notice of the proposed payment of such
Defaulted Interest and the special record date therefor having been mailed as
aforesaid, such Defaulted Interest shall be paid to the persons in whose names
such Debentures (or their Predecessor Debentures) are registered on such special
record date and shall be no longer payable pursuant to the following clause (2).
(2) The Company may make payment of any Defaulted Interest on
any Debentures in any other lawful manner not inconsistent with the requirements
of any securities exchange on which such Debentures may be listed, and upon such
notice as may be required by such exchange, if, after notice given by the
Company to the Trustee of the proposed payment pursuant to this clause, such
manner of payment shall be deemed practicable by the Trustee.
Subject to the foregoing provisions of this Section, each
Debenture of a series delivered under this Indenture upon transfer of or in
exchange for or in lieu of any other Debenture of such series shall carry the
rights to interest accrued and unpaid, and to accrue, which were carried by such
other Debenture.
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SECTION 2.07 Execution and Authentication. The Debentures shall,
subject to the provisions of Section 2.09, be printed on steel engraved borders
or fully or partially engraved, or legibly typed, as the proper officers of the
Company may determine, and shall be signed on behalf of the Company by its
Chairman, President or one of its Vice Presidents, under its corporate seal
attested by its Secretary or one of its Assistant Secretaries. The signature of
the Chairman, President or a Vice President and/or the signature of the
Secretary or an Assistant Secretary in attestation of the corporate seal, upon
the Debentures, may be in the form of a facsimile signature of a present or any
future Chairman, President or Vice President and of a present or any future
Secretary or Assistant Secretary and may be imprinted or otherwise reproduced on
the Debentures and for that purpose the Company may use the facsimile signature
of any person who shall have been a Chairman, President or Vice President, or of
any person who shall have been a Secretary or Assistant Secretary,
notwithstanding the fact that at the time the Debentures shall be authenticated
and delivered or disposed of such person shall have ceased to be the Chairman,
President or a Vice President, or the Secretary or an Assistant Secretary, of
the Company, as the case may be. The seal of the Company may be in the form of a
facsimile of the seal of the Company and may be impressed, affixed, imprinted or
otherwise reproduced on the Debentures.
Only such Debentures as shall bear thereon a Certificate of
Authentication substantially in the form provided in Exhibit A hereto, executed
manually by an authorized signatory of the Trustee, or by any Authenticating
Agent with respect to such Debentures, shall be entitled to the benefits of this
Indenture or be valid or obligatory for any purpose. Such certificate executed
by the Trustee, or by any Authenticating Agent appointed by the Trustee with
respect to such Debentures, upon any Debenture executed by the Company shall be
conclusive evidence that the Debenture so authenticated has been duly
authenticated and delivered hereunder and that the holder is entitled to the
benefits of this Indenture.
At any time and from time to time after the execution and delivery of
this Indenture, the Company may deliver Debentures executed by the Company to
the Trustee for authentication, together with a written order of the Company for
the authentication and delivery of such Debentures, signed by its Chairman,
President or any Vice President and its Treasurer or any Assistant Treasurer,
and the Trustee in accordance with such written order shall authenticate and
make available for delivery such Debentures.
In authenticating such Debentures and accepting the additional
responsibilities under this Indenture in relation to such Debentures, the
Trustee shall be entitled to receive, and (subject to Section 7.01) shall be
fully protected in relying upon, an Opinion of Counsel stating that the form and
terms thereof have been established in conformity with the provisions of this
Indenture.
The Trustee shall not be required to authenticate such Debentures if
the issue of such Debentures pursuant to this Indenture will affect the
Trustee's own rights, duties or immunities under the Debentures and this
Indenture or otherwise in a manner which is not reasonably acceptable to the
Trustee.
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SECTION 2.08 Exchange of Debentures. (a) Debentures may be exchanged
upon presentation thereof at the office or agency of the Trustee designated for
such purpose in the Borough of Manhattan, the City and State of New York, for
other Debentures of authorized denominations, and for a like aggregate principal
amount, upon payment of a sum sufficient to cover any tax or other governmental
charge in relation thereto, all as provided in this Section. In respect of any
Debentures so surrendered for exchange, the Company shall execute, the Trustee
shall authenticate and such office or agency shall deliver in exchange therefor
the Debenture or Debentures which the Debentureholder making the exchange shall
be entitled to receive, bearing numbers not contemporaneously outstanding.
(b) The Company shall keep, or cause to be kept, at its office
or agency designated for such purpose a register or registers (herein referred
to as the "Debenture Register") in which, subject to such reasonable regulations
as it may prescribe, the Company shall register the Debentures and the transfers
of Debentures as in this Article provided and which at all reasonable times
shall be open for inspection by the Trustee. The registrar for the purpose of
registering Debentures and transfer of Debentures as herein provided shall be
appointed as authorized by Board Resolution (the "Debenture Registrar").
Upon surrender for transfer of any Debenture at the office or
agency of the Trustee designated for such purpose in the Borough of Manhattan,
the City and State of New York, the Company shall execute, the Trustee shall
authenticate and such office or agency shall deliver in the name of the
transferee or transferees a new Debenture or Debentures as the Debenture
presented for a like aggregate principal amount.
All Debentures presented or surrendered for exchange or
registration of transfer, as provided in this Section, shall be accompanied (if
so required by the Company or the Debenture Registrar) by a written instrument
or instruments of transfer, in form satisfactory to the Company or the Debenture
Registrar, duly executed by the registered holder or by the registered holder's
duly authorized attorney in writing.
(c) No service charge shall be made for any exchange or
registration of transfer of Debentures, or issue of new Debentures in case of
partial redemption, but the Company may require payment of a sum sufficient to
cover any tax or other governmental charge in relation thereto, other than
exchanges pursuant to Section 2.08, the second paragraph of Section 3.03 and
Section 9.04 not involving any transfer.
(d) The Company shall not be required (i) to issue, exchange
or register the transfer of any Debentures during a period beginning at the
opening of business 15 days before the day of the mailing of a notice of
redemption of less than all the outstanding Debentures and ending at the close
of business on the day of such mailing, nor (ii) to register the transfer of or
exchange any Debentures or portions thereof called for redemption. The
provisions of this Section 2.08 are, with respect to any Global Debenture,
subject to Section 2.14 hereof.
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SECTION 2.09 Temporary Debentures. At all times prior to distribution
of Debentures to the holders of Trust Preferred Securities, and, upon such
distribution, pending the preparation of definitive Debentures, the Company may
execute, and the Trustee shall authenticate and make available for delivery,
temporary Debentures (printed, lithographed or typewritten) of any authorized
denomination, and substantially in the form of the definitive Debentures in lieu
of which they are issued, but with such omissions, insertions and variations as
may be appropriate for temporary Debentures, all as may be determined by the
Company. Every temporary Debenture shall be executed by the Company and be
authenticated by the Trustee upon the same conditions and in substantially the
same manner, and with like effect, as the definitive Debentures. Upon
distribution of Debentures to the holders of Trust Preferred Securities, without
unnecessary delay the Company will execute and will furnish definitive
Debentures and thereupon any or all temporary Debentures may be surrendered in
exchange therefor (without charge to the holders), at the office or agency of
the Trustee designated for the purpose in the Borough of Manhattan, the City and
State of New York, and the Trustee shall authenticate and such office or agency
shall deliver in exchange for such temporary Debentures an equal aggregate
principal amount of definitive Debentures of such series, unless the Company
advises the Trustee to the effect that definitive Debentures need not be
executed and furnished until further notice from the Company. Until so
exchanged, the temporary Debentures shall be entitled to the same benefits under
this Indenture as definitive Debentures authenticated and delivered hereunder.
SECTION 2.10 Replacement of Debentures. In case any temporary or
definitive Debenture shall become mutilated or be destroyed, lost or stolen, the
Company (subject to the next succeeding sentence) shall execute, and upon its
request the Trustee (subject as aforesaid) shall authenticate and make available
for delivery, a new Debenture bearing a number not contemporaneously
outstanding, in exchange and substitution for the mutilated Debenture, or in
lieu of and in substitution for the Debenture so destroyed, lost or stolen. In
every case the applicant for a substituted Debenture shall furnish to the
Company and to the Trustee such security or indemnity as may be required by them
to save each of them harmless, and, in every case of destruction, loss or theft,
the applicant shall also furnish to the Company and to the Trustee evidence to
their satisfaction of the destruction, loss or theft of the applicant's
Debenture and of the ownership thereof. The Trustee may authenticate any such
substituted Debenture and deliver the same upon the written request or
authorization of any officer of the Company. Upon the issuance of any
substituted Debenture, the Company may require the payment of a sum sufficient
to cover any tax or other governmental charge that may be imposed in relation
thereto and any other expenses (including the fees and expenses of the Trustee)
connected therewith. In case any Debenture which has matured or is about to
mature shall become mutilated or be destroyed, lost or stolen, the Company may,
instead of issuing a substitute Debenture, pay or authorize the payment of the
same (without surrender thereof except in the case of a mutilated Debenture) if
the applicant for such payment shall furnish to the Company and to the Trustee
such security or indemnity as they may require to save them harmless, and, in
case of destruction, loss or theft, evidence to the satisfaction of the Company
and the Trustee of the destruction, loss or theft of such Debenture and of the
ownership thereof.
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Every Debenture issued pursuant to the provisions of this Section in
substitution for any Debenture which is mutilated, destroyed, lost or stolen
shall constitute an additional contractual obligation of the Company, whether or
not the mutilated, destroyed, lost or stolen Debenture shall be found at any
time, or be enforceable by anyone, and shall be entitled to all the benefits of
this Indenture equally and proportionately with any and all other Debentures
duly issued hereunder. All Debentures shall be held and owned upon the express
condition that the foregoing provisions are exclusive with respect to the
replacement or payment of mutilated, destroyed, lost or stolen Debentures, and
shall preclude (to the extent lawful) any and all other rights or remedies,
notwithstanding any law or statute existing or hereafter enacted to the contrary
with respect to the replacement or payment of negotiable instruments or other
securities without their surrender.
SECTION 2.11 Cancellation of Surrendered Debentures. All Debentures
surrendered for the purpose of payment, redemption, exchange or registration of
transfer shall, if surrendered to the Company or any paying agent, be delivered
to the Trustee for cancellation, or, if surrendered to the Trustee, shall be
canceled by it, and no Debentures shall be issued in lieu thereof except as
expressly required or permitted by any of the provisions of this Indenture. On
request of the Company, the Trustee shall deliver to the Company canceled
Debentures held by the Trustee. In the absence of such request the Trustee may
dispose of canceled Debentures in accordance with its standard procedures,
provided, however, that the Trustee shall not be required to destroy such
cancelled Debentures and deliver a certificate of disposition to the Company. If
the Company shall otherwise acquire any of the Debentures, however, such
acquisition shall not operate as a redemption or satisfaction of the
indebtedness represented by such Debentures unless and until the same are
delivered to the Trustee for cancellation.
SECTION 2.12 No Rights of Third Parties. Nothing in this Indenture or
in the Debentures, express or implied, shall give or be construed to give to any
person, firm or corporation, other than the parties hereto and the holders of
the Debentures, any legal or equitable right, remedy or claim under or in
respect of this Indenture, or under any covenant, condition or provision herein
contained; all such covenants, conditions and provisions being for the sole
benefit of the parties hereto and of the holders of the Debentures.
SECTION 2.13 Authenticating Agent. So long as any of the Debentures
remains outstanding there may be an Authenticating Agent for Debentures which
the Trustee shall have the right to appoint. Said Authenticating Agent shall be
authorized to act on behalf of the Trustee to authenticate Debentures issued
upon exchange, transfer or partial redemption thereof, and Debentures so
authenticated shall be entitled to the benefits of this Indenture and shall be
valid and obligatory for all purposes as if authenticated by the Trustee
hereunder. All references in this Indenture to the authentication of Debentures
by the Trustee shall be deemed to include authentication by an Authenticating
Agent except for authentication upon original issuance or pursuant to Section
2.07 hereof. Each Authenticating Agent shall be acceptable to the Company and
shall be a corporation which has a combined capital and surplus, as most
recently reported or determined by it, sufficient under the laws of any
jurisdiction under which it is organized or in
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which it is doing business to conduct a trust business, and which is otherwise
authorized under such laws to conduct such business and is subject to
supervision or examination by Federal or State authorities. If at any time any
Authenticating Agent shall cease to be eligible in accordance with these
provisions, it shall resign immediately.
Any Authenticating Agent may at any time resign by giving written
notice of resignation to the Trustee and to the Company. The Trustee may at any
time (and upon request by the Company shall) terminate the agency of any
Authenticating Agent by giving written notice of termination to such
Authenticating Agent and to the Company. Upon resignation, termination or
cessation of eligibility of any Authenticating Agent, the Trustee may appoint an
eligible successor Authenticating Agent acceptable to the Company. Any successor
Authenticating Agent, upon acceptance of its appointment hereunder, shall become
vested with all the rights, powers and duties of its predecessor hereunder as if
originally named as an Authenticating Agent pursuant hereto.
SECTION 2.14 Global Debenture. (a) If the Debentures have been
distributed to the holders of Trust Preferred Securities, Debentureholders may
elect to hold such Debentures through the Depository, in which event the Company
shall execute and the Trustee shall, in accordance with Section 2.07,
authenticate and deliver, one or more Global Debentures which (i) shall
represent, and shall be denominated in an aggregate amount equal to the
aggregate principal amount of, all Debentures to be so held, (ii) shall be
registered in the name of the Depository or its nominee, (iii) shall be
delivered by the Trustee to the Depository or pursuant to the Depository's
instruction and (iv) shall bear a legend substantially to the following effect:
"Except as otherwise provided in Section 2.14 of the Indenture, this Debenture
may be transferred, in whole but not in part, only to another nominee of the
Depository or to a successor Depository or to a nominee of such successor
Depository."
(b) Notwithstanding the provisions of Section 2.08, the Global
Debenture may be transferred, in whole but not in part and in the manner
provided in Section 2.08, only to another nominee of the Depository for such
series, or to a successor Depository for such series selected or approved by the
Company or to a nominee of such successor Depository.
(c) If at any time the Depository notifies the Company that it
is unwilling or unable to continue as Depository for such series or if at any
time the Depository shall no longer be registered or in good standing under the
Exchange Act, or other applicable statute or regulation and a successor
Depository is not appointed by the Company within 90 days after the Company
receives such notice or becomes aware of such condition, as the case may be,
this Section 2.14 shall no longer be applicable to the Debentures and the
Company will execute, and subject to Section 2.08, the Trustee will authenticate
and make available for delivery Debentures in definitive registered form without
coupons, in authorized denominations, and in an aggregate principal amount equal
to the principal amount of the Global Debentures in exchange for such Global
Debenture. In addition, the Company may at any time determine that the
Debentures shall no longer be represented by one or more Global Debentures and
that the provisions of this
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Section 2.14 shall no longer apply to the Debentures. In such event the Company
will execute and subject to Section 2.08, the Trustee, upon receipt of an
Officers' Certificate evidencing such determination by the Company, will
authenticate and deliver Debentures in definitive registered form without
coupons, in authorized denominations, and in an aggregate principal amount equal
to the principal amount of the Global Debentures in exchange for such Global
Debentures. Upon the exchange of the Global Debentures for such Debentures in
definitive registered form without coupons, in authorized denominations, the
Global Debentures shall be canceled by the Trustee. Such Debentures in
definitive registered form issued in exchange for the Global Debentures pursuant
to this Section 2.14(c) shall be registered in such names and in such authorized
denominations as the Depository, pursuant to instructions from its direct or
indirect participants or otherwise, shall instruct the Trustee. The Trustee
shall make available for delivery such Debentures to the Depository for delivery
to the persons in whose names such Debentures are so registered.
SECTION 2.15 CUSIP Numbers. The Company in issuing Debentures may use
"CUSIP" numbers (if then generally in use), and, if so, the Trustee shall use
"CUSIP" numbers in notices of redemption as a convenience to Debentureholders;
provided, that any such notice may state that no representation is made as to
the correctness of such numbers either as printed on the Debentures or as
contained in any notice of a redemption and that reliance may be placed only on
the other identification numbers printed on the Debentures, and any such
redemption shall not be affected by any defect in or omission of such numbers.
The Company will promptly notify the Trustee of any change in the CUSIP numbers.
ARTICLE THREE
OPTIONAL REDEMPTION OF DEBENTURES
SECTION 3.01 Optional Redemption. Except as provided in Section 3.02,
the Debentures may not be redeemed by the Company prior to __________, 2002.
Subject to the terms of this Article Three, the Company shall have the right to
redeem the Debentures, in whole or in part, from time to time, on or after
__________, 2002, at a redemption price equal to 100% of the principal amount to
be redeemed plus any accrued and unpaid interest thereon, including Compounded
Interest, if any, to the date of such redemption (the "Optional Redemption
Price"). Any redemption pursuant to this paragraph will be made upon not less
than 30 nor more than 60 days' notice, at the Optional Redemption Price.
SECTION 3.02 Redemption upon Tax Event; Shortening of Stated Maturity.
If, at any time, a Tax Event (as defined below) shall occur or be continuing
after receipt of a Dissolution Tax Opinion (as defined below) and (i) the
Regular Trustees of the Trust and the Company shall have received an opinion (a
"Redemption Tax Opinion") of a 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 Company would be precluded from deducting the
interest on the Debentures for United States federal income tax purposes even if
(a) the Debentures were distributed to the holders of Trust
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Preferred Securities and Common Securities in liquidation of such holder's
interest in the Trust as set forth in the Declaration or (b) the Corporation
shortened the Stated Maturity of the Debentures as described in the last
sentence of this paragraph, and (ii) the Regular Trustees shall have been
informed by such tax counsel that a No Recognition Opinion (as defined below)
cannot be delivered to the Trust, the Company shall have the right at any time,
upon not less than 30 nor more than 60 days notice, to redeem the Debentures in
whole or in part for cash at a redemption price equal to 101% of the principal
amount of the Debentures if the Redemption occurs prior to ____________, 2002 or
100% thereafter, within 90 days following the occurrence of such Tax Event;
provided, however, that, if at the time there is available to the Company or the
Trustee, on behalf of the Trust the opportunity to eliminate, within such 90 day
period, the Tax Event by taking some ministerial action ("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 Company or the
holders of the Trust Preferred Securities, the Company or the Trustee on behalf
of the Trust will pursue such measure in lieu of redemption and provided further
that the Company shall have no right to redeem the Debentures while the Regular
Trustees on behalf of SunSource Capital Trust are pursuing any such Ministerial
Action. In addition to taking any Ministerial Action, if a Tax Event occurs and
is continuing and in the opinion of nationally recognized independent tax
counsel to the Trust, there would in all cases, after effecting the termination
of the Trust and the distribution of the Debentures to the holders of the Trust
Preferred Securities in exchange therefor upon liquidation of the Trust, be more
than an insubstantial risk that the Tax Event would continue, then the
Corporation shall have the right to shorten the stated maturity of the
Debentures (and thereby cause the Trust Preferred Securities to be redeemed on
such earlier date) to the latest date (which date shall in no event be earlier
than September 30, 2002) permissible without adversely affecting the
deductibility under federal income tax law of interest payable on the
Debentures, such that, in the opinion of nationally recognized independent tax
counsel to the Trust, after advancing the stated maturity of the Debentures,
interest paid on the Debentures will be deductible by the Corporation for
federal income tax purposes.
"Tax Event" means that the Company and the Regular Trustees shall have
obtained an opinion of nationally recognized independent tax counsel experienced
in such matters (a "Dissolution Tax Opinion") 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 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
announced 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 Debentures, (ii) the Trust is, or will be
within 90 days of the date thereof, subject to more than a de minimis amount of
taxes, duties or other governmental charges or (iii) interest payable by the
Company to the Trust on the Debentures is not, or within 90 days of the date
thereof will not be, deductible by the Company for United States federal income
tax purposes.
"No Recognition Opinion" means an opinion of a nationally recognized
independent tax counsel experienced in such matters, which opinion may rely on
any then applicable published revenue ruling 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 a
dissolution of the Trust and distribution of the Debentures as provided in the
Declaration.
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SECTION 3.03 Notice of Redemption. (a) In case the Company shall desire
to exercise such right to redeem all or, as the case may be, a portion of the
Debentures in accordance with the right reserved so to do, it shall give notice
of such redemption to holders of the Debentures to be redeemed by mailing, first
class postage prepaid, a notice of such redemption not less than 30 days and not
more than 60 days before the date fixed for redemption to such holders at their
last addresses as they shall appear upon the Debenture Register. Any notice
which is mailed in the manner herein provided shall be conclusively presumed to
have been duly given, whether or not the registered holder receives the notice.
In any case, failure duly to give such notice to the holder of any Debenture
designated for redemption in whole or in part, or any defect in the notice,
shall not affect the validity of the proceedings for the redemption of any other
Debentures. In the case of any redemption of Debentures prior to the expiration
of any restriction on such redemption provided in the terms of such Debentures
or elsewhere in this Indenture, the Company shall furnish the Trustee with an
Officers' Certificate evidencing compliance with any such restriction.
Each such notice of redemption shall include the CUSIP numbers of
Debentures to be redeemed and shall specify the date fixed for redemption and
the redemption price at which Debentures are to be redeemed, and shall state
that payment of the redemption price of such Debentures to be redeemed will be
made at the office or agency of the Trustee in the Borough of Manhattan, the
City and State of New York, upon presentation and surrender of such Debentures,
that interest accrued to the date fixed for redemption will be paid as specified
in said notice, and that from and after said date interest will cease to accrue.
If less than all the Debentures are to be redeemed, the notice to the holders of
Debentures to be redeemed in whole or in part shall specify the particular
Debentures to be so redeemed. In case any Debenture is to be redeemed in part
only, the notice which relates to such Debenture shall state the portion of the
principal amount thereof to be redeemed, and shall state that on and after the
redemption date, upon surrender of such Debenture, a new Debenture or Debentures
in principal amount equal to the unredeemed portion thereof will be issued.
By 10:00 a.m., New York City time, on the redemption date, the Company
will deposit irrevocably with the 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 Debentures.
(b) If less than all the Debentures are to be redeemed, the Company
shall give the Trustee at least 45 days notice in advance of the date fixed for
redemption as to the aggregate principal amount of Debentures to be redeemed,
and thereupon the Trustee shall select, by lot or in such other manner as it
shall deem appropriate and fair in its discretion and which may provide for the
selection of a portion or portions (equal to $25 or any integral multiple
thereof) of the principal amount of such Debentures of a denomination larger
than $25, the Debentures to be redeemed and shall thereafter promptly notify the
Company in writing of the numbers of the Debentures to be redeemed, in whole or
in part.
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The Company may, if and whenever it shall so elect, by delivery of
instructions signed on its behalf by its Chairman, President or any Vice
President, instruct the Trustee or any paying agent to call all or any part of
the Debentures for redemption and to give notice of redemption in the manner set
forth in this Section, such notice to be in the name of the Company or its own
name as the Trustee or such paying agent may deem advisable. In any case in
which notice of redemption is to be given by the Trustee or any such paying
agent, the Company shall deliver or cause to be delivered to, or permit to
remain with, the Trustee or such paying agent, as the case may be, such
Debenture Register, transfer books or other records, or suitable copies or
extracts therefrom, sufficient to enable the Trustee or such paying agent to
give any notice by mail that may be required under the provisions of this
Section.
SECTION 3.04 Surrender of Debentures. (a) If the giving of notice of
redemption shall have been completed as above provided, the Debentures or
portions of Debentures to be redeemed specified in such notice shall become due
and payable on the date and at the place stated in such notice at the applicable
redemption price, together with interest (including Compounded Interest) accrued
to the date fixed for redemption and interest on such Debentures or portions of
Debentures shall cease to accrue on and after the date fixed for redemption,
unless the Company shall default in the payment of such redemption price and
accrued interest with respect to any such Debenture or portion thereof. On
presentation and surrender of such Debentures on or after the date fixed for
redemption at the place of payment specified in the notice, said Debentures
shall be paid and redeemed at the applicable redemption price, together with
interest (including Compounded Interest) accrued thereon to the date fixed for
redemption (but if the date fixed for redemption is an Interest Payment Date,
the interest installment payable on such date shall be payable to the registered
holder at the close of business on the applicable record date pursuant to
Section 2.03).
(b) Upon presentation of any Debenture which is to be redeemed
in part only, the Company shall execute and the Trustee shall authenticate and
the office or agency where the Debenture is presented shall deliver to the
holder thereof, at the expense of the Company, a new Debenture or Debentures, of
authorized denominations in principal amount equal to the unredeemed portion of
the Debenture so presented.
ARTICLE FOUR
PARTICULAR COVENANTS OF THE COMPANY
The Company covenants and agrees as follows:
SECTION 4.01 Payments of Principal and Interest. The Company will duly
and punctually pay or cause to be paid the principal of (and premium, if any)
and interest on the Debentures at the time and place and in the manner provided
herein and established with respect to the Debentures.
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SECTION 4.02 Maintain Office or Agency. So long as the Debentures
remain outstanding, the Company agrees to maintain an office or agency with
respect to the Debentures, where (i) Debentures may be presented for payment,
(ii) Debentures may be presented as hereinabove authorized for registration of
transfer and exchange, and (iii) notices and demands to or upon the Company in
respect of the Debentures and this Indenture may be given or served, such
designation to continue with respect to such office or agency until the Company
shall, by written notice signed by its Chairman, President or a Vice President
and delivered to the Trustee, designate some other office or agency for such
purposes or any of them. If at any time the Company shall fail to maintain any
such required office or agency or shall fail to furnish the Trustee with the
address thereof, such presentations, notices and demands may be made or served
at the Corporate Trust Office of the Trustee, and the Company hereby appoints
the Trustee as its agent to receive all such presentations, notices and demands.
SECTION 4.03 Appointment of Paying Agent. (a) If the Company shall
appoint one or more paying agents for the Debentures, other than the Trustee,
the Company will cause each such paying agency to execute and deliver to the
Trustee an instrument in which such agent shall agree with the Trustee, subject
to the provisions of this Section:
(1) that it will hold all sums held by it as such agent for
the payment of the principal of (and premium, if any) or interest on the
Debentures (whether such sums have been paid to it by the Company or by any
other obligor of such Debentures) in trust for the benefit of the persons
entitled thereto:
(2) that it will give the Trustee notice of any failure by the
Company (or by any other obligor of such Debentures) to make any payment of the
principal of (and premium, if any) or interest on the Debentures when the same
shall be due and payable;
(3) that it will, at any time during the continuance of any
failure referred to in the preceding paragraph (a)(2) above, upon the written
request of the Trustee, forthwith pay to the Trustee all sums so held in trust
by such paying agent; and
(4) that it will perform all other duties of paying agent as
set forth in this Indenture.
(b) If the Company shall act as its own paying agent with
respect to any series of the Debentures, it will on or before each due date of
the principal of (and premium, if any) or interest on Debentures, set aside,
segregate and hold in trust for the benefit of the persons entitled thereto a
sum sufficient to pay such principal (and premium, if any) or interest so
becoming due on Debentures until such sums shall be paid to such persons or
otherwise disposed of as herein provided and will promptly notify the Trustee of
such action, or any failure (by it or any other obligor on such Debentures) to
take such action. Whenever the Company shall have one or more paying agents, it
will, by 10:00 a.m., New York City time, on each due date of the principal of
(and premium, if any) or interest on any Debentures, deposit with the paying
agent a sum
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sufficient to pay the principal (and premium, if any) or interest so becoming
due, such sum to be held in trust for the benefit of the persons entitled to
such principal, premium or interest, and (unless such paying agent is the
Trustee) the Company will promptly notify the Trustee of its action or failure
so to act.
(c) Anything in this Section to the contrary notwithstanding,
(i) the agreement to hold sums in trust as provided in this Section is subject
to the provisions of Section 11.04, and (ii) the Company may at any time, for
the purpose of obtaining the satisfaction and discharge of this Indenture or for
any other purpose, pay, or direct any paying agent to pay, to the Trustee all
sums held in trust by the Company or such paying agent, such sums to be held by
the Trustee upon the same terms and conditions as those upon which such sums
were held by the Company or such paying agent; and, upon such payment by any
paying agent to the Trustee, such paying agent shall be released from all
further liability with respect to such money.
SECTION 4.04 Appointment of Trustee. The Company, whenever necessary to
avoid or fill a vacancy in the office of Trustee, will appoint, in the manner
provided in Section 7.10, a Trustee, so that there shall at all times be a
Trustee hereunder.
SECTION 4.05 Restrictions upon Dividends, Redemptions, etc. So long as
any Trust Preferred Securities remain outstanding, the Company will not declare
or pay any dividend 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, if at such time (i) the
Company shall be in default with respect to its Guarantee Payments (as defined
in the Guarantee Agreement) or other payment obligations under the Guarantee
Agreement, (ii) there shall have occurred any Event of Default hereunder or
(iii) the Company shall have given notice of its selection of an Extension
Period and such Period, or any extension thereof, is continuing.
SECTION 4.06 Listing of Debentures. In connection with the distribution
of the Debentures to the holders of the Trust Preferred Securities, the Company
will use its best efforts to list such Debentures on the New York Stock Exchange
or on such other exchange as the Trust Preferred Securities are then listed and
traded.
SECTION 4.07 Compliance with Declaration. The Company covenants and
agrees for the benefit of the holders of the Trust Preferred Securities to
comply fully with all of its obligations and agreements under the Declaration,
including, without limitation, its obligations under Article IV thereof.
SECTION 4.08 Transfer of Trust Common Securities. Prior to the
distribution of Debentures to the holders of Trust Preferred Securities and for
so long as the Trust Preferred Securities remain outstanding, the Company
covenants and agrees for the benefit of the holders of the Preferred Securities
(i) not to cause or permit the Trust Common Securities to be transferred except
as permitted by the Declaration, (ii) to comply fully with all of its
obligations
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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 the Debentures
as provided in the Declaration.
ARTICLE FIVE
DEBENTUREHOLDERS' LISTS AND REPORTS BY
THE COMPANY AND THE TRUSTEE
SECTION 5.01 List of Debentureholders. The Company will furnish or
cause to be furnished to the Trustee (a) on a monthly basis on each regular
record date (as defined in Section 2.03) a list, in such form as the Trustee may
reasonably require, of the names and addresses of the holders of Debentures as
of such regular record date, provided, that the Company shall not be obligated
to furnish or cause to furnish such list at any time that the list shall not
differ in any respect from the most recent list furnished to the Trustee by the
Company and (b) at such other times as the Trustee may request in writing within
30 days after the receipt by the Company of any such request, a list of similar
form and content as of a date not more than 15 days prior to the time such list
is furnished; provided, however, no such list need be furnished for any series
for which the Trustee shall be the Debenture Registrar.
SECTION 5.02 Preservation and Disclosure of List. (a) The Trustee shall
preserve, in as current a form as is reasonably practicable, all information as
to the names and addresses of the holders of Debentures contained in the most
recent list furnished to it as provided in Section 5.01 and as to the names and
addresses of holders of Debentures received by the Trustee in its capacity as
Debenture Registrar (if acting in such capacity).
(b) The Trustee may destroy any list furnished to it as
provided in Section 5.01 upon receipt of a new list so furnished.
(c) In case three or more holders of Debentures (hereinafter
referred to as "applicants") apply in writing to the Trustee, and furnish to the
Trustee reasonable proof that each such applicant has owned a Debenture for a
period of at least six months preceding the date of such application, and such
application states that the applicants desire to communicate with other holders
of Debentures or holders of all Debentures with respect to their rights under
this Indenture or under such Debentures, and is accompanied by a copy of the
form of proxy or other communication which such applicants propose to transmit,
then the Trustee shall within five business days after the receipt of such
application, at its election, either:
(1) afford to such applicants access to the information
preserved at the time by the Trustee in accordance with the provisions of
subsection (a) of this Section 5.02; or
(2) inform such applicants as to the approximate number of
holders of
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Debentures whose names and addresses appear in the information preserved at the
time by the Trustee, in accordance with the provisions of subsection (a) of this
Section 5.02, and as to the approximate cost of mailing to such Debentureholders
the form of proxy or other communication, if any, specified in such application.
(d) If the Trustee shall elect not to afford such applicants
access to such information, the Trustee shall, upon the written request of such
applicants, mail to each holder of Debentures whose name and address appears in
the information preserved at the time by the Trustee in accordance with the
provisions of subsection (a) of this Section 5.02, a copy of the form of proxy
or other communication which is specified in such request, with reasonable
promptness after a tender to the Trustee of the material to be mailed and of
payment, or provision for the payment, of the reasonable expenses of mailing,
unless within five days after such tender, the Trustee shall mail to such
applicants and file with the Securities and Exchange Commission (the
"Commission"), together with a copy of the material to be mailed, a written
statement to the effect that, in the opinion of the Trustee, such mailing would
be contrary to the best interests of the holders of Debentures, or would be in
violation of applicable law. Such written statement shall specify the basis of
such opinion. If the Commission, after opportunity for a hearing upon the
objections specified in the written statement so filed, shall enter an order
refusing to sustain any of such objections or if, after the entry of an order
sustaining one or more of such objections, the Commission shall find, after
notice and opportunity for hearing, that all the objections so sustained have
been met and shall enter an order so declaring, the Trustee shall mail copies of
such material to all such Debentureholders with reasonable promptness after the
entry of such order and the renewal of such tender; otherwise, the Trustee shall
be relieved of any obligation or duty to such applicants respecting their
application.
(e) Each and every holder of the Debentures, by receiving and
holding the same, agrees with the Company and the Trustee that neither the
Company nor the Trustee nor any paying agent nor any Debenture Registrar shall
be held accountable by reason of the disclosure of any such information as to
the names and addresses of the holders of Debentures in accordance with the
provisions of subsection (b) of this Section, regardless of the source from
which such information was derived, and that the Trustee shall not be held
accountable by reason of mailing any material pursuant to a request made under
said subsection (b).
SECTION 5.03 Documents Provided to Trustee. (a) The Company covenants
and agrees to file with the Trustee, within 15 days after the Company is
required to file the same with the Commission, copies of the annual reports and
of the information, documents and other reports (or copies of such portions of
any of the foregoing as the Commission may from time to time by rules and
regulations prescribe) which the Company may be required to file with the
Commission pursuant to Section 13 or Section 15 (d) of the Exchange Act; or, if
the Company is not required to file information, documents or reports pursuant
to either of such sections, then to file with the Trustee and the Commission in
accordance with the rules and regulations prescribed from time to time by the
Commission, such of the supplementary and periodic information, documents and
reports which may be required pursuant to Section 13 of the Exchange Act, in
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respect of a security listed and registered on a national securities exchange as
may be prescribed from time to time in such rules and regulations.
(b) The Company covenants and agrees to file with the Trustee
and the Commission, in accordance with the rules and regulations prescribed from
time to time by the Commission, such additional information, documents and
reports with respect to compliance by the Company with the conditions and
covenants provided for in this Indenture as may be required from time to time by
such rules and regulations.
(c) The Company covenants and agrees to transmit by mail,
first class postage prepaid, or reputable over-night delivery service which
provides for evidence of receipt, to the Debentureholders, as their names and
addresses appear upon the Debenture Register, within 30 days after the filing
thereof with the Trustee, such summaries of any information, documents and
reports required to be filed by the Company pursuant to subsections (a) and (b)
of this Section as may be required by rules and regulations prescribed from time
to time by the Commission.
(d) The Company covenants and agrees to furnish to the
Trustee, on or before April 15 in each calendar year in which any of the
Debentures are outstanding, or on or before such other day in each calendar year
as the Company and the Trustee may from time to time agree upon, a Certificate
as to such officer's knowledge of the Company's compliance with all conditions
and covenants under this Indenture. For purposes of this subsection (d), such
compliance shall be determined without regard to any period of grace or
requirement of notice provided under this Indenture.
SECTION 5.04 Information to Debentureholders. (a) On or before August 1
in each year in which any of the Debentures are outstanding, the Trustee shall
transmit by mail, first class postage prepaid, to the Debentureholders, as their
names and addresses appear upon the Debenture Register, a brief report dated as
of the preceding June 1, with respect to any of the following events which may
have occurred within the previous twelve months (but if no such event has
occurred within such period no report need be transmitted):
(1) any change to its eligibility under Section 7.09, and its
qualifications under Section 7.08;
(2) the creation of or any material change to a relationship
specified in paragraphs (1) through (10) of subsection (c) of Section 7.08;
(3) the character and amount of any advances (and if the
Trustee elects so to state, the circumstances surrounding the making thereof)
made by the Trustee (as such) which remain unpaid on the date of such report,
and for the reimbursement of which it claims or may claim a lien or charge,
prior to that of the Debentures, on any property or funds held or collected by
it as Trustee if such advances so remaining unpaid aggregate more than 1/2 of 1%
of the principal amount of the Debentures outstanding on the date of such
report;
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(4) any change to the amount, interest rate, and maturity date
of all other indebtedness owing by the Company, or by any other obligor on the
Debentures, to the Trustee in its individual capacity, on the date of such
report, with a brief description of any property held as collateral security
therefor, except any indebtedness based upon a creditor relationship arising in
any manner described in paragraph (2), (3), (4), or (6) of subsection (b) of
Section 7.13;
(5) any change to the property and funds, if any, physically
in the possession of the Trustee as such on the date of such report;
(6) any release, or release and substitution, of property
subject to the lien of this Indenture (and the consideration thereof, if any)
which it has not previously reported;
(7) any additional issue of Debentures which the Trustee has
not previously reported; and
(8) any action taken by the Trustee in the performance of its
duties under this Indenture which it has not previously reported and which in
its opinion materially affects the Debentures or the Debentures of any series,
except any action in respect of a default, notice of which has been or is to be
withheld by it in accordance with the provisions of Section 6.07.
(b) The Trustee shall transmit by mail, first class postage
prepaid, to the Debentureholders, as their names and addresses appear upon the
Debenture Register, a brief report with respect to the character and amount of
any advances (and if the Trustee elects so to state, the circumstances
surrounding the making thereof) made by the Trustee as such since the date of
the last report transmitted pursuant to the provisions of subsection (a) of this
Section (or if no such report has yet been so transmitted, since the date of
execution of this Indenture), for the reimbursement of which it claims or may
claim a lien or charge prior to that of the Debentures on property or funds held
or collected by it as Trustee, and which it has not previously reported pursuant
to this subsection if such advances remaining unpaid at any time aggregate more
than 10% of the principal amount of Debentures outstanding at such time, such
report to be transmitted within 90 days after such time.
(c) A copy of each such report shall, at the time of such
transmission to Debentureholders, be filed by the Trustee with the Company, with
each stock exchange upon which any Debentures are listed (if so listed) and also
with the Commission. The Company agrees to notify the Trustee when any
Debentures become listed on any stock exchange.
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ARTICLE SIX
REMEDIES OF THE TRUSTEE AND DEBENTUREHOLDERS ON EVENT OF DEFAULT
SECTION 6.01 Events of Default. (a) Whenever used herein with respect
to Debentures, "Event of Default" means any one or more of the following events
which has occurred and is continuing:
(1) default in the payment of any installment of interest upon
any of the Debentures, as and when the same shall become due and payable, and
continuance of such default for a period of 30 days; provided, however, that a
valid extension of an interest payment period by the Company in accordance with
the terms hereof, shall not constitute a default in the payment of interest for
this purpose;
(2) default in the payment of the principal of (or premium, if
any, on) any of the Debentures as and when the same shall become due and payable
whether at maturity, upon redemption, by declaration or otherwise;
(3) failure on the part of the Company duly to observe or
perform any other of the covenants or agreements on the part of the Company
contained in such Debentures or otherwise established with respect to such
Debentures or contained in this Indenture for a period of 90 days after the date
on which written notice of such failure, requiring the same to be remedied and
stating that such notice is a "Notice of Default" hereunder, shall have been
given to the Company by the Trustee, by registered or certified mail, or to the
Company and the Trustee by the holders of at least 25% in principal amount of
the Debentures at the time outstanding;
(4) a decree or order by a court having jurisdiction in the
premises shall have been entered adjudging the Company as bankrupt or insolvent,
or approving as properly filed a petition seeking liquidation or reorganization
of the Company under the Federal Bankruptcy Code or any other similar applicable
Federal or State law, and such decree or order shall have continued unvacated
and unstayed for a period of 90 days; or an involuntary case shall be commenced
under such Code in respect of the Company and shall continue undismissed for a
period of 90 days or an order for relief in such case shall have been entered;
or a decree or order of a court having jurisdiction in the premises shall have
been entered for the appointment on the ground of insolvency or bankruptcy of a
receiver or custodian or liquidator or Trustee or assignee in bankruptcy or
insolvency of the Company or of its property, or for the winding up or
liquidation of its affairs, and such decree or order shall have remained in
force unvacated and unstayed for a period of 90 days; or
(5) the Company shall institute proceedings to be adjudicated
a voluntary bankrupt, or shall consent to the filing of a bankruptcy proceeding
against it, or shall file a petition or answer or consent seeking liquidation or
reorganization under the Federal Bankruptcy
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Code or any other similar applicable Federal or State law, or shall consent to
the filing of any such petition, or shall consent to the appointment on the
ground of insolvency or bankruptcy of a receiver or custodian or liquidator or
Trustee or assignee in bankruptcy or insolvency of it or of its property, or
shall make an assignment for the benefit of creditors.
(b) In each and every such case, unless the principal of all
the Debentures of that series shall have already become due and payable, either
the Trustee or the holders of not less than 25% in aggregate principal amount of
the Debentures then outstanding hereunder, by notice in writing to the Company
(and to the Trustee if given by such Debentureholders), may declare the
principal of all the Debentures to be due and payable immediately, and upon any
such declaration the same shall become and shall be immediately due and payable,
anything contained in this Indenture or in the Debentures to the contrary
notwithstanding.
(c) Section 6.01(b), however, is subject to the condition that
if, at any time after the principal of the Debentures shall have been so
declared due and payable, and before any judgment or decree for the payment of
the moneys due shall have been obtained or entered as hereinafter provided, the
Company shall pay or shall deposit with the Trustee a sum sufficient to pay all
matured installments of interest upon all the Debentures and the principal of
(and premium, if any, on) any and all Debentures that shall have become due
otherwise than by acceleration (with interest upon such principal and premium,
if any, and, to the extent that such payment is enforceable under applicable
law, upon overdue installments of interest, at the rate per annum expressed in
the Debentures to the date of such payment or deposit) and the amount payable to
the Trustee under Section 7.06, and any and all defaults under the Indenture,
other than the nonpayment of principal on Debentures which shall not have become
due by their terms, shall have been remedied or waived as provided in Section
6.06 then and in every such case the holders of a majority in aggregate
principal amount of the Debentures then outstanding (subject to, in the case of
Debentures held as trust assets of the Trust and with respect to which a
Security Exchange has not theretofore occurred, such consent of the holders of
the Preferred Securities and the Common Securities of the Trust as may be
required under the Declaration), by written notice to the Company and to the
Trustee, may rescind and annul such declaration and its consequences with
respect to the Debentures; but no such rescission and annulment shall extend to
or shall affect any subsequent default, or shall impair any right consequent
thereon.
(d) In case the Trustee shall have proceeded to enforce any
right with respect to the Debentures and such proceedings shall have been
discontinued or abandoned because of such rescission or annulment or for any
other reason or shall have been determined adversely to the Trustee, then and in
every such case the Company and the Trustee shall be restored respectively to
their former positions and rights hereunder, and all rights, remedies and powers
of the Company and the Trustee shall continue as though no such proceedings had
been taken.
(e) If, prior to a Security Exchange with respect to the
Debentures of any series, a Default with respect to the Debentures of such
series shall have occurred, the Company expressly acknowledges that under the
circumstances set forth in the Declaration, any holder of Preferred
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Securities of the Trust may enforce directly against the Company the applicable
Property Trustee's rights hereunder. In furtherance of the foregoing and for the
avoidance of any doubt, the Company acknowledges that, under the circumstances
described in the Declaration, any such holder of Preferred Securities, in its
own name, in the name of the Trust or in the name of the holders of the
Preferred Securities issued by the Trust, may institute or cause to be
instituted a proceeding, including, without limitation, any suit in equity, an
action at law or other judicial or administrative proceeding, to enforce the
applicable Property Trustee's rights hereunder directly against the Company as
issuer of the applicable series of Debentures, and may prosecute such proceeding
to judgment or final decree, and enforce the same against the Company.
SECTION 6.02 Payment by the Company. (a) The Company covenants that (1)
in case default shall be made in the payment of any installment of interest on
any of the Debentures as and when the same shall have become due and payable,
and such default shall have continued for a period of ten business days, or (2)
in case default shall be made in the payment of the principal of (or premium, if
any, on) any of the Debentures when the same shall have become due and payable,
whether upon maturity of the Debentures or upon redemption or upon declaration
or otherwise, then, upon demand of the Trustee, the Company will pay to the
Trustee, for the benefit of the holders of the Debentures, the whole amount that
then shall have become due and payable on all such Debentures for principal (and
premium, if any) or interest, or both, as the case may be, with interest upon
the overdue principal (and premium, if any) and (to the extent that payment of
such interest is enforceable under applicable law and without duplication of any
other amounts paid by the Company or the Trust in respect thereof) upon overdue
installments of interest at the rate per annum expressed in the Debentures; and,
in addition thereto, such further amount as shall be sufficient to cover the
costs and expenses of collection, and the amount payable to the Trustee under
Section 7.06.
(b) In case the Company shall fail forthwith to pay such
amounts upon such demand, the Trustee, in its own name and as Trustee of an
express trust, shall be entitled and empowered to institute any action or
proceedings at law or in equity for the collection of the sums so due and
unpaid, and may prosecute any such action or proceeding to judgment or final
decree, and may enforce any such judgment or final decree against the Company or
other obligor upon the Debentures and collect in the manner provided by law out
of the property of the Company or other obligor upon the Debentures wherever
situated the moneys adjudged or decreed to be payable.
(c) In case of any receivership, insolvency, liquidation,
bankruptcy, reorganization, readjustment, arrangement, composition or other
judicial proceedings affecting the Company, any other obligor on such
Debentures, or the creditors or property of either, the Trustee shall have the
power to intervene in such proceedings and take any action therein that may be
permitted by the court and shall (except as may be otherwise provided by law) be
entitled to file such proofs of claim and other papers and documents as may be
necessary or advisable in order to have the claims of the Trustee and of the
holders of Debentures allowed for the entire amount due and payable by the
Company or such other obligor under the Indenture at the date of
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institution of such proceedings and for any additional amount which may become
due and payable by the Company or such other obligor after such date, and to
collect and receive any moneys or other property payable or deliverable on any
such claim, and to distribute the same after the deduction of the amount payable
to the Trustee under Section 7.06; and any receiver, assignee or Trustee in
bankruptcy or reorganization is hereby authorized by each of the holders of
Debentures to make such payments to the Trustee, and, in the event that the
Trustee shall consent to the making of such payments directly to such
Debentureholders, to pay to the Trustee any amount due it under Section 7.06.
(d) All rights of action and of asserting claims under this
Indenture, or under any of the terms established with respect to Debentures, may
be enforced by the Trustee without the possession of any of such Debentures, or
the production thereof at any trial or other proceeding relative thereto, and
any such suit or proceeding instituted by the Trustee shall be brought in its
own name as Trustee of an express trust, and any recovery of judgment shall,
after provision for payment to the Trustee of any amounts due under Section
7.06, be for the ratable benefit of the holders of the Debentures.
In case of an Event of Default hereunder, the Trustee may in its
discretion proceed to protect and enforce the rights vested in it by this
Indenture by such appropriate judicial proceedings as the Trustee shall deem
most effectual to protect and enforce any of such rights, either at law or in
equity or in bankruptcy or otherwise, whether for the specific enforcement of
any covenant or agreement contained in the Indenture or in aid of the exercise
of any power granted in this Indenture, or to enforce any other legal or
equitable right vested in the Trustee by this Indenture or by law.
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Debentureholder any
plan of reorganization, arrangement, adjustment or composition affecting the
Debentures or the rights of any holder thereof or to authorize the Trustee to
vote in respect of the claim of any Debentureholder in any such proceeding.
SECTION 6.03 Application of Payments. Any moneys collected by the
Trustee pursuant to Section 6.02 shall be applied in the order following, at the
date or dates fixed by the Trustee and, in case of the distribution of such
moneys on account of principal (or premium, if any) or interest, upon
presentation of the several Debentures of that series, and stamping thereon the
payment, if only partially paid, and upon surrender thereof if fully paid:
FIRST: To the payment of costs and expenses of collection and of all
amounts payable to the Trustee under Section 7.06;
SECOND: To the payment of the amounts then due and unpaid upon
Debentures for principal (and premium, if any) and interest, in respect of which
or for the benefit of which such money has been collected, ratably, without
preference or priority of any kind, according to the
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amounts due and payable on such Debentures for principal (and premium, if any)
and interest, respectively; and
THIRD: To the Company.
SECTION 6.04 Limitation on Suits. No holder of any Debenture shall have
any right by virtue or by availing of any provision of this Indenture to
institute any suit, action or proceeding in equity or at law upon or under or
with respect to this Indenture or for the appointment of a receiver or Trustee,
or for any other remedy hereunder, unless such holder previously shall have
given to the Trustee written notice of an Event of Default and of the
continuance thereof with respect to Debentures specifying such Event of Default,
as hereinbefore provided, and unless also the holders of not less than 25% in
aggregate principal amount of the Debentures then outstanding shall have made
written request upon the Trustee to institute such action, suit or proceeding in
its own name as Trustee hereunder and shall have offered to the Trustee such
reasonable indemnity as it may require against the costs, expenses and
liabilities to be incurred therein or thereby, and the Trustee for 60 days after
its receipt of such notice, request and offer of indemnity, shall have failed to
institute any such action, suit or proceeding; it being understood and intended,
and being expressly covenanted by the taker and holder of every Debenture with
every other such taker and holder and Trustee, that no one or more holders of
Debentures shall have any right in any manner whatsoever by virtue or by
availing of any provision of this Indenture to affect, disturb or prejudice the
rights of the holders of any other of such Debentures, or to obtain or seek to
obtain priority over or preference to any other such holder, or to enforce any
right under this Indenture, except in the manner herein provided and for the
equal, ratable and common benefit of all holders of Debentures. For the
protection and enforcement of the provisions of this Section, each and every
Debentureholder and the Trustee shall be entitled to such relief as can be given
either at law or in equity.
Notwithstanding any other provisions of this Indenture, however, the
right of any holder of any Debenture to receive payment of the principal of (and
premium, if any) and interest on such Debenture, as therein provided, on or
after the respective due dates expressed in such Debenture (or in the case of
redemption, on the redemption date), or to institute suit for the enforcement of
any such payment on or after such respective dates or redemption date, shall not
be impaired or affected without the consent of such holder.
SECTION 6.05 Remedies Cumulative; Waivers. (a) All powers and remedies
given by this Article to the Trustee or to the Debentureholders shall, to the
extent permitted by law, be deemed cumulative and not exclusive of any others
thereof or of any other powers and remedies available to the Trustee or the
holders of the debentures, by judicial proceedings or otherwise, to enforce
performance or observance of the covenants and agreements contained in this
Indenture or otherwise established with respect to such Debentures.
(b) No delay or omission of the Trustee or of any holder of
any of the Debentures to exercise any right or power accruing upon any Event of
Default occurring and
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continuing as aforesaid shall impair any such right or power, or shall be
construed to be a waiver of any such default or an acquiescence therein; and,
subject to the provisions of Section 6.04, every power and remedy given by this
Article or by law to the Trustee or to the Debentureholders may be exercised
from time to time, and as often as shall be deemed expedient, by the Trustee or
by the Debentureholders.
SECTION 6.06 Direction by Debentureholders. The holders of a majority
in aggregate principal amount of the Debentures at the time outstanding,
determined in accordance with Section 8.04 (with, in the case of any series of
Debentures held as trust assets of the Trust and with respect to which a
Security Exchange has not theretofore occurred, such consent of holders of the
Trust Preferred Securities and the Trust Common Securities of the Trust as may
be required under the Declaration), shall have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Trustee, or exercising any trust or power conferred on the Trustee with respect
to such series; provided, however, that such direction shall not be in conflict
with any rule of law or with this Indenture or unduly prejudicial to the rights
of holders of Debentures at the time outstanding determined in accordance with
Section 8.04 not parties thereto. Subject to the provisions of Section 7.01, the
Trustee shall have the right to decline to follow any such direction if the
Trustee in good faith shall, by a Responsible Officer or Officers of the
Trustee, determine that the proceeding so directed would involve the Trustee in
personal liability. The holders of a majority in aggregate principal amount of
the Debentures at the time outstanding affected thereby, determined in
accordance with section 8.04 (with, in the case of any series of Debentures held
as trust assets of the Trust and with respect to which a Security Exchange has
not theretofore occurred, such consent of holders of the Trust Preferred
Securities and the Trust Common Securities of the Trust as may be required under
the Declaration), may on behalf of the holders of all of the Debentures waive
any past default in the performance of any of the covenants contained herein or
established pursuant to section 2.01 and its consequences, except a default in
the payment of the principal of, or premium, if any, or interest on, any of the
Debentures as and when the same shall become due by the terms of such Debentures
otherwise than by acceleration (unless such default has been cured and a sum
sufficient to pay all matured installments of interest and principal and any
premium has been deposited with the Trustee (in accordance with Section 6.01(c))
or a call for redemption of Debentures or a default in respect of a covenant or
provision hereof which under Article 9 cannot be modified or amended without the
consent of the Debentureholder of each outstanding security affected thereby.
Upon any such waiver, the default covered thereby shall be deemed to be cured
for all purposes of this Indenture and the Company, the Trustee and the holders
of the Debentures shall be restored to their former positions and rights
hereunder, respectively; but no such waiver shall extend to any subsequent or
other default or impair any right consequent thereon.
SECTION 6.07 Notice of Defaults. The Trustee shall, within 90 days
after the occurrence of a default, transmit by mail, first class postage
prepaid, to the holders of Debentures, as their names and addresses appear upon
the Debenture Register, notice of all defaults known to the Trustee, unless such
defaults shall have been cured before the giving of
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such notice (the term "defaults" for the purposes of this Section being hereby
defined to be the events specified in subsections (1), (2), (3), (4) and (5) of
Section 6.01(a), not including any periods of grace provided for therein and
irrespective of the giving of notice provided for by subsection (3) of Section
6.01(a)); provided, that, except in the case of default in the payment of the
principal of (or premium, if any) or interest on any of the Debentures, the
Trustee shall be protected in withholding such notice if and so long as the
board of directors, the executive committee, or a trust committee of directors
and/or Responsible Officers, of the Trustee in good faith determine that the
withholding of such notice is in the interests of the holders of Debentures;
provided further, that in the case of any default of the character specified in
Section 6.01(a)(3) with respect to Debentures no such notice to the holders of
the Debentures shall be given until at least 30 days after the occurrence
thereof.
The Trustee shall not be deemed to have knowledge of any default,
except (i) a default under subsection (a)(1) or (a)(2) of Section 6.01 as long
as the Trustee is acting as paying agent or (ii) any default as to which the
Trustee shall have received written notice or a Responsible Officer charged with
the administration of this Indenture shall have obtained written notice.
SECTION 6.08 Undertaking to Pay Costs. All parties to this Indenture
agree, and each holder of any Debentures by his or her acceptance thereof shall
be deemed to have agreed, that any court may in its discretion require, in any
suit for the enforcement of any right or remedy under this Indenture, or in any
suit against the Trustee for any action taken or omitted by it as Trustee, the
filing by any party litigant in such suit of an undertaking to pay the costs of
such suit, and that such court may in its discretion assess reasonable costs,
including reasonable attorneys' fees, against any party litigant in such suit,
having due regard to the merits and good faith of the claims or defenses made by
such party litigant; but the provisions of this Section shall not apply to any
suit instituted by the Trustee, to any suit instituted by any Debentureholder,
or group of Debentureholders, holding more than 10% in aggregate principal
amount of the outstanding Debentures, or to any suit instituted by any
Debentureholder for the enforcement of the payment of the principal of (or
premium, if any) or interest on any Debenture of such series, on or after the
respective due dates expressed in such Debenture or established pursuant to this
Indenture.
SECTION 6.09 Waiver of Usury, Stay or Extension Laws. The Company
covenants (to the extent that it may lawfully do so) that it will not at any
time insist upon, or plead, or in any manner whatsoever claim or take the
benefit or advantage of, any usury, stay or extension law wherever enacted, now
or at any time hereafter in force which may affect the covenants or the
performance of this Indenture; and the Company (to the extent that it may
lawfully do so) hereby expressly waives all benefit or advantage of any such
law, and covenants that it will not hinder, delay or impede the execution of any
power herein granted to the Trustee, but will suffer and permit the execution of
every such power as though no such law has been enacted.
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ARTICLE SEVEN
CONCERNING THE TRUSTEE
SECTION 7.01 Duties of Trustee. (a) The Trustee, prior to the
occurrence of an Event of Default with respect to Debentures and after the
curing of all Events of Default with respect to Debentures which may have
occurred, shall undertake to perform with respect to the Debentures such duties
and only such duties as are specifically set forth in this Indenture, and no
implied covenants shall be read into this Indenture against the Trustee. In case
an Event of Default with respect to the Debentures has occurred (which has not
been cured or waived), the Trustee shall exercise with respect to the Debentures
such of the rights and powers vested in it by this Indenture, and use the same
degree of care and skill in their exercise, as a prudent man would exercise or
use under the circumstances in the conduct of his own affairs.
(b) No provision of this Indenture shall be construed to
relieve the Trustee from liability for its own negligent action, its own
negligent failure to act, or its own willful misconduct, except that:
(1) prior to the occurrence of an Event of Default with
respect to the Debentures and after the curing or waiving of all such Events of
Default with respect to which may have occurred:
(i) the duties and obligations of the Trustee shall with
respect to the Debentures be determined solely by the express provisions of this
Indenture, and the Trustee shall not be liable with respect to the Debentures
except for the performance of such duties and obligations as are specifically
set forth in this Indenture, and no implied covenants or obligations shall be
read into this Indenture against the Trustee; and
(ii) in the absence of bad faith on the part of the
Trustee, the Trustee may with respect to Debentures conclusively rely, as to the
truth of the statements and the correctness of the opinions expressed therein,
upon any certificates or opinions furnished to the Trustee and conforming to the
requirements of this Indenture; but in the case of any such certificates or
opinions which by any provision hereof are specifically required to be furnished
to the Trustee, the Trustee shall be under a duty to examine the same to
determine whether or not they conform to the requirements of this Indenture;
(2) the Trustee shall not be liable for any error of judgment
made in good faith by a Responsible Officer or Responsible Officers of the
Trustee, unless it shall be proved that the Trustee was negligent in
ascertaining the pertinent facts;
(3) the Trustee shall not be liable with respect to any action
taken or omitted to
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be taken by it in good faith in accordance with the direction of the holders of
not less than a majority in principal amount of the Debentures at the time
outstanding relating to the time, method and place of conducting any proceeding
for any remedy available to the Trustee, or exercising any trust or power
conferred upon the Trustee under this Indenture with respect to the Debentures;
and
(4) none of the provisions contained in this Indenture shall
require the Trustee to expend or risk its own funds or otherwise incur personal
financial liability in the performance of any of its duties or in the exercise
of any of its rights or powers, if there is reasonable ground for believing that
the repayment of such funds or liability is not reasonably assured to it under
the terms of this Indenture or adequate indemnity against such risk is not
reasonably assured to it.
(c) Whether or not therein expressly so provided, every
provision of this Indenture relating to the conduct or affecting the liability
of or affording protection to the Trustee shall be subject to the provisions of
this Section.
SECTION 7.02 Reliance; Consultation with Counsel. Except as otherwise
provided in Section 7.01:
(a) The Trustee may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement, instrument,
opinion, report, notice, request, consent, order, approval, bond, security or
other paper or document believed by it to be genuine and to have been signed or
presented by the proper party or parties;
(b) Any request, direction, order or demand of the Company
mentioned herein shall be sufficiently evidenced by a Board Resolution or an
instrument signed in the name of the Company by the Chairman, President or any
Vice President and by the Secretary or an Assistant Secretary or the Treasurer
or an Assistant Treasurer (unless other evidence in respect thereof is
specifically prescribed herein);
(c) The Trustee may consult with counsel of its selection and
the advice of such counsel or any Opinion of Counsel shall be full and complete
authorization and protection in respect of any action taken or suffered or
omitted hereunder in good faith and in reliance thereon;
(d) The Trustee shall be under no obligation to exercise any
of the rights or powers vested in it by this Indenture at the request, order or
direction of any of the Debentureholders, pursuant to the provisions of this
Indenture, unless such Debentureholders shall have offered to the Trustee
reasonable security or indemnity against the costs, expenses and liabilities
which may be incurred therein or thereby; nothing herein contained shall,
however, relieve the Trustee of the obligation, upon the occurrence of an Event
of Default with respect to a series of the Debentures (which has not been cured
or waived) to exercise with respect to the Debentures such of the rights and
powers vested in it by this Indenture, and to use the same degree of care and
skill in their exercise, as a prudent person would exercise or use under the
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circumstances in the conduct of his or her own affairs;
(e) The Trustee shall not be liable for any action taken or
omitted to be taken by it in good faith and believed by it to be authorized or
within the discretion or rights or powers conferred upon it by this Indenture;
(f) The Trustee shall not be bound to make any investigation
into the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, consent, order, approval, bond,
security, or other papers or documents, unless requested in writing so to do by
the holders of not less than a majority in principal amount of the outstanding
Debentures (determined as provided in Section 8.04); provided, however, that if
the payment within a reasonable time to the Trustee of the costs, expenses or
liabilities likely to be incurred by it in the making of such investigation is,
in the opinion of the Trustee, not reasonably assured to the Trustee by the
security afforded to it by the terms of this Indenture, the Trustee may require
reasonable indemnity against such costs, expenses or liabilities as a condition
to so proceeding. The reasonable expense of every such examination shall be paid
by the Company or, if paid by the Trustee, shall be repaid by the Company upon
demand; and
(g) The Trustee may execute any of the trusts or powers
hereunder or perform any duties hereunder either directly or by or through
agents or attorneys and the Trustee shall not be responsible for any misconduct
or negligence on the part of any agent or attorney appointed with due care by it
hereunder.
SECTION 7.03 Absence of Reliance upon Trustee. (a) The recitals
contained herein and in the Debentures (other than the Certificate of
Authentication on the Debentures) shall be taken as the statements of the
Company, and the Trustee assumes no responsibility for the correctness of the
same.
(b) The Trustee makes no representations as to the validity or
sufficiency of this Indenture or of the Debentures.
(c) The Trustee shall not be accountable for the use or
application by the Company of any of the Debentures or of the proceeds of such
Debentures, or for the use or application of any moneys paid over by the Trustee
in accordance with any provision of this Indenture or established pursuant to
Section 2.01, or for the use or application of any moneys received by any paying
agent other than the Trustee.
SECTION 7.04 Ownership of Debentures. The Trustee or any paying agent
or Debenture Registrar, in its individual or any other capacity, may become the
owner or pledgee of Debentures with the same rights it would have if it were not
Trustee, paying agent or Debenture Registrar.
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SECTION 7.05 Moneys Held in Trust. Subject to the provisions of Section
11.04, all moneys received by the Trustee shall, until used or applied as herein
provided, be held in trust for the purposes for which they were received, but
need not be segregated from other funds except to the extent required by law.
The Trustee shall be under no liability for interest on any moneys received by
it hereunder except such as it may agree with the Company to pay thereon.
SECTION 7.06 Compensation. (a) The Company covenants and agrees to pay
to the Trustee from time to time, and the Trustee shall be entitled to, such
compensation as the parties shall agree to in writing from time to time (which
shall not be limited by any provision of law in regard to the compensation of a
Trustee of an express trust) for all services rendered by it in the execution of
the trusts hereby created and in the exercise and performance of any of the
powers and duties hereunder of the Trustee, and the Company will pay or
reimburse the Trustee upon its request for all reasonable expenses,
disbursements and advances incurred or made by the Trustee in accordance with
any of the provisions of this Indenture (including the reasonable compensation
and the expenses and disbursements of its counsel and of all persons not
regularly in its employ) except any such expense, disbursement or advance as may
arise from its negligence or bad faith or wilful misconduct. The Company also
covenants to indemnify the Trustee (and its officers, agents, directors and
employees) for, and to hold it harmless against, any loss, liability or expense
incurred without negligence or bad faith on the part of the Trustee and arising
out of or in connection with the acceptance or administration of this trust,
including the costs and expenses of defending itself against any claim of
liability in the premises.
(b) The obligations of the Company under this Section to
compensate and indemnify the Trustee and to pay or reimburse the Trustee for
expenses, disbursements and advances shall constitute additional indebtedness
hereunder. Such additional indebtedness shall be secured by a lien prior to that
of the Debentures upon all property and funds held or collected by the Trustee
as such, except funds held in trust for the benefit of the holders of particular
Debentures.
SECTION 7.07 Officers' Certificates. Except as otherwise provided in
Section 7.01, whenever in the administration of the provisions of this Indenture
the Trustee shall deem it necessary or desirable that a matter be proved or
established prior to taking or suffering or omitting to take any action
hereunder, such matter (unless other evidence in respect thereof be herein
specifically prescribed) may, in the absence of negligence or bad faith or
willful misconduct on the part of the Trustee, be deemed to be conclusively
proved and established by an Officers' Certificate delivered to the Trustee and
such certificate, in the absence of negligence or bad faith on the part of the
Trustee, shall be full warrant to the Trustee for any action taken, suffered or
omitted to be taken by it under the provisions of this Indenture upon the faith
thereof.
SECTION 7.08 Conflicting Interests. (a) If the Trustee has or shall
acquire any conflicting interest, as defined in this Section, with respect to
the Debentures and if the Default to which such conflicting interest relates has
not been cured, duly waived or otherwise eliminated, within 90 days after
ascertaining that it has such conflicting interest, it shall either eliminate
such
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conflicting interest, except as otherwise provided herein, or resign in the
manner and with the effect specified in Section 7.10 and the Company shall
promptly appoint a successor trustee in the manner provided herein.
(b) In the event that the Trustee shall fail to comply with
the provisions of subsection (a) of this Section, the Trustee shall, within ten
days after the expiration of such 90-day period, transmit notice of such failure
by mail, first class postage prepaid, to the Debentureholders as their names and
addresses appear upon the registration books.
(c) For the purposes of this Section the Trustee shall be
deemed to have a conflicting interest with respect to the Debentures if a
Default has occurred and is continuing and:
(1) the Trustee is Trustee under another indenture under which
any other securities, or certificates of interest or participation in any other
securities, of the Company are outstanding, unless such other indenture is a
collateral trust indenture under which the only collateral consists of
Debentures issued under this Indenture; provided that there shall be excluded
from the operation of this paragraph any other indenture or indentures under
which other securities, or certificates of interest or participation in other
securities, of the Company are outstanding if (i) this Indenture and such other
indenture or indentures and all series of securities issuable thereunder are
wholly unsecured and rank equally and such other indenture or indentures (and
such series) are hereafter qualified under the Trust Indenture Act, unless the
Commission shall have found and declared by order pursuant to subsection (b) of
Section 305 or subsection (c) of Section 307 of the Trust Indenture Act, that
differences exist between the provisions of this Indenture and the provisions of
such other indenture or indentures (or such series), which are so likely to
involve a material conflict of interest as to make it necessary in the public
interest or for the protection of investors to disqualify the Trustee from
acting as such under this Indenture with respect to the Debentures and such
other series or such other indenture or indentures, or (ii) the Company shall
have sustained the burden of proving, on application to the Commission and after
opportunity for hearing thereon, that the Trusteeship under this Indenture with
respect to the Debentures and such other indenture or indentures is not so
likely to involve a material conflict of interest as to make it necessary in the
public interest or for the protection of investors to disqualify the Trustee
from acting as such under this Indenture with respect to the Debentures and
under such other indentures;
(2) the Trustee or any of its directors or executive officers
is an underwriter for the Company;
(3) the Trustee directly or indirectly controls or is directly
or indirectly controlled by or is under direct or indirect common control with
an underwriter for the Company;
(4) the Trustee or any of its directors or executive officers
is a director, officer, partner, employee, appointee or representative of the
Company, or of an underwriter (other than
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the Trustee itself) for the Company who is currently engaged in the business of
underwriting, except that (A) one individual may be a director and/or an
executive officer of the Trustee and a director and/or an executive officer of
the Company, but may not be at the same time an executive officer of both the
Trustee and the Company; (B) if and so long as the number of directors of the
Trustee in office is more than nine, one additional individual may be a director
and/or an executive officer of the Trustee and a director of the Company; and
(C) the Trustee may be designated by the Company or by an underwriter for the
Company to act in the capacity of transfer agent, registrar, custodian, paying
agent, fiscal agent, escrow agent, or depository, or in any other similar
capacity, or, subject to the provisions of paragraph (1) of this subsection (c),
to act as Trustee whether under an indenture or otherwise;
(5) 10% or more of the voting securities of the Trustee is
beneficially owned either by the Company or by any director, partner, or
executive officer thereof, or 20% or more of such voting securities is
beneficially owned, collectively, by any two or more of such persons; or 10% or
more of the voting securities of the Trustee is beneficially owned either by an
underwriter for the Company or by any director, partner, or executive officer
thereof, or is beneficially owned, collectively by any two or more such persons;
(6) the Trustee is the beneficial owner of, or holds as
collateral security for an obligation which is in default (as hereinafter in
this subsection (c) defined), (A) 5% or more of the voting securities, or 10% or
more of any other class of security, of the Company, not including the
Debentures issued under this Indenture and securities issued under any other
indenture under which the Trustee is also Trustee, or (B) 10% or more of any
class of security of an underwriter for the Company;
(7) the Trustee is the beneficial owner of, or holds as
collateral security for an obligation which is in default (as hereinafter in
this subsection (c) defined), 5% or more of the voting securities of any person
who, to the knowledge of the Trustee, owns 10% or more of the voting securities
of, or controls directly or indirectly or is under direct or indirect common
control with, the Company;
(8) the Trustee is the beneficial owner of, or holds as
collateral security for an obligation which is in default (as hereinafter in
this subsection (c) defined), 10% or more of any class of security of any person
who, to the knowledge of the Trustee, owns 50% or more of the voting securities
of the Company;
(9) the Trustee owns, on the date of Default upon the
Debentures or any anniversary of such Default while such Default upon the
Debentures issued under this Indenture remains outstanding, in the capacity of
executor, administrator, testamentary or inter vivos Trustee, guardian,
committee or conservator, or in any other similar capacity, an aggregate of 25%
or more of the voting securities, or of any class of security, of any person,
the beneficial ownership of a specified percentage of which would have
constituted a conflict interest under paragraph (6), (7), or (8) of this
subsection (c). As to any such securities of which the Trustee
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acquired ownership through becoming executor, administrator or testamentary
Trustee of an estate which includes them, the provisions of the preceding
sentence shall not apply, for a period of two years from the date of such
acquisition, to the extent that such securities in such estate do not exceed 25%
of such voting securities or 25% of any such class of security. Promptly after
the dates of any such Default upon the Debentures issued under this Indenture
and annually in each succeeding year that the Debentures issued under this
Indenture remain in Default, the Trustee shall make a check of its holding of
such securities in any of the above-mentioned capacities as of such dates. If
the Company fails to make payment in full of principal of or interest on any of
the Debentures when and as the same becomes due and payable, and such failure
continues for 30 days thereafter, the Trustee shall make a prompt check of its
holding of such securities in any of the above-mentioned capacities as of the
date of the expiration of such 30-day period, and after such date,
notwithstanding the foregoing provisions of this paragraph (9), all such
securities so held by the Trustee, with sole or joint control over such
securities vested in it, shall, but only so long as such failure shall continue,
be considered as though beneficially owned by the Trustee for the purposes of
paragraphs (6), (7) and (8) of this subsection (c); or
(10) except under the circumstances described in paragraph
(1), (3), (4), (5) or (6) of subsection (b) of Section 7.13 the Trustee shall be
or shall become a creditor of the Company.
For purposes of paragraph (1) of this subsection (c), and of Section
6.06, the term "series of securities" or "securities" means a series, class or
group of securities issuable under an indenture pursuant to whose terms holders
of one such series may vote to direct the indenture Trustee, or otherwise take
action pursuant to a vote of such holders, separately from holders of another
such series; provided, that, "series of securities" or "series" shall not
include any series of securities issuable under an indenture if all such series
rank equally and are wholly secured.
The specification of percentages in paragraphs (5) to (9), inclusive,
of this subsection (c) shall not be construed as indicating that the ownership
of such percentages of securities of a person is or is not necessary or
sufficient to constitute direct or indirect control for the purposes of
paragraph (3) or (7) of this subsection (c).
For the purposes of paragraphs (6), (7), (8) and (9) of this subsection
(c) only, (A) the terms "security" and "securities" shall include only such
securities as are generally known as corporate securities, but shall not include
any note or other evidence of indebtedness issued to evidence an obligation to
repay moneys lent to a person by one or more banks, trust companies or banking
firms, or any certificate of interest or participation in any such note or
evidence of indebtedness; (B) an obligation shall be deemed to be in "default",
when a default in payment of principal shall have continued for 30 days or more
and shall not have been cured; and (C) the Trustee shall not be deemed to be the
owner or holder of (i) any security which it holds as collateral security (as
Trustee or otherwise) for any obligation which is not in default as defined in
clause (B) above, or (ii) any security which it holds as collateral security
under this Indenture, irrespective of any Default hereunder, or (iii) any
security which it holds as agent for collection,
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or as custodian, escrow agent or depositary, or in any similar representative
capacity.
Except as above provided, the word "security" or securities" as used in
this Indenture shall mean any note, stock, treasury stock, bond, debenture,
evidence of indebtedness, certificate of interest or participation in any
profit-sharing agreement, collateral trust certificate, pre-organization
certificate or subscription, transferable share, investment contract, voting
trust certificate, certificate of deposit for a security, fractional undivided
interest in oil, gas, or other mineral rights, or, in general, any interest or
instrument commonly known as a "security", or any certificate of interest or
participation in, temporary or interim certificate for, receipt for, guarantee
of, or warrant or right to subscribe to or purchase, any of the foregoing.
(d) For the purposes of this Section:
(1) The term "underwriter" when used with reference to the
Company shall mean every person, who, within one year prior to the time as of
which the determination is made, has purchased from the Company with a view to,
or has offered or sold for the Company in connection with, the distribution of
any security of the Company, or has participated or has had a direct or indirect
participation in any such undertaking, or has participated or has had a
participation in the direct or indirect underwriting of any such undertaking,
but such term shall not include a person whose interest was limited to a
commission from an underwriter or dealer not in excess of the usual and
customary distributors' or sellers' commission.
(2) The term "director" shall mean any member of the board of
directors of a corporation or any individual performing similar functions with
respect to any organization whether incorporated or unincorporated.
(3) The term "person" shall mean an individual, a corporation,
a partnership, an association, a joint-stock company, a trust, an unincorporated
organization or a government or political subdivision thereof. As used in this
paragraph, the term "trust" shall include only a trust where the interest or
interests of the beneficiary or beneficiaries are evidenced by a security.
(4) The term "voting security" shall mean any security
presently entitling the owner or holder thereof to vote in the direction or
management of the affairs of a person, or any security issued under or pursuant
to any trust, agreement or arrangement whereby a Trustee or Trustees or agent or
agents for the owner or holder of such security are presently entitled to vote
in the direction or management of the affairs of a person.
(5) The term "Company" shall mean any obligor upon the
Debentures.
(6) The term "executive officer" shall mean the chairman of
the board of directors, president, every vice president, every assistant vice
president, every trust officer, the cashier, the secretary, and the treasurer of
a corporation, and any individual customarily performing similar functions with
respect to any organization whether incorporated or
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unincorporated.
(e) The percentages of voting securities and other securities
specified in this Section shall be calculated in accordance with the following
provisions:
(1) A specified percentage of the voting securities of the
Trustee, the Company or any other person referred to in this Section (each of
whom is referred to as a "person" in this paragraph) means such amount of the
outstanding voting securities of such person as entitles the holder or holders
thereof to cast such specified percentage of the aggregate votes which the
holders of all the outstanding voting securities of such person are entitled to
cast in the direction or management of the affairs of such person.
(2) A specified percentage of a class of securities of a
person means such percentage of the aggregate amount of securities of the class
outstanding.
(3) The term "amount", when used in regard to securities,
means the principal amount if relating to evidences of indebtedness, the number
of shares if relating to capital shares and the number of units if relating to
any other kind of security.
(4) The term "outstanding" means issued and not held by or for
the account of the issuer. The following securities shall not be deemed
outstanding within the meaning of this definition:
(i) securities of an issuer held in a sinking fund relating to
securities of the issuer of the same class;
(ii) securities of an issuer held in a sinking fund relating
to another class of securities of the issuer, if the obligation evidenced by
such other class of securities is not in default as to principal or interest or
otherwise;
(iii) securities pledged by the issuer thereof as security for
an obligation of the issuer not in default as to principal or interest or
otherwise; and
(iv) securities held in escrow if placed in escrow by the
issuer thereof, provided, however, that any voting securities of an issuer shall
be deemed outstanding if any person other than the issuer is entitled to
exercise the voting rights thereof.
(5) A security shall be deemed to be of the same class as
another security if both securities confer upon the holder or holders thereof
substantially the same rights and privileges; provided, however, that, in the
case of secured evidences of indebtedness, all of which are issued under a
single indenture, differences in the interest rates or maturity dates of various
series thereof shall not be deemed sufficient to constitute such series
different classes; and provided, further, that, in the case of unsecured
evidences of indebtedness, differences in the interest rates
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or maturity dates thereof shall not be deemed sufficient to constitute them
securities of different classes, whether or not they are issued under a single
indenture.
(f) Except in the case of a default in the payment of the
principal of (or premium, if any) or interest on any Debentures issued under
this Indenture, or in the payment of any sinking or analogous fund installment,
the Trustee shall not be required to resign as provided by this Section 7.08 if
such Trustee shall have sustained the burden of proving, on application to the
Commission and after opportunity for hearing thereon, that (i) the default under
the Indenture may be cured or waived during a reasonable period and under the
procedures described in such application and (ii) a stay of the Trustee's duty
to resign will not be inconsistent with the interests of Debentureholders. The
filing of such an application shall automatically stay the performance of the
duty to resign until the Commission orders otherwise.
Any resignation of the Trustee shall become effective only upon the
appointment of a successor trustee and such successor's acceptance of such an
appointment.
SECTION 7.09 Trustee. There shall at all times be a Trustee with
respect to the Debentures issued hereunder which shall at all times be a
corporation organized and doing business under the laws of the United States of
America or any State or Territory thereof or of the District of Columbia, or a
corporation or other person permitted to act as Trustee by the Commission,
authorized under such laws to exercise corporate trust powers, having a combined
capital and surplus of at least 50 million dollars, and subject to supervision
or examination by Federal, State, Territorial, or District of Columbia
authority. If such corporation publishes reports of condition at least annually,
pursuant to law or to the requirements of the aforesaid supervising or examining
authority, then for the purposes of this Section, the combined capital and
surplus of such corporation shall be deemed to be its combined capital and
surplus as set forth in its most recent report of condition so published. The
Company may not, nor may any person directly or indirectly controlling,
controlled by, or under common control with the Company, serve as Trustee. In
case at any time the Trustee shall cease to be eligible in accordance with the
provisions of this Section, the Trustee shall resign immediately in the manner
and with the effect specified in Section 7.10.
SECTION 7.10 Resignation and Removal of Trustee. (a) The Trustee or any
successor hereafter appointed, may at any time resign with respect to the
Debentures by giving written notice thereof to the Company and by transmitting
notice of resignation by mail, first class postage prepaid, to the
Debentureholders, as their names and addresses appear upon the Debenture
Register. Upon receiving such notice of resignation, the Company shall promptly
appoint a successor trustee with respect to Debentures by written instrument, in
duplicate, executed by order of the Board of Directors, one copy of which
instrument shall be delivered to the resigning Trustee and one copy to the
successor trustee. If no successor trustee shall have been so appointed and have
accepted appointment within 30 days after the mailing of such notice of
resignation, the resigning Trustee may petition any court of competent
jurisdiction for the appointment of a successor trustee with respect to
Debentures, or any Debentureholder who has
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been a bona fide holder of a Debenture or Debentures for at least six months
may, subject to the provisions of Section 6.08, on behalf of himself and all
others similarly situated, petition any such court for the appointment of a
successor trustee. Such court may thereupon after such notice, if any, as it may
deem proper and prescribe, appointment a successor trustee.
(b) In case at any time any of the following shall occur:
(1) the Trustee shall fail to comply with the provisions of
subsection (a) of Section 7.08 after written request therefor by the Company or
by any Debentureholder who has been a bona fide holder of a Debenture or
Debentures for at least six months; or
(2) the Trustee shall cease to be eligible in accordance with
the provisions of Section 7.09 and shall fail to resign after written request
therefor by the Company or by any such Debentureholder; or
(3) the Trustee shall become incapable of acting, or shall be
adjudged a bankrupt or insolvent, or a receiver of the Trustee or of its
property shall be appointed, or any public officer shall take charge or control
of the Trustee or of its property or affairs for the purpose of rehabilitation,
conservation or liquidation, then, in any such case, the Company may remove the
Trustee with respect to all Debentures and appoint a successor trustee by
written instrument, in duplicate, executed by order of the Board of Directors,
one copy of which instrument shall be delivered to the Trustee so removed and
one copy to the successor trustee. If no successor trustee shall have been so
appointed and have accepted appointment within 30 days after the mailing of such
notice of removal, the removed Trustee may petition any court of competent
jurisdiction for the appointment of a successor trustee with respect to
Debentures, , or, subject to the provisions of Section 6.08, unless the
Trustee's duty to resign is stated as provided herein, any Debentureholder who
has been a bona fide holder of a Debenture or Debentures for at least six months
may, on behalf of himself and all others similarly situated, petition any court
of competent jurisdiction for the removal of the Trustee and the appointment of
a successor trustee. Such court may thereupon after such notice, if any, as it
may deem proper and prescribe, remove the Trustee and appoint a successor
trustee.
(c) The holders of a majority in aggregate principal amount of
the Debentures at the time outstanding may at any time remove the Trustee and
appoint a successor trustee.
(d) Any resignation or removal of the Trustee and appointment
of a successor trustee with respect to the Debentures pursuant to any of the
provisions of this Section shall become effective upon acceptance of appointment
by the successor trustee as provided in Section 7.11.
SECTION 7.11 Successor Trustee. (a) Every successor trustee so
appointed shall execute, acknowledge and deliver to the Company and to the
retiring Trustee an instrument accepting such appointment, and thereupon the
resignation or removal of the retiring Trustee
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shall become effective and such successor trustee, without any further act, deed
or conveyance, shall become vested with all the rights, powers, trusts and
duties of the retiring Trustee; but, on the request of the Company or the
successor trustee, such retiring Trustee shall, upon payment of its charges,
execute and deliver an instrument transferring to such successor trustee all the
rights, powers, and trusts of the retiring Trustee and shall duly assign,
transfer and deliver to such successor trustee all property and money held by
such retiring Trustee hereunder.
(b) Upon request of any such successor trustee, the Company
shall execute any and all instruments for more fully and certainly vesting in
and confirming to such successor trustee all such rights, power and trusts
referred to in paragraph (a) of this Section, as the case may be.
(c) No successor trustee shall accept its appointment unless
at the time of such acceptance such successor trustee shall be qualified and
eligible under this Article.
(d) Upon acceptance of appointment by a successor trustee as
provided in this Section, the Company shall transmit notice of the succession of
such Trustee hereunder by mail, first class postage prepaid, to the
Debentureholders, as their names and addresses appear upon the Debenture
Register. If the Company fails to transmit such notice within ten days after
acceptance of appointment by the successor trustee, the successor trustee shall
cause such notice to be transmitted at the expense of the Company.
SECTION 7.12 Merger, Consolidation of Trustee. Any corporation into
which the Trustee may be merged or converted or with which it may be
consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the Trustee shall be a party, or any corporation
succeeding to all or substantially all of the corporate trust business of the
Trustee, shall be the successor of the Trustee hereunder, provided such
corporation shall be qualified under the provisions of Section 7.08 and eligible
under the provisions of Section 7.09, without the execution or filing of any
paper or any further act on the part of any of the parties hereto, anything
herein to the contrary notwithstanding. In case any Debentures shall have been
authenticated, but not delivered, by the Trustee then in office, any successor
by merger, conversion or consolidation to such authenticating Trustee may adopt
such authentication and deliver the Debentures so authenticated with the same
effect as if such successor trustee had itself authenticated such Debentures.
SECTION 7.13 Trustee's Application for Instructions from the Company.
Any application by the Trustee for written instructions from the Company may, at
the option of the Trustee, set forth in writing any action proposed to be taken
or omitted by the Trustee under this Indenture and the date on and/or after
which such action shall be taken or such omission shall be effective. The
Trustee shall not be liable for any action taken by, or omission of, the Trustee
in accordance with a proposal included in such application (which date shall not
be less than three Business Days after the date any officer of the Company
actually receives such application, unless any such officer shall have consented
in writing to any earlier date) unless prior to taking
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any such action (or the effective date in the case of an omission), the Trustee
shall have received written instructions in response to such application
specifying the action to be taken or omitted.
SECTION 7.14 Trustee as Creditor. (a) Subject to the provisions of
subsection (b) of this Section, if the Trustee shall be or shall become a
creditor, directly or indirectly, secured or unsecured, of the Company within
three months prior to a default, as defined in subsection (b) of this Section,
or subsequent to such a default, then, unless and until such default shall be
cured, the Trustee shall set apart and hold in a special account for the benefit
of the Trustee individually, the holders of the Debentures and the holders of
other indenture securities (as defined in subsection (c) of this Section):
(1) an amount equal to any and all reductions in the amount
due and owing upon any claim as such creditor in respect of principal or
interest, effected after the beginning of such three month period and valid as
against the Company and its other creditors, except any such reduction resulting
from the receipt or disposition of any property described in paragraph (2) of
this subsection, or from the exercise of any right of set-off which the Trustee
could have exercised if a petition in bankruptcy had been filed by or against
the Company upon the date of such default; and
(2) all property received by the Trustee in respect of any
claim as such creditor, either as security therefor, or in satisfaction or
composition thereof, or otherwise, after the beginning of such three month
period, or an amount equal to the proceeds of any such property, if disposed of,
subject, however, to the rights, if any, of the Company and its other creditors
in such property or such proceeds.
Nothing herein contained, however, shall affect the right of the Trustee:
(A) to retain for its own account (i) payments made on account
of any such claim by any person (other than the Company) who is liable thereon,
and (ii) the proceeds of the bona fide sale of any such claim by the Trustee to
a third person, and (iii) distributions made in cash, securities, or other
property in respect of claims filed against the Company in bankruptcy or
receivership or in a case for reorganization pursuant to the Federal Bankruptcy
Code or applicable State law;
(B) to realize, for its own account, upon any property held by
it as security for any such claim, if such property was so held prior to the
beginning of such three months' period;
(C) to realize, for its own account, but only to the extent of
the claim hereinafter mentioned, upon any property held by it as security for
any such claim, if such claim was created after the beginning of such three
month period and such property was received as security therefor simultaneously
with the creation thereof, and if the Trustee shall sustain the burden of
proving that at the time such property was so received the Trustee had no
reasonable cause to believe that a default, as defined in subsection (c) of this
Section, would occur within three
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months; or
(D) to receive payment on any claim referred to in paragraph
(B) or (C), against the release of any property held as security for such claim
as provided in such paragraph (B) or (C), as the case may be, to the extent of
the fair value of such property.
For the purposes of paragraphs (B), (C) and (D), property substituted
after the beginning of such three month period for property held as security at
the time of such substitution shall, to the extent of the fair value of the
property released, have the same status as the property released, and, to the
extent that any claim referred to in any of such paragraphs is created in
renewal of or in substitution for or for the purpose of repaying or refunding
any pre-existing claim of the Trustee as such creditor, such claim shall have
the same status as such pre-existing claim.
If the Trustee shall be required to account, the funds and property
held in such special account and the proceeds thereof shall be apportioned among
the Trustee, the Debentureholders and the holders of other indenture securities
in such manner that the Trustee, the Debentureholders and the holders of other
indenture securities realize, as a result of payments from such special account
and payments of dividends on claims filed against the Company in bankruptcy or
receivership or in a case for reorganization pursuant to the Federal Bankruptcy
Code or applicable State law, the same percentage of their respective claims,
figured before crediting to the claim of the Trustee anything on account of the
receipt by it from the Company of the funds and property in such special account
and before crediting to the respective claims of the Trustee, the
Debentureholders and the holders of other indenture securities dividends on
claims filed against the Company in bankruptcy or receivership or in a case for
reorganization pursuant to the Federal Bankruptcy Code or applicable State law,
but after crediting thereon receipts on account of the indebtedness represented
by their respective claims from all sources other than from such dividends and
from the funds and property so held in such special account. As used in this
paragraph, with respect to any claim, the term "dividends" shall include any
distribution with respect to such claim, in bankruptcy or receivership or in a
case for reorganization pursuant to the Federal Bankruptcy Code or applicable
State law, whether such distribution is made in cash, securities, or other
property, but shall not include any such distribution with respect to the
secured portion, if any, of such claim. The court in which such bankruptcy,
receivership or a case for reorganization is pending shall have jurisdiction (i)
to apportion between the Trustee, the Debentureholders and the holders of other
indenture securities, in accordance with the provisions of this paragraph, the
funds and property held in such special account and the proceeds thereof, or
(ii) in lieu of such apportionment, in whole or in part, to give to the
provisions of this paragraph due consideration in determining the fairness of
the distributions to be made to the Trustee, the Debentureholders and the
holders of other indenture securities with respect to their respective claims,
in which event it shall not be necessary to liquidate or to appraise the value
of any securities or other property held in such special account or as security
for any such claim, or to make a specific allocation of such distributions as
between the secured and unsecured portions of such claims, or otherwise to apply
the provisions of this paragraph as a mathematical formula.
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Any Trustee who has resigned or been removed after the beginning of
such three months' period shall be subject to the provisions of this subsection
(a) as though such resignation or removal had not occurred. If any Trustee has
resigned or been removed prior to the beginning of such three month period, it
shall be subject to the provisions of this subsection (a) if and only if the
following conditions exist:
(i) the receipt of property or reduction of claim which would
have given rise to the obligation to account, if such Trustee had continued as
Trustee, occurred after the beginning of such three month period; and
(ii) such receipt of property or reduction of claim occurred
within three months after such resignation or removal.
(b) There shall be excluded from the operation of subsection
(a) of this Section a creditor relationship arising from:
(1) the ownership or acquisition of securities issued under
any indenture, or any security or securities having a maturity of one year or
more at the time of acquisition by the Trustee;
(2) advances authorized by a receivership or bankruptcy court
of competent jurisdiction, or by this Indenture, for the purpose of preserving
any property other than cash which shall at any time be subject to the lien, if
any, of this Indenture or of discharging tax liens or other prior liens or
encumbrances thereon, if notice of such advance and of the circumstances
surrounding the making thereof is given to the Debentureholders at the time and
in the manner provided in this Indenture;
(3) disbursements made in the ordinary course of business in
the capacity of Trustee under an indenture, transfer agent, registrar,
custodian, paying agent, subscription agent, fiscal agent or depositary, or
other similar capacity;
(4) an indebtedness created as a result of services rendered
or premises rented; or an indebtedness created as a result of goods or
securities sold in a cash transaction as defined in subsection (c) of this
Section;
(5) the ownership of stock or of other securities of a company
organized under the provisions of Section 25(a) of the Federal Reserve Act, as
amended, which is directly or indirectly a creditor of the Company; or
(6) the acquisition, ownership, acceptance or negotiation of
any drafts, bills of exchange, acceptance or obligations which fall within the
classification of self-liquidating paper as defined in subsection (c) of this
Section.
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(c) As used in this Section:
(1) The term "default" shall mean any failure to make payment
in full of the principal of (or premium, if any) or interest upon any of the
Debentures or upon the other indenture securities when and as such principal (or
premium, if any) or interest becomes due and payable.
(2) The term "other indenture securities" shall mean
securities upon which the Company is an obligor (as defined in the Trust
Indenture Act) outstanding under any other indenture (A) under which the Trustee
is also Trustee, (B) which contains provisions substantially similar to the
provisions of subsection (a) of this Section, and (C) under which a default
exists at the time of the apportionment of the funds and property held in said
special account.
(3) The term "cash transaction" shall mean any transaction in
which full payment for goods or securities sold is made within seven days after
delivery of the goods or securities in currency or in checks or other orders
drawn upon banks or bankers and payable upon demand.
(4) The term "self-liquidating paper" shall mean any draft,
bill of exchange, acceptance or obligation which is made, drawn, negotiated or
incurred by the Company for the purpose of financing the purchase, processing,
manufacture, shipment, storage or sale of goods, wares or merchandise and which
is secured by documents evidencing title to, possession of, or a lien upon, the
goods, wares or merchandise or the receivables or proceeds arising from the sale
of the goods, wares or merchandise previously constituting the security,
provided the security is received by the Trustee simultaneously with the
creation of the credit or relationship with the Company arising from the making,
drawing, negotiating or incurring of the draft, bill of exchange, acceptance or
obligation.
(5) The term "Company" shall mean any obligor upon any of the
Debentures.
ARTICLE EIGHT
CONCERNING THE DEBENTUREHOLDERS
SECTION 8.01 Action by Debentureholders. Whenever in this Indenture it
is provided that the holders of a majority or specified percentage in aggregate
principal amount of the Debentures may take any action (including the making of
any demand or request, the giving of any notice, consent or waiver or the taking
of any other action) the fact that at the time of taking any such action the
holders of such majority or specified percentage of that series have joined
therein may be evidenced by any instrument or any number of instruments of
similar tenor executed by such holders of Debentures in person or by agent or
proxy appointed in writing.
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If the Company shall solicit from the Debentureholders any request,
demand, authorization, direction, notice, consent, waiver or other action, the
Company may, at its option, as evidenced by an Officers' Certificate, fix in
advance a record date for the determination of Debentureholders entitled to give
such request, demand, authorization, direction, notice, consent, waiver or other
action, but the Company shall have no obligation to do so. If such a record date
is fixed, such request, demand, authorization, direction, notice, consent,
waiver or other action may be given before or after the record date, but only
the Debentureholders of record at the close of business on the record date shall
be deemed to be Debentureholders for the purposes of determining whether
Debentureholders of the requisite proportion of outstanding Debentures have
authorized or agreed or consented to such request, demand, authorization,
direction, notice, consent, waiver or other action, and for that purpose the
outstanding Debentures shall be computed as of the record date; provided that no
such authorization, agreement or consent by such Debentureholders on the record
date shall be deemed effective unless it shall become effective pursuant to the
provisions of this Indenture not later than six months after the record date.
SECTION 8.02 Proof of Action by Debentureholder. Subject to the
provisions of Section 7.01, proof of the execution of any instrument by a
Debentureholder (such proof will not require notarization) or his agent or proxy
and proof of the holding by any person of any of the Debentures shall be
sufficient if made in the following manner;
(a) The fact and date of the execution by any such person of
any instrument may be proved in any reasonable manner acceptable to the Trustee.
(b) The ownership of Debentures shall be proved by the
Debenture Register of such Debentures or by a certificate of the Debenture
Registrar thereof.
(c) The Trustee may require such additional proof of any
matter referred to in this Section as it shall deem necessary.
SECTION 8.03 Registered Holder. Prior to the due presentment for
registration of transfer of any Debenture, the Company, the Trustee, any paying
agent and any Debenture Registrar may deem and treat the person in whose name
such Debenture shall be registered upon the books of the Company as the absolute
owner of such Debenture (whether or not such Debenture shall be overdue and
notwithstanding any notice of ownership or writing thereon made by anyone other
than the Debenture Registrar) for the purpose of receiving payment of or on
account of the principal of, premium, if any, and (subject to Section 2.03)
interest on such Debenture and for all other purposes; and neither the Company
nor the Trustee nor any paying agent nor any Debenture Registrar shall be
affected by any notice to the contrary.
SECTION 8.04 Determination of Requisite Debentureholders. In
determining whether the holders of the requisite aggregate principal amount of
Debentures have concurred in any direction, consent or waiver under this
Indenture, Debentures which are owned by the Company
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or any other obligor on the Debentures or by any Subsidiary of the Company or of
such other obligor on the Debentures shall be disregarded and deemed not to be
outstanding for the purpose of any such determination, except that for the
purpose of determining whether the Trustee shall be protected in relying on any
such direction, consent or waiver, only Debentures which the Trustee actually
knows are so owned shall be so disregarded. Debentures so owned which have been
pledged in good faith may be regarded as outstanding for the purposes of this
Section, if the pledgee shall establish to the satisfaction of the Trustee the
pledgee's right so to act with respect to such Debentures and that the pledgee
is not a person directly or indirectly controlling or controlled by or under
direct or indirect common control with the Company or any such other obligor. In
case of a dispute as to such right, any decision by the Trustee taken upon the
advice of counsel shall be full protection to the Trustee.
SECTION 8.05 Revocation of Action; Binding Effect. At any time prior to
(but not after) the evidencing to the Trustee, as provided in Section 8.01, of
the taking of any action by the holders of the majority or percentage in
aggregate principal amount of the Debentures specified in this Indenture in
connection with such action, any holder of a Debenture which is shown by the
evidence to be included in the Debentures the holders of which have consented to
such action may, by filing written notice with the Trustee, and upon proof of
holding as provided in Section 8.02, revoke such action so far as concerns such
Debenture. Except as aforesaid any such action taken by the holder of any
Debenture shall be conclusive and binding upon such holder and upon all future
holders and owners of such Debenture, and of any Debenture issued in exchange
therefor, on registration of transfer thereof or in place thereof, irrespective
of whether or not any notation in regard thereto is made upon such Debenture.
Any action taken by the holders of the majority or percentage in aggregate
principal amount of the Debentures specified in this Indenture in connection
with such action shall be conclusively binding upon the Company, the Trustee and
the holders of all the Debentures.
ARTICLE NINE
SUPPLEMENTAL INDENTURES
SECTION 9.01 Supplemental Indentures. In addition to any supplemental
indenture otherwise authorized by this Indenture, the Company, when authorized
by a Board Resolution, and the Trustee may from time to time and at any time
enter into an indenture or indentures supplemental hereto (which shall conform
to the provisions of the Trust Indenture Act as then in effect), without the
consent of the Debentureholders, for one or more of the following purposes:
(a) to evidence the succession of another corporation to the
Company, and the assumption by any such successor of the covenants of the
Company contained herein or otherwise established with respect to the
Debentures; or
(b) to add to the covenants of the Company such further
covenants, restrictions,
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conditions or provisions for the protection of the holders of the Debentures as
the Board of Directors and the Trustee shall consider to be for the protection
of the holders of Debentures, and to make the occurrence, or the occurrence and
continuance, of a default in any of such additional covenants, restrictions,
conditions or provisions a default or an Event of Default with respect to such
series permitting the enforcement of all or any of the several remedies provided
in this Indenture as herein set forth; provided, however, that in respect of any
such additional covenant, restriction, condition or provision such supplemental
indenture may provide for a particular period of grace after default (which
period may be shorter or longer than that allowed in the case of other defaults)
or may provide for an immediate enforcement upon such default or may limit the
remedies available to the Trustee upon such default or may limit the right of
the holders of a majority in aggregate principal amount of the Debentures to
waive such default; or
(c) to convey, transfer, assign, mortgage or pledge any
property to or with the Trustee or to surrender any right or power herein
conferred upon the Company; or
(d) to cure any ambiguity or to correct or supplement any
provision contained herein or in any supplemental indenture which may be
defective or inconsistent with any other provision contained herein or in any
supplemental indenture, or to make such other provisions in regard to matters or
questions arising under this Indenture as shall not be inconsistent with the
provisions of this Indenture and shall not adversely affect the interests of the
holders of the Debentures.
The Trustee is hereby authorized to join with the Company in the
execution of any such supplemental indenture, and to make any further
appropriate agreements and stipulations which may be therein contained, but the
Trustee shall not be obligated to enter into any such supplemental indenture
which affects the Trustee's own rights, duties or immunities under this
Indenture or otherwise.
Any supplemental indenture authorized by the provisions of this Section
may be executed by the Company and the Trustee without the consent of the
holders of any of the Debentures at the time outstanding, notwithstanding any of
the provisions of Section 9.02.
SECTION 9.02 Approval of Supplemental Indentures. With the consent
(evidenced as provided in Section 8.01) of the holders of not less than a
majority in aggregate principal amount of the Debentures (and, if a Security
Exchange has not theretofore occurred, such consent of holders of the Preferred
Securities and the Common Securities of the Trust as may be required under the
Declaration), the Company, when authorized by a Board Resolution, and the
Trustee may from time to time and at any time enter into an indenture or
indentures supplemental hereto (which shall conform to the provisions of the
Trust Indenture Act as then in effect) for the purpose of adding any provisions
to or changing in any manner or eliminating any of the provisions of this
Indenture or of any supplemental indenture or of modifying in any manner the
rights of the holders of the Debentures under this Indenture; provided, however,
that no such supplemental indenture shall (i) extend the fixed maturity of any
Debentures, or reduce the
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principal amount thereof, or reduce the rate or extend the time of payment of
interest thereon, or reduce any premium payable upon the redemption thereof,
without the consent of the holder of each Debenture so affected, (ii) change the
place of payment where, or the coin or currency in which, the Debentures or
interest thereon, are payable, (iii) reduce the aforesaid percentage of
Debentures, the holders of which are required to consent to any such
supplemental indenture, (iv) modify any of the provisions of this Section 9.02
or Section 6.06, except to increase any such percentage or to provide that
certain other provisions of this Indenture cannot be waived without the consent
of the holder of each Debenture thereby affected, (v) modify the provisions of
Article Fourteen of this Indenture with respect to the subordination of
outstanding Debentures in a manner adverse to the holders thereof, (vi) impair
the right to institute suit for the enforcement of any payment on or with
respect to any Debenture, (vii) reduce the percentage in principal amount of the
outstanding 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, (viii) change the
obligation of the Company to maintain an office or agency in the places and for
the purposes specified herein or (ix) modify the provisions relating to waiver
of certain defaults or any of the foregoing provisions, without the consent of
the holders of each Debenture (and, in the case of any Debentures held as trust
assets of the Trust and with respect to which a Security Exchange has not
theretofore occurred, such consent of the holders of the Preferred Securities
and the Common Securities of the Trust as may be required under the Declaration)
then outstanding and affected thereby provided, further, that, so long as the
Preferred Securities remain outstanding (i) no such amendment shall be made that
adversely affects the holders of such Preferred Securities in any material
respect, and no termination of this Indenture shall occur, and no waiver of any
Event of Default or compliance with any covenant under this Indenture shall be
effective, without the prior consent of the holders of at least a majority in
liquidation amount of such Preferred Securities then outstanding unless and
until the principal (and premium, if any) of the Debentures and all accrued and,
subject to Section 2.07, unpaid interest (including any Compounded Interest)
thereon have been paid in full and (ii) no amendment shall be made to Section
6.01(e) of this Indenture that would impair the rights of the holders of
Preferred Securities provided therein without the prior consent of the holders
of each Preferred Security then outstanding unless and until the principal (and
premium, if any) of the Debentures and all accrued and (subject to Section 2.06)
unpaid interest (including any Compounded Interest) thereon have been paid in
full.
Upon the request of the Company, accompanied by a Board Resolution
authorizing the execution of any such supplemental indenture, and upon the
filing with the Trustee of evidence of the consent of Debentureholders (and, in
the case of any Debentures held as trust assets of the Trust and with respect to
which a Security Exchange has not theretofore occurred, such consent of holders
of the Preferred Securities and the Common Securities of the Trust as may be
required under the Declaration) required to consent thereto as aforesaid, the
Trustee shall join with the Company in the execution of such supplemental
indenture unless such supplemental indenture affects the Trustee's own rights,
duties or immunities under this Indenture or otherwise, in which case the
Trustee may in its discretion but shall not be obligated to enter into such
supplemental indenture.
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It shall not be necessary for the consent of the Debentureholders
affected thereby under this Section to approve the particular form of any
proposed supplemental indenture, but it shall be sufficient if such consent
shall approve the substance thereof.
Promptly after the execution by the Company and the Trustee of any
supplemental indenture pursuant to the provisions of this Section, the Trustee
shall transmit by mail, first class postage prepaid, a notice, setting forth in
general terms the substance of such supplemental indenture, to the
Debentureholders affected thereby as their names and addresses appear upon the
Debenture Register. Any failure of the Trustee to mail such notice, or any
defect therein, shall not, however, in any way impair or affect the validity of
any such supplemental indenture.
SECTION 9.03 Effect of Supplemental Indenture. Upon the execution of
any supplemental indenture pursuant to the provisions of this Article or of
Section 10.01, this Indenture shall be and be deemed to be modified and amended
in accordance therewith and the respective rights, limitations of rights,
obligations, duties and immunities under this Indenture of the Trustee, the
Company and the holders of Debentures affected thereby shall thereafter be
determined, exercised and enforced hereunder subject in all respects to such
modifications and amendments, and all the terms and conditions of any such
supplemental indenture shall be and be deemed to be part of the terms and
conditions of this Indenture for any and all purposes.
SECTION 9.04 Affected Debentures. Debentures affected by a supplemental
indenture, authenticated and delivered after the execution of such supplemental
indenture pursuant to the provisions of this Article or of Section 10.01, may
bear a notation in form approved by the Company, provided such form meets the
requirements of any exchange upon which such Debentures may be listed, as to any
matter provided for in such supplemental indenture. If the Company shall so
determine, new Debentures so modified as to conform, in the opinion of the Board
of Directors, to any modification of this Indenture contained in any such
supplemental indenture may be prepared by the Company, authenticated by the
Trustee and delivered in exchange for the Debentures then outstanding.
SECTION 9.05 Opinion of Counsel. The Trustee, subject to the provisions
of Section 7.01, may receive an Opinion of Counsel as conclusive evidence that
any supplemental indenture executed pursuant to this Article is authorized or
permitted by, and conforms to, the terms of this Article and that it is proper
for the Trustee under the provisions of this Article to join in the execution
thereof.
ARTICLE TEN
CONSOLIDATION, MERGER, SALE OR CONVEYANCE
SECTION 10.01 Consolidation, Merger, etc. of Company. The Company shall
not consolidate with or merge into any other Person or transfer or lease its
properties and assets
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substantially as an entirety to any Person, and the Company shall not permit any
other Person to consolidate with or merge into the Company, unless:
(a) either the Company shall be the continuing corporation, or
the corporation (if other than the Company) formed by such consolidation or into
which the Company is merged or to which the properties and assets of the Company
substantially as an entity are transferred or leased shall be a corporation
organized and existing under the laws of the United States of America or any
State thereof or the District of Columbia and shall expressly assume, by an
indenture supplemental hereto, executed and delivered to the Trustee, in form
satisfactory to the Trustee, all the obligations of the Company under the
Debentures and this Indenture; and
(b) immediately after giving effect to such transaction no
Event of Default, and no event which, after notice or lapse of time or both,
would become an Event of Default, shall have happened and be continuing.
SECTION 10.02 Successor Corporation. The successor corporation formed
by such consolidation or into which the Company is merged or to which such
transfer or lease is made shall succeed to and be substituted for, and may
exercise every right and power of, the Company under this Indenture with the
same effect as if such successor corporation had been named as the Company
herein, and thereafter (except in the case of a lease to another Person) the
predecessor corporation shall be relieved of all obligations and covenants under
the Indenture and the Debentures and, in the event of such conveyance or
transfer, any such predecessor corporation may be dissolved and liquidated.
SECTION 10.03 Opinion of Counsel Provided to Trustee. The Trustee,
subject to the provisions of Section 7.01, may receive an Opinion of Counsel as
conclusive evidence that any such consolidation, merger, sale, conveyance,
transfer or other disposition, and any such assumption, comply with the
provisions of this Article.
ARTICLE ELEVEN
SATISFACTION AND DISCHARGE OF INDENTURE; UNCLAIMED MONEYS
SECTION 11.01 Satisfaction and Discharge. (a) If at any time (1) the
Company shall have paid or caused to be paid the principal of and interest on
all the Debentures Outstanding hereunder (other than Debentures which have been
destroyed, lost or stolen and which have been replaced or paid as provided in
Section 2.07) as and when the same shall have become due and payable, or (2) the
Company shall have delivered to the Trustee for cancellation all Debentures
theretofore authenticated (other than any Debentures which shall have been
destroyed, lost or stolen and which shall have been replaced or paid as provided
in Section 2.07) or (3) (A) all the Debentures not theretofore delivered to the
Trustee for cancellation shall have become due and payable, or are by their
terms to become due and payable within one year or are to be called for
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redemption within one year under arrangements satisfactory to the Trustee for
the giving of notice of redemption, and (B) the Company shall have irrevocably
deposited or caused to be deposited with the Trustee as trust funds the entire
amount in cash (other than moneys repaid by the Trustee or any paying agent to
the Company in accordance with Section 11.04) or Government Obligations,
maturing as to principal and interest at such times and in such amounts as will
insure the availability of cash, or a combination thereof, sufficient in the
opinion of a nationally recognized firm of independent public accountants
expressed in a written certification thereof delivered to the Trustee, to pay
the principal and interest on all Debentures on each date that such principal or
interest is due and payable; and if, in any such case, the Company shall also
pay or cause to be paid all other sums payable hereunder by the Company, then
this Indenture shall cease to be of further effect (except as to (i) rights of
registration of transfer and exchange of Debentures and the Company's right of
optional redemption, if any, (ii) substitution of mutilated, defaced, destroyed,
lost or stolen Debentures, (iii) rights of holders of Debentures to receive
payments of principal thereof and interest thereon, upon the original stated due
dates therefor (but not upon acceleration), (iv) the rights, obligations, duties
and immunities of the Trustee hereunder, (v) the rights of the holders of
Debentures as beneficiaries hereof with respect to the property so deposited
with the Trustee payable to all or any of them, and (vi) the obligations of the
Company under Section 4.02) and the Trustee, on demand of the Company
accompanied by an Officers' Certificate and an Opinion of Counsel and at the
cost and expense of the Company, shall execute proper instruments acknowledging
such satisfaction of and discharging this Indenture; provided, that the rights
of holders of the Debentures to receive amounts in respect of principal of and
interest on the Debentures held by them shall not be delayed longer than
required by then-applicable mandatory rules or policies of any securities
exchange upon which the Debentures are listed. The Company agrees to reimburse
the Trustee for any costs or expenses thereafter reasonably and properly
incurred and to compensate the Trustee for any services thereafter reasonably
and properly rendered by the Trustee in connection with this Indenture or the
Debentures.
(b) The following provisions shall apply to the Debentures
unless specifically otherwise provided in a Board Resolution or indenture
supplemental hereto provided pursuant to Section 2.01. In addition to discharge
of the Indenture pursuant to the next preceding paragraph, the Company shall be
deemed to have paid and discharged the entire indebtedness on all the Debentures
on the date of the deposit referred to in subparagraph (1) below, and the
provisions of this Indenture with respect to the Debentures shall no longer be
in effect (except as to (i) rights of registration of transfer and exchange of
Debentures and the Company's right of optional redemption, if any, (ii)
substitution of mutilated, defaced, destroyed, lost or stolen Debentures, (iii)
rights of holders of Debentures to receive payments of principal thereof and
interest thereon, upon the original stated due dates therefor (but not upon
acceleration), if any, (iv) the rights, obligations, duties and immunities of
the Trustee hereunder, (v) the rights of the holders of Debentures as
beneficiaries hereof with respect to the property so deposited with the Trustee
payable to all or any of them and (vi) the obligations of the Company under
Section 4.02) and the Trustee, at the expense of the Company, shall at the
Company's request, execute proper instruments acknowledging the same, if
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(1) with reference to this provision the Company has
irrevocably deposited or caused to be irrevocably deposited with the Trustee as
trust funds in trust, specifically pledged as security for, and dedicated solely
to, the benefit of the holders of the Debentures (i) cash in an amount, or (ii)
Governmental Obligations maturing as to principal and interest at such times and
in such amounts as will insure the availability of cash or (iii) a combination
thereof, sufficient, in the opinion of a nationally recognized firm of
independent public accountants expressed in a written certification thereof
delivered to the Trustee, to pay the principal and interest on all Debentures of
such series on each date that such principal or interest is due and payable;
(2) such deposit will not result in a breach or violation of,
or constitute a default under, any agreement or instrument to which the Company
is a party or by which it is bound;
(3) the Company has delivered to the Trustee an Opinion of
Counsel based on the fact that (x) the Company has received from, or there has
been published by, the Internal Revenue Service a ruling or (y) since the date
hereof, there has been a change in the applicable Federal income tax law, in
either case to the effect that, and such opinion shall confirm that, the holders
of the Debentures will not recognize income, gain or loss for Federal income tax
purposes as a result of such deposit, defeasance and discharge and will be
subject to Federal income tax on the same amount and in the same manner and at
the same times, as would have been the case if such deposit, defeasance and
discharge had not occurred;
(4) the Company has delivered to the Trustee an Officer's
Certificate and an Opinion of Counsel, each stating that all conditions
precedent provided for relating to the defeasance contemplated by this provision
have been complied with; and
(5) no event or condition shall exist that, pursuant to the
provisions of Section 14.02 or 14.03, would prevent the Company from making
payments of the principal of or interest on the Debentures on the date of such
deposit.
SECTION 11.02 Deposits held in Trust. Subject to Section 11.04, all
moneys deposited with the Trustee (or other Trustee) pursuant to Section 11.01
shall be held in trust and applied by it to the payment, either directly or
through any paying agent (including the Company acting as its own paying agent),
to the holders of the particular Debentures for the payment or redemption of
which such moneys have been deposited with the Trustee, of all sums due and to
become due thereon for principal and interest; but such money need not be
segregated from other funds except to the extent required by law.
SECTION 11.03 Moneys held by Paying Agent. In connection with the
satisfaction and discharge of this Indenture with respect to any Debentures, all
moneys then held by any paying agent under the provisions of this Indenture with
respect to such Debentures shall, upon demand of the Company, be repaid to it or
paid to the Trustee and thereupon such paying agent shall be released from all
further liability with respect to such moneys.
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SECTION 11.04 Repayment to Company. Any moneys deposited with or paid
to the Trustee or any paying agent for the payment of the principal of or
interest on any Debenture and not applied but remaining unclaimed for two years
after the date upon which such principal or interest shall have become due and
payable, shall, upon the written request of the Company and unless otherwise
required by mandatory provisions of applicable escheat or abandoned or unclaimed
property law, be repaid to the Company by the Trustee for such Debentures or
such paying agent, and the holder of the Debentures shall, unless otherwise
required by mandatory provisions of applicable escheat or abandoned or unclaimed
property laws, thereafter look only to the Company for any payment which such
holder may be entitled to collect, and all liability of the Trustee or any
paying agent with respect to such moneys shall thereupon cease; provided,
however, that the Trustee or such paying agent, before being required to make
any such repayment with respect to moneys deposited with it for any payment
series, shall at the expense of the Company, mail by first-class mail to holders
of such Debentures at their addresses as they shall appear on the Debenture
Register, notice, that such moneys remain and that, after a date specified
therein, which shall not be less than thirty days from the date of such mailing
or publication, any unclaimed balance of such money then remaining will be
repaid to the Company.
SECTION 11.05 Indemnification of Trustee. The Company shall pay and
indemnify the Trustee against any tax, fee or other charge imposed on or
assessed against the Governmental Obligations deposited pursuant to Section
11.01 or the principal or interest received in respect of such obligations.
ARTICLE TWELVE
IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS
SECTION 12.01 Immunity. No recourse under or upon any obligations,
covenant or agreement of this Indenture, or of any Debenture, or for any claim
based thereon or otherwise in respect thereof, shall be had against any
incorporator, stockholder, officer or director, past, present or future as such,
of the Company or of any predecessor or successor corporation, either directly
or through the Company or any such predecessor or successor corporation, whether
by virtue of any constitution, statute or rule of law, or by the enforcement of
any assessment or penalty or otherwise; it being expressly understood that this
Indenture and the obligations issued hereunder are solely corporate obligations,
and that no such personal liability whatever shall attach to, or is or shall be
incurred by, the incorporators, stockholders, officers or directors as such, of
the Company or of any predecessor or successor corporation, or any of them,
because of the creation of the indebtedness hereby authorized, or under or by
reason of the obligations, covenants or agreements contained in this Indenture
or in any of the Debentures or implied therefrom; and that any and all such
personal liability of every name and nature, either at common law or in equity
or by constitution or statute, of, and any and all such rights and claims
against, every such incorporator, stockholder, officer or director as such,
because of the creation
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of the indebtedness hereby authorized, or under or by reason of the obligations,
covenants or agreements contained in this Indenture or in any of the Debentures
or implied therefrom, are hereby expressly waived and released as a condition
of, and as a consideration for, the execution of this Indenture and the issuance
of such Debentures.
ARTICLE THIRTEEN
MISCELLANEOUS PROVISIONS
SECTION 13.01 Successors and Assigns. All the covenants, stipulations,
promises and agreements in this Indenture contained by or on behalf of the
Company shall bind its successors and assigns, whether so expressed or not.
SECTION 13.02 Actions by Predecessor. Any act or proceeding by any
provision of this Indenture authorized or required to be done or performed by
any board, committee or officer of the Company shall and may be done and
performed with like force and effect by the corresponding board, committee or
officer of any corporation that shall at the time be the lawful sole successor
of the Company.
SECTION 13.03 Surrender of Power. The Company by instrument in writing
executed by authority of two-thirds of its Board of Directors and delivered to
the Trustee may surrender any of the powers reserved to the Company and
thereupon such power so surrendered shall terminate both as to the Company and
as to any successor corporation.
SECTION 13.04 Notices. Except as otherwise expressly provided herein
any notice or demand which by any provision of this Indenture is required or
permitted to be given or served by the Trustee or by the holders of Debentures
to or on the Company may be given or served by being deposited first class
postage prepaid in a post-office letterbox addressed (until another address is
filed in writing by the Company with the Trustee), as follows: SunSource Inc.,
2600 One Logan Square, Philadelphia, PA 19103, Attention: Secretary. Any notice,
election, request or demand by the Company or any Debentureholder to or upon the
Trustee shall be deemed to have been sufficiently given or made, for all
purposes, if given or made in writing at the Corporate Trust Office of the
Trustee.
SECTION 13.05 Governing Law. This Indenture and each Debenture shall be
deemed to be a contract made under the laws of the State of New York without
regard to the conflicts of laws provisions thereof, and for all purposes shall
be construed in accordance with the laws of said State.
SECTION 13.06 Officers' Certificate from Company. (a) Upon any
application or demand by the Company to the Trustee to take any action under any
of the provisions of this Indenture, the Company shall furnish to the Trustee an
Officers' Certificate stating that all
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conditions precedent provided for in this Indenture relating to the proposed
action have been complied with and an Opinion of Counsel stating that in the
opinion of such counsel all such conditions precedent have been complied with,
except that in the case of any such application or demand as to which the
furnishing of such documents is specifically required by any provision of this
Indenture relating to such particular application or demand, no additional
certificate or opinion need be furnished.
(b) Each certificate or opinion provided for in this Indenture
and delivered to the Trustee with respect to compliance with a condition or
covenant in this Indenture (other than the certificate provided pursuant to
Section 5.03(d) of this Indenture) shall include (1) a statement that the person
making such certificate or opinion has read such covenant or condition; (2) a
brief statement as to the nature and scope of the examination or investigation
upon which the statements or opinions contained in such certificate or opinion
are based; (3) a statement that, in the opinion of such person, the person has
made such examination or investigation as is necessary to enable him to express
an informed opinion as to whether or not such covenant or condition has been
complied with; and (4) a statement as to whether or not, in the opinion of such
person, such condition or covenant has been complied with.
SECTION 13.07 Date of Payments. Except as provided pursuant to Section
2.01 pursuant to a Board Resolution, and as set forth in an Officers'
Certificate, or established in one or more indentures supplemental to the
Indenture, in any case where the date of maturity of interest or principal of
any Debenture or the date of redemption of any Debenture shall not be a business
day then payment of interest or principal (and premium, if any) may be made on
the next succeeding business day with the same force and effect as if made on
the nominal date of maturity or redemption, and no interest shall accrue for the
period after such nominal date, except that if such business day is in the next
calendar year, such payment shall be made on the immediately preceding business
day, with the same force and effect as if made on such date.
SECTION 13.08 Certain Duties under Trust Indenture Act. If and to the
extent that any provision of this Indenture limits, qualifies or conflicts with
the duties imposed by Sections 310 to 317, inclusive, of the Trust Indenture
Act, such imposed duties shall control.
SECTION 13.09 Counterparts. This Indenture may be executed in any
number of counterparts, each of which shall be an original; but such
counterparts shall together constitute but one and the same instrument.
SECTION 13.10 Severability. In case any one or more of the provisions
contained in this Indenture or in the Debentures of any series shall for any
reason be held to be invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other provisions
of this Indenture or of such Debentures, but this Indenture and such Debentures
shall be construed as if such invalid or illegal or unenforceable provision had
never been contained herein or therein.
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SECTION 13.11 Assignment by Company. The Company will have the right at
all times to assign any of its rights or obligations under this Indenture to a
direct or indirect wholly owned Subsidiary of the Company; provided that, in the
event of any such assignment, the Company will remain jointly and severally
liable for all such obligations. Subject to the foregoing, this Indenture is
binding upon and inures to the benefit of the parties hereto and their
respective successors and assigns. This Indenture may not otherwise be assigned
by the parties hereto.
SECTION 13.12 Holders of Preferred Securities as Third Party
Beneficiaries. The Company hereby acknowledges that, to the extent specifically
set forth herein, prior to a Security Exchange with respect to the Debentures
held as trust assets of the Trust, the holders of the Preferred Securities of
the Trust shall expressly be third party beneficiaries of this Indenture.
ARTICLE FOURTEEN
SUBORDINATION OF DEBENTURES
SECTION 14.01 Subordination. The Company, for itself, its successors
and assigns, covenants and agrees, and each holder of a Debenture, by its
acceptance thereof, likewise covenants and agrees, that the payment of the
principal of, premium, if any, and interest on, each and all of the Debentures
is hereby expressly subordinated, to the extent and in the manner hereinafter in
this Article Fourteen set forth, in right of payment to the prior payment in
full in cash of all Senior Indebtedness.
SECTION 14.02 Payments upon Liquidation, etc.
(a) In the event of any insolvency or bankruptcy proceedings,
and any receivership, liquidation, reorganization or other similar proceedings
in connection therewith, relative to the Company or to its creditors, as such,
or to its property, and in the event of any proceedings for voluntary
liquidation, dissolution or other winding up of the Company, whether or not
involving insolvency or bankruptcy, and in the event of any execution sale, then
the holders of Senior Indebtedness shall be entitled to receive payment in full
of principal thereof and interest due thereon (including without limitation,
except to the extent, if any, prohibited by mandatory provisions of law,
post-petition interest in any such proceedings) in cash of all Senior
Indebtedness before the holders of Debentures are entitled to receive any
payment on account of the principal of or interest on the indebtedness evidenced
by the Debentures, and to that end the holders of Senior Indebtedness shall be
entitled to receive for application in payment thereof any payment or
distribution of any kind or character, whether in cash or property or
securities, which may be payable or deliverable in connection with any such
proceedings or sale in respect of the principal of or interest on the Debentures
other than securities of the Company as reorganized or readjusted or securities
of the Company or any other corporation provided for by a plan of reorganization
or readjustment the payment of which is subordinate, at least to the extent
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provided in this Article Fourteen with respect to the Debentures, to the payment
of all indebtedness of the nature of Senior Indebtedness, provided that the
rights of the holders of the Senior Indebtedness are not altered by such
reorganization or readjustment;
(b) In the event and during the continuation of any default in
payment of any Senior Indebtedness or if any event of default, as therein
defined, shall exist under any Senior Indebtedness or any agreement pursuant to
which any Senior Indebtedness is issued, no payment of the principal of, premium
if any, or interest on the Debentures shall be made and the Company covenants
that it will, upon becoming aware of any such default or event of default,
provide written notice to the Trustee of such default or event of default;
(c) In the event that the Debentures are declared due and
payable before their expressed maturity pursuant to the Indenture (under
circumstances when the provisions of subsection (a) of this Section 14.02 shall
not be applicable), the holders of all Senior Indebtedness shall be entitled to
receive payment in full in cash of such Senior Indebtedness before such holders
of Debentures are entitled to receive any payment on account of the principal of
or interest on the Debentures; and
(d) No holder of Senior Indebtedness shall be prejudiced in
its right to enforce subordination of the Debentures by any act or failure to
act on the part of the Company.
SECTION 14.03 Receipt of Payments; Subrogation. In the event that,
notwithstanding the provisions of Section 14.02, any payment or distribution of
assets of the Company of any kind or character, whether in cash, property or
securities (other than securities of the Company as reorganized or readjusted or
securities of the Company or any other corporation provided for by a plan of
reorganization or readjustment the payment of which is subordinate, at least to
the extent provided in this Article Fourteen with respect to the Debentures, to
the payment of all indebtedness of the nature of Senior Indebtedness, provided
that the rights of the holders of the Senior Indebtedness are not altered by
such reorganization or readjustment) shall be received by the holders or by the
Trustee for their benefit in connection with any proceedings or sale referred to
in subsection (a) of Section 14.02 before all Senior Indebtedness is paid in
full in cash, such payment or distribution shall be paid over to the holders of
such Senior Indebtedness or their representative or representatives or to the
Trustee or Trustees under any indenture under which any instruments evidencing
any of such Senior Indebtedness may have been issued, ratably according to the
aggregate amounts remaining unpaid on account of the Senior Indebtedness held or
represented by each, for application to the payment of all Senior Indebtedness
remaining unpaid until all such Senior Indebtedness shall have been paid in full
in cash, after giving effect to any concurrent payment or distribution to the
holders of such Senior Indebtedness.
From and after the payment in full in money of all Senior Indebtedness,
the holders of Debentures (together with the holders of any other indebtedness
of the Company which is subordinate in right of payment to the payment in full
of all Senior Indebtedness, which is not subordinate in right of payment to the
Debentures and which by its terms grants such right of
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subrogation to the holder thereof) shall be subrogated to the rights of the
holders of Senior Indebtedness to receive payments or distributions of assets or
securities of the Company applicable to the Senior Indebtedness until the
Debentures shall be paid in full in cash, and, for the purposes of such
subrogation, no such payments or distributions to the holders of Senior
Indebtedness of assets or securities, which otherwise would have been payable or
distributable to holders of Debentures , shall, as between the Company, its
creditors other than the holders of Senior Indebtedness, and the holders of the
Debentures, be deemed to be a payment by the Company to or on account of the
Senior Indebtedness, it being understood that the provisions of this Article
Fourteen are and are intended solely for the purpose of defining the relative
rights of the holders of the Debentures, on the one hand, and the holders of the
Senior Indebtedness, on the other hand, and nothing contained in this Article
Fourteen or elsewhere in this Indenture or in the Debentures is intended to or
shall impair as between the Company, its creditors other than the holders of
Senior Indebtedness, and the holders of the Debentures, the obligation of the
Company, which is unconditional and absolute, to pay to the holders of the
Debentures the principal of and interest on the Debentures as and when the same
shall become due and payable in accordance with their terms, or to affect the
relative rights of the holders of the Debentures and creditors of the Company
other than the holders of the Senior Indebtedness, nor shall anything herein or
therein prevent the Trustee or the holder of any Debenture from exercising all
remedies otherwise permitted by applicable law upon default under this Indenture
subject to the rights of the holders of Senior Indebtedness, under Section
14.02, to receive cash, property or securities of the Company otherwise payable
or deliverable to the holders of the Debentures.
Upon any distribution or payment in connection with any proceedings or
sale referred to in subsection (a) of Section 14.02, the Trustee, as between the
Trustee and the holders of the Debentures subject to the provisions of Sections
7.01 and 7.02 hereof, shall be entitled to rely upon a certificate of the
liquidating Trustee or agent or other person making any distribution or payment
to the Trustee for the purpose of ascertaining the holders of Senior
Indebtedness entitled to participate in such payment or distribution, the amount
of such Senior Indebtedness or the amount payable thereon, the amount or amounts
paid or distributed thereon and all other facts pertinent thereto or to this
Article Fourteen. In the event that the Trustee determines, in good faith, that
further evidence is required with respect to the right of any person as a holder
of Senior Indebtedness to participate in any payment or distribution pursuant to
this Section 14.03, the Trustee may request such person to furnish evidence to
the reasonable satisfaction of the Trustee as to the amount of Senior
Indebtedness held by such person, as to the extent to which such person is
entitled to participate in such payment or distribution, and as to other facts
pertinent to the rights of such person under this Section 14.03, and if such
evidence is not furnished, the Trustee may defer any payment to such person
pending judicial determination as to the right of such person to receive such
payment.
The Trustee, however, shall not be deemed to owe any fiduciary duty to
the holders of Senior Indebtedness, and shall not be liable to any such holders
if it shall in good faith pay over or distribute to holders of Debentures or the
Company or any other person moneys or assets to which any holders of Senior
Indebtedness shall be entitled by virtue of Article Fourteen of this
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Indenture or otherwise.
SECTION 14.04 Application of Payments to Debentures. Nothing contained
in this Article Fourteen or elsewhere in this Indenture, or in any of the
Debentures, shall prevent at any time, (a) the Company, except under the
conditions described in Section 14.02, from making payments of principal of or
interest on the Debentures, provided, however, that payments of principal of or
interest on the Debentures shall be made by the Company only within three
business days of the due dates for such payments as provided in Article Two or
(b) the application by the Trustee of any moneys deposited with it hereunder to
the payment of or on account of the principal of or interest on the Debentures,
if at the time of such deposit the Trustee did not have written notice in
accordance with Section 14.06 of any event prohibiting the making of such
deposit by the Company or if in the event of redemption, the Trustee did not
have such written notice prior to the time that the notice of redemption
pursuant to Section 3.02 was given (which notice of redemption shall in no event
be given more than 60 days prior to the date fixed for redemption).
SECTION 14.05 Banking Effect. Each Debentureholder by his acceptance of
a Debenture authorizes and directs the Trustee on his behalf to take such action
as may be necessary or appropriate to acknowledge or effectuate the
subordination as provided in this Article Fourteen and appoints the Trustee as
attorney-in-fact for any and all such purposes, including, in the event of any
dissolution, winding up, liquidation or reorganization of the Company (whether
in bankruptcy, insolvency or receivership proceedings or upon an assignment for
the benefit of creditors or otherwise) tending towards liquidation of the
business and assets of the Company, the immediate filing of a claim for the
unpaid balance of such Debentureholder's Debentures in the form required in said
proceedings and cause said claim to be approved.
SECTION 14.06 Knowledge of Trustee. Notwithstanding the provisions of
this Article Fourteen or any other provisions of this Indenture, the Trustee
shall not be charged with the knowledge of the existence of any facts which
would prohibit the making of any payment of moneys to the Trustee, unless and
until the Trustee shall have received written notice thereof from the Company or
from the holder or the representative of any class of Senior Indebtedness;
provided, however, that if at least two business days prior to the date upon
which by the terms hereof any such monies may become payable for any purpose
(including, without limitation, the payment of either the cash amount payable at
maturity or interest on any Debenture) the Trustee shall not have received with
respect to such monies the notice provided for in this Section 14.06, then,
anything herein contained to the contrary notwithstanding, the Trustee shall
have full power and authority to receive such monies and to apply the same to
the purpose for which they were received, and shall not be affected by any
notice to the contrary, which may be received by it on or after such two
business days prior to such date.
SECTION 14.07 Rights of Trustee as Holder of Senior Indebtedness. The
Trustee shall be entitled to all the rights set forth in this Article Fourteen
with respect to any Senior Indebtedness which may at any time be held by it, to
the same extent as any other holder of
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Senior Indebtedness.
SECTION 14.08 Paying Agent. In case at any time any paying agent other
than the Trustee shall be appointed by the Company and be then acting hereunder,
the term "Trustee" as used in this Article Fourteen shall in such case (unless
the context shall otherwise require) be construed as extending to and including
such paying agent within its meaning as fully for all intents and purposes as if
such paying agent were named in this Article Fourteen in place of the Trustee.
The Bank of New York, as Trustee, hereby accepts the trust in this
Indenture declared and provided, upon the terms and conditions hereinabove set
forth.
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IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly executed as of the day and year first above written.
SUNSOURCE INC.
By ______________________________
THE BANK OF NEW YORK, as Trustee
By _______________________________
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EXHIBIT A
FORM OF DEBENTURE
(FORM OF FACE OF DEBENTURE)
No.
CUSIP NO. 867948 AA __
SUNSOURCE INC.
11.6% JUNIOR SUBORDINATED DEBENTURE,
DUE 2027
SunSource Inc., a corporation duly organized and existing under the
laws of the State of Delaware (herein referred to as the "Company," which term
includes any successor corporation under the Indenture hereinafter referred to)
for value received, hereby promises to pay to ______________, or registered
assigns, the principal sum of _______ Dollars on ___________, 2027, and to pay
interest on said principal sum from * , 1997 or from the most recent interest
payment date (each such date, an "Interest Payment Date") to which interest has
been paid or duly provided for (subject to deferral as set forth herein) monthly
in arrears on each Interest Payment Date commencing , 1997 at the rate of 11.6%
per annum plus Compounded Interest (as defined below), if any, until the
principal hereof shall have become due and payable, and on any overdue principal
and premium, if any, and (without duplication and to the extent that payment of
such interest is enforceable under applicable law) on any overdue installment of
interest at the same rate per annum. The amount of interest payable on an
Interest Payment Date shall be computed on the basis of a 360-day year of twelve
30-day months and for any period shorter than a full monthly interest 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 30-day month. In the
event that any date on which interest is payable on this Debenture is not a
business day, then payment of interest payable on such date will be made on the
next succeeding day which 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. The interest installment so payable, and punctually paid or duly
provided for, on any Interest Pyament date will, as provided in the Indenture,
be paid to the person in which name this Debtenture (or one or more Predecessor
Debentures, as defined in such Indenture) is registered at the close of business
on the regular record date for such interest installment, which, except as set
forth below, shall be the close of business on the first day of the month in
which such Interest Payment Date occurs. Any such interest installment not
punctually
- ------------------------
* Insert Effective Date
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paid or duly provided for shall forthwith cease to be payable to the registered
holders on such regular record date, and may be paid to the person in whose name
the Debenture (or one or more Predecessor Debentures) is registered at the close
of business on a special record date to be fixed by the Trustee for the payment
of such defaulted interest, notice whereof shall be given to the registered
holders of the Debentures not less than ten days prior to such special record
date, or may be paid at any time in any other lawful manner not inconsistent
with the requirements of any securities exchange on which the Debentures may
listed, and upon such notice as may be required by such exchange, all as more
fully provided in the Indenture. The principal of (and premium, if any) and the
interest on this Debenture shall be payable at the office or agency of the
Trustee maintained for that purpose in the Borough of Manhattan, The City and
State of New York, in any coin or currency of the United States of America which
at the time of payment is legal tender for payment of public and private debts;
provided, however, that payment of interest may be made at the option of the
Company by check mailed to the registered holder at such address as shall appear
in the Debenture register and the payment of principal will be made only upon
the surrender of this Debenture to the Trustee. Notwithstanding the foregoing,
so long as the owner and record holder of this Debenture is the Property Trustee
(as defined in the Indenture referred to on the reverse hereof), the payment of
the principal of (and premium, if any) and interest (including Compounded
Interest, if any) on this Debenture will be made at such place and to such
account of the Property Trustee as may be designated by the Property Trustee.
The indebtedness evidenced by this Debenture is, to the extent provided
in the Indenture, subordinate and subject in right of payment to the prior
payment in full of all Senior Indebtedness, and this Debenture is issued subject
to the provisions of the Indenture with respect thereto. Each Holder of this
Debenture, by accepting the same, (a) agrees to and shall be bound by such
provisions, (b) authorizes and directs the Trustee on his behalf to take such
action as may be necessary or appropriate to acknowledge or effectuate the
subordination so provided and (c) appoints the Trustee his attorney-in-fact for
any and all such purposes. Each Holder hereof, by his acceptance hereof, hereby
waives all notice of the acceptance of the subordination provisions contained
herein and in the Indenture by each holder of Senior Indebtedness, whether now
outstanding or hereafter incurred, and waives reliance by each such Holder upon
said provisions.
This Debenture shall not be entitled to any benefit under the Indenture
hereinafter referred to, be valid or become obligatory for any purpose until the
Certificate of Authentication hereon shall have been signed by or on behalf of
the Trustee.
Unless the Certificate of Authentication hereon has been executed by
the Trustee referred to on the reverse side hereof, this Debenture shall not be
entitled to any benefit under the Indenture or be valid or obligatory for any
purpose.
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The provisions of this Debenture are continued on the reverse side
hereof and such continued provisions shall for all purposes have the same effect
as though fully set forth at this place.
IN WITNESS WHEREOF, the Company has caused this Debenture to be
executed.
Dated___________________________
SUNSOURCE INC.
By _______________________
Chairman
Attest:
By______________________________
(FORM OF CERTIFICATE OF AUTHENTICATION)
CERTIFICATE OF AUTHENTICATION
This is one of the Debentures described in the within-mentioned
Indenture.
______________________________
______________________________ or _________________________
as Trustee as Authentication Agent
By____________________________ _________________________
Authorized Signatory Authorized Signatory
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(FORM OF REVERSE OF DEBENTURE)
This Debenture is one of a duly authorized series of Debentures of the
Company (herein sometimes referred to as the "Debentures"), specified in the
Indenture, all issued or to be issued in one or more series under and pursuant
to an Indenture dated as of ________, 1997 (herein referred to as the
"Indenture") duly executed and delivered between the Company and The Bank of New
York, a New York banking corporation, as Trustee (herein referred to as the
"Trustee"), to which Indenture and all indentures supplemental thereto reference
is hereby made for a description of the rights, limitations of rights,
obligations, duties and immunities thereunder of the Trustee, the Company and
the holders of the Debentures, and, to the extent specifically set forth in the
Indenture, the holders of Senior Indebtedness and Preferred Securities.
Except as provided in the next paragraph, the Debentures may not be
redeemed by the Company prior to _________, 2002. The Company shall have the
right to redeem this Debenture, in whole or in part, from time to time, on or
after ______, 2002 (an "Optional Redemption") at a redemption price equal to
100% of the principal amount to be redeemed plus any accrued and unpaid interest
thereon, including Compounded Interest, if any, to the date of such redemption
(the "Optional Redemption Price"). Any redemption pursuant to this paragraph
will be made upon not less than 30 nor more than 60 days' notice, at the
Optional Redemption Price.
If, at any time, a Tax Event (as defined below) shall occur or be
continuing after receipt of a Dissolution Tax Opinion (as defined below) and (i)
the Regular Trustees of the Trust and the Company shall have received an opinion
(a "Redemption Tax Opinion") of a 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 Company would be precluded from deducting the
interest on the Debentures for United States federal income tax purposes even if
(a) the Debentures were distributed to the holders of Trust Preferred Securities
and Common Securities in liquidation of such holder's interest in the Trust as
set forth in the Declaration or (b) the Corporation shortened the Stated
Maturity of the Debentures as described in the last sentence of this paragraph,
and (ii) the Regular Trustees shall have been informed by such tax counsel that
a No Recognition Opinion (as defined below) cannot be delivered to the Trust,
the Company shall have the right at any time, upon not less than 30 nor more
than 60 days notice, to redeem the Debentures in whole or in part for cash at a
redemption price equal to 101% of the principal amount of the Debentures if the
Redemption occurs prior to ____________, 2002 or 100% thereafter, within 90 days
following the occurrence of such Tax Event; provided, however, that, if at the
time there is available to the Company or the Trustee, on behalf of the Trust
the opportunity to eliminate, within such 90 day period, the Tax Event by taking
some ministerial action ("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 Company or the holders of the Trust Preferred
Securities, the Company or the Trustee on behalf of the Trust will pursue such
measure in lieu of redemption and provided further that the Company shall have
no right to redeem the Debentures while the Regular Trustees on behalf of
SunSource Capital Trust are pursuing any such Ministerial Action. In addition to
taking any Ministerial Action, if a Tax Event occurs and is continuing and in
the opinion of nationally recognized independent tax counsel to the Trust, there
would in all cases, after effecting the termination of the Trust and the
distribution of the Debentures to the holders of the Trust Preferred Securities
in exchange therefor upon liquidation of the Trust, be more than an
insubstantial risk that the Tax Event would continue, then the Corporation shall
have the right to shorten the stated maturity of the Debentures (and thereby
cause the Trust Preferred Securities to be redeemed on such earlier date) to the
latest date permissible (which date should in no event be earlier than September
30, 2002) without adversely affecting the deductibility of interest under
federal income tax law payable on the Debentures, such that, in the opinion of
nationally recognized independent tax counsel to the Trust, after advancing the
stated maturity of the Debentures, interest paid on the Debentures will be
deductible by the Corporation for federal income tax purposes.
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"Tax Event" means that the Company and the Regular Trustees shall have
obtained an opinion of nationally recognized independent tax counsel experienced
in such matters (a "Dissolution Tax Opinion") 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 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
announced 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 Debentures, (ii) the Trust is, or will be
within 90 days of the date thereof, subject to more than a de minimis amount of
taxes, duties or other governmental charges or (iii) interest payable by the
Company to the Trust on the Debentures is not, or within 90 days of the date
thereof will not be, deductible by the Company for United States federal income
tax purposes.
"No Recognition Opinion" means an opinion of a nationally recognized
independent tax counsel experienced in such matters, which opinion may rely on
any then applicable published revenue ruling 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 a
dissolution of the Trust and distribution of the Debentures as provided in the
Declaration.
If the Debentures are only partially redeemed by the Company pursuant
to an Optional Redemption or as a result of a Tax Event as described above, the
Debentures will be redeemed pro rata or by lot or in some other equitable manner
determined by the Trustee.
In the event of redemption of this Debenture in part only, a new
Debenture or Debentures for the unredeemed portion hereof will be issued in the
name of the Debentureholder hereof upon the cancellation hereof.
In case an Event of Default, as defined in the Indenture, shall have
occurred and be continuing, the principal of all of the Debentures may be
declared, and upon such declaration shall become, due and payable, in the
manner, with the effect and subject to the conditions provided in the Indenture.
The Indenture contains provisions for defeasance at any time of the
entire indebtedness of this Debenture upon compliance by the Company with
certain conditions set forth therein.
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The Indenture contains provisions permitting the Company and the
Trustee, with the consent of the holders of not less than a majority in
aggregate principal amount of the Debentures affected at the time outstanding,
as defined in the Indenture (and, in the case of any Debentures held as trust
assets of a SunSource Capital Trust and with respect to which a Security
Exchange has not theretofore occurred, such consent of holders of the Preferred
Securities and the Common Securities of such SunSource Capital Trust as may be
required under the Declaration of Trust of such SunSource Capital Trust), to
execute supplemental indentures for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of the Indenture or
of any supplemental indenture or of modifying in any manner the rights of the
holders of the Debentures; provided, however, that no such supplemental
indenture shall (a) extend the fixed maturity of any Debentures, or reduce the
principal amount thereof, or reduce the rate or extend the time of payment of
interest thereon, or reduce any premium payable upon the redemption thereof,
without the consent of the holder of each Debenture so affected, (b) change the
place of payment where, or the coin or currency in which, the Debentures or
interest thereon, are payable, (c) reduce the aforesaid percentage of
Debentures, the holders of which are required to consent to any such
supplemental indenture, (d) modify any of the provisions of the Indenture
relating to supplemental indentures or direction by debentureholders, except to
increase any such percentage or to provide that certain other provisions of the
Indenture cannot be waived without the consent of the holder of each Debenture
thereby affected, (e) modify the provisions of the Indenture with respect to the
subordination of outstanding Debentures in a manner adverse to the holders
thereof, (f) impair the right to institute suit for the enforcement of any
payment on or with respect to any Debenture, (g) reduce the percentage in
principal amount of the outstanding 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, (h) change the obligation of the Company to maintain an office or
agency in the places and for the purposes specified herein or (i) modify the
provisions relating to waiver of certain defaults or any of the foregoing
provisions, without the consent of the holders of each Debenture (and, in the
case of any Debentures held as trust assets of the Trust and with respect to
which a Security Exchange has not theretofore occurred, such consent of the
holders of the Preferred Securities and the Common Securities of the Trust as
may be required under the Declaration) then outstanding and affected thereby
provided, further, that, so long as the Preferred Securities remain outstanding
(i) no such amendment shall be made that adversely affects the holders of such
Preferred Securities in any material respect, and no termination of the
Indenture shall occur, and no waiver of any Event of Default or compliance with
any covenant under the Indenture shall be effective, without the prior consent
of the holders of at least a majority in liquidation amount of such Preferred
Securities then outstanding unless and until the principal (and premium, if any)
of the Debentures and all accrued and unpaid interest (including any Compounded
Interest) thereon have been paid in full and (ii) no amendment shall be made to
the Indenture that would impair the rights of the holders of Preferred
Securities to institute an action in an Event of Default without the prior
consent of the holders of each Preferred Security then outstanding unless and
until the principal (and premium, if any) of the Debentures and all accrued and
unpaid interest (including any Compounded Interest) thereon have been paid in
full. The Indenture also contains provisions permitting the holders of a
majority in aggregate principal
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amount of the Debentures at the time outstanding affected thereby (with, in the
case of any series of Debentures held as trust assets of the Trust and with
respect to which a Security Exchange has not theretofore occurred, such consent
of holders of the Trust Preferred Securities and the Trust Common Securities of
the Trust as may be required under the Declaration), on behalf of the holders of
all of the Debentures, to waive any past default in the performance of any of
the covenants contained in the Debenture or established pursuant to the
Indenture and its consequences, except a default in the payment of the principal
of, or premium, if any, or interest on, any of the Debentures as and when the
same shall become due by the terms of such Debentures otherwise than by
acceleration (unless such default has been cured and a sum sufficient to pay all
matured installments of interest and principal and any premium has been
deposited with the Trustee (in accordance with the Indenture)) or a call for
redemption of Debentures or a default in respect of a covenant or provision of
the Indenture which cannot be modified or amended without the consent of the
Debentureholder of each outstanding security affected thereby. Upon any such
waiver, the default covered thereby shall be deemed to be cured for all purposes
of the Indenture and the Company, the Trustee and the holders of the Debentures
shall be restored to their former positions and rights hereunder, respectively;
but no such waiver shall extend to any subsequent or other default or impair any
right consequent thereon.
No reference herein to the Indenture (other than such Section) and
provision of this Debenture or of the Indenture shall alter or impair the
obligation of the Company, which is absolute and unconditional, to pay the
principal of and premium, if any, and interest on this Debenture at the time and
place at the rate and in the manner herein prescribed.
So long as the Company is not in default in the payment of interest on
the Debentures, the Company shall have the right, at any time during the term of
the Debentures, from time to time to extend the interest payment period of such
Debentures for up to 60 consecutive months (the "Extension Period"), at the end
of which period the Company shall pay all interest accrued and unpaid thereon
(together with interest thereon at the rate of 11.6% per annum to the extent
permitted by applicable law, compounded monthly ("Compounded Interest")). During
such Extension Period the Company shall not declare or pay any dividend 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 Company may pay all or any portion of the interest accrued on the
Debentures on any Interest Payment Date to holders of record on the regular
record date for such Interest Payment Date or from time to time further extend
such Period, provided that such Extension Period together with all such further
extensions thereof shall not exceed 60 consecutive months. Upon the termination
of any Extension Period and upon the payment of all accrued and unpaid interest
then due, together with Compounded Interest, the Company may select a new
Extension Period, subject to the foregoing requirements. No interest shall be
due and payable during an Extension Period, except at the end thereof. At the
end of the Extension Period the Company shall pay all interest accrued and
unpaid on the Debentures including any Compounded Interest which shall be
payable to the holders of the Debentures in whose names the Debentures are
registered in the Debenture register on the first record date after the end of
the
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Extension Period.
As provided in the Indenture and subject to certain limitations therein
set forth, this Debenture is transferable by the registered holder hereof on the
Debenture register of the Company, upon surrender of this Debenture for
registration of transfer at the office or agency of the Trustee in the Borough
of Manhattan, The City and State of New York accompanied by a written instrument
or instruments of transfer in form satisfactory to the Company or the Trustee
duly executed by the registered holder here of or the holder's attorney duly
authorized in writing, and thereupon one or more new Debentures of authorized
denominations and for the same aggregate principal amount will be issued to the
designated transferee or transferees. No service charges will be made for any
exchange or registration of transfer of Debentures, but the Company may require
payment of a sum sufficient to cover any tax or other governmental charge in
relation thereto.
Prior to due presentment for registration of transfer of this
Debenture, the Company, the Trustee, any paying agent and any Debenture
Registrar may deem and treat the registered holder hereof as the absolute owner
hereof (whether or not this Debenture shall be overdue and notwithstanding any
notice of ownership or writing hereon made by anyone other than the Debenture
Registrar) for the purpose of receiving payment of or on and for all other
purposes, and neither the Company nor the Trustee nor any paying agent nor any
Debenture Registrar shall be affected by any notice to the contrary.
No recourse shall be had for the payment of the principal of or the
interest on this Debenture, or for any claim based hereon, or otherwise in
respect hereof, or based on or in respect of the Indenture, against any
incorporator, stockholder, officer or director, past, present or future, as
such, of the Company or of any predecessor or successor corporation, whether by
virtue of any constitution, statute or rule of law, or by the enforcement of any
assessment or penalty or otherwise, all such liability being, by the acceptance
hereof and as part of the consideration for the issuance hereof, expressly
waived and released.
The Debentures are issuable only in registered form without coupons in
denominations of $25 and any integral multiple thereto. As provided in the
Indenture and subject to certain limitations therein set forth, Debentures are
exchangeable for a like aggregate principal amount of Debentures of a difference
authorized denomination, as requested by the holder surrendering same.
All terms used in this Debenture that are defined in the Indenture
shall have the meanings assigned to them in the Indenture.
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GUARANTEE AGREEMENT
This GUARANTEE AGREEMENT, dated as of ___________, 1997, is executed
and delivered by SunSource Inc., a Delaware corporation (the "Guarantor"), for
the benefit of the Holders (as defined herein) from time to time of the
Preferred Securities (as defined herein) of SunSource Capital Trust, a Delaware
statutory business trust (the "Trust").
WHEREAS, pursuant to an Amended and Restated Declaration of Trust (the
"Declaration"), dated as of __________, 1997, among the Trustees of the Trust
named therein, SunSource Inc., as Sponsor, and the Holders from time to time of
undivided beneficial interests in the assets of the Trust, the Trust is issuing
as of the date hereof in accordance with the Conversion (as defined in the
Declaration) $____ aggregate liquidation amount of its 11.6% Trust Preferred
Securities (the "Preferred Securities") representing preferred undivided
beneficial interests in the assets of the Trust and having the terms set forth
in Exhibit B to the Declaration;
WHEREAS, the Preferred Securities will be issued by the Trust upon
deposit of the Guarantor's Debentures (as defined in the Declaration) with the
Trust as trust assets; and
WHEREAS, the Guarantor desires to irrevocably and unconditionally
agree, to the extent set forth herein, to pay to the Holders of the Preferred
Securities the Guarantee Payments (as defined herein) and to make certain other
payments on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the benefits to be received by the
Guarantor in the Conversion, the Guarantor executes and delivers this Guarantee
Agreement for the benefit of the Holders from time to time of the Preferred
Securities.
ARTICLE I
SECTION 1.01. As used in this Guarantee Agreement, the terms set forth
below shall, unless the context otherwise requires, have the following meanings.
Capitalized or otherwise defined terms used but not otherwise defined herein
shall have the meanings assigned to such terms in the Declaration as in effect
on the date hereof.
"Guarantee Payments" shall mean the following payments or
distributions, without duplication, with respect to the Preferred Securities, to
the extent not paid or made by the Trust: (i) any accrued and unpaid
Distributions and the redemption price, including all accrued and unpaid
Distributions to the date of redemption (the "Redemption Price"), with respect
to the Preferred Securities called for redemption by the Trust but if and only
to the extent that in each case the Guarantor has made a payment to the Property
Trustee or, if no Property Trustee is required pursuant to the Declaration, the
Trust, of interest or principal on the Debentures and (ii) upon a voluntary or
involuntary dissolution, winding-up or termination of the Trust (other than in
connection with the distribution of Preferred Securities to the holders of
Debentures as provided
<PAGE>
in the Declaration or the redemption of all of the Preferred Securities upon the
maturity or redemption of the Debentures), the lesser of (a) the aggregate of
the stated liquidation amount of $25 (or, in the case of dissolution prior to
September 30, 2002, $25.25) per Preferred Security and Common Security plus all
accrued and unpaid Distributions thereon 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 in liquidation of the
Trust (in either case, the "Liquidation Distribution").
"Holder" shall mean any holder, as registered on the books and records
of the Trust, of any Preferred Securities; provided, however, that in
determining whether the holders of the requisite percentage of Preferred
Securities have given any request, notice, consent or waiver hereunder, "Holder"
shall not include the Guarantor or any entity directly or indirectly controlling
or controlled by or under direct or indirect common control with the Guarantor.
ARTICLE II
SECTION 2.01. The Guarantor irrevocably and unconditionally agrees to
pay in full to the Holders the Guarantee Payments (without duplication of
amounts theretofore paid by the Trust) regardless of any defense, right of
set-off or counterclaim which the Trust may have or assert. The Guarantor's
obligation to make a Guarantee Payment may be satisfied by direct payment of the
required amounts by the Guarantor to the Holders or by causing the Trust to pay
such amounts to the Holders.
SECTION 2.02. The Guarantor hereby waives notice of acceptance of this
Guarantee Agreement and of any liability to which it applies or may apply,
presentment, demand for payment, any right to require a proceeding first against
the Trust or any other Person before proceeding against the Guarantor, protest,
notice of nonpayment, notice of dishonor, notice of redemption and all other
notices and demands.
SECTION 2.03. The obligations, covenants, agreements and duties of the
Guarantor under this Guarantee Agreement shall in no way be affected or impaired
by reason of the happening from time to time of any of the following:
(a) the release or waiver, by operation of law or otherwise,
of the performance or observance by the Trust of any express or implied
agreement, covenant, term or condition relating to the Preferred Securities to
be performed or observed by the Trust;
(b) the extension of time for the payment by the Trust of all
or any portion of the Distributions (other than an extension of time for payment
of Distributions that results from the extension of any interest payment period
on the Debentures), Redemption Price, Liquidation Distribution or any other sums
payable under the terms of the Preferred Securities or the extension of time for
the performance of any other obligation under, arising out of, or in connection
with, the Preferred Securities;
2
<PAGE>
(c) any failure, omission, delay or lack of diligence on the
part of the Holders to enforce, assert or exercise any right, privilege, power
or remedy conferred on the Holders pursuant to the terms of the Preferred
Securities, or any action on the part of the Trust granting indulgence or
extension of any kind;
(d) the voluntary or involuntary liquidation, dissolution,
sale of any collateral, receivership, insolvency, bankruptcy, assignment for the
benefit of creditors, reorganization, arrangement, composition or readjustment
of debt of, or other similar proceedings affecting, the Trust or any of the
assets of the Trust;
(e) any invalidity of, or defect or deficiency in, the
Preferred Securities;
(f) the settlement or compromise of any obligation guaranteed
hereby or hereby incurred; or
(g) any other circumstance whatsoever that might otherwise
constitute a legal or equitable discharge or defense of a guarantor, it being
the intent of this Section 2.03 that the obligations of the Guarantor hereunder
shall be absolute and unconditional under any and all circumstances. There shall
be no obligation of the Holders to give notice to, or obtain consent of, the
Guarantor with respect to the happening of any of the foregoing.
SECTION 2.04. The Guarantor expressly acknowledges that (i) this
Guarantee Agreement is subject to the provisions of the Trust Indenture Act that
are required to be part of this Guarantee Agreement and shall, to the extent
applicable, be governed by such provisions; (ii) this Guarantee Agreement will
be deposited with the Property Trustee to be held for the benefit of the Holders
of the Preferred Securities; (iii) the Property Trustee has the right to enforce
this Guarantee Agreement on behalf of the Holders of the Preferred Securities;
(iv) the Holders of Preferred Securities representing not less than a majority
in aggregate liquidation amount of the Preferred Securities have the right to
direct the time, method and place of conducting any proceeding for any remedy
available in respect of this Guarantee Agreement including the giving of
directions to the Property Trustee; and (v) any Holder of the Preferred
Securities may enforce this Guarantee Agreement, institute a legal proceeding
directly against the Guarantor to enforce its rights under this Guarantee
Agreement, without first instituting a legal proceeding against the Trust or any
other person or entity; provided, that any Holder may institute direct action
without prior request to the Property Trustee to enforce the Sponsor's payment
obligations on the Debentures.
SECTION 2.05. This Guarantee Agreement creates a guarantee of payment
and not merely of collection. This Guarantee Agreement will not be discharged
except by payment of the Guarantee Payments in full (without duplication of
amounts theretofore paid by the Trust).
SECTION 2.06. The Guarantor shall be subrogated to all (if any) rights
of the Holders of Preferred Securities against the Trust in respect of any
amounts paid to the Holders by the Guarantor under this Guarantee Agreement;
provided, however, that the Guarantor shall not
3
<PAGE>
(except to the extent required by mandatory provisions of law) be entitled to
enforce or exercise any rights which it may acquire by way of subrogation or any
indemnity, reimbursement or other agreement, in all cases as a result of payment
under this Guarantee Agreement, if, at the time of any such payment, any amounts
are due and unpaid under this Guarantee Agreement. If any amount shall be paid
to the Guarantor in violation of the preceding sentence, the Guarantor agrees to
hold such amount in trust for the Holders and to pay over such amount to the
Holders.
SECTION 2.07. The Guarantor acknowledges that its obligations hereunder
are independent of the obligations of the Trust with respect to the Preferred
Securities and that the Guarantor shall be liable as principal and as debtor
hereunder to make Guarantee Payments pursuant to the terms of this Guarantee
Agreement notwithstanding the occurrence of any event referred to in subsections
(a) through (g), inclusive, of Section 2.03 hereof.
ARTICLE III
SECTION 3.01. So long as any Preferred Securities remain outstanding,
the Guarantor will not declare or pay any dividend 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 Guarantor shall be in default with respect to
its Guarantee Payments or other payment obligations hereunder, (ii) there shall
have occurred any Event of Default under the Indenture or (iii) the Guarantor
shall have given notice of its selection of an Extension Period (as defined in
the Indenture) and such period, or any extension thereof, is continuing. In
addition, so long as any Preferred Securities remain outstanding, the Guarantor
(i) will remain the sole direct or indirect owner of all of the outstanding
Common Securities and shall not cause or permit the Common Securities to be
transferred except to the extent such transfer is permitted under Section 8.1(c)
of the Declaration, provided that any permitted successor of the Guarantor under
the Indenture may succeed to the Guarantor's ownership of the Common Securities;
and (ii) will use its 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 Debentures as provided in the Declaration.
SECTION 3.02. This Guarantee Agreement will constitute an unsecured
obligation of the Guarantor and will rank (i) subordinate and junior in right of
payment to all other liabilities of the Guarantor, including the Debentures,
except those made pari passu or subordinate by their terms, and (ii) senior to
all capital stock now or hereafter issued by the Guarantor and to any guarantee
now or hereafter entered into by the Guarantor in respect of any of its capital
stock.
ARTICLE IV
SECTION 4.01. This Guarantee Agreement shall terminate and be of no
further force
4
<PAGE>
and effect upon full payment of the Redemption Price of all Preferred
Securities, upon the distribution of Debentures to Holders of Preferred
Securities in exchange for all of the Preferred Securities or upon full payment
of the amounts payable in accordance with the Declaration upon liquidation of
the Trust. Notwithstanding the foregoing, this Guarantee Agreement will continue
to be effective or will be reinstated, as the case may be, if at any time any
Holder must restore payment of any sums paid with respect to Preferred
Securities or this Guarantee Agreement.
ARTICLE V
SECTION 5.01. All guarantees and agreements contained in this Guarantee
Agreement shall bind the successors, assigns, receivers, trustees and
representatives of the Guarantor and shall inure to the benefit of the Holders
of the Preferred Securities then outstanding. Except in connection with a
consolidation, merger or sale involving the Guarantor that is permitted under
Article Ten of the Indenture, the Guarantor shall not assign its obligations
hereunder.
SECTION 5.02. Except with respect to any changes which do not
materially adversely affect the material rights of Holders (in which case no
consent of Holders will be required), this Guarantee Agreement may only be
amended with the prior approval of the Holders of not less than 66-2/3% in
liquidation amount of all the outstanding Preferred Securities. The provisions
of Section 11.2 of the Declaration concerning meetings of Holders shall apply to
the giving of such approval.
SECTION 5.03. Any notice, request or other communication required or
permitted to be given hereunder shall be in writing, duly signed by the party
giving such notice, and delivered, telecopied or mailed by first class mail as
follows:
(a) if given to the Guarantor, to the address set forth below
or such other address as the Guarantor may give notice of to the Holders of the
Preferred Securities:
SunSource Inc.
2600 One Logan Square
Philadelphia, PA 19103
Facsimile No.: (215) 665-3662
Attention: Joseph M. Corvino
(b) if given to the Trust, in care of the Regular Trustees
(with copy to the Property Trustee), at the Trust's (and the Property Trustee's)
address set forth below or such other address as the Regular Trustees on behalf
of the Trust (or the Property Trustee) may give notice to the Holders of the
Preferred Securities:
5
<PAGE>
SunSource Capital Trust
501 Silverside Road
Suite 17
Wilmington, DE 19809
Facsimile No.: (302) 792-0777
Attention: Joseph M. Corvino
with copy to:
The Bank of New York
101 Barclay Street
Floor 21 West
New York, New York 10286
Facsimile No.: 212-815-5915
Attention: Corporate Trust Administration
(c) if given to any Holder of Preferred Securities, at the
address set forth on the books and records of the Trust.
All notices hereunder shall be deemed to have been given when received
in person, telecopied with receipt confirmed, or mailed by first class mail,
postage prepaid except that if a notice or other document is refused delivery or
cannot be delivered because of a changed address of which no notice was given,
such notice or other document shall be deemed to have been delivered on the date
of such refusal or inability to deliver.
SECTION 5.04. The masculine, feminine and neuter genders used herein
shall include the masculine, feminine and neuter genders.
SECTION 5.05. This Guarantee Agreement is solely for the benefit of the
Holders and is not separately transferable from the Preferred Securities.
SECTION 5.06. THIS GUARANTEE AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF NEW YORK.
6
<PAGE>
THIS GUARANTEE AGREEMENT is executed as of the day and year first above
written.
SUNSOURCE INC.
By: ___________________________
Name:
Title:
7
<PAGE>
[Letterhead of Richards, Layton & Finger]
August 6, 1997
SunSource Capital Trust
501 Silverside Road
Suite 17
Wilmington, Delaware 19809
Re: SunSource Capital Trust
-----------------------
Ladies and Gentlemen:
We have acted as special Delaware counsel for SunSource
Capital Trust, a Delaware business trust (the "Trust"), in connection with the
matters set forth herein. At your request, this opinion is being furnished to
you.
For purposes of giving the opinions hereinafter set forth, our
examination of documents has been limited to the examination of originals or
copies of the following:
(a) The Certificate of Trust of the Trust, dated as of June
13, 1997 (the "Certificate"), as filed in the office of the Secretary of State
of the State of Delaware (the "Secretary of State") on June 17, 1997;
(b) The Declaration of Trust of the Trust, dated as of June
13, 1997, among SunSource Inc., a Delaware corporation ("SunSource"), as
sponsor, and the trustees of the Trust named therein;
<PAGE>
SunSource Capital Trust
August 6, 1997
Page 2
(c) Amendment No. 4 to the Registration Statement (the
"Registration Statement") on Form S-4, including a preliminary proxy
statement/prospectus (the "Prospectus"), relating to the 11.6% Trust Preferred
Securities of the Trust representing preferred undivided beneficial interests in
the assets of the Trust (each, a "Trust Preferred Security" and collectively,
the "Trust Preferred Securities"), as filed by SunSource and the Trust with the
Securities and Exchange Commission on July 24, 1997;
(d) A form of Amended and Restated Declaration of Trust of the
Trust, to be entered into among SunSource, as sponsor, the trustees of the Trust
named therein, and the holders, from time to time, of undivided beneficial
interests in the assets of the Trust (the "Declaration"), attached as an exhibit
to the Registration Statement; and
(e) A Certificate of Good Standing for the Trust, dated
August 6, 1997, obtained from the Secretary of State.
Initially capitalized terms used herein and not otherwise
defined are used as defined in the Declaration.
For purposes of this opinion, we have not reviewed any
documents other than the documents listed in paragraphs (a) through (e) above.
In particular, we have not reviewed any document (other than the documents
listed in paragraphs (a) through (e) above) that is referred to in or
incorporated by reference into the documents reviewed by us. We have assumed
that there exists no provision in any document that we have not reviewed that is
inconsistent with the opinions stated herein. We have conducted no independent
factual investigation of our own but rather have relied solely upon the
foregoing documents, the statements and information set forth therein and the
additional matters recited or assumed herein, all of which we have assumed to be
true, complete and accurate in all material respects.
With respect to all documents examined by us, we have assumed
(i) the authenticity of all documents submitted to us as authentic originals,
(ii) the conformity with the originals of all documents submitted to us as
copies or forms, and (iii) the genuineness of all signatures.
For purposes of this opinion, we have assumed (i) that the
Declaration and the Certificate are in full force and effect and have not been
amended, (ii) except to the extent provided in paragraph 1 below, the due
creation or due organization or due formation, as the case may be, and valid
existence in good standing of each party to the documents examined by us under
the laws of the jurisdiction governing its creation, organization or formation,
(iii) the legal capacity of natural persons who are signatories to
<PAGE>
SunSource Capital Trust
August 6, 1997
Page 3
the documents examined by us, (iv) that each of the parties to the documents
examined by us has the power and authority to execute and deliver, and to
perform its obligations under, such documents, (v) the due authorization,
execution and delivery by all parties thereto of all documents examined by us,
(vi) the receipt by each Person to whom a Trust Preferred Security is to be
issued by the Trust (collectively, the "Trust Preferred Security Holders") of a
certificate for such Trust Preferred Security in the form prescribed by the
Declaration and the payment for the Trust Preferred Security acquired by it, in
accordance with the Declaration and the Registration Statement, and (vii) that
the Trust Preferred Securities are issued and sold to the Trust Preferred
Security Holders in accordance with the Declaration and the Registration
Statement. We have not participated in the preparation of the Registration
Statement and assume no responsibility for its contents.
This opinion is limited to the laws of the State of Delaware
(excluding the securities laws of the State of Delaware), and we have not
considered and express no opinion on the laws of any other jurisdiction,
including federal laws and rules and regulations relating thereto. Our opinions
are rendered only with respect to Delaware laws and rules, regulations and
orders thereunder that are currently in effect.
Based upon the foregoing, and upon our examination of such
questions of law and statutes of the State of Delaware as we have considered
necessary or appropriate, and subject to the assumptions, qualifications,
limitations and exceptions set forth herein, we are of the opinion that:
1. The Trust has been duly created and is validly existing in
good standing as a business trust under the Delaware Business Trust Act.
2. The Trust Preferred Securities will represent valid and,
subject to the qualifications set forth in paragraph 3 below, fully paid and
nonassessable undivided beneficial interests in the assets of the Trust.
3. The Trust Preferred Security Holders, as beneficial owners
of the Trust, will be entitled to the same limitation of personal liability
extended to stockholders of private corporations for profit organized under the
General Corporation Law of the State of Delaware. We note that the Trust
Preferred Security Holders may be obligated to make payments as set forth in the
Declaration.
<PAGE>
SunSource Capital Trust
August 6, 1997
Page 4
We consent to the filing of this opinion with the Securities
and Exchange Commission as an exhibit to the Registration Statement. In
addition, we hereby consent to the use of our name under the heading "Legal
Matters" in the Prospectus. In giving the foregoing consents, we do not thereby
admit that we come within the category of Persons whose consent is required
under Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission thereunder. Except as
stated above, without our prior written consent, this opinion may not be
furnished or quoted to, or relied upon by, any other Person for any purpose.
Very truly yours,
/s/ Richards, Layton & Finger
PMA/GWL/jj
<PAGE>
EXHIBIT 10.2
STOCKHOLDERS AGREEMENT
STOCKHOLDERS AGREEMENT, dated as of July 31, 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, L.P. (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. Ownership of Interests. Each party hereto
represents and warrants that it is the owner of record and beneficially of the
general or a limited partnership interest in the General Partner described
opposite its name on Exhibit A hereto and that the information in such exhibit
relating to the ulitmate beneficial ownership of such interests is true and
correct.
Section 6. 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 7. 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 8. 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: Senior Executive
IN WITNESS WHEREOF, the parties hereto have executed this
Stockholders Agreement as of the date first above written.
SUNSOURCE INC.
By /s/ Donald T. Marshall
--------------------------------
Title Chairman
LEHMAN/SDI, INC.
By /s/ Donald T. Marshall
--------------------------------
Title Chairman
-3-
<PAGE>
LEHMAN LTD. I, INC.
By /s/
-------------------------------
Title
-------------------------------
LEHMAN BROTHERS CAPITAL PARTNERS I, L.P.
By /s/
--------------------------------
Title
--------------------------------
LB I GROUP, INC.
By /s/
--------------------------------
Title
--------------------------------
DOTMAR CORP.
/s/ Donald T. Marshall By /s/ Donald T. Marshall
- ------------------------------ ---------------------------------
Donald T. Marshall
JPM CORP.
/s/ John P. McDonnell By /s/ John P. McDonnell
- ------------------------------ ---------------------------------
John P. McDonnell
NORVED CORP.
/s/ Norman V. Edmonson By /s/ Norman V. Edmonson
- ------------------------------ ---------------------------------
Norman V. Edmonson
HJC CORP.
/s/ Harold J. Cornelius By /s/ Harold J. Cornelius
- ------------------------------ ---------------------------------
Harold J. Cornelius
MWH CORP.
/s/ Max W. Hillman By /s/ Max W. Hillman
- ------------------------------ ---------------------------------
Max W. Hillman
DIACOR CORP.
/s/ Joseph M. Corvino By /s/ Joseph M. Corvino
- ------------------------------ ---------------------------------
Joseph M. Corvino
-4-
<PAGE>
EXHIBIT A
Entity Interests Held in General Partner
- ------
General Partner
- ---------------
Lehman/SDI, Inc. 100.0% general partnership interest
- ----------------
Limited Partners
Dotmar Corp. 39.00% limited partnership interest
JPM Corp. 12.00% limited partnership interest
Norved Corp. 25.00% limited partnership interest
Diacor Corp. 2.00% limited partnership interest
HJC Corp. 6.00% limited partnership interest
MWH Corp. 6.00% limited partnership interest
LJC Corp. 5.00% limited partnership interest
Celar Corp. 5.00% limited partnership interest
<PAGE>
ANNEX 1
SECTION __. Approval of Independent Directors for Certain Actions.--(a)
Prior to September 30, 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, (ii) any amendment to, or waiver
of, any provisions of the Stockholders Agreement, dated as of July 31, 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 Holdings 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.
<PAGE>
EXHIBIT 10.3
CONTRIBUTION AGREEMENT
CONTRIBUTION AGREEMENT, dated as of July 31, 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 and required payments in
respect of 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. L.P. 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 /s/ Donald T. Marshall
-------------------------------
Title: Chairman
-------------------------------
LEHMAN BROTHERS HOLDINGS INC.
By /s/
-------------------------------
Title:
-------------------------------
<PAGE>
Exhibit 23.1
Consent of Independent Accountants
We consent to the incorporation by reference and inculusion in this
registration statement of Form S-4 (File No. 333-19077) of our report dated
January 29, 1997, except for Note 9 as to which the date is March 21, 1997 and
Note 19 as to which the date is March 4, 1997, on our audits of the consolidated
financial statements and financial statement schedules of SunSource L.P. and to
the inclusion of our report dated May 1, 1997 on the audit of the Balance sheet
of SunSource Inc. We also consent to the reference to our firm under the caption
"Experts."
/s/ COOPERS & LYBRAND L.L.P.
-----------------------------------
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
August 14, 1997
<PAGE>
SunSource
Sun Distributors
Dear SunSource Limited Partner:
We are asking you to consider and vote on a proposal to convert the
Partnership to corporate form.
The Conversion Proposal is described in detail in the accompanying
Proxy Statement/Prospectus and summarized in the enclosed brochure, which we
urge you to read carefully. We have also included a copy of Form 10Q for the
quarter ended June 30, 1997, as filed with the Securities and Exchange
Commission on August 14, 1997, which provides you the most recent financial
results of the Partnership. After you have reviewed the enclosed information,
we urge you to vote "FOR" adoption of the Conversion
Proposal by marking, signing and dating the accompanying proxy card and
returning it to us in the enclosed postage-paid envelope.
The Special Meeting of the Limited Partners of SunSource LP will be
held at The Warwick, 1701 Locust Street, Philadelphia, Pennsylvania, on
September 18, 1997, at 10:00 a.m. local time. To assure that your vote on the
Conversion Proposal is counted, please return the enclosed proxy card as soon as
practicable. Failure to forward a proxy or vote in person at the special meeting
will have the same effect as voting against the Conversion Proposal.
If you have additional questions or need assistance with the completion
and return of your proxy card, please call D.F. King & Co., Inc., the
Information Agent for the Conversion, toll free at 1-800-488-8075.
Thank you for your prompt attention to this important matter.
Very truly yours,
Donald T. Marshall
Chairman and Chief Executive Officer
One Logan Square, Philadelphia, PA 19103 o Telephone: 215-665-3650 o
Facsimile: 215-665-3662
<PAGE>
[LOGO]
SUNSOURCE
Selected Questions and Answers
This booklet answers key questions about the proposal
to convert the Partnership to corporate form
and related matters
August 18, 1997
- --------------------------------------------------------------------------------
This booklet is neither an offer to sell nor a solicitation of an offer to buy
any securities. Such offer or solicitation may be made only by means of the
Proxy Statement/Prospectus. This booklet is accompanied by, should be read in
conjunction with, and is qualified by the more detailed information contained
in, the Proxy Statement/Prospectus relating to the Conversion.
- --------------------------------------------------------------------------------
<PAGE>
Voting Information
Meeting Date: September 25, 1997
Meeting Location: The Warwick,
1701 Locust Street
Philadelphia, PA 19103
Meeting Time: 10:00 a.m.
Vote Required: Approval of the Conversion will require the affirmative
votes of (1) a majority of the outstanding A Interests and B Interests, each
class voting separately; and (2) a majority of the outstanding unaffiliated A
Interests and unaffiliated B Interests (Interests held by holders not affiliated
with the General Partner), each class voting separately.
How to Vote: You may vote "For" or "Against" the proposal or you may
"Abstain" by so indicating on the enclosed Proxy Card, signing and dating it,
and returning it in the self-addressed envelope enclosed for that purpose. You
must sign the Proxy Card exactly as your name appears on your Proxy Card. Joint
owners should both sign. When signing as an attorney, executor, administrator,
trustee or guardian, please give your full title. 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.
Please return your Proxy Card as soon as possible, regardless of
whether you plan to attend the meeting. You may revoke your proxy at any time
prior to the meeting by giving written notice to the Partnership, by submitting
a later dated Proxy Card or by voting in person at the meeting.
If you wish to vote in person, you may do so at the meeting, regardless
of whether you have previously granted a proxy. The General Partner urges you to
consider the Conversion carefully and to vote FOR the Conversion by returning
the enclosed Proxy Card as soon as possible.
The General Partner urges you to consider the Conversion carefully and
to vote FOR the Conversion by returning the enclosed Proxy Card as soon as
possible.
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Key Terms
Partnership SunSource L.P., the existing publicly-owned limited
partnership.
Corporation SunSource Inc., the new corporation.
SunSource The Partnership before the Conversion or the
Corporation after the Conversion.
Conversion The conversion of the Partnership to corporate form
and related transactions as described in the Proxy
Statement dated August __, 1997.
A Interests Class A limited partnership interests in the Partnership.
B Interests Class B limited partnership interests in the Partnership.
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<PAGE>
SUNSOURCE INC.
SUNSOURCE L.P.
Selected Questions and Answers
---------------------
1. What has been proposed for approval by holders of SunSource limited
partnership interests?
You are being asked to consider and vote on a proposal to convert the
Partnership to a publicly-traded corporation. After the Conversion, the
business currently conducted by the Partnership will be conducted by
the Corporation, with the same operating management as the Partnership.
2. What is the reason for the proposal?
The Conversion is being proposed in response to current tax law which
will reduce the benefit of being taxed as a partnership for years
beginning after December 31, 1997. Existing publicly traded
partnership, such as the Partnership, have the option after December
31, 1997 of being taxed as corporations or being taxed as partnerships
by electing to be subject to tax at the rate of 3.5% on their gross
income. The General Partner does not recommend adoption of this tax
election since it will result in a significant erosion of the
Partnership's cash flow. Also, there are two bills pending in Congress
which would eliminate the December 31, 1997 deadline, but we still
believe the Conversion is desirable for the reasons set forth in the
Answer to Question 7. See "Certain Federal Income Tax Consequences --
Partnership Status and Taxation of the Partnership."
3. If the Conversion occurs, what will be exchanged for each of my A
Interests?
Each A Interest will receive 0.38 of an 11.6% Trust Preferred Security
plus $1.30 in cash. The Trust Preferred Securities will represent
undivided beneficial interests in the assets of SunSource Capital
Trust, which will hold 11.6% Junior Subordinated Debentures of the
Corporation.
Since the annual distribution on the Trust Preferred Securities will be
$2.90 per share, the 0.38 exchange ratio means that you will receive
after the Conversion $1.10 per year per A Interest, the same as the
Priority Return you are presently receiving on your A Interest.
Distributions will be made monthly as is presently the case.
The Trust Preferred Securities will have a liquidation preference of
$25. Under the exchange ratio, the current A Interest liquidation
preference of $10.00 will be exchanged for 0.38 Trust Preferred
Securities, with a liquidation preference of $9.50, plus $1.30 in cash
at the time of the Conversion.
- --------------------------------------------------------------------------------
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 the answer to Question 6 in this booklet and under "RISK
FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS" in the Proxy
Statement:
o conflicts of interest between the General Partner and the
limited partners and between the A Interests and the B
Interests.
o no independent representation of the limited partners.
o a taxable transaction to the A Interests.
o no dissenters' rights for nonconsenting limited partners.
o uncertainty regarding market price for Trust Preferred
Securities and Common Stock, including the effect which the
possible sale of Common Stock by Lehman Brothers might have on
the market price of the Common Stock.
o terms of Trust Preferred Securities, including the ability of
the Corporation to defer payments for up to five years, the
subordination of underlying Junior Subordinated Debentures,
limited voting rights, and optional redemption after five
years.
- --------------------------------------------------------------------------------
The vote of each SunSource limited partner is important. You are urged
to mark, date and sign the accompanying Proxy Card and return it in the enclosed
postage paid envelope as soon as possible. By returning the Proxy Card promptly,
you will save the Partnership additional solicitation expenses.
-1-
<PAGE>
4. If the Conversion occurs, what will be exchanged for each of my B
Interests?
Each B Interest will be exchanged for 0.25 share of Common Stock of the
Corporation. This is effectively a reverse stock split of one-for-four
which is intended to increase the price of a share of Common Stock. It
is believed that a higher share price should make the Corporation's
stock more attractive to investors and brokers who generally avoid, or
are not permitted to purchase, lower-priced stocks.
Each B Interest is currently allocated its share of Partnership taxable
income and receives a cash distribution with which to pay income taxes.
Since the Corporation will pay income taxes, no taxable income will be
allocated to the holders of Common Stock, thereby eliminating the need
for cash distributions to shareholders for income tax payments.
The Corporation has not yet established a dividend policy for its
Common Stock but may in the future decide to do so, subject to, among
other things, earnings, financial condition, capital requirements,
availability of acquisition candidates, level of indebtedness and
contractual restrictions with respect to the payment of dividends.
5. What do the partners of the General Partner receive in the Conversion?
The holders of interests in the General Partner will receive 1,000,000
shares of Common Stock in exchange for their General Partner Interests.
Thereafter, the management fee of $3,330,000 per year and the General
Partner's 1.99% share (approximately $400,000) of the Partnership's
distributions will be retained by wholly owned subsidiaries of the
Corporation. In addition, certain owners of the General Partner
Interests (Lehman Brothers and six senior members of management) have
agreed to certain restrictions with respect to voting and sale of
shares of Common Stock to be received by them. See "DESCRIPTION OF
CAPITAL STOCK -- Stockholders Agreement."
6. Are there any special factors I should consider in voting on the
Conversion?
<TABLE>
<CAPTION>
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RISKS TO HOLDERS OF A INTERESTS RISKS TO HOLDERS OF B INTERESTS
<S> <C>
The proposed Conversion necessitates the allocation of The proposed Conversion necessitates the allocation of
the total value of the Partnership among the holders of the A the total value of the Partnership among the holders of the B
Interests, the holders of the B Interests and the General Interests, the holders of the A Interests and the General
Partner. It would be in the General Partner's interest to Partner. It would be in the General Partner's interest to have
have its partners receive maximum consideration, undertake its partners receive maximum consideration, undertake the
the least possible responsibilities and assume minimum risk, least possible responsibilities and assume minimum risk, all
all at the limited partners' expense. Also, it would be in the at the limited partners' expense. Also, it would be in the
interest of the holders of A Interests to receive the interest of the holders of B Interests to receive the maximum
maximum consideration for their A Interests, at the consideration for their B Interests, at the expense of the
expense of the General Partner and the holders of the B General Partner and the holders of the A Interests.
Interests.
o Holders of B Interests were not separately
o Holders of A Interests were not separately represented in establishing the terms of the
represented in establishing the terms of the Conversion. Such representation might have
Conversion. Such representation might have caused the terms of the Conversion to be different
caused the terms of the Conversion to be different in some material respects from those described
in some material respects from those described herein.
herein.
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</TABLE>
-2-
<PAGE>
<TABLE>
<CAPTION>
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RISKS TO HOLDERS OF A INTERESTS RISKS TO HOLDERS OF B INTERESTS
<S> <C>
o Unlike A Interests, which are not subject to o If the Conversion is approved, holders of B
mandatory or optional redemption by the Interests will no longer have the right to receive tax
Partnership, the Junior Subordinated Debentures distributions with respect to their allocable share of
held by the Trust may be redeemed by the the Partnership's taxable income since they will no
Corporation at 100% of the principal amount plus longer be taxed with respect to income of the
accrued and unpaid interest at any time after corporation.
September 30, 2002 or, if certain conditions are
met, earlier at 101% of the principal amount plus o The Board of Directors has not yet established a
accrued and unpaid interest upon the occurrence of policy regarding the payment of dividends on the
a Tax Event. See "DESCRIPTION OF JUNIOR Common Stock after the Effective Time of the
SUBORDINATED DEBENTURES -- Optional Conversion. The payment of dividends will be at
Redemption." This redemption will result in the the discretion of the Corporation's Board of
redemption of the Trust Preferred Securities. Directors and will depend, among other things, on
earnings, financial condition, capital requirements,
o Upon the occurrence of a Tax Event, if certain availability of acquisition candidates, level of
conditions are met, the Corporation shall have the indebtedness, contractual restrictions with respect
right under certain circumstances to shorten the to the payment of dividends and other factors that
maturity of the Junior Subordinated Debentures to the Corporation's Board of Directors deems
a date not earlier than September 30, 2002. See relevant. It should be noted that the Corporation's
"DESCRIPTION OF TRUST PREFERRED unaudited pro forma balance sheet for the three
SECURITIES -- Special Event Redemption or months ended March 31, 1997 reflects a
Distribution; Shortening of Stated Maturity." If stockholders' deficit of approximately $7.4 million
the Corporation exercises such right, there can be and a negative net book value per common share of
no assurance that the shortening of the maturity of $1.16. Counsel has advised the Partnership and the
the Junior Subordinated Debentures will not have Corporation that under Delaware law, dividends or
an effect on the market price of the Trust Preferred distributions on the stock of a Delaware
Securities or Junior Subordinated Debentures that corporation may be declared or paid out of surplus,
may be distributed in exchange for Trust Preferred so that the net assets of the corporation after such
Securities. payment shall at least equal the amount of its
capital. However, such a dividend or distribution is
o The liquidation preference for 0.38 of a Trust Preferred permissible under such provision only if the
Security will be $9.50 compared to a liquidation preference corporation's board of directors concludes that (a)
for an A Interest of $10.00. However, holders of A Interests immediately following payment of such dividend
will also receive a cash payment of $1.30. 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
o If the Conversion is approved, holders of A being made out of the corporation's surplus (net
Interests will no longer have their contractual right assets minus capital) and not out of capital in
under the Partnership Agreement to the Priority contravention of Delaware law. In case there shall
Return, although they will be entitled to be no surplus, dividends may also be paid out of
distributions on the Trust Preferred Securities net profits for the fiscal year and/or the preceding
in an amount equal to such fiscal year. fiscal year. In evaluating the fairness of the proposed
Priority Return before dividends, if any, are paid Conversion, the Special Committee did not consider the
on the Common Stock. The Board of Directors of pro forma stockholders' deficit and negative book value to
the Corporation will have discretion to defer be a significant negative factor, because the accounting
payments on the Junior Subordinated Debentures measures of stockholders' equity and net book value were
for up to five years. If such payments are deferred, not viewed by the Special Committee's financial advisor,
the Trust will be unable to make distributions on Smith Barney, as primary determinants of value for ongoing
the Trust Preferred Securities, and the Corporation industrial concerns like the Corporation or the
will be prohibited from paying dividends on the Partnership.
Common Stock.
o If distributions on the Trust Preferred Securities are
o Holders of Trust Preferred Securities will be in arrears, the Board of Directors will not be able to
required to accrue original issue discount income declare and pay dividends on the Common Stock.
with respect to any unpaid distributions on the
Trust Preferred Securities. o Holders of B Interests have no dissenters' or
appraisal rights in the Conversion. Therefore,
holders of B Interests 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 Common Stock. The Common
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</TABLE>
-3-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
RISKS TO HOLDERS OF A INTERESTS RISKS TO HOLDERS OF B INTERESTS
<S> <C>
o The obligations of the Corporation under the Junior Stock received by the holders of the B Interests
Subordinated Debentures will be unsecured may trade at prices below the historical trading
obligations and will be subordinate and junior in levels of the B Interests.
right of payment to senior indebtedness of the
Corporation and the Operating Partnership and will o If a large number of holders of Common Stock
be structurally subordinated to all liabilities and were to offer their securities for sale immediately
obligations of the Operating Partnership and the after consummation of the Conversion, the market
Corporation's other subsidiaries. As of March 31, could decline.
1997 (on a pro forma basis, assuming the Merger
had occurred on such date), the Corporation and o The Corporation has agreed to file a registration
the Operating Partnership would have had statement for the sale of shares of Common Stock
approximately $105.4 million principal amount of by Lehman Brothers and, subject to certain
senior indebtedness outstanding, and the Operating limitations, by management, after the Conversion.
Partnership and the Corporation's other Lehman Brothers and management have agreed to
subsidiaries would have had approximately $92.4 cooperate to execute an underwritten secondary
million of indebtedness and other liabilities. offering of all or some portion of their shares of
Common Stock as soon as practicable after the
o There are no terms in the Trust Preferred Securities effective date of the Conversion, subject to market
or the Junior Subordinated Debentures that limit conditions. The Corporation has agreed not to sell
the Corporation's or its subsidiaries' ability to any additional shares of Common Stock prior to the
incur additional indebtedness. earlier of such initial secondary offering and the
nine-month anniversary of the Conversion, except
o The receipt of Trust Preferred Securities and cash the issuance of unregistered shares in connection
by the holders of A Interests will be a taxable with acquisitions. In addition, Lehman Brothers
event. The receipt of Trust Preferred Securities, Capital Partners I, L.P., an affiliate of Lehman/SDI
Common Stock and cash by holders who hold both holding 5,788,124 B Interests, may distribute to its
A Interests and B Interests will be a taxable event. partners the shares of Common Stock it receives as
a result of the Conversion (a majority of which
o Holders of A Interests currently have the right to shares would be freely tradeable immediately after
vote as a class on mergers and together with the such distribution). See "RESALE OF SECURITIES
holders of B Interests on the sale of substantially -- Resales by Lehman Brothers and Management."
all the assets of the Partnership, amendment of the
Partnership Agreement, dissolution and removal of o Certain provisions of Delaware law and the
the General Partner. The Trust Preferred Securities Corporation's organizational documents, as well as
will not have these voting rights. provisions of the Stockholders Agreement dated as
of July 31, 1997 among the Corporation and
o Holders of A Interests have no dissenters' or certain of its stockholders (the "Stockholders
appraisal rights in the Conversion. Therefore, Agreement") and the stockholder rights plan,
holders of A Interests will not be entitled to receive contain provisions that may reduce the likelihood
cash payments from SunSource for the fair value of of a takeover of the Corporation that, if successful,
their Interests if they dissent and the Conversion is might permit stockholders to receive a premium
approved and consummated. over the market price for the Common Stock. See
"DESCRIPTION OF CAPITAL STOCK." Such
o Prior to the Conversion, there has been no public provisions could also have a negative effect on the
market for the Trust Preferred Securities. Because market price of the Common Stock.
the consideration received by the holders of A
Interests includes $1.30 in cash for each A Interest, o A benefit to the partners of the General Partner of
it is likely that .38 of a Trust Preferred Security the Conversion which is not shared by the limited
received in respect of each A Interest will trade at partners is the elimination of liability, if any, of the
prices below the market price of the A Interest partners of the General Partner for obligations and
immediately prior to the Conversion. liabilities of SunSource which occur after the
Conversion.
o The Corporation intends to list the Trust Preferred
Securities on the New York Stock Exchange o The fiduciary duties owed by the directors of the
("NYSE"). The Trust Preferred Securities may Corporation after the Conversion may be less than
trade at prices that do not fully reflect the value of those owed by the General Partner of the
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</TABLE>
-4-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
RISKS TO HOLDERS OF A INTERESTS RISKS TO HOLDERS OF B INTERESTS
<S> <C>
accrued but unpaid interest with respect to the Partnership before the Conversion, which may
underlying Junior Subordinated Debentures. A result in decreased potential liability of the
holder of Trust Preferred Securities that disposes of directors of the Corporation.
its Trust Preferred Securities between record dates
for payments of distributions (and consequently o Certain members of management will receive
does not receive a distribution from the Trust for accelerated payments under certain deferred
the period prior to such disposition) will compensation plans of the Operating Partnership as
nevertheless be required to include as ordinary a result of the Conversion. "See MANAGEMENT -- Change in
income, accrued but unpaid interest on the Junior Control Arrangements."
Subordinated Debentures through the date of
disposition. Such holder will recognize a capital o In addition to the factors noted above, an
loss to the extent the amount realized with respect investment in SunSource (whether in partnership or
to the Trust Preferred Securities is less than its corporate form) is subject to risks associated with
adjusted tax basis. Subject to certain limited operating conditions, competitive factors, economic
exceptions, capital losses cannot be applied to conditions, industry conditions and equity market
offset ordinary income for United States federal conditions.
income tax purposes. See "CERTAIN FEDERAL
INCOME TAX CONSEQUENCES -- Certain Tax
Consequences of the Conversion to Holders of A
Interests."
o If a large number of holders of Trust Preferred
Securities were to offer their securities for sale
immediately after consummation of the Conversion, the
market price of the Trust Preferred Securities could
decline.
o 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, if any, of the partners of
the General Partner for obligations and liabilities of
SunSource which occur after the Conversion.
o The General Partner currently owes fiduciary duties to the
limited partners. The directors of the Corporation will not
have fiduciary duties to the holders of Trust Preferred
Securities after the Conversion.
o Certain members of management will receive accelerated
payments under certain deferred compensation plans of the
Operating Partnership as a result of the Conversion. See
"MANAGEMENT -- Change in Control Arrangements."
o 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 market conditions.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
7. What are the reasons the General Partner believes the Conversion would
be beneficial?
The General Partner believes that the Conversion will provide SunSource
and the holders of B Interests the following benefits:
-5-
<PAGE>
o Expansion of Potential Investor Base. 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 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 to the Corporation. 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
Priority Return 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, which will be eliminated, and the tax that will
become payable by the Corporation. If the Conversion is not
approved, the Priority Return would most likely be paid from
net income after corporate income taxes after December 31,
1997.
o Acquisition Currency. The Corporation will have greater
flexibility to consummate acquisitions due to conservation of
cash resources and the ability to use capital stock as
acquisition currency.
o Greater Access to Equity Markets. The Corporation will also
have greater access to public and private equity capital
markets at a potentially lower cost of capital.
o Tax Reporting. 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 the continuation
of a 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, there is greater assurance that the $1.10
of annual distributions will continue to be paid.
8. What is the impact of the Conversion on earnings per B Interest?
If the Conversion is approved, net income available to the Common Stock
will be increased because the management fee of $3,330,000 and
distributions on the General Partner's ownership in the Partnership and
the Operating Partnership amounting to approximately $400,000 annually
will be retained within the corporate family. The Corporation would
also save approximately $4,900,000 per year in income taxes due to its
ability to deduct from taxable income the interest paid on the Junior
Subordinated Debentures. On the other hand, an additional 1,000,000
shares of Common Stock will be outstanding and held by the former
owners of the General Partner Interests (Lehman Brothers and its
affiliates, and management).
9. What is the impact on earnings per share if the Conversion is not
approved?
If the Conversion is not approved, the Partnership's present intention
is to continue to operate as a partnership, subject to tax as a
corporation after December 31, 1997. Based on pro forma results for the
twelve months ended December 31, 1996, SunSource would have generated
net income of $0.205 per B Interest (after the reverse stock split) if
the Partnership were
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to have converted to corporate form on January 1, 1996, but a net loss
of $0.075 per B Interest (after the reverse stock split) if the
Conversion were not approved and the Partnership were taxed as a
corporation effective January 1, 1996. Of the $0.280 increase in
earnings per B Interest in the pro forma results for the Conversion,
$0.233 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 $0.047 is attributable to the retention 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 1,000,000
shares of Common Stock (after the reverse stock split). See"SPECIAL
FACTORS --- Consequences if the Conversion is Not Approved."
If the Conversion is not approved, tax distributions to B Interests
would be eliminated after December 31, 1997 because there would be no
taxable income allocated to the B Interests after that date.
10. How was the allocation of value determined among the A Interests, B
Interests, and the General Partner Interests?
On June 12, 1996, the Board of Directors of Lehman/SDI appointed a
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. The Special Committee was authorized to
retain its own legal counsel and financial advisor to assist them in
their work.
O. Gordon Brewer, Jr. and Ernest L. Ransome, III were appointed to
serve on the Special Committee. Except for their directorship in
Lehman/SDI, Inc. and membership on the Special Committee, the members
of the Special Committee are not otherwise affiliated with SunSource,
Lehman Brothers, or their affiliates. Their combined holdings of
limited partnership interests are 8,000 A Interests and 6,000 B
Interests.
The Special Committee selected Dechert Price & Rhoads as its
independent legal counsel and Smith Barney, Inc. to act as its
independent financial advisor. The Special Committee, its advisors, and
the General Partner had numerous meetings in the ensuing months for the
purpose of negotiating the terms of the Conversion. On December 11,
1996, the Special Committee recommended to the Board of Directors that
the terms of the Conversion were fair to the holders of the
Partnership's A Interests and B Interests. The Board of Directors voted
unanimously to accept the recommendation of the Special Committee. On
June 19, 1997, the Special Committee unanimously determined to reaffirm
its recommendation to the Board of Directors of Lehman/SDI based upon
Smith Barney's updated written fairness opinion as of such date, a copy
of which is included as Exhibit C to the Proxy Statement. See "SPECIAL
FACTORS -- Allocation of Interests in the Conversion;" "--
Determinations of the Special Committee."
11. Have any opinions as to the fairness of the Conversion been received?
Yes. Smith Barney, Inc. delivered its written opinion to the Special
Committee on 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.
See "SPECIAL FACTORS - Opinion of Smith Barney." A similar opinion was
rendered by Smith Barney on June 19, 1997, a copy of which is included
as Exhibit C to the Proxy Statement.
PH02/170278.5
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12. Where will the Trust Preferred Securities and the Common Stock trade?
The Trust Preferred Securities and the Common Stock are expected to be
listed on the New York Stock Exchange.
13. What will be the market values of the Trust Preferred Securities and
the Common Stock?
Smith Barney has not expressed any opinion as to what the values of the
Trust Preferred Securities or Common Stock will actually be when issued
to holders of A Interests or B Interests, respectively, nor as to the
prices at which they will trade subsequent to the Conversion. 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 prior to the consummation of the
Conversion. See "SPECIAL FACTORS - Opinion of Smith Barney."
(a) Trust Preferred Securities.
Prior to the Conversion, there has been no public market for the Trust
Preferred Securities. 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. If a large number of holders of Trust
Preferred Securities were to offer their securities for sale
immediately after consummation of the Conversion, the market prices of
the Trust Preferred Securities could decline substantially absent a
corresponding demand for the securities from other investors.
(b) Common Stock.
Prior to the Conversion there has been no public market for the Common
Stock. The Common Stock received by the holders of B Interests could
trade at prices substantially below the historical trading level of the
B Interests (adjusted for the one-for-four reverse stock split) if a
large number of holders of Common Stock were to offer their shares for
sale shortly after the Conversion and there was an absence of
corresponding demand for the Common Stock from institutional and retail
investors.
The Corporation has agreed to file registration statements for the sale
of shares of Common Stock by Lehman/SDI, Inc. 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 certain acquisitions. In
addition, Lehman Brothers Capital Partners I, L.P., an affiliate of
Lehman/SDI, Inc. 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."
Issuances of additional shares of Common Stock or Preferred Stock by
the Corporation could adversely affect the existing stockholders'
equity interest in the Corporation and the market price of the Common
Stock.
14. What are the significant tax aspects of the Conversion to holders of
limited partnership interests?
For investors who hold only A Interests, the Conversion will be a
taxable transaction. Gain or loss
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will be recognized in an amount equal to the difference between the sum
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 gain or loss
if the A Interests have been held for more than one year, except for a
portion of the gain attributable to inventory items that will result in
ordinary income. The General Partner believes that the distribution of
$1.30 in cash per A Interest will be adequate to fund the tax liability
for the great majority of holders of A Interests.
For investors who hold only B Interests, the exchange should be
tax-free under current tax law, 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 the B Interests are held as
capital assets.
For investors who hold both A Interests and B Interests, the tax
treatment is somewhat more complex. Generally, gain will be recognized
on an aggregate basis in an amount equal to the lesser of (i) the
difference between the sum of cash and the fair market value of the
Trust Preferred Securities and Common Stock received in the exchange
and the exchanging holder's aggregate tax basis in the A Interests and
B Interests exchanged or (ii) the amount of cash and Trust Preferred
Securities received in the exchange. Such gain should be treated as
long-term capital gain provided that the A interests have been held for
more than one year, except for a portion of the gain attributable to
inventory items that will result in ordinary income. Losses generally
would not be recognized but apportioned as part of the tax basis in the
Trust Preferred Securities and Common Stock. See "CERTAIN FEDERAL
INCOME TAX CONSEQUENCES - General Tax Treatment of the Conversion;
-Certain Tax Consequences of the Conversion to Holders of B Interests;
and Certain Tax Consequences of the Conversion to Holders of A
Interests."
15. Will dissenting holders of A Interests and B Interests be entitled to
appraisal rights?
No. 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.
16. What impact does the Conversion have on voting rights?
If the Conversion is approved, the A Interest holders will generally be
exchanging limited partnership voting rights for corporate creditors'
rights.
If the Conversion is approved, the B Interest holders will be
exchanging limited partnership voting rights for shareholder voting
rights.
The General Partner and its affiliates presently own 46.3% of the B
Interests. After the Conversion, this ownership percentage will
increase to 54.0% of the Common Stock. However, the General Partner and
its affiliates have entered into a Stockholders Agreement that will
effectively limit the voting power of Lehman Brothers and six senior
executives to the respective voting powers they had immediately prior
to the Conversion. See "DESCRIPTION OF CAPITAL STOCK - Stockholders
Agreement."
17. Who can I call for more information?
In order to respond to your questions, SunSource has appointed D.F.
King & Co., Inc. as the Information Agent for limited partners desiring
additional information. You may call them toll free at
1-800-488-8075.
Please have your Proxy Card available when you call.
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18. What should I do if my Interests are held by a broker or bank?
If your Interests are held for you by a broker or bank, only your
broker or banker can vote your Interests and only after receiving
specific voting instructions from you. Please sign and return the
accompanying voting instruction form in the enclosed return envelope as
soon as possible.
19. How should I vote on the Conversion?
You are urged to review the accompanying Proxy Statement/Prospectus
carefully and consult with your personal financial and tax advisor
before voting on the Conversion. In making your decision, you should
consider that the General Partner urges you to vote "FOR" the adoption
of the Conversion proposal.
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