<PAGE>
As filed with the Securities and Exchange Commission on January 22, 1998
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------------------
Form S-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------------------
SUNSOURCE INC.
(Exact name of registrant as specified in its charter)
Delaware 23-2874736
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3000 One Logan Square
Philadelphia, Pennsylvania 19103
(215) 282-1290
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
---------------------------
JOSEPH M. CORVINO
Vice President - Finance, Chief Financial Officer,
Treasurer and Secretary
SunSource Inc.
3000 One Logan Square
Philadelphia, Pennsylvania 19103
(215) 282-1290
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------------------
Copies to:
DONALD A. SCOTT, ESQUIRE JOHN E. RILEY, ESQUIRE
Morgan, Lewis & Bockius LLP Simpson Thacher & Bartlett
2000 One Logan Square 425 Lexington Avenue
Philadelphia, Pennsylvania 19103-6993 New York, New York 10017
(215) 963-5000 (212) 455-2000
---------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
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,
check the following box. [ ]____________
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legal facsimile thereof, pursuant to item 11(a)(1) of
this Form, check the following box. [ ]____________
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]____________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
======================================================================================================================
Title of Each Class of Proposed Proposed
Securities to be Amount to be Maximum Offering Maximum Aggregate Amount of
Registered Registered Price Per Share(1) Offering Price(1) Registration Fee
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value 2,887,169 shares $23.4375 $67,668,023 $19,962
$.01 per share............
======================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933 based on the
average of the high and low prices reported on the New York Stock Exchange
Composite Tape on January 16, 1998.
---------------------------
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 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
Subject to Completion, dated January 22, 1998
PROSPECTUS 2,512,169 Shares
[LOGO]
Common Shares
---------------------------
Of the 2,512,169 shares of Common Stock, par value $.01 per share (the
"Common Shares"), of SunSource Inc. ("SunSource" or the "Company") offered
hereby, 500,000 shares are being issued and sold by the Company and 2,012,169
shares are being sold by the Selling Stockholders (collectively, the
"Offering"). The Selling Stockholders are affiliates of Lehman Brothers Inc. See
"Security Ownership of Certain Beneficial Owners, Management and Selling
Stockholders." The Company will not receive any of the proceeds from the shares
being sold by the Selling Stockholders.
The Company's Common Shares are listed on the New York Stock Exchange
under the symbol "SDP." On January 20, 1998, the reported last sale price of the
Common Shares on the New York Stock Exchange Composite Tape was $23.50 per
share.
---------------------------
An investment in the Common Shares offered hereby involves various risks.
See "Risk Factors" beginning on page 8.
---------------------------
THESE SECURITIES HAVE NOT 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 ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
========================================================================================================================
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions (1) Company (2) Stockholders
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share........................... $ $ $ $
- ------------------------------------------------------------------------------------------------------------------------
Total (3) .......................... $ $ $ $
========================================================================================================================
</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting estimated expenses of the Offering of $500,000 payable
by the Company.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 375,000 Common Shares on the same terms and conditions as the
securities offered hereby solely to cover over-allotments, if any. If such
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to the Company will be $ ,
$ and $ , respectively. The Proceeds to the Selling Stockholders
will not change if such option is exercised. See "Underwriting" and
"Security Ownership of Certain Beneficial Owners, Management and Selling
Stockholders."
---------------------------
The Common Shares offered by this Prospectus are offered by the
Underwriters subject to prior sale, to withdrawal, cancellation or modification
of the offer without notice, to delivery to and acceptance by the Underwriters
and to certain further conditions. It is expected that delivery of the shares
will be made at the offices of Lehman Brothers Inc., New York, on or about
, 1998.
---------------------------
Lehman Brothers
Robert W. Baird & Co.
Incorporated
Furman Selz
Legg Mason Wood Walker
Incorporated
, 1998
<PAGE>
[Organizational chart of the Company]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES. SUCH
TRANSACTIONS MAY INCLUDE THE PURCHASE OF COMMON SHARES PRIOR TO THE PRICING OF
THE OFFERING FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON SHARES AND
THE PURCHASE OF COMMON SHARES FOLLOWING THE PRICING OF THE OFFERING TO COVER A
SYNDICATE SHORT POSITION IN THE COMMON SHARES OR FOR THE PURPOSE OF MAINTAINING
THE PRICE OF THE COMMON SHARES. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in all respects by the more detailed
information set forth elsewhere in this Prospectus and the documents
incorporated by reference herein. Unless the context suggests otherwise, (i)
SunSource or the Company refers to SunSource Inc. and its predecessors and (ii)
all information provided herein assumes no exercise of the Underwriters'
over-allotment option. This Prospectus contains forward-looking statements that
address, among other things, projected revenue, cash flow and income, the
implementation of new management information systems, cost savings, profit
growth and acquisition strategy. These statements may be found under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," as well as in this 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" and matters set forth in this Prospectus generally.
As used herein, (i) the term "Conversion" means the conversion of the Company on
September 30, 1997 from partnership to corporate form, (ii) the term
"Refinancing" means the refinancing of the Company's senior notes and bank
revolving credit which occurred on September 30, 1997 and (iii) the term
"Partnership" means SunSource L.P., the predecessor partnership to the Company.
The Company
SunSource is one of the largest providers of industrial products and
related value-added services in North America. Through its applications
engineers and technical support personnel, SunSource provides customized
solutions to complex problems encountered by its customers. The Company believes
that it differentiates itself from other industrial distributors by providing
superior technical and problem-solving capabilities in addition to an extensive
product offering and broad array of related services, such as engineering design
and integrated supply arrangements. The Company has more than 180,000 customers,
none of which represents more than 5% of annual net sales. The Company's
distribution and related services support more than 1,300 product lines,
consisting of approximately 175,000 stock keeping units.
The Company has targeted three businesses within the distribution industry
which are characterized by a potential for value-added services, economies of
scale and opportunities for further consolidation.
Industrial Services. SunSource Industrial Services Company, with sales of
$455 million in 1996, provides a broad range of products and services throughout
North America through the sales and marketing activities of SunSource Technology
Services ("STS") and Sun Inventory Management Company ("SIMCO"). The Company
believes that STS is a leading provider of systems and parts and engineering
services for hydraulic, pneumatic, electrical and related systems to major
industrial concerns, as well as small and medium-size businesses. STS provides
services, including engineering and design of both products and processes and
the assembly and repair of complex systems, which enable its customers to
outsource engineering and other functions which they previously performed
in-house. SIMCO provides inventory management services enabling its customers to
reduce inventory investment and the associated expenses of purchasing,
receiving, disbursing and accounting for parts and materials.
Hardware Merchandising Services. Hardware Merchandising Services, which
operates under the name Hillman ("Hillman"), with sales of $103 million in 1996,
provides small hardware items and merchandising services to retail hardware
stores through a nationwide sales and service organization. Hillman offers a
full range of fasteners, letters, numbers, signs, keys, rope and chain
accessories and many other inexpensive "specialty" goods, which are the
"must-have" items for hardware retailers that cannot be managed economically by
the retailer's own employees because of the large number of items and their low
prices. Hillman maintains a 235 person nationwide sales and service organization
which seeks to ensure that its customers' inventories are maintained at
appropriate levels with a minimum of administrative effort or expense. Hillman
also provides inventory management software that ties into retailers'
point-of-sale systems. Through its merchandising system, Hillman assists
retailers with rack positioning, store layout, new package design and color
coding systems to permit ease of shopping by consumers.
Glass Merchandising. Glass Merchandising, which operates under the name
Harding ("Harding"), with sales of $90 million in 1996, operates one of the
largest networks of full service retail glass shops in the United States.
Harding is comprised of approximately 85 retail locations throughout the
Southwest and, to a lesser degree, along the East Coast. Harding sells and
installs automotive glass and also sells, fabricates and installs flat glass.
Customers include individual retail consumers, insurance companies and
commercial accounts.
The markets in which the Company participates are currently impacted by
the following trends:
o Manufacturers are increasing their reliance on distributors in order
to enhance their profitability and improve their returns on capital;
3
<PAGE>
o Customers are increasing their reliance on value-added distributors as
their contacts with the manufacturers diminish or cease altogether;
o Customers are outsourcing non-core functions to high-quality service
providers;
o Channels of distribution are in the process of consolidation; and
o Managerial skills required for success in industrial distribution are
changing dramatically.
The Company's growth has resulted from its ability to capitalize on these
trends due to its competitive strengths in the following areas:
o Acquisition Integration Capability - The ability to integrate acquired
companies while improving operational efficiencies and enhancing their
effectiveness in the marketplace.
Since the organization of its predecessor in 1975 and through 1991,
the Company grew primarily through acquisitions of existing
distribution companies. During this period, a series of acquisitions
expanded the Company's operations both geographically and in the
number and types of products offered. Thirty-five of these
acquisitions had purchase prices in excess of $1 million and
approximately 40 more had purchase prices under $1 million. The
Company's ability to make acquisitions since 1991 was hindered by its
previous partnership structure and associated restrictions in its
credit agreement. As a result of the Conversion, the Refinancing and
this Offering, the Company expects to have the necessary financial
capacity to resume its acquisition program. The Company intends to
seek acquisition candidates that have developed attractive market
niches, have strong management and have demonstrated their ability to
achieve stable growth and high returns on invested capital.
o Ability to Capitalize on Industry Trends - The ability to execute
dynamic business strategies to capitalize on opportunities arising
from rapid structural changes in the marketplace.
The Company has established separate organizations for its three
businesses, each headed by a chief executive officer who is supported
by sales, marketing, financial, logistics and information systems
resources. This organizational structure enables the Company to manage
each of its businesses within the context of the varying market
opportunities, rates of change and competitive threats affecting those
businesses. The Company's small headquarters staff shapes and guides
the strategic decisions of its operating companies. Performance
benchmarks are established as part of this process and progress is
monitored to ensure that initiatives remain on track.
o Technology for Competitive Advantage - The ability to use technology
and technical expertise as competitive advantages to build and defend
attractive market niches.
For example, STS is implementing a new integrated information system
which will permit (i) the centralization of the purchasing function,
resulting in a smaller staff with a higher level of professional
skills; (ii) a reduction in the number of warehouses from 36 to fewer
than ten; (iii) higher customer order fill rates; and (iv) lower
exposure to obsolete or slow-moving inventory.
SunSource believes that each of its three operating businesses is well
positioned to capture opportunities in the markets in which it participates:
o SunSource Industrial Services Company's strategy is to capitalize on
the trends among industrial customers toward consolidation of
suppliers, outsourcing the procurement function for goods and
outsourcing in-plant services for which they lack expertise or
sufficient resources.
o Hillman's strategy is to capitalize on the desire of its customers to
outsource the burden of maintaining a complex, low value inventory as
well as to continually expand its product line.
4
<PAGE>
o Harding's strategy is to take advantage of the trend toward
consolidation in the retail glass business. Multiple acquisitions,
most of which are quite small, can be integrated because of Harding's
management information systems and the increased number of management
personnel dedicated to making acquisitions.
The Company traces its origins to 1975, when Sun Company, Inc. ("Sun")
decided to pursue a diversification strategy outside of its traditional energy
business. After an extensive analysis of strategic alternatives, Sun concluded
that the industrial distribution business offered substantial opportunities for
growth, high returns on invested capital, and relatively low business risk. Sun
pursued this strategy through Sun Distributors, Inc., which became an industry
consolidator and acquired 16 companies between 1975 and 1985. In 1986, Sun
decided to refocus its efforts on its core energy business and sell its
non-energy businesses. The Company was purchased by a predecessor affiliate of
the Selling Stockholders in October 1986. In February 1987, the Company made an
initial public offering of its limited partnership interests and became a
publicly traded master limited partnership.
The Company continued to make acquisitions after its initial public
offering, but its ability to make acquisitions after 1991 was hindered by its
partnership structure and associated restrictions in the Company's credit
agreements. In 1994 and 1995, the Company divested three non-strategic
businesses with aggregate 1994 sales of $177.1 million. The Company converted
from partnership to corporate form on September 30, 1997.
The Offering
<TABLE>
<CAPTION>
<S> <C>
Common Shares being offered by the Company.................... 500,000
Common Shares being offered by the Selling Stockholders....... 2,012,169
Common Shares outstanding (before and after the Offering)..... 6,418,936 and 6,918,936, respectively
Selling Stockholders.......................................... Lehman LTD I, Inc., Lehman Brothers Capital Partners I and
Lehman/SDI, Inc., who are affiliates of Lehman Brothers Inc.
Use of Proceeds by the Company................................ To repay borrowings under the Company's revolving credit
facility
New York Stock Exchange symbol................................ SDP
</TABLE>
Risk Factors
An investment in the Common Shares offered hereby involves various
risks. See "Risk Factors."
5
<PAGE>
SUMMARY HISTORICAL AND
PRO FORMA FINANCIAL INFORMATION
(In thousands except per share amounts)
The following tables set forth summary consolidated historical and pro
forma financial data of the Company and the Partnership as of the dates and for
the periods indicated. The historical financial information as of September 30,
1997 and for the nine months ended September 30, 1997 and 1996 is derived from
unaudited financial statements included elsewhere herein. The historical
information for each of the three years in the period ended December 31, 1996 is
derived from audited financial statements included elsewhere herein. The
historical financial information for each of the two years in the period ended
December 31, 1993 are derived from audited financial statements not included
elsewhere herein. The summary unaudited pro forma income statement information
for the nine months ended September 30, 1997 and 1996 and for the twelve months
ended December 31, 1996 gives effect to the Conversion, the Refinancing, the
Offering and the elimination of other non-recurring charges and credits as of
the beginning of each period presented. The pro forma financial information
should be read in conjunction with the unaudited pro forma consolidated
financial statements and related notes thereto appearing elsewhere herein. See
"Index to Financial Statements," "Selected Historical and Pro Forma Financial
Information" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Years Ended December 31,
------------------------- -----------------------------------------------------------
Historical Statement of Operations Data: 1997 1996 1996 1995 (1) 1994 (1) 1993 (1) 1992 (1)
----------- ----------- ----------- ---------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.................................. $ 529,199 $ 489,517 $ 649,254 $ 628,935 $ 735,861 $ 655,707 $ 612,052
EBITDA (2), (3)............................ 30,482 29,047 29,999 36,959 44,901 36,835 38,126
EBITA (2), (3)............................. 27,458 26,363 26,376 33,298 40,399 31,729 32,654
Income from operations (2)................. 26,100 24,914 24,452 31,302 37,759 28,975 29,712
Pro Forma Statement of Operations Data: PRO FORMA
--------------------------------------
(unaudited)
Net sales.................................. $ 529,199 $ 489,517 $ 649,254
EBITDA (3)................................. 36,026 31,538 41,429
EBITA (3).................................. 33,002 28,854 37,806
Amortization............................... 1,748 1,839 2,444
Income from operations..................... 31,254 27,015 35,362
Interest expense, net...................... 5,371 5,038 6,726
Distribution on guaranteed
preferred beneficial interests........... (9,174) (9,174) (12,232)
Income before income taxes................. 16,889 13,481 17,149
Provision for income taxes................. 7,576 6,336 8,060
Net income................................. $ 9,313 $ 7,145 $ 9,089
Net income per Common Share................ $ 1.35 $ 1.03 $ 1.31
Weighted average number of
outstanding Common Shares................ 6,918,936 6,918,936 6,918,936
September 30, 1997
-------------------------
As
Balance Sheet Data: Historical Adjusted(4)
---------- -----------
(unaudited)
Working capital............................ $ 105,357 $ 105,357
Total assets............................... 305,003 305,003
Long-term debt............................. 77,708 67,104
Guaranteed preferred beneficial
interests in the Company's
junior subordinated debentures........... 115,991 115,991
Stockholders' (deficit) equity............. (3,097) 7,507
Book value per Common Share................ (.48) 1.08
</TABLE>
6
<PAGE>
- -------------------
(1) Includes results of operations from divisions sold as follows:
Years Ended December 31,
----------------------------------------------------
1995 1994 1993 1992
----------- ----------- ------------ ------------
Net sales $ 29,070 $ 177,107 $ 162,270 $ 159,912
EBITDA (3) 608 10,338 8,539 10,106
EBITA (3) 305 9,085 6,989 8,315
Income from operations 270 8,588 6,637 8,017
(2) Includes $3,053 of Conversion-related transaction and other costs for the
nine months ended September 30, 1997 and $2,150 for the year ended December
31, 1996, $5,950 of restructuring charges for the year ended December 31,
1996 and management fee expense of $2,491 for the nine-month periods ending
September 30, 1996 and 1997 and $3,330 in each year in the five year period
ending December 31, 1996.
(3) "EBITDA" is defined as income from operations before depreciation and
amortization; "EBITA" is defined as income from operations before
amortization. EBITDA and EBITA are not measures of performance under
Generally Accepted Accounting Principles ("GAAP"). While EBITDA and EBITA
should not be considered in isolation or as a substitute for net income,
cash flows from operating activities and other income or cash flow statement
data prepared in accordance with GAAP, the Company believes that EBITDA and
EBITA are accepted within the business segments in which the Company
operates as generally recognized measures of performance. Moreover,
substantially all of the Company's financing agreements contain covenants in
which EBITDA and/or EBITA are used as measures of financial performance. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a discussion of other measures of performance determined in
accordance with GAAP.
(4) Assumes the Offering closed on September 30, 1997 with net proceeds of
$10,604,000 to the Company for 500,000 Common Shares issued.
7
<PAGE>
RISK FACTORS
An investment in the Common Shares of the Company offered hereby
involves various risks. In addition to general investment risks and those
factors set forth elsewhere in this Prospectus, prospective investors should
consider, among other things, the following factors:
Restructuring
In December 1996, the Company announced a restructuring plan to
integrate and consolidate its five domestic STS divisions. The Company expects
the restructuring plan to result in the elimination of approximately 175
employees in the STS divisions and produce certain net annualized cost savings
of approximately $5.0 million per year upon its completion. The STS divisions
consist of hydraulic and pneumatic distributors that were acquired by the
Company between 1976 and 1991. Until the restructuring, each of the STS
divisions was operated on a decentralized basis. The announced restructuring
plan is a three-year project to consolidate all financial and other
administrative responsibilities for the STS divisions in one location, and
includes a migration to one management information system. The integration and
consolidation of the finance and administrative functions is expected to be
completed in the first half of 1999. The restructuring of the sales organization
and distribution network has begun; however, management's current estimate is
that completion of this phase will require approximately an additional 18 months
due to the need for further analysis of STS' customer base and logistics
requirements. The failure to complete the restructuring or successfully
integrate the STS divisions would have an adverse impact on the Company's
ability to fully achieve the net cost savings indicated above. Although the
Company believes that STS will be successful with its restructuring plan, there
can be no assurance that it will be able to complete the plan effectively or on
a timely basis. See "Business--Industrial Services--SunSource Technology
Services."
Changing Industry Environment
The industrial distribution industry is undergoing significant change.
Historically, industrial distributors have served as suppliers of industrial
products and as extensions of manufacturers' sales forces, selling products
through the distribution channels to original equipment manufacturers,
retailers, end users and other customers. In recent years, both manufacturers
and customers have been increasingly relying on industrial distributors such as
the Company to reduce purchasing costs and provide a broad range of value-added
services, including inventory management programs, integrated supply
arrangements, electronic ordering capabilities, engineering design and technical
support services. In addition, customers' desire to consolidate their supplier
relationships has required industrial distributors to achieve purchasing
efficiencies, expand their geographic coverage and increase product and service
offerings through acquisitions of other distributors. These changes in the
industrial distribution industry could cause the industry to become more
competitive. Although the Company believes that it is well positioned to take
advantage of these changing industry dynamics, there can be no assurance that
the Company will be able to compete effectively in or adapt to the changing
industry environment. See "Business--Industry Overview" and "Business--Business
Strategy."
Risks Associated with Acquisitions
An element of the Company's future growth strategy is to pursue
selected acquisitions that either expand or complement its businesses in new or
existing markets. However, there can be no assurance that the Company will be
able to identify or acquire acceptable acquisition candidates on terms favorable
to the Company and in a timely manner to the extent necessary to fulfill the
Company's growth strategy. Future acquisitions may be financed through the
issuance of Common Shares, which may be dilutive to the Company's stockholders,
or through the incurrence of additional indebtedness. Furthermore, there can be
no assurance that competition for acquisition candidates will not escalate,
thereby increasing the costs of acquisitions. The process of integrating
acquired businesses into the Company's operations may result in unforeseen
difficulties and may require a disproportionate amount of resources and
management's attention, and there can be no assurance that the Company will be
able to successfully integrate acquired businesses into its operations. The
failure to complete or successfully integrate
8
<PAGE>
prospective acquisitions may have an adverse impact on the Company's growth
strategy. The Company is not currently a party to any agreement or understanding
regarding a material acquisition but is pursuing discussions with a number of
prospective sellers of businesses. See "Business--Business Strategy."
Competition
The distribution industry is highly competitive, with the principal
methods of competition being price, quality of service, quality of products,
product availability, credit terms and the provision of value-added services,
such as engineering design, integrated supply and inventory management. The
Company 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 Company and offer a greater variety of products.
See "Business."
Seasonality and Industry Cycles
The Company has in the past experienced seasonal fluctuations in sales
and operating results from quarter to quarter. Typically, the first calendar
quarter is the weakest due to the effect of weather on construction activity
which produces a slowdown of sales of material and equipment in the construction
market. Fluctuations in the Company's quarterly operating results could result
in significant volatility in, and otherwise adversely affect, the market price
of the Common Shares.
Some of the principal markets for the products and services offered by
the Company are subject to cyclical fluctuations that generally affect demand
for industrial, commercial and consumer durable goods. Cyclical fluctuations can
affect a number of factors such as pricing, availability and demand for the
Company's products, growth rates in the markets served by the Company's
customers, the delivery and performance of vendors, and the availability of
suitable acquisition candidates. Changes in general economic conditions could
have a material adverse effect on the Company's business, results of operations
and financial condition.
Dependence on Information Systems; Year 2000 Issue
The Company believes that its proprietary computer software programs
are an integral part of its business and growth strategies. The Company depends
on its information systems generally to process orders, to manage inventory and
accounts receivable collections, to purchase, sell and ship products efficiently
and on a timely basis, to maintain cost-effective operations and to provide
superior service to its customers. While the Company has taken precautions
against certain events that could disrupt the operation of its information
systems, there can be no assurance that such a disruption will not occur. Any
such disruption could have a material adverse effect on the Company's business
and results of operations. See "Business."
The Company faces the "Year 2000" issue. The Year 2000 issue is the
result of computer programs being written using two digits (rather than four) to
define the applicable year, resulting in incorrect calculations for the year
2000 and beyond. The Company's issues relate not only to its own systems being
Year 2000 compliant, but also the systems of its suppliers and customers. The
Company presently believes that, with modifications to existing software and
converting to new software, the Year 2000 issue will not pose significant
operational problems for its computer systems as so modified or converted.
However, if such modifications and conversions are not completed in a timely
manner, or if the Company's suppliers and customers fail to address the problem,
the Year 2000 issue could have a material adverse effect on the operations of
the Company.
Future Dilution of Common Stock
The Company is permitted to issue additional equity or debt securities,
including shares of Preferred Stock. Issuances of additional Common Shares or
shares of Preferred Stock could adversely affect stockholders' equity interest
in the Company and could adversely affect the market price of the Common Shares,
and the interests in the
9
<PAGE>
assets, liabilities, cash flow and results of operations of the Company
represented by Common Shares may be diluted. Holders of Common Shares are not
entitled to preemptive rights.
Provisions that May Discourage Changes of Control
The Company's Certificate of Incorporation and Bylaws and the
Stockholders Agreement and Stockholders Rights Plan described under "Description
of Capital Stock" contain certain provisions that may have the effect of
encouraging persons considering an acquisition or takeover of the Company 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 the market price for the Common Shares.
In addition to the Stockholders Rights Plan, these provisions include
authorization for the Board of Directors to issue classes or series of Preferred
Stock and a requirement that stockholders notify the Company in advance of any
director nominees or items of business to be proposed at any meeting of
stockholders. In addition, the deferred compensation plans of the Company
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.
These provisions may reduce interest in the Company as a potential acquisition
target or reduce the likelihood of a change in the management or voting control
of the Company without the consent of the then incumbent Board of Directors.
Limited Trading Market and Volatility of Common Shares
The Common Shares have traded on the New York Stock Exchange since the
effective date of the Conversion on October 1, 1997. Prior to that time the
Class B limited partnership interests of the Partnership had limited trading
volume because institutional and other investors do not typically invest in
limited partnership interests for various tax and administrative reasons. The
limited trading volume in the Common Shares has continued since October 1, 1997.
From time to time after the Offering, there may be significant
volatility in the market price for the Common Shares. Operating results of the
Company or of other companies participating in the industrial distribution
industry, changes in general economic conditions and the financial markets, or
other developments affecting the Company or its competitors could cause the
market price for the Common Shares to fluctuate substantially.
Reliance on Executive Officers
The Company is highly dependent upon the skills, experience and efforts
of its executive officers. Loss of the services of one or more of the Company's
executive officers could have a material adverse effect on the Company's
business and development. The Company's continued growth also depends in part on
its ability to attract and retain qualified managers, sales representatives and
other key employees and on its executive officers' ability to implement the
Company's strategy successfully. No assurance can be given that the Company will
be able to attract and retain such employees or that such executive officers
will be able to implement the Company's strategy successfully. See "Management."
10
<PAGE>
THE COMPANY
SunSource Inc. is a Delaware corporation organized in 1996 to
accomplish the Conversion. The Conversion was effected by the merger of the
Partnership into the Company effective on September 30, 1997. In the Conversion,
each Class A limited partnership interest of the Partnership was exchanged for
$1.30 in cash and 0.38 of a Guaranteed Preferred Beneficial Interest in the
Company's Junior Subordinated Debentures (the "Trust Preferred Securities");
each Class B limited partnership interest was exchanged for 0.25 Common Share of
the Company; and the general and limited partnership interests in the general
partner of the Partnership were exchanged for 1,000,000 Common Shares.
The Partnership was organized 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. The name was changed to SunSource L.P. in April
1996.
The principal executive office of the Company is located at 3000 One
Logan Square, Philadelphia, PA 19103 and its telephone number is (215) 282-1290.
USE OF PROCEEDS
The net proceeds to the Company from the Offering (estimated at
$10,604,000) will be used to repay borrowings under the Company's revolving
credit facility. As of December 31, 1997, the balance on the Company's revolving
credit facility was approximately $33.0 million. The funds borrowed by the
Company under the revolving credit facility were used to pay transaction costs
and other payments related to the Conversion and for working capital purposes.
The interest rate on borrowings under the revolving credit facility are based on
London Interbank Offered Rate ("LIBOR") plus 1.0% to 1.5% or prime. At December
31, 1997, such interest rate was approximately 7.37% per annum.
The Company will receive no proceeds from the sale of Common Shares in
the Offering by the Selling Stockholders.
DIVIDEND POLICY
The Company paid a cash dividend of $.10 per Common Share on January 6,
1998. The Company expects to declare future quarterly dividends on the Common
Shares of $.40 per Common Share annually, subject to the discretion of the Board
of Directors and dependent upon, among other things, the Company's future
earnings, financial condition, capital requirements, funds needed for
acquisitions, level of indebtedness, contractual restrictions and other factors
that the Board of Directors deems relevant.
11
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997 and as adjusted to give effect to the Offering and repayment
of borrowings under the Company's revolving credit facility (assuming the
Offering closed on September 30, 1997 with net proceeds of $10,604,000 to the
Company). The table should be read in conjunction with the historical and pro
forma consolidated financial statements of the Company and the Partnership and
related notes thereto included elsewhere herein and the unaudited pro forma
financial statements and related notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
As of September 30, 1997
------------------------------------
Historical As Adjusted
------------------ ----------------
(In thousands)
<S> <C> <C>
Senior notes................................................................ $60,000 $60,000
Bank revolving credit facility (1).......................................... 17,000 6,396
Capital lease obligations................................................... 708 708
-------- ---
Total debt......................................................... 77,708 67,104
-------- --------
Guaranteed preferred beneficial interests in the Company's junior
subordinated debentures................................................... 115,991 115,991
------- -------
Stockholders' deficit/equity:
Preferred Stock, $0.01 par, 1,000,000 shares authorized, none issued... -- --
Common Stock, $0.01 par, 20,000,000 shares authorized, 6,418,936
historical shares issued and outstanding; 6,918,936 as adjusted shares
issued and outstanding............................................ 64 69
Paid-in-capital........................................................ -- 10,599
Accumulated deficit(2)................................................. (1,485) (1,485)
Cumulative foreign currency translation adjustment..................... (1,676) (1,676)
------- ---------
Total stockholders' deficit/equity................................. (3,097) 7,507
------- ---------
Total capitalization............................................... $190,602 $ 190,602
======= =======
</TABLE>
(1) Subsequent to September 30, 1997, distributions payable of $17,557 were
funded through the bank revolving credit facility.
(2) The Company's accumulated deficit is primarily a result of the exchange of
Class A limited partnership interests for cash and guaranteed preferred
beneficial interests in the Company's junior subordinated debentures. The
guaranteed preferred beneficial interests are classified between total
liabilities and equity on the Company's balance sheet and were recorded at
their fair value on September 30, 1997. (See page F-10 for further
information on Conversion-related adjustments).
12
<PAGE>
PRICE RANGE OF COMMON SHARES
As a result of the Conversion which was effective at the close of
business on September 30, 1997, the Common Shares began trading on the New York
Stock Exchange on October 1, 1997 under the symbol "SDP". The following table
sets forth the high and low closing sale prices on the New York Stock Exchange
Composite Tape for the Common Shares since that date:
High Low
1998
First Quarter (to January 20)......... $23 9/16 $23 5/16
1997
Fourth Quarter........................ $25 13/16 $23 1/2
For a recent reported last sale price of the Common Shares on the New
York Stock Exchange Composite Tape see the cover page of this Prospectus. As of
January 20, 1998, there were approximately 776 holders of record of the Common
Shares.
As discussed above under "The Company," in the Conversion each Class B
limited partnership interest of the Partnership was exchanged on September 30,
1997 for 0.25 of a Common Share, effectively a one-for-four reverse split. The
following table shows the quarterly range of high and low closing sales prices
on the New York Stock Exchange Composite Tape for the Class B limited
partnership interests for the periods indicated, adjusted for the one-for-four
reverse split:
High Low
1997
First Quarter................................ $ 18 $ 16 1/2
Second Quarter............................... 20 1/2 16
Third Quarter................................ 23 1/2 19
1996
First Quarter................................ $ 20 1/2 $ 16
Second Quarter............................... 18 16
Third Quarter................................ 18 17
Fourth Quarter............................... 18 1/2 16 1/2
13
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
(In thousands, except for per unit and per share data)
The following table sets forth selected consolidated historical and pro
forma financial data of the Company and the Partnership as of the dates and for
the periods indicated. The historical financial information as of September 30,
1997 and for the nine months ended September 30, 1997 and 1996 is derived from
unaudited financial statements included elsewhere herein. The historical
financial information as of December 31, 1996 and 1995 and for each of the three
years in the period ended December 31, 1996 is derived from audited financial
statements included elsewhere herein. The historical financial information as of
September 30, 1996, December 31, 1994, 1993, 1992 and for each of the two years
in the period ended December 31, 1993 is derived from financial statements not
included elsewhere herein. The selected unaudited pro forma income statement
information for the nine months ended September 30, 1997 and 1996 and for the
twelve months ended December 31, 1996 gives effect to the Conversion, the
Refinancing, the Offering and the elimination of other non-recurring charges and
credits as of the beginning of each period presented. The pro forma financial
information should be read in conjunction with the unaudited consolidated pro
forma financial statements and notes thereto appearing elsewhere herein. See
"Index to Financial Statements" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Nine Months Ended September 30, Years Ended December 31,
------------------------------- ----------------------------------------------------
1997 1996 1996 1995 (1) 1994 (1) 1993 (1) 1992 (1)
---- ---- ---- ---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Historical Statement of Operations Data:
Net sales.............................. $ 529,199 $ 489,517 $ 649,254 $ 628,935 735,861 $ 655,707 $ 612,052
Cost of sales.......................... 315,000 293,748 386,251 375,425 451,785 401,441 370,435
------- ------- ------- ------- ------- ------- -------
Gross profit........................... 214,199 195,769 263,003 253,510 284,076 253,266 241,617
Selling, general and admin. exp........ 178,783 164,231 221,574 213,221 235,845 213,101 200,161
Management fee......................... 2,491 2,491 3,330 3,330 3,330 3,330 3,330
Depreciation........................... 3,024 2,684 3,623 3,661 4,502 5,106 5,472
Amortization........................... 1,358 1,449 1,924 1,996 2,640 2,848 2,861
Restructuring charges.................. -- -- 5,950 -- -- -- --
Transaction and other costs............ 3,053 -- 2,150 -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Income from operations................. 26,100 24,914 24,452 31,302 37,759 28,975 29,712
Interest expense, net.................. 5,507 5,147 6,875 6,920 9,890 10,004 11,540
Other income (expense), net............ (83) 470 550 256 (1,748) 498 (69)
Gain on sale of division............... -- -- -- 20,644 3,523 -- --
Provision (benefit) for income taxes... (8,932) (372) (1,140) 537 100 869 493
Extraordinary loss..................... (3,392) -- -- (629) -- -- (3,434)
Cumulative effect on prior years of
change in accounting principle...... -- -- -- -- -- -- 822
Net income ............................ $ 26,050 $ 20,609 $ 19,267 $ 44,116 $ 29,544 $ 18,506 $ 15,079
Net income per limited partnership
interest
- Class A............................ N/A 0.82 1.10 1.10 1.10 1.10 1.10
- Class B............................ N/A 0.52 0.32 1.45 0.79 0.28 0.13
Cash distributions declared per limited
partnership interest
- Class A............................ N/A 0.73 1.10 1.10 1.10 1.10 1.10
- Class B............................ N/A 0.23 0.33 0.67 0.49 0.27 0.13
Weighted average number of out-
standing limited partnership interests
- Class A............................ 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
Pro forma net income per Common Share (2) $ 1.35 N/A N/A N/A N/A N/A N/A
Weighted average number of outstanding
Common Shares........................ 6,418,936 N/A N/A N/A N/A N/A N/A
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
September 30, December 31,
------------------------------- ---------------------------------------------------------
Balance Sheet Data: 1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Working capital........................ $ 105,357 $ 101,476 $ 100,781 $ 95,841 $ 76,060 $ 92,091 $ 98,579
Total assets........................... 305,003 263,303 262,555 254,591 266,186 273,493 261,588
Short-term debt financing.............. -- 6,395 6,395 6,395 18,970 5,700 5,700
Long-term debt and capitalized lease
obligations.......................... 77,708 63,934 69,150 63,934 75,168 104,185 116,122
Guaranteed preferred beneficial
interests in the Company's junior
subordinated debentures ............. $ 115,991 N/A N/A N/A N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
----------------------------------------------------------------------
Nine Months Ended September 30, Year Ended December 31,
--------------------------------------- --------------------------
1997 1996 1996
---- ---- ----
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Pro Forma Statement of Operations:
Net sales.................................................. $ 529,199 $ 489,517 $ 649,254
EBITDA (3)................................................. 36,026 31,538 41,429
EBITA (3).................................................. 33,002 28,854 37,806
Amortization............................................... 1,748 1,339 2,444
Income from operations..................................... 31,254 27,015 35,362
Interest expense, net...................................... 5,371 5,038 6,726
Distribution on guaranteed preferred beneficial interests.. (9,174) (9,174) (12,232)
Income before income taxes................................. 16,889 13,481 17,149
Provision for income taxes................................. 7,576 6,336 8,060
Net income................................................. $ 9,313 $ 7,145 $ 9,089
Net income per Common Share................................ $ 1.35 $ 1.03 $ 1.31
Weighted average number of outstanding Common Shares...... 6,918,936 6,918,936 6,918,936
</TABLE>
- -------------------
(1) Includes results of operations from divisions sold as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------
1995 1994 1993 1992
----------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Net sales................................. $ 29,070 $ 177,107 $ 162,270 $ 159,912
Gross profit.............................. 8,649 56,931 52,707 52,404
Selling, general and administrative expense 8,041 46,593 44,168 42,298
Depreciation.............................. 303 1,253 1,550 1,791
Amortization.............................. 35 497 352 298
Income from operations.................... 270 8,588 6,637 8,017
</TABLE>
(2) The pro forma earnings per common share for the nine months ended September
30, 1997 gives effect to the Conversion as of the beginning of the year
presented and excludes non-recurring charges and credits directly related
to the Conversion.
(3) "EBITDA" is defined as income from operations before depreciation and
amortization; "EBITA" is defined as income from operations before
amortization. EBITDA and EBITA are not measures of performance under
Generally Accepted Accounting Principles ("GAAP"). While EBITDA and EBITA
should not be considered in isolation or as a substitute for net income,
cash flows from operating activities and other income or cash flow
statement data prepared in accordance with GAAP, the Company believes that
EBITDA and EBITA are accepted within the business segments in which the
Company operates as generally recognized measures of performance. Moreover,
substantially all of the Company's financing agreements contain covenants
in which EBITDA and/or EBITA are used as measures of financial performance.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of other measures of performance
determined in accordance with GAAP.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
The Company is one of the largest providers of industrial products and
related value-added services in North America. The Company is organized into
three businesses which are SunSource Industrial Services Company, Hillman and
Harding. SunSource Industrial Services Company is comprised of STS and SIMCO.
Conversion
The Conversion resulted in the Company reporting a stockholders'
deficit as of September 30, 1997, due to the exchange of Trust Preferred
Securities and cash for all of the Class A partnership interests which was
recorded at fair value aggregating $130.4 million. The Trust Preferred
Securities have both equity characteristics and certain creditors' rights, and
therefore are classified between total liabilities and stockholders' equity on
the Company's balance sheet. The Trust Preferred Securities bear interest at an
annual rate of 11.6% and are cumulative and callable, at the Company's option,
after September 30, 2002. The interest payments on the Junior Subordinated
Debentures underlying the Trust Preferred Securities of approximately $12.2
million annually are deductible for federal income tax purposes under current
law and will remain an obligation of the Company until the Trust Preferred
Securities are redeemed or upon their maturity in 2027.
Restructuring
In December 1996, the Company recorded restructuring charges of $6.0
million (on a pre-tax basis) related to a restructuring and consolidation of STS
(approximately $4.4 million) and the one-time write-off of certain
non-performing assets of Harding (approximately $1.6 million). The restructuring
plan is expected to result in the elimination of approximately 175 employees in
the STS divisions and result in net cost savings of approximately $5.0 million
annually upon its completion. The restructuring plan is a three-year project
that will consolidate all financial and administrative responsibilities for STS
in a centralized location which is expected to be completed in the first half of
1999. However, the Company has deferred completion of restructuring of the STS
sales organization and distribution network for an additional eighteen months
pending further analysis of its customer base and logistics requirements. Of the
$4.2 million of restructuring charges that will result in cash payments, $0.2
million was paid by the Company through December 31, 1996, and an additional
$1.8 million was paid during the nine months ended September 30, 1997.
Sale of Certain Divisions
The Company 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 purposes including
acquisitions. The Company recorded gains on the sale of these divisions
aggregating $24 million. See Note 14 of the Notes to the Consolidated Financial
Statements of the Partnership for the three years in the period ended December
31, 1996 regarding litigation pertaining to the sale of the Dorman Products
division.
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 from operations from the divested divisions aggregated $0.3 million in
1995 and $8.6 million in 1994.
Acquisitions
The Company recently resumed its strategy to acquire retail glass shops
for integration with Harding. Since August 31, 1997, Harding acquired the assets
of three retail glass shops for net cash consideration of $0.8 million. Sales
from the acquired shops aggregated approximately $2.5 million for the
twelve-month period prior to acquisition.
16
<PAGE>
On April 11, 1996, STS purchased certain assets of Hydraulic Depot,
Inc. for an aggregate purchase price of $0.7 million. Sales of Hydraulic Depot
were $2.2 million for the nine months ended September 30, 1997 and $2.0 million
from the acquisition date through December 31, 1996.
On November 13, 1995, Hillman purchased certain assets of the retail
division of Curtis Industries ("Curtis") for an aggregate purchase price of $8.0
million and the assumption of certain liabilities. Curtis was integrated with
the Hillman division and its sales were $11.0 million for the twelve months
ended December 31, 1996 and $1.6 million from the acquisition date through
December 31, 1995.
Income Taxes
The Company's pro forma effective income tax rate for the nine months
ended September 30, 1997 was 44.9%. The Company incurs federal, state and local
income taxes on its domestic operations and foreign income taxes on its
operations in Canada and Mexico. In addition, the Company has recorded goodwill
in connection with acquisitions and the Conversion that is not deductible for
federal income tax purposes. Consequently, the Company expects that its
consolidated effective income tax rate will continue to be approximately 45.0%.
Results of Operations
The following discussion provides information which management believes
is relevant to an assessment and understanding of the Company's operations and
financial condition. The discussion pertains to the consolidated statements of
income and cash flows of the Company for the nine months ended September 30,
1997 and 1996 (pro forma) and for the years ended December 31, 1996, 1995 and
1994 (historical) and the consolidated balance sheets dated September 30, 1997,
December 31, 1996 and 1995 (historical) and should be read in conjunction with
these consolidated financial statements and notes thereto appearing elsewhere
herein. Reference is also made, where appropriate, to the unaudited consolidated
pro forma financial statements and the notes thereto contained elsewhere herein.
Pro Forma Results for the Nine Months Ended September 30, 1997 and 1996
Net income on a pro forma basis for the nine months ended September 30,
1997 was $9.3 million or $1.35 per Common Share compared with $7.1 million or
$1.03 per Common Share for the same period in 1996, an increase of $2.1 million
or 30.3%.
Net sales increased $39.7 million or 8.1% in the first nine months of
1997 to $529.2 million from $489.5 million in the first nine months of 1996.
Sales for the nine months ended September 30, 1997 and 1996 and
respective sales variances by business segment are as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Sales Increase (Decrease)
----------------------------------- -----------------------------------
1997 1996 Amount %
--------------- --------------- --------------- --------------
(In millions)
<S> <C> <C> <C> <C>
SunSource Industrial Services Company
STS..................................... $ 242.8 $ 224.5 $ 18.3 8.1%
SIMCO................................... 130.5 116.9 13.6 11.7%
----- ----- -----
Total SunSource Industrial
Services Company.................. 373.3 341.4 31.9 9.3%
Hillman.................................... 89.3 79.4 9.9 12.4%
Harding.................................... 66.6 68.7 (2.1) (3.0)%
------ ------ -------
Total Company .................... $ 529.2 $ 489.5 $ 39.7 8.1%
===== ===== ====
</TABLE>
17
<PAGE>
Sales of STS increased $18.3 million or 8.1% in the first nine months
of 1997 to $242.8 million from $224.5 million in the comparable 1996 period due
primarily to an increase in the volume of products sold and value-added services
provided to STS's customer base. SIMCO's sales increased $13.6 million or 11.7%
in the first nine-months of 1997 to $130.5 million from $116.9 million in the
comparable 1996 period due to sales from new in-plant inventory management
programs aggregating $9.1 million and an increase in expediter maintenance
product sales of $4.5 million.
Hillman's sales increased $9.9 million or 12.4% in the first
nine months of 1997 to $89.3 million from $79.4 million in the comparable 1996
period as a result primarily of expansion into complementary product lines, such
as keys, letters, numbers, signs and rope and chain accessories.
Harding's sales decreased $2.1 million or 3.0% in the first nine months
of 1997 to $66.6 million from $68.7 million in the comparable 1996 period. The
decline is attributable to decreases in wholesale glass and other product lines
aggregating $2.7 million, offset by an increase in retail automotive sales of
$0.6 million. In recent years, Harding has discontinued certain low-margin
product lines and has withdrawn from non-strategic markets. Growth in Harding's
retail glass shops is expected to continue as a result of internal sales
programs and acquisitions.
Cost of sales increased $21.3 million or 7.2% in the first nine months
of 1997 to $315.0 million from $293.7 million in the comparable 1996 period, due
primarily to increased sales levels in the comparison period.
Gross margins were 40.5% in the first nine months of 1997 compared with
40.0% in the comparable 1996 period, comprised by business segment as follows:
Nine Months Ended
September 30,
------------------------
1997 1996
----- -----
SunSource Industrial Services Company
STS....................................... 26.1% 25.7%
SIMCO..................................... 58.6% 61.4%
Total SunSource Industrial
Services Company...................... 37.5% 37.9%
Hillman........................................ 52.8% 49.9%
Harding........................................ 40.8% 38.4%
Total Company......................... 40.5% 40.0%
The improvement in STS' gross margin is due primarily to labor
efficiencies in its service and repair business and lower freight costs. The
decrease in SIMCO's gross margin is due mainly to competitive pricing pressures
and changes in sales mix as a result of new inventory management programs.
Hillman's gross margins increased due primarily to a significant reduction in
packaging costs in the first nine months of 1997 from the comparable 1996
period. The increase in Harding's gross margins was due primarily to improved
purchasing management in auto and flat glass, exiting from low-margin product
lines and efforts to improve margins in the wholesale flat glass business.
Selling, warehouse and delivery and general & administrative
("S,G&A") expenses increased by $13.9 million or 8.5% in the first nine months
of 1997 to $178.2 million from $164.2 million in the comparable 1996 period.
Selling expenses increased $4.8 million comprised of increases in SunSource
Industrial Services Company and Hillman to support expanded sales and Harding as
a result of increased marketing efforts in retail glass. Warehouse and delivery
expenses increased $2.6 million to support increased sales in the 1997 period.
General and administrative expenses increased $6.5 million consisting of: (i) an
increase of $5.3 million to support the overall increase in 1997 sales levels
and the increased number of SIMCO system accounts and (ii) an increase of $1.3
million in corporate expenses compared to the 1996 period which included an
expense reduction of $0.8 million as a result of incentive-based compensation
plans and a non-recurring reduction in insurance reserves of $0.4 million.
18
<PAGE>
The Company is subject to federal, state and local income taxes on its
domestic operations and foreign income taxes on its Canadian and Mexican
operations as accounted for in accordance with Statement of Financial Accounting
Standard No. 109, "Accounting for Income Taxes" ("SFAS 109"). Deferred income
taxes represent differences between the financial statement and tax bases of
assets and liabilities as classified on the Company's balance sheet. The
Company's provision for income taxes on a pro forma basis in the first nine
months of 1997 increased $1.2 million from the first nine months of 1996 due to
higher income levels in the 1997 period. The Company's effective income tax rate
decreased from 47.0% in the 1996 period to 44.9% in the 1997 period as a result
of certain expenses that are non-deductible permanently for tax purposes, such
as goodwill.
Operating Results Excluding Divisions Sold for the Three Years Ended
December 31, 1996
The table below reflects the results from ongoing operations of the
Company for each of the three years in the period ended December 31, 1996, which
excludes the sales, gross profit and operating expenses of divisions sold in
1995 and 1994. The management fee to general partner represents a payment made
by the Company to its general partner while operating as a master limited
partnership. Since the Company's conversion to corporate form, the management
fee is retained by a wholly owned subsidiary of the Company.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------
1996 1995 1994
-------------- --------------- ---------------
(In thousands)
<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 administrative 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 discussed, 1996 net income
included a $4.9 million charge (net of $1.1 million in deferred tax benefits),
related to the restructuring of STS and Harding and a $2.1 million charge for
transaction costs associated with the Conversion. The 1995 net income included a
gain of $20.6 million from the sale of the Downey Glass division in October 1995
and the Dorman Products division in January 1995. Net income for 1995 also
included a $0.6 million charge related to the early retirement of debt and $0.3
million of operating income from the Downey Glass division. Excluding these
non-recurring items, net income for 1996 amounted to $26.3 million or 10.5%
above the comparable 1995 net income of $23.8 million.
After giving effect to the Offering, the Conversion, the Refinancing
and the elimination of gains and results of operations from divisions sold, as
well as non-recurring items, pro forma net income for the twelve months ended
December 31, 1996 was $9.1 million or $1.31 per Common Share or 10.2% above
comparable 1995 net income of $8.2 million. See Notes to Pro Forma Consolidated
Financial Statements for adjustments that affect comparability to historical
results.
19
<PAGE>
Net sales increased $49.4 million or 8.2% in 1996 to $649.3 million
from $599.9 million in 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 for the years ended December 31, 1996 and 1995 and sales
variances by business segment are as follows:
<TABLE>
<CAPTION>
Years Ended December 31, Sales Increase (Decrease)
---------------------------------- ------------------------------------
1996 1995 Amount %
--------------- ------------- ---------------- --------------
(In millions)
SunSource Industrial Services Company
<S> <C> <C> <C> <C>
STS..................................... $ 299.1 $ 285.5 $ 13.6 4.8%
SIMCO................................... 156.4 138.2 18.2 13.1%
----- ----- ----
Total SunSource Industrial
Services Company.................. 455.5 423.7 31.8 7.5%
Hillman.................................... 103.4 84.6 18.8 22.2%
Harding.................................... 90.4 91.6 (1.2) (1.3)%
------ ------ ------ -----
Total Company..................... $ 649.3 $ 599.9 $ 49.4 8.2%
===== ===== ==== =====
</TABLE>
Sales of STS increased $13.6 million or 4.8% in 1996 to $299.1 million
from $285.5 million in 1995 due to continued strength in existing product
markets. SIMCO sales increased $18.2 million or 13.1% in 1996 to $156.4 million
from $138.2 million in 1995 as a result of sales growth from new inventory
management programs of $10.5 million and an increase in expediter maintenance
product sales of $7.7 million.
Hillman's sales increased $18.8 million or 22.2% in 1996 to $103.4
million from $84.6 million in 1995 due to contributions from the Curtis
acquisition in the amount of approximately $11.0 million and the balance of $7.8
million in growth from new accounts, expansion of existing product lines and
market penetration of new product lines.
Harding's sales declined $1.2 million or 1.3% in 1996 to $90.4 million
from $91.6 million in 1995 due to a decrease in wholesale glass, brokerage and
other product line sales of $2.8 million and the discontinuation of certain low
margin product lines and markets served aggregating $0.2 million, offset by an
increase in retail glass sales of $1.8 million or 4.2% from the comparable 1995
period.
Cost of sales increased $31.3 million or 8.8% in 1996 to $386.3 million
from $355.0 million in 1995 due primarily to increased sales levels.
Gross margins were 40.5% in 1996 compared with 40.8% in 1995, comprised
by business segment as follows:
Years Ended December 31,
------------------------
1996 1995
---- ----
SunSource Industrial Services Company
STS..................................... 26.7% 27.4%
SIMCO................................... 61.1% 64.5%
Total SunSource Industrial
Services Company.................. 38.6% 39.5%
Hillman.................................... 50.8% 52.4%
Harding.................................... 38.8% 35.9%
Total Company..................... 40.5% 40.8%
The decline in SunSource Industrial Services Company's gross margin was
due mainly to competitive pricing pressures and changes in sales mix. Hillman's
gross margins decreased due to reduced packaging productivity levels and costs
associated with integration of the Curtis acquisition and for other business
expansion
20
<PAGE>
programs. Harding's gross margins increased due to improved purchasing
management and increased 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% to $221.6 million in
1996 from $205.2 million in 1995, comprised as follows: increased selling
expenses of $7.4 million supporting increased 1996 sales levels; increased
warehouse and delivery expenses of $6.3 million due to the integration of the
Curtis acquisition, expansion programs by certain operating units and the
addition of seven large in-plant accounts by SIMCO; and increased general and
administrative expenses of $2.7 million.
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 of net income in 1994,
which included a gain of $3.5 million from the sale of the Electrical Group
divisions in December 1994. Net income for 1995 also included a $0.6 million
charge related to the early retirement of debt and a reduction in net interest
cost of approximately $3.2 million from the prior year. Net income for the year
ended December 31, 1994 included income from divisions sold aggregating $8.6
million. Excluding operating income 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 comparable 1994 net income of $17.4
million.
After giving effect to the Conversion, the Refinancing, the Offering
and the elimination of gains and results of operations from divisions sold, as
well as non-recurring items, net income for the year ended December 31, 1995
would have been $8.2 million, an increase of 103% from the comparable 1994 net
income of $4.1 million. See Notes to Pro Forma Consolidated Financial Statements
for adjustments that affect comparability to historical results.
Net sales increased $41.1 million or 7.4% in 1995 to $599.9 million
from $558.8 million in 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.
Sales for the years ended December 31, 1995 and 1994 and sales
variances by business segment were as follows:
<TABLE>
<CAPTION>
Years Ended December 31, Sales Increase (Decrease)
----------------------------------- ----------------------------------
1995 1994 Amount %
--------------- --------------- --------------- --------------
(In millions)
SunSource Industrial Services Company
<S> <C> <C> <C> <C>
STS..................................... $ 285.5 $ 260.4 $ 25.1 9.6%
SIMCO................................... 138.2 128.1 10.1 7.9%
----- ----- ----
Total SunSource Industrial
Services Company.................. 423.7 388.5 35.2 9.1%
Hillman.................................... 84.6 72.8 11.8 16.2%
Harding.................................... 91.6 97.5 (5.9) (6.1)%
------ ------ ------
Total Company..................... $ 599.9 $ 558.8 $ 41.1 7.4%
===== ===== ====
</TABLE>
Sales of SunSource Industrial Services Company increased $35.2 million
or 9.1% in 1995 to $423.7 million from $388.5 million in 1994 due primarily to
an increase in the volume of products sold as a result of strengthening in most
product markets.
Hillman's sales increased $11.8 million or 16.2% in 1995 to $84.6
million from $72.8 million in 1994 due primarily to continued geographic
expansion and the introduction of new product lines.
Harding's sales decreased $5.9 million or 6.1% in 1995 to $91.6 million
from $97.5 million in 1994 due to a decline in sales volume primarily
attributable to the discontinuation of certain product lines and markets served.
21
<PAGE>
Cost of sales increased $23.4 million or 7.1% in 1995 to $355.0 million
from $331.6 million in 1994, due primarily to increased sales levels in the
existing businesses in the comparison period.
Gross margins were 40.8% in 1995 compared with 40.7% in 1994, comprised
by business segment as follows:
Years Ended December 31,
------------------------
1995 1994
---- ----
SunSource Industrial Services Company
STS..................................... 27.4% 27.7%
SIMCO................................... 64.5% 65.9%
Total SunSource Industrial
Services Company................... 39.5% 40.3%
Hillman..................................... 52.4% 51.0%
Harding..................................... 35.9% 34.4%
Total Company...................... 40.8% 40.7%
Changes in sales mix were the principal contributors to the changes in
gross margins.
S,G&A expenses increased by $15.9 million or 8.4% to $205.2 million in
1995 from $189.3 million in 1994, comprised as follows: increased selling
expenses of $8.9 million, increased warehouse and delivery expenses of $3.2
million and increased general and administrative expenses of $3.8 million. The
increase in S,G&A expenses supported increased 1995 sales levels and expansion
programs by certain operating units. S,G&A as a percentage of sales increased
from 33.9% in 1994 to 34.2% in 1995 due mainly to increased support payments,
incentive programs and marketing efforts for the sales force.
Interest expense, net decreased $3.0 million to $6.9 million in 1995
from $9.9 million in 1994 due to reduced financing costs of approximately $1.5
million from the prepayment of senior notes on March 14, 1995, $1.1 million from
reduced borrowing levels under the Company's revolving credit facility and
increased interest income of approximately $0.4 million.
Other income, net was $0.7 million for the twelve months ended December
31, 1995, compared to $1.4 million of other expense recorded in 1994. This
change was primarily due to the favorable settlement of certain non-recurring
insurance and legal matters in 1995.
Liquidity and Capital Resources
On a historical basis, net cash provided by operations was $23.0
million in the first nine months of 1997 compared with $20.6 million in the
first nine months of 1996, an increase of $2.4 million. This increase was due
primarily to increased net income of $5.4 million offset by increased working
capital investment in operations in the comparison period of approximately $0.5
million, and other non-cash items of $2.5 million. The Company's net interest
coverage ratio on a pro forma basis (earnings before interest, distributions on
guaranteed preferred beneficial interests and taxes over net interest expense
and distributions on guaranteed preferred beneficial interests) improved to
2.16x in the first nine months of 1997 from 1.95x in the comparable 1996 period.
The Company's cash position of $2.7 million as of September 30, 1997
increased $1.0 million from the balance at December 31, 1996. Cash was provided
during this period primarily from operations of $23.0 million and proceeds from
the sale of property and equipment of $0.7 million. Cash was used during this
period predominantly for capital expenditures ($3.3 million), cash distributions
to partners ($13.9 million), pre-payment penalty on senior notes ($4.3 million)
and other items ($1.2 million).
The Company's working capital position of $105.4 million at September
30, 1997 represents an increase of $4.6 million from the December 31, 1996 level
of $100.8 million. The Company's current ratio decreased to 2.02x
22
<PAGE>
at September 30, 1997 from 2.16x at December 31, 1996, principally due to an
increase in distributions payable of $14.4 million related to the Conversion.
Excluding this item, the Company's current ratio was 2.34x as of September 30,
1997.
On September 30, 1997, the Company issued a $60.0 million 7.66% Senior
Note due 2002 and amended its credit agreement to increase the aggregate
availability under the existing revolving line of credit to $90.0 million at
variable borrowing rates of LIBOR plus 1.0% to 1.5% or prime. SunSource
anticipates interest cost savings of approximately 100 basis points through its
new debt facilities compared to its previous debt structure. The Company's
current borrowing capacity along with proceeds from the Offering is expected to
provide the Company with sufficient working capital for reinvestment in its
businesses and acquisition capital in the near future.
As of September 30, 1997, the Company had $70.8 million available under
its new credit facilities. As of September 30, 1997, the Company had $79.2
million of outstanding indebtedness consisting of the aforementioned $60.0
million Senior Note, bank borrowings totaling $17.0 million, and letter of
credit commitments aggregating $2.2 million. In addition, an indirect,
wholly-owned Canadian subsidiary of the Company has a $2.5 million Canadian
dollar line of credit for working capital purposes, of which no amount was
outstanding at September 30, 1997.
As of September 30, 1997, the Company's total debt (including
distributions payable) as a percentage of its consolidated capitalization (total
debt, Trust Preferred Securities and stockholders' deficit) was 45.8% compared
with 44.7% as of December 31, 1996. The Company's consolidated capitalization
(including distributions payable) as of September 30, 1997 was $208.2 million
compared to $173.0 million at December 31, 1996.
Proceeds from the Offering will be used to repay borrowings under the
Company's revolving credit facility. As a result of the Offering, the Company's
net worth would be $7.5 million on an as adjusted basis as of September 30,
1997, resulting in total debt as a percentage of consolidated capitalization
ratio of 40.7% as defined above.
The Company spent approximately $5.0 million for capital expenditures
in 1997, primarily for warehouse, machinery and equipment and computer hardware
and software.
The Company has recorded an estimated liability of $2.9 million at
September 30, 1997 for remaining tax distributions due to Class B interest
holders of the Partnership, related to taxable income for the nine months ended
September 30, 1997 that is expected to be paid by March 31, 1998.
As a result of the Conversion of the Partnership to corporate form, the
Company's cash flow is expected to improve due to the following: (i) retention
of the management fee payable to the general partner of SDI Operating Partners,
L.P. in the amount of $3.3 million per year, (ii) retention of distributions on
the general partner's ownership in the Partnership and SDI Operating Partners,
L.P. amounting to approximately $0.4 million annually and (iii) a reduction in
income tax rates.
The Board of Directors of the Company declared on December 10, 1997 a
cash dividend of $.10 per share of Common Stock which was paid on January 6,
1998, to holders of record as of December 22, 1997. The Company expects to
declare future quarterly dividends on the Common Stock to aggregate $.40 per
Common Share annually, subject to the discretion of its Board of Directors and
dependent upon, among other things, the Company's future earnings, financial
condition, capital requirements, funds needed for acquisitions, level of
indebtedness, contractual restrictions and other factors that the Board of
Directors deems relevant.
The Company has deferred tax assets aggregating $15.9 million as of
September 30, 1997. Management believes that the Company's deferred tax assets
will be realized through the reversal of existing temporary differences between
the financial statement and tax bases. The minimum level of future taxable
income necessary to realize the Company's recorded deferred tax assets at
September 30, 1997, is approximately $39.8 million. For the year ended December
31, 1996, the Company's consolidated federal taxable income was $28.6 million.
23
<PAGE>
Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive
Income," which requires changes in comprehensive income be shown in a financial
statement that is displayed with the same prominence as other financial
statements. Additionally, the FASB issued SFAS 131, "Disclosures about Segments
of an Enterprise and Related Information," which requires disclosures in
financial statements based on management's approach to segment reporting and
industry requirements to report selected segment information, disclosures about
products and services and major customers, on a quarterly basis. The Company
will be required to adopt SFAS 130 and 131 during fiscal 1998. The impact of
these new standards on the Company's future financial statements and disclosures
has not been determined.
Inflation
Inflation in recent years has had a modest impact on the operations of
the Company. Continued inflation, over a period of years at higher than current
rates, would result in significant increases in inventory costs and operating
expenses. However, such higher cost of sales and operating expenses can
generally be offset by increases in selling prices, although the ability of the
Company's operating divisions to raise prices is dependent on competitive market
conditions.
24
<PAGE>
BUSINESS
General
SunSource is one of the largest providers of industrial products and
related value-added services in North America. Through its applications
engineers and technical support personnel, SunSource provides customized
solutions to complex problems encountered by its customers. The Company believes
that it differentiates itself from other industrial distributors by providing
superior technical and problem-solving capabilities in addition to an extensive
product offering and broad array of related services, such as engineering design
and integrated supply arrangements. The Company has more than 180,000 customers,
none of which represents more than 5% of annual net sales. The Company's
distribution and related services support more than 1,300 product lines,
consisting of approximately 175,000 stock keeping units.
The Company traces its origins to 1975, when Sun decided to pursue a
diversification strategy outside of its traditional energy business. After an
extensive analysis of strategic alternatives, Sun concluded that the industrial
distribution business offered substantial opportunities for growth, high returns
on invested capital, and relatively low business risk. Sun pursued this strategy
through Sun Distributors, Inc., which became an industry consolidator and
acquired 16 companies between 1975 and 1985. In 1986, Sun decided to refocus its
efforts on its core energy business and sell its non-energy businesses. The
Company was purchased by a predecessor affiliate of the Selling Stockholders in
October 1986. In February 1987, the Company made an initial public offering of
its limited partnership interests and became a publicly traded master limited
partnership.
The Company continued to make acquisitions after its initial public
offering, but its ability to make acquisitions after 1991 was hindered by its
partnership structure and associated restrictions in the Company's credit
agreements. In 1994 and 1995, the Company divested three non-strategic
businesses with aggregate 1994 sales of $177.1 million. The Company converted
from partnership to corporate form on September 30, 1997.
The Company has targeted three businesses within the distribution
industry which are characterized by a potential for value-added services,
economies of scale and opportunities for further consolidation.
Industrial Services. SunSource Industrial Services Company, with sales
of $455 million in 1996, provides a broad range of products and services
throughout North America through the sales and marketing activities of STS and
SIMCO. The Company believes that STS is a leading provider of systems, parts and
engineering services for hydraulic, pneumatic, electrical and related systems to
major industrial concerns, such as Ford Motor Company, Hillrom and Vermeer
Manufacturing, as well as small and medium-size businesses. STS provides
services, including engineering and design of both products and processes and
the assembly and repair of complex systems, which enable its customers to
outsource engineering and other functions which they previously performed
in-house. SIMCO provides inventory management services enabling its customers to
reduce inventory investment and the associated expenses of purchasing,
receiving, disbursing and accounting for parts and materials.
Hardware Merchandising Services. Hillman, with sales of $103 million in
1996, provides small hardware items and merchandising services to retail
hardware stores through a nationwide sales and service organization. Hillman
offers a full range of fasteners, letters, numbers, signs, keys, rope and chain
accessories and many other inexpensive "specialty" goods, which are "must-have"
items for retailers that cannot be managed economically by the retailer's own
employees because of the large number of items and their low prices. Hillman
maintains a 235 person nationwide sales and service organization which seeks to
ensure that its customers' inventories are maintained at appropriate levels with
a minimum of administrative effort or expense. Hillman also provides inventory
management software that ties into retailers' point-of-sale systems. Through its
merchandising system, Hillman assists retailers with rack positioning, store
layout, new package design and color coding systems to permit ease of shopping
by consumers.
25
<PAGE>
Glass Merchandising. Harding, with sales of $90 million in 1996,
operates one of the largest networks of full service retail glass shops in the
United States. Harding is comprised of approximately 85 retail locations
throughout the Southwest and, to a lesser degree, along the East Coast. Harding
sells and installs automotive glass and also sells, fabricates and installs flat
glass. Customers include individual retail consumers, insurance companies and
commercial accounts.
The table below provides the sales and gross profit for each of the
Company's three businesses for the nine months ended September 30, 1997 and 1996
and for each of the three years in the period ended December 31, 1996, excluding
sales and gross profit from divisions sold. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
FINANCIAL INFORMATION BY BUSINESS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30, Years Ended December 31,
--------------------------------------------------------------------------------------------------
1997 1996 1996 1995 1994
----------------- ------------------- ------------------ ---------------- ------------------
% Total % Total % Total % Total % Total
SALES Sales Sales Sales Sales Sales
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SunSource Industrial Services
Company
STS............................ $ 242,804 45.9% $ 224,542 45.9% $ 299,068 46.1% $ 285,466 47.6% $ 260,428 46.6%
SIMCO.......................... 130,514 24.6% 116,891 23.9% 156,380 24.1% 138,207 23.0% 128,077 22.9%
--------- ---- -------- ---- -------- ---- -------- ----- ---------- -----
Total SunSource Industrial
Services Company......... 373,318 70.5% 341,433 69.8% 455,448 70.2% 423,673 70.6% 388,505 69.5%
Hillman.......................... 89,235 16.9% 79,369 16.2% 103,437 15.9% 84,631 14.1% 72,779 13.0%
Harding.......................... 66,646 12.6% 68,715 14.0% 90,369 13.9% 91,561 15.3% 97,470 17.5%
--------- ---- --------- ----- -------- ----- --------- ----- --------- ----
Consolidated Net Sales........ $ 529,199 100.0% $ 489,517 100.0% $649,254 100.0% $ 599,865 100.0% $ 558,754 100.0%
========= ====== ========= ====== ======== ====== ========= ====== ========= ======
GROSS PROFIT % Sales % Sales % Sales % Sales % Sales
- ------------ ------- ------- ------- ------- -------
SunSource Industrial Services
Company
STS............................ $ 63,438 26.1% $ 57,949 25.7% $ 79,745 26.7% $ 78,496 27.4% $ 72,019 27.7%
SIMCO.......................... 76,439 58.6% 71,810 61.4% 95,626 61.1% 89,171 64.5% 84,432 65.9%
--------- --------- --------- --------- -----------
Total SunSource Industrial
Services Company......... 139,877 37.5% 129,759 37.9% 175,371 38.6% 167,667 39.5% 156,451 40.3%
Hillman.......................... 47,100 52.8% 39,599 49.9% 52,527 50.8% 44,360 52.4% 37,130 51.0%
Harding.......................... 27,222 40.8% 26,411 38.4% 35,105 38.8% 32,834 35.9% 33,564 34.4%
--------- --------- --------- --------- ---------
Consolidated Gross Profit..... $ 214,199 40.5% $ 195,769 40.0% $ 263,003 40.5% $ 244,861 40.8% $ 227,145 40.7%
========= ========= ========= ========= =========
</TABLE>
Industry Overview
The Company operates in large, fragmented industries characterized by
multiple channels of supply. These channels of supply are currently experiencing
significant changes driven by the higher quality and widespread availability of
management information systems. With better information, manufacturers,
distributors and customers are all able to track their expenses, investments and
returns on investments more accurately. The distribution industry is driven by
the following trends which are rendering the traditional producer-controlled
channels obsolete and subject to being replaced by new channels organized around
customer requirements and value-added services.
Manufacturers are increasing their reliance on distributors in order to
enhance their profitability and improve their returns on capital. Manufacturers
are attempting to (i) reduce their logistics expense by making less frequent,
larger shipments to fewer locations; (ii) reduce their sales expense by
shrinking their direct sales forces; (iii) lower their marketing expense by
trimming or eliminating technical support of their product lines; (iv) control
their inventory investment with computer systems that enable them to track the
inventory held by their distributors; and (v) improve their credit exposure by
dealing with fewer, better capitalized distributors.
Customers are increasing their reliance on value-added distributors as
their contacts with the manufacturers diminish or cease altogether. Customers
are beginning to rely on their distributors for technical
26
<PAGE>
support, engineering, repair and other services no longer available from the
downsized manufacturers. The Company believes that the percentage of products
sold through distributors will continue to increase as customers move to
consolidate supply sources to streamline operations and reduce administrative
costs. Customers can monitor their inventory requirements through the
distributor's information system and avoid stocking such inventory until
necessary. In addition, current information systems enable customers to measure
precisely the economic benefits provided by their distributors.
Customers are outsourcing non-core functions to high quality service
providers. Many companies have chosen to outsource primary supply chain
functions including procurement, delivery and inventory management functions to
high-quality service providers. Others have outsourced primary engineering,
maintenance and repair functions. The Company expects this trend to continue as
customers increasingly concentrate resources on developing their core
capabilities.
Channels of distribution are in the process of consolidation. The
increasing demands upon distributors from both vendors and customers are forcing
them to make substantial investments in technology, training and logistics
systems. Many smaller distributors that cannot afford to make these investments
are being acquired by larger competitors that can provide the requisite
services. The surviving, larger distributors enjoy multiple benefits, such as
greater purchasing power with vendors, a larger revenue base over which to
spread substantial fixed costs and lower costs of capital.
Managerial skills required for success in industrial distribution are
changing dramatically. Management today must deal with complex and sophisticated
national distribution channels while remaining responsive to increasingly
individualized customer demands. Future success will require management to adapt
to changing technology and develop sophisticated organizations that are
comfortable with change and can react quickly.
Business Strategy
While each of the Company's three businesses has its roots in
traditional wholesale distributor activities, the evolution of each business has
been affected in significantly different ways by the trends discussed above.
However, commonalities among the businesses have enabled the Company to build a
record of strong, profitable growth on the basis of three core competencies:
o Acquisition Integration Capability - The ability to integrate
acquired companies while improving operational efficiencies and
enhancing their effectiveness in the marketplace.
Since the organization of its predecessor in 1975 and through 1991, the
Company grew primarily through acquisitions of existing distribution
companies. During this period, a series of acquisitions expanded the
Company's operations both geographically and in the number and types of
products offered. Thirty-five of these acquisitions had purchase prices
in excess of $1 million and approximately 40 more had purchase prices
under $1 million. The Company's ability to make acquisitions since 1991
was hindered by its previous partnership structure and associated
restrictions in its credit agreement. As a result of the Conversion,
the Refinancing and this Offering, the Company expects to have the
necessary financial capacity to resume its acquisition program. The
Company intends to seek acquisition candidates that have developed
attractive market niches, have strong management and have demonstrated
their ability to achieve stable growth and high returns on invested
capital.
o Ability to Capitalize on Industry Trends - The ability to execute
dynamic business strategies to capitalize on opportunities arising from
rapid structural changes in the marketplace.
The Company has established separate organizations for its three
businesses, each headed by a chief executive officer who is supported
by sales, marketing, financial, logistics and information systems
resources. This organizational structure enables the Company to manage
each of its businesses within the
27
<PAGE>
context of the varying market opportunities, rates of change, and
competitive threats affecting those businesses. The Company's small
headquarters staff shapes and guides the strategic decisions of its
operating companies. Performance benchmarks are established as part of
this process and progress is monitored to ensure that initiatives
remain on track.
o Technology for Competitive Advantage - The ability to use technology
and technical expertise as competitive advantages to build and defend
attractive market niches.
Technology offers significant opportunities for improving both the
Company's internal operations and its product and service offerings to
its customers. For example, STS is implementing a new integrated
information system which will permit (i) the centralization of the
purchasing function, resulting in a smaller staff with a higher level
of professional skills; (ii) a reduction in the number of warehouses
from 36 to fewer than ten; (iii) higher customer order fill rates; and
(iv) lower exposure to obsolete or slow-moving inventory. Hillman has
developed a new sales tracking program that will enable it to closely
monitor the performance of its sales representatives with respect to
increasing product line penetration within their accounts. Harding's
new management information system improves its ability to manage
operations and fully utilize its purchasing power. It also permits
Harding to integrate acquisitions substantially faster than was
previously possible.
Growth Opportunities
SunSource believes that each of its three operating businesses is well
positioned to capture opportunities in the markets in which it participates.
SunSource Industrial Services Company's strategy is to capitalize on
the trends among industrial customers toward consolidation of suppliers,
outsourcing the procurement function for goods and outsourcing in-plant services
for which they lack expertise or sufficient resources.
STS believes that it can significantly increase its revenues by
expanding its relationships with large industrial customers to provide them with
the full range of available products and services which STS can provide. To this
end, STS is currently enhancing its sales organization to include industry
specialists to augment the effectiveness of individual sales representatives.
For example, a sales representative could call upon STS' technology specialists
to assist in solving a paper mill's production problem. A successful solution
would be communicated to STS' industry specialist, who would check for similar
opportunities at the customer's other mills and would ensure the information was
made available to all STS representatives who call on paper mills.
STS plans to continue its successful program of establishing service
centers for the repair and overhaul of hydraulic equipment in major industrial
markets around the country. In addition, STS intends to resume its acquisition
program later in 1998 when its restructuring project is closer to completion.
STS' acquisition strategy is to acquire technology-driven distributors on the
West Coast, New England, and Florida to solidify its geographic coverage in
those areas. STS' objective is also to acquire companies with complementary
services, such as vibration monitoring or preventive maintenance programs to
industrial facilities.
Hillman's strategy is to capitalize on the desire of its customers to
shift the burden of maintaining a complex, low value inventory as well as to
continually expand its product line. Hillman currently services approximately
8,000 retail hardware locations, an estimated 65% of the retail hardware outlets
that are large enough to benefit from the Hillman merchandising system.
Management believes that growth is most likely to come from: (i) further
penetration of the retail hardware outlet markets; (ii) an increase in the
average number of Hillman product lines sold to each retail hardware outlet;
(iii) expanded participation in the home center and regional lumber yard
businesses in the United States; and (iv) expansion in the Caribbean, Mexico and
Central America under a newly-hired Director of International Sales. Hillman
targets companies for acquisition that offer a significant extension of its
already broad product line, companies with substantial selling relationships
with very large outlets,
28
<PAGE>
such as home centers and nationwide building supply operations, and companies
which offer management services which would be of value to Hillman's customer
base (such as companies that specialize in providing set up and layout design
services for new store locations).
Harding believes that it has an excellent opportunity to build its
network of retail glass shops through further acquisitions in the highly
fragmented retail glass industry that consists of more than 9,000 independent
and small regional glass shops.
Industrial Services (STS and SIMCO)
SunSource Industrial Services Company provides a single nationwide
source for a broad array of industrial products and supporting technical
services. SunSource Industrial Services Company is comprised of two sales and
marketing activities--STS and SIMCO. Their common strategy is to capitalize on
the increasing awareness of many industrial companies of their inefficiencies in
performing activities that are ancillary to their principal business. These
activities include repairing equipment, running preventive maintenance programs,
maintaining in-house engineering capabilities and inventory management. In most
instances, the only alternative available to many industrial companies for such
services has been small, local firms, many of which lack the resources necessary
to assure the quality of services that they provide. SunSource Industrial
Services Company's customers are located throughout the United States, Mexico
and Canada and include major industrial concerns, as well as small and
medium-size businesses.
SunSource Technology Services (STS)
STS, with sales of approximately $300 million in 1996, offers a full
range of technology-based products and services to its customers. Its product
lines include hydraulic, pneumatic, electronic and filtration parts and
equipment. Services include engineering design, equipment repair and product
upgrades.
STS seeks to build strong relationships with its customers by providing
technological/problem-solving capabilities along with quality products. STS
relies on its engineering and fabricating capabilities to provide customized
solutions for specific applications requiring product engineering, assembly or
fabrication. To help a customer better understand how it is performing relative
to best industry practices, STS can perform a technology review of the
customer's facilities covering areas such as electronic systems, hydraulics,
pneumatics, repair activities and inventory management. STS can demonstrate to
its customers those areas in which they meet best industry practices and, when
they do not, offer detailed, cost-efficient steps to improve their performance
to meet those standards. STS also conducts multiple-day training programs to
help customers stay current with evolving technologies relevant to their
operations.
STS has benefited from the trend for manufacturers to move towards
increased standardization of products. The result is that many such products
have to be modified and used in combination with other components in order to
meet customers' performance requirements. STS recognized this trend as an
opportunity to set up a formal system to customize standardized products to meet
the more specialized needs of its customers. One example of this type of
customized solution is a hydraulic integrated circuit ("HIC"), which is more
compact and less prone to leakage than a generic circuit. Customized solutions
like HICs make STS a more valuable resource to its customers, thereby allowing
STS greater pricing flexibility. Management believes that there is a growing
market for such customized solutions among medium and smaller original equipment
manufacturers ("OEM") who do not have the capabilities to develop such products.
Since 1991, STS has opened 26 repair centers throughout the United
States to provide customers with convenient and reliable sources for the repair
of worn-out hydraulic power equipment. Repair centers have been useful in
gaining market share as they have helped STS achieve an expanded relationship
with many of its customers. They also provide STS with an opportunity to win new
customers because many of the local distributors do not have the resources to
provide comparable repair services. STS plans to continue its successful program
of
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establishing service centers for the repair and overhaul of hydraulic equipment
in major industrial markets around the country.
The six hydraulic and pneumatic distributors which today comprise STS
were acquired by the Company between 1976 and 1991. The acquired companies
typically enjoyed profitable market niches created either through exclusive
territories granted by their vendors or the unique services they offered. Until
recently, STS operated each of its divisions on a decentralized basis with each
division having its own president and vice president of sales. In early 1997,
STS initiated a three-year project to consolidate financial and administrative
activities in its Chicago headquarters. STS is in the first stage of installing
a new information system that should be fully operational in the first half of
1999. In addition, STS is in the process of consolidating 36 inventory stocking
locations into fewer than ten facilities which the Company believes will result
in significantly lower operating costs and better product availability.
Centralized purchasing and inventory management is expected to result in
improved fill rates for customers while at the same time reducing STS' inventory
investment, leveraging its purchasing power with many suppliers and reducing
suppliers' operating costs. As an important part of this restructuring, the
focus of the sales organization will increasingly be on specific technologies
and market segments instead of geography.
Products and Suppliers. STS believes that it carries the most diverse
selection of fluid power products of any distributor in the United States,
totaling an estimated 100,000 items in five major product categories. Typically,
hydraulic systems are employed for dealing with heavy loads in applications such
as mining, manufacturing, construction or agriculture. An example of a hydraulic
application is the system that controls the positioning of the scraping blade of
a road grader - an integrated system of motors, pumps, valves, tubing, sensors
and electronic controls. Pneumatic systems are similar to hydraulic systems
except that air or some other gas is substituted for hydraulic fluid. Pneumatic
systems are preferred for lighter weight applications such as light
manufacturing and packaging lines. Hydraulic and pneumatic products represented
approximately 60% and 21%, respectively, of STS' 1996 sales.
STS distributes products in five major product categories. A
representative list of products by category is shown below:
<TABLE>
<CAPTION>
Product Category Representative Products
- ------------------------------- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Hydraulic Products Accumulators Heat Exchangers Power Units
Contamination Controls Hoses Pumps
Control Valves Hydrostatic Drives Regulators
Coolers Hydrostatic Transmissions Servos
Cylinders Manifold Systems Swivels
Fittings Motors Tubing
Gauges Oil Filters Valves
Gear Boxes Power Steering Units Winches
Pneumatic Products Actuators Control Valves Lube Systems
Air Cylinders Coolers Lubricators
Air Dryers Couplings Plastic Tubing
Air Filters Cylinders Pressure Switches
Air Lubricators Dryers Regulators
Air Regulators Filters Slides
Air Springs Fittings Switches
Booster Pumps Gauges Vacuum Generators
Cable Cylinders Grippers Vacuum Pumps
Connector Products Lube Panels Valves
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Electronic Controls AC Converters Electric Controls Starters
Contractors Encoders Switches
Controls Motion Control Systems Tachometers
Counters Sensors Timers
Electric Actuators Software
Filtration Products Filtration Media Pump Systems Regulators
Meters Pumps
Lubrication Products Air Lubricators Lubricators
</TABLE>
STS has a broad supply base which includes almost all major
manufacturers of fluid power products in the United States. STS' top ten
suppliers account for less than 30% of its 1996 sales. Because of the fragmented
nature of the industry, manufacturers of fluid power equipment historically have
awarded their franchises on a limited geographical basis. STS has secured
exclusive franchises within certain geographic areas from significant suppliers
such as Vickers, Hydroline, Trabon, Versa, SMC, Denison, Norgren, Mosier and
Hansen. Two of STS' larger suppliers are Sunstrand and Commercial, whose
products are distributed in most of STS' territories.
In recent years there has been considerable consolidation among
suppliers, a trend which management believes will continue. STS, as a leading
fluid power distributor, is likely to benefit from this trend. In addition, STS
seeks to provide valuable market and product information that enhances its
relationships with its key suppliers by helping them improve their product
offering in response to changing market demands.
Markets and Customers. STS currently serves over 35,000 customers, the
top ten of which accounted for approximately 11% of its 1996 sales.
Approximately 60% of sales are to OEM customers who incorporate the equipment or
system purchased from STS into their final products. An example of an OEM
customer is a manufacturer of back-hoes who incorporates a STS hydraulic system
to operate the hoe. The remaining 40% of sales are to maintenance, repair and
operation ("MRO") customers who use STS products as part of their production
process. An example of an MRO customer is an automobile manufacturer whose heavy
metal presses are powered by large hydraulic systems designed and installed by
STS.
Within the MRO and OEM markets, STS sells to construction and mining
equipment manufacturers, industrial wholesale distributors, metalworking
equipment manufacturers, farm and garden equipment manufacturers, industrial
specialized machinery manufacturers and automobile and auto parts manufacturers.
Sales and Marketing. STS markets its products nationwide, principally
through a network of outside sales representatives supported by inside sales
representatives and a telemarketing operation. In order to become more
responsive to the increasing demands of customers, STS has devoted substantial
resources to make its sales force more specialized both in terms of technical
training and industry knowledge.
STS employs approximately 315 outside sales representatives. Each
customer has a primary sales representative who might be assisted by technology
specialists or industry specialists. Technology specialists are available in the
fields of hydraulics, pneumatics, mobile equipment, lubrication, filtration,
automation and other specialties while industry specialists bring particular
expertise in industries such as pulp and paper, construction equipment,
injection molding or heavy metal working. STS is in the process of adding
additional industry specialists to its sales organization.
To support the outside sales representatives, STS employs approximately
235 inside sales representatives who collectively function as a customer service
department, taking orders from customers on the telephone, answering questions
and solving problems. STS also employs approximately 20 people in its
telemarketing group which is responsible for customers with sales potential not
large enough to justify the cost of service by an outside
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<PAGE>
sales representative. STS has established an electronic data interchange ("EDI")
capability for use with selected customers and vendors and is in the early
stages of establishing a presence on the Internet.
Competition. The great majority of STS' competitors are relatively
small companies with sales of less than $10 million from one or two facilities.
Many of these companies offer considerable depth in certain product lines,
together with related technical support. STS competes with these companies on
price, the strength of its product offering and an extensive range of ancillary
technical services. The largest national competitor is Motion Industries which
competes on the basis of price and product availability. Another national
competitor is Applied Industrial Technologies, Inc., formerly known as Bearings,
Inc.
Sun Inventory Management Company (SIMCO)
SIMCO provides inventory management services resulting in the delivery
of required material to the customer's point of use at the lowest total cost.
SIMCO's customers range from small machine shops with two or three employees to
major manufacturing facilities with thousands of employees.
SIMCO serves its small and medium-size accounts through its "expediter"
activity. The expediter activity, with sales of $121 million in 1996, offers
personalized, small parts inventory management service to the low volume
customer. The expediter sales force relieves the customer of the inconvenience
and expense of purchasing numerous, small, inexpensive maintenance parts and
provides assurance against the expense and inconvenience of stock outs. Sales in
this market segment tend to be of relatively small dollar value items with
limited technology content but high service demands. The Company believes that
SIMCO has a competitive advantage in this market segment due to its large sales
force, a broad inventory of parts for diverse applications, a reputation for
high-quality products, a responsive physical distribution system and a
computerized material management system which permits 98% of all orders to be
shipped within 24 hours. In 1996, the expediter activity of SIMCO sold more than
25,000 products to over 50,000 customers in the United States and Canada.
SIMCO's "integrated supply" activity, with sales of $35 million in
1996, is focused on major industrial manufacturing customers. In some instances,
SIMCO will take over complete responsibility for a customer's purchases of
maintenance, repair and operating supplies. In those cases, SIMCO places the
purchase orders, receives the material and dispenses it to the customer's
employees from the customer's tool cribs. The advantage to the customer is
substantial reduction in the total cost of procuring and handling the thousands
of items which are routinely used by a large facility, while at the same time
improving the availability of these materials.
Products and Suppliers. SIMCO's expediter activity packages and
inventories over 25,000 items in nine major product categories. The largest
category is fasteners, which accounted for approximately 30% of SIMCO's 1996
expediter sales. A representative list of products of SIMCO's expediter activity
by category is shown below:
<TABLE>
<CAPTION>
Product Category Representative Products
- ------------------------------------ ------------------------------------------------------------------------------
<S> <C> <C> <C>
Fasteners Bolts Nuts Socket Products
Cotter Pins Screws Washers
Electrical Products Clamps Plugs/Clips Terminals
Connectors Fuses/Switches Wire/Cable
Fluid Power Connectors Hydraulic Hose Unions
Fittings Tubing Valves
Cutting Tools Abrasives Drill Bits Reamers
Cutoff Blades Hacksaw Blades Taps and Dies
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Chemicals Adhesives Coolants Paints
Brake Cleaner Lubricants Penetrating Fluid
Transportation Hardware Air Brake Parts Filters Ignition Parts
Body Hardware Gaskets Wheel Hardware
Assortments Cutting Tools Electrical Products Fasteners
Shop Supplies Brooms Hand Cleaners Towels
Welding and Other Regulators Solder Welding Rods
</TABLE>
SIMCO purchases the parts it needs for its expediter activity from over
600 regular vendors, none of which account for greater than 2% of SIMCO's annual
purchases. SIMCO has long-standing relationships with a majority of its
suppliers and continually seeks to upgrade vendor performance by measuring it
and educating vendors on SIMCO's quality and service standards. A majority of
the products sold by SIMCO's expediter activity are packaged by vendors under
SIMCO's private brand labels.
To maintain its reputation for leading product lines and "one-stop
shopping," SIMCO's expediter activity emphasizes new product innovation and is
an active participant in trade shows and trade publications. SIMCO works with
its vendors to introduce more than 500 new products per year.
The products and suppliers used by SIMCO's integrated supply activity
vary considerably depending on the nature of the customer's manufacturing
activity. SIMCO seeks to maximize its purchasing power by aggregating purchases
of common items used by multiple SIMCO customers and also by purchasing through
the other SunSource businesses. SIMCO often obtains lower prices and provides
improved availability for many products without changing the customer's vendors.
Markets and Customers. Customers of the expediter activity tend to be
smaller companies that make frequent small purchases. A typical expediter
customer purchases less than $2,400 per year from SIMCO and includes truck fleet
operators, construction and mining operations, industrial plants, paper plants,
welding shops, hospitals, schools, government facilities and automobile
dealerships.
SIMCO's integrated supply customers tend to be large industrial
facilities which purchase in excess of $1 million per year from SIMCO. SIMCO's
major industrial customers include Colgate Palmolive, Mercedes Benz and Marley
Cooling Tower.
Sales and Marketing. SIMCO's expediter sales representatives serve
their customers by providing merchandising systems, helping control inventory
and physically stocking and organizing products. For example, a sales
representative might maintain an inventory of 100 to 150 small items for an
automobile repair center. Items typically include nuts, bolts, small cutting
tools, lubricants and related items. The service provided to the customer is to
insure that all of these small consumables remain in stock, thereby enabling the
customer to avoid the expense of maintaining inventories, placing purchase
orders and receiving materials. Even more importantly, the customer's highly
trained technicians do not have to waste time and money tracking down missing
parts of nominal dollar value. Larger accounts are offered programmed inventory
maintenance service ("PIMS") to ensure that inventory is maintained at
appropriate levels. PIMS sales account for approximately 20% of total expediter
sales. SIMCO also offers customized product literature which is targeted to
selected niche markets.
SIMCO's expediter sales force consists of approximately 750 sales
representatives, each of whom sells the entire product line and serves an
average of 65 customer accounts. Ten to twelve sales representatives in a
geographical area report to a district manager, who in turn reports to one of
ten regional vice presidents. Sales management support includes training on new
product applications and technical information to assist customers in
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<PAGE>
solving operational and maintenance problems. The marketing department provides
support in the form of product line management, promotional programs, catalogs
and related materials. Logistics support is provided by seven strategically
located distribution centers and a computerized material management system which
assures fast, accurate and complete shipments.
SIMCO approaches its larger integrated supply customers by offering to
perform a survey of their existing procurement practices. The goal of the study
is to determine whether the customer's total costs can be reduced by utilizing
the outsourcing services offered by SIMCO. Typically, savings occur in the
customer's purchasing department, in its tool cribs or other dispensing
locations within its facility and in lower inventory carrying costs. The net
result of a decision to outsource to SIMCO is typically lower total costs,
substantial reduction in inventory investment and improved product availability.
Competition. SIMCO's expediter activity competes primarily with other
national expediters that similarly provide a high level of service, and to a
lesser extent with more narrowly focused regional or small local distributors
competing mainly on the basis of low price with minimal service. The four
largest national expediters are Premier Industrial, Bowman Products, Curtis
Industries and Lawson Products, none of which has a significant market share.
SIMCO's expediter business serves all segments of the highly fragmented MRO
market and has less than 1% market share. The Company believes that SIMCO can
capture additional market share by increasing the number of its qualified sales
representatives and has recently undertaken a program to improve the quality and
training of its sales representatives.
The competition for SIMCO's integrated supply activity comes from a
large number of companies following a variety of strategies. Some competitors
seek to be perceived as an integrated supplier by continually increasing the
number of product lines offered. Other competitors provide staff to dispense
product in a customer's plant. SIMCO also competes with "strategic alliances"
among established distributors of traditional product lines.
Hardware Merchandising Services (Hillman)
The Company believes that Hillman, with sales of $103 million in 1996,
is the leading supplier of merchandising services, fasteners and related small
hardware repair items to retail outlets in the United States. Through its sales
and service force, Hillman provides hardware retailers in all 50 states and in
Mexico, Central and South America with an extensive line of fasteners and other
small hardware items. More importantly, Hillman complements its extensive
product selection with value-added services for the retailer.
Fasteners and other small hardware items typically account for
approximately 25% of a hardware store's traffic, but less than 5% of its
revenues. A typical hardware store maintains in inventory thousands of different
items, many of which generate only small profits. It is difficult for a retailer
to monitor economically all stock levels and to reorder the products from
multiple vendors. The problem is compounded by the necessity of receiving small
shipments of inventory at different times and having to stock the goods.
However, failure to have these small items consistently available will have an
adverse effect on store traffic, thereby denying the retailer the opportunity to
sell items that generate higher profits.
Hillman's sales representatives regularly visit retail outlets to
review stock levels and to reorder those items in need of replacement. Thousands
of items can thus be actively managed with the retailer experiencing a
substantial reduction in paperwork and labor costs. Hillman's sales
representatives also assist in organizing the products in a user-friendly
manner. Hillman complements its broad range of products with value-added
merchandising services such as free displays, product identification stickers,
retail price stickers, store rack and drawer systems, assistance in rack
positioning and store layout and inventory and restocking services. Hillman
periodically introduces new package designs and color-coding for ease of
shopping by hardware store customers, and also modifies rack designs to improve
attractiveness of individual store displays. Furthermore, Hillman provides the
retailer with inventory management software that ties to the retailer's
point-of-sale system. In effect, Hillman functions as a merchandising manager
for the hardware store. Hillman supports these services with high
34
<PAGE>
order fill rates and rapid delivery from its nine distribution centers across
the United States. Orders are shipped within 24 hours with a 96% order fill
rate.
Products and Suppliers. Hillman buys its products from approximately
500 vendors, the largest of which accounted for 14.6% of Hillman's 1996
purchases and the top ten of which accounted for less than 45% of Hillman's 1996
total purchases. Hillman's wide variety of products includes standard and
specialty nuts, bolts, screws, washers and anchors, plus brass, stainless steel,
plastic and miscellaneous fasteners. Management believes that Hillman's
selection of over 20,000 fastener items is the largest in the industry.
Non-fastener products include locks, keys, letters, numbers, signs, rope and
chain accessories and an extensive list of special-purpose items having a
relatively limited product line such as corks, electrical connectors, flashlight
bulbs, specialty fuses, and picture hangers.
Hillman buys approximately half of its purchases directly from foreign
suppliers and coordinates its overseas purchasing with SIMCO. The balance of
purchases are made from domestic manufacturers and master distributors. To
assure quality from its vendors, Hillman conducts annual on-site evaluations and
random sampling of products and communicates the results to vendors. Hillman
also tracks the performance of its vendors based on delivery time and accuracy
of shipments.
Markets and Customers. Hillman services approximately 8,000 full
service retail outlets. Hillman historically has serviced individual dealers of
some of the larger cooperatives, such as Cotter (Tru-Serve), Ace and HWI.
Hillman sells directly to the cooperative's retail locations and also supplies
many fastener items to the cooperative's central warehouses. These central
warehouses continue to distribute to their smaller members that do not have the
purchase volume to justify direct service from Hillman. These arrangements with
the cooperatives reduce credit risk and logistics for Hillman and reduce central
warehouse inventory and delivery costs for the cooperatives.
Hillman is also increasing its focus on regional and national lumber
yards and home centers, particularly companies with three to fifteen locations.
Management believes that the dynamics which make its services attractive to
hardware retailers are present with these larger customers as well. At the
present time, Hillman sells approximately $15 million to this market segment.
Management has established a special sales and service force to further
penetrate this market segment.
Hillman also sells to approximately 6,000 smaller hardware outlets who
are not large enough to qualify for Hillman's full service program, and has four
sales representatives dedicated to serving industrial customers in the greater
Cincinnati area. Hillman can offer such industrial customers very attractive
prices because of Hillman's purchasing power and low freight costs.
Sales and Marketing. Hillman believes that it is more responsive to
customers' needs than its competitors because it operates the largest direct
national sales force selling fasteners and small hardware repair items and
providing related value-added services to hardware stores. The sales force is
comprised of a vice president of sales, two regional managers, 20 field sales
managers and approximately 175 sales representatives. Each sales representative
is responsible for approximately 50 full service accounts, each of which is
generally called on an average of every three weeks. Several specialists call on
cooperative warehouses and others focus on home centers and regional lumber
yards. The sales effort to home centers and lumber yards is supported by a 60
person service organization that is devoted to maintaining the customers'
inventory levels and ensuring that the Hillman displays are properly maintained.
Hillman has an EDI system which is used by a number of larger customers.
Hillman's sales force is supported by a five person customer support staff which
is responsible for quoting special items and bulk quantity orders, expediting
orders, issuing credits and providing sales representatives with customer
feedback.
Competition. The principal competitors for Hillman's core business are
Midwest Fasteners, Servalite, Elco and Sharon Bolt & Screw, the latter two of
which carry only fastener products. Hillman competes primarily on the strength
of the merchandising services it provides, as well as product availability,
price and breadth of product line.
35
<PAGE>
Management estimates that Hillman sells to approximately 65% of the full service
retail outlets that comprise its core market. The smaller hardware outlets who
purchase products but not services from Hillman also purchase products from
local and regional distributors and cooperatives. Competition in this segment is
primarily on the basis of price and availability.
The principal competitors in the home center, regional and national
lumberyard markets are Crown Fastener with an estimated 50% market share and
Elco and Newell Industries. Hillman estimates its share in this market to be
less than 10%. Competition is based primarily on in-store service and price.
Other competitors are local and regional distributors.
Glass Merchandising (Harding)
Harding, with sales of approximately $90 million in 1996, is one of the
largest regional networks of full service retail glass shops in the United
States. Harding operates in the following businesses: retail automotive and flat
glass, insulating glass, small contract glazing and the wholesale distribution
of automotive and flat glass.
Harding provides retail glass products and related services through a
network of approximately 85 retail locations throughout the Southwestern United
States and, to a lesser degree, along the East Coast. Customers include
individuals, insurance companies and commercial accounts. The retail glass
market is highly fragmented within the U.S. market, consisting primarily of
small, privately owned companies with one or two locations. The industry is in
the early stages of consolidation and Harding believes that it is well
positioned to capitalize on this opportunity due to its substantial purchasing
power and its comprehensive management information systems.
As a result of emphasizing the higher margin retail business and
deemphasizing lower margin businesses, such as glass tempering and large
contract glazing, Harding has increased its overall gross margins from 34.9% in
1994 to 40.8% in the nine-month period ended September 30, 1997. Harding is
positioned as a full-service glass retailer offering one of the broadest product
lines in the retail glass industry as well as installation services for
automotive glass, windows and commercial store fronts. The role of the
fabrication and wholesale activities is to ensure that the full service shops
receive the products they require at the lowest total cost.
Harding's new management information system links all of its formerly
independent locations and improves its ability to manage operations. The system
also allows Harding to centralize its purchasing function, thereby enabling it
to take advantage of its significant purchasing power. Another important benefit
is that acquired businesses can immediately begin following Harding's
standardized business practices. The Company believes that this will allow
Harding to integrate acquisitions substantially faster than previously and
reduce the dependence on key employees at any location.
Products and Suppliers. Harding maintains in inventory over 8,000 items
and many more products can be fabricated to meet customer requirements. The
following are major products carried by Harding:
Adhesives/Sealants Commercial Glass Store Fronts Storm Doors
Automotive Glass Mirrors/Mirrored Walls Fire Resistant Glass
Beveled Mirror Strips Wardrobe Doors Patio Doors
Shower/Bath Enclosures Glass Blocks Wire Glass
Framed Mirrors Replacement Insulating Glass
Glass Units Solariums
Harding purchases both automotive and flat glass from four leading
national manufacturers, as well as from regional glass companies and local
distributors. These four manufacturers account for approximately 25% of
Harding's purchases. In addition to flat and automotive glass, Harding purchases
a number of other items, including sheet mirror, framed mirror, shower door
frames and accessories from a variety of manufacturers and distributors.
Harding has in inventory over 90% of the products ordered by its customers.
36
<PAGE>
Markets and Customers. Approximately 37% of retail autoglass sales are
attributable to insurance companies while the remaining sales are divided among
individuals, autobody shops, rental car agencies and car dealerships. Retail
flat glass sales are split fairly evenly between individual consumers and small
contract jobs under $5,000. Wholesale autoglass sales are primarily to glass
shops, while wholesale flat glass sales are divided among independent retail
glass shops, window manufacturers and large contract glaziers. Harding's top ten
customers accounted for approximately 10% of 1996 sales.
Sales and Marketing. The majority of Harding's retail customers are
located within ten miles of a store and typically order in person or via phone.
The retail marketing effort relies on the strategic location of the stores as
well as advertising in the local media. Harding's retail organization also
maintains a 24 person sales force of whom 19 sell both flat and automotive glass
and five focus exclusively on flat glass.
The retail sales force calls on replacement automotive glass users such
as auto body shops, rental car agencies, automotive dealerships and insurance
agents who direct insured claims to approved suppliers. Sales management calls
on regional and national fleet accounts, insurance companies and network
providers in order to become an approved or preferred supplier. Network
providers are companies that handle the entire glass replacement process for
many insurance companies.
Harding's wholesale operation has a nine person sales force, all of
whom sell both flat and automotive glass. Sales representatives call on flat
glass customers such as window manufacturers, glass shops, and other large users
of glass such as contract glaziers.
Competition. Because of the diversity of markets and geographic
locations it serves, Harding has numerous competitors at the retail level.
Harding's retail competitors can be categorized as follows: national automotive
chains, large regional glass retailers and local independent glass shops.
Harding, with its broad offering of both automotive and flat glass, has
positioned itself as the largest comprehensive glass retailer in its region. At
the wholesale level, Harding faces competition from national, regional and local
competitors. In addition, in recent years, the major manufacturers of automotive
and flat glass have been taking steps to integrate vertically into wholesale
distribution, thereby assuring themselves of greater control over the sale of
their products. As a result, many of these smaller, independent glass businesses
are now inclined to look favorably upon the sale of their businesses to a larger
competitor.
The Company believes that Harding is currently the largest full service
retail glass shop business in the United States with approximately 85 retail
locations. Although a number of chains are larger than Harding, they deal
primarily in auto glass replacement and are not full service shops. Competition
for Harding's full service shops comes mainly from single location operations or
small chains. Harding's purchasing power and recently installed comprehensive
information system give it significant advantages over these competitors.
Insurance Arrangements
Under the Company's current insurance programs, commercial umbrella
coverage is obtained for catastrophic exposure and aggregate losses in excess of
expected claims. Since October 1991, the Company has retained the exposure on
certain expected losses related to worker's compensation, general liability and
automobile. The Company also retains the exposure on expected losses related to
health benefits of certain employees. The Company 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.
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<PAGE>
Employees
As of September 30, 1997, the Company had approximately 4,000
employees, of which approximately 1,700 are sales personnel, approximately 1,300
are employed as warehouse and delivery personnel and approximately 1,000 hold
administrative positions. The Company has collective bargaining agreements with
five unions representing a total of approximately 80 employees. In the opinion
of management, employee relations are good.
Backlog
The Company's sales backlog excluding divested operations was
$59,531,000 as of December 31, 1996, and $54,935,000 as of December 31, 1995. On
average, the Company's backlog is less than one month's sales.
Properties
The Company currently has approximately 200 warehouse and stocking
facilities located throughout the United States, Canada and Mexico. Most of
these include sales offices. Approximately 32% of these facilities are owned and
the remainder are leased. The Company's principal properties are the following
warehouse facilities:
Business Location Description
-------- -------- -----------
Hillman Cincinnati, Ohio 190,000 sq. ft. (leased)
Harding Denver, Colorado 184,000 sq. ft. (owned)
SIMCO Itasca, Illinois 80,000 sq. ft. (owned)
In the opinion of management, the Company's existing facilities are in
good condition.
Legal Proceedings
Litigation originally instituted on February 27, 1996 is pending in the
Court of Common Pleas of Montgomery County, Pennsylvania in which Dorman
Products of America, Ltd. ("Dorman"), and its parent, R&B, Inc. ("R&B"), allege
that misrepresentations of certain facts were made by the Company's subsidiary
operating partnership, upon which R&B allegedly based its offer to purchase the
assets of the Dorman Products division of such subsidiary operating partnership.
Dorman and R&B seek damages of approximately $21 million. In the opinion of
management, the ultimate resolution of this matter will not have a material
effect on the consolidated financial position, operations or cash flows of the
Company.
38
<PAGE>
MANAGEMENT
The following table sets forth certain information regarding the
Company's directors and executive officers.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Donald T. Marshall.............................. 63 Chairman of the Board and Chief Executive Officer
John P. McDonnell............................... 62 President and Chief Operating Officer; Chief Executive
Officer, SunSource Industrial Services Company;
Director
Norman V. Edmonson.............................. 57 Executive Vice President; Director
Joseph M. Corvino............................... 43 Vice President-Finance, Chief Financial Officer,
Treasurer and Secretary
Max W. Hillman, Jr.............................. 50 Chief Executive Officer, Hillman
Harold J. Cornelius............................. 48 Chief Executive Officer, Harding
O. Gordon Brewer, Jr............................ 60 Director
Eliot M. Fried.................................. 65 Director
Arnold S. Hoffman............................... 62 Director
Robert E. Keith, Jr............................. 56 Director
Ernest L. Ransome, III.......................... 71 Director
Donald A. Scott................................. 68 Director
Henri I. Talerman............................... 40 Director
</TABLE>
Donald T. Marshall has been the Chairman and Chief Executive Officer
since December 1988 and a director since February 1987. Mr. Marshall served as
President and Chief Executive Officer from February 1987 to December 1988. Mr.
Marshall started with the Company in 1977 as Vice President-Operations.
John P. McDonnell has been the President and Chief Operating Officer
since December 1994 and a director since May 1995. Mr. McDonnell served as Group
Vice President from December 1987 to December 1994 and President of the Walter
Norris division from December 1981 to December 1987.
Norman V. Edmonson has been the Executive Vice President since December
1994 and a director since February 1987. Mr. Edmonson served as Group Vice
President from May 1, 1977 to December 1994. Mr. Edmonson plans to retire as an
executive officer in May 1998 but will continue after that time as a director
and consultant to the Company.
Joseph M. Corvino has been Vice President-Finance, Chief Financial
Officer, Treasurer and Secretary since December 1995. Mr. Corvino served as Vice
President and Controller from May 1993 to December 1995 and as Controller from
December 1985 to May 1993. Mr. Corvino started with the Company as Assistant
Controller in June 1980.
39
<PAGE>
Max W. Hillman, Jr. has been the Chief Executive Officer of Hillman
since December 1996. Mr. Hillman served as Group Vice President from December
1991 to December 1996. Mr. Hillman started with the Company in operations in
1982.
Harold J. Cornelius has been the Chief Executive Officer of Harding
since December 1996. Mr. Cornelius served as Group Vice President from December
1988 to December 1996. Mr. Cornelius started with the Company in the sales
organization in 1979.
O. Gordon Brewer, Jr. has been a director of the Company since February
1987. Mr. Brewer has served as Vice President-Finance of Ikon Office Solutions
(formerly Alco Standard Corporation) for more than the past five years. Mr.
Brewer serves as a director of Corporate Insurance and Reinsurance Limited.
Eliot M. Fried has been a director of the Company since December 1994.
Mr. Fried has been a Managing Director of Lehman Brothers Inc. since 1987. Mr.
Fried serves as a director of Axsys Technologies, Inc., Bridgeport Machines,
Inc., EVI, Inc., L3 Communications, Inc. and Walter Industries.
Arnold S. Hoffman has been a director of the Company since February
1987. Mr. Hoffman has been a Senior Managing Director in Corporate Finance at
Legg Mason Wood Walker, Incorporated since April 1995 and a Managing Director at
Legg Mason Wood Walker, Incorporated prior thereto. Mr. Hoffman serves as a
director of Intelligent Electronics Incorporated.
Robert E. Keith, Jr. has been a director of the Company since December
10, 1997. Mr. Keith has been the Managing Director and Chief Executive Officer
of TL Ventures (a venture capital firm) for more than the past five years. Mr.
Keith serves as a director of Cambridge Technology Partners, National Media
Corporation, Navigator, Safeguard Scientifics, Inc. and Wave Technologies
International.
Ernest L. Ransome, III has been a director of the Company since
February 1987. Mr. Ransome has been the Chairman of Giles & Ransome, Inc. (a
distributor of construction equipment) for more than the past five years.
Donald A. Scott has been a director of the Company since February 1987.
Mr. Scott has been a partner of Morgan, Lewis & Bockius LLP from July 1964 to
present. Mr. Scott serves as a director of Provident Mutual Life Insurance
Company.
Henri I. Talerman has been a director of the Company since March 1995.
Mr. Talerman has been a Managing Director of Lehman Brothers Inc. from June 1992
to present and Senior Vice President of Lehman Brothers Inc. prior to 1992. Mr.
Talerman serves as a director of McBride plc. and Financier Gerflor SA and as an
advisory director of Europe Capital Partners.
All directors will hold office until the next annual meeting of
stockholders and until their successors are duly elected and qualified. All
executive officers hold office at the pleasure of the Board of Directors.
40
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, MANAGEMENT AND
SELLING STOCKHOLDERS
Except for the 500,000 shares being offered by the Company, all of the
Common Shares being offered hereby are being sold by the Selling Stockholders
named below.
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, (iv) the Selling Stockholders and (v) all
officers and directors as a group, the beneficial ownership of Common Shares
before and after the Offering. Percentage amounts represent less than 1% of the
outstanding Common Shares unless otherwise indicated.
<TABLE>
<CAPTION>
Ownership Before Offering Ownership After Offering
------------------------- ------------------------
Percent of Common Percent of
Common Common Shares Common Common
Name of Beneficial Owner Shares Shares Held Being Sold Shares Shares Held
------------------------ ------ ----------- ---------- ------ -----------
<S> <C> <C> <C> <C> <C>
Directors and Executive
Officers
O. Gordon Brewer, Jr. 250 -- -- 250 --
Harold J. Cornelius 27,770 -- -- 27,770 --
Joseph M. Corvino 35,626 -- -- 35,626 --
Norman V. Edmonson 440,729 6.9% --(1) 440,729 6.4%
Eliot M. Fried --(2) -- -- -- --
Max W. Hillman, Jr. 30,220 -- -- 30,220 --
Arnold S. Hoffman 3,250(2)(3) -- -- 3,250 --
Robert E. Keith, Jr. 2,000 -- -- 2,000 --
Donald T. Marshall 698,988 10.9% -- 698,988 10.1%
John P. McDonnell 211,208 3.3% -- 211,208 3.1%
Ernest L. Ransome, III 1,250(4) -- -- 1,250 --
Donald A. Scott 2,250 -- -- 2,250 --
Henri I. Talerman --(2) -- -- -- --
All directors and executive
officers as a group (13
persons) 1,453,541(2) 22.6% -- 1,453,541 21.0%
Selling Stockholders
Lehman LTD I, Inc. 27,138 -- 27,138 -- --
Lehman Brothers Capital
Partners I 1,447,031 22.5% 1,447,031 -- --
Lehman/SDI, Inc. 538,000 8.4% 538,000 -- --
</TABLE>
- ---------------
(1) Mr. Edmonson intends to sell 20,000 Common Shares after completion of
the Offering.
(2) Does not include any Common Shares owned by the Selling Stockholders.
Messrs. Hoffman and Fried, as limited partners of Lehman Brothers
Capital Partners I, together derive economic benefit of approximately
1% from interests held by Lehman Brothers Capital Partners I. An
affiliate of Lehman Brothers Inc., of which Messrs. Fried and Talerman
are officers, also owns all of the capital stock of Lehman Ltd. I,
Inc. and Lehman/SDI, Inc.
(3) 750 of these Common Shares are owned by Hoffman Investment Co., of
which Mr. Hoffman is Managing Partner. In addition, Mr. Hoffman's
children own 1,000 Common Shares with respect to which he disclaims
beneficial ownership.
(4) 625 of these Common Shares are held in a trust, of which Mr. Ransome
is a trustee.
41
<PAGE>
The address of Lehman LTD I, Inc., Lehman Brothers Capital Partners I
and Lehman/SDI is 3 World Financial Center, New York, NY 10285.
See "Description of Capital Stock - Stockholders Agreement" for a
description of certain restrictions with respect to voting and sale of Common
Shares held by affiliates of Lehman Brothers and certain officers of the
Company.
In connection with the Conversion, the Company entered into a
Registration Rights Agreement with affiliates of Lehman Brothers (collectively
referred to as "Lehman Brothers") and Messrs. Marshall, McDonnell and Edmonson.
The agreement provides that at any time after the Conversion Lehman Brothers may
require the Company to file a registration statement with the Securities and
Exchange Commission for the sale of Common Shares held by them. Messrs.
Marshall, McDonnell and Edmonson are entitled to include up to 20% of the Common
Shares held by them in the registration statement. The registration statement of
which this Prospectus is a part has been filed pursuant to that demand. The
parties have agreed that they will not sell any Common Shares (other than
pursuant to the Offering) during such period prior to and after the effective
date of the registration statement as may be reasonably requested by the
managing underwriters. The Company has also agreed not to sell any Common Shares
(other than pursuant to the Offering) prior to the earlier of the closing of
this Offering and nine months following the Conversion, except for the issuance
of Common Shares in connection with acquisitions where the person receiving the
Common Shares agrees to abide by this restriction.
The Company has agreed to pay all expenses incident to the Company's
compliance with the Registration Rights Agreement, including registration and
filing fees, blue sky expenses, printing expenses and fees and expenses of
Company counsel and accountants. The parties have agreed to indemnify each other
for certain liabilities including liabilities under the Securities Act of 1933,
as amended.
DESCRIPTION OF CAPITAL STOCK
Preferred Stock
The Certificate of Incorporation of the Company 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 are no shares of Preferred Stock outstanding. There are reserved
for issuance 64,189 shares of Series A Junior Participating Preferred Shares
pursuant to the Company's Stockholder Rights Plan. See "--Stockholder Rights
Plan."
Common Stock
The Certificate of Incorporation of the Company authorizes the issuance
of 20,000,000 Common Shares, of which 6,418,936 Common Shares are outstanding.
Holders of Common Shares 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 Common Shares
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 Company, the
holders of Common Shares are entitled to share ratably in all assets after
satisfaction of liabilities, subject to prior distribution rights of Preferred
Stock, if any, then outstanding. Common Shares have no preemptive, conversion or
other subscription rights and there are no redemption or sinking fund provisions
applicable to the Common Shares.
42
<PAGE>
Stockholders Agreement
The Company and certain stockholders have entered into a Stockholders
Agreement dated as of July 31, 1997 (the "Stockholders Agreement"), that
contains certain restrictions with respect to voting and sale of Common Shares.
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"), agree with the Company not to sell any Common Shares 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 the Senior Executives, after reasonable inquiry, would beneficially own
after such transactions more than 10% of the outstanding Common Shares (or more
than 15% of the outstanding Common Shares 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 Securities Exchange Act of
1934, as amended (the "Exchange Act"), as such rule is currently in effect.) The
Stockholders Agreement also contains provisions that restrict the respective
voting power of Lehman Brothers and the Senior Executives. Under the terms of
such restriction, such persons 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 Common Shares 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
of the Partnership voting together as a single class. See also "-- Anti-takeover
Provisions - Bylaw Provisions" below.
The Stockholders Agreement contains a provision regarding nomination of
the Board of Directors of the Company. The Board of Directors of the Company
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 Shares held by Lehman
Brothers.
Anti-takeover Provisions
Certain provisions of the Company's Bylaws and the Stockholder Rights
Plan could have an anti-takeover effect. These provisions are intended to
enhance the likelihood of continuity and stability in the composition of the
Company's Board of Directors and management and in the policies formulated by
the Board of Directors and to discourage an unsolicited takeover of the Company
if the Board of Directors determines that the takeover is not in the best
interests of the Company and its stockholders. However, these provisions could
have the effect of discouraging certain attempts to acquire the Company 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 Company's Independent Directors is required to
approve and authorize (i) amendments to the Company's Certificate of
Incorporation or Bylaws or any
43
<PAGE>
stockholder rights plan of the Company (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 Company or (ii) any agreement binding the Company in respect
of the sale, in a single transaction or a series of related transactions, of all
or a substantial part of the Company. In addition, the approval of at least a
majority of the Company's Independent Directors is required to approve and
authorize (i) any transaction or series of related transactions between the
Company 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 Shares, (ii) any amendment to,
or waiver of, any provision of the Stockholders Agreement, or (iii) any
amendment to the Certificate of Incorporation or Bylaws that would amend these
restrictive provisions.
Stockholder Rights Plan. The Company has adopted a Stockholder Rights
Plan pursuant to a Rights Agreement between the Company and Registrar and
Transfer Company. The Plan is designed to insure that all stockholders of the
Company receive fair value for their Common Shares in the event of any proposed
takeover of the Company and to guard against the use of partial tender offers or
other coercive tactics to gain control of the Company without offering fair
value to the Company's stockholders. Under the Rights Plan, each Common Share
has attached thereto a Right. Each Right entitles the registered holder to
purchase from the Company one one-hundredth of a share of Series A Junior
Participating Preferred Stock, par value $.01 per share, of the Company (the
"Preferred Shares"), or a combination of securities and assets of equivalent
value, at a Purchase Price of $75, subject to adjustment. The Purchase Price may
be paid, at the option of the holder, in cash or Common Shares having a value at
the time of exercise equal to the Purchase Price.
Until the Distribution Date, ownership of the Rights will be evidenced
by and will be transferred with and only with the certificates representing the
Common Shares, 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 Common Shares,
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 Common
Shares. 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 Common Shares
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-hundredth of a Preferred Share (a
"Preferred Share Fraction"). Each Preferred Share Fraction carries voting and
dividend rights that are intended to produce the equivalent of one Common Share.
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
Shares) declared on the Common Shares 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 Company. 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 Shares. 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 Common Shares 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:
44
<PAGE>
o A person or group acquires 20% or more of the outstanding Common
Shares.
o A 20% stockholder merges with or acquires the Company and an
equity security of the Company remains outstanding.
o A 20% stockholder engages in "self-dealing" transactions with the
Company, defined as (i) the receipt of securities from the
Company; (ii) the sale of assets by the 20% stockholder to, from
or with the Company having a value of more than $5,000,000 or on
terms and conditions less favorable to the Company than the
Company would be able to obtain in an arm's length negotiation
with an unaffiliated third party; (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 Company. The Board of
Directors of the Company 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 Company is acquired or merged and no outstanding
shares remain or if 50% of the Company's assets or earning power is sold or
transferred. The Rights Plan prohibits the Company 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 Company for $.005 per right until up
to ten days after the public announcement that someone has acquired 20% or more
of the Company'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 Company, they will expire on September 30, 2007.
Limitation of Liability
As permitted by the Delaware General Corporation Law (the "DGCL"), the
Company's Certificate of Incorporation provides that directors of the Company
shall not be personally liable to the Company 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 Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL,
relating to prohibited dividends or distributions or the repurchase or
redemption of stock or (iv) for any transaction from which the director derives
an improper personal benefit.
Transfer Agent and Registrar
The transfer agent and registrar for the Common Shares is Registrar and
Transfer Company.
45
<PAGE>
UNDERWRITING
Under the terms of, and subject to the conditions contained in, the
Underwriting Agreement, the form of which is filed as an exhibit to the
Registration Statement of which the Prospectus forms a part, each of the
Underwriters named below, for whom Lehman Brothers Inc., Robert W. Baird & Co.
Incorporated, Furman Selz LLC and Legg Mason Wood Walker, Incorporated are
acting as representatives (the "Representatives"), has severally agreed to
purchase from the Company and the Selling Stockholders, and the Company and the
Selling Stockholders have agreed to sell to each Underwriter, the aggregate
number of Common Shares set forth opposite the name of each such Underwriter
below:
Underwriters Number of Shares
------------ ----------------
Lehman Brothers Inc..................................
Robert W. Baird & Co. Incorporated...................
Furman Selz LLC......................................
Legg Mason Wood Walker, Incorporated.................
Total.......................................... 2,512,169
=========
The Company and the Selling Stockholders have been advised by the
Representatives that the Underwriters propose to offer the Common Shares
directly to the public at the public offering price set forth on the cover page
of this Prospectus and to certain selected dealers (who may include the
Underwriters) at such public offering price less a concession not in excess of $
per share. The selected dealers may reallow a concession not in excess of $
per share to certain other brokers and dealers. After commencement of the
public offering, the offering price and other selling terms may be changed by
the Representatives.
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Common Shares are subject to
certain conditions precedent, including the conditions that no stop order
suspending the effectiveness of the Registration Statement is in effect and no
proceedings for such purpose are pending before or threatened by the Commission,
and that there has been no material adverse change in the condition of the
Company. The Underwriters will be obligated to purchase all of the Common Shares
if any are purchased.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act or to contribute to payments that may be required to be made in
respect thereof.
The Company has granted the Underwriters an option to purchase up to an
aggregate of 375,000 additional Common Shares at the public offering price less
the underwriting discounts and commissions set forth on the cover page of this
Prospectus. Such option may be exercised at any time until 30 days after the
date of the Underwriting Agreement. To the extent that the Underwriters exercise
such option, each of the Underwriters will have a firm commitment, subject to
certain conditions, to purchase a number of the additional Common Shares
proportionate to such Underwriter's initial commitment as indicated in the
preceding table. The Company will be obligated, pursuant to such option, to sell
such shares to the Underwriters to the extent such option is exercised. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of Common Shares offered hereby.
46
<PAGE>
Prior to the Offering, Lehman Ltd. I, Inc., Lehman Brothers Capital
Partners I and Lehman/SDI, Inc., each an affiliate of Lehman Brothers Inc.,
beneficially own, in the aggregate, approximately 2,012,169 of the outstanding
Common Shares. Because Lehman Brothers Inc. is a member of the National
Association of Securities Dealers, Inc. ("NASD") and will act as an underwriter
in the Offering, the Offering is subject to the provisions of Section 2720 of
the Conduct Rules of the NASD (formerly Schedule E to the Bylaws of the NASD)
("Section 2720"). Although not required by Section 2720 in this instance, it has
been determined that Robert W. Baird & Co. Incorporated will serve as a
"qualified independent underwriter" and will recommend the public price in
compliance with the standard requirements of Section 2720. Robert W. Baird & Co.
Incorporated, in its role as qualified independent underwriter, is assuming the
responsibilities of acting as a qualified independent underwriter and has
performed due diligence investigation and participated in the preparation of
this Prospectus and the Registration Statement of which this Prospectus is a
part. In addition, in accordance with Section 2720, the Underwriters will not
make sales of Common Shares offered hereby to customer's discretionary accounts
without the prior specific written approval of such customer.
Until the distribution of the Common Shares is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase Common Shares. As an exception to these rules,
the Representatives are permitted to engage in certain transactions that
stabilize the price of the Common Shares. Such transactions may consist of bids
or purchases for the purposes of pegging, fixing or maintaining the price of the
Common Shares.
In addition, if the Representatives over-allot (i.e., if they sell more
Common Shares than are set forth on the cover page of this Prospectus), and
thereby create a short position in the Common Shares in connection with the
Offering, the Representatives may reduce that short position by purchasing
Common Shares in the open market. The Representatives also may elect to reduce
any short position by exercising all or part of the over-allotment option
described herein.
In general, purchases of a security for the purpose of stabilization or
to reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchase.
Neither the Company nor any of the Underwriters make any representation
or prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Shares. In
addition, neither the Company nor any of the Underwriters make any
representation that the Representatives will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
The Company, its officers and directors and certain of its stockholders
have agreed that they will not, subject to certain exceptions, for a period of
90 days from the date of this Prospectus, directly or indirectly, offer, sell or
otherwise dispose of any Common Shares or any securities convertible into or
exchangeable or exercisable for any such Common Shares, without the prior
written consent of Lehman Brothers Inc.
Affiliates of Lehman Brothers Inc. will receive a substantial portion
of the proceeds from the Offering. In addition, two of the ten members of the
Company's Board of Directors are presently employed by Lehman Brothers Inc. and
a third is employed by Legg Mason Wood Walker, Incorporated. Lehman Brothers
Inc. and Legg Mason Wood Walker, Incorporated have from time to time provided
investment banking, financial advisory and other services to the Company, for
which services they have received fees.
47
<PAGE>
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for
the Company by Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania. Donald
A. Scott, a partner in Morgan, Lewis & Bockius LLP, is a director of the
Company. Certain legal matters in connection with this offering will be passed
upon for the Underwriters by Simpson Thacher & Bartlett (a partnership which
includes professional corporations), New York, New York.
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 Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports and other information with the Commission.
Such reports and other information may be inspected and copied at the public
reference facilities maintained by the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission'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 Commission at its principal
office in Washington, D.C. The Commission also maintains a Web site
(http://www.sec.gov) that contains reports and other information regarding the
Company. Such reports and other information concerning the Company 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 Common Shares are listed.
This Prospectus constitutes a part of a Registration Statement on Form
S-2 (the "Registration Statement") filed by the Company with the Commission
under the Securities Act. This Prospectus omits certain of the information
contained in the Registration Statement in accordance with the rules and
regulations of the Commission. Reference is hereby made to the Registration
Statement and related exhibits for further information with respect to the
Company and the securities offered hereby. Any statements contained herein
concerning the provisions of any document are not necessarily complete, and, in
such instance, reference is made to the copy of such document filed as an
exhibit to the Registration Statement or otherwise filed with the Commission.
Each such statement is qualified in its entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
This 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 Prospectus is delivered, upon written or oral
request addressed to SunSource Inc., 3000 One Logan Square, Philadelphia,
Pennsylvania 19103, Attention: Joseph M. Corvino, Secretary, telephone number
(215) 282-1290.
The following documents of the Partnership (Commission file no.
1-09375) and the Company (Commission file no. 1-13293) have been filed with the
Commission and are incorporated herein by reference:
48
<PAGE>
(a) Annual Report on Form 10-K for the Partnership for the fiscal
year ended December 31, 1996;
(b) Quarterly Reports on Form 10-Q for the Partnership for the
quarterly periods ended March 31 and June 30, 1997; and
(c) Quarterly Report on Form 10-Q for the Company for the quarterly
period ended September 30, 1997.
49
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Unaudited Pro Forma Consolidated Financial Statements Page
-------
SunSource Inc. and Subsidiaries
Introduction to Unaudited Pro Forma Consolidated Financial Statements ................... F-2
Unaudited Pro Forma Consolidated Statements of Income:
for the nine months ended September 30, 1997 .......................................... F-3
for the nine months ended September 30, 1996 .......................................... F-4
for the twelve months ended December 31, 1996 ......................................... F-5
Notes to Unaudited Pro Forma Consolidated Financial Statements .......................... F-6
Unaudited Historical Consolidated Financial Statements
SunSource Inc. and Subsidiaries
Consolidated Balance Sheets as of September 30, 1997 (Unaudited) and December 31, 1996
(Audited) ............................................................................. F-7
Unaudited Consolidated Statements of Income for the nine months ended September 30,
1997 and 1996 ......................................................................... F-8
Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30,
1997 and 1996 ......................................................................... F-9
Unaudited Consolidated Statements of Changes in Partners' Capital/ Stockholders' Deficit
for the nine months ended September 30, 1997 .......................................... F-10
Notes to Unaudited Consolidated Financial Statements .................................... F-11:14
Audited Historical Consolidated Financial Statements
SunSource Inc.
Report of Independent Accountants ....................................................... F-15
Balance Sheet as of December 31, 1996 ................................................... F-16
Notes to Balance Sheet .................................................................. F-17:18
SunSource L.P.
Report of Independent Accountants ....................................................... F-19
Consolidated Balance Sheets as of December 31, 1996 and 1995 ............................ F-20
Consolidated Statements of Income for the Years ended December 31, 1996, 1995 and 1994 F-21
Consolidated Statements of Cash Flows for the Years ended December 31, 1996, 1995 and
1994 .................................................................................. F-22
Consolidated Statements of Changes in Partners' Capital for the Years ended December 31,
1996, 1995 and 1994 ................................................................... F-23
Notes to Consolidated Financial Statements .............................................. F-24:40
</TABLE>
F-1
<PAGE>
SunSource Inc. and Subsidiaries
Pro Forma Consolidated Financial Statements (Unaudited)
The following unaudited pro forma consolidated financial statements of
SunSource Inc. ("the Company"), give effect to the closing of this offering of
common shares of the Company, (the "Offering"), the conversion of its
predecessor, SunSource L.P. ("the Partnership") to corporate form, including
the elimination of non-recurring charges and credits ("the Conversion") and the
refinancing of debt in conjunction with the Conversion (the "Refinancing"). The
pro forma financial statements include the accounts of the Company and its
indirect wholly-owned subsidiary partnership, SDI Operating Partners, L.P. (the
"Operating Partnership"). Refer to the unaudited historical financial
statements and notes thereto filed by the Company on Form 10-Q for the period
ending September 30, 1997 and included elsewhere herein for further information
regarding the Conversion.
The pro forma consolidated statements of income assume the Offering and
the Refinancing closed and the Conversion occurred at the beginning of the
periods presented. The pro forma consolidated income statements are not
necessarily indicative of operating results that would have been achieved had
the Offering, the Conversion, and the Refinancing occurred on the dates
indicated and should not be construed as representative of future operating
results.
These pro forma financial statements should be read in conjunction with
the unaudited historical financial statements and notes thereto as filed by the
Company and the Partnership on Form 10-Q for the nine months ended September
30, 1997 and 1996 and the audited financial statements filed by the Partnership
on Form 10-K for the twelve months ended December 31, 1996, and included
elsewhere herein.
F-2
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except for per unit data)
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1997
------------------------------------------------------
Pro Forma
Adjustments
Historical Amount Note* Pro Forma
------------ -------------- ------- ---------
<S> <C> <C> <C> <C>
Net sales .................................................. $ 529,199 $ -- $ 529,199
Cost of sales .............................................. 315,000 -- 315,000
--------- ---------- ---------
Gross profit ............................................. 214,199 -- 214,199
--------- ---------- ---------
Operating expenses:
Selling, general and administrative expenses .............. 178,173 -- 178,173
Management fee to general partner ......................... 2,491 (2,491) 1A --
Depreciation .............................................. 3,024 -- 3,024
Amortization .............................................. 1,358 390 1B 1,748
--------- ---------- ---------
Total operating expenses ................................. 185,046 (2,101) 182,945
--------- ---------- ---------
Transaction and other costs related to Conversion .......... 3,053 (3,053) 1D --
--------- ---------- ---------
Income from operations ................................... 26,100 5,154 31,254
Interest expense, net ...................................... 5,507 (136) 1E 5,371
Other income (expense), net ................................ (83) 263 1F 180
Distribution on guaranteed preferred beneficial interests in
Corporation's junior subordinated debentures .............. -- (9,174) 1G (9,174)
--------- ---------- ---------
Income before income taxes ............................... 20,510 (3,621) 16,889
Provision (benefit) for income taxes ....................... (8,932) 16,508 1H 7,576
--------- ---------- ---------
Income before extraordinary loss ......................... 29,442 (20,129) 9,313
Extraordinary loss from early extinguishment of debt, net
of deferred income tax benefit of $951 .................... (3,392) 3,392 1I --
--------- ---------- ---------
Net income ............................................... $ 26,050 $ (16,737) $ 9,313
========= ========== =========
Net income per common share ................................ $ 1.35
Weighted average number of outstanding common shares . 6,918,936
</TABLE>
*SEE ACCOMPANYING NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
F-3
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except for per unit data)
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1996
--------------------------------------------------------
Pro Forma
Adjustments
Historical Amount Note* Pro Forma
-------------- -------------- ------- ---------
<S> <C> <C> <C> <C>
Net sales .................................................. $ 489,517 $ -- $ 489,517
Cost of sales .............................................. 293,748 -- 293,748
----------- ---------- ---------
Gross profit ............................................. 195,769 -- 195,769
----------- ---------- ---------
Operating expenses:
Selling, general and administrative expenses .............. 164,231 -- 164,231
Management fee to general partner ......................... 2,491 (2,491) 1A --
Depreciation .............................................. 2,684 -- 2,684
Amortization .............................................. 1,449 390 1B 1,839
----------- ---------- ---------
Total operating expenses ................................. 170,855 (2,101) 168,754
----------- ---------- ---------
Income from operations ................................... 24,914 2,101 27,015
Interest expense, net ...................................... 5,147 (109) 1E 5,038
Other income, net .......................................... 470 208 1F 678
Distribution on guaranteed preferred beneficial interests in
Corporation's junior subordinated debentures .............. -- (9,174) 1G (9,174)
----------- ---------- ---------
Income before income taxes ............................... 20,237 (6,756) 13,481
Provision (benefit) for income taxes ....................... (372) 6,708 1H 6,336
----------- ---------- ---------
Net income ............................................... $ 20,609 $ (13,464) $ 7,145
=========== ========== =========
Net income allocated to partners:
General partner ........................................... $ 206
-----------
Class A limited partners .................................. $ 9,157
-----------
Class B limited partners .................................. $ 11,246
-----------
Earnings per limited partnership interest:
-- Class A interest ..................................... $ 0.82
-- Class B interest ..................................... $ 0.52
Weighted average number of outstanding limited
partnership interests:
-- Class A interests .................................... 11,099,573
-- Class B interests .................................... 21,675,746
Net income per common share ................................ $ 1.03
Weighted average number of outstanding common shares........ 6,918,936
</TABLE>
*SEE ACCOMPANYING NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
F-4
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except for per unit data)
<TABLE>
<CAPTION>
Twelve Months Ended December 31, 1996
-----------------------------------------------------
Pro Forma
Adjustments
Historical Amount Note* Pro Forma
-------------- -------------- ------- ---------
<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) 1A --
Depreciation ................................................... 3,623 -- 3,623
Amortization ................................................... 1,924 520 1B 2,444
----------- ---------- ----------
Total operating expenses ..................................... 230,451 (2,810) 227,641
----------- ---------- ----------
Restructuring charges ........................................... 5,950 (5,950) 1C --
Transaction costs ............................................... 2,150 (2,150) 1D --
----------- ---------- ----------
Income from operations ....................................... 24,452 10,910 35,362
Interest expense, net ........................................... 6,875 (149) 1E 6,726
Other income, net ............................................... 550 195 1F 745
Distribution on guaranteed preferred beneficial interests in
Corporation's junior subordinated debentures ................... -- (12,232) 1G (12,232)
----------- ---------- ----------
Income before income taxes ................................... 18,127 (978) 17,149
Provision (benefit) for income taxes ............................ (1,140) 9,200 1H 8,060
----------- ---------- ----------
Net income ................................................... $ 19,267 $ (10,267) $ 9,089
=========== ========== ==========
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 inter-
ests:
-- Class A interests ......................................... 11,099,573
-- Class B interests ......................................... 21,675,746
Net income per common share ..................................... $ 1.31
Weighted average number of outstanding common shares ............ 6,918,936
</TABLE>
*SEE ACCOMPANYING NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
F-5
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands)
1. Pro Forma Adjustments to Consolidated Statements of Income:
A. To eliminate, in consolidation, the management fee paid to SDI Partners I,
L.P., the "General Partner" or "GP" of the Operating Partnership.
B. To record amortization of goodwill associated with the exchange of the GP's
Minority Interest in the Operating Partnership, using the Partnership's
current estimated useful life of goodwill.
C. To eliminate restructuring charges due to their non-recurring nature.
D. To eliminate transaction and other costs related entirely to the Conversion
which have been recorded by the Company for each period presented.
E. To adjust interest expense, utilizing for each period presented, (i) an
interest rate of 6.98% (equal to current LIBOR rates of 5.73% plus 125
basis points, which reflects interest rates under the new revolving credit
facility), and (ii) net proceeds from the offering of $10,604.
<TABLE>
<CAPTION>
Nine Months Ended Year
------------------------- -----------
9/30/97 9/30/96 1996
----------- ----------- -----------
<S> <C> <C> <C>
Interest expense reduction as a result of proceeds from
the Offering used to repay the Company's bank
revolving credit ...................................... $ (555) $ (555) $ (740)
Interest expense reduction as a result of the Company's
Refinancing .......................................... (582) (555) (744)
Interest expense related to incremental debt used to pay
distributions, transaction costs and other items as a
result of the Conversion ............................. 1,001 1,001 1,335
------- ------- -------
Net reduction in interest expense ...................... $ (136) $ (109) $ (149)
======= ======= =======
Increase or decrease in pro forma interest expense
adjustment due to each 1/8 percent (.00125) change
in interest rate ..................................... $ 24 $ 11 $ 17
</TABLE>
F. Eliminate minority interest expense as a result of the Conversion.
G. 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.
H. Adjust the partnership basis state and foreign provision or benefit for
income taxes to reflect a total provision for federal, state and foreign
income taxes under corporate form.
I. Eliminate extraordinary loss from early extinguishment of debt as a
non-recurring charge.
F-6
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except for per share amounts)
<TABLE>
<CAPTION>
September 30,
1997 December 31,
ASSETS (Unaudited) 1996
------ -------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................................................ $ 2,674 $ 1,666
Accounts and notes receivable, net ................................................... 90,923 78,578
Inventories .......................................................................... 99,872 102,396
Deferred income taxes ................................................................ 11,402 --
Other current assets ................................................................. 4,236 4,672
-------- --------
Total current assets .............................................................. 209,107 187,312
Property and equipment, net ........................................................... 21,285 21,409
Goodwill .............................................................................. 63,118 43,036
Other intangibles ..................................................................... 886 667
Deferred income taxes ................................................................. 4,471 5,007
Cash surrender value of life insurance policies ....................................... 5,535 4,566
Other assets .......................................................................... 601 558
-------- --------
Total assets ...................................................................... $305,003 $262,555
======== ========
LIABILITIES, PARTNERS' CAPITAL, GUARANTEED PREFERRED
BENEFICIAL INTERESTS AND STOCKHOLDERS' DEFICIT
----------------------------------------------
Current liabilities:
Accounts payable, trade .............................................................. $ 55,385 $ 48,557
Notes payable ........................................................................ 1,099 2,670
Current portion of senior notes ...................................................... -- 6,395
Current portion of capitalized lease obligations ..................................... 135 107
Distributions payable ................................................................ 17,557 1,857
Accrued expenses:
Salaries and wages ................................................................. 6,393 5,696
Interest on senior notes ........................................................... 13 473
Management fee due the general partner ............................................. -- 3,330
Income and other taxes ............................................................. 4,617 2,695
Other accrued expenses ............................................................. 18,551 14,751
-------- --------
Total current liabilities ......................................................... 103,750 86,531
Senior notes .......................................................................... 60,000 57,539
Bank revolving credit ................................................................. 17,000 11,000
Capitalized lease obligations ......................................................... 573 504
Deferred compensation ................................................................. 9,994 8,644
Other liabilities ..................................................................... 792 3,718
-------- --------
Total liabilities ................................................................. 192,109 167,936
-------- --------
Commitments and contingencies
Guaranteed preferred beneficial interests in the Corporation's junior
subordinated debentures .............................................................. 115,991 --
-------- --------
Partners' capital:
General partner ...................................................................... -- 960
Limited partners:
Class A interests; 11,099,573 outstanding .......................................... -- 67,642
Class B interests; 21,675,746 outstanding .......................................... -- 29,040
Class B interests held in treasury ................................................. -- (1,514)
Cumulative foreign translation adjustment ............................................ -- (1,509)
-------- --------
Total partners' capital ........................................................... -- 94,619
-------- --------
Stockholders' deficit:
Preferred stock, $.01 par, 1,000,000 shares authorized, none issued................... -- --
Common stock, $.01 par, 20,000,000 shares authorized, 6,418,936 shares issued
and outstanding .................................................................... 64 --
Accumulated deficit .................................................................. (1,485) --
Cumulative foreign translation adjustment ............................................ (1,676) --
-------- --------
Total stockholders' deficit ....................................................... (3,097) --
-------- --------
Total liabilities, partners' capital, guaranteed preferred beneficial interests
and stockholders' deficit ........................................................ $305,003 $262,555
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-7
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
FOR THE NINE MONTHS ENDED
(dollars in thousands, except for per unit amounts)
<TABLE>
<CAPTION>
September 30, September 30,
1997 1996
--------------- --------------
<S> <C> <C>
Net sales ........................................................... $529,199 $ 489,517
Cost of sales ....................................................... 315,000 293,748
-------- -----------
Gross profit ....................................................... 214,199 195,769
-------- -----------
Operating expenses:
Selling, general and administrative expenses ....................... 178,173 164,231
Management fee to general partner .................................. 2,491 2,491
Depreciation ....................................................... 3,024 2,684
Amortization ....................................................... 1,358 1,449
-------- -----------
Total operating expenses ......................................... 185,046 170,855
-------- -----------
Transaction and other costs related to Conversion ................... 3,053 --
-------- -----------
Income from operations ........................................... 26,100 24,914
Interest income ..................................................... 80 60
Interest expense .................................................... 5,587 5,207
Other income (expense), net ......................................... (83) 470
-------- -----------
Income before provision for income taxes ......................... 20,510 20,237
Income tax benefit .................................................. (8,932) (372)
-------- -----------
Income before extraordinary loss ................................. 29,442 20,609
Extraordinary loss from early extinguishment of debt, net of deferred
income tax benefit of $951 ......................................... (3,392) --
-------- -----------
Net income ....................................................... $ 26,050 $ 20,609
======== ===========
Net income allocated to partners:
General partner .................................................... N/A $ 206
-----------
Class A limited partners ........................................... N/A $ 9,157
-----------
Class B limited partners ........................................... N/A $ 11,246
-----------
Net income per limited partnership interest:
-- Class A interest ................................................ N/A $ 0.82
-- Class B interest ................................................ N/A $ 0.52
Pro forma earnings per common share - See Note 2 .................... $ 1.35
Weighted average number of outstanding limited partnership interests:
-- Class A interests ............................................... N/A 11,099,573
-- Class B interests ............................................... N/A 21,675,746
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-8
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE NINE MONTHS ENDED
(dollars in thousands)
<TABLE>
<CAPTION>
September 30, September 30,
1997 1996
--------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income .............................................................. $ 26,050 $ 20,609
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ......................................... 4,382 4,133
Extraordinary loss .................................................... 4,343 --
Increase in cash value of life insurance .............................. (653) --
Transaction and other costs related to Conversion ..................... 3,053 --
Provision for deferred compensation ................................... 2,184 898
Deferred income tax benefit ........................................... (10,866) (903)
Changes in current operating items:
Increase in accounts and notes receivable ............................. (12,062) (10,580)
Decrease (increase) in inventories .................................... 2,643 (2,132)
Decrease in other current assets ...................................... 436 112
Increase in accounts payable .......................................... 6,592 10,342
Increase (decrease) in accrued interest ............................... (460) 1,561
Decrease in accrued restructuring charges and transaction costs ....... (3,402) --
Increase (decrease) in other accrued liabilities ...................... 1,400 (3,675)
Other items, net ........................................................ (597) 258
--------- ---------
Net cash provided by operating activities ............................... 23,043 20,623
--------- ---------
Cash flows from investing activities:
Payment for purchase of assets .......................................... (704) (673)
Proceeds from sale of property and equipment ............................ 695 39
Investment in life insurance policies ................................... (316) (100)
Capital expenditures .................................................... (3,252) (2,713)
Other, net .............................................................. (24) (80)
--------- ---------
Net cash used for investing activities .................................. (3,601) (3,527)
--------- ---------
Cash flows from financing activities:
Early extinguishment of senior notes .................................... (63,934) --
Proceeds from issuance of senior notes .................................. 60,000 --
Cash distributions to partners .......................................... (13,901) (20,535)
Prepayment penalty ...................................................... (4,278) --
Borrowings under bank credit agreements, net ............................ 6,000 --
Repayments under other credit facilities, net ........................... (1,571) (732)
Principal payments under capitalized lease obligations .................. (104) --
Other, net .............................................................. (646) --
--------- ---------
Net cash used for financing activities ................................ (18,434) (21,267)
--------- ---------
Net increase (decrease) in cash and cash equivalents ..................... 1,008 (4,171)
Cash and cash equivalents at beginning of period ......................... 1,666 5,900
--------- ---------
Cash and cash equivalents at end of period ............................... $ 2,674 $ 1,729
========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-9
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL/STOCKHOLDERS' DEFICIT
(UNAUDITED)
FOR THE PERIOD ENDED SEPTEMBER 30, 1997
(dollars in thousands)
<TABLE>
<CAPTION>
PARTNERS' CAPITAL
--------------------------------------------------------------------
Cumulative
Foreign
General Class A Class B Class B Translation
Partner Limited Limited Treasury Adjustment
----------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Partners' Capital -- December 31, 1996 ...... 960 67,642 29,040 (1,514) (1,509)
Net income ................................. 260 9,157 16,633
Cash distributions paid and/or declared to
partners .................................. (150) (8,140) (6,730)
Change in Cumulative foreign translation
adjustment ................................ -- -- -- -- (167)
--------- ---------- ---------- -------- --------
Partners' Capital -- September 30, 1997 ..... $ 1,070 $ 68,659 $ 38,943 $ (1,514) $ (1,676)
Conversion adjustments:
Common Stock ............................... (64)
Paid-in capital ............................ (1,070) (68,659)
Cumulative foreign translation adjustment... 1,676
Retained Earnings .......................... (38,879) 1,514
Minority interest (a) ......................
Class A exchange (b) .......................
Goodwill -- Minority interest (c) .......... --------- ---------- ---------- --------- --------
Stockholders' Deficit -- September 30,
1997 $ -- $ -- $ -- $ -- $ --
========= ========== ========== ======== ========
</TABLE>
(RESTUBBED TABLE)
<TABLE>
<CAPTION>
STOCKHOLDERS' DEFICIT
------------------------------------------------------------------
Cumulative
Foreign
Common Paid-in Accumulated Translation
Stock Capital Deficit Adjustment TOTAL
-------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Partners' Capital -- December 31, 1996 ...... -- -- -- -- 94,619
Net income ................................. 26,050
Cash distributions paid and/or declared to
partners .................................. (15,020)
Change in Cumulative foreign translation
adjustment ................................ -- -- -- -- (167)
--- -- -- -- -------
Partners' Capital -- September 30, 1997 ..... -- ---------- -------- -------- $ 105,482
Conversion adjustments:
Common Stock ............................... 64 --
Paid-in capital ............................ 68,659 1,070 --
Cumulative foreign translation adjustment... (1,676) --
Retained Earnings .......................... 37,365 --
Minority interest (a) ...................... 1,082 1,082
Class A exchange (b) ....................... (68,659) (61,761) (130,420)
Goodwill -- Minority interest (c) .......... 20,759 20,759
--- ---------- --------- -------- -----------
Stockholders' Deficit -- September 30,
1997 $ 64 $ -- $ (1,485) $ (1,676) $ (3,097)
==== ========== ========= ======== ===========
</TABLE>
- --------
(a) Minority interest included as other liabilities by the Partnership.
(b) Each Class A limited partnership interest was exchanged for $1.30 in cash
plus .38 share of Trust Preferred Securities recorded at fair value based
on the price of the Class A interests upon close of trading on the New
York Stock Exchange on September 30, 1997 of $11.75. This fair value of
$115,991 is recorded by the Corporation as Guaranteed Preferred Beneficial
Interests in the Corporation's Junior Subordinated Debentures.
(c) Goodwill related to the exchange of the GP minority interest (See Note 1).
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-10
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars in thousands)
1. Basis of Presentation:
The accompanying financial statements include the consolidated accounts of
SunSource Inc. (the "Corporation"), its predecessor, SunSource L.P. (the
"Partnership"), and its wholly-owned subsidiaries including SDI Operating
Partners, L.P. (the "Company") and SunSource Capital Trust (the "Trust"). All
significant intercompany balances and transactions have been eliminated. The
Company is one of the largest wholesale distributors of industrial products and
related services in the United States. The Company's three business segments
are Industrial Services, Hardware Merchandising and Glass Merchandising.
On September 25, 1997, the limited partners of the Partnership approved
the conversion of the Partnership to a taxable C corporation (the "Conversion")
effective at the close of business on September 30, 1997. As a result of the
Conversion, each Class A limited partnership interest in the Partnership was
converted into $1.30 of cash and .38 share of 11.6% Guaranteed Preferred
Beneficial Interests in the Corporation's Junior Subordinated Debentures (the
"Trust Preferred Securities"), each Class B limited partnership interest in the
Partnership was converted into .25 share of common stock of the Corporation and
the general and limited partnership interests in the GP were exchanged with the
Corporation for 1,000,000 shares of its common stock (the "GP Exchange"). In
connection with the Conversion, the Company also refinanced all of its
outstanding senior notes and bank revolving credit.
The exchange represented by the GP's 1% interest in the Company (the
"Minority Interest") is subject to purchase accounting in accordance with
Accounting Principles Bulletin ("APB") No. 16. Accordingly, the excess of fair
value of the consideration received for the Minority Interest over its book
value has been recorded by the Corporation as goodwill at September 30, 1997,
calculated as follows:
Fair value of Minority Interest (i) ...................... $21,841
Less book value of the GP Minority Interest (ii) ......... 1,082
-------
Excess over book value recorded as Goodwill ........... $20,759
(i) Represents 92.9% of the GP Exchange (the portion allocable to the
Minority Interest) valued at $23,500 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 September 30, 1997 of
$5.875.
(ii) As reported on the pre-conversion balance sheet of the Partnership at
September 30, 1997.
The Trust was organized in connection with the Conversion 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 Trust had no
operating history prior to the issuance of the Trust Preferred Securities. The
terms of the Junior Subordinated Debentures include those stated in the
Indenture (the "Indenture") between the Corporation and the indenture trustee,
the form of which was filed as an exhibit to Registration Statement No.
33319077 of the Corporation and the Trust, as amended (the "Registration
Statement") and those made part of the Indenture by the Trust Indenture Act.
The Corporation has guaranteed on a subordinated basis the payment of
distributions on the Trust Preferred Securities and payments on liquidation of
the Trust and redemption of Trust Preferred Securities (the "Preferred
Securities Guarantee"). The sole assets of the Trust are the Junior
Subordinated Debentures and the obligations of the Corporation under the
Indenture, the Preferred Securities Guarantee and the Junior Subordinated
Debentures in the aggregate constitute a full and unconditional guarantee by
the Corporation of the Trust's obligations under the Trust Preferred
Securities.
The accompanying consolidated financial statements and related notes are
unaudited; however, in management's opinion all adjustments (consisting of
normal recurring accruals) considered necessary for the fair presentation of
financial position, 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.
F-11
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(dollars in thousands)
1. Basis of Presentation: -- (Continued)
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
Corporation 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, and the Registration Statement.
2. Pro Forma Corporate Basis Financial Information:
As a result of the Conversion, historical net income of the Partnership is
not meaningful in the comparison to net income as recorded by the Corporation.
In order to present financial information for the current reporting periods
that will be comparable prospectively to corporate basis financial information,
the table below reconciles the partnership historical basis net income reported
on the Statements of Income included herein with corporate pro forma basis net
income which assumes the Conversion occurred at the beginning of the year for
each period presented and excludes non-recurring charges and credits related
solely to the Conversion.
Conversion of Class B Limited Partnership Interests to Common Stock:
<TABLE>
<CAPTION>
<S> <C>
Actual weighted average number of outstanding Class B Interests during all periods
before conversion ................................................................... 21,675,746
Conversion ratio -- reverse split of one share of Common Stock for four Class B
interests. .......................................................................... X .25
----------
Sub-total -- pro forma outstanding common shares .................................. 5,418,936
Common shares received by the general and limited partners of the GP ................. 1,000,000
----------
Pro forma weighted average number of common shares ................................ 6,418,936
==========
</TABLE>
F-12
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(dollars in thousands)
2. Pro Forma Corporate Basis Financial Information: -- (Continued)
Reconciliation of historical net income to pro forma basis net income:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
PARTNERSHIP BASIS HISTORICAL NET
INCOME ....................................... $ 12,281 $ 8,286 $ 26,050 $ 20,609
Eliminate extraordinary loss from early
extinguishment of debt, net of deferred tax
benefit of $951 ............................ 3,392 -- 3,392 --
Eliminate historical income tax provision
(benefit) .................................. (8,960) 97 (8,932) (372)
--------- -------- -------- -------
Partnership actual historical income before
provision (benefit) for income taxes and
extraordinary loss ........................... 6,713 8,383 20,510 20,237
PRO FORMA ADJUSTMENTS:
Eliminate minority interest .................. 124 84 263 208
Incremental interest expense ................. (331) (331) (994) (994)
Distribution on guaranteed preferred
beneficial interests ....................... (3,058) (3,058) (9,174) (9,174)
Eliminate management fee to the GP ........... 840 840 2,491 2,491
Eliminate transaction and other costs related
to Conversion .............................. 2,428 -- 3,053 --
Incremental amortization on goodwill ......... (130) (130) (390) (390)
---------- ---------- --------- ---------
PRO FORMA C CORPORATION BASIS:
Income before provision for income taxes ..... 6,586 5,788 15,759 12,378
Income tax provision ......................... 2,978 2,759 7,125 5,900
---------- ---------- --------- ---------
Pro forma net income ......................... $ 3,608 $ 3,029 $ 8,634 $ 6,478
========== ========== ========= =========
Pro forma earnings per common share .......... $ .56 $ .47 $ 1.35 $ 1.01
========== ========== ========= =========
Pro forma weighted average common shares
outstanding ................................ 6,418,936 6,418,936 6,418,936 6,418,936
</TABLE>
3. Lines of Credit and Long-Term Debt:
On September 30, 1997, the Company entered into two new financing
commitments which together aggregate $150,000 from lenders. The new financing
commitments consist of a $60,000 five-year fixed rate senior note at 7.66% and
a $90,000 five-year bank revolver with terms and conditions more favorable than
the Corporation's previous senior notes and bank credit lines including less
restrictive covenants and an effective interest rate reduction of approximately
1.00%. The Company utilized this debt capacity to fund transaction costs and
other payments related to the Conversion, refinance its current outstanding
senior notes of $63,934 as of September 30, 1997, including interest thereon
and related make-whole amount of approximately $4,343, and outstanding bank
revolver borrowings of $17,000 as of September 30, 1997.
The new credit facilities provide working capital for reinvestment in the
Company's businesses and acquisition capital for future growth. As of September
30, 1997, the Company had $70,818 available under its new bank credit
facilities. The $79,182 outstanding balance consisted of Senior Notes totaling
$60,000, bank borrowings totaling $17,000, and Letter of Credit Commitments
aggregating $2,182.
F-13
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (Continued)
(dollars in thousands)
3. Lines of Credit and Long-Term Debt: -- (Continued)
The Company has another credit facility available in the amount of $500
for letter of credit commitments only, of which no amount was outstanding as of
September 30, 1997. In addition, an indirect, wholly-owned Canadian subsidiary
of the Company has a $2,500 Canadian dollar line of credit for working capital
purposes of which no amount was outstanding at September 30, 1997.
4. Contingencies:
On February 27, 1996, a lawsuit was filed against the Company by the buyer
of its Dorman Products division for alleged misrepresentation of certain facts
by the Company upon which the buyer allegedly based its offer to purchase
Dorman. The complaint seeks damages of approximately $21,000.
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 GP 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 were
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. The Corporation and its co-defendants have reached an agreement in
principle to settle the class action.
Certain other legal proceedings are pending which are either in the
ordinary course of business or incidental to the Company's business. Those
legal proceedings incidental to the business of the Company are generally not
covered by insurance or other indemnity.
In the opinion of management, the ultimate resolution of these matters
will not have a material effect on the consolidated financial position,
operations or cashflows of the Company.
F-14
<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.
/s/ Coopers & Lybrand L.L.P.
- ----------------------------
2400 Eleven Penn Center
Philadelphia, Pennsylvania
May 1, 1997
F-15
<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
outstanding ............................................................................ 10
Paid-In-Capital ......................................................................... 990
-------
Total liabilities and stockholders' equity .............................................. $ 1,000
=======
</TABLE>
SEE ACCOMPANYING NOTES TO BALANCE SHEET
F-16
<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-17
<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-18
<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. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and the significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of SunSource 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.
/s/ 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-19
<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-20
<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-21
<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
liabilities..................................... (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-22
<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-23
<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:
Termination Other
Balance Sheet Classification Benefits Exit Costs Total
- ----------------------------------- ------------- ------------ ---------
Current -- other accrued expenses . $ 829 $896 $1,725
Long-term -- other liabilities .... $2,014 $573 $2,587
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-24
<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:
Termination Other
Balance Sheet Classification Benefits Exit Costs Total
- ---------------------------------------------------- ------------ ---------
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
- ------------
* 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-25
<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-26
<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-27
<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-28
<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-29
<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-30
<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-31
<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-32
<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:
Capital Operating
Leases Leases
--------- ----------
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
======
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-33
<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-34
<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-35
<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:
1996 1995
--------- --------
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
====== ======
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-36
<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-37
<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-38
<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-39
<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-40
<PAGE>
[Photograph of STS technician servicing equipment]
[Photograph of SIMCO's operations]
[Photograph of Hillman display racks]
[Photograph of Harding glass operations]
<PAGE>
================================================================================
No dealer, salesperson, or any other individual has been authorized to give
any information or to make any representation not contained in this Prospectus
and, if given or made, such information or representations must not be relied
upon as having been authorized by the Company, the Selling Stockholders or any
of the Underwriters. This Prospectus does not constitute an offer of any
securities other than those to which it relates or an offer to sell, or a
solicitation of an offer to buy, to any person in any jurisdiction where such
offer or solicitation would be unlawful. Neither the delivery of this Prospectus
nor any sale made hereunder shall, under any circumstances, create any
implication that the information contained herein is correct as of any time
subsequent to the date hereof.
---------------------------
TABLE OF CONTENTS
Page
----
Prospectus Summary................................... 1
Risk Factors......................................... 8
The Company.......................................... 11
Use of Proceeds...................................... 11
Dividend Policy...................................... 11
Capitalization....................................... 12
Price Range of Common Shares......................... 13
Selected Historical and Pro Forma Financial
Information........................................ 14
Managements' Discussion and Analysis of Financial
Condition and Results of Operations................ 16
Business............................................. 25
Management........................................... 39
Security Ownership of Certain Beneficial Owners,
Management and Selling Stockholders................ 41
Description of Capital Stock......................... 42
Underwriting......................................... 46
Legal Matters........................................ 48
Experts.............................................. 48
Available Information................................ 48
Incorporation of Certain Documents by Reference...... 48
Index to Financial Statements........................ F-1
================================================================================
<PAGE>
================================================================================
2,512,169 Shares
[LOGO]
Common Shares
---------------------------
PROSPECTUS
, 1998
---------------------------
LEHMAN BROTHERS
ROBERT W. BAIRD & CO.
INCORPORATED
FURMAN SELZ
LEGG MASON WOOD WALKER
INCORPORATED
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses of the issuance
and distribution of the securities being registered hereby, all of which are
being borne by the Company. All costs and expenses, other than the SEC
registration fee, the New York Stock Exchange Listing Fee and the NASD filing
fee, are estimated.
SEC Registration Fee................................ $19,962
NASD Filing Fee..................................... *
Legal Fees and Expenses............................. *
Accounting Fees and Expenses........................ *
Blue Sky Fees and Expenses.......................... *
Printing Expenses................................... *
Transfer Agent's Fees............................... *
New York Stock Exchange Listing Fee................. *
Miscellaneous Expenses.............................. *
--------
Total............................................... $ *
========
- ---------------
* To be completed by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's By-laws contain provisions permitted by the Delaware
General Corporation Law (under which the Company is organized) that provide that
directors and officers will be indemnified by the Company to the fullest extent
permitted by law for all losses that may be incurred by them in connection with
any action, suit or proceeding in which they may become involved by reason of
their service as a director or officer of the Company. In addition, the
Company's Certificate of Incorporation contains provisions permitted by the
Delaware General Corporation Law that limit the monetary liability of directors
of the Company for certain breaches of their fiduciary duty, and its By-laws
provide for the advancement by the Company to directors and officers of expenses
incurred by them in connection with a proceeding of a type to which the duty of
indemnification applies. The Company maintains directors' and officers'
liability insurance to insure its directors and officers against certain
liabilities incurred in their capacity as such, including claims based on
breaches of duty, negligence, error and other wrongful acts. Insofar as
indemnification for liabilities arising under the Securities Act of 1933, as
amended, may be permitted to directors, officers, or persons controlling the
Company pursuant to the foregoing provisions, the Company has been informed that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in that Act and is therefore unenforceable.
Reference is also made to the indemnification provisions of the
Underwriting Agreement to be filed as Exhibit 1 and to the first undertaking
contained in Item 17 of this Registration Statement.
ITEM 16. EXHIBITS.
EXHIBIT NO. DESCRIPTION
- ----------- -----------
1 Form of Underwriting Agreement*
4 Rights Agreement between the Company and the Registrar
and Transfer Company***
<PAGE>
5 Opinion of Morgan, Lewis & Bockius LLP regarding
legality of securities being registered*
10.1 Amended and Restated Credit Agreement dated September
30, 1997, among CoreStates Bank, N.A., for itself and
as agent, The Bank of Nova Scotia, for itself and as
documentation agent, and SDI Operating Partners, L.P.,
SDI Partners I, L.P., SunSource Inc., SunSub A Inc. and
SunSub B Inc. **
10.2 Note Purchase Agreement dated September 30, 1997
between Teachers Insurance and Annuity Association and
SDI Operating Partners, L.P., SDI Partners I, L.P.,
SunSource Inc., SunSub A Inc. and SunSub B Inc.**
23.1 Consent of Coopers & Lybrand L.L.P.**
23.2 Consent of Morgan, Lewis & Bockius LLP (contained in
its opinion to be filed as Exhibit 5)*
24 Powers of Attorney (included in signature page)**
27 Financial Data Schedule **
- ---------------
*To be filed by amendment.
**Filed herewith.
***Incorporated by reference to Exhibit 10.5 to the Company's
Registration Statement on Form S-4 (No. 333-19077).
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company 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 Company 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 Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Company hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Company 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.
(2) For the purpose of determining any liability under the Securities
Act, 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.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Philadelphia, Pennsylvania on January 22, 1998.
SUNSOURCE INC.
BY: /s/ Joseph M. Corvino
--------------------------------
Name: Joseph M. Corvino
Title: Vice President - Finance,
Chief Financial Officer,
Treasurer and Secretary
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned does hereby
constitute and appoint Norman V. Edmonson and Joseph M. Corvino, or either of
them acting alone, his true and lawful attorney-in-fact and agent, with full
power of substitution and revocation for him and in his name, place and stead,
in any and all capacities, to sign this Registration Statement on Form S-2 of
SunSource Inc. (and any Registration Statement filed pursuant to Rule 462(b)
under the Securities Act), relating to the offer and sale of its Common Shares
and any and all amendments (including post-effective amendments) to the
Registration Statement and to file the same with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange 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 as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or his or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons, in the capacities indicated,
on January 22, 1998.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Donald T. Marshall Chairman and Chief Executive Officer January 22, 1998
- ------------------------------------- (Principal Executive Officer) and Director
Donald T. Marshall
/s/ Joseph M. Corvino Vice President-Finance, Chief Financial January 22, 1998
- ------------------------------------- Officer, Treasurer and Secretary
Joseph M. Corvino (Principal Financial Officer)
/s/ John S. Dabrowski Controller (Principal Accounting Officer) January 22, 1998
- -------------------------------------
John J. Dabrowski
/s/ O. Gordon Brewer, Jr. Director January 22, 1998
- -------------------------------------
O. Gordon Brewer, Jr.
/s/ Norman V. Edmonson Director January 22, 1998
- -------------------------------------
Norman V. Edmonson
/s/ Eliot M. Fried Director January 22, 1998
- -------------------------------------
Eliot M. Fried
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Arnold S. Hoffman Director January 22, 1998
- -------------------------------------
Arnold S. Hoffman
/s/ Robert E. Keith, Jr. Director January 22, 1998
- -------------------------------------
Robert E. Keith, Jr.
/s/ John P. McDonnell Director January 22, 1998
- -------------------------------------
John P. McDonnell
/s/ Ernest L. Ransome, III Director January 22, 1998
- -------------------------------------
Ernest L. Ransome, III
/s/ Donald A. Scott Director January 22, 1998
- -------------------------------------
Donald A. Scott
/s/ Henri I. Talerman Director January 22, 1998
- -------------------------------------
Henri I. Talerman
</TABLE>
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
1 Form of Underwriting Agreement*
4 Rights Agreement between the Company and the Registrar
and Transfer Company***
5 Opinion of Morgan, Lewis & Bockius LLP regarding
legality of securities being registered*
10.1 Amended and Restated Credit Agreement dated September
30, 1997, among CoreStates Bank, N.A., for itself and
as agent, The Bank of Nova Scotia, for itself and as
documentation agent, and SDI Operating Partners, L.P.,
SDI Partners I, L.P., SunSource Inc., SunSub A Inc. and
SunSub B Inc. **
10.2 Note Purchase Agreement dated September 30, 1997
between Teachers Insurance and Annuity Association and
SDI Operating Partners, L.P., SDI Partners I, L.P.,
SunSource Inc., SunSub A Inc. and SunSub B Inc.**
23.1 Consent of Coopers & Lybrand L.L.P.**
23.2 Consent of Morgan, Lewis & Bockius LLP (contained in
its opinion to be filed as Exhibit 5)*
24 Powers of Attorney (included in signature page)**
27 Financial Data Schedule **
- ---------------
*To be filed by amendment.
**Filed herewith.
***Incorporated by reference to Exhibit 10.5 to the Company's
Registration Statement on Form S-4 (No. 333-19077).
<PAGE>
Exhibit 10.1
AMENDED AND RESTATED
CREDIT AGREEMENT
AMONG
SDI OPERATING PARTNERS, L.P.,
AND ITS SUBSIDIARIES AS SET FORTH
ON SCHEDULE 1 ATTACHED HERETO
("BORROWERS"),
SDI PARTNERS I, L.P.,
SUNSOURCE INC., SUNSUB A INC. and
SUNSUB B INC.
("GUARANTORS"),
CORESTATES BANK, N.A.
for itself and as Agent,
THE BANK OF NOVA SCOTIA
for itself and as Documentation Agent
and
THE BANKS SET FORTH ON SCHEDULE 2 ATTACHED HERETO
("BANKS")
September 30, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION ONE - DEFINITIONS...........................................................................3
1.1. Definitions.......................................................................3
1.2. Rules of Construction............................................................13
SECTION TWO - REVOLVING CREDIT LOAN................................................................13
2.1. (a) The Facility............................................................13
(b) Amendment and Restatement...............................................13
(c) Authority of the Company................................................14
(d) Optional Increase of Commitment.........................................14
2.2. Promissory Notes.................................................................14
2.3. Banks' Participation.............................................................14
2.4. Use of Proceeds..................................................................15
2.5. Repayment........................................................................15
2.6. Interest.........................................................................15
2.7. Advances.........................................................................20
2.8. Reduction and Termination of Commitment; Voluntary and Mandatory
Prepayment.......................................................................22
2.9. Prepayment.......................................................................22
2.10. Funding Costs; Loss of Earnings..................................................23
2.11. Payments.........................................................................23
2.12. Commitment Fee...................................................................23
2.13. Swing Line Loans.................................................................23
2.14. Regulatory Changes in Capital Requirements.......................................25
2.15. Taxes............................................................................26
SECTION THREE - LETTERS OF CREDIT..................................................................28
3.1. (a) Availability of Letters of Credit.......................................28
(b) Evergreen Letters of Credit.............................................28
3.2. Commitment Availability..........................................................29
3.3. Approval and Issuance............................................................29
3.4. Obligations of the Borrowers.....................................................29
3.5. Payment by Banks on Letters of Credit............................................30
3.6. Collateral.......................................................................31
3.7. General Terms of Credits.........................................................31
SECTION FOUR - REPRESENTATIONS AND WARRANTIES......................................................33
4.1. Organization and Good Standing...................................................33
4.2. Power and Authority; Validity of Agreement.......................................33
4.3. No Violation of Laws or Agreements...............................................34
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Page
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<S> <C>
4.4. Material Contracts...............................................................34
4.5. Compliance.......................................................................34
4.6. Litigation.......................................................................34
4.7. Title to Assets..................................................................34
4.8. Partnership Interests............................................................35
4.9. Capital Stock....................................................................35
4.10. Accuracy of Information; Full Disclosure.........................................35
4.11. Taxes and Assessments............................................................36
4.12. Indebtedness.....................................................................36
4.13. Management Agreements............................................................37
4.14. Subsidiaries and Investments.....................................................37
4.15. ERISA............................................................................37
4.16. Fees and Commissions.............................................................38
4.17. No Extension of Credit for Securities............................................38
4.18. Hazardous Wastes, Substances and Petroleum Products..............................38
4.19. Solvency.........................................................................38
4.20. Foreign Assets Control Regulations...............................................39
4.21. Investment Company Act...........................................................39
SECTION FIVE - CONDITIONS..........................................................................39
5.1. First Advance....................................................................39
5.2. Subsequent Advances..............................................................41
5.3. Additional Condition to Banks' Obligations.......................................41
SECTION SIX - AFFIRMATIVE COVENANTS................................................................41
6.1. Existence and Good Standing......................................................41
6.2. Quarterly Financial Statements...................................................41
6.3. Annual Financial Statements......................................................42
6.4. Cash Flow Projections............................................................42
6.5. Public Information...............................................................42
6.6. Books and Records................................................................42
6.7. Properties; Insurance............................................................42
6.8. Notices to Banks.................................................................43
6.9. Taxes............................................................................43
6.10. Costs and Expenses...............................................................43
6.11. Compliance; Notification.........................................................43
6.12. ERISA............................................................................44
6.13. Capitalization Ratio.............................................................44
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
6.14. Fixed Charge Coverage Ratio......................................................45
6.15. Leverage Ratio...................................................................45
6.16. Management Changes...............................................................45
6.17. Subsequent Credit Terms..........................................................45
6.18. Use of Proceeds..................................................................45
6.19. Successor Agent..................................................................45
6.20. Transactions Among Affiliates....................................................46
6.21. Other Information................................................................46
SECTION SEVEN - NEGATIVE COVENANTS.................................................................46
7.1. Indebtedness.....................................................................46
7.2. Guaranties.......................................................................46
7.3. Loans............................................................................47
7.4. Liens and Encumbrances...........................................................47
7.5. Additional Negative Pledge.......................................................47
7.6. Restricted Payments..............................................................47
7.7. Transfer of Assets...............................................................48
7.8. Acquisitions and Investments.....................................................48
7.9. Use of Proceeds..................................................................48
7.10. Amendment of Documents...........................................................48
7.11. Payment of Senior Notes..........................................................49
SECTION EIGHT - RIGHT OF SETOFF....................................................................49
SECTION NINE - DEFAULT.............................................................................49
9.1. Events of Default................................................................49
9.2. Remedies.........................................................................51
SECTION TEN - THE BANKS............................................................................51
10.1. Application of Payments..........................................................51
10.2. Setoff...........................................................................52
10.3. Modifications and Waivers........................................................52
10.4. Obligations Several..............................................................52
10.5. Banks' Representations...........................................................53
10.6. Investigation....................................................................53
10.7. Powers of Agent; Rights and Duties of Documentation Agent........................53
10.8. General Duties of Agent, Immunity and Indemnity..................................53
10.9. No Responsibility for Representations or Validity, etc...........................53
</TABLE>
-iii-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
10.10. Action on Instruction of Banks; Right to Indemnity................................53
10.11. Employment of Agents..............................................................54
10.12. Reliance on Documents.............................................................54
10.13. Agent's Rights as a Bank..........................................................54
10.14. Expenses..........................................................................54
10.15. Resignation of Agent..............................................................54
10.16. Successor Agent...................................................................54
10.17. Collateral Security...............................................................55
10.18. Enforcement by Agent..............................................................55
SECTION ELEVEN - GUARANTY..........................................................................55
11.1. Guaranty.........................................................................55
11.2. Bankruptcy.......................................................................55
11.3. Nature and Term of Guaranty......................................................55
11.4. Rights and Remedies of Agent.....................................................56
11.5. Actions by Agent Not Affecting Guaranty..........................................56
11.6. Payment in Accordance with Promissory Notes and Credit Agreement.................56
11.7. Payments Under Guaranty..........................................................57
11.8. Waivers and Modifications........................................................57
11.9. Waiver...........................................................................57
11.10. Subordination of Rights of Subrogation............................................57
11.11. No Setoff by Guarantors...........................................................58
11.12. Continuing Guaranty; Transfer of Promissory Note..................................58
11.13. Representations and Warranties; Covenants.........................................58
SECTION TWELVE - MISCELLANEOUS.....................................................................58
12.1. Indemnification..................................................................58
12.2. Participations and Assignments...................................................58
12.3. Binding and Governing Law........................................................59
12.4. Survival.........................................................................59
12.5. No Waiver; Delay.................................................................59
12.6. Modification.....................................................................60
12.7. Headings.........................................................................60
12.8. Notices..........................................................................60
12.9. Payment on Non-Business Days.....................................................60
12.10. Time of Day.......................................................................60
12.11. Severability......................................................................60
12.12. Counterparts......................................................................60
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
12.13. Consent to Jurisdiction and Service of Process....................................60
12.14. WAIVER OF JURY TRIAL..............................................................61
12.15. ACKNOWLEDGMENTS...................................................................61
12.16. Complete Agreement................................................................61
</TABLE>
-v-
<PAGE>
LIST OF EXHIBITS
Schedule 1: The Subsidiaries party to this Agreement
Schedule 2: The Lenders, their respective addresses and Maximum Principal
Amounts
Exhibit A: Advance/Credit Request Form
Exhibit B: Form of Promissory Note(s)
Exhibit C: Funding Costs and Loss of Earnings Calculation
Exhibit D: Agent's Letter of Credit Application
Exhibit E: Disclosure Pursuant to Representations and Warranties
Exhibit F: Form of Covenant Compliance Certificate
-vi-
<PAGE>
AMENDED AND RESTATED
CREDIT AGREEMENT
THIS AMENDED AND RESTATED CREDIT AGREEMENT is made this 30th
day of September, 1997, by and among SDI OPERATING PARTNERS, L.P. (the
"Company"), a Delaware limited partnership with offices at 3000 One Logan
Square, Philadelphia, Pennsylvania 19103, and its subsidiaries identified on
Schedule 1 attached hereto on a joint and several basis (the "Subsidiaries")
(the Company and the Subsidiaries, collectively, the "Borrowers"); SDI PARTNERS
I, L.P. ("SDIPI"), a Delaware limited partnership with offices at 501 Silverside
Road, Suite 17, Wilmington, DE 19809, the sole general partner of the Company,
SUNSOURCE INC., a Delaware corporation with offices at 3000 One Logan Square,
Philadelphia, PA 19103, SUNSUB A INC. ("SunSub A") a Delaware corporation with
offices at 3000 One Logan Square, Philadelphia, PA 19103, and SUNSUB B INC.,
("SunSub B") a Delaware corporation with offices at 3000 One Logan Square,
Philadelphia, PA 19103 (SDIPI, SunSource Inc., SUNSUB A and SUNSUB B
collectively, the "Guarantors"); and CORESTATES BANK, N.A., a national banking
association with offices at Broad and Chestnut Streets, Philadelphia,
Pennsylvania 19107, for itself and as administrative agent for the Banks
identified below ("Agent"); THE BANK OF NOVA SCOTIA, a Canadian chartered bank,
with offices at 1 Liberty Plaza, New York, New York 10006 (the "Documentation
Agent"), and the banks identified on Schedule 2 attached hereto (the Agent, the
Documentation Agent and the banks identified on Schedule 2, individually a
"Bank" and collectively the "Banks").
W I T N E S S E T H:
WHEREAS, the Company is a limited partnership, the sole
general partner of which is SDIPI and the sole limited partner of which is
SunSub A Inc.,
WHEREAS, as of the partner vote of September 25, 1997,
effective on September 30, 1997 (the "Effective Time"), the partners of
SunSource L.P., a Delaware limited partnership, agreed to convert said limited
partnership to corporate form in the manner and as set forth in the Securities
and Exchange Commission Form S-4 Registration Statement dated December 31, 1996,
as amended, at the Effective Time, and SunSource L.P. will be known as SunSource
Inc., a Delaware corporation (the "Conversion");
WHEREAS, the Company, SDIPI, the Agent and certain of the
Banks (the "Existing Banks") are parties to that certain Credit Agreement dated
December 22, 1992 (as amended, the "Existing Credit Agreement"), and the Company
issued Ninety-Five Million Dollars ($95,000,000) in privately-placed notes
pursuant to note purchase agreements (the "Existing Note Purchase Agreements");
WHEREAS, the Company has requested, and Agent and the Banks
have agreed, to amend and restate the Existing Credit Agreement to accommodate
the Conversion, to increase the aggregate availability under the Commitment to
Ninety Million Dollars ($90,000,000), which may be increased by an additional
Twenty Million Dollars ($20,000,000) upon the request of
<PAGE>
Borrowers and agreement of the Banks, to add certain Banks as lenders, to amend
the covenants and to revise the Existing Credit Agreement in certain additional
respects, all on the terms and conditions as set forth herein;
WHEREAS, SunSource Inc. is a newly-formed Delaware corporation
beneficially owned by (i) the former public holders of B interests of SunSource
L.P., (ii) Lehman/SDI, Inc., a Delaware corporation, which is an indirect
wholly-owned subsidiary of Lehman Brothers Holdings Inc., a Delaware
corporation, and (iii) the current or former management employees of SunSource
Inc. and the Company;
WHEREAS, SunSub A is the sole limited partner of the Company
and the sole limited partner of SDIPI;
WHEREAS, SunSub B a Guarantor, is a Delaware corporation, a
wholly-owned subsidiary of SunSource Inc., and the sole general partner of
SDIPI;
WHEREAS, the Company is one of the largest wholesale
distributors of industrial products and services in the United States, and it is
organized in three segments: industrial services, hardware merchandising and
glass merchandising;
WHEREAS, the Conversion will include the issuance of: (i)
common stock by SunSource Inc.; and (ii) Trust Preferred Securities and Trust
Common Securities of SunSource Capital Trust (the "Trust"), a Delaware statutory
business trust;
WHEREAS, the assets of the Trust are the Junior Subordinated
Debentures (as defined below) to be issued by SunSource Inc.;
WHEREAS, payments of interest and principal on the Junior
Subordinated Debentures to the Trust will be used to make distributions on the
Trust Preferred Securities and Trust Common Securities in accordance with the
terms set forth in the Declaration of Trust of the Trust and the "Terms of
Common Securities" for the Trust and "Terms of Preferred Securities" for the
Trust;
WHEREAS, in connection with its issuance on the date hereof by
the Company of Sixty Million Dollars ($60,000,000) in privately-placed notes
pursuant to a Note Purchase Agreement dated the date hereof, Borrowers desire to
obtain a NINETY MILLION DOLLAR ($90,000,000) revolving credit facility, which
amount may be increased by up to an additional TWENTY MILLION DOLLARS
($20,000,000) upon the request of Borrowers and agreement of the Banks pursuant
to certain terms and conditions set forth herein, such facility to be used for
general corporate purposes including working capital, the financing of
acquisitions, transaction expenses, payments of up to approximately $14,500,000
to the former holders of the A interests of SunSource L.P. pursuant to the
Conversion; and the repayment of debt, including under the
-2-
<PAGE>
Existing Credit Agreement and under Existing Note Purchase Agreements and make
whole payments thereunder; and
WHEREAS, the Banks are willing to provide a revolving credit
commitment and to participate in the issuance by Agent of letters of credit for
the account of Borrowers in the maximum principal amount of NINETY MILLION
DOLLARS ($90,000,000), which amount may be increased by up to an additional
TWENTY MILLION DOLLARS ($20,000,000) upon the request of the Company and the
agreement of the Banks, subject to the terms and conditions hereof;
NOW THEREFORE, in consideration of the foregoing background
and the promises and the agreements hereinafter set forth, and intending to be
legally bound hereby, the parties hereto agree as follows:
SECTION ONE
DEFINITIONS
1.1. Definitions. When used in this Agreement, the following
terms shall have the respective meanings set forth below. Certain terms relating
to interest rates are defined in Paragraph 2.6 and shall have the respective
meanings set forth therein.
"Accumulated Funding Deficiency" has the meaning ascribed to
that term in Section 302 of ERISA.
"Additional Commitment" shall have the meaning set forth in
Paragraph 2.1(d)(i) hereof.
"Adjusted EBITDAR" means, for any fiscal period of SunSource
Inc. and its Consolidated Subsidiaries, EBITDA plus rent expense (as determined
in accordance with GAAP) minus Capital Expenditures.
"Advance/Credit Request Form" means the certificate in the
form attached hereto as Exhibit A to be delivered by the Company to Agent as a
condition of each Advance and the issuance of each Letter of Credit.
"Advance" means a borrowing under the Commitment pursuant to
Paragraph 2.7 hereof.
"Affiliate" means: (i) any person who or entity which directly
or indirectly owns, controls or holds ten percent (10%) or more of the
outstanding common stock in SunSource Inc.; (ii) any entity of which ten percent
(10%) or more of the outstanding common stock or beneficial interest is directly
or indirectly owned, controlled, or held by SunSource Inc. or an Affiliate;
(iii)
-3-
<PAGE>
any entity which directly or indirectly is under common control with SunSource
Inc.; (iv) any officer, director or partner of SunSource Inc. or any Affiliate;
or (v) any immediate family member of any person who is an Affiliate. For
purposes of this definition, the term "control" means the possession, directly
or indirectly of the power to direct or cause the direction of the management
and policies of an entity, whether through the ownership of voting securities,
by contract, or otherwise.
"Agent" means CoreStates Bank, N.A. in its capacity as
administrative agent for the Banks hereunder, and its successors and assigns in
such capacity.
"Agreement" means this Amended and Restated Credit Agreement
and all exhibits and schedules hereto, as each may be amended, modified or
supplemented from time to time.
"Bank" means individually and "Banks" means, collectively, the
banks identified on Schedule 2 attached hereto as such Schedule may be amended
from time to time, their respective successors and assigns and any additional
banks which become parties to this Agreement after the date hereof in accordance
with Paragraph 12.2 hereof, but shall not include any such Bank which is
replaced pursuant to the terms hereof after the date hereof.
"Banks' Applicable Share" means, as of any date of
determination, with respect to any Net Cash Proceeds which are required or
permitted to be used by Borrowers to reduce the Commitment pursuant to this
Agreement, (i) the portion of such Net Cash Proceeds which bears the same
relationship to the entire amount of such Net Cash Proceeds as the amount of the
Commitment on the date of determination bears to the sum of the outstanding
principal amount of the Senior Notes plus the amount of the Commitment on the
date of determination, plus (ii) such amount of the Net Cash Proceeds which has
been offered to the holders of the Senior Notes pursuant to Paragraph 4.8 of the
Note Purchase Agreement as a prepayment, but as to which such offer has not been
accepted.
"Borrowers" mean, jointly and severally, SDI Operating
Partners, L.P., a Delaware limited partnership and its Subsidiaries as set forth
on Schedule 1 hereto.
"Business Day" means any day not a Saturday, Sunday or a day
or which banks are required or permitted to be closed under the laws of the
Commonwealth of Pennsylvania.
"Capital Expenditures" means, for any period, amounts accrued
or incurred for fixed assets or improvements, replacements, substitutions or
additions thereto, which have a useful life of more than one (1) year, including
direct or indirect acquisition costs of such assets.
"Capital Leases" means capital leases and subleases, as
defined in Statement 13 of the Financial Accounting Standards Board dated
November 1976, as amended and updated from time to time.
-4-
<PAGE>
"Capitalization Ratio" means, as of any date of determination,
the ratio of Funded Debt to Total Capital.
"CERCLA" means the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended by the Superfund Amendment
and Reauthorization Act of 1986, as amended from time to time.
"Change of Control" means if at any time after the date of
this Agreement: (a) SunSource Inc. ceases to own, directly or indirectly, all of
the general and limited partnership interests in the Company and SDIPI; or
(b)(i) any person or group within the meaning of Section 13(d)(3) of the
Securities Exchange Act of 1934, as amended (the "1934 Act") and the rules and
regulations promulgated thereunder shall have beneficial ownership (within the
meaning of Rule 13d-3 of the 1934 Act), directly or indirectly, of securities of
SunSource Inc. (or other securities convertible into such securities)
representing twenty percent (20%) or more of the combined voting power of all
securities of SunSource Inc. entitled to vote in the election of directors,
other than Lehman Affiliates and the management group of Norman V. Edmonson,
Donald T. Marshall, John P. McDonnell, Harold J. Cornelius, Max W. Hillman and
Joseph M. Corvino (hereinafter called a "Controlling Person"); or (ii) a
majority of the Board of Directors of SunSource Inc. shall cease for any reason
to consist of (1) individuals who on the date hereof are serving as directors of
SunSource Inc. or (2) individuals who subsequently become members of the Board
if such individuals' nomination for election or election to the board is
recommended or approved by a majority of the Board of Directors of SunSource
Inc. For purposes of clause (b)(i) above, a person or group shall not be a
Controlling Person if such person or group holds voting power in good faith and
not for the purpose of circumventing Paragraph 9.1(f) as an agent, bank, broker,
nominee, trustee, or holder of revocable proxies given in response to a
solicitation pursuant to the 1934 Act, for one or more beneficial owners who do
not individually, or, if they are a group acting in concert, as a group, have
the voting power specified in clause (b)(i) above.
"Code" means the Internal Revenue Code of 1986, as amended
from time to time and regulations in effect from time to time.
"Commitment" means the sum of (i) the maximum aggregate
principal amount which Banks, on a several basis, have agreed to advance under
Section Two hereof, including the Swing Line Commitment (subject to the
$5,000,000 sublimit set forth therein) and (ii) the available amount under
Letters of Credit issued pursuant to Section Three hereof (subject to the
$20,000,000 sublimit set forth therein) in which Banks have agreed to
participate, such Commitment being in the aggregate Ninety Million Dollars
($90,000,000) on the date hereof subject to increase at the Company's request
and agreement of the Banks pursuant to Paragraph 2.1(d) hereof.
"Conversion" means the conversion of SunSource L.P., a
Delaware limited partnership, to the corporate form of SunSource Inc., a
Delaware corporation as set forth in
-5-
<PAGE>
SunSource Inc.'s Registration Statement on Form S-4, filed with the Securities
and Exchange Commission on December 31, 1996, as amended.
"Default" means an event or circumstance which, with the
giving of notice or the passage of time or both, would constitute an Event of
Default.
"Distributions Paid on Trust Securities" means all amounts
payable by the Trust to the holders of the Trust Preferred Securities and Trust
Common Securities.
"Documentation Agent" shall mean The Bank of Nova Scotia.
"EBITDA" means, for any fiscal period of SunSource Inc. and
its Consolidated Subsidiaries, Net Income plus (i) GP Management Fees, (ii)
Interest Expense (including all interest paid on the Junior Subordinated
Debentures (whether paid in cash or in kind)), (iii) all provisions for income
taxes, (iv) depreciation and amortization expense, and (v) extraordinary losses,
minus extraordinary gains, as each such item is determined in accordance with
GAAP. For purposes of this definition, extraordinary losses shall include the
restructuring charge of Four Million Nine Hundred Thousand Dollars ($4,900,000),
net of deferred income tax benefits and Conversion transaction charges of Two
Million One Hundred Fifty Thousand Dollars ($2,150,000) incurred during 1996,
and Conversion transaction charges (including make whole provisions and other
costs), not to exceed Eight Million Dollars ($8,000,000) to be incurred in 1997.
"Environmental Control Statutes" means any federal, state or
local laws governing control, storage, removal, spill, release or discharge of
Hazardous Substances including without limitation CERCLA, the Solid Waste
Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976
and the Hazardous and Solid Waste Amendments of 1984, the Federal Water
Pollution Control Act, as amended by the Clean Water Act of 1976, the Hazardous
Materials Transportation Act, the Emergency Planning and Community Right to Know
Act of 1986, the National Environmental Policy Act of 1975, the Oil Pollution
Act of 1990, any similar or implementing state law, in each case, including all
amendments thereto and all rules and regulations promulgated thereunder and
permits issued in connection therewith.
"Environmental Material Adverse Effect" means a material
adverse effect on the business, financial condition or prospects of Borrowers,
taken as a whole, greater than or equal to $1,000,000 per single event or
$5,000,000 in the aggregate for all such environmental events as a result of any
condition, circumstance or contingency.
"EPA" means the United States Environmental Protection Agency,
or any successor thereto.
"ERISA Affiliate" means, when used with respect to an Employee
Benefit Plan, ERISA, the PBGC or a provision of the Code pertaining to employee
benefit plans, any Person
-6-
<PAGE>
that is a member of any group of organization within the meaning of Code Section
414(b), (c), (m) or (o) of which any Borrower or Guarantor is a member.
"ERISA" means the Employee Retirement Income Security Act of
1974, all amendments thereto and all rules and regulations in effect at any
time.
"Event of Default" means an event described in Paragraph 9.1
hereof.
"Existing Credit Agreement" means that certain Credit
Agreement among the Company, SDIPI, the Agent and certain of the Banks dated
December 22, 1992, as amended.
"Existing Note Purchase Agreement(s)" means those note
purchase agreements dated December 15, 1992, as amended, issued by the Company
for Ninety-Five Million Dollars ($95,000,000) in privately-placed notes.
"Financial Standby Letter of Credit" means a Letter of Credit
pursuant to which the beneficiary may draw following a default under an
obligation to pay money to the beneficiary.
"Fixed Charges" means, at any date of determination for the
most recently ended Rolling Period of SunSource Inc. and its Consolidated
Subsidiaries, the sum of (i) Interest Expense (including interest paid on the
Junior Subordinated Debentures to the extent paid in cash); (ii) GP Management
Fees; (iii) rent expense; (iv) scheduled maturities paid on Funded Debt
(excluding the Loan); (v) cash dividends paid by SunSource Inc.; and (vi)
Partnership Distributions, all as determined in accordance with GAAP.
"Fixed Charge Coverage Ratio" means, at any date of
determination, the ratio of Adjusted EBITDAR to Fixed Charges for the most
recently ended Rolling Period.
"Funded Debt" means, at any date of determination of SunSource
Inc. and its Consolidated Subsidiaries, the sum of the following in such period,
without duplication: (i) Indebtedness for borrowed money; (ii) Indebtedness
evidenced by notes, debentures or similar instruments; (iii) Capital Leases;
(iv) guarantees of Indebtedness or Capital Leases; and (v) Letters of Credit and
letter of credit reimbursement obligations. For purposes of this definition,
Funded Debt does not include the Junior Subordinated Debentures.
"GAAP" shall mean generally accepted accounting principles,
which shall be (i) applied in accordance with the Statement on Auditing
Standards No. 69 "The Meaning of Present Fairly in Conformity with Generally
Accepted Accounting Principles in the Independent Auditor's Report," (SAS 69) or
superseding pronouncements, issued by the Auditing Standards Board of the
American Institute of Certified Public Accountants and (ii) in the form and
content of any requirements for financial statements filed with the Securities
and Exchange Commission, in all cases applied on a consistent basis. The
requirement that such principles be applied on a
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consistent basis shall mean that the accounting principles observed in a current
period are comparable in all material respects to those applied in a preceding
period except such changes in accounting principles approved by the Guarantor's
outside auditors.
"GP Management Fees" shall mean management fees due SDIPI from
the Company which arose or accrued prior to the Conversion notwithstanding that
any such amount may not be due or payable until after the Conversion.
"Guarantors" means collectively SunSource Inc., a Delaware
corporation, SDIPI, SunSub A and SunSub B.
"Hazardous Substance" means petroleum products and items
defined in the Environmental Control Statutes as "hazardous substances",
"hazardous wastes", "pollutants" or "contaminants" and any other toxic,
reactive, corrosive, carcinogenic, flammable or hazardous substance or other
pollutants.
"Indebtedness" of any person means and includes all
obligations of such person which, in accordance with GAAP, shall be classified
on a balance sheet of such person as liabilities of such person and in any event
shall include all (i) obligations of such person for borrowed money or which
have been incurred in connection with acquisition of property or assets, (ii)
obligations secured by any lien upon property or assets owned by such person,
notwithstanding that such person has not assumed or become liable for the
payment of such obligations, (iii) obligations created or arising under any
conditional sale or other title retention agreement with respect to property
acquired by such person, notwithstanding the fact that the rights and remedies
of the seller, lender or lessor under such agreement in the event of default are
limited to repossession or sale of property, (iv) Capital Leases, (v) guarantees
and (vi) letters of credit and letter of credit reimbursement obligations.
"Interest Expense" means for any fiscal period, the interest
expense of SunSource Inc. and its Consolidated Subsidiaries, as determined in
accordance with GAAP for such period.
"Indenture" means the Indenture dated as of September 5, 1997
between SunSource Inc. and Bank of New York, as trustee, providing for the
issuance of the Junior Subordinated Debentures.
"Junior Subordinated Debentures" means the unsecured
subordinated obligations of SunSource Inc. which will be deposited in the Trust
as trust assets upon the Conversion and the terms of which are included in the
Indenture.
"Letters of Credit" means each Performance Standby Letter of
Credit and each Financial Standby Letter of Credit, issued pursuant to Section
Three of this Agreement by the Agent and in which the Banks shall participate,
with such terms as may be agreed by Borrowers, the applicable beneficiary and
Agent at the time of issuance thereof.
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"Lehman Affiliates" means Lehman Brothers Capital Partners I,
L.P., LBI Group, Inc., Lehman Ltd. I Inc., Lehman/SDI, Inc. and Lehman Brothers
Holdings Inc.
"Leverage Ratio" means as of any date of determination of
SunSource Inc. and its Consolidated Subsidiaries the ratio of Funded Debt as of
such date to EBITDA for the most recently ended Rolling Period.
"Loan" or "Loans" means the outstanding principal balance of
Indebtedness for Advances, plus the outstanding principal balance of
Indebtedness for Advances on Swing Line Loans under Paragraph 2.13 of this
Agreement, plus the unreimbursed amount of any draws on Letters of Credit, in
each case, together with interest accrued thereon and fees and expenses incurred
in connection therewith.
"Local Authorities" means individually and collectively the
state and local governmental authorities and administrative agencies which
govern the commercial or industrial facilities or businesses owned or operated
by Borrowers.
"Material Adverse Change" means a material adverse change in
the business, financial condition or prospects of Borrowers taken as a whole as
a result of any condition, circumstance or contingency, either singly or in the
aggregate.
"Material Adverse Effect" means a material adverse effect on
the business, financial condition or prospects of Borrowers taken as a whole as
a result of any condition, circumstance or contingency, either singly or in the
aggregate.
"Maximum Principal Amount" means the maximum principal amount
of the Commitment which each Bank has agreed to lend or to participate in the
issuance of Letters of Credit as set forth on Schedule 2 attached hereto.
"Net Cash Proceeds" of (A) any sale of assets shall mean the
cash proceeds received by the seller in such a transaction less (i) the
reasonable costs of the transaction, (ii) indebtedness secured by any lien on
such assets which is paid from such proceeds and (iii) any tax payment required
to be made as a result of the gain (if any) on such sale; and (B) any other
prepayment of the Loan and Senior Notes shall mean the total amount of such
payment to the Banks and the holder of the Senior Notes.
"Net Income" means, for any period, SunSource Inc. and its
Consolidated Subsidiaries' gross revenue for such period (excluding
extraordinary gains and losses) less all expenses and other proper charges
(including taxes on income), in each case as determined in accordance with GAAP.
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"Net Worth" means, as of any date of determination, Total
Assets minus Total Liabilities in SunSource Inc. and its Consolidated
Subsidiaries, as stated on the financial statements most recently delivered to
Banks pursuant to Paragraphs 5.1(e)(i), 6.2, and 6.3 hereof, as applicable.
"Note Purchase Agreement" means the Note Purchase Agreement
dated as of the date hereof between the Company and Teachers Insurance and
Annuity Association of America providing for the issuance of the Senior Notes,
as amended, modified or supplemented from time to time pursuant to the terms
thereof and hereof.
"Partnership Agreement" means individually, as noted, and
"Partnership Agreements" means collectively the Amended and Restated Agreement
of Limited Partnership of the Company dated February 1, 1987, and the Amended
and Restated Agreement of Limited Partnership of SDIPI dated February 5, 1987,
as each may be amended to date and from time to time hereafter in accordance
with its terms and the provisions hereof.
"Partnership Distributions" means amounts payable by the
Company to SunSource Inc. and SDIPI pursuant to Section 5.02 of the Company's
Partnership Agreement, to fund Tax Distributions, including without limitation
those which arose or accrued prior to the Conversion notwithstanding that any
such amounts may not be due or payable until after the Conversion.
"PBGC" means the Pension Benefit Guaranty Corporation, or any
successor thereto.
"Performance Standby Letter of Credit" means a Letter of
Credit pursuant to which the beneficiary may draw following a default by
Borrowers under an obligation, other than an obligation to pay money, owed to
the beneficiary.
"Permitted Investments" means (i) investments in commercial
paper maturing in 180 days or less from the date of issuance which is rated Al
or better by Standard & Poor's Corporation or Pl or better by Moody's Investors
Services, Inc.; (ii) investments in direct obligations of the United States of
America or obligations of any agency thereof which are guaranteed by the United
States of America, provided that such obligations mature within twelve (12)
months of the date of acquisition thereof; (iii) investments in certificates of
deposit maturing within one (1) year from the date of acquisition thereof issued
by a bank or trust company organized under the laws of the United States or any
state thereof, having capital, surplus and undivided profits aggregating at
least $1,000,000,000 and the long-term deposits of which are rated Al or better
by Moody's Investors Services, Inc. or equivalent by Standard & Poor's
Corporation; (iv) money market funds invested in vehicles of the types set forth
in subsections (i) through (iii); and (v) other investments not to exceed
$500,000 in the aggregate made from the date hereof to the Termination Date.
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"Plan" means any pension benefit or welfare benefit plan as
defined in section 3(1), (2) or (3) of ERISA covering employees of Borrowers or
any ERISA Affiliate.
"Pro Rata Share" means as to a Bank the ratio which the
outstanding principal balance of its portion of the Loan hereunder bears to the
aggregate outstanding principal balance of the Loan at any time; or if no
indebtedness is outstanding hereunder, its percentage share of the Commitment.
"Promissory Notes" means collectively the Promissory Notes in
the form of Exhibit B attached hereto to be delivered by Borrowers to Banks
pursuant to Paragraph 5.1(a) hereof, as the same may be amended or modified or
extended or restated from time to time.
"Required Banks" means those Banks (which may include Agent)
holding sixty-six and two-thirds percent (66-2/3%) or more of the amount of the
Commitment or, if indebtedness is outstanding hereunder, sixty-six and
two-thirds percent (66-2/3%) or more of the Loan.
"Restricted Payments" means (i) any dividend or distribution
on, or the purchase, redemption, prepayment or other retirement of the common
securities of SunSource Inc.; (ii) the payment of principal or interest on or
the purchase, redemption, prepayment or other retirement of the Junior
Subordinated Debentures; and (iii) Tax Distributions.
"Rolling Period" means, as of any date, the most recent four
(4) consecutive fiscal quarters of SunSource Inc. and its Consolidated
Subsidiaries completed on or before such date.
"Sale of Material Assets" means any sale, transfer or other
disposition of Borrowers' assets in transactions in which the total
consideration paid or payable to Borrowers (including without limitation all
cash, liabilities assumed and the fair market value of any stock provided in
such transaction) is, in the aggregate, as to all such transactions after the
date of this Agreement, greater than Fifteen Million Dollars ($15,000,000).
"Senior Notes" means the Company's 7.66% Senior Notes due 2002
issued in an original aggregate principal amount of Sixty Million Dollars
($60,000,000) pursuant to the Note Purchase Agreement.
"Subsidiary" or "Subsidiaries" means any corporation of which
the Company, directly or indirectly, owns more than fifty percent (50%) of any
class or classes of securities. The Subsidiaries of the Company on the date
hereof are set forth on Schedule 1 attached hereto.
The Subsidiaries, collectively with the Company, are the Borrowers.
"SunSource Inc. and its Consolidated Subsidiaries" means
SunSource Inc. and its consolidated subsidiaries as defined in accordance with
GAAP.
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"Swing Line Commitment" means the obligation of the Agent to
make the Swing Line Loan pursuant to Paragraph 2.13 hereof in the aggregate
principal amount of Five Million Dollars ($5,000,000).
"Swing Line Loan" means an Advance under the Swing Line
Commitment made by the Agent on behalf of the Banks pursuant to Paragraph 2.13
hereof.
"Tax Distributions" shall mean those distributions which are
payable to the former B interest holders in SunSource L.P. pursuant to the
Company's Partnership Agreement, including any payments which are due and
payable after the Conversion.
"Termination Date" means the earlier of (i) September 30, 2002
or (ii) the date on which the Commitment is terminated pursuant to Paragraphs
2.8 and 9.2 hereof.
"Total Assets" means, as of any date of determination, all
assets of SunSource Inc. and its Consolidated Subsidiaries, as set forth on
SunSource Inc.'s financial statements most recently delivered to Banks pursuant
to Paragraphs 5.1, 6.2 and 6.3 hereof, as defined in accordance with GAAP.
"Total Capital" means, at any date of determination of
SunSource Inc. and its Consolidated Subsidiaries, the sum of the following: (i)
Funded Debt; (ii) the outstanding principal amount of Junior Subordinated
Debentures; and (iii) Net Worth.
"Total Liabilities" means, as of any date of determination,
all liabilities and deferred items of SunSource Inc. and its Consolidated
Subsidiaries, as set forth on SunSource Inc.'s financial statements most
recently delivered to Banks pursuant to Paragraphs 5.1, 6.2 and 6.3 hereof, as
defined in accordance with GAAP.
"Trade Notes" means Indebtedness of the Company secured by the
Company's inventory of glass and window products pursuant to financing plans in
the normal course of business for value received.
"Trust" shall mean SunSource Capital Trust, a Delaware
statutory business trust, which is the issuer of the Trust Preferred Securities
to the former holders of the A interests in SunSource L.P. and the Trust Common
Securities to SunSource Inc.
"Trust Preferred Securities" means the preferred securities
issued by the Trust pursuant to the Conversion.
"Trust Common Securities" means the common securities issued
by the Trust pursuant to the Conversion.
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1.2. Rules of Construction.
(a) GAAP. Except as otherwise provided herein,
financial and accounting terms used in the foregoing definitions or elsewhere in
this Agreement shall be defined in accordance with GAAP. If Borrowers or
Required Banks determine that a change in GAAP from that in effect on the date
hereof has altered the treatment of certain financial data to their detriment
under this Agreement, such party may, by written notice to the other within
thirty (30) days after the effective date of such change in GAAP, request
renegotiation and the parties agree to negotiate in good faith to modify such
financial covenants affected by such change to reflect equitably such change. If
Borrowers and Required Banks have not agreed on revised covenants within thirty
(30) days after the delivery of such notice, then, for purposes of this
Agreement, GAAP will mean generally accepted accounting principles on the date
just prior to the date on which the change occurred that gave rise to the
notice.
(b) Use of Term "Consolidated". Any term defined in
Paragraph 1.1 hereof, when modified by the word "Consolidated," shall have the
meaning given to such term herein as to SunSource Inc. on a consolidated basis
with its Subsidiaries and all other entities whose accounts, financial results
or position, for either federal income tax or financial accounting purposes, are
consolidated with those of SunSource Inc. in accordance with GAAP.
SECTION TWO
REVOLVING CREDIT LOAN
2.1. (a) The Facility. From time to time prior to the
Termination Date, subject to the provisions below, each Bank on a several basis
up to its Maximum Principal Amount shall make Advances to Borrowers on a joint
and several basis and Borrowers may repay and reborrow under the Commitment an
aggregate principal amount not to exceed at any time outstanding the aggregate
Commitment as from time to time in effect less (i) outstanding Advances, (ii)
the amount of any Swing Line advances outstanding under Paragraph 2.13 hereof;
and (iii) the aggregate amount of all amounts available under and unreimbursed
draws with respect to Letters of Credit.
(b) Amendment and Restatement. This Agreement amends
and restates, replaces and supersedes the Existing Credit Agreement; provided,
however, that the execution and delivery of this Agreement shall not in any
circumstance be deemed to have terminated, extinguished, or discharged the
Company's Indebtedness under the Existing Credit Agreement, all of which
Indebtedness and the guaranties therefor shall continue under and be governed by
this Agreement and the other Loan Documents. This Agreement IS NOT A NOVATION.
(c) Authority of the Company. Each of the Borrowers
hereby irrevocably authorizes and requests that SunSource Inc. execute all
Advance/Credit Request
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Forms, make all elections as to interest rates and take any other actions
required or permitted of Borrowers hereunder, on its respective behalf, in each
case with the same force and effect as if such Borrower had executed such
Advance/Credit Request Form, made such election or taken such other action
itself.
(d) Optional Increase of Commitment.
(i) For a period of up to one hundred twenty
(120) days after the date of this Agreement, and in the absence of a Default or
Event of Default hereunder, Borrowers shall have the right to request that the
Commitment be increased by up to Twenty Million Dollars ($20,000,000) (the
"Additional Commitment"). Borrowers shall request such Additional Commitment
from Agent in writing thirty (30) days before the requested date of such
increase. Agent shall first offer such Additional Commitment to the Banks on the
basis of their respective Pro Rata Shares. Banks shall respond to Agent's offer
within five (5) Business Days. Any amount of the Additional Commitment not
agreed to be loaned by Banks shall then be offered to those Banks which have
agreed to increase their respective Commitments on a pro rata basis. Such Banks
shall respond to Agent's offer within five (5) Business Days. Any portion of the
Additional Commitment not agreed to be loaned by such Banks may then be offered
to other banks not party to this Agreement on such terms and conditions as
Borrowers and Agent may agree.
(ii) Banks shall have no obligation to agree to
increase their Pro Rata Share of the Commitment. Banks hereby acknowledge that
the Commitment may be increased by the Additional Commitment, and that no
approval of any Bank is required for such increase. Appropriate amendment
documentation, amended promissory notes, resolutions, certificates and opinions
will be executed to make available the Additional Commitment.
2.2. Promissory Notes. The Indebtedness of Borrowers to each
Bank under the Loan will be evidenced by a Promissory Note executed by Borrowers
in favor of such Bank in the form of Exhibit B hereto. The original principal
amount of each Bank's Promissory Note will be the amount identified in Schedule
2 attached hereto as its respective Maximum Principal Amount; provided, however,
that notwithstanding the face amount of each such Promissory Note, Borrowers'
liability under each such Promissory Note shall be limited at all times to its
actual indebtedness, principal, interest and fees, then outstanding hereunder.
2.3. Banks' Participation. Banks shall participate in the Loan
in the Maximum Principal Amounts and percentages set forth in Schedule 2
attached hereto.
2.4. Use of Proceeds. Funds advanced under the Loan shall be
used by the Borrowers solely for general corporate purposes, including working
capital, acquisition financing, transaction expenses, payments of up to
$14,500,000 to the former holders of the A interests in SunSource L.P. pursuant
to the Conversion, and repayment of certain Indebtedness,
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including Indebtedness under the Existing Credit Agreement and Existing Note
Purchase Agreements and make whole payments under the Existing Note Purchase
Agreements.
2.5. Repayment. The aggregate outstanding principal balance
under the Loan on the Termination Date shall be due and payable in full on the
Termination Date, subject to earlier payments required pursuant to Paragraph
2.8(c) and (d) hereof in connection with reductions of the amount of the
Commitment (including voluntary reductions, reductions by Banks following an
Event of Default and reductions required in connection with certain sales of
assets). Notwithstanding the immediately preceding sentence, the aggregate
outstanding balance of the Promissory Notes shall be due and payable on the date
of Banks' notice to Borrowers of the occurrence of an Event of Default,
termination of the Commitment and acceleration of the Loan.
2.6. Interest. Portions of the Loan shall bear interest on the
outstanding principal amount thereof in accordance with the following
provisions:
Definitions. As used in this Paragraph 2.6, the following
words and terms shall have the meanings specified below:
"Adjusted Libor Rate" shall mean, for any Interest Period, as
applied to a Portion, the rate per annum (rounded upwards, if necessary to the
next 1/100 of 1%) determined pursuant to the following formula:
Adjusted Libor Rate = Libor Rate
----------------------
1 - Reserve Percentage
For purposes hereof, "Libor Rate" shall mean, as applied to a Portion, the rate
which appears on the Telerate page 3750 at approximately 9:00 a.m. Philadelphia
time two (2) London Business Days prior to the commencement of such Interest
Period for the offering to leading banks in the London Interbank Market of
deposits in United States Dollars or alternate currency ("Eurodollars") or, if
such rate does not appear on the Telerate page 3750, the rate which appears (or,
if two or more such rates appear, the average rounded up to the nearest 1/100 of
1% of the rates which appear) on the Reuters Screen LIBO Page as of 11:00 a.m.
London time two (2) London Business Days prior to the commencement of the
Interest Period in amounts substantially equal to such Portion as to which
Borrowers may elect the Adjusted Libor Rate to be applicable with a maturity of
comparable duration to the Interest Period selected by Borrowers.
"Applicable Margin" shall mean, with respect to each Portion
bearing interest at the Adjusted Libor Rate, the percentage per annum set forth
in the appropriate column below that corresponds to the Leverage Ratio;
provided, however, that Borrowers shall be deemed to be in Level I as of the
date of this Agreement, and shall not be eligible for Levels II and III until
Agent shall have received SunSource Inc.'s and its Consolidated Subsidiaries'
financial statements for the period ended December 31, 1997 to be delivered
pursuant to Paragraph 6.2 hereof.
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Level Leverage Ratio Applicable Margin
- ----- -------------- -----------------
I less than 3.25 to 1 1.50%
but greater than
or equal to 2.75 to 1
II less than 2.75 to 1 1.25%
but greater than
or equal to 2.25 to 1
III less than 2.25 to 1 1.00%
The Applicable Margin shall adjust automatically, as
appropriate, on the day following delivery of a quarterly Compliance Certificate
in accordance with Paragraph 6.2 or 6.3 hereof, provided, that in the event that
a quarterly compliance certificate has not been delivered within ten (10) days
after the date required by Paragraph 6.2 or 6.3, then the Applicable Margin
shall adjust to Level I as of the latest date of required delivery; provided,
further, however, that the Applicable Margin shall readjust retroactively to the
date such certificate was required to be delivered by Paragraph 6.2 or 6.3 if
the Applicable Margin shall increase based on such Compliance Certificate and
shall readjust on the day after delivery of such delinquent Compliance
Certificate if the Applicable Margin shall decrease or remain the same based on
the ratio set forth in such Compliance Certificate.
"Base Rate" shall mean the highest of (i) the Federal Funds
Rate plus one half of one percent (1/2%) per annum, or (ii) the Prime Rate.
"Federal Funds Rate" means for any day the effective rate of
interest for such day, as announced from time to time by the Board of Governors
of the Federal Reserve System as shown in publication H.15 as the "Federal Funds
Rate."
"Interest Period" means a period of one (l), two (2), three
(3) or six (6) months' duration, as Borrowers may elect, during which the
Adjusted Libor Rate is applicable; provided, however, that (a) interest shall
accrue from and including the first day of each Interest Period to, but
excluding, the day on which any Interest Period expires; (b) any Interest Period
which would otherwise end on a day which is not a London Business Day shall be
extended to the next succeeding London Business Day unless such London Business
Day falls in another calendar month, in which case such Interest Period shall
end on the next preceding London Business Day; and (c) with respect to an
Interest Period which begins on the last London Business Day of a calendar month
(or on a day for which there is no numerically corresponding day in the calendar
month at the end of such Interest Period), the Interest Period shall end on the
last London Business Day of a calendar month.
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"London Business Day" shall mean any Business Day on which
banks in London, England are open for business.
"Portion" shall mean a portion of a Loan as to which Borrowers
have elected a specific interest rate and, in the case of a Portion bearing
interest at a rate based upon the Adjusted Libor Rate, an Interest Period.
"Prime Rate" shall mean the rate of interest announced by
Agent from time to time as its prime rate.
"Regulation D" shall mean Regulation D of the Board of
Governors of the Federal Reserve System, comprising Part 204 of Title 12, Code
of Federal Regulations, as amended and as may be amended from time to time, and
any successor thereto.
"Reserve" shall mean, for any day, that reserve (expressed as
a decimal) which is in effect (whether or not actually incurred) with respect to
a Bank on such day, as prescribed by the Board of Governors of the Federal
Reserve System (or any successor or any other banking authority to which a Bank
is subject including any board or governmental or administrative agency of the
United States or any other jurisdiction to which a Bank is subject), for
determining the maximum reserve requirement (including without limitation any
basic, supplemental, marginal or emergency reserves) for Eurocurrency
liabilities as defined in Regulation D.
"Reserve Percentage" shall mean, for a Bank on any day, that
percentage (expressed as a decimal) prescribed by the Board of Governors of the
Federal Reserve System (or any successor or any other banking authority to which
a Bank is subject, including any board or governmental or administrative agency
of the United States or any other jurisdiction to which a Bank is subject), for
determining the reserve requirement (including without limitation any basic,
supplemental, marginal or emergency reserves) for deposits of United States
Dollars in a nonUnited States or an international banking office of a Bank used
to fund a Portion bearing interest based on the Adjusted Libor Rate or any loan
made with the proceeds of such deposit. The Adjusted Libor Rate shall be
adjusted on and as of the effective day of any change in the Reserve Percentage.
(a) Interest on Loan.
(i) At the Company's election in accordance with
the provisions of Paragraph 2.6(c) below, in the absence of an Event of Default
or Default hereunder, and prior to maturity, any Portion of the Loan shall bear
interest at any one of the following rates:
(A) Base Rate. The Base
Rate, such rate to change when and
as the Base Rate changes.
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(B) Adjusted Libor-Based
Rate. The Adjusted Libor Rate plus
the Applicable Margin.
(ii) Notwithstanding the foregoing, upon the
occurrence and during the continuance of an Event of Default or Default
hereunder, including after maturity and before and after judgment, Borrowers
hereby agree to pay to Banks interest on the outstanding principal balance of
the Loan at the rate of two percent (2%) per annum in excess of the rates then
available to and elected by the Company for each Portion then outstanding, and
with respect to Portions bearing interest based on the Adjusted Libor Rate, at
the end of the applicable Interest Periods and thereafter, such Portions shall
bear interest at the rate of two percent (2%) per annum in excess of the Base
Rate, such rate to change when and as the Base Rate changes.
(b) Procedure for Determining Interest Periods and
Rates of Interest.
(i) If the Company elects the Base Rate to be
applicable to a Portion, the Company must notify Agent of such election prior to
one o'clock (1:00) p.m. Philadelphia time one (1) Business Day prior to the date
of the proposed application of such rate. If the Company elects the Adjusted
Libor Rate to be applicable to a Portion, the Company must notify Agent of (A)
such election and (B) the Interest Period selected prior to one o'clock (1:00)
p.m. Philadelphia time at least three (3) London Business Days prior to such
Advance or the commencement of the proposed Interest Period. If Company does not
provide the applicable notice for the Adjusted Libor Rate, then the Borrowers
shall be deemed to have requested that the Base Rate apply to any Portion as to
which the Interest Period is expiring and to any new Advance of the Loan until
Borrowers shall have given proper notice of a change in or determination of the
rate of interest in accordance with this Paragraph 2.6(b).
(ii) Borrowers shall not elect more than five (5)
different Portions (other than Portions bearing interest at the Base Rate) to be
applicable to the Loan at one time.
(c) Payment and Calculation of Interest. Interest
shall be due and payable on the last day of each Interest Period for each
Portion bearing interest based on the Adjusted Libor Rate; provided, however,
that with respect to Portions which bear interest at the Adjusted Libor Rate
having Interest Periods in excess of three (3) months, the Borrowers shall pay
interest on the ninetieth (90th) day of the Interest Period and on the last day
of the Interest Period. With respect to Portions which bear interest at the Base
Rate, the Borrowers shall pay interest on the last Business Day of each month
commencing on the first such date after the first Advance which bears interest
at the Base Rate. Interest shall be calculated in accordance with the provisions
of Paragraph 2.6(b) hereof; interest based on the Base Rate shall be calculated
on the basis of the actual number of days elapsed over a year of three hundred
sixty-five (365) or three hundred sixty-six (366) days, as the case may be, and
interest based on the Adjusted Libor Rate shall be calculated on the basis of
the actual number of days elapsed over a year of three hundred sixty (360) days.
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(d) Reserves. If at any time when a Portion is
subject to the Adjusted Libor Rate, and a Bank is subject to and incurs a
Reserve, Borrowers hereby agree to pay within five (5) Business Days of demand
thereof from time to time, as billed by Agent on behalf of itself or a Bank,
such additional amount as is necessary to reimburse such Bank for its costs in
maintaining such Reserve to the extent such costs are not reflected in the
Reserve Percentage used to determine the Adjusted Libor Rate. Such amount shall
be computed by taking into account the cost incurred by the Bank in maintaining
such Reserve in an amount equal to such Bank's ratable share of the Portion on
which such Reserve is incurred. The determination by Agent on behalf of any Bank
of such costs incurred and the allocation, if any, of such costs among Borrowers
and other customers which have similar arrangements with such Bank shall be
prima facie evidence of the correctness of the fact and the amount of such
additional costs. Upon notification to Borrowers of any payment required
pursuant to this Paragraph 2.6(d), Borrowers may, subject to the payment of all
amounts due under this provision as of such date and the provisions of Paragraph
2.10, repay the Portion with respect to which such payment is required.
(e) Special Provisions Applicable to Adjusted Libor
Rate. The following special provisions shall apply to the Adjusted Libor Rate:
(i) Change of Adjusted Libor Rate. The Adjusted
Libor Rate may be automatically adjusted by Agent on a prospective basis to take
into account the additional or increased cost of maintaining any necessary
reserves for Eurodollar deposits or increased costs due to changes in applicable
law or regulation or the interpretation thereof occurring subsequent to the
commencement of the then applicable Interest Period, including but not limited
to changes in tax laws (except changes of general applicability in corporate
income tax laws) and changes in the reserve requirements imposed by the Board of
Governors of the Federal Reserve System (or any successor), excluding the
Reserve Percentage, and any Reserve which has resulted in a payment pursuant to
Paragraph 2.6(d), that increase the cost to Banks of funding the Loan or a
Portion thereof bearing interest at the Adjusted Libor Rate. Agent shall give
the Borrowers notice of such a determination and adjustment, which determination
shall be prima facie evidence of the correctness of the fact and the amount of
such adjustment. Borrowers may, by notice to Agent, (A) request Agent to furnish
to Borrowers a statement setting forth the basis for adjusting such Adjusted
Libor Rate and the method for determining the amount of such adjustment; and/or
(B) repay the Portion of the Loan with respect to which such adjustment is made,
subject to the requirements of Paragraph 2.10 hereof.
(ii) Unavailability of Eurodollar Funds. In the
event that Borrowers shall have requested the rate based on the Adjusted Libor
Rate in accordance with Paragraph 2.6(c) hereof and any Bank shall have
reasonably determined that Eurodollar deposits equal to the amount of the
principal of the Portion and for the Interest Period specified are unavailable,
or that the rate based on the Adjusted Libor Rate will not adequately and fairly
reflect the cost of making or maintaining the principal amount of the Portion
specified by the Borrowers during the Interest Period specified or that by
reason of circumstances affecting
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Eurodollar markets, adequate and reasonable means do not exist for ascertaining
the Adjusted Libor Rate applicable to the specified Interest Period, Agent shall
promptly give notice of such determination to the Borrowers that the rate based
on the Adjusted Libor Rate is not available. A determination by such Bank
hereunder shall be prima facie evidence of the correctness of the fact and
amount of such additional costs or unavailability. Upon such a determination,
the Banks' obligation to advance or maintain Portions at the Adjusted Libor Rate
shall be suspended until Agent shall have notified the Borrowers and Banks that
such conditions shall have ceased to exist, and the Base Rate shall be
applicable to all Portions.
(iii) Illegality. In the event that it becomes
unlawful for a Bank to maintain Eurodollar liabilities sufficient to fund any
Portion of the Loan bearing interest at the rate based on the Adjusted Libor
Rate, then such Bank shall immediately notify the Borrowers thereof (with a copy
to Agent) and such Bank's obligations hereunder to make or maintain Advances
bearing interest based on the Adjusted Libor Rate shall be suspended until such
time as such Bank may again cause the rate based on the Adjusted Libor Rate to
be applicable to its share of any Portion of the outstanding principal balance
of the Loan and such Bank's share of any Portion shall then be subject to the
Base Rate.
2.7. Advances.
(a) At the time the Company provides the requisite
notices set forth in Paragraph 2.6(b) hereof relating to the election of
interest rates, the Company shall give Agent written notice of each requested
Advance under the Commitment, specifying the date, amount and purpose thereof.
The Company shall give Agent three (3) London Business Days notice of an Advance
for an Adjusted Libor Rate Loan, one (1) Business Day notice of an Advance for a
Base Rate Loan, and same day notice of an Advance for a Swing Line Loan. Such
notices shall be in the form of the Advance/Credit Request Form attached hereto
as Exhibit A, shall be certified by the chief financial officer or controller of
SunSource Inc. and shall contain the following information and representations,
which shall be deemed affirmed and true and correct as of the date of the
requested Advance:
(i) the aggregate amount of the requested
Advance, which for Base Rate Loans and Adjusted Libor Rate Loans shall be in
multiples of $100,000 but not less than the lesser of $2,000,000 or the
unborrowed balance of the Commitment;
(ii) confirmation of the interest rate(s) the
Borrowers have elected to apply to the above Advance and, if more than one
interest rate has been elected, the amount of the Portion as to which each
interest rate shall apply;
(iii) confirmation of Borrowers' compliance with
Paragraphs 6.13 through 6.15 and Section Seven hereof after giving effect to
such Advance of the Loan;
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(iv) statements that the representations and
warranties set forth in Section Four hereof are true and correct in all material
respects as of the date thereof; no Event of Default or Default has occurred and
is then continuing; and there has been no Material Adverse Change since the date
of the quarterly and audited annual financial statements most recently delivered
by Borrowers to Banks pursuant to Paragraphs 5.1(e), 6.2 and 6.3 of this
Agreement; and
(b) (i) Upon receiving a request for an Advance in
accordance with subparagraph (a) above, Agent shall request by written notice to
Banks that each Bank advance funds to Agent so that each Bank participates in
the requested Advance in the same percentage as it participates in the
Commitment. Each Bank shall advance its applicable percentage of the requested
Advance to Agent by delivering federal funds immediately available at Agent's
offices prior to twelve o'clock (12:00) noon Philadelphia time on the date of
the Advance. Subject to the satisfaction of the terms and conditions hereof,
Agent shall make the requested Advance available to the Borrowers by crediting
such amount to the Company's or applicable Borrowers' deposit account with Agent
not later than two o'clock (2:00) p.m. Philadelphia time on the day of the
requested Advance; provided, however, that in the event Agent does not receive a
Bank's share of the requested Advance by such time as provided above, Agent
shall not be obligated to advance such Bank's share.
(ii) Unless Agent shall have been notified by a
Bank prior to the date such Bank's share of any such Advance is to be made by
such Bank that such Bank does not intend to make its share of such requested
Advance available to Agent, Agent may assume that such Bank has made such
proceeds available to Agent on such date, and Agent may, in reliance upon such
assumption (but shall not be obligated to), make available to the Borrowers a
corresponding amount. If such corresponding amount is not in fact made available
to Agent by such Bank on the date the Advance is made, Agent shall be entitled
to recover such amount on demand from such Bank together with interest thereon
in respect of each day during the period commencing on the date such amount was
made available to the Borrowers and ending on (but excluding) the date Agent
recovers such amount, at a rate per annum, equal to the effective rate for
overnight federal funds in New York as reported by the Federal Reserve Bank of
New York for such day (or, if such day is not a Business Day, for the next
preceding Business Day). If such Bank fails to pay such amount to Agent upon
demand, Agent may demand repayment thereof from Borrowers, together with
interest accrued thereon at the rate per annum applicable to the Advance which
such Bank failed to fund.
(c) Each request for an advance pursuant to this
Paragraph 2.7 shall be irrevocable and binding on the Borrowers. In the case of
any requested Advance which is to be based upon the Adjusted Libor Rate, the
Borrowers shall indemnify each Bank against any loss, cost or expense incurred
by such Bank as a result of any failure to fulfill on or before the date of the
requested Advance the applicable conditions thereto set forth in Section Five
hereof, including, without limitation, any loss (including loss of anticipated
profits), cost or expense incurred by reason of the liquidation or redeployment
of deposits or other funds acquired by such
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Bank to fund the requested Advance when such Advance, as a result of such
failure, is not made on such date, as calculated by Agent in accordance with
Exhibit C attached hereto.
2.8. Reduction and Termination of Commitment; Voluntary and
Mandatory Prepayment.
(a) Voluntary. Borrowers shall have the right at any
time and from time to time, upon three (3) Business Days prior written notice to
Agent, to reduce the Commitment in whole or in part to be shared among the Banks
based on each Bank's respective Pro Rata Share in increments of Five Million
Dollars ($5,000,000) without penalty or premium.
(b) Default. Pursuant to Paragraph 9.2 hereof, upon
the occurrence of any Event of Default hereunder Required Banks shall have the
right to terminate the Commitment at any time, in their discretion and upon
notice to Borrowers (and the Commitment shall terminate automatically without
notice if an Event of Default described in Paragraph 9.1(h) shall occur).
(c) Mandatory Prepayments; Sale of Assets. In
connection with any Sale of Material Assets, the Commitment shall be
automatically and permanently reduced by the Banks' Applicable Share of the
amount by which the Net Cash Proceeds thereof exceed the amounts permitted to be
sold pursuant to Paragraph 7.7 hereof; provided that in connection with any
amounts due under this provision, the holder of the Senior Notes is
simultaneously offered a prepayment so that the amount paid to the Banks equals
the Banks' Applicable Share of the Net Cash Proceeds required to be paid as set
forth above.
(d) Payments. On the effective date of each reduction
permitted or required by clauses (a) and (c) of this Paragraph 2.8, Borrowers
shall make a payment of the Loan in an amount, if any, by which the aggregate
outstanding principal balance of the Loan plus the undrawn amount of all Letters
of Credit exceeds the amount of the Commitment as then so reduced, together in
all cases with accrued interest on the amount so paid, and if a Portion is paid
prior to the last day of an Interest Period, Borrowers shall also pay any
funding costs and loss of earnings and anticipated profits which may arise in
connection with such prepayment or repayment, as required by Paragraph 2.10
hereof.
(e) Reductions Permanent. Any termination or
reduction of the Commitment shall be permanent, and the Commitment cannot
thereafter be restored or increased without the written consent of all Banks.
2.9. Prepayment. Borrowers may prepay the outstanding Advances
at any time without premium or penalty and may reborrow under the Commitment
upon the terms and conditions set forth therein; provided, however, that (i)
Borrowers shall give Agent one (1) Business Days' notice of a payment on a
Portion bearing interest at the Base Rate; and (ii)
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Portions bearing interest at the Adjusted Libor Rate may only be paid on the
last day of the applicable Interest Period.
2.10. Funding Costs; Loss of Earnings. In connection with any
prepayment or repayment of a Portion bearing interest based on the Adjusted
Libor Rate made on other than the last day of the applicable Interest Period,
whether such prepayment or repayment is voluntary, mandatory, by demand,
acceleration or otherwise, Borrowers shall pay to Banks all funding costs and
loss of earnings and anticipated profits which may arise in connection with such
prepayment or repayment, as calculated by Agent in accordance with Exhibit C
attached hereto.
2.11. Payments. All payments of principal, interest, fees and
other amounts due hereunder, including any prepayments thereof, shall be made by
Borrowers to Agent in immediately available funds before twelve o'clock (12:00)
noon Philadelphia time on any Business Day at the principal office of Agent set
forth at the beginning of this Agreement. Borrowers hereby authorize Agent to
charge Borrowers' accounts with Agent for all payments of principal, interest
and fees when due hereunder.
2.12. Commitment Fee. Borrowers shall pay to Agent for the
benefit of Banks a commitment fee on the average daily amount of the unused
portion of the Commitment at the rate of .375 percent per annum. Such fee shall
be paid from the date hereof through the Termination Date, which fee shall be
payable at the offices of Agent quarterly in arrears on the last day of each
January, April, July and October, as billed by Agent. Banks shall share in such
commitment fee in the same proportion as they participate in the Commitment. The
Commitment fee shall be calculated on the basis of the actual number of days
elapsed over a year of three hundred sixty (360) days.
2.13. Swing Line Loans.
(a) Swing Line Commitment. Subject to the terms and
conditions hereof, Agent, on behalf of the Lenders, may in Agent's discretion
from the date hereof through and including the Termination Date make Swing Line
Loans to Borrowers on a joint and several basis from time to time in an
aggregate principal amount at any one time outstanding not to exceed Five
Million Dollars ($5,000,000), provided, that, no Swing Line Loan shall be made
if after giving effect to the making of such Loan and the simultaneous
application of the proceeds thereof, such Swing Line Loan shall exceed the
aggregate Commitment as from time to time in effect less (i) outstanding
Advances, (ii) the amount of any prior Swing Line advances outstanding under
this Paragraph, and (iii) the aggregate amount of all amounts available under
and unreimbursed draws with respect to Letters of Credit. Except as otherwise
may be agreed upon from time to time between the Company and the Agent,
Borrowers shall give Agent written notice of each requested Advance of a Swing
Line Loan. Such notice of a requested Advance of a Swing Line Loan shall be
certified by chief financial officer or controller of SunSource Inc. and shall
be in the form of the Advance/Credit Request Form attached hereto as Exhibit A.
Within
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the foregoing limits, the Borrowers may repay and reborrow under the Swing Line
Commitment prior to the Termination Date, subject to and in accordance with the
terms and limitations hereof.
(b) Interest. The interest rate applicable to a Swing
Line Loan shall be the Base Rate and shall be paid to the Agent for its own
account on the last day of each month.
(c) Payment. Each Swing Line Loan shall be due and
payable on the earlier of: (i) the Termination Date and (ii) one (1) Business
Day after the date on which Agent shall have demanded payment thereof; provided,
however, that the Borrowers may pay the Swing Line Advance on any date in their
discretion with same day notice to the Agent without premium or penalty.
(d) Procedure for Swing Line Loans. Subject to the
terms and conditions hereof, the Borrowers may borrow under the Swing Line
Commitment on any Business Day prior to the Termination Date. Except as
otherwise may be agreed upon from time to time between the Company and the
Agent, the Borrowers shall give Agent irrevocable notice, which notice must be
received by the Agent prior to one o'clock (1:00) p.m., Philadelphia time, on
the requested date, specifying in the notice (a) the amount requested to be
borrowed and (b) the requested borrowing date. The proceeds of each Swing Line
Loan will be made available by the Agent to the Borrowers by the Agent crediting
the account of the Borrowers with such proceeds on the requested borrowing date.
(e) Allocating Swing Line Loans; Swing Line Loan
Participation.
(i) The Agent, may in its sole and absolute
discretion, direct that all Swing Line Loans owing to it be refunded by
delivering a notice (a "Notice of Swing Line Refunding") to each Bank and,
unless an Event of Default described in Paragraph 9.1(h) (an "Insolvency Event
of Default") in respect of a Borrower has occurred, to the Borrowers, each such
Notice of Swing Line Refunding shall be deemed to constitute delivery by the
Company of an Advance/Credit Request Form of a Loan to bear interest at the Base
Rate in an amount equal to the amount of the Swing Line Loans outstanding on
such date. Unless an Insolvency Event of Default shall have occurred (in which
case the procedures of Paragraph 2.13(e)(ii) shall apply), each Bank (including
the Agent in its capacity as a Bank) shall (i) make a Loan to Borrowers in an
amount equal to such Bank's percentage share of the Commitment of the aggregate
principal amount of the Swing Line Loans outstanding on the date of delivery of
the applicable Notice of Swing Line Refunding and (ii) make the proceeds of its
Loan available to the Agent for the account of the Agent at the office of the
Agent prior to twelve o'clock (12:00) noon, Philadelphia time, in funds
immediately available to the Agent on the Business Day next succeeding the date
such notice is given. The proceeds of such Loans shall be immediately applied to
repay the outstanding Swing Line Loans.
(ii) If an Insolvency Event of Default occurs
prior to an Advance pursuant to a Notice of Swing Line Refunding, each Bank
(other than the Agent) shall,
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on the date a Loan would have been made pursuant to such Notice of Swing Line
Refunding (the "Refunding Date"), purchase an undivided participating interest
in the outstanding Swing Line Loans in an amount equal to (i) such Bank's Pro
Rata Share times (ii) the aggregate principal amount of the Swing Line Loans
then outstanding which were to have been repaid with Loans (the "Swing Line
Participation Amount"). On the Refunding Date, each Bank shall transfer to the
Agent, in immediately available funds, such Bank's Swing Line Participation
Amount.
(iii) Whenever, at any time after the Agent has
received from any Bank such Bank's Swing Line Participation Amount, the Agent
receives any payment on account thereof, the Agent will distribute to such Bank
its participating interest in such amount (appropriately adjusted, in the case
of interest payments, to reflect the period of time during which such Bank's
participating interest was outstanding and funded) in like funds as received;
provided, however, that in the event such payment received by the Agent is
required to be returned, such Bank will return to the Agent any portion thereof
previously distributed by the Agent to it in like funds as such payment is
required to be returned by the Agent.
(iv) Each Bank's obligation to make Loans
pursuant to Paragraph 2.13(a) and to purchase participating interests shall be
absolute and unconditional and shall not be affected by any circumstances
including, without limitation, (i) any setoff counterclaim, recoupment, defense
or other right which such Bank may have against any other Bank or any Borrower,
or any Borrower may have against any Bank or any other person, as the case may
be, for any reason whatsoever; (ii) the occurrence or continuance of a Default
or Event or Event of Default; (iii) any adverse change in the condition
(financial or otherwise) of the Borrowers or the Guarantors; (iv) any breach of
this Agreement by any party hereto; (v) the failure to satisfy any condition to
the making of any Loan hereunder; or (vi) any other circumstance, happening or
event whatsoever, whether or not similar to any of the foregoing.
2.14. Regulatory Changes in Capital Requirements. If any Bank
shall have determined that the adoption or the effectiveness after the date
hereof of any law, rule, regulation or guideline regarding capital adequacy, or
any change in any of the foregoing or in the interpretation or administration of
any of the foregoing by any governmental authority, central bank or comparable
agency charged with the interpretation or administration thereof, or compliance
by such Bank (or any lending office of such Bank) or such Bank's holding company
with any request or directive regarding capital adequacy (whether or not having
the force of law) of any such authority, central bank or comparable agency, has
or would have the effect of reducing the rate of return on such Bank's capital
or on the capital of such Bank's holding company if any, as a consequence of
this Agreement, the Commitment, Advances, Letters of Credit or the Loan made by
such Bank pursuant hereto to a level below that which such Bank or its holding
company would have achieved but for such adoption, change or compliance (taking
into consideration such Bank's policies and the policies of such Bank's holding
company with respect to capital adequacy) by an amount deemed by such Bank to be
material, then from time to time the Borrowers shall pay to such Bank, within
five (5) Business Days after receiving such
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Bank's demand therefor and the certificate referred to below, such additional
amount or amounts as will compensate such Bank or its holding company for any
such reduction suffered, which amount, if not paid within such period of five
(5) Business Days, shall bear interest from the date due until payment in full
thereof at the rate provided in Paragraph 2.6(a)(ii) hereof. Such Bank will
notify the Borrowers of any event occurring after the date of this Agreement
that will entitle such Bank to compensation pursuant to this Paragraph 2.14 as
promptly as practicable after it obtains knowledge thereof.
A certificate of such Bank setting forth in detail such amount
or amounts as shall be necessary to compensate such Bank or its holding company
as specified above and describing the calculation of such amount shall be
delivered to the Borrowers and shall be conclusive absent manifest error. For
purposes of the application of this Paragraph 2.14 to Borrowers and in
calculating any amount that may be necessary to compensate a Bank under this
Paragraph 2.14, such Bank shall determine the applicability of this provision to
Borrowers and calculate the amount payable to such Bank hereunder in a manner
consistent with the manner in which it shall apply and calculate similar
compensation payable to it by other borrowers having provisions in their credit
agreements comparable to this Paragraph 2.14.
Failure on the part of any Bank to demand compensation for
increased costs or reduction in amounts received or receivable or reduction in
return on capital with respect to any period shall not constitute a waiver of
such Bank's right to demand compensation with respect to any other period.
2.15. Taxes.
(a) Net Payment by Borrowers. Except as provided
below, all payments by Borrowers hereunder shall be made without deduction for
and free and clear of all taxes, levies, imposts, or charges and all liabilities
(including penalties, interest, additions to tax and expenses) arising therefrom
or with respect thereto.
(i) U. S. Withholding Taxes. Borrowers and Agent
shall be entitled to deduct and withhold United States withholding taxes with
respect to all payments to be made hereunder to a Bank as may be required by
United States law. Within (30) days after the date of any payment of withheld
taxes by Borrowers to the applicable taxing authority, Borrowers will furnish to
Agent the original or a certified copy of a receipt or other documents
reasonably acceptable to Agent evidencing such payment. Any Bank that is (or
that has granted an assignment or participation to any lender that is) organized
under the laws of a jurisdiction other than the United States (or any political
subdivision thereof) shall provide on the date of this Agreement and from time
to time thereafter if requested by Borrowers or Agent or required by the
Internal Revenue Service of the United States, (i) a facially complete Internal
Revenue Service Form 4224 (or any successor form) certifying that all payments
made to such Bank are effectively connected with its conduct of a trade or
business in the United States and will be includible in its gross income, (ii) a
facially complete Internal Revenue Service Form 1001 (or
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any successor form) certifying as to its status for purposes of determining the
applicability of a reduced rate of United States withholding taxes with respect
to all payments to be made hereunder to such Bank pursuant to a double tax
treaty obligation of the United States, or (iii) other facially complete
documents satisfactory to Agent and Borrowers indicating that all payments that
will be made to such Bank are exempt from or subject to a reduced rate of United
States withholding tax. Unless the Borrowers and Agent have received such forms
or such documents validly indicating that payments hereunder are not subject to
United States withholding tax or are subject to such withholding tax at a
reduced rate, Borrowers or Agent shall withhold taxes from such payments to such
Bank at the applicable statutory rate.
(ii) Other Taxes. The general prohibition against
reduction of payments contained in this Paragraph 2.15(a) shall exclude any tax
imposed on or measured by the net income of a Bank pursuant to the laws of the
jurisdiction in which the principal office or applicable lending office of such
Bank is located or under the laws of any political subdivision or taxing
authority of any such jurisdiction in which the principal office or applicable
lending office of such Bank is located (all such non-excluded taxes, levies,
imposts, charges and liabilities being hereinafter referred to as "Taxes"). If
any Taxes shall be required by law to be deducted or paid from or in respect of
any sum payable hereunder or under any Promissory Note to any Bank, then
Borrowers shall be required to pay an additional amount such that after making
all required deductions or payments for such Taxes (including deductions and
payments applicable to additional sums payable under this Paragraph
2.15(a)(ii)), but taking into account any credit, deduction or offset available
in any other jurisdiction as a result of such payment (as determined and
certified by such Bank's tax or accounting department to Borrowers in good
faith), such Bank receives an amount equal to the sum it would have received had
no such deductions or payments been made. Payment of any additional amounts
required by this Paragraph 2.15(a)(ii) shall be made at the time of payment of
the amounts otherwise required to be paid by Borrowers if the Taxes have been
withheld by Borrowers, or otherwise within thirty (30) days from the date such
Bank makes written demand therefor.
(b) Participants and Assignees. Any Bank that enters
into any participation or assignment permitted by Paragraph 12.2 hereof shall
give Borrowers and Agent immediate notice of such assignment or participation,
describing the terms thereof and indicating the identity and country of
residence of each of the participants or assignees. Notwithstanding any other
provision contained herein to the contrary, the Borrowers and the Agent shall be
entitled to deduct and withhold United States withholding taxes with respect to
all payments to be made hereunder to or for such Bank or Assignee as may be
required by United States law due to such assignment or participation. Each Bank
hereby indemnifies and holds harmless Borrowers and Agent from and against any
tax, interest, penalty or other expense that Borrowers or Agent may incur as a
consequence of any failure to withhold United States taxes applicable because of
any participation or assignment that is not fully disclosed to them as required
hereunder.
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SECTION THREE
LETTERS OF CREDIT
3.1. (a) Availability of Letters of Credit. Subject to the
terms and conditions set forth herein, Banks shall from time to time prior to
the Termination Date participate in the issuance by Agent of Letters of Credit
for the account of Borrowers on the following terms and conditions:
(i) at the time of the issuance of each Letter of
Credit, the face amount of such Letter of Credit together with the undrawn
amount of any outstanding Letters of Credit and the amount of any unreimbursed
draws under Letters of Credit shall not exceed Twenty Million Dollars
($20,000,000);
(ii) at the time of the issuance of each Letter of
Credit, the face amount of such Letter of Credit shall not exceed the aggregate
Commitment as from time to time in effect less (i) outstanding Advances, (ii)
the amount of any Swing Line advances outstanding under Paragraph 2.13 hereof,
and (iii) the aggregate amount of all amounts available under and unreimbursed
draws with respect to Letters of Credit.
(iii) the final expiration date of each Letter of
Credit shall be on or before the earlier of (A) the date one (1) year from the
date of its issuance or (B) the Termination Date;
(iv) there shall not exist at the time of issuance of
the Letter of Credit, or as a result thereof, any Default or Event of Default;
and
(v) each Letter of Credit issued under this Section
Three shall be required by Borrowers in their ordinary course of business.
(b) Evergreen Letters of Credit. Notwithstanding the
provisions of Paragraph 3.1(a)(iii) which requires that the final expiration of
each Letter of Credit be within one year of issuance, Banks hereby agree that
Agent may issue, upon the Borrowers' request if required by a proposed
beneficiary, a Letter of Credit which by its terms may be extended for
additional periods of up to one year each provided that (x) the final expiration
date of each such Letter of Credit is on or before the Termination Date and (y)
extensions of such Letters of Credit shall be available upon request from
Borrowers to Agent at least forty-five (45) days before the then-effective
expiration date.
(c) Existing Letters of Credit. Reference is made to
certain letters of credit issued by CoreStates Bank prior to the date of
execution hereof, as identified on the Advance/Credit Request Form delivered on
the date of this Agreement (the "Existing Letters of Credit"). Borrowers and
Banks agree that as of the date of this Agreement, subject to receipt by Agent
of the Advance/Credit Request Form dated the date hereof duly completed and
executed
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with respect thereto, all such Existing Letters of Credit shall hereafter be
Letters of Credit under this Agreement, as if originally issued hereunder.
3.2. Commitment Availability. The Commitment as from time to
time in effect shall be reduced by the undrawn amount of all outstanding Letters
of Credit. Such Commitment amount shall be restored but simultaneously reduced
by the amount of any Advances under Paragraph 2.7 which are made to Borrowers to
reimburse Agent for draws under the Letters of Credit as required pursuant to
Paragraph 3.4 hereof.
3.3. Approval and Issuance.
(a) Borrowers shall provide Agent not less than five (5)
Business Days' prior written notice of each request for the issuance of a
Financial Standby Letter of Credit or a Performance Standby Letter of Credit by
delivery of an Advance/Credit Request Form and Agent's Letter of Credit
Application in the form attached hereto as Exhibit D. Each Advance/Credit
Request Form submitted by Borrowers to Agent requesting the issuance of a
Performance or Financial Standby Letter of Credit shall be certified by the
chief financial officer or controller of SunSource Inc. and represent as to the
matters set forth in Paragraph 2.7(a) hereof.
(b) Agent will promptly provide to Banks written or
telephonic notice of Agent's receipt of the Advance/Credit Request Form and the
Letter of Credit Application which shall state (i) the amount of the Performance
or Financial Standby Letter of Credit requested and (ii) the expiration date of
the Performance or Financial Standby Letter of Credit.
3.4. Obligations of the Borrowers.
(a) Borrowers agree to pay to Agent in connection with
each Letter of Credit issued hereunder: (i) immediately upon the demand of Agent
on behalf of all Banks, the amount paid by each Bank with respect to such Letter
of Credit; (ii) immediately upon demand of Agent, the amount of any draft
presented purporting to be drawn under such Letter of Credit provided that the
draft and accompanying documents conform to the terms of the Letter of Credit
but subject to the terms of Paragraph 3.7 hereof (whether or not Agent has at
such time honored such draft) and any other amounts paid thereunder (it being
understood that Agent is not required to make demand upon or proceed against any
Bank or other party or to resort to any collateral before obtaining payment from
Borrowers); (iii) on the date of issuance thereof and quarterly thereafter in
advance, a fee for the benefit of Banks, in accordance with each Bank's Pro Rata
Share, of a rate equal to the then Applicable Margin under Paragraph 2.6 hereof,
on the face amount of each Financial Standby Letter of Credit and each
Performance Standby Letter of Credit, provided, however, that if a Letter of
Credit is canceled, the Agent shall rebate to Borrowers any portion of the
applicable LC Fee (as defined below) paid on account of any quarter after the
quarter in which the Letter of Credit is terminated; (iv) on the date of
issuance of each Letter of Credit a fee (the "LC Fee") to the Agent on its own
behalf equal to one-eighth of
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one percent (1/8%) per annum of the face amount of such Letter of Credit; and
(v) interest on any Indebtedness outstanding with respect to such Letter of
Credit, whether for funds paid on drafts on such Letter of Credit, or otherwise
(but such indebtedness shall not include undrawn balances of such Letter of
Credit issued hereunder) calculated at the rate and paid at the times and in the
manner set forth for the calculation of interest and payment thereof on the Loan
in Paragraph 2.6(a)(i)(A) hereof based on the Base Rate. Interest under clause
(v) above shall accrue on amounts paid on a Letter of Credit (if not reimbursed
by Borrowers on the same day) from the date of payment by Agent, whether or not
demand is made, until such amounts are reimbursed by Borrowers whether before,
at or after demand.
(b) In the absence of a Default or an Event of Default
and subject to the provisions of Paragraph 2.7 hereof, Banks hereby agree to
make Advances to Borrowers under the Commitment to fund the payments required
under Paragraphs 3.4(a)(i) and (ii) hereof. If any payment by the Agent of a
draft drawn under a Letter of Credit is for any reason (including without
limitation the occurrence or continuation of a Default or an Event of Default
hereunder) not reimbursed prior to or on the date such payment is made, the
Agent in its sole and absolute discretion may direct that all amounts due under
drafts drawn under a Letter of Credit be refunded by delivery of a notice (a
"Drawing Refunding") to each Bank and to Borrowers and such Drawing Refunding
shall constitute delivery by the Company of an Advance/Credit Request Form in an
amount equal to the drawings to be refunded, which shall bear interest at the
rate set forth in Paragraph 2.6(a)(i)(A) for Advances bearing interest based on
the Base Rate until paid in full.
3.5. Payment by Banks on Letters of Credit.
(a) With respect to each Letter of Credit issued
hereunder, each Bank agrees that it is irrevocably obligated to pay to Agent,
for each such Letter of Credit, such Bank's Pro Rata Share of each and every
payment made or to be made by Agent under such Letter of Credit (each such
payment to be made, a "LOC Contribution"). Each Bank's LOC Contribution shall be
due from such Bank immediately upon, and in any event no later than the same day
as, receipt of written notice (which may be sent by telex) from Agent that (i)
it has made a payment or (ii) a draft has been presented purporting to be drawn
on a Letter of Credit issued hereunder. Such payment shall be made at Agent's
offices in immediately available federal funds.
(b) The obligation of each Bank to make its LOC
Contribution hereunder is absolute, continuing and unconditional, and Agent
shall not be required first to make demand upon or proceed against Borrowers or
any guarantor or surety, or any others liable with respect to the applicable
Letter of Credit and shall not be required first to resort to any collateral.
LOC Contributions shall be made without regard to termination of this Agreement
or the Commitment, the existence of a Default or an Event of Default, the
acceleration of indebtedness hereunder or any other event or circumstance.
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3.6. Collateral.
(a) If Borrowers shall have deposited with Agent cash
collateral or U.S. Treasury securities with maturities no more than ninety (90)
days from the date of deposit ("U.S. Treasury Bills") (discounted in accordance
with customary banking practice to present value to determine amount) in an
amount equal at all times to one hundred three percent (103%) of the outstanding
undrawn amount of all Letters of Credit, such cash or U.S. Treasury Bills and
all interest earned thereon to constitute cash collateral for all such Letters
of Credit, on or before the Termination Date and shall have irrevocably paid in
full the Loan and all other indebtedness, liabilities and obligations of
Borrowers to Banks under this Agreement (including all indebtedness and fees due
and owing under this Section Three other than for undrawn balances of Letters of
Credit and other fees and liabilities not yet accrued thereunder), Borrowers
shall be entitled upon the termination of the Commitment to the termination of
all covenants of Borrowers under this Agreement (except under this Section
Three).
(b) On the Termination Date, the termination of the
Commitment (other than voluntary termination of the Commitment by Borrowers in
compliance with subparagraph (a) above) or the occurrence of an Event of
Default, the Agent may require (and in the case of an Event of Default occurring
under Paragraph 9.1(h) it shall be required automatically) that Borrowers
deliver to Agent, unless previously delivered to Agent under subparagraph (a)
above, cash or U.S. Treasury Bills with maturities of not more than ninety (90)
days from the date of delivery (discounted in accordance with customary banking
practice to present value to determine amount) in an amount equal at all times
to one hundred three percent (103%) of the outstanding undrawn amount of all
Letters of Credit, such cash or U.S. Treasury Bills and all interest earned
thereon to constitute cash collateral for all such Letters of Credit. At such
time as such cash collateral or U.S. Treasury Bills is required to be and has
not been deposited, Agent in its sole and absolute discretion on behalf of Banks
shall be entitled to (x) liquidate such collateral it may hold at such time as
is necessary or appropriate in its sole judgment so as to create such cash
collateral, and (y) direct by delivery of a notice (a "Cash Collateral Notice")
to each Bank and to Borrowers and such Cash Collateral Notice shall constitute
delivery by the Company of an Advance/Credit Request Form in an amount equal to
the Cash Collateral due under this Paragraph 3.6(b) which shall bear interest at
the rate set forth in Paragraph 2.6(a)(ii) for Advances bearing interest based
on the Base Rate.
(c) Any cash collateral deposited under subparagraphs
(a) and (b) above, and all interest earned thereon, shall be held by Agent and
invested and reinvested at the expense and the written direction of Borrowers,
in U.S. Treasury Bills with maturities of no more than thirty (30) days from the
date of investment.
3.7. General Terms of Credits. The following terms and
conditions apply with respect to each Letter of Credit (a "Credit")
notwithstanding anything to the contrary contained herein:
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(a) Borrowers assume all risks of the acts or omissions
of the beneficiary of each Credit with respect to the use of the Credit or with
respect to the beneficiary's obligations to Borrowers. None of the Banks nor any
of their officers or directors shall be liable or responsible for (and the Banks
hereby agree to indemnify and hold the Agent and any issuer of a Credit harmless
(subject to Paragraph 10.8 hereof) with respect to): (i) the use which may be
made of the Credit or for any acts or omissions of the beneficiary in connection
therewith; (ii) the accuracy, truth, validity, sufficiency or genuineness of
documents, or of any endorsement thereon, even if such documents should in fact
prove to be in any or all respects false, misleading, inaccurate, invalid,
insufficient, fraudulent or forged; (iii) any other circumstances whatsoever in
making or failing to make payment under a Credit; or (iv) any inaccuracy,
interruption, error or delay in transmission or delivery of correspondence or
documents by post, telegraph or otherwise. In furtherance and not in limitation
of the foregoing, Agent may accept documents that appear on their face to be in
order, without responsibility for further investigation, regardless of any
notice or information to the contrary.
(b) To the extent any failure to comply with the
provisions of this Section 3.7(b) could have a Material Adverse Effect,
Borrowers agree to procure or to cause the beneficiaries of each Letter of
Credit to procure promptly any necessary import and export or other licenses for
the import or export or shipping of any goods referred to in or pursuant to a
Credit and to comply and to cause the beneficiaries to comply with all foreign
and domestic governmental regulations with respect to the shipment and
warehousing of such goods or otherwise relating to or affecting such Credit,
including governmental regulations pertaining to transactions involving
designated foreign countries or their nationals, and to furnish such
certificates in that respect as Agent may at any time reasonably require, and to
keep such goods adequately covered by insurance in amounts, with carriers and
for such risks as shall be customary in the industry and to cause Banks'
interest to be endorsed on such insurance and to furnish Agent at its request
with reasonable evidence thereof. Should such insurance (or lack thereof) upon
said goods for any reason not be reasonably satisfactory to Agent, Agent may
(but is not obligated to) obtain, at Borrowers' expense, insurance satisfactory
to Agent.
(c) In connection with each Credit, neither any Bank nor
any of their correspondents shall be responsible for: (i) the existence,
character, quality, quantity, condition, packing, value or delivery of the
property purporting to be represented by documents; (ii) any difference in
character, quality, quantity, condition or value of the property from that
expressed in documents; (iii) the time, place, manner or order in which shipment
of the property is made; (iv) partial or incomplete shipment referred to in such
Credit; (v) the character, adequacy or responsibility of any insurer, or any
other risk connected with insurance; (vi) any deviation from instructions,
delay, default or fraud by the beneficiary or any one else in connection with
the property or the shipping thereof; (vii) the solvency, responsibility or
relationship to the property of any party issuing any documents in connection
with the property; (viii) delay in arrival or failure to arrive of either the
property or any of the documents relating thereto; (ix) delay in giving or
failure to give notice of arrival or any other notice; (x) any breach of
contract between
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the Letter of Credit beneficiaries and Borrowers; (xi) any laws, customs, and
regulations which may be effective in any jurisdiction where any negotiation
and/or payment of such Credit occurs; (xii) failure of documents (other than
documents required by the terms of the Credit) to accompany any draft at
negotiation; or (xiii) failure of any person to note the amount of any document
or draft on the reverse of such Credit or to surrender or to take up such Credit
or to forward documents other than documents required by the terms of the
Credit. In connection with each Credit, no Bank shall be responsible for any
error, neglect or default of any of their correspondents. None of the above
shall affect, impair or prevent the vesting of any of the Banks' rights or
powers hereunder. If a Credit provides that payment is to be made by the issuing
Bank's correspondent, neither the issuing Bank nor such correspondent shall be
responsible for the failure of any of the documents specified in such Credit to
come into the Agent's hands, or for any delay in connection therewith, and
Borrowers' obligation to make reimbursements shall not be affected by such
failure or delay in the receipt of any such documents.
(d) Notwithstanding but without limiting any of the
foregoing, with respect to any Credit, Borrowers shall have a claim against
Agent, and Agent shall be liable to Borrowers, to the extent, but only to the
extent, of any direct, as opposed to indirect or consequential, damages suffered
by Borrowers caused by the Agent's willful misconduct or gross negligence.
(e) To the extent not inconsistent with this Agreement,
the Uniform Customs and Practices for Documentary Credits (1993 Revision),
International Chamber of Commerce Publication No. 500, are hereby made a part of
this Agreement with respect to obligations in connection with each Credit.
SECTION FOUR
REPRESENTATIONS AND WARRANTIES
Each of the Borrowers and each of the Guarantors represents
and warrants, as follows:
4.1. Organization and Good Standing. Each of the Company and
SDIPI is a limited partnership duly formed and validly existing under the laws
of the state of Delaware, and has the power and authority to carry on its
business as now conducted. Each Subsidiary and each Guarantor (other than SDIPI)
is duly organized and existing and in good standing, under the laws of the
jurisdiction of its incorporation, and has the power and authority to carry on
its business as now conducted. Each of the Borrowers and Guarantors is qualified
to do business in all other states in which the failure to qualify would have a
Material Adverse Effect.
4.2. Power and Authority; Validity of Agreement. Each of the
Borrowers and Guarantors has the power and authority under Delaware law and
under its organizational documents to enter into and perform this Agreement, the
Promissory Notes and all other
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agreements, documents and actions required hereunder, to the extent each is a
party thereto; and all actions necessary or appropriate for Borrowers' and
Guarantors' execution and performance of this Agreement, the Promissory Notes,
and all other agreements, documents and actions required hereunder, to the
extent it is a party hereto, have been taken, and, upon their execution, the
same will constitute the valid and binding obligations of Borrowers and
Guarantors to the extent each is a party thereto, enforceable in accordance with
their terms.
4.3. No Violation of Laws or Agreements. The making and
performance of this Agreement, the Promissory Notes, and the other documents,
agreements and actions required of Borrowers and Guarantors hereunder, to the
extent it is a party thereto, will not violate any provisions of any law or
regulation, federal, state or local, or the respective organizational documents
of Borrowers or Guarantors or result in any breach or violation of, or
constitute a default under, any agreement or instrument by which either
Borrowers, Guarantors or their respective property may be bound, including
without limitation the Note Purchase Agreement and the Indenture.
4.4. Material Contracts. None of the Guarantors or Borrowers
is a party to or in any manner obligated under any contracts material to their
respective business except this Agreement, their organizational documents, the
Senior Notes and the Note Purchase Agreement pursuant to which they were issued,
the Indenture, and the agreements identified on Exhibit E hereto and there
exists no material default under any of such contracts.
4.5. Compliance. Each of the Guarantors and Borrowers is in
compliance in all material respects with all applicable laws and regulations,
federal, state and local (including without limitation those administered by the
Local Authorities) material to the conduct of its business and operations;
Guarantors and Borrowers possess all the material franchises, authorizations,
patents, copyrights, trademarks, permits and licenses necessary or required in
the conduct of their respective businesses, and, except as may be described on
Exhibit E, the same are valid, binding, enforceable and subsisting without any
material defaults thereunder; and, except as described on Exhibit E, no
authorization, consent, approval, waiver, license or exemptions from, nor any
filing, declaration or registration with, any court, governmental agency or
regulatory authority (federal, state or local) or non-governmental entity, under
the terms of contracts or otherwise, is required by reason of or in connection
with Borrowers' and Guarantors' execution and performance of this Agreement, the
Promissory Notes and all other agreements, documents and actions required
hereunder to the extent each is a party hereto and thereto.
4.6. Litigation. Except as set forth on Exhibit E hereto,
there are no actions, suits, proceedings or claims which are pending or, to the
best of Guarantors' and Borrowers' knowledge or information, threatened against
any of the Guarantors or Borrowers which, if adversely resolved, would be
reasonably likely to have a Material Adverse Effect.
4.7. Title to Assets. Except as set forth on Exhibit E hereto,
each Borrower and Guarantor has good and marketable title to substantially all
of its properties and assets as
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reflected in the financial statements of SunSource Inc. and its Consolidated
Subsidiaries most recently delivered to Banks pursuant to Paragraphs 5.1(e), 6.2
and 6.3 hereof, free and clear of any liens and encumbrances, except the
security interests permitted pursuant to Paragraph 7.4 hereof and all such
assets are in good order and repair and fully covered by the insurance required
pursuant to Paragraph 6.7 hereof.
4.8. Partnership Interests. The number and percentage of
partnership interests in the Company and SDIPI and the ownership thereof are
accurately set forth on Exhibit E attached hereto; all such interests are
validly existing and the creation and sale thereof are in compliance with all
applicable federal and state securities and other applicable laws; the ownership
thereof is free and clear of any liens and encumbrances or other contractual
restrictions except as set forth in the Partnership Agreements, and SDIPI is the
general partner of the Company.
4.9. Capital Stock. The number of shares and classes of the
capital stock of each Subsidiary, SunSub A and SunSub B and the ownership
thereof effective upon the Conversion are accurately set forth on Exhibit E
attached hereto; all such shares are validly existing, fully paid and
non-assessable, and the issuance and sale thereof are in compliance with all
applicable federal and state securities and other applicable laws; and the
shareholders' ownership thereof is free and clear of any liens or encumbrances
or other contractual restrictions.
4.10. Accuracy of Information; Full Disclosure.
(a) All information furnished to Banks concerning the
financial condition of SunSource Inc. and its Consolidated Subsidiaries,
including SunSource L.P. and its Consolidated Subsidiaries', SDIPI's, and the
Guarantors' respective annual financial statements for the period ending
December 31, 1996, and SunSource L.P. and its Consolidated Subsidiaries'
consolidated interim financial statement for the period ending June 30, 1997,
copies of which have been furnished to Banks, have been prepared in accordance
with GAAP (except that the annual financial statements of SDIPI were prepared on
a tax basis, not a GAAP basis) and fairly present the financial condition of
SDIPI, Guarantors and SunSource L.P. and its Consolidated Subsidiaries as of the
dates and for the periods covered and discloses liabilities of SDIPI, Guarantors
and SunSource L.P. and its Consolidated Subsidiaries required to be disclosed
under GAAP and, except on the date hereof for the effect of the Conversion,
there has been no Material Adverse Change from the date of such statements to
the date hereof; and
(b) All financial statements and other documents
furnished by SunSource L.P., SDIPI, Guarantors and SunSource Inc. and its
subsidiaries to the Banks in connection with this Agreement and the Promissory
Notes do not and will not contain any untrue statement of material fact or omit
to state a material fact necessary in order to make the statements contained
therein not misleading. Borrowers and Guarantors have disclosed to the Banks in
writing any and all facts which materially and adversely affect the business,
properties, operations or condition, financial or otherwise, of Guarantors and
Borrowers or the Borrowers' or
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Guarantors' ability to perform their respective obligations under this Agreement
and the Promissory Notes.
4.11. Taxes and Assessments.
(a) Each of Guarantors and the Company has duly and
timely filed all information and tax returns and reports with all federal,
state, local or foreign governmental taxing authorities, bodies or agencies; and
all taxes, including without limitation income, gross receipt, sales, use,
excise and any other taxes, and any governmental charges, penalties, interest or
fines with respect thereto, due and payable by Guarantors, the Company and the
other Borrowers, have been paid, withheld or reserved for in accordance with
GAAP or, to the extent they relate to periods on or prior to the date of the
financial statements delivered from time to time pursuant to Paragraphs 5.1(e),
6.2 and 6.3 hereof (the "Financial Statements"), are reflected as a liability on
the Financial Statements in accordance with GAAP.
(b) Each of the Guarantors and the Borrowers has
properly withheld all amounts determined by them to be required by law to be
withheld for income taxes and unemployment taxes including without limitation,
all amounts required with respect to social security and unemployment
compensation, relating to its employees, and has remitted such withheld amounts
in a timely manner to the appropriate taxing authority, agency or body.
(c) As of the date of this Agreement, none of the
federal income tax information returns of SDIPI or the Company has been audited.
Except as set forth on Exhibit E hereto, neither Guarantors nor Borrowers have
entered into any agreements for the extension of time for the assessment of any
tax or tax delinquency, nor has any of them received outstanding and unresolved
notices from the Internal Revenue Service or any other state, local or foreign
taxing authority, agency or body of any proposed examination or of any proposed
change in reported information which may result in a deficiency or assessment
against Guarantors or Borrowers and there are no suits, actions, claims,
investigations, inquiries or proceedings now pending against Guarantors or
Borrowers in respect of taxes, governmental charges or assessments.
4.12. Indebtedness. Guarantors and Borrowers have no presently
outstanding Indebtedness or obligations including contingent obligations and
obligations under leases of property from others, except the Senior Notes, the
Junior Subordinated Debentures, the Indebtedness and obligations described
either on Exhibit E hereto or in Guarantors' or Borrowers' financial statements
which have been furnished to Banks and Indebtedness permitted to be incurred
pursuant to Paragraph 7.1 hereof. There exists no default with respect to the
payment of principal or interest under any such outstanding Indebtedness. The
Indebtedness under the Senior Notes ranks pari passu and equal to the
Indebtedness to Banks hereunder, without any priority. The Junior Subordinated
Debentures rank junior and are subordinated to the Indebtedness to Banks, and
all other Indebtedness of the Borrowers and Guarantors ranks either pari passu
or junior to the Indebtedness to the Banks.
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4.13. Management Agreements. The Company is a party to no
other material management or consulting agreements for the provision of services
to the Company, except as described in Exhibit E hereto.
4.14. Subsidiaries and Investments. Borrowers have no
Subsidiaries or Affiliates, or investments in or loans to any other individuals
or business entities, except as described in Exhibit E hereto and except as are
permitted to be acquired or created pursuant to Paragraph 7.8 hereof.
4.15. ERISA. Each Plan maintained by Guarantors or Borrowers
and each ERISA Affiliate is, as of its most recently completed annual report, in
compliance in all material respects with all applicable provisions of ERISA and
the regulations promulgated thereunder; and, except as set forth in Exhibit E
hereto:
(a) Neither Guarantors, Borrowers nor any ERISA
Affiliate maintains or contributes to or has maintained or contributed to any
multiemployer plan (as defined in Section 4001 of ERISA) under which Guarantors,
Borrowers, or any ERISA affiliate could have any withdrawal liability;
(b) Neither Guarantors, Borrowers, nor any ERISA
Affiliate, sponsors or maintains any Plan under which there is an Accumulated
Funding Deficiency, whether or not waived;
(c) The aggregate liability for accrued benefits and
other ancillary benefits under each Plan that is or will be sponsored or
maintained by Guarantors, Borrowers or any ERISA Affiliate (determined on the
basis of the actuarial assumptions prescribed for valuing benefits under
terminating single-employer defined benefit plans under Title IV of ERISA) does
not exceed the aggregate fair market value of the assets under each such defined
benefit pension Plan;
(d) Neither Guarantors, Borrowers nor any ERISA
Affiliate has liability arising out of or relating to a failure of any Plan to
comply with the provisions of ERISA or the Code;
(e) There does not exist any unfunded liability
(determined on the basis of actuarial assumptions utilized by the actuary for
the Plan in preparing the most recent Annual Report) of Guarantors, Borrowers or
any ERISA Affiliate under any plan, program or arrangement providing
post-retirement life or health benefits; and
(f) The matters described on Exhibit E attached
hereto referencing clauses (a) through (e) of this Paragraph 4.15, would not,
either singly or in the aggregate, have a Material Adverse Effect.
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4.16. Fees and Commissions. Borrowers owe no fees or
commissions of any kind, and know of no claim for any fees or commissions, in
connection with Borrowers' obtaining the Commitment or the Loan from Banks,
except those provided herein or the letters with the Agent and the Documentation
Agent referred to in Paragraph 5.1(g) hereof.
4.17. No Extension of Credit for Securities. Guarantors and
Borrowers are not now, nor at any time have they been, engaged principally, or
as one of their important activities, in the business of extending or arranging
for the extension of credit, for the purpose of purchasing or carrying any
margin stock or margin securities; nor will the proceeds of the Loan be used by
Borrowers directly or indirectly, for such purposes.
4.18. Hazardous Wastes, Substances and Petroleum Products.
Except as set forth in Exhibit E hereto:
(a) Each of the Guarantors and the Borrowers: (i) has
received all permits and filed all notifications necessary to carry on their
respective business(es); and (ii) is in compliance in all respects with all
Environmental Control Statutes except with respect to immaterial instances of
noncompliance of which it has no knowledge.
(b) Neither Guarantors nor Borrowers have given any
written or oral notice, nor has it failed to give required notice, to the
Environmental Protection Agency ("EPA") or any state or local agency with regard
to any actual or imminently threatened removal, spill, release or discharge of
Hazardous Substances on properties owned, leased or operated by SDIPI,
Guarantors or Borrowers or used in connection with the conduct of its business
and operations.
(c) Neither Guarantors nor Borrowers have received
notice that it is potentially responsible for the performance of or payment of
costs relating to clean-up or remediation of any actual or imminently threatened
spill, release or discharge of Hazardous Substances pursuant to any
Environmental Control Statute.
4.19. Solvency. To the best of SunSource Inc.'s knowledge,
SunSource Inc. and its Consolidated Subsidiaries are, on a consolidated basis,
upon the Conversion and after receipt and application of the first Advance will
be, solvent such that (i) the fair value of their assets (including without
limitation the fair salable value of the goodwill and other intangible property
of SunSource Inc. and its Consolidated Subsidiaries) is greater than the total
amount of their liabilities, including without limitation, contingent
liabilities, (ii) the present fair salable value of their assets (including
without limitation the fair salable value of the goodwill and other intangible
property of SunSource Inc. and its Consolidated Subsidiaries) is not less than
the amount that will be required to pay the probable liability on their debts as
they become absolute and matured, and (iii) they are able to realize upon their
assets and pay their debts and other liabilities, contingent obligations and
other commitments as they mature in the normal course of business. SunSource
Inc. and its Consolidated Subsidiaries (i) do not intend to, and do not
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believe that they will, incur debts or liabilities beyond their ability to pay
as such debts and liabilities mature, or (ii) are not engaged in a business or
transaction, or about to engage in a business or transaction, for which their
property would constitute unreasonably small capital after giving due
consideration to the prevailing practice and industry in which they are engaged.
For purposes of this Paragraph 4.19, in computing the amount of contingent
liabilities at any time, it is intended that such liabilities will be computed
at the amount which, in light of all the facts and circumstances existing at
such time, represents the amount that reasonably can be expected to become an
actual matured liability.
4.20. Foreign Assets Control Regulations. Neither the
borrowing by the Borrowers of the Loan nor their use of the proceeds of any
Advance thereof will violate the Foreign Assets Regulations, the Foreign Funds
Control Regulations, the Transactions Control Regulations, the Cuban Assets
Control Regulations, the Iranian Transaction Regulations, or the Iraqi Sanctions
Regulations of the United States Treasury Department (31 C.F.R. Subtitle B,
Chapter V, as amended).
4.21. Investment Company Act. Neither the Borrowers nor
Guarantors are directly or indirectly controlled by or acting on behalf of any
person which is an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
SECTION FIVE
CONDITIONS
5.1. First Advance. The obligation of Banks to make the first
Advance under the Loan or issue a Letter of Credit shall be subject to Banks'
receipt of the following documents, each in form and substance satisfactory to
Banks:
(a) Promissory Notes. The Promissory Notes duly
executed by Borrowers in favor of Banks.
(b) Authorization Documents. A certificate of the
secretary (or secretary of the general partner, as applicable) of (i) the
Company, (ii) each Subsidiary, and (iii) each Guarantor, attaching and
certifying as to (i) the certificate or articles of incorporation and bylaws or
partnership agreement, as applicable, of such entity; (ii) resolutions or other
evidence of authorization by the board of directors of such entity, if
applicable, authorizing its execution and full performance of this Agreement,
the Promissory Notes, and all other documents and actions required hereunder;
and (iii) incumbency certificates setting forth the name, titles and specimen
signature of each officer of such entity (or each officer of the general partner
of such entity, as applicable) who is authorized to execute the Loan Documents
on behalf of such entity.
(c) Opinion of Counsel. An opinion letter from
counsel for Borrowers and Guarantors in form and substance reasonably
satisfactory to Banks.
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(d) Insurance. Certificates of insurance with respect
to all of Borrowers' fire, casualty, liability and other insurance covering its
respective property and business.
(e) Financial Information. A certificate signed by
the chief financial officer or controller of SunSource Inc. attaching (i) A pro
forma schedule of assets and liabilities of SunSource Inc. and its Consolidated
Subsidiaries setting forth all SunSource Inc.'s and its Consolidated
Subsidiaries' Indebtedness, certified as accurate by the chief financial officer
of SunSource Inc.; (ii) cash flow projections for SunSource Inc. and its
Consolidated Subsidiaries on a consolidated basis, for the three (3) year period
immediately following the date hereof, satisfactory to Agent and certified as
reasonable by the chief financial officer or controller of SunSource Inc. (such
cash flow projections shall take into account the transactions contemplated by
this Agreement and shall identify the sources of cash the Company intends to use
to meet its cash needs during such three year period); and (iii) financial
projections for SunSource Inc. and its Consolidated Subsidiaries for the period
from closing through December 31, 2001 on a consolidated basis satisfactory to
Agent; and with respect to the matters set forth in Paragraph 4.19 hereof.
(f) Advance Request. A completed Advance/Credit
Request Form required under Paragraph 2.7(a), hereof, and any other documents or
information reasonably required by Banks in connection therewith.
(g) Fees. Payment of the fees required by Section 2
hereof; and execution by the Borrowers of letters of agreement with the Agent
and the Documentation Agent with respect to payment of an annual administrative
agency and certain other fees.
(h) Officer's Certificate. A certificate signed by
the chief financial officer or controller of SunSource Inc. stating: (i) that
there exists no Default or Event of Default hereunder, (ii) except for the
Conversion, that there has been no Material Adverse Change in the financial
condition, assets, nature of the assets, operations or prospects of the
Borrowers and Guarantors since June 30, 1997, and (iii) that there exists no
default under any Indebtedness of Borrowers or Guarantors.
(i) The Conversion. A certificate of the chief
financial officer or controller of SunSource Inc. with respect to the completion
of the Conversion as outlined in SEC Form S-4 Registration Statement dated
December 31, 1996, as amended, simultaneously with the first Advance under the
Loan.
(j) Senior Notes. Borrowers shall, simultaneously
with the Conversion, have executed the Note Purchase Agreement, issued the
Senior Notes, received Sixty Million Dollars ($60,000,000) in proceeds thereof,
and provided copies of the Note Purchase Agreement to Banks.
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(k) Tax Forms. A facially complete Internal Revenue
Service Form 4224 from each of The Bank of Nova Scotia and each other non-U.S.
Bank certifying as to such Bank's entitlement to exemption from, or reduction
of, United States withholding tax on payments to be made hereunder or under the
Promissory Notes.
(l) Other Documents. The Declaration of Trust of the
Trust, the Indenture, and such additional documents as Banks reasonably may
request.
5.2. Subsequent Advances. The obligation of Banks to make
additional Advances under the Loan shall be subject to Banks' receipt of a
completed Advance/Credit Request Form.
5.3. Additional Condition to Banks' Obligations. It shall be a
condition to Banks' obligation hereunder to make any Advance that the
representations and warranties set forth herein shall be true and correct as if
made on the date of such Advance, that no Event of Default or Default shall have
occurred and be continuing on the date of such Advance or be caused by such
Advance, that all fees required pursuant to Section 5 hereof have been paid as
and when due, and there shall have been no Material Adverse Change since the
date hereof.
SECTION SIX
AFFIRMATIVE COVENANTS
Guarantors and Borrowers covenant and agree that so long as
the Commitment of Banks to Borrowers or any indebtedness of Borrowers to Banks
is outstanding hereunder, each of the Guarantors and Borrowers will (and with
respect to Paragraph 6.12, Borrowers will cause each ERISA Affiliate) to:
6.1. Existence and Good Standing. Preserve and maintain its
existence as a limited partnership or corporation, as applicable, and its good
standing in all states in which it conducts business and the validity of all its
material franchises, licenses and permits required in the conduct of its
business.
6.2. Quarterly Financial Statements. Furnish Banks within
forty-five (45) days of the end of each quarterly fiscal period hereafter, other
than the last quarterly fiscal period in the fiscal year, with unaudited
quarterly consolidated financial statements of SunSource Inc. and its
Consolidated Subsidiaries, in form and substance as required by GAAP, including
for each such quarter (i) a consolidated balance sheet, (ii) a consolidated
statement of income, (iii) a consolidated statement of cash flow and (iv) a
certificate in the form of Exhibit F attached hereto executed by the chief
financial officer or controller of SunSource Inc. showing the calculation of the
covenants set forth in Paragraphs 6.13 through 6.15 and Section Seven hereof
prepared in accordance with GAAP consistently applied and stating that the
financial statements fairly
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present the financial condition of SunSource Inc. and its Consolidated
Subsidiaries as of the date and for the periods covered and that as of the date
of such certificate there exists no violation of any provision of this Agreement
or the happening of any Event of Default or Default.
6.3. Annual Financial Statements. Furnish Banks within ninety
(90) days after the close of each fiscal year commencing with fiscal 1997 with
audited consolidated annual financial statements of SunSource Inc. and its
Consolidated Subsidiaries, including the financial statements, certificate in
the form of Exhibit F attached hereto and information required under Paragraph
6.2 hereof, which consolidated financial statements shall be prepared in
accordance with GAAP. The financial statements delivered pursuant to the
preceding sentence shall be certified without qualification (except with respect
to changes in GAAP as to which SunSource Inc.'s independent certified public
accountants have concurred) by an independent certified public accounting firm
satisfactory to Banks; and SunSource Inc. shall cause Banks to be furnished, at
the time of the completion of the annual audit, with a certificate signed by
such accountants showing the calculation of the covenants set forth in
Paragraphs 6.13 through 6.15 hereof and stating that to the best of their
knowledge there exists no violations of any provisions of this Agreement or the
happening of any Event of Default or Default hereunder.
6.4. Cash Flow Projections. Furnish to Banks, on or before
March 31 of each year, commencing with fiscal year 1998, cash flow projections
of SunSource Inc. and its Consolidated Subsidiaries on a consolidated basis for
the twelve (12) month period ending on December 31 of such year.
6.5. Public Information. Deliver to Banks, promptly upon
transmission thereof, copies of all such financial statements, proxy statements,
notices and reports as the Company shall send to its limited partners or to the
holders of the Senior Notes or the Junior Subordinated Debentures, copies of all
registration statements (without exhibits), and all annual, quarterly or other
reports which the Company or the Guarantors files with the Securities and
Exchange Commission (or any governmental body or agency succeeding to the
functions of the Securities and Exchange Commission) including without
limitation, Form 10Q and Form 10K; and copies of all auditors' annual management
letters delivered to SunSource Inc., the Company or a Guarantor.
6.6. Books and Records. Keep and maintain satisfactory and
adequate books and records of account in accordance with GAAP and make or cause
the same to be made available to Banks or their agents or nominees at any
reasonable time during normal business hours upon reasonable notice for
inspection and to make extracts thereof and permit Agent or any Bank to discuss
contents of same with senior officers of SunSource Inc., Borrowers or a
Guarantor and also with outside auditors and accountants of SunSource Inc.,
Borrowers or a Guarantor.
6.7. Properties; Insurance. Keep and maintain all of its
property and assets in good order and repair and materially covered by insurance
with reputable and financially sound insurance companies against such hazards
and in such amounts as is customary in the industry,
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under policies requiring the insurer to furnish reasonable notice to Banks and
opportunity to cure any non-payment of premiums prior to termination of
coverage; and, as required above, furnish Banks with certificates of such
insurance.
6.8. Notices to Banks. Notify Banks in writing immediately of
(i) the institution of any litigation, the commencement of any administrative
proceedings, the happening of any event or the assertion or threat of any claim
which might reasonably be expected to have a Material Adverse Effect, (ii) the
occurrence of any Event of Default or Default hereunder or (iii) any notice
delivered to the Trustee from SunSource Inc. or the holder of any Senior
Indebtedness (as defined in the Indenture) in respect of Section 14.06 of the
Indenture.
6.9. Taxes. Pay and discharge all taxes, assessments or other
governmental charges or levies imposed on it or any of its property or assets
prior to the date on which any penalty for non-payment or late payment is
incurred, unless the same are (a) being contested in good faith by appropriate
proceedings and (b) are covered by appropriate reserves maintained in cash or
cash equivalents in accordance with GAAP.
6.10. Costs and Expenses. Pay or reimburse Agent for all
reasonable out-of-pocket costs and expenses (including but not limited to
reasonable attorneys' fees and disbursements) Agent may pay or incur in
connection with the preparation and review of this Agreement and all waivers,
consents and amendments in connection therewith and all other documentation
related thereto and the making of the Loan hereunder; and pay or reimburse Banks
for all reasonable out-of-pocket costs and expenses (including but not limited
to reasonable attorneys' fees and disbursements) Banks may pay or incur in
connection with the collection or enforcement of the same, including without
limitation any fees and disbursements incurred in defense of or to retain
amounts of principal, interest or fees paid. All obligations provided for in
this Paragraph 6.10 shall survive any termination of this Agreement or the
Commitment and the repayment of the Loan.
6.11. Compliance; Notification.
(a) Except to the extent that noncompliance would not
have a Material Adverse Effect, comply in all respects with all local, state and
federal laws and regulations applicable to its business, including without
limitation the Environmental Control Statutes, the Securities Act, and all laws
and regulations of the Local Authorities, and the provisions and requirements of
all franchises, permits, licenses and other like grants of authority held by
Borrowers or Guarantors; and notify Banks immediately in detail of any actual or
alleged failure to comply with, failure to perform, breach, violation or default
under any such laws or regulations or under the terms of any of such franchises,
permits, certificates, licenses or grants of authority, or of the occurrence or
existence of any facts or circumstances which with the passage of time, the
giving of notice or otherwise could create such a failure, breach, violation or
default or could occasion the termination of any of such franchises, permits,
certificates, licenses
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or grants of authority, except to the extent that such matter would not have a
Material Adverse Effect.
(b) With respect to the Environmental Control
Statutes, promptly notify Agent when, in connection with the conduct of
Borrowers' businesses or operations, any person (including, without limitation,
EPA or any state or local agency) provides oral or written notification to
Borrowers or Guarantors or Borrowers or Guarantors otherwise become aware of a
condition with regard to an actual or imminently threatened removal, spill,
release or discharge of hazardous or toxic wastes, substances or petroleum
products that requires notification to the applicable governmental authority
under an Environmental Control Statute and would have an Environmental Material
Adverse Effect; and notify Banks in detail promptly upon the receipt by
Borrowers or Guarantors of an assertion of liability under the Environmental
Control Statutes, of any actual or alleged failure to comply with or perform,
breach, violation or default under any such statutes or regulations or of the
occurrence or existence of any facts, events or circumstances which with the
passage of time, the giving of notice, or both, could create such a breach,
violation or default and would have an Environmental Material Adverse Effect.
(c) With respect to each disclosure previously made
to Agent pursuant to Exhibit E attached hereto or Paragraph 6.11(b) hereof
regarding alleged or actual liability under Environmental Control Statutes, not
later than twenty (20) days after the last day of each fiscal quarter, deliver
to Agent a report describing (i) the estimated dollar amount, when initially
determined, of any such liability (including costs of investigation and
remediation) and if any such initial estimate with respect to a disclosed matter
shall be modified thereafter by more than $1,000,000, the modified dollar
amount; and (ii) any information or change in circumstances regarding actual or
alleged liability under Environmental Control Statutes of Borrowers or
Guarantors, if the effect thereof would be to increase liability in connection
with the investigation or remediation with respect thereto by more than
$1,000,000.
6.12. ERISA. (a) Comply, and cause any Plan maintained for the
employees of SDIPI, Guarantors or Borrowers to comply, in all material respects
with the provisions of ERISA; (b) not incur any material Accumulated Funding
Deficiency or any material liability to the PBGC (as established by ERISA); (c)
permit any event to occur (i) as described in Section 4042 of ERISA or (ii)
which may result in the imposition of a lien on its properties or assets; and
(d) notify Banks in writing promptly after it has come to the attention of
senior management of Guarantors or Borrowers of the assertion or threat of any
"reportable event" or other event described in Section 4042 of ERISA (relating
to the soundness of a Plan), except those with respect to which the PBGC has
waived the 30 day notice rule, or the PBGC's ability to assert a material
liability against it) or impose a lien on Guarantors' or Borrowers' properties
or assets.
6.13. Capitalization Ratio. Maintain a Capitalization Ratio
not to exceed: (i) with respect to the last day of each of the first two fiscal
quarters in each fiscal year, sixty-two percent (62%) and (ii) with respect to
the last day of each of the last two fiscal quarters of each fiscal year, sixty
percent (60%).
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6.14. Fixed Charge Coverage Ratio. Maintain as of the last day
of each fiscal quarter set forth in the left hand column, for the Rolling Period
ending on such date, a Fixed Charge Coverage Ratio for SunSource Inc. and its
Consolidated Subsidiaries of not less than the amount set forth in the right
hand column:
Period Minimum Ratio
------ -------------
Date of Agreement through 3/31/98 1.00
6/30/98 through 12/31/98 1.25
3/31/99 through 9/30/99 1.40
12/31/99 and the last day of each fiscal quarter thereafter 1.50
6.15. Leverage Ratio. Maintain on the last day of each
fiscal quarter a Leverage Ratio of not greater than 3.25:1.
6.16. Management Changes. Notify Banks in writing within
thirty (30) days after any change of its management group as described in the
"Change of Control" definition.
6.17. Subsequent Credit Terms.
(a) Notify Bank in writing not less than five (5)
Business Days prior to its entering into any amendment or modification of any
credit arrangement, whether now in effect or hereafter incurred, pursuant to
which Borrowers or Guarantors agree to financial covenants which are more
restrictive to Borrowers or Guarantors than those contained in sections Six and
Seven hereof. Upon entering into any such amendment or modification, and with
respect to the covenants in the Note Purchase Agreements, the corresponding
covenants, terms and conditions of this Agreement are and shall be deemed to be
automatically and immediately amended to conform with and to include the
applicable covenants, terms and/or conditions of such other agreement; provided,
however, that the foregoing shall not be applicable to or be deemed to affect
any provision of this Agreement to the extent that any amendment or modification
is less restrictive than the corresponding provisions of this Agreement.
(b) Borrowers and Guarantors hereby agree promptly to
execute and deliver any and all such documents and instruments and to take all
such further actions as Agent may, in its sole discretion, deem necessary or
appropriate to effectuate the provisions of this Paragraph 6.17.
6.18. Use of Proceeds. Use the proceeds of the Loan only for
the purposes set forth in Paragraph 2.4 hereof.
6.19. Successor Agent. In the event of the appointment of any
successor Agent pursuant to Paragraph 10.15 hereof, execute and deliver any
documents reasonably requested by
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Banks to effectuate and confirm the transfer to such successor Agent of all
rights, powers, duties, obligations and property vested in its predecessor Agent
hereunder.
6.20. Transactions Among Affiliates. Cause all transactions
between and among Affiliates to be on an arms-length basis and on such terms and
conditions as are customary in the applicable industry between and among
unrelated entities.
6.21. Other Information. Provide Banks with any other
documents and information, financial or otherwise, reasonably requested by Banks
from time to time.
SECTION SEVEN
NEGATIVE COVENANTS
So long as the Commitment or any Indebtedness of Borrowers to
Banks remains outstanding hereunder, each of Borrowers and Guarantors covenants
and agrees that it will not:
7.1. Indebtedness. Borrow any monies or create any
Indebtedness except (i) borrowings from Banks hereunder; (ii) Indebtedness
evidenced by the Senior Notes not to exceed Sixty Million Dollars ($60,000,000)
aggregate principal amount outstanding at any time, which shall rank equally and
are pari passu with the obligations to the Banks hereunder; (iii) Indebtedness
under the Junior Subordinated Debentures, not to exceed One Hundred Five Million
Five Hundred Thousand Dollars ($105,500,000) principal amount outstanding at any
time (but not including any amounts which constitute Compounded Interest, as
defined in the Indenture), which shall be subordinate and junior to the
obligations to the Banks hereunder; (iv) trade Indebtedness in the normal and
ordinary course of business for value received, of which no more than Five
Million Dollars ($5,000,000) shall be outstanding at any time under Trade Notes;
(v) Indebtedness and obligations incurred or assumed to purchase or lease fixed
or capital assets, provided, however, that the total principal amount of such
Indebtedness and obligations incurred in any calendar year shall not exceed in
the aggregate Seven Million Five Hundred Thousand Dollars ($7,500,000); (vi)
borrowings from the Company by its Subsidiaries to the extent the Company is
permitted to make such loans pursuant to Paragraph 7.3(i) hereof; (vii)
Indebtedness outstanding on the date hereof and disclosed on Exhibit E hereto,
but without any increase in the outstanding principal amount thereof; (viii) up
to an additional Ten Million Dollars ($10,000,000) aggregate principal amount
outstanding at any time (which shall include the revolving credit facility with
the Bank of Nova Scotia); and (ix) unsecured promissory notes in favor of
sellers of assets or stock in acquisitions otherwise permitted pursuant to
Paragraph 7.8 hereof not to exceed Ten Million Dollars ($10,000,000); provided,
however, that Indebtedness of Subsidiaries under clauses (v) and (viii) hereof
shall in no event exceed in the aggregate outstanding at any time Five Million
Dollars ($5,000,000).
7.2. Guaranties. Guarantee or assume or agree to become liable
in any way, either directly or indirectly, for any additional Indebtedness or
liability of others (except
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hereunder and with respect to the Senior Notes and to endorse checks or drafts
in the ordinary course of business), except that (i) Borrowers may guarantee
Indebtedness which in the aggregate shall not exceed Five Million Dollars
($5,000,000) outstanding at any time and (ii) any entity may guarantee debt of
another entity otherwise permitted hereunder.
7.3. Loans. Make any loans or advances to others provided that
the Company may make loans and advances to (i) the Subsidiaries not to exceed
Seven Million Five Hundred Thousand Dollars ($7,500,000) in aggregate
outstanding principal amount at any time, and (ii) to its sales personnel in the
ordinary course of business.
7.4. Liens and Encumbrances. Create, permit or suffer the
creation of any liens, security interests, or any other encumbrances on any of
its property, real or personal, except (i) liens arising in favor of sellers or
lessors for indebtedness and obligations incurred to purchase or lease fixed or
capital assets permitted under Paragraph 7.1(v) hereof, provided, however, that
such liens secure only the indebtedness and obligations created thereunder and
are limited to the assets purchased or leased pursuant thereto; (ii) liens for
taxes, assessments or other governmental charges, federal, state or local, which
are then being currently contested in good faith by appropriate proceedings and
are covered by appropriate reserves maintained in cash or cash equivalents and
in accordance with GAAP; (iii) pledges or deposits to secure obligations under
workmen's compensation, unemployment insurance or social security laws or
similar legislation; (iv) deposits to secure performance or payment bonds, bids,
tenders, contracts, leases, franchises or public and statutory obligations
required in the ordinary course of business; (v) deposits to secure surety,
appeal or custom bonds required in the ordinary course of business and (vi)
liens and security interests securing up to Five Million Dollars ($5,000,000) of
Indebtedness outstanding under Trade Notes.
7.5. Additional Negative Pledge. Agree or covenant with or
promise any person or entity other than Banks and the holders of the Senior
Notes that it will not pledge its assets or properties or otherwise grant any
liens, security interests or encumbrances on its property on terms similar to
those set forth in Paragraph 7.4 hereof.
7.6. Restricted Payments. Make any Restricted Payments;
provided, however that so long as there exists no Event of Default or Default
under this Agreement and no Event of Default or Default will result therefrom:
(i) SunSource Inc. may pay dividends on its common stock; (ii) SunSource Inc.
may make regularly scheduled interest payments on the Junior Subordinated
Debentures as in effect on the date hereof; and (iii) SunSource Inc. may make
Tax Distributions; provided further that if the Leverage Ratio immediately prior
to and after giving effect to such purchase is less than 2.25 to 1, as set forth
in a certificate of the chief financial officer or controller of SunSource Inc.
and delivered to Agent, then SunSource Inc. may purchase or redeem its common
stock or purchase Trust Preferred Securities, provided a like amount of the
Junior Subordinated Debentures are simultaneously purchased.
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7.7. Transfer of Assets. Sell, lease, transfer or otherwise
dispose of all or any portion of its assets, real or personal, other than such
transactions made on an arm's length basis in the normal and ordinary course of
business for value received; provided, however, that in the absence of a Default
or an Event of Default, and, if a Default or Event of Default would not result
therefrom, Borrowers may (i) sell assets other than in transactions made on an
arm's length basis in the normal and ordinary course of business for value
received in the aggregate after the date hereof for all such transactions up to
Fifteen Million Dollars ($15,000,000) and (ii) consummate a Sale of Material
Assets, provided that the Commitment shall be permanently reduced and the Loan
shall be repaid in connection therewith pursuant to Paragraphs 2.8(c) and (d)
hereof by an amount equal to the Banks' Applicable Share received by Borrowers
on account of such sale(s), to the extent such sale(s), in the aggregate, exceed
Fifteen Million Dollars ($15,000,000).
7.8. Acquisitions and Investments. (a) Purchase or otherwise
acquire any part or amount of the capital stock or assets of, or make any
investments in, any other entity or corporation, except Permitted Investments;
(b) create, acquire or maintain any Subsidiary not listed on Schedule I hereto,
except: (i) A & H Holding Company, Inc., (ii) if the Subsidiary is either
directly or indirectly owned by A & H Holding Company, Inc. or (iii) if the
Subsidiary executes a joinder to this Agreement and the Promissory Notes to
become a joint and several obligor hereunder and delivers such opinions and
certificates as Agent shall reasonably request; (c) enter into any new business
activities or ventures not directly related to its present business; or (d)
merge or consolidate with or into any other entity or corporation, except that
SunSub A, SunSub B, SunSource Inc. or SDIPI may be merged into the Company if
the Company is the surviving entity; provided, however, that in the absence of a
Default or an Event of Default hereunder, and if a Default or Event of Default
would not result therefrom, Borrowers may make acquisitions (by merger or
purchase) of substantially all but not less than substantially all of other
entities or corporations in the same or substantially the same business as
Borrowers. Borrowers shall provide to Agent a cash flow projection from the date
of any proposed acquisition with a purchase price exceeding Ten Million Dollars
($10,000,000), showing prospective compliance with Paragraphs 6.13 through 6.15
and Section Seven of this Agreement through the Termination Date.
7.9. Use of Proceeds. Use any of the proceeds of the Loan,
directly or indirectly, to purchase or carry margin securities within the
meaning of Regulation U of the Board of Governors of the Federal Reserve System;
or engage as its principal business in the extension of credit for purchasing or
carrying such securities.
7.10. Amendment of Documents. (a) Without the consent of
Agent, which consent shall not be withheld unreasonably, amend or permit any
amendments to: Borrowers' or Guarantors' organizational documents (including
without limitation the Partnership Agreements); the Declaration of Trust; the
Indenture; the Terms of Common Securities of the Trust; the Terms of Preferred
Securities of the Trust; the Preferred Securities Guaranty; and (b) with respect
to those provisions of the Note Purchase Agreement relating to financial
covenants
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(Paragraph 5.12 through 5.14), events of default (Section 8), mandatory or
voluntary prepayments (Paragraphs 4.2, 4.3, 4.4, 4.7 and 4.8) and all
definitions related thereto, any amendment, waiver or consent thereto shall
require the simultaneous amendment, waiver or consent of the Banks or Required
Banks, as applicable, to the corresponding provision in this Agreement.
7.11. Payment of Senior Notes. Make any payment of principal
on the Senior Notes except if simultaneously with such payment a reduction of
Commitment and prepayment to the extent of Bank's Applicable Share of such
payment is made pursuant to Paragraph 2.8 hereof.
SECTION EIGHT
RIGHT OF SETOFF
After and during the continuation of any Event of Default
hereunder, each Bank is hereby authorized at any time and from time to time, to
the fullest extent permitted by law, to setoff and apply any and all deposits
(general or special, time or demand, provisional or final) at any time held and
other indebtedness at any time owing by such Bank to or for the credit or the
account of the Borrowers against any and all of the obligations of the Borrowers
now or hereafter existing under this Agreement and the Promissory Note held by
such Bank; provided that to the extent not prohibited by applicable law or
affecting the Banks' or holder of the Senior Notes' right to retain such funds,
Banks shall retain Banks' Applicable Share of the Net Cash Proceeds of any
amount so recovered and the remainder shall be shared with the holder of the
Senior Notes. Each Bank agrees promptly to notify the Borrowers and Agent after
any such setoff and application made by such Bank; provided, however, that the
failure to give such notice shall not affect the validity of such setoff and
application. The rights of each Bank under this Section Eight are in addition to
other rights and remedies (including, without limitation, other rights of
setoff) which such Bank may have.
SECTION NINE
DEFAULT
9.1. Events of Default. Each of the following events shall be
an Event of Default hereunder:
(a) If any Borrower or Guarantor shall fail to pay
(i) any installment of principal, or interest when due or (ii) fees, costs,
expenses or any other sum payable to Banks hereunder or otherwise within 5 days
after notice from Agent it is due;
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(b) If any representation or warranty made herein or
in connection herewith or in any statement, certificate or other document
furnished hereunder is incorrect, false or misleading in any material respect
when made;
(c) If any Borrower or Guarantor shall default in the
payment or performance of any obligation or Indebtedness to another, either
singly or in the aggregate in excess of $1,000,000, whether now or hereafter
incurred;
(d) If there shall be a default in or failure to
observe at any test date the covenants set forth in Paragraphs 6.13 through 6.15
or Section Seven hereof;
(e) If any Borrower or Guarantor shall default in the
performance of any other agreement or covenant contained herein (other than as
provided in subparagraphs (a), (b) or (d) above) or in any document executed or
delivered in connection herewith, and such default shall continue uncured for
twenty (20) days after the earlier of (i) any Borrower having actual knowledge
of such default, and (ii) notice thereof to Borrowers given by Agent pursuant to
the direction of Required Banks;
(f) If a Change of Control shall occur;
(g) If custody or control of any substantial part of
the property of any Borrower or Guarantor shall be assumed by any governmental
agency or any court of competent jurisdiction at the instance of any
governmental agency; if any material license or franchise shall be suspended,
revoked or otherwise terminated; if any governmental regulatory authority or
judicial body shall make any other final non-appealable determination the effect
of which would be to affect materially and adversely the operations of any
Borrower or Guarantor as now conducted;
(h) If any Borrower or Guarantor: becomes insolvent,
bankrupt or generally fails to pay its debts as such debts become due; is
adjudicated insolvent or bankrupt; admits in writing its inability to pay its
debts; or shall suffer a custodian, receiver or trustee for it or substantially
all of its property to be appointed and if appointed without its consent, not be
discharged within thirty (30) days; makes an assignment for the benefit of
creditors; or suffers proceedings under any law related to bankruptcy,
insolvency, liquidation or the reorganization, readjustment or the release of
debtors to be instituted against it and if contested by it not dismissed or
stayed within thirty (30) days; if proceedings under any law related to
bankruptcy, insolvency, liquidation, or the reorganization, readjustment or the
release of debtors is instituted or commenced by any Borrower; if any order for
relief is entered relating to any of the foregoing proceedings; if any Borrower
or Guarantor shall call a meeting of its creditors with a view to arranging a
composition or adjustment of its debts; or if any Borrower or Guarantor shall by
any act or failure to act indicate its consent to, approval of or acquiescence
in any of the foregoing;
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(i) any event or condition shall occur or exist with
respect to any activity or substance regulated under the Environmental Control
Statutes and as a result of such event or condition, any Guarantor or Borrower
has incurred or in the opinion of the Borrowers are reasonably likely to incur a
liability in excess of $1,000,000 during any consecutive twelve (12) month
period;
(j) if any judgment, writ, warrant or attachment or
execution or similar process which calls for payment or presents liability in
excess of $1,000,000 shall be rendered, issued or levied against any Guarantor
or Borrower or its respective property and such process shall not be paid,
waived, stayed, vacated, discharged, settled, satisfied or fully bonded within
sixty (60) days after its issuance or levy; provided, however that if a
judgment, writ, warrant or attachment or execution or similar process relates to
federal or state taxation, then an Event of Default shall occur if the same
shall not be paid, waived, stayed, vacated, discharged, settled, satisfied or
fully bonded within one hundred twenty (120) days after its issuance or levy; or
(k) If SunSource Inc. makes a payment of principal or
interest on or purchases or redeems the Junior Subordinated Debentures and the
Trust does not immediately use such funds to make Distributions Paid on Trust
Securities.
9.2. Remedies. Upon the happening and during the continuation
of any Event of Default, at the election of Required Lenders, and by notice by
Agent to Borrowers (except if an Event of Default described in Paragraph 9.1(h)
shall occur in which case acceleration shall occur automatically without
notice), Required Lenders may declare the entire unpaid balance, principal,
interest and fees, of all indebtedness of Borrowers to Banks, hereunder or
otherwise, to be immediately due and payable. Upon such declaration, the
Commitment shall immediately and automatically terminate and Banks shall have no
further obligation to make any advances and the immediate right to enforce or
realize on any collateral security granted therefor in any manner or order they
deem expedient without regard to any equitable principles of marshaling or
otherwise. In addition to any rights granted hereunder or in any documents
delivered in connection herewith, Banks shall have all the rights and remedies
granted by any applicable law, all of which shall be cumulative in nature.
SECTION TEN
THE BANKS
This Section sets forth the relative rights and duties of
Agent, Documentation Agent and Banks respecting the Loan and does not confer any
enforceable rights on Borrowers against Banks or create on the part of Banks any
duties or obligations to the Borrowers.
10.1. Application of Payments. Agent shall apply all payments
of principal, interest, commitment fee or other amounts hereunder made to Agent
by or on behalf of Borrowers, to Banks on the basis of their Pro Rata Shares of
the outstanding principal balance of
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the Loan hereunder, and shall apply the fees paid to the Agent on its own behalf
upon the issuance of each Letter of Credit in Paragraph 3.4 hereof.
10.2. Setoff. In the event a Bank, by exercise of its right of
setoff, or otherwise, receives any payment of the indebtedness owing to it
hereunder in an amount greater than its Pro Rata Share of such payment based
upon the Banks' respective shares of the Loan outstanding immediately before
such payment, such Bank shall purchase a portion of the Loan hereunder owing to
each other Bank so that after such purchase each Bank shall hold its Pro Rata
Share of Loan then outstanding hereunder, provided that if all or any portion of
such excess payment is thereafter recovered from such Bank, such purchase shall
be rescinded and the purchase price restored to the extent of any such recovery,
but without interest.
10.3. Modifications and Waivers. No modification or amendment
hereof, consent hereunder or waiver of Event of Default shall be effective
except by written consent of the Required Banks, provided, however, (A) that the
written consent of all Banks shall be required to: (i) decrease the rate of
interest or fees due hereunder, (ii) increase or, other than in the case of pro
rata reductions pursuant to Paragraph 2.8 hereof, decrease the amount of the
Commitment or the Banks' respective Pro Rata Shares thereof, (iii) modify, amend
or waive compliance with the dates of payment of principal, interest or fees
hereunder, (iv) modify, amend or waive compliance with the commitment fee, (v)
modify, amend, waive or release any Guarantor from the provisions of Section
Eleven hereof; or (vi) amend or modify the provisions of the definition of
Required Banks or this Paragraph 10.3; (B) with respect to: (i) Paragraphs 6.13,
6.14 and 6.15 and Section Seven hereof; (ii) any of the Events of Default set
forth in Paragraph 9.1 hereof; (iii) the mandatory and voluntary prepayment
provisions of Paragraph 2.8 hereof; and (iv) any of the definitions relating to
the matters described in clauses (i) through (iii) above, the holders of the
Senior Notes shall have simultaneously amended, waived or modified the
corresponding provision to the Note Purchase Agreement; and (C) that any
amendment pursuant to Paragraph 2.1(d) shall not require the consent of any
Bank, each of which hereby agrees to execute such amendment to implement the
Additional Commitment. The Borrowers hereby agree to execute such further
documents including without limitation amendments to this Agreement, and the
Promissory Note(s), and certificates and deliver such opinions as the Agent and
its counsel shall so request to implement any termination or replacement
contemplated hereby. Any amendment or waiver made pursuant to this Section 10.3
shall apply to and bind all of the Banks and any future holder of any Promissory
Notes. No modification or waiver of any provision of this Agreement or any
Promissory Note, nor any consent to any departure by the Borrowers herefrom or
therefrom, shall in any case be effective unless the same be in writing, and
then such waiver or consent shall be effective only in the specific instance and
for the specific purpose for which given. No notice to or demand on the
Borrowers in any case shall entitle the Borrowers to any other or further notice
or demand in any similar or other circumstances.
10.4. Obligations Several. The obligations of the Banks
hereunder are several, and each Bank hereunder shall not be responsible for the
obligations of the other Banks
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hereunder, nor, will the failure of one Bank to perform any of its obligations
hereunder relieve the other Banks from the performance of their respective
obligations hereunder.
10.5. Banks' Representations. Each Bank represents and
warrants to the other Banks that (i) it has been furnished all information it
has requested for the purpose of evaluating its proposed participation under
this Agreement; and (ii) it has decided to enter into this Agreement on the
basis of its independent review and credit analysis of Borrowers, this Agreement
and the documentation in connection therewith and has not relied for such
analysis on any information or analysis provided by any other Bank.
10.6. Investigation. No Bank shall have any obligation to the
others to investigate the condition of the Borrowers or any other matter
concerning the Loan.
10.7. Powers of Agent; Rights and Duties of Documentation
Agent. Agent shall have and may exercise those powers specifically delegated to
Agent herein, together with such powers as are reasonably incidental thereto.
The parties hereby agree that Documentation Agent, in its capacity as
Documentation Agent hereunder, shall not have any obligations, rights or duties
hereunder.
10.8. General Duties of Agent, Immunity and Indemnity. In
performing its duties as Agent hereunder, Agent will take the same care as it
takes in connection with loans in which it alone is interested, subject to the
limitations on liabilities contained herein; provided that Agent shall not be
obligated to ascertain or inquire as to the performance of any of the terms,
covenants or conditions hereof by Borrowers. Neither Agent nor any of its
directors, officers, agents or employees shall be liable for any action or
omission by any of them hereunder or in connection herewith except for gross
negligence or willful misconduct. Subject to such exception, each of the Banks
hereby indemnifies Agent on the basis of such Bank's Pro Rata Share, against any
such liability, claim, loss or expense.
10.9. No Responsibility for Representations or Validity, etc.
Each Bank agrees that Agent shall not be responsible to any Bank for any
representations, statements, or warranties of Borrowers herein. Agent will
promptly deliver to Banks such reports, notices and material information which
it receives from Borrowers. Neither Agent nor any of its directors, officers,
employees or agents shall be responsible for the validity, effectiveness,
sufficiency, perfection or enforceability of this Agreement or any documents
relating thereto.
10.10. Action on Instruction of Banks; Right to Indemnity.
Agent shall in all cases be fully protected in acting or refraining from acting
hereunder in accordance with written instructions to it signed by Required Banks
unless the consent of all the Banks is expressly required hereunder in which
case Agent shall be so protected when acting in accordance with such
instructions from all the Banks. Such instructions and any action taken or
failure to act pursuant thereto shall be binding on all the Banks, provided that
except as otherwise provided herein, Agent may act hereunder in its own
discretion without requesting such instructions.
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Agent shall be fully justified in failing or refusing to take any action
hereunder unless it shall first be specifically indemnified to its satisfaction
by the other Banks on the basis of their respective Pro Rata Shares, against any
and all liability and expense which it may incur by reason of taking or
continuing to take any such action.
10.11. Employment of Agents. In connection with its activities
hereunder, Agent may employ agents and attorneys-in-fact and shall not be
answerable, except as to money or securities received by it or its authorized
agents, for the default or misconduct of agents or attorneys-in-fact selected
with reasonable care.
10.12. Reliance on Documents. Agent shall be entitled to rely
upon any paper or document believed by it to be genuine and correct and to have
been signed or sent by the proper person or persons and upon the opinion of its
counsel with respect to legal matters.
10.13. Agent's Rights as a Bank. With respect to its share of
the indebtedness hereunder, Agent shall have the same rights and powers
hereunder as any other Bank and may exercise the same as though it were not
Agent. Each of the Banks may accept deposits from, lend money to, and generally
engage in any kind of banking or trust business with Borrowers as if it were not
Agent or a Bank hereunder.
10.14. Expenses. Each of the Banks shall reimburse Agent, from
time to time at the request of Agent, for its Pro Rata Share of any expenses
incurred by Agent in connection with the performance of its functions hereunder,
provided however that in the event Banks shall reimburse Agent for expenses for
which Borrowers subsequently reimburse Agent, Agent shall remit to each Bank the
respective amount received from such Bank against such expenses.
10.15. Resignation of Agent. Agent may at any time resign its
position as Agent, without affecting its position as a Bank, by giving written
notice to Banks and Borrowers. Such resignation shall take effect upon the
appointment of a successor agent in accordance with this Paragraph. In the event
Agent shall resign, Banks shall appoint a bank as successor agent. If within
thirty (30) days of the Agent's notice of resignation no successor agent shall
have been appointed by Banks and accepted such appointment, then Agent, in its
discretion may appoint any other bank as a successor agent.
10.16. Successor Agent. The successor Agent appointed pursuant
to Paragraph 10.15 shall execute and deliver to its predecessor and Banks an
instrument in writing accepting such appointment, and thereupon such successor,
without any further act, deed or conveyance, shall become fully vested with all
the properties, rights, duties and obligations of its predecessor Agent. The
predecessor Agent shall deliver to its successor Agent forthwith all collateral
security, documents and moneys held by it as Agent, if any, whereupon such
predecessor Agent shall be discharged from its duties and obligations as Agent
under this Agreement.
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10.17. Collateral Security. Agent will hold, administer and
manage any collateral security pledged from time to time hereunder either in its
own name or as Agent, but each Bank shall hold a direct, undivided pro-rata
beneficial interest therein, on the basis of its Pro Rata Share, by reason of
and as evidenced by this Agreement.
10.18. Enforcement by Agent. All rights of action under this
Agreement and under the Promissory Notes and all rights to the collateral
security, if any, hereunder may be enforced by Agent and any suit or proceeding
instituted by Agent in furtherance of such enforcement shall be brought in its
name as Agent without the necessity of joining as plaintiffs or defendants any
other Banks, and the recovery of any judgment shall be for the benefit of Banks
subject to the expenses of Agent.
SECTION ELEVEN
GUARANTY
11.1. Guaranty. Each Guarantor hereby irrevocably, absolutely
and unconditionally guarantees and becomes surety for the full, prompt and
punctual payment to Banks, as and when due, whether at maturity, by acceleration
or otherwise, of any and all Indebtedness, liabilities and obligations of the
Borrowers to Banks created at any time under, or pursuant to the terms of, this
Agreement and of the Promissory Notes, whether for principal, interest,
premiums, fees, expenses or otherwise (all such indebtedness, liabilities and
obligations being called in this Section Eleven collectively the "Obligations"),
together with any and all reasonable expenses, including attorneys' fees and
disbursements, which may be incurred by Agent in enforcing any and all rights
against Guarantors under this Agreement (herein the "Expenses").
11.2. Bankruptcy. Without limiting Guarantors' obligations
hereunder and notwithstanding any purported termination of this Section Eleven
or this Agreement, if any bankruptcy, insolvency, reorganization, arrangement,
readjustment, composition, liquidation, dissolution, assignment for the benefit
of creditors, or similar event with respect to the Borrowers or any additional
guarantor or endorser of all or any of the Obligations and Expenses shall occur,
and such occurrence shall result in the return of (or if in such event a Bank
shall be requested to return) any payment or performance of any of the
Obligations or Expenses, then the obligations of each Guarantor hereunder shall
be reinstated with respect to such payment or performance returned or requested
to be returned and with respect to all further obligations arising as a result
of such return or request, and each Guarantor shall thereupon be liable
therefor, without any obligation on the part of any Bank to contest or resist
any such return.
11.3. Nature and Term of Guaranty. The obligations of each
Guarantor under this Section Eleven shall be independent, absolute, irrevocable
and unconditional and shall remain in full force and effect until the
Obligations and all other amounts payable hereunder shall have been paid in full
(subject, however, to reinstatement under Paragraph 11.2 hereof).
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11.4. Rights and Remedies of Agent. Agent, acting on behalf of
Banks may proceed to exercise any right or remedy which it may have under this
Section Eleven against Guarantors without first pursuing or exhausting any
rights or remedies which it may have against the Borrowers, any additional
guarantor or against any other person or entity or any collateral security, and
may proceed to exercise any right or remedy which it may have under this Section
Eleven without regard to any actions or omissions of any other person or entity,
in any manner or order, without any obligation to marshal in favor of Guarantors
or other persons or entities and without releasing any of Guarantors'
obligations hereunder with respect to any unpaid Obligations and Expenses. No
remedy herein conferred upon or reserved to Agent is intended to be exclusive of
any other available remedy or remedies, but each and every such remedy shall be
cumulative and shall be in addition to every other remedy given under this
Section Eleven or now or hereafter existing at law or in equity.
11.5. Actions by Agent Not Affecting Guaranty. Agent, acting
on behalf of Banks, or Banks, in accordance with Paragraph 10.3 of this
Agreement, may, at any time or from time to time, in such manner and upon such
terms as Banks may deem proper, extend or change the time of payment or the
manner or place of payment of, or otherwise modify or waive any of the terms of,
or release, exchange, settle or compromise any or all of the Obligations and
Expenses or any collateral security therefor, or subordinate payment of the
same, or any part thereof, to the payment of any other indebtedness, liabilities
or obligations of Borrowers which may at any time be due or owing to Banks or
anyone, or elect not to enforce any of Banks' rights with respect to any or all
of the Obligations and Expenses or any collateral security therefor, all without
notice to, or further assent of, Guarantors and without releasing or affecting
Guarantors' obligations under this Section Eleven.
11.6. Payment in Accordance with Promissory Notes and Credit
Agreement. This Section Eleven shall be construed as guaranteeing that the
Obligations and Expenses shall be paid strictly in accordance with the terms of
the Promissory Notes and this Agreement, regardless of any non-perfection of any
collateral security for the Obligations; any invalidity or unenforceability of
this Agreement, the Promissory Notes or any of the Obligations; the voluntary or
involuntary liquidation, dissolution, sale or other disposition of all, or
substantially all of the assets, marshaling of assets and liabilities,
receivership, insolvency, bankruptcy, assignment for the benefit of creditors,
reorganization, arrangement, composition with creditors or readjustment of, or
other similar proceedings affecting Borrowers, Guarantors or any additional
guarantor or endorser of any or all of the Obligations and Expenses or any of
the assets of any of them, or any contest of the validity of this Section Eleven
in any such proceeding; or any law, regulation or decree now or hereafter in
effect in any jurisdiction which might in any manner affect any of such terms or
provisions or any of the rights of Agent with respect thereto or which might
cause or permit Borrowers or any additional guarantor or endorser of the
Obligations and Expenses to invoke any defense to, or any alteration in the
time, amount or manner of payment of any or all of the Obligations and Expenses
or performance of this Section Eleven.
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11.7. Payments Under Guaranty. All payments by Guarantors
hereunder shall be made in immediately available funds and in lawful money of
the United States of America to Agent at its office at Broad and Chestnut
Streets, Philadelphia, PA 19107 or at such other location as Agent shall specify
by notice to Guarantors.
11.8. Waivers and Modifications. No failure or delay on the
part of Agent in exercising any power or right under this Section Eleven against
Guarantors shall operate as a waiver thereof, nor shall any single or partial
exercise of any such right or power preclude any other or further exercise
thereof or the exercise of any other right or power under this Section Eleven.
No modification or waiver of any provision of this Section Eleven, nor consent
to any departure therefrom, shall, in any event, be effective unless the same is
in writing signed by Agent and then such waiver or consent shall be effective
only in the specific instance and for the purpose for which given. No notice to,
or demand on Guarantors, in any case, shall entitle the Guarantors to any other
or further notice or demand in similar or other circumstances.
11.9. Waiver. Each Guarantor hereby waives promptness,
diligence, presentment, demand, notice of acceptance and any other notice with
respect to any of the Obligations and this Section Eleven, except notice of
demand for payment hereunder.
11.10. Subordination of Rights of Subrogation. Guarantors
shall not exercise any rights which Guarantors may acquire by way of subrogation
under this Section Eleven, applicable law or otherwise, by any payment made
hereunder or otherwise, until all of the Obligations and Expenses and all other
amounts payable hereunder (including amounts which may become due following a
reinstatement hereof under Paragraph 11.2 hereof) shall have been paid in full
in cash. If any amount shall be paid to any Guarantor on account of such rights
at any time when all the Obligations and Expenses shall not have been paid in
full (including amounts which may become due following a reinstatement hereof
under Paragraph 11.2 hereof), such amount paid to such Guarantor shall be held
in trust for the benefit of Banks and shall forthwith be paid to Agent to be
credited and applied against the Obligations and Expenses, whether matured or
unmatured, in accordance with the terms of the Promissory Notes and this
Agreement; provided, however, that to the extent not prohibited by applicable
law or affecting the Banks' or holder of the Senior Notes right to retain such
funds, Banks shall retain Banks' Applicable Share of the Net Cash Proceeds of
any amount so recovered and the remainder shall be shared with the holder of the
Senior Notes. If any Guarantor shall make payment to Agent of all or any part of
the Obligations and Expenses and all of the Obligations and Expenses shall be
paid in full, Agent shall, at such Guarantor's request, execute and deliver to
such Guarantor appropriate documents, without recourse and without
representation or warranty, necessary to evidence the transfer, by subrogation,
to Guarantor of an interest in the Obligations resulting from such payment by
Guarantor.
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11.11. No Setoff by Guarantors. No setoff, counterclaim,
reduction, or diminution of any obligation, or any defense of any kind or nature
which Guarantors have or may have against Borrowers or any Bank shall be
available hereunder to Guarantors.
11.12. Continuing Guaranty; Transfer of Promissory Note.
Except as provided in Paragraph 11.2. hereof, this Section Eleven is a
continuing guaranty and shall (i) remain in full force and effect until the
Obligations and Expenses and all other amounts payable under this Section Eleven
shall have been paid in full (subject, however, to reinstatement under Paragraph
11.2 hereof), (ii) be binding upon Guarantors and the successors and assigns of
Guarantors, and (iii) inure to the benefit of Banks, and be enforceable by Agent
and its successors, transferees and assigns. Without limiting the generality of
the foregoing clause (iii), any Bank may, to the extent permitted in this
Agreement endorse, assign or otherwise transfer its Promissory Notes to any
other person or entity, and such other person or entity shall thereupon become
vested with all the rights in respect thereof granted to such Bank herein or
otherwise.
11.13. Representations and Warranties; Covenants. By signing
in the place provided below, each Guarantor hereby makes the representations and
warranties set forth in this Agreement and hereby agrees to the covenants and
other agreements of the Guarantors to the extent set forth in this Agreement.
SECTION TWELVE
MISCELLANEOUS
12.1. Indemnification. Each Borrower and each Guarantor hereby
agrees to defend Agent and each Bank and its directors, officers, agents,
employees and counsel (each an "Indemnified Party") from, and hold each of them
harmless against, any and all losses, liabilities (including without limitation
settlement costs and amounts, transfer taxes, documentary taxes, or assessments
or charges made by any governmental authority other than taxes imposed on the
net income of a Bank), claims, damages, interests, judgments, costs, or
expenses, including without limitation reasonable fees and disbursements of
counsel, incurred by any of them arising out of or in connection with or by
reason of this Agreement, the Commitment or the making of the Loan, including
without limitation, any and all losses, liabilities, claims, damages, interests,
judgments, costs or expenses relating to or arising under any Environmental
Control Statute or the application of any such Statute to any of Borrowers' or
Guarantors' properties or assets, provided, that neither the Borrowers nor the
Guarantors shall be liable for any portion of such losses, liabilities, claims,
damages, interests, judgments, costs and expenses resulting from the gross
negligence or willful misconduct of an Indemnified Party. All obligations
provided for in this Paragraph 12.1 shall survive any termination of this
Agreement or the Commitment and the repayment of the Loan.
12.2. Participations and Assignments. Each Borrower hereby
acknowledges and agrees that a Bank may at any time: (a) grant participations in
its right, title and interest therein or
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in or to this Agreement (collectively, "Participations") to any other lending
office or to any other bank, lending institution or other entity which has the
requisite sophistication to evaluate the merits and risks of investments in
Participations (collectively, "Participants"); provided, however, that: (i) all
amounts payable by Borrowers hereunder shall be determined as if such Bank had
not granted such Participation; and (ii) any agreement pursuant to which any
Bank may grant a Participation: (x) shall provide that such Bank shall retain
the sole right and responsibility to enforce the obligations of Borrowers
hereunder including, without limitation, the right to approve any amendment,
modification or waiver of any provisions of this Agreement; (y) such
participation agreement may provide that such Bank will not agree to any
modification, amendment or waiver of this Agreement without the consent of the
Participant if such amendment, modification or waiver would reduce the principal
of or rate of interest on the Loan or postpone the date fixed for any payment of
principal of or interest on the Loan or release the guaranty provided for
herein; and (z) shall not relieve such Bank from its obligations, which shall
remain absolute, to make Advances hereunder and (b) assign its right, title and
interest therein or in and to this Agreement in an aggregate amount of at least
the lesser of (i) Five Million Dollars ($5,000,000) or (ii) its remaining
interest in the Loan, to a third party with the prior written consent of the
Agent and in the absence of a Default or an Event of Default, the Company, which
consent of the Company shall not be unreasonably withheld (provided, however,
that a Bank may assign up to one hundred percent (100%) of its interests and
consent shall not be required in connection with (i) an assignment from a Bank
to its affiliate or another Bank or (ii) a pledge by a Bank to its Federal
Reserve Bank) and upon payment to Agent of a transfer fee in the amount of
$3,500.
12.3. Binding and Governing Law. This Agreement and all
documents executed hereunder shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and assigns;
provided, however, that Borrowers may not assign this Agreement without the
prior written consent of Banks, and shall be governed as to their validity,
interpretation and effect by the laws of the Commonwealth of Pennsylvania.
12.4. Survival. All agreements, representations, warranties
and covenants of Borrowers contained herein or in any documentation required
hereunder shall survive the execution of this Agreement and the making of the
Loan hereunder and except for Paragraphs 6.10 and 12.1 which provide otherwise
and any amounts which may arise under Paragraphs 2.6(d), 2.7(c) and 2.10 hereof,
will continue in full force and effect as long as any indebtedness or other
obligation of Borrowers to any Bank remains outstanding.
12.5. No Waiver; Delay. If Banks or any of them shall waive
any power, right or remedy arising hereunder or under any applicable law, such
waiver shall not be deemed to be a waiver upon any other Bank or the later
occurrence or recurrence of any of said events with respect to any Bank. No
delay by Banks in the exercise of any power, right or remedy shall, under any
circumstances, constitute or be deemed to be a waiver, express or implied, of
the same and no course of dealing between the parties hereto shall constitute a
waiver of Banks' powers,
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rights or remedies. The remedies herein provided are cumulative and not
exclusive of any remedies provided by law.
12.6. Modification/Waiver. Except as otherwise provided in
this Agreement, no modification or amendment hereof, or waiver or consent
hereunder, shall be effective unless made in a writing signed by appropriate
officers of the parties hereto.
12.7. Headings. The various headings in this Agreement are
inserted for convenience only and shall not affect the meaning or interpretation
of this Agreement or any provision hereof.
12.8. Notices. Any notice, request or consent required
hereunder or in connection herewith shall be deemed satisfactorily given if in
writing (including by facsimile transmissions) and delivered by hand or mailed
(registered or certified mail) to the Banks to the attention of the individuals
and at the respective addresses or telecopier numbers set forth in Schedule 2 to
this Agreement and to Borrowers and Guarantors to the attention of the Chief
Financial Officer, SunSource Inc. at the address of Borrowers set forth on page
1 hereof and at telecopy number 215-282-1309 or such other addresses or
telecopier numbers as may be given by any party to the others in writing.
12.9. Payment on Non-Business Days. Whenever any payment to be
made hereunder shall be stated to be due on a day other than a Business Day,
such payment may be made on the next succeeding Business Day, provided however
that such extension of time shall be included in the computation of interest due
in conjunction with such payment or other fees due hereunder, as the case may
be.
12.10. Time of Day. All time of day restrictions imposed
herein shall be calculated using Agent's local time.
12.11. Severability. If any provision of this Agreement or the
application thereof to any person or circumstance shall be invalid or
unenforceable to any extent, the remainder of this Agreement and the application
of such provisions to other persons or circumstances shall not be affected
thereby and shall be enforced to the greatest extent permitted by law.
12.12. Counterparts. This Agreement may be executed in any
number of counterparts with the same effect as if all the signatures on such
counterparts appeared on one document, and each such counterpart shall be deemed
to be an original.
12.13. Consent to Jurisdiction and Service of Process. Each
Borrower and Guarantor irrevocably appoints each and every officer of SunSource
Inc. as its attorney upon whom may be served any notice, process or pleading in
any action or proceeding against it arising out of or in connection with this
Agreement, the Promissory Notes or any document executed or action taken in
connection therewith; and each Borrower hereby consents that any
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action or proceeding against it be commenced and maintained in any court within
the Commonwealth of Pennsylvania or in the United States District Court for the
Eastern District of Pennsylvania by service of process on any such officer; and
each Borrower agrees that the courts of the Commonwealth of Pennsylvania and the
United States District Court for the Eastern District of Pennsylvania shall have
jurisdiction with respect to the subject matter hereof and the person of each
Borrower. Notwithstanding the foregoing, a Bank, in its absolute any discretion
may also initiate proceedings in the courts of any other jurisdiction in which
each Borrower may be found or in which any of its properties may be located.
12.14. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY
KNOWINGLY, VOLUNTARILY, AND INTENTIONALLY WAIVES ANY RIGHTS IT MAY HAVE TO A
TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON OR ARISING OUT OF, UNDER
OR IN CONNECTION WITH THIS AGREEMENT OR THE PROMISSORY NOTE OR ANY COURSE OF
CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF
ANY BANK OR AGENT. THIS PROVISION IS A MATERIAL INDUCEMENT FOR EACH BANK'S
ENTERING INTO THIS AGREEMENT.
12.15. ACKNOWLEDGMENTS. EACH BORROWER AND GUARANTOR
ACKNOWLEDGES THAT IT HAS HAD THE ASSISTANCE OF COUNSEL IN THE REVIEW AND
EXECUTION OF THIS AGREEMENT AND, SPECIFICALLY, PARAGRAPH 12.14 HEREOF, AND
FURTHER ACKNOWLEDGES THAT THE MEANING AND EFFECT OF THE FOREGOING WAIVER OF JURY
TRIAL HAVE BEEN FULLY EXPLAINED TO EACH BORROWER AND GUARANTOR BY SUCH COUNSEL.
12.16. Complete Agreement. This Agreement sets forth the
complete agreement of the parties hereto with respect to the matters addressed
herein, and supersedes any prior
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written agreement or any prior or simultaneous oral agreements between the
parties with respect to the same subject matter.
IN WITNESS WHEREOF, the undersigned, by their duly authorized
partners or officers, as applicable, have executed this Agreement the day and
year first above written.
SDI OPERATING PARTNERS, L.P.,
By: SDI Partners I, L.P., its general partner
By: SUNSUB B INC., its general partner
By: _______________________________
Name:
Title:
SUNSOURCE INC., as Guarantor, and for purposes of making
the representations and warranties, and agreeing to the
covenants and other agreements as set forth in the
Agreement
By: ________________________
Name:
Title:
SUNSUB B INC., as Guarantor, and for purposes of making the
representations and warranties, and agreeing to the
covenants and other agreements as set forth in the
Agreement
By: ________________________
Name:
Title:
[EXECUTIONS CONTINUED]
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SUNSUB A INC., as Guarantor, and for purposes of making the
representations and warranties, and agreeing to the
covenants and other agreements as set forth in the
Agreement
By: ________________________
Name:
Title:
SDI PARTNERS I, L.P., as Guarantor, and for purposes of
making the representations and warranties and agreeing to
the covenants and other agreements as set forth in the
Agreement
By: SUNSUB B INC., its general partner
By: _______________________
Name:
Title:
CORESTATES BANK, N.A., individually and in its capacity as
Agent hereunder
By: _____________________________________
Name:
Title:
[EXECUTIONS CONTINUED]
-63-
<PAGE>
THE BANK OF NOVA SCOTIA
By: _____________________________
Name:
Title:
FIFTH THIRD BANK
By: _____________________________
Name:
Title:
SUNTRUST BANK, ATLANTA
By: _____________________________
Name:
Title:
By: _____________________________
Name:
Title:
THE FUJI BANK, LIMITED
NEW YORK BRANCH
By: _____________________________
Name:
Title:
-64-
<PAGE>
Exhibit 10.2
=================================================================
SDI OPERATING PARTNERS, L.P.
AND THE SUBSIDIARIES SET FORTH
ON SCHEDULE I HERETO
----------------
NOTE PURCHASE AGREEMENT
Dated as of September 30, 1997
----------------
7.66% Senior Notes due 2002
=================================================================
<PAGE>
TABLE OF CONTENTS
Page
SECTION 1. ISSUANCE OF NOTES..................................................1
1.1. Authorization..............................................1
1.2. Purchase and Sale of Notes; the Closing....................1
1.3. Representations of the Purchaser...........................2
1.4. Surcharge Rate.............................................2
SECTION 2. REPRESENTATIONS OF THE COMPANY.....................................2
2.1. Organization and Good Standing.............................3
2.2. Power and Authority; Validity of Agreement.................3
2.3. No Violation of Laws or Agreements.........................3
2.4. Material Contracts.........................................3
2.5. Compliance.................................................3
2.6. Litigation.................................................4
2.7. Title to Assets............................................4
2.8. Partnership Interests......................................4
2.9. Capital Stock..............................................4
2.10. Accuracy of Information; Full Disclosure...................4
2.11. Taxes and Assessments......................................5
2.12. Indebtedness...............................................6
2.13. Management Agreements......................................6
2.14. Subsidiaries and Investments...............................6
2.15. ERISA......................................................6
2.16. Fees and Commissions.......................................7
2.17. No Extension of Credit for Securities......................7
2.18. Hazardous Wastes, Substances and Petroleum Products........7
2.19. Solvency...................................................8
2.20. Investment Company Act.....................................8
2.21. Private Offering by the Company............................8
2.22. Solvency...................................................8
2.23. Foreign Assets Control Regulations.........................9
SECTION 3. CONDITIONS OF CLOSING..............................................9
3.1. Proceedings Satisfactory...................................9
3.2. Opinion of Special Counsel.................................9
3.3. Opinion of Counsel for the Company.........................9
3.4. Authorization Documents; Officer's Certificate.............9
3.5. Legality...................................................9
3.6. Financial Information......................................9
3.7. Private Placement Number..................................10
3.8. Prepayment of Existing Notes..............................10
<PAGE>
Page
3.9. Credit Agreement..........................................10
3.10. The Conversion............................................10
3.11. Commitment Fee............................................10
SECTION 4. PREPAYMENT OF THE NOTES...........................................10
4.1. Mandatory Repayments of the Notes.........................10
4.2. Optional Prepayment of the Notes..........................10
4.3. Notice of Prepayment; Make-Whole Computations.............11
4.4. Allocation of Prepayments.................................11
4.5. Surrender of Notes; Notation Thereon......................11
4.6. Purchase of Notes.........................................11
4.7. Special Prepayment for Change of Control..................12
4.8. Prepayment in Connection with a Sale of Material Assets...12
SECTION 5. AFFIRMATIVE COVENANTS.............................................13
5.1. Existence and Good Standing..............................13
5.2. Quarterly Financial Statements...........................13
5.3. Annual Financial Statements..............................13
5.4. Cash Flow Projections....................................14
5.5. Public Information.......................................14
5.6. Books and Records........................................14
5.7. Properties; Insurance....................................14
5.8. Notices..................................................14
5.9. Taxes....................................................15
5.10. Compliance; Notification.................................15
5.11. ERISA....................................................16
5.12. Capitalization Ratio.....................................16
5.13. Fixed Charge Coverage Ratio..............................16
5.14. Leverage Ratio...........................................16
5.15. Management Changes.......................................16
5.16. Subsequent Credit Terms..................................17
5.17. Use of Proceeds..........................................17
5.18. Transactions Among Affiliates............................17
5.19. Other Information........................................17
SECTION 6. NEGATIVE COVENANTS. .............................................17
6.1. Indebtedness..............................................17
6.2. Guaranties................................................18
6.3. Loans.....................................................18
6.4. Liens and Encumbrances....................................18
6.5. Additional Negative Pledge................................19
<PAGE>
Page
6.6. Restricted Payments.......................................19
6.7. Transfer of Assets........................................19
6.8. Acquisitions and Investments..............................19
6.9. Use of Proceeds...........................................20
6.10. Amendment of Documents....................................20
6.11. Payment of Loan...........................................20
SECTION 7. DEFINITIONS.......................................................20
7.1. Definitions...............................................20
7.2. Rules of Construction.....................................30
SECTION 8. EVENTS OF DEFAULT; REMEDIES.......................................30
8.1. Events of Default.........................................30
8.2. Acceleration; Suits for Enforcement.......................32
8.3. Remedies Cumulative.......................................33
8.4. Remedies Not Waived.......................................33
SECTION 9. GUARANTY..........................................................33
9.1. Guaranty..................................................33
9.2. Bankruptcy................................................33
9.3. Nature and Term of Guaranty...............................34
9.4. Rights and Remedies.......................................34
9.5. Actions by Holders of the Notes Not Affecting Guaranty....34
9.6. Payment in Accordance with Notes and this Agreement.......34
9.7. Payments Under Guaranty...................................35
9.8. Waivers and Modifications.................................35
9.9. Waiver....................................................35
9.10. Subordination of Rights of Subrogation....................35
9.11. No Setoff by Guarantors...................................36
9.12. Continuing Guaranty; Transfer of Note.....................36
9.13. Representations and Warranties; Covenants.................36
SECTION 10. REGISTRATION, TRANSFER AND EXCHANGE OF NOTES......................36
SECTION 11. LOST, ETC., NOTES.................................................37
SECTION 12. AMENDMENT AND WAIVER..............................................37
SECTION 13. HOME OFFICE PAYMENT...............................................38
SECTION 14. LIABILITIES OF THE PURCHASER......................................39
<PAGE>
Page
SECTION 15. TAXES.............................................................39
SECTION 16. MISCELLANEOUS.....................................................39
16.1. Expenses.................................................39
16.2. Reliance on and Survival of Representations..............40
16.3. Successors and Assigns...................................40
16.4. Notices..................................................40
16.5. Reproduction of Documents................................40
16.6. Law Governing............................................41
16.7. Headings.................................................41
16.8. Counterparts.............................................41
SCHEDULE I - The Subsidiaries party to this Agreement
SCHEDULE II - Manner of Payment and Notice
EXHIBIT A - Form of Note
EXHIBIT B - Disclosures of the Company and its Subsidiaries
EXHIBIT C - Covenant Compliance Certificate
<PAGE>
SDI OPERATING PARTNERS, L.P.
AND ITS SUBSIDIARIES SET FORTH ON
SCHEDULE I HERETO
One Logan Square
Philadelphia, Pennsylvania 19103
NOTE PURCHASE AGREEMENT
Philadelphia, Pennsylvania
as of September 30, 1997
TEACHERS INSURANCE AND
ANNUITY ASSOCIATION OF AMERICA
730 Third Avenue
New York, NY 10017
Ladies and Gentlemen:
SDI OPERATING PARTNERS, L.P., a Delaware limited partnership (the
"Company"), and its Subsidiaries set forth on Schedule I hereto (the
"Subsidiaries" and collectively with the Company, the "Obligors"), hereby agree
with you as follows:
I. ISSUANCE OF NOTES.
A. Authorization. The Company has duly authorized an issue of
$60,000,000 aggregate principal amount of its 7.66% Senior Notes due 2002 (the
"Notes"). Each Note shall be substantially in the form annexed hereto as Exhibit
A. As used herein, (i) the term "Notes" shall include all notes originally
issued pursuant to this Agreement and all notes delivered in substitution or
exchange for any of said notes pursuant to this Agreement and, where applicable,
shall include the singular number as well as the plural and (ii) the term "Note"
shall mean one of the Notes.
B. Purchase and Sale of Notes; the Closing. The Company shall sell to
you and, subject to the terms and conditions hereof, you shall purchase from the
Company, Notes in the aggregate principal amount of $60,000,000, at a price
equal to 100% of such amount. The closing of the purchases of Notes by you
hereunder shall be held at 10:00 a.m., Philadelphia time, on September 30, 1997
(the "Closing Date") at the office of Pepper, Hamilton & Scheetz LLP, 3000 Two
Logan Square, 18th and Arch Streets, Philadelphia, PA 19103. On the Closing
Date, the Company will deliver to you one or more Notes, in any denominations
(multiples of $1,000), in the aggregate principal amount to be purchased by you,
all as you may specify by timely notice
<PAGE>
to the Company (or, in the absence of such notice, one Note to be purchased by
you registered in your name), duly executed and dated the Closing Date, against
your delivery to the Company of such purchase price.
C. Representations of the Purchaser. You represent to the Company as
follows:
1. You are purchasing the Notes to be purchased by you on the
ClosingDate for investment and not with a view to the distribution or sale of
the Notes, subject, however, to any requirement of law that your property be at
all times within your control.
2. The source of your funds to pay the purchase price of the Notes
is an "insurance company general account" (as the term is defined in Prohibited
Transaction Exemption 95-60 (issued by the Department of Labor on July 12,
1995)) in respect of which the reserves and liabilities (as defined by the
annual statement for life insurance companies approved by the National
Association of Insurance Commissioners (the "NAIC Annual Statement")) for the
general account contract(s) held by or on behalf of any employee benefit plan
together with the amount of the reserves and liabilities for the general account
contract(s) held by or on behalf of any other employee benefit plans maintained
by the same employer (or affiliate thereof as defined in said Prohibited
Transaction Exemption 95-60) or by the same employee organization in the general
account do not exceed 10% of the total reserves and liabilities of the general
account (exclusive of separate account liabilities) plus surplus as set forth in
the NAIC Annual Statement filed with your state of domicile.
3. You understand that the Notes have not been registeredunder the
Securities Act of 1933, as amended, and may be resold only if registered
pursuant to the provisions of the Securities Act of 1933, as amended, or if an
exemption from registration is available, except under circumstances where
neither such registration nor such an exemption is required by law, and that the
Company is not required to register the Notes.
D. Surcharge Rate. Notwithstanding the interest rate set forth in
Paragraph 1.1 hereof and in the Notes , the Company shall pay interest on the
Notes at the rate of 7.91% (the "Surcharge Rate") (i) for the period from the
Closing Date to December 31, 1997 and (ii) thereafter if for the Rolling Period
ended on or immediately prior to the date of the interest payment then being
made, the Leverage Ratio is equal to or greater than 2.75 to 1.
II. REPRESENTATIONS OF THE COMPANY. Each of the Obligors and Guarantors
represents and warrants to you that:
A. Organization and Good Standing. Each of the Company and SDIPI is a
limited partnership duly formed and validly existing under the laws of the state
of Delaware, and has the power and authority to carry on its business as now
conducted. Each Subsidiary and each Guarantor (other than SDIPI) is duly
organized and existing and in good standing under the laws of the jurisdiction
of its incorporation, and has the power and authority to carry on its business
as now conducted. Each of the Company and Guarantors is qualified to do business
in all other states in which the failure to qualify would have a Material
Adverse Effect.
<PAGE>
B. Power and Authority; Validity of Agreement. Each of the Obligors and
Guarantors has the power and authority under Delaware law and under its
organizational documents to enter into and perform this Agreement, the Notes and
all other agreements, documents and actions required hereunder, to the extent
each is a party thereto; and all actions necessary or appropriate for the
Obligors' and Guarantors' execution and performance of this Agreement, the
Notes, and all other agreements, documents and actions required hereunder, to
the extent it is a party hereto, have been taken, and, upon their execution, the
same will constitute the valid and binding obligations of the Obligors and
Guarantors to the extent each is a party thereto, enforceable in accordance with
their terms.
C. No Violation of Laws or Agreements. The making and performance of
this Agreement, the Notes, and the other documents, agreements and actions
required of the Obligors and Guarantors hereunder, to the extent each is a party
thereto, will not violate any provisions of any law or regulation, federal,
state or local, or the respective organizational documents of the Obligors or
Guarantors or result in any breach or violation of, or constitute a default
under, any agreement or instrument by which either the Obligors, Guarantors or
their respective property may be bound, including without limitation the Credit
Agreement and the Indenture.
D. Material Contracts. None of the Guarantors or the Obligors is a
party to or in any manner obligated under any contracts material to their
respective business except this Agreement, the Notes, their organizational
documents, the Promissory Notes, the Credit Agreement, the Indenture, and the
agreements identified on Exhibit B hereto and there exists no material default
under any of such contracts.
E. Compliance. Each of the Guarantors and the Obligors is in compliance
in all material respects with all applicable laws and regulations, federal,
state and local (including without limitation those administered by the Local
Authorities) material to the conduct of its business and operations; the
Guarantors and the Obligors possess all the material franchises, authorizations,
patents, copyrights, trademarks, permits and licenses necessary or required in
the conduct of their respective businesses, and, except as may be described on
Exhibit B, the same are valid, binding, enforceable and subsisting without any
material defaults thereunder; and, except as described on Exhibit B, no
authorization, consent, approval, waiver, license or exemptions from, nor any
filing, declaration or registration with, any court, governmental agency or
regulatory authority (federal, state or local) or non-governmental entity, under
the terms of contracts or otherwise, is required by reason of or in connection
with the Obligors' and the Guarantors' execution and performance of this
Agreement, the Notes and all other agreements, documents and actions required
hereunder to the extent each is a party hereto and thereto.
F. Litigation. Except as set forth on Exhibit B hereto, there are no
actions, suits, proceedings or claims which are pending or, to the best of the
Guarantors' and the Obligors' knowledge or information, threatened against any
of the Guarantors or the Obligors which, if adversely resolved, would be
reasonably likely to have a Material Adverse Effect.
G. Title to Assets. Except as set forth on Exhibit B hereto, each
Obligor and Guarantor has good and marketable title to substantially all of its
properties and assets as
<PAGE>
reflected in the financial statements of SunSource Inc. and its Consolidated
Subsidiaries most recently delivered to you pursuant to Paragraphs 3.6, 5.2 and
5.3 hereof, free and clear of any liens and encumbrances, except the security
interests permitted pursuant to Paragraph 6.4 hereof and all such assets are in
good order and repair and fully covered by the insurance required pursuant to
Paragraph 5.7 hereof.
H. Partnership Interests. The number and percentage of partnership
interests in the Company and SDIPI and the ownership thereof, effective upon the
conversion, are accurately set forth on Exhibit B attached hereto; all such
interests are validly existing and the creation and sale thereof are in
compliance with all applicable federal and state securities and other applicable
laws; the ownership thereof is free and clear of any liens and encumbrances or
other contractual restrictions except as set forth in the Partnership
Agreements, and SDIPI is the general partner of the Company.
I. Capital Stock. The number of shares and classes of the capital stock
of each Subsidiary, SunSub A and SunSub B and the ownership thereof, effective
upon the Conversion, are accurately set forth on Exhibit B attached hereto; all
such shares are validly existing, fully paid and non-assessable, and the
issuance and sale thereof are in compliance with all applicable federal and
state securities and other applicable laws; and the shareholders' ownership
thereof is free and clear of any liens or encumbrances or other contractual
restrictions.
J. Accuracy of Information; Full Disclosure.
1. All information furnished to you concerning the financial
condition of SunSource Inc. and its Consolidated Subsidiaries, including
SunSource L.P. and its Consolidated Subsidiaries', SDIPI's, and the Guarantors'
respective annual financial statements for the period ending December 31, 1996,
and SunSource L.P. and its Consolidated Subsidiaries' consolidated interim
financial statement for the period ending June 30, 1997, copies of which have
been furnished to you, have been prepared in accordance with GAAP (except that
the annual financial statements of SDIPI were prepared on a tax basis, not a
GAAP basis) and fairly present the financial condition of SDIPI, Guarantors and
SunSource L.P. and its Consolidated Subsidiaries as of the dates and for the
periods covered and discloses liabilities of SDIPI, Guarantors and SunSource
L.P. and its Consolidated Subsidiaries required to be disclosed under GAAP and,
except on the date hereof for the effect of the Conversion, there has been no
Material Adverse Change from the date of such statements to the date hereof; and
2. All financial statements and other documents furnished by
SunSource L.P., SDIPI, Guarantors and SunSource Inc. and its subsidiaries to you
in connection with this Agreement and the Notes do not and will not contain any
untrue statement of material fact or omit to state a material fact necessary in
order to make the statements contained therein not misleading. The Company and
Guarantors have disclosed to you in writing any and all facts which materially
and adversely affect the business, properties, operations or condition,
financial or otherwise, of Guarantors and the Obligors' or the Obligors' or
Guarantors' ability to perform their respective obligations under this Agreement
and the Notes.
<PAGE>
K. Taxes and Assessments.
1. Each of the Guarantors and the Company has duly and timely
filed all information and tax returns and reports with all federal, state, local
or foreign governmental taxing authorities, bodies or agencies; and all taxes,
including without limitation income, gross receipt, sales, use, excise and any
other taxes, and any governmental charges, penalties, interest or fines with
respect thereto, due and payable by Guarantors and the Company have been paid,
withheld or reserved for in accordance with GAAP or, to the extent they relate
to periods on or prior to the date of the financial statements delivered from
time to time pursuant to Paragraphs 3.6, 5.2 and 5.3 hereof (the "Financial
Statements"), are reflected as a liability on the Financial Statements in
accordance with GAAP.
2. Each of the Guarantors and the Obligors has properly withheld
all amounts determined by them to be required by law to be withheld for income
taxes and unemployment taxes including without limitation, all amounts required
with respect to social security and unemployment compensation, relating to its
employees, and has remitted such withheld amounts in a timely manner to the
appropriate taxing authority, agency or body.
3. As of the date of this Agreement, none of the federalincome tax
information returns of SDIPI or the Company has been audited. Except as set
forth on Exhibit B hereto, neither Guarantors nor Obligors have entered into any
agreements for the extension of time for the assessment of any tax or tax
delinquency, nor has any of them received outstanding and unresolved notices
from the Internal Revenue Service or any other state, local or foreign taxing
authority, agency or body of any proposed examination or of any proposed change
in reported information which may result in a deficiency or assessment against
Guarantors or Obligors and there are no suits, actions, claims, investigations,
inquiries or proceedings now pending against Guarantors or Obligors in respect
of taxes, governmental charges or assessments.
L. Indebtedness. Guarantors and Obligors have no presently outstanding
Indebtedness or obligations including contingent obligations and obligations
under leases of property from others, except the Loan, the Junior Subordinated
Debentures, the Indebtedness and obligations described either on Exhibit B
hereto or in Guarantors' or the Company's financial statements which have been
furnished to you and Indebtedness permitted to be incurred pursuant to Paragraph
6.1 hereof. There exists no default with respect to the payment of principal or
interest under any such outstanding Indebtedness. The Indebtedness under the
Loan ranks pari passu and equal to the Indebtedness evidenced by the Notes,
without any priority. The Junior Subordinated Debentures rank junior and are
subordinated to the Indebtedness evidenced by the Notes, and all other
Indebtedness of the Company and Guarantors ranks either pari passu or junior to
the Indebtedness evidenced by the Notes.
M. Management Agreements. The Company is a party to no other material
management or consulting agreements for the provision of services to the
Company, except as described in Exhibit B hereto.
<PAGE>
N. Subsidiaries and Investments. Obligors have no Subsidiaries or
Affiliates, or investments in or loans to any other individuals or business
entities, except as described in Exhibit B hereto and except as are permitted to
be acquired or created pursuant to Paragraph 6.8 hereof.
O. ERISA. Each Plan maintained by Guarantors or Obligors and each ERISA
Affiliate is, as of its most recently completed annual report, in compliance in
all material respects with all applicable provisions of ERISA and the
regulations promulgated thereunder; and, except as set forth in Exhibit B
hereto:
1. Neither Guarantors, Obligors nor any ERISA Affiliatemaintains or
contributes to or has maintained or contributed to any multiemployer plan (as
defined in Section 4001 of ERISA) under which Guarantors, Obligors, or any ERISA
Affiliate could have any withdrawal liability;
2. Neither Guarantors, Obligors, nor any ERISA Affiliate, sponsors
or maintains any Plan under which there is an Accumulated Funding Deficiency,
whether or not waived;
3. The aggregate liability for accrued benefits and otherancillary
benefits under each Plan that is or will be sponsored or maintained by
Guarantors, Obligors or any ERISA Affiliate (determined on the basis of the
actuarial assumptions prescribed for valuing benefits under terminating
single-employer defined benefit plans under Title IV of ERISA) does not exceed
the aggregate fair market value of the assets under each such defined benefit
pension Plan;
4. Neither Guarantors, Obligors nor any ERISA Affiliate has
liability arising out of or relating to a failure of any Plan to comply with the
provisions of ERISA or the Code;
5. There does not exist any unfunded liability (determined on the
basis of actuarial assumptions utilized by the actuary for the Plan in preparing
the most recent Annual Report) of Guarantors, the Obligors or any ERISA
Affiliate under any plan, program or arrangement providing post-retirement life
or health benefits; and
6. The matters described on Exhibit B attached hereto referencing
clauses (a) through (e) this Paragraph 2.15, would not, either singly or in the
aggregate, have a Material Adverse Effect.
The execution, sale and delivery of the Notes hereunder will not
involve any prohibited transaction within the meaning of ERISA or Section 4975
of the Code. The representation by the Company in the preceding sentence is made
in reliance upon and subject to the accuracy of your representation in Paragraph
1.3(b) of this Agreement.
<PAGE>
P. Fees and Commissions. The Obligors owe no fees or commissions of any
kind, and know of no claim for any fees or commissions, in connection with the
Obligors' issuing the Notes except (i) those set forth in the Credit Agreement
and (ii) those provided herein.
Q. No Extension of Credit for Securities. Guarantors and Obligors are
not now, nor at any time have they been, engaged principally, or as one of their
important activities, in the business of extending or arranging for the
extension of credit, for the purpose of purchasing or carrying any margin stock
or margin securities; nor will the proceeds of the Notes be used by the Company
directly or indirectly, for such purposes.
R. Hazardous Wastes, Substances and Petroleum Products. Except as set
forth in Exhibit B hereto:
1. Each of the Guarantors and the Obligors: (i) has received all
permits and filed all notifications necessary to carry on their respective
business(es); and (ii) is in compliance in all respects with all Environmental
Control Statutes except with respect to immaterial instances of noncompliance of
which it has no knowledge.
2. Neither Guarantors nor Obligors have given any written or oral
notice, nor has it failed to give required notice, to the Environmental
Protection Agency ("EPA") or any state or local agency with regard to any actual
or imminently threatened removal, spill, release or discharge of Hazardous
Substances on properties owned, leased or operated by Guarantors or Obligors or
used in connection with the conduct of its business and operations.
3. Neither Guarantors nor Obligors have received notice that it is
potentially responsible for the performance of or payment of costs relating to
clean-up or remediation of any actual or imminently threatened spill, release or
discharge of Hazardous Substances pursuant to any Environmental Control Statute.
S. Solvency. To the best of SunSource Inc.'s knowledge, SunSource Inc.
and its Consolidated Subsidiaries are, on a consolidated basis, upon the
Conversion and after receipt and application of the proceeds of the sale of the
Notes will be, solvent such that (i) the fair value of their assets (including
without limitation the fair salable value of the goodwill and other intangible
property of SunSource Inc. and its Consolidated Subsidiaries) is greater than
the total amount of their liabilities, including without limitation, contingent
liabilities, (ii) the present fair salable value of their assets (including
without limitation the fair salable value of the goodwill and other intangible
property of SunSource Inc. and its Consolidated Subsidiaries) is not less than
the amount that will be required to pay the probable liability on their debts as
they become absolute and matured, and (iii) they are able to realize upon their
assets and pay their debts and other liabilities, contingent obligations and
other commitments as they mature in the normal course of business. SunSource
Inc. and its Consolidated Subsidiaries (i) do not intend to, and do not believe
that they will, incur debts or liabilities beyond their ability to pay as such
debts and liabilities mature, or (ii) are not engaged in a business or
transaction, or about to engage in a business or transaction, for which their
property would constitute unreasonably small capital after giving due
consideration to the prevailing practice and industry in which they are engaged.
<PAGE>
For purposes of this Paragraph 2.19, in computing the amount of contingent
liabilities at any time, it is intended that such liabilities will be computed
at the amount which, in light of all the facts and circumstances existing at
such time, represents the amount that reasonably can be expected to become an
actual matured liability.
T. Investment Company Act. Neither the Obligors nor Guarantors are
directly or indirectly controlled by or acting on behalf of any person which is
an "investment company" within the meaning of the Investment Company Act of
1940, as amended.
U. Private Offering by the Company. Neither the Company, nor any
partner thereof, nor anyone acting on behalf of the Company, or any partner
thereof, has offered the Notes or any similar securities for sale to, or
solicited any offer to buy any of the same from, or otherwise approached or
negotiated in respect thereof with, any person other than you. Neither the
Company, nor any partner thereof, nor anyone acting on behalf of the Company, or
any partner thereof, has taken, or will take, any action which would subject the
issuance or sale of the Notes to Section 5 of the Securities Act of 1933, as
amended.
V. Solvency. The Company is, and upon giving effect to the issuance of
the Notes will be, a "solvent institution", as said term is used in Section
1405(c) of the New York Insurance Law, whose "obligations are not in default as
to principal or interest", as said terms are used in said Section 1405(c).
W. Foreign Assets Control Regulations. Neither the execution, sale nor
delivery by the Company of the Notes nor its use of the proceeds thereof will
violate the Foreign Assets Regulations, the Foreign Funds Control Regulations,
the Transaction Control Regulations, the Cuban Assets Control Regulations, the
Iranian Transaction Regulations, or the Iraqi Sanctions Regulations of the
United States Treasury Department (31 C.F.R. Subtitle B, Chapter V, as amended).
III. CONDITIONS OF CLOSING. Your obligation to purchase and pay for the
Notes to be purchased by you hereunder shall be subject to the conditions
hereinafter set forth:
A. Proceedings Satisfactory. All proceedings taken in connection with
the issue of the Notes and the consummation of the transactions contemplated
hereby and all documents and papers relating thereto shall be satisfactory to
you and your special counsel, and you and your special counsel shall have
received copies of such documents and papers, all in form and substance
satisfactory to you and your special counsel, as you or they may reasonably
request in connection therewith.
B. Opinion of Special Counsel. You shall have received an opinion dated
the Closing Date from Milbank, Tweed, Hadley & McCloy, your special counsel, in
form and substance satisfactory to you.
<PAGE>
C. Opinion of Counsel for the Company. You shall have received an
opinion dated the Closing Date from Morgan, Lewis & Bockius LLP, counsel for the
Company and Guarantors, in form and substance satisfactory to you.
D. Authorization Documents; Officer's Certificate. The Company shall
deliver to you those documents it is required to deliver to Banks pursuant to
Paragraphs 5.1(b) and 5.1(h) of the Credit Agreement.
E. Legality. On the Closing Date, the Notes to be purchased by you
hereunder shall be a legal investment for you under the laws of each
jurisdiction to which you may be subject (without resort to any basket provision
of said laws such as New York Insurance Law Section 1405(a)(8)) (unless you have
waived such requirement), and you shall have received such certificates or other
evidence as you may reasonably request demonstrating the legality of such
purchase under such laws.
F. Financial Information. The Company shall have furnished to you: (i)
a pro forma schedule of assets and liabilities of SunSource Inc. and its
Consolidated Subsidiaries setting forth all SunSource Inc.'s and its
Consolidated Subsidiaries' Indebtedness, certified as accurate by the chief
financial officer of SunSource Inc.; (ii) cash flow projections for SunSource
Inc. and its Consolidated Subsidiaries on a consolidated basis, for the three
(3) year period immediately following the date hereof, satisfactory to you and
certified as reasonable by the chief financial officer or controller of
SunSource Inc. (such cash flow projections shall take into account the
transactions contemplated by this Agreement and shall identify the sources of
cash the Company intends to use to meet its needs during such three year
period); (iii) financial projections for SunSource Inc. and its Consolidated
Subsidiaries for the period from closing through December 31, 2001 on a
consolidated basis satisfactory to you and (iv) a certificate with respect to
the matters set forth in Paragraph 2.19 hereof.
G. Private Placement Number. The Company shall have delivered to you a
certificate or other satisfactory evidence that Standard & Poor's CUSIP Service
Bureau has assigned a private placement number with respect to the Notes.
H. Prepayment of Existing Notes. In connection with the Conversion, the
Company shall simultaneously prepay the entire aggregate principal amount of its
Senior Notes due 2002 (together with the agreed upon make whole premium) and the
holders of such Notes shall have waived, pursuant to an instrument in form and
substance satisfactory to you, the refunding restrictions applicable thereto.
I. Credit Agreement. The Company shall, simultaneously with the
execution hereof, have entered into the Credit Agreement in the form theretofore
provided to you which shall be in full force and effect.
J. The Conversion. The Company shall complete the Conversion as
outlined in SEC Form S-4 Registration Statement dated December 31, 1996, as
amended.
<PAGE>
K. Commitment Fee. The Company shall have paid to you a commitment fee
of .25% on the entire principal amount of the Notes.
L. Insurance. The Company shall have provided you with certificates of
insurance with respect to all of the Obligors' fire, casualty, liability and
other insurance covering its respective property and business.
M. Other Documents. The Company shall provide you with the Declaration
of Trust of the Trust, the Indenture, and such additional documents as you
reasonably may request.
IV. PREPAYMENT OF THE NOTES.
A. Mandatory Repayments of the Notes. As provided therein, the entire
unpaid principal amount of the Notes shall be due and payable on September 30,
2002.
B. Optional Prepayment of the Notes.
1. Upon notice given as provided in Paragraph 4.3, the Company, at
its option, may at any time prepay the Notes as a whole or from time to time in
part (in multiples of $100,000), in each case at the principal amount so to be
prepaid, together with interest accrued thereon to the date fixed for such
prepayment, plus (subject to Paragraph 4.2(b) below) an amount equal to the
Make-Whole Amount for each such Note. Each prepayment pursuant to this Paragraph
4.2 shall be allocated as provided in Paragraph 4.4.
2. Notwithstanding anything to the contrary in Paragraph 4.2(a)
above, the Company may apply Designated Disposition Proceeds in an amount not to
exceed $15,000,000 to the prepayment of the Notes pursuant to Paragraph 4.2(a)
without payment of any Make-Whole Amount.
C. Notice of Prepayment; Make-Whole Computations.
1. The Company shall call the Notes for prepayment pursuant to
Paragraph 4.2 by giving written notice thereof to each holder of any Note, which
notice shall be given not less than 30 nor more than 60 days prior to the date
fixed for such prepayment in such notice and shall specify the amount so to be
prepaid and the date fixed for such prepayment. Upon the giving of notice of any
prepayment as provided in this Paragraph, the Company will prepay on the date
therein fixed for prepayment the principal amount of the Notes so to be prepaid
as specified in such notice, together with interest accrued thereon to such date
fixed for prepayment, plus (subject to Paragraph 4.2(b)) the applicable
Make-Whole Amount (if any).
2. Three business days prior to any prepayment pursuant to Paragraph
4.2, the Company will furnish to each holder of a Note an Officer's Certificate
setting forth in reasonable detail the calculation of the Make-Whole Amount (if
any) in connection with such prepayment and attaching a copy of the source of
the market data by reference to which the applicable Treasury Yields were
determined in connection with such computations.
<PAGE>
D. Allocation of Prepayments. In the event of any prepayment of less
than all of the outstanding Notes pursuant to Paragraph 4.2, the Company will
allocate the principal amount so to be prepaid (but only in units of $1,000)
among all outstanding Notes pro rata according to the respective principal
amounts thereof.
E. Surrender of Notes; Notation Thereon. Subject to the provisions of
Section 13, the Company may, as a condition of payment of all or any part of the
principal of, premium, if any, and interest on, any Note, require the holder to
present such Note for notation of such payment and, if such Note be paid in
full, require the surrender thereof.
F. Purchase of Notes. The Company will not, and will not permit any of
its Subsidiaries to, acquire directly or indirectly by purchase or prepayment or
otherwise any of the outstanding Notes except by way of payment or prepayment in
accordance with the provisions of the Notes and of this Agreement.
G. Special Prepayment for Change of Control. Promptly and in any event
within five days after a Change of Control, the Company will give notice thereof
to the holders of all outstanding Notes, which notice shall (i) refer
specifically to this Paragraph 4.7, (ii) specify the Change of Control
Prepayment Date and the Response Date (each as defined below) in respect thereof
and (iii) offer to prepay all Notes at the unpaid principal amount of such
Notes, together with interest accrued thereon to the Change of Control
Prepayment Date on the date specified in such notice (the "Change of Control
Prepayment Date"), which date shall be not less than 30 nor more than 60 days
after the date of such notice. Each holder of a Note shall notify the Company of
such holder's acceptance or rejection of such offer by giving notice of such
acceptance or rejection to the Company on a date (the "Change of Control
Response Date") not more than 20 days after the date of the notice required to
be given by the Company pursuant to the first sentence of this Paragraph 4.7
(which notice given by such holder shall be binding upon such holder and the
Company). The failure by the holder of a Note to respond to such offer on or
before the Change of Control Response Date shall be deemed to be a rejection of
such offer. On the Change of Control Prepayment Date, the Company shall prepay,
and there shall become due and payable, all of the Notes held by the holders by
whom such offer has been accepted in accordance with this Paragraph 4.7 at a
price in respect of each Note held by each such holder equal to the unpaid
principal amount of such Note, together with interest accrued thereon to the
Change of Control Prepayment Date.
H. Prepayment in Connection with a Sale of Material Assets. If at any
time the Company is required to offer to apply any Net Cash Proceeds of any
asset disposition to the prepayment of the Notes as contemplated by Paragraph
6.7 (including any Designated Disposition Proceeds not applied by the Company to
the prepayment of the Notes pursuant to Paragraph 4.2), the Company will give
written notice thereof to the holders of all outstanding Notes, which notice
shall (i) refer specifically to this Paragraph 4.8, (ii) specify the Asset
Disposition Prepayment Date and the Response Date (each as defined below) in
respect thereof, (iii) set forth (x) the aggregate Net Cash Proceeds to be
applied to the retirement of the Indebtedness, (y) the Noteholders' Applicable
Share and (z) the amount of such Noteholders'
<PAGE>
Applicable Share allocable to each Note, determined by allocating such
Noteholders' Applicable Share pro rata among all outstanding Notes according to
the respective unpaid principal amounts thereof, and (iv) offer to prepay a
principal amount of each Note equal to such Noteholders' Applicable Share so
allocable to such Note, on the date therein specified (the "Asset Disposition
Prepayment Date"), which shall be not less than 30 nor more than 60 days after
the date of the giving of such notice. Any such prepayment shall be at the
principal amount so to be prepaid, together with interest accrued thereon to the
date fixed for such prepayment. Each holder of a Note shall notify the Company
of such holder's acceptance or rejection of such offer by giving written notice
of such acceptance or rejection to the Company on a date (the "Asset Disposition
Response Date") not more than 20 days after the date of the notice required to
be given by the Company pursuant to the first sentence of this Paragraph 4.8
(which notice given by such holder shall be binding upon such holder and the
Company). The failure by the holder of a Note to respond to such offer on or
before the Asset Disposition Response Date shall be deemed to be a rejection of
such offer. On the Asset Disposition Prepayment Date, the Company shall prepay,
and there shall become due and payable, the applicable portion of the Notes held
by the holders by whom such offer has been accepted in accordance with this
Paragraph 4.8 at a price in respect of each Note held by each such holder equal
to the principal amount of such Note so to be prepaid, together with interest
accrued thereon to the Asset Disposition Prepayment Date. Any such Net Cash
Proceeds which are not applied to the prepayment of the Notes pursuant to the
foregoing provisions of this Paragraph 4.8 due to a rejection of the Company's
offer shall be applied by the Company to the prepayment of the debt outstanding
under the Credit Agreement and the permanent reduction of the commitment
thereunder as set forth in the Credit Agreement.
V. AFFIRMATIVE COVENANTS. The Obligors and Guarantors covenant and agree
that so long as any Note shall be outstanding hereunder, each of the Obligors
and Guarantors will (and with respect to Paragraph 5.11, the Obligors will cause
each ERISA Affiliate) to:
A. Existence and Good Standing. Preserve and maintain its existence as
a limited partnership or corporation, as applicable, and its good standing in
all states in which it conducts business and the validity of all its material
franchises, licenses and permits required in the conduct of its business.
B. Quarterly Financial Statements. Furnish each holder of a Note within
forty-five (45) days of the end of each quarterly fiscal period hereafter, other
than the last quarterly fiscal period in the fiscal year, with unaudited
quarterly consolidated financial statements of SunSource Inc. and its
Consolidated Subsidiaries, in form and substance as required by GAAP, including
for each such quarter (i) a consolidated balance sheet; (ii) a consolidated
statement of income; (iii) a consolidated statement of cash flows; and (iv) a
certificate in the form of Exhibit C attached hereto executed by the chief
financial officer or controller of SunSource Inc. showing the calculation of the
covenants set forth in Paragraphs 5.12 through 5.14 and Section Six hereof
prepared in accordance with GAAP consistently applied and stating that the
financial statements fairly present the financial condition of SunSource Inc.
and its Consolidated Subsidiaries as of the date and for the periods covered and
that as of the date of such certificate there exists no violation of any
provision of this Agreement or the happening of any Event of Default or Default.
<PAGE>
C. Annual Financial Statements. Furnish each holder of a Note within
ninety (90) days after the close of each fiscal year commencing with fiscal 1997
with audited consolidated annual financial statements of SunSource Inc. and its
Consolidated Subsidiaries, including the financial statements, certificate in
the form of Exhibit C attached hereto and information required under Paragraph
5.2 hereof, which consolidated financial statements shall be prepared in
accordance with GAAP. The financial statements delivered pursuant to (i) above
shall be certified without qualification (except with respect to changes in GAAP
as to which SunSource Inc.'s independent certified public accountants have
concurred) by an independent certified public accounting firm satisfactory to
the Required Holders; and SunSource Inc. shall cause each holder of a note to be
furnished, at the time of the completion of the annual audit, with a certificate
signed by such accountants showing the calculation of the covenants set forth in
Paragraphs 5.12 through 5.14 and Section Six hereof and stating that to the best
of their knowledge there exists no violations of any provisions of this
Agreement or the happening of any Event of Default or Default hereunder.
D. Cash Flow Projections. Furnish to each holder of a Note, on or
before March 31 of each year, commencing with fiscal year 1998, cash flow
projections of SunSource Inc. and its Consolidated Subsidiaries on a
consolidated basis for the twelve (12) month period ending on December 31 of
such year.
E. Public Information. Deliver to each holder of a Note, promptly upon
transmission thereof, copies of all such financial statements, proxy statements,
notices and reports as the Company shall send to its limited partners or to the
Banks or to the holders of the Junior Subordinated Debentures, copies of all
registration statements (without exhibits), and all annual, quarterly or other
reports which the Company or the Guarantors files with the Securities and
Exchange Commission (or any governmental body or agency succeeding to the
functions of the Securities and Exchange Commission) including without
limitation, Form 10Q and Form 10K, and copies of all auditors' annual management
letters delivered to SunSource Inc., the Company or a Guarantor.
F. Books and Records. Keep and maintain satisfactory and adequate books
and records of account in accordance with GAAP and make or cause the same to be
made available to each holder of a Note or their agents or nominees at any
reasonable time during normal business hours upon reasonable notice for
inspection and to make extracts thereof and permit any holder of the Notes to
discuss contents of same with senior officers of SunSource Inc., the Obligors or
a Guarantor and also with outside auditors and accountants of SunSource Inc.,
the Obligors or a Guarantor.
G. Properties; Insurance. Keep and maintain all of its property and
assets in good order and repair and materially covered by insurance with
reputable and financially sound insurance companies against such hazards and in
such amounts as is customary in the industry, under policies requiring the
insurer to furnish reasonable notice to you and opportunity to cure any
non-payment of premiums prior to termination of coverage; and, as required
above, furnish each holder of a Note with certificates of such insurance.
<PAGE>
H. Notices. Notify each holder of a Note in writing immediately of (i)
the institution of any litigation, the commencement of any administrative
proceedings, the happening of any event or the assertion or threat of any claim
which might reasonably be expected to have a Material Adverse Effect, (ii) the
occurrence of any Event of Default or Default hereunder or (iii) any notice
delivered to the Trustee from SunSource Inc. or the holder of any Senior
Indebtedness (as defined in the Indenture) in respect of Section 14.06 of the
Indenture.
I. Taxes. Pay and discharge all taxes, assessments or other
governmental charges or levies imposed on it or any of its property or assets
prior to the date on which any penalty for non-payment or late payment is
incurred, unless the same are (a) being contested in good faith by appropriate
proceedings and (b) are covered by appropriate reserves maintained in cash or
cash equivalents in accordance with GAAP.
J. Compliance; Notification.
1. Except to the extent that noncompliance would not have a Material
Adverse Effect, comply in all respects with all local, state and federal laws
and regulations applicable to its business, including without limitation the
Environmental Control Statutes, the Securities Act of 1933, as amended, and all
laws and regulations of the Local Authorities, and the provisions and
requirements of all franchises, permits, licenses and other like grants of
authority held by the Obligors or Guarantors; and notify each holder of a Note
immediately in detail of any actual or alleged failure to comply with, failure
to perform, breach, violation or default under any such laws or regulations or
under the terms of any of such franchises, permits, certificates, licenses or
grants of authority, or of the occurrence or existence of any facts or
circumstances which with the passage of time, the giving of notice or otherwise
could create such a failure, breach, violation or default or could occasion the
termination of any of such franchises, permits, certificates, licenses or grants
of authority, except to the extent that such matter would not have a Material
Adverse Effect.
2. With respect to the Environmental Control Statutes, promptly
notify each holder of a Note when, in connection with the conduct of the
Company's businesses or operations, any person (including, without limitation,
EPA or any state or local agency) provides oral or written notification to the
Company or Guarantors or the Company or Guarantors otherwise become aware of a
condition with regard to an actual or imminently threatened removal, spill,
release or discharge of hazardous or toxic wastes, substances or petroleum
products that requires notification to the applicable governmental authority
under an Environmental Control Statute and would have an Environmental Material
Adverse Effect; and notify each holder of a Note in detail promptly upon the
receipt by the Obligors or Guarantors of an assertion of liability under the
Environmental Control Statutes, of any actual or alleged failure to comply with
or perform, breach, violation or default under any such statutes or regulations
or of the occurrence or existence of any facts, events or circumstances which
with the passage of time, the giving of notice, or both, could create such a
breach, violation or default and would have an Environmental Material Adverse
Effect.
<PAGE>
3. With respect to each disclosure previously made to each holder of
a Note pursuant to Exhibit B attached hereto or Paragraph 5.10(b) hereof
regarding alleged or actual liability under Environmental Control Statutes, not
later than twenty (20) days after the last day of each fiscal quarter, deliver
to each holder of a Note a report describing (i) the estimated dollar amount,
when initially determined, of any such liability (including costs of
investigation and remediation) and if any such initial estimate with respect to
a disclosed matter shall be modified thereafter by more than $1,000,000, the
modified dollar amount; and (ii) any information or change in circumstances
regarding actual or alleged liability under Environmental Control Statutes of
the Obligors or Guarantors, if the effect thereof would be to increase liability
in connection with the investigation or remediation with respect thereto by more
than $1,000,000.
K. ERISA. (a) Comply, and cause any Plan maintained for the employees
of SDIPI, Guarantors or Obligors to comply, in all material respects with the
provisions of ERISA; (b) not incur any material Accumulated Funding Deficiency
or any material liability to the PBGC (as established by ERISA); (c) permit any
event to occur (i) as described in Section 4042 of ERISA or (ii) which may
result in the imposition of a lien on its properties or assets; and (d) notify
you in writing promptly after it has come to the attention of senior management
of Guarantors or the Company of the assertion or threat of any "reportable
event" or other event described in Section 4042 of ERISA (relating to the
soundness of a Plan), except those with respect to which the PBGC has waived the
30 day notice rule, or the PBGC's ability to assert a material liability against
it) or impose a lien on Guarantors' or the Company's properties or assets.
L. Capitalization Ratio. Maintain a Capitalization Ratio not to exceed:
(i) with respect to the last day of each of the first two fiscal quarters in
each fiscal year, sixty-two percent (62%) and (ii) with respect to the last day
of each of the last two fiscal quarters of each fiscal year, sixty percent
(60%).
M. Fixed Charge Coverage Ratio. Maintain as of the last day of each
fiscal quarter set forth in the left hand column, for the Rolling Period ending
on such date, a Fixed Charge Coverage Ratio for SunSource Inc. and its
Consolidated Subsidiaries of not less than the amount set forth in the right
hand column:
Period Minimum Ratio
Date of Agreement through 3/31/98 1.00
6/30/98 through 12/31/98 1.25
3/31/99 through 9/30/99 1.40
12/31/99 and the last day of each fiscal quarter
thereafter 1.50
N. Leverage Ratio. Maintain on the last day of each fiscal quarter a
Leverage Ratio of not greater than 3.25:1.
O. Management Changes. Notify each holder of a Note in writing within
thirty (30) days after any change of its management group as described in the
"Change of Control" definition.
<PAGE>
P. Subsequent Credit Terms.
1. Notify each holder of a Note in writing not less than five (5)
Business Days prior to its entering into any amendment or modification of any
credit arrangement, whether now in effect or hereafter incurred, pursuant to
which the Obligors or Guarantors agree to financial covenants which are more
restrictive to the Obligors or Guarantors than those contained in Sections Five
and Six hereof. Upon entering into any such amendment or modification, and with
respect to the covenants in the Credit Agreement, the corresponding covenants,
terms and conditions of this Agreement are and shall be deemed to be
automatically and immediately amended to conform with and to include the
applicable covenants, terms and/or conditions of such other agreement; provided,
however, that the foregoing shall not be applicable to or be deemed to affect
any provision of this Agreement to the extent that any amendment or modification
is less restrictive than the corresponding provisions of this Agreement.
2. The Obligors and Guarantors hereby agree promptly to execute and
deliver any and all such documents and instruments and to take all such further
actions as you may, in your sole discretion, deem necessary or appropriate to
effectuate the provisions of this Paragraph 5.16.
Q. Use of Proceeds. Use the proceeds of the Notes solely for general
corporate purposes, including working capital, acquisition financing,
transaction expenses, payments of up to $14,500,000 to the former holders of the
A interests in SunSource L.P. pursuant to the Conversion, and repayment of
certain Indebtedness, including Indebtedness under the Existing Credit Agreement
and Existing Note Purchase Agreements and make-whole payments under the Existing
Note Purchase Agreements.
R. Transactions Among Affiliates. Cause all transactions between and
among Affiliates to be on an arms-length basis and on such terms and conditions
as are customary in the applicable industry between and among unrelated
entities.
S. Other Information. Provide you with any other documents and
information, financial or otherwise, reasonably requested by you from time to
time.
VI. NEGATIVE COVENANTS. So long as any Note shall be outstanding
hereunder, eachof the Company and the Guarantors covenants and agrees that it
will not:
A. Indebtedness. Borrow any monies or create any Indebtedness except:
(i) borrowings from you hereunder; (ii) Indebtedness evidenced by the Credit
Agreement not to exceed Ninety Million Dollars ($90,000,000) aggregate principal
amount outstanding at any time, which may be increased by up to an additional
Twenty Million Dollars ($20,000,000) upon the request of the Company and
agreement of the Banks, which shall rank equally and are pari passu with the
obligations to holders of the Notes hereunder; (iii) Indebtedness under the
Junior Subordinated Debentures, not to exceed One Hundred Five Million Five
Hundred Thousand Dollars ($105,500,000) principal amount outstanding at any time
(but not including any amounts
<PAGE>
which constitute Compounded Interest, as defined in the Indenture), which shall
be subordinate and junior to the obligations to holders of the Notes hereunder;
(iv) trade Indebtedness in the normal and ordinary course of business for value
received, of which no more than Five Million Dollars ($5,000,000) shall be
outstanding at any time under Trade Notes; (v) Indebtedness and obligations
incurred or assumed to purchase or lease fixed or capital assets, provided,
however, that the total principal amount of such Indebtedness and obligations
incurred in any calendar year shall not exceed in the aggregate Seven Million
Five Hundred Thousand Dollars ($7,500,000); (vi) borrowings from the Company by
its Subsidiaries to the extent the Company is permitted to make such loans
pursuant to Paragraph 6.3(i) hereof; (vii) Indebtedness outstanding on the date
hereof and disclosed on Exhibit B hereto, but without any increase in the
outstanding principal amount thereof; (viii) up to an additional Ten Million
Dollars ($10,000,000) aggregate principal amount outstanding at any time (which
shall include the revolving credit facility with the Bank of Nova Scotia); and
(ix) unsecured promissory notes in favor of sellers of assets or stock in
acquisitions otherwise permitted pursuant to Paragraph 6.8 hereof not to exceed
Ten Million Dollars ($10,000,000); provided, however, that Indebtedness of
Subsidiaries under clauses (v) and (viii) hereof shall in no event exceed in the
aggregate outstanding at any time Five Million Dollars ($5,000,000).
B. Guaranties. Guarantee or assume or agree to become liable in any
way, either directly or indirectly, for any additional Indebtedness or liability
of others (except hereunder and under the Notes and with respect to the
Promissory Notes and to endorse checks or drafts in the ordinary course of
business), except that (i) the Obligors may guarantee Indebtedness which in the
aggregate shall not exceed Five Million Dollars ($5,000,000) outstanding at any
time and (ii) any entity may guarantee debt of another entity otherwise
permitted hereunder.
C. Loans. Make any loans or advances to others provided that the
Company may make loans and advances to (i) the Subsidiaries not to exceed Seven
Million Five Hundred Thousand Dollars ($7,500,000) in aggregate outstanding
principal amount at any time, and (ii) to its sales personnel in the ordinary
course of business.
D. Liens and Encumbrances. Create, permit or suffer the creation of any
liens, security interests, or any other encumbrances on any of its property,
real or personal, except (i) liens arising in favor of sellers or lessors for
indebtedness and obligations incurred to purchase or lease fixed or capital
assets permitted under Paragraph 6.1(v) hereof, provided, however, that such
liens secure only the indebtedness and obligations created thereunder and are
limited to the assets purchased or leased pursuant thereto; (ii) liens for
taxes, assessments or other governmental charges, federal, state or local, which
are then being currently contested in good faith by appropriate proceedings and
are covered by appropriate reserves maintained in cash or cash equivalents and
in accordance with GAAP; (iii) pledges or deposits to secure obligations under
workmen's compensation, unemployment insurance or social security laws or
similar legislation; (iv) deposits to secure performance or payment bonds, bids,
tenders, contracts, leases, franchises or public and statutory obligations
required in the ordinary course of business; (v) deposits to secure surety,
appeal or custom bonds required in the ordinary course of business and (vi)
liens and security interests securing up to Five Million Dollars ($5,000,000) of
Indebtedness outstanding under Trade Notes.
<PAGE>
E. Additional Negative Pledge. Agree or covenant with or promise any
person or entity other than you and the Banks that it will not pledge its assets
or properties or otherwise grant any liens, security interests or encumbrances
on its property on terms similar to those set forth in Paragraph 6.4 hereof.
F. Restricted Payments. Make any Restricted Payments; provided, however
that so long as there exists no Event of Default or Default under this Agreement
and no Event of Default or Default will result therefrom: (i) SunSource Inc. may
pay dividends on its common stock; (ii) SunSource Inc. may make regularly
scheduled interest payments on the Junior Subordinated Debentures as in effect
on the date hereof; and (iii) SunSource Inc. may make Tax Distributions;
provided further that if the Leverage Ratio immediately prior to and after
giving effect to such purchase is less than 2.25 to 1, as set forth in a
certificate of the chief financial officer or controller of SunSource Inc. and
delivered to each holder of a Note, then SunSource Inc. may purchase or redeem
its common stock or purchase Trust Preferred Securities, provided a like amount
of the Junior Subordinated Debentures are simultaneously purchased.
G. Transfer of Assets. Sell, lease, transfer or otherwise dispose of
all or any portion of its assets, real or personal, other than such transactions
made on an arm's length basis in the normal and ordinary course of business for
value received; provided, however, that in the absence of a Default or an Event
of Default, and, if a Default or Event of Default would not result therefrom,
the Company may (i) sell assets other than in transactions made on an arm's
length basis in the normal and ordinary course of business for value received in
the aggregate after the date hereof for all such transactions up to Fifteen
Million Dollars ($15,000,000) and (ii) consummate a Sale of Material Assets,
provided that the Notes shall be repaid in connection therewith pursuant to
Paragraph 4.8 hereof by an amount equal to the Noteholders' Applicable Share
received by the Company on account of such sale(s), to the extent such sale(s),
in the aggregate, exceed Fifteen Million Dollars ($15,000,000).
H. Acquisitions and Investments. (a) Purchase or otherwise acquire any
part or amount of the capital stock or assets of, or make any investments in any
other entity or corporation, except Permitted Investments; (b) create, acquire
or maintain any Subsidiary not listed on Schedule I hereto except: (i) A & H
Holding Company, Inc., (ii) if the Subsidiary is either directly or indirectly
owned by A & H Holding Company, Inc. or (iii) if the Subsidiary executes a
joinder to this Agreement to become a Guarantor hereunder and delivers such
opinions and certificates as the holders of the Notes shall reasonably request;
(c) enter into any new business activities or ventures not directly related to
its present business; or (d) merge or consolidate with or into any other entity
or corporation, except that SunSub A, SunSub B, SunSource Inc. or SDIPI may be
merged into the Company if the Company is the surviving entity; provided,
however, that in the absence of a Default or an Event of Default hereunder, and
if a Default or Event of Default would not result therefrom, the Company may
make acquisitions (by merger or purchase) of substantially all but not less than
substantially all of other entities or corporations in the same or substantially
the same business as the Company. The Company shall provide to you a cash flow
projection from the date of any proposed acquisition with a purchase
<PAGE>
price exceeding Ten Million Dollars ($10,000,000), showing prospective
compliance with Paragraphs 5.12 through 5.14 and Section Six of this Agreement
through the Maturity Date.
I. Use of Proceeds. Use any of the proceeds of the Notes, directly or
indirectly, to purchase or carry margin securities within the meaning of
Regulation G of the Board of Governors of the Federal Reserve System; or engage
as its principal business in the extension of credit for purchasing or carrying
such securities.
J. Amendment of Documents. (a) Without the consent of the Required
Holders, which consent shall not be withheld unreasonably, amend or permit any
amendments to: the Obligors' or Guarantors' organizational documents (including
without limitation the Partnership Agreements); the Declaration of Trust of the
Trust; the Indenture; the Terms of Common Securities of the Trust; the Terms of
Preferred Securities of the Trust; the Preferred Securities Guaranty; and (b)
with respect to those provisions of the Credit Agreement relating to financial
covenants (Paragraphs 6.13 through 6.15 through), Events of Default (Section 9),
mandatory or voluntary prepayments (Paragraphs 2.8 and 2.9) and all definitions
related thereto, any amendment, waiver or consent thereto shall require the
simultaneous amendment, waiver or consent, as applicable, to the corresponding
provision in this Agreement pursuant to Section 12.
K. Payment of Loan. Make any payment of principal on the Loan except if
simultaneously with such payment a prepayment to the extent of the Noteholders'
Applicable Share of such payment is made pursuant to Section 4 hereof.
VII. DEFINITIONS.
A. Definitions. When used in this Agreement, the following terms shall
have the respective meanings set forth below.
"Accumulated Funding Deficiency" has the meaning ascribed to that
term in Section 302 of ERISA.
"Adjusted EBITDAR" means, for any fiscal period of SunSource Inc.
and its Consolidated Subsidiaries, EBITDA plus rent expense (as determined in
accordance with GAAP) minus Capital Expenditures.
"Affiliate" means: (i) any person who or entity which directly or
indirectly owns, controls or holds ten percent (10%) or more of the outstanding
common stock in SunSource Inc.; (ii) any entity of which ten percent (10%) or
more of the outstanding common stock or beneficial interest is directly or
indirectly owned, controlled, or held by SunSource Inc. or an Affiliate; (iii)
any entity which directly or indirectly is under common control with SunSource
Inc.; (iv) any officer, director or partner of SunSource Inc. or any Affiliate;
or (v) any immediate family member of any person who is an Affiliate. For
purposes of this definition, the term "control" means the possession, directly
or indirectly of the power to direct or cause the direction of the management
and policies of an entity, whether through the ownership of voting securities,
by contract, or otherwise.
<PAGE>
"Agent" means CoreStates Bank, N.A. in its capacity as
administrative agent for the Banks pursuant to the Credit Agreement, and its
successors and assigns in such capacity.
"Agreement" means this Note Purchase Agreement and all exhibits and
schedules hereto, as each may be amended, modified or supplemented from time to
time.
"Bank" means individually and "Banks" means collectively, the banks
identified on Schedule 2 attached to the Credit Agreement as such Schedule may
be amended from time to time, their respective successors and assigns and any
additional banks which become parties to the Credit Agreement after the date
thereof in accordance with Paragraph 12.2 of the Credit Agreement, but shall not
include any such Bank which is replaced pursuant to the terms thereof after the
date thereof.
"Business Day" means any day not a Saturday, Sunday or a day on
which banks are required or permitted to be closed under the laws of the
Commonwealth of Pennsylvania.
"Capital Expenditures" means, for any period, amounts accrued or
incurred for fixed assets or improvements, replacements, substitutions or
additions thereto, which have a useful life of more than one (1) year, including
direct or indirect acquisition costs of such assets.
"Capital Leases" means capital leases and subleases, as defined in
Statement 13 of the Financial Accounting Standards Board dated November 1976, as
amended and updated from time to time.
"Capitalization Ratio" means, as of any date of determination, the
ratio of Funded Debt to Total Capital.
"CERCLA" means the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended by the Superfund Amendment
and Reauthorization Act of 1986, as amended from time to time.
"Change of Control" means if at any time after the date of this
Agreement: (a) SunSource Inc. ceases to own, directly or indirectly, all of the
general and limited partnership interests in the Company and SDIPI; or (b)(i)
any person or group within the meaning of Section 13(d)(3) of the Securities
Exchange Act of 1934, as amended (the "1934 Act") and the rules and regulations
promulgated thereunder shall have beneficial ownership (within the meaning of
Rule 13d-3 of the 1934 Act), directly or indirectly, of securities of SunSource
Inc. (or other securities convertible into such securities) representing twenty
percent (20%) or more of the combined voting power of all securities of
SunSource Inc. entitled to vote in the election of directors other than Lehman
Affiliates and the management group of Joseph M. Corvino, Max W. Hillman, Harold
J. Cornelius, Norman V. Edmonson, Donald T. Marshall and John P. McDonnell
(hereinafter called a "Controlling Person"); or (ii) a majority of the Board of
Directors of SunSource Inc. shall cease for any reason to consist of (1)
individuals who on the date hereof are serving as directors of SunSource Inc. or
(2) individuals who subsequently become members of the Board if such
individuals' nomination for election or election to the board is recommended or
<PAGE>
approved by a majority of the Board of Directors of SunSource Inc. For purposes
of clause (b)(i) above, a person or group shall not be a Controlling Person if
such person or group holds voting power in good faith and not for the purpose of
circumventing Paragraph 8.1(f) as an agent, bank, broker, nominee, trustee, or
holder of revocable proxies given in response to a solicitation pursuant to the
1934 Act, for one or more beneficial owners who do not individually, or, if they
are a group acting in concert, as a group, have the voting power specified in
clause (b)(i) above.
"Closing Date" means September 30, 1997.
"Code" means the Internal Revenue Code of 1986, as amended from time
to time and regulations in effect from time to time.
"Conversion" means the conversion of SunSource L.P., a Delaware
limited partnership, to the corporate form of SunSource Inc., a Delaware
corporation as set forth in SunSource Inc.'s Registration Statement on Form S-4,
filed with the Securities and Exchange Commission on December 31, 1996, as
amended.
"Credit Agreement" means the Amended and Restated Credit Agreement
dated September 30, 1997 among SDI Operating Partners, L.P. and its Subsidiaries
set forth on Schedule 1 attached thereto, SDI Partners I, L.P., SunSource Inc.,
SunSub A and SunSub B and CoreStates Bank N.A., for itself and as Agent, the
Bank of Nova Scotia, for itself and as Documentation Agent, and the Banks set
forth on Schedule 2 attached thereto, as amended, modified or supplemented from
time to time pursuant to the terms thereof and hereof.
"Default" means an event or circumstance which, with the giving of
notice or the passage of time or both, would constitute an Event of Default.
"Designated Disposition Proceeds" means the aggregate proceeds of
any one or more sales, divestitures or spin-offs of or any portion of either the
Hillman Fastener or Harding Glass divisions of the Company up to Fifteen Million
Dollars ($15,000,000).
"Distributions Paid on Trust Securities" means all amounts payable
by the Trust to the holders of the Trust Preferred Securities and Trust Common
Securities.
"EBITDA" means, for any fiscal period of SunSource Inc. and its
Consolidated Subsidiaries, Net Income plus (i) GP Management Fees, (ii) Interest
Expense (including all interest paid on the Junior Subordinated Debentures
(whether paid in cash or in kind)), (iii) all provisions for income taxes, (iv)
depreciation and amortization expense, and (v) extraordinary losses, minus
extraordinary gains, as each such item is determined in accordance with GAAP.
For purposes of this definition, extraordinary losses shall include the
restructuring charge of Four Million Nine Hundred Thousand Dollars ($4,900,000),
net of deferred income tax benefits and Conversion transaction charges of Two
Million One Hundred Fifty Thousand Dollars ($2,150,000) incurred during 1996,
and Conversion transaction charges (including make whole provisions and other
costs), not to exceed Eight Million Dollars ($8,000,000) to be incurred in 1997.
<PAGE>
"Environmental Control Statutes" means any federal, state or local
laws governing control, storage, removal, spill, release or discharge of
Hazardous Substances including without limitation CERCLA, the Solid Waste
Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976
and the Hazardous and Solid Waste Amendments of 1984, the Federal Water
Pollution Control Act, as amended by the Clean Water Act of 1976, the Hazardous
Materials Transportation Act, the Emergency Planning and Community Right to Know
Act of 1986, the National Environmental Policy Act of 1975, the Oil Pollution
Act of 1990, any similar or implementing state law, in each case, including all
amendments thereto and all rules and regulations promulgated thereunder and
permits issued in connection therewith.
"Environmental Material Adverse Effect" means a material adverse
effect on the business, financial condition on prospects of the Company taken as
a whole, greater than or equal to $1,000,000 per single event of $5,000,000 in
the aggregate for all such environmental events as a result of any condition,
circumstance or contingency.
"EPA" means the United States Environmental Protection Agency, or
any successor thereto.
"ERISA Affiliate" means, when used with respect to an Employee
Benefit Plan, ERISA, the PBGC or a provision of the Code pertaining to employee
benefit plans, any Person that is a member of any group of organization within
the meaning of Code Sections 414(b), (c), (m) or (o) of which any Obligor or any
Guarantor is a member.
"ERISA" means the Employee Retirement Income Security Act of 1974,
all amendments thereto and all rules and regulations in effect at any time.
"Event of Default" means an event described in Paragraph 8.1 hereof.
"Existing Credit Agreement" means that certain Credit Agreement
among SDI Operating Partners L.P., SDIPI, Agent and certain of the Banks dated
December 22, 1992, as amended.
"Existing Note Purchase Agreement(s)" means those note purchase
agreements dated December 15, 1992, as amended, issued by SDI Operating
Partners, L.P. for Ninety-Five Million Dollars ($95,000,000) in privately-placed
notes.
"Fixed Charges" means, at any date of determination for the most
recently ended Rolling Period of SunSource Inc. and its Consolidated
Subsidiaries, the sum of (i) Interest Expense (including interest paid on the
Junior Subordinated Debentures to the extent paid in cash); (ii) GP Management
Fees; (iii) rent expense; (iv) scheduled maturities paid on Funded Debt
(excluding the Loan); (v) cash dividends paid by SunSource Inc.; and (vi)
Partnership Distributions, all as determined in accordance with GAAP.
"Fixed Charge Coverage Ratio" means, at any date of determination,
the ratio of Adjusted EBITDAR to Fixed Charges for the most recently ended
Rolling Period.
<PAGE>
"Funded Debt" means, at any date of determination of SunSource Inc.
and its Consolidated Subsidiaries, the sum of the following in such period,
without duplication: (i) Indebtedness for borrowed money; (ii) Indebtedness
evidenced by notes, debentures or similar instruments; (iii) Capital Leases;
(iv) guarantees of Indebtedness or Capital Leases; and (v) letters of credit and
letter of credit reimbursement obligations. For purposes of this definition,
Funded Debt does not include the Junior Subordinated Debentures.
"GAAP" shall mean generally accepted accounting principles, which
shall be (i) applied in accordance with the Statement on Auditing Standards No.
69 "The Meaning of Present Fairly in Conformity with Generally Accepted
Accounting Principles in the Independent Auditor's Report," (SAS 69) or
superseding pronouncements, issued by the Auditing Standards Board of the
American Institute of Certified Public Accountants and (ii) in the form and
content of any requirements for financial statements filed with the Securities
and Exchange Commission, in all cases applied on a consistent basis. The
requirement that such principles be applied on a consistent basis shall mean
that the accounting principles observed in a current period are comparable in
all material respects to those applied in a preceding period except such changes
in accounting principles approved by the Guarantor's outside auditors.
"GP Management Fees" shall mean management fees due SDIPI from SDI
Operating Partners, L.P. which arose or accrued prior to the Conversion
notwithstanding that any such amount may not be due or payable until after the
Conversion.
"Guarantors" means SDIPI, SunSub A, SunSub B, SunSource Inc. and any
future Subsidiary executing a joinder to this Agreement to become a guarantor.
"Hazardous Substance" means petroleum products and items defined in
the Environmental Control Statutes as "hazardous substances", "hazardous
wastes", "pollutants" or "contaminants" and any other toxic, reactive,
corrosive, carcinogenic, flammable or hazardous substance or other pollutants.
"Indebtedness" of any person means and includes all obligations of
such person which, in accordance with GAAP, shall be classified on a balance
sheet of such person as liabilities of such person and in any event shall
include all (i) obligations of such person for borrowed money or which have been
incurred in connection with acquisition of property or assets, (ii) obligations
secured by any lien upon property or assets owned by such person,
notwithstanding that such person has not assumed or become liable for the
payment of such obligations, (iii) obligations created or arising under any
conditional sale or other title retention agreement with respect to property
acquired by such person, notwithstanding the fact that the rights and remedies
of the seller, lender or lessor under such agreement in the event of default are
limited to repossession or sale of property, (iv) Capital Leases, (v) guarantees
and (vi) letters of credit and letter of credit reimbursement obligations.
"Interest Expense" means for any fiscal period, the interest expense
of SunSource Inc. and its Consolidated Subsidiaries, as determined in accordance
with GAAP for such period.
<PAGE>
"Indenture" means the Indenture dated as of September 5, 1997
between SunSource Inc. and Bank of New York, as trustee, providing for the
issuance of the Junior Subordinated Debentures.
"Junior Subordinated Debentures" means the unsecured subordinated
obligations of SunSource Inc. which will be deposited in the Trust as trust
assets upon the Conversion and the terms of which are included in the Indenture.
"Lehman Affiliates" means Lehman Brothers Capital Partners I, L.P.,
LBI Group, Inc., Lehman Ltd. I Inc., Lehman/SDI, Inc. and Lehman Brothers
Holdings Inc.
"Leverage Ratio" means as of any date of determination of SunSource
Inc. and its Consolidated Subsidiaries the ratio of Funded Debt as of such date
to EBITDA for the most recently ended Rolling Period.
"Loan" or "Loans" means the outstanding principal balance of
Indebtedness for advances under the Credit Agreement, plus the outstanding
principal balance of Indebtedness for advances on swing line loans under
Paragraph 2.13 of the Credit Agreement, plus the unreimbursed amount of any
draws on letters of credit under the Credit Agreement, in each case, together
with interest accrued thereon and fees and expenses incurred in connection
therewith.
"Local Authorities" means individually and collectively the state
and local governmental authorities and administrative agencies which govern the
commercial or industrial facilities or businesses owned or operated by the
Obligors.
"Make-Whole Amount" shall mean, in connection with any prepayment of
a Note pursuant to Paragraph 4.2, the amount (but not less than zero) equal to
the excess, if any, of
(1) the sum of the Present Values (as hereinafter defined) of (a)
the principal amount of such Note being prepaid (assuming the principal balance
of such Note payable upon maturity is paid when due) and (b) the amount of
interest (other than accrued interest being paid concurrently with such
prepayment) that would have been payable on each interest payment date on the
amount of such principal being prepaid (assuming the principal balance of such
Note payable upon maturity and interest payments are paid when due), over
(2) the principal amount of such Note being prepaid.
For purposes of this definition, "Present Value" shall be determined in
accordance with generally accepted financial practice on a semiannual basis at a
discount rate equal to the sum of the applicable Treasury Yield plus 1/2 of 1%;
and the applicable "Treasury Yield" for such purpose shall be the yield on
actively traded United States Treasury securities having a maturity equal to the
then-remaining weighted average life to maturity (determined in accordance with
generally accepted financial practice) of the Note being prepaid as determined
by reference to the display designated as "Page 500" on the Dow Jones Markets
Service (or, if such display is no longer published, any publicly available
source of similar market data, such as Federal Reserve
<PAGE>
Statistical Release H.15(519), that became publicly available at least four
Business Days prior to the date of such prepayment); provided that if such
weighted average life to maturity is not equal to the maturity of any actively
traded United States Treasury securities as set forth on said display (or said
substitute source of market data), such yield shall be obtained by linear
interpolation (calculated to the nearest one-twelfth of a year) from the yields
of actively traded United States Treasury securities set forth on said display
(or said substitute source of market data) having a maturity closest to such
weighted average life to maturity.
"Material Adverse Change" means a material adverse change in the
business, financial condition or prospects of the Obligors taken as a whole as a
result of any condition, circumstance or contingency, either singly or in the
aggregate.
"Material Adverse Effect" means a material adverse effect on the
business, financial condition or prospects of the Obligors taken as a whole as a
result of any condition, circumstance or contingency, either singly or in the
aggregate.
"Maturity Date" means September 30, 2002.
"Net Cash Proceeds" of (A) any sale of assets shall mean the cash
proceeds received by the seller in such a transaction less (i) the reasonable
costs of the transaction, and (ii) indebtedness secured by any lien on such
assets which is paid from such proceeds and (iii) any tax payment required to be
made as a result of the gain (if any) on such sale; and (B) any other prepayment
of the Loan and Notes shall mean the total amount of such payment to the Banks
and the holder of the Notes.
"Net Income" means, for any period, SunSource Inc. and its
Consolidated Subsidiaries' gross revenue for such period (excluding
extraordinary gains and losses) less all expenses and other proper charges
(including taxes on income) in each case as determined in accordance with GAAP.
"Net Worth" means, as of any date of determination, Total Assets
minus Total Liabilities in SunSource Inc. and its Consolidated Subsidiaries, as
stated on the financial statements most recently delivered to you pursuant to
Paragraphs 5.2 and 5.3 hereof, as applicable.
"Noteholders' Applicable Share" means, as of any date of
determination, with respect to any Net Cash Proceeds which are required or
permitted to be used by the Company to reduce the amount outstanding on the
Notes pursuant to this Agreement, the portion of such Net Cash Proceeds which
bears the same relationship to the entire amount of such Net Cash Proceeds as
the amount outstanding on the Notes on the date of determination bears to the
sum of the outstanding principal amount of the Loan plus the amount of the Notes
on the date of determination.
"Notes" means the Company's 7.66% Notes due 2002 issued in an
original aggregate principal amount of Sixty Million Dollars ($60,000,000)
pursuant to this Agreement.
<PAGE>
"Officer's Certificate" means a certificate signed on behalf of the
Company and SunSource Inc. by the chief financial officer or controller of
SunSource Inc.
"Partnership Agreement" means individually, as noted, and
"Partnership Agreements" means collectively the Amended and Restated Agreement
of Limited Partnership of SDI Operating Partners, L.P. dated February 1, 1987,
and the Amended and Restated Agreement of Limited Partnership of SDIPI dated
February 5, 1987, as each may be amended to date and from time to time hereafter
in accordance with its terms and the provisions hereof.
"Partnership Distributions" means amounts payable by the Company to
SunSource Inc. and SDIPI pursuant to Section 5.02 of the Company's Partnership
Agreement, to fund Tax Distributions, including without limitation those which
arose or accrued prior to the Conversion notwithstanding that any such amounts
may not be due or payable until after the Conversion.
"PBGC" means the Pension Benefit Guaranty Corporation, or any
successor thereto.
"Permitted Investments" means (i) investments in commercial paper
maturing in 180 days or less from the date of issuance which is rated Al or
better by Standard & Poor's Corporation or Pl or better by Moody's Investors
Services, Inc.; (ii) investments in direct obligations of the United States of
America or obligations of any agency thereof which are guaranteed by the United
States of America, provided that such obligations mature within twelve (12)
months of the date of acquisition thereof; (iii) investments in certificates of
deposit maturing within one (1) year from the date of acquisition thereof issued
by a bank or trust company organized under the laws of the United States or any
state thereof, having capital, surplus and undivided profits aggregating at
least $1,000,000,000 and the long-term deposits of which are rated Al or better
by Moody's Investors Services, Inc. or equivalent by Standard & Poor's
Corporation; (iv) money market funds invested in vehicles of the types set forth
in subsections (i) through (iii); and (v) other investments not to exceed
$500,000 in the aggregate made from the date hereof to the Maturity Date.
"Plan" means any pension benefit or welfare benefit plan as defined
in Sections 3(1), (2) or (3) of ERISA covering employees of the Obligors or any
ERISA Affiliate.
"Promissory Notes" means collectively the Promissory Notes in the
form of Exhibit B attached to the Credit Agreement to be delivered by the
borrowers set forth in the Credit Agreement to Banks pursuant to Paragraph
5.1(a) thereof, as the same may be amended or modified or extended or restated
from time to time.
"Required Banks" means those Banks (which may include Agent) holding
sixty-six and two-thirds percent (66-2/3%) or more of the amount of the
commitment, as defined in the Credit Agreement, or, if indebtedness is
outstanding hereunder, sixty-six and two-thirds percent (66-2/3%) or more of the
Loan.
<PAGE>
"Required Holders" means the holder or holders of at least sixty-six
and two-thirds percent (66-2/3%) of the outstanding principal amount of the
Notes.
"Restricted Payments" means (i) any dividend or distribution on, or
the purchase, redemption, prepayment or other retirement of the common
securities of SunSource Inc.; (ii) the payment of principal or interest on or
the purchase, redemption, prepayment or other retirement of the Junior
Subordinated Debentures; and (iii) Tax Distributions.
"Rolling Period" means, as of any date, the most recent four (4)
consecutive fiscal quarters of SunSource Inc. and its Consolidated Subsidiaries
completed on or before such date.
"Sale of Material Assets" means any sale, transfer or other
disposition of the Company's assets in transactions in which the total
consideration paid or payable to Company (including without limitation all cash,
liabilities assumed and the fair market value of any stock provided in such
transaction) is, in the aggregate, as to all such transactions after the date of
this Agreement, greater than Fifteen Million Dollars ($15,000,000).
"SDI Operating Partners, L.P." means SDI Operating Partners, L.P., a
Delaware limited partnership.
"SDIPI" means SDI Partners I, L.P., a Delaware limited partnership
and the general partner of SDI Operating Partners, L.P.
"Subsidiary" or "Subsidiaries" means any corporation of which the
Company, directly or indirectly, owns more than fifty percent (50%) of any class
or classes of securities. The Subsidiaries of the Company on the date hereof are
set forth on Schedule I attached hereto.
"SunSource Inc." means SunSource Inc., a Delaware corporation.
"SunSource Inc. and its Consolidated Subsidiaries" means SunSource
Inc. and its consolidated subsidiaries as defined in accordance with GAAP.
"SunSource L.P. and its Consolidated Subsidiaries" means SunSource
L.P., a Delaware limited partnership, converted to corporate form by the
Conversion, and its consolidated subsidiaries as defined in accordance with
GAAP.
"SunSub A" means SunSub A Inc., a Delaware corporation.
"SunSub B" means SunSub B Inc., a Delaware corporation.
"Tax Distributions" shall mean those distributions which are payable
to the former B interest holders in SunSource L.P. pursuant to the Company's
Partnership Agreement, including any payments which are due and payable after
the Conversion.
<PAGE>
"Total Assets" means, as of any date of determination, all assets of
SunSource Inc. and its Consolidated Subsidiaries, as set forth on SunSource
Inc.'s financial statements most recently delivered to you pursuant to
Paragraphs 3.6, 5.2 and 5.3 hereof, as defined in accordance with GAAP.
"Total Capital" means, at any date of determination of SunSource
Inc. and its Consolidated Subsidiaries, the sum of the following: (i) Funded
Debt; (ii) the outstanding principal amount of Junior Subordinated Debentures;
and (iii) Net Worth.
"Total Liabilities" means, as of any date of determination, all
liabilities and deferred items of SunSource Inc. and its Consolidated
Subsidiaries, as set forth on SunSource Inc.'s financial statements most
recently delivered to you pursuant to Paragraphs 3.6, 5.2 and 5.3 hereof, as
defined in accordance with GAAP.
"Trade Notes" means Indebtedness of the Company secured by the
Company's inventory of glass and window products pursuant to financing plans in
the normal course of business for value received.
"Trust" shall mean SunSource Capital Trust, a Delaware statutory
business trust, which is the issuer of the Trust Preferred Securities to the
former holders of the A interests in SunSource L.P. and the Trust Common
Securities to SunSource Inc.
"Trust Common Securities" means the common securities issued by the
Trust pursuant to the Conversion.
"Trust Preferred Securities" means the preferred securities issued
by the Trust pursuant to the Conversion.
B. Rules of Construction.
(a) GAAP. Except as otherwise provided herein, financial and
accounting terms used in the foregoing definitions or elsewhere in this
Agreement shall be defined in accordance with GAAP. If the Company or you
determine that a change in GAAP from that in effect on the date hereof has
altered the treatment of certain financial data to their detriment under this
Agreement, such party may, by written notice to the other within thirty (30)
days after the effective date of such change in GAAP, request renegotiation and
the parties agree to negotiate in good faith to modify such financial covenants
affected by such change to reflect equitably such change. If the Company and the
holders of the Notes have not agreed on revised covenants within thirty (30)
days after the delivery of such notice, then, for purposes of this Agreement,
GAAP will mean generally accepted accounting principles on the date just prior
to the date on which the change occurred that gave rise to the notice.
<PAGE>
(b) Use of Term "Consolidated". Any term defined in thi
Section 7, when modified by the word "Consolidated" shall have the meaning given
to such term herein as to SunSource Inc. on a consolidated basis with its
Subsidiaries and all other entities whose accounts, financial results or
position, for either federal income tax or financial accounting purposes, are
consolidated with those of SunSource Inc. in accordance with GAAP.
VIII. EVENTS OF DEFAULT; REMEDIES.
A. Events of Default. Each of the following events shall be an Event of
Default hereunder:
1. If any of the Obligors or Guarantors shall fail to pay when due
(i) any installment of principal or interest when due or (ii) fees, costs,
expenses or any other sum payable to you hereunder or otherwise within 5 days
after notice from you that it is due;
2. If any representation or warranty made herein or in connection
herewith or in any statement, certificate or other document furnished hereunder
is incorrect, false or misleading in any material respect when made;
3. If any of the Obligors or Guarantors shall default in the payment
or performance of any obligation or Indebtedness to another, either singly or in
the aggregate in excess of $1,000,000, whether now or hereafter incurred;
4. If there shall be a default in or failure to observe at any test
date the covenants set forth in Paragraphs 5.12 through 5.14 or Section Six
hereof;
5. If any of the Obligors or Guarantors shall default in the
performance of any other agreement or covenant contained herein (other than as
provided in subparagraphs (a), (b) or (d) above) or in any document executed or
delivered in connection herewith, and such default shall continue uncured for
twenty (20) days after the earlier of (i) any Obligor having actual knowledge of
such default, and (ii) notice thereof to the Company given by any holder of a
Note;
6. [Intentionally omitted];
7. If custody or control of any substantial part of the property of
any of the Obligors or Guarantors shall be assumed by any governmental agency or
any court of competent jurisdiction at the instance of any governmental agency;
if any material license or franchise shall be suspended, revoked or otherwise
terminated; if any governmental regulatory authority or judicial body shall make
any other final non-appealable determination the effect of which would be to
affect materially and adversely the operations of any of the Obligors or
Guarantors as now conducted;
<PAGE>
8. If any of the Obligors or Guarantors: becomes insolvent, bankrupt
or generally fails to pay its debts as such debts become due; is adjudicated
insolvent or bankrupt; admits in writing its inability to pay its debts; or
shall suffer a custodian, receiver or trustee for it or substantially all of its
property to be appointed and if appointed without its consent, not be discharged
within thirty (30) days; makes an assignment for the benefit of creditors; or
suffers proceedings under any law related to bankruptcy, insolvency, liquidation
or the reorganization, readjustment or the release of debtors to be instituted
against it and if contested by it not dismissed or stayed within thirty (30)
days; if proceedings under any law related to bankruptcy, insolvency,
liquidation, or the reorganization, readjustment or the release of debtors is
instituted or commenced by any Obligor; if any order for relief is entered
relating to any of the foregoing proceedings; if any of the Obligors or
Guarantors shall call a meeting of its creditors with a view to arranging a
composition or adjustment of its debts; or if any of the Obligors or Guarantors
shall by any act or failure to act indicate its consent to, approval of or
acquiescence in any of the foregoing;
9. If any event or condition shall occur or exist with respect to
any activity or substance regulated under the Environmental Control Statutes and
as a result of such event or condition, any of Guarantors or the Obligors has
incurred or in the opinion of the Company are reasonably likely to incur a
liability in excess of $1,000,000 during any consecutive twelve (12) month
period;
10. If any judgment, writ, warrant or attachment or execution or
similar process which calls for payment or presents liability in excess of
$1,000,000 shall be rendered, issued or levied against any of Guarantors or
Obligors or their respective property and such process shall not be paid,
waived, stayed, vacated, discharged, settled, satisfied or fully bonded within
sixty (60) days after its issuance or levy; provided, however, that if a
judgment, writ, warrant or attachment or execution or similar process relates to
federal or state taxation, then an Event of Default shall occur if the same
shall not be paid, waived, stayed, vacated, discharged, settled, satisfied or
fully bonded within one hundred twenty (120) days after its issuance or levy; or
11. If SunSource Inc. makes a payment of principal or interest on or
purchases or redeems the Junior Subordinated Debentures and the Trust does not
immediately use such funds to make Distributions Paid on Trust Securities.
B. Acceleration; Suits for Enforcement. (i) Upon the occurrence of an
Event of Default under Paragraph 8.1(h), the unpaid principal amount of all
Notes, together with the interest accrued thereon and, to the extent permitted
by law, an amount equal to the Additional Amount specified below shall
automatically become immediately due and payable, without presentment, demand,
protest or other requirements of any kind, all of which are hereby expressly
waived by the Company and (ii) if any other Event of Default shall have occurred
and be continuing, the holders of at least 51% in aggregate principal amount of
the Notes may elect to declare the entire unpaid principal amount of all Notes
to be, and the same shall forthwith become, due and payable, together with the
interest accrued thereon and, to the extent permitted by law, an amount equal to
the Additional Amount specified below, provided that, during the
<PAGE>
existence of an Event of Default described in Paragraph 8.1(a) with respect to
any Note, the holder of such Note may, by written notice to the Company, declare
such Note to be, and the same shall forthwith become, due and payable, together
with the interest accrued thereon and, to the extent permitted by law, an amount
equal to the Additional Amount specified below. If any holder of any Note shall
exercise the option specified in the proviso to the preceding sentence, the
Company will forthwith give written notice thereof to the holders of all other
outstanding Notes and each such holder may (whether or not such notice is given
or received), by written notice to the Company, declare the principal of all
Notes held by it to be, and the same shall forthwith become, due and payable,
together with the interest accrued thereon and, to the extent permitted by law,
an amount equal to the Additional Amount specified below. For purposes of this
Paragraph 8.2 the term "Additional Amount" means, with respect to any Note, an
amount equal to the Make-Whole Amount that would be payable with respect to such
Note if the Company had elected to prepay the Notes pursuant to Paragraph 4.2.
In addition, the holder of any Note may proceed to protect and enforce its
rights, either by suit in equity or by action at law, or both, whether for the
specific performance of any covenant or agreement contained in this Agreement or
in aid of the exercise of any power granted in this Agreement, or the holder of
any Note may proceed to enforce the payment of all sums due upon such Note
whether by acceleration or otherwise or to enforce any other legal or equitable
right of the holder of such Note.
The Company covenants that, if it shall default in the making of any
payment due under any Note or in the performance or observance of any agreement
contained in this Agreement, it will pay to the holder thereof such further
amounts, to the extent lawful, as shall be sufficient to pay the costs and
expenses of collection or of otherwise enforcing such holder's rights, including
reasonable counsel fees.
C. Remedies Cumulative. No remedy herein conferred upon you or the
holder of any Note is intended to be exclusive of any other remedy and each and
every such remedy shall be cumulative and shall be in addition to every other
remedy given hereunder or now or hereafter existing at law or in equity or by
statute or otherwise.
D. Remedies Not Waived. No course of dealing between the Company and
you or the holder of any Note and no delay or failure in exercising any rights
hereunder or under any Note in respect thereof shall operate as a waiver of any
of your rights or the rights of any holder of such Note.
IX. GUARANTY.
A. Guaranty. Each Guarantor hereby irrevocably, absolutely and
unconditionally guarantees and becomes surety for the full, prompt and punctual
payment to you and the other holders of the Notes, as and when due, whether at
maturity, by acceleration or otherwise, of any and all Indebtedness, liabilities
and obligations of the Company to you and the other holders of the Notes created
at any time under, or pursuant to the terms of, this Agreement and of the Notes,
whether for principal, interest, premiums, fees, expenses or otherwise (all such
indebtedness, liabilities and obligations being called in this Section Nine
collectively the "Obligations"),
<PAGE>
together with any and all reasonable expenses, including attorneys' fees and
disbursements, which may be incurred by you or the other holders of the Notes in
enforcing any and all rights against Guarantors under this Agreement (herein the
"Expenses").
B. Bankruptcy. Without limiting Guarantors' obligations hereunder and
notwithstanding any purported termination of this Section Nine or this
Agreement, if any bankruptcy, insolvency, reorganization, arrangement,
readjustment, composition, liquidation, dissolution, assignment for the benefit
of creditors, or similar event with respect to any of the Obligors or any
additional guarantor or endorser of all or any of the Obligations and Expenses
shall occur, and such occurrence shall result in the return of (or if in such
event you or another holder of the Notes shall be requested to return) any
payment or performance of any of the Obligations or Expenses, then the
obligations of each Guarantor hereunder shall be reinstated with respect to such
payment or performance returned or requested to be returned and with respect to
all further obligations arising as a result of such return or request, and each
Guarantor shall thereupon be liable therefor, without any obligation on the part
of you or another holder of the Notes to contest or resist any such return.
C. Nature and Term of Guaranty. The obligations of each Guarantor under
this Section Nine shall be independent, absolute, irrevocable and unconditional
and shall remain in full force and effect until the Obligations and all other
amounts payable hereunder shall have been paid in full (subject, however, to
reinstatement under Paragraph 9.2 hereof).
D. Rights and Remedies. You or any other holder of the Notes may
proceed to exercise any right or remedy which you or it may have under this
Section Nine against Guarantors without first pursuing or exhausting any rights
or remedies which it may have against any of the Obligors, any additional
guarantor or against any other person or entity or any collateral security, and
may proceed to exercise any right or remedy which it may have under this Section
Nine without regard to any actions or omissions of any other person or entity,
in any manner or order, without any obligation to marshal in favor of Guarantors
or other persons or entities and without releasing any of Guarantors'
obligations hereunder with respect to any unpaid Obligations and Expenses. No
remedy herein conferred upon or reserved to you and the other holders of the
Notes is intended to be exclusive of any other available remedy or remedies, but
each and every such remedy shall be cumulative and shall be in addition to every
other remedy given under this Section Nine or now or hereafter existing at law
or in equity.
E. Actions by Holders of the Notes Not Affecting Guaranty. The Required
Holders may, at any time or from time to time, in such manner and upon such
terms as they may deem proper, extend or change the time of payment or the
manner or place of payment of, or otherwise modify or waive any of the terms of,
or release, exchange, settle or compromise any or all of the Obligations and
Expenses or any collateral security therefor, or subordinate payment of the
same, or any part thereof, to the payment of any other indebtedness, liabilities
or obligations of any of the Obligors which may at any time be due or owing to
themselves or anyone, or elect not to enforce any of their rights with respect
to any or all of the Obligations and Expenses or any collateral security
therefor, all without notice to, or further assent of, Guarantors and without
releasing or affecting Guarantors' obligations under this Section Nine.
<PAGE>
F. Payment in Accordance with Notes and this Agreement. This Section
Nine shall be construed as guaranteeing that the Obligations and Expenses shall
be paid strictly in accordance with the terms of the Notes and this Agreement,
regardless of any non-perfection of any collateral security for the Obligations;
any invalidity or unenforceability of this Agreement, the Notes or any of the
Obligations; the voluntary or involuntary liquidation, dissolution, sale or
other disposition of all, or substantially all of the assets, marshaling of
assets and liabilities, receivership, insolvency, bankruptcy, assignment for the
benefit of creditors, reorganization, arrangement, composition with creditors or
readjustment of, or other similar proceedings affecting any of the Obligors,
Guarantors or any additional guarantor or endorser of any or all of the
Obligations and Expenses or any of the assets of any of them, or any contest of
the validity of this Section Nine in any such proceeding; or any law, regulation
or decree now or hereafter in effect in any jurisdiction which might in any
manner affect any of such terms or provisions or any rights of the holder or
holders of the Notes with respect thereto or which might cause or permit any of
the Obligors or any additional guarantor or endorser of the Obligations and
Expenses to invoke any defense to, or any alteration in the time, amount or
manner of payment of any or all of the Obligations and Expenses or performance
of this Section Nine.
G. Payments Under Guaranty. All payments by Guarantors hereunder shall
be made in the manner set forth on Schedule II hereto.
H. Waivers and Modifications. No failure or delay on the part of any
holder of the Notes in exercising any power or right under this Section Nine
against Guarantors shall operate as a waiver thereof, nor shall any single or
partial exercise of any such right or power preclude any other or further
exercise thereof or the exercise of any other right or power under this Section
Nine. No modification or waiver of any provision of this Section Nine, nor
consent to any departure therefrom, shall, in any event, be effective unless the
same is in writing signed by the Required Holders and then such waiver or
consent shall be effective only in the specific instance and for the purpose for
which given. No notice to, or demand on Guarantors, in any case, shall entitle
the Guarantors to any other or further notice or demand in similar or other
circumstances.
I. Waiver. Each Guarantor hereby waives promptness, diligence,
presentment, demand, notice of acceptance and any other notice with respect to
any of the Obligations and this Section Nine, except notice of demand for
payment hereunder.
J. Subordination of Rights of Subrogation. Guarantors shall not
exercise any rights which Guarantors may acquire by way of subrogation under
this Section Nine, applicable law or otherwise, by any payment made hereunder or
otherwise, until all of the Obligations and Expenses and all other amounts
payable hereunder (including amounts which may become due following a
reinstatement hereof under Paragraph 9.2 hereof) shall have been paid in full in
cash. If any amount shall be paid to any Guarantor on account of such rights at
any time when all the Obligations and Expenses shall not have been paid in full
(including amounts which may become due following a reinstatement hereof under
Paragraph 9.2 hereof), such amount paid to such Guarantor shall be held in trust
for the benefit of the holders of the Notes and shall forthwith be credited and
applied against the Obligations and Expenses, whether matured or unmatured, in
<PAGE>
accordance with the terms of the Notes and this Agreement; provided, however,
that to the extent not prohibited by applicable law or affecting the Banks' or
holders of the Notes right to retain such funds, the holders of the Notes shall
retain Noteholders' Applicable Share of the Net Cash Proceeds of any amount so
recovered and the remainder shall be shared with the Banks. If any Guarantor
shall make payment to the holders of the Notes of all or any part of the
Obligations and Expenses and all of the Obligations and Expenses shall be paid
in full, the holders of the Notes, shall, at such Guarantor's request, execute
and deliver to such Guarantor appropriate documents, without recourse and
without representation or warranty, necessary to evidence the transfer, by
subrogation, to Guarantor of an interest in the Obligations resulting from such
payment by Guarantor.
K. No Setoff by Guarantors. No setoff, counterclaim, reduction, or
diminution of any obligation, or any defense of any kind or nature which
Guarantors have or may have against any of the Obligors or any holder of the
Notes shall be available hereunder to Guarantors.
L. Continuing Guaranty; Transfer of Note. Except as provided in
Paragraph 9.2 hereof, this Section Nine is a continuing guaranty and shall (i)
remain in full force and effect until the Obligations and Expenses and all other
amounts payable under this Section Nine shall have been paid in full (subject,
however, to reinstatement under Paragraph 9.2 hereof), (ii) be binding upon
Guarantors and the successors and assigns of Guarantors, and (iii) inure to the
benefit of the holders of the Notes, and be enforceable by them and their
successors, transferees and assigns. Without limiting the generality of the
foregoing clause (iii), any holder of the Notes may, to the extent permitted in
this Agreement endorse, assign or otherwise transfer its Notes to any other
person or entity, and such other person or entity shall thereupon become vested
with all the rights in respect thereof granted to any holder of the Notes herein
or otherwise.
M. Representations and Warranties; Covenants. By signing in the place
provided below, each Guarantor hereby makes the representations and warranties
set forth in this Agreement and hereby agrees to the covenants and other
agreements of the Guarantors to the extent set forth in this Agreement.
X. REGISTRATION, TRANSFER AND EXCHANGE OF NOTES. The Company will
keep at its principal executive office a note register (herein sometimes
referred to as the "Note Register"), in which, subject to such reasonable
regulations as it may prescribe, but at its expense (other than transfer taxes,
if any), it will provide for the registration and transfer of Notes.
Whenever any Note or Notes shall be surrendered either at the principal
executive office of the Company or at the place of payment named in the Notes,
for transfer or exchange, the Company will execute and deliver in exchange
therefor a new Note or Notes, as may be requested by such holder, in the same
aggregate unpaid principal amount of the Note or Notes so surrendered. Each such
new Note shall be payable to such person as such holder may request. Each Note
presented or surrendered for registration of transfer or exchange shall be duly
endorsed, or shall be accompanied by a written instrument of transfer duly
executed, by the registered holder of such Note or its attorney duly authorized
in writing. Any Note issued in exchange for any other Note or upon transfer
thereof shall carry the rights to unpaid interest and
<PAGE>
interest to accrue which were carried by the Note so exchanged or transferred,
and neither gain nor loss of interest shall result from any such transfer or
exchange. Any transfer tax relating to such transaction shall be paid by the
holder requesting the exchange.
The Company and any agent of the Company may treat the person in whose
name any Note is registered as the owner of such Note for the purpose of
receiving payment of the principal of and premium (if any) and interest on such
Note and for all other purposes whatsoever, whether or not such Note be overdue.
XI. LOST, ETC., NOTES. Upon receipt by the Company of evidence satisfactory
to it of the loss, theft, destruction or mutilation of any Note, and (in case of
loss, theft or destruction) of indemnity satisfactory to it and upon surrender
and cancellation of such Note, if mutilated, the Company will deliver in lieu of
such Note a new Note in a like unpaid principal amount, dated as of the date to
which interest has been paid thereon.
Notwithstanding the foregoing provisions of this Section, if any Note
of which you or any other institutional holder is the owner is lost, stolen or
destroyed, then the affidavit of your or such holder's Treasurer or Assistant
Treasurer (or other responsible officials) shall be accepted as satisfactory
evidence thereof and no indemnity shall be required as a condition to the
execution and delivery by the Company of a new Note in lieu of such Note (or as
a condition to the payment thereof, if due and payable) other than your or such
holder's written agreement to indemnify the Company.
The Company will keep at its principal executive offices a true copy of
this Agreement (as at the time in effect), and cause the same to be available
for inspection at said office during normal business hours by any holder of a
Note or any prospective purchaser of a Note designated by a holder thereof.
XII. AMENDMENT AND WAIVER.
A. Any term, covenant, agreement or condition of this Agreement or of
the Notes may, with the consent of the Company, be amended, or compliance
therewith may be waived (either generally or in a particular instance and either
retroactively or prospectively) by one or more substantially concurrent written
instruments signed by the Required Holders, provided, however, that no such
amendment or waiver shall:
a. (i) change the rate or the time of payment of interest on any
of the Notes, without the consent of the holder of each Note so affected,
(ii) modify any of the provisions of this Agreement or of the
Notes with respect to the payment or prepayment thereof, or change the
percentage of holders of Notes required to approve any such amendment or
effectuate any such waiver, without the consent of the holders of all the Notes
then outstanding, or
(iii) give to any Note any preference over any other Note,
<PAGE>
b. extend to or affect any obligation not expressly waived or
impair any right consequent thereon, and
c. amend, waive or modify the provisions of this Agreement
relating to (i) the covenants set forth in Paragraphs 5.12 through 5.14 and
Section Six hereof; (ii) any of the Events of Default set forth in Paragraph 8.1
hereof; (iii) the mandatory and voluntary prepayment provisions of Paragraphs
4.1, 4.2, 4.3, 4.4, 4.7 and 4.8 hereof; and (iv) any of the definitions relating
to the matters described in clauses (i) through (iii) above, without the
simultaneous amendment, waiver or modification of the corresponding provision of
the Credit Agreement by Banks or Required Banks, as applicable.
B. Any amendment or waiver pursuant to Subsection A of this Section
shall (except as provided in Clause A(1)(i)) apply equally to all the holders of
the Notes and shall be binding upon them, upon each future holder of any Note
and upon the Company, in each case whether or not a notation thereof shall have
been placed on any Note.
C. The Company will not solicit, request or negotiate for or with
respect to any proposed waiver or amendment of any of the provisions of this
Agreement or the Notes unless each holder of any Note (irrespective of the
amount of Notes then owned by it) shall be informed thereof by the Company and
shall be afforded the opportunity of considering the same and shall be supplied
by the Company with sufficient information to enable it to make an informed
decision with respect thereto. Executed or true and correct copies of any
amendment or waiver effected pursuant to the provisions of this Section 12 shall
be delivered by the Company to each holder of outstanding Notes forthwith
following the date on which the same shall have been executed and delivered by
the required percentage of the holders of the Notes. The Company will not,
directly or indirectly, pay or cause to be paid any remuneration, whether by way
of supplemental or additional interest, fee or otherwise, to any holder of any
Note as consideration for or as an inducement to the entering into by any holder
of any Note or any amendment or waiver of any of the terms and provisions of
this Agreement unless such remuneration is concurrently paid, on the same terms,
ratably to the holders of all of the Notes outstanding at the time such offer is
made.
XIII. HOME OFFICE PAYMENT. Notwithstanding anything to the contrary in this
Agreement or the Notes, so long as you or any nominee designated by you shall be
the holder of any Note, the Company shall punctually pay all amounts which
become due and payable on such Note to you at your address and in the manner set
forth in Schedule II hereto, or at such other place and in such other manner as
you may designate by notice to the Company, without presentation or surrender of
such Note. You agree that prior to the sale, transfer or other disposition of
any such Note, you will make notation thereon of the portion of the principal
amount paid or prepaid and the date to which interest has been paid thereon, or
surrender the same in exchange for a Note or Notes aggregating the same
principal amount as the unpaid principal amount of the Note so surrendered. The
Company shall enter into an agreement similar to that contained in this Section
with any other institutional investor (or nominee thereof) who shall hold any of
the Notes.
<PAGE>
XIV. LIABILITIES OF THE PURCHASER. Neither this Agreement nor any
disposition of any of the Notes shall be deemed to create any liability or
obligation of you or any other holder of any Note to enforce any provision
hereof or of any of the Notes for the benefit or on behalf of any other person
who may be the holder of any Note.
XV. TAXES. The Company will pay all taxes (including interest and
penalties) which may be payable in respect of the execution and delivery of this
Agreement or of the execution and delivery (but not the transfer) of any of the
Notes or of any amendment of, or waiver or consent under or with respect to,
this Agreement or of any of the Notes and will save you and all subsequent
holders of the Notes harmless against any loss or liability resulting from
nonpayment or delay in payment of any such tax. The obligations of the Company
under this Section shall survive the payment of the Notes.
XVI. MISCELLANEOUS.
A. Expenses. The Company agrees, whether or not the transactions
contemplated by Paragraph 1.2 shall be consummated, to pay all reasonable
expenses incident to such transactions and also in connection with any future
amendment of, or waiver under or with respect to (whether or not the same shall
become effective), this Agreement or any of the Notes, including in each case,
without limitation, all document production and other expenses, the reasonable
fees and disbursements of your special and local counsel for their services in
connection with such transactions, the fees and expenses in connection with the
assignment of the private placement number referred to in Paragraph 3.7 and all
expenses in connection with the shipping to and from your office or the office
of your nominee or custodian bank of the Notes delivered to you on the Closing
Date and to reimburse you for any reasonable out-of-pocket expenses in
connection therewith. The Company also agrees to pay all reasonable expenses
following the occurrence and during the continuance of any Default or Event of
Default or incident to the negotiation of any restructuring, workout or similar
arrangement, whether or not consummated, relating to the Company. The
obligations of the Company under this Paragraph shall survive the payment of the
Notes.
In furtherance of the foregoing paragraph, on the Closing Date, the
Company will pay the fees and disbursements of Milbank, Tweed, Hadley & McCloy
and Pepper, Hamilton & Scheetz LLP which are reflected in the statement of such
special counsel delivered to the Company on or prior to the Closing Date; and
thereafter the Company will pay, promptly upon receipt of supplemental
statements therefor from time to time, additional fees, if any, and
disbursements of such special counsel in connection with the transactions
contemplated by Paragraph 1.2 (including unposted disbursements as of the
Closing Date).
B. Reliance on and Survival of Representations. All agreements,
representations and warranties of the Company or any partner of the Company
herein and in any certificates or other instruments delivered pursuant to this
Agreement shall (A) be deemed to be material and to have been relied upon by
you, notwithstanding any investigation heretofore or hereafter made by you or on
your behalf, and (B) survive the execution and delivery of this Agreement and
the delivery
<PAGE>
of the Notes to you, and shall continue in effect so long as any Note is
outstanding and thereafter as provided in Section 15 and Paragraph 16.1.
C. Successors and Assigns. All covenants and agreements in this
Agreement by or on behalf of the respective parties hereto shall bind and inure
to the benefit of their respective successors and assigns, except that, in the
case of a successor to the Company by consolidation or merger or a transferee of
its assets, this Agreement shall inure to the benefit of such successor or
transferee only if it becomes such in accordance with Paragraph 6.8; provided,
however, that you shall not be obligated to purchase any Notes on the Closing
Date from any person other than the Company. The provisions of this Agreement
are intended to be for the benefit of all holders, from time to time, of the
Notes, and shall be enforceable by any such holder, whether or not an express
assignment to such holder of rights under this Agreement has been made by you or
your successor or assign, provided, however, that the benefit of Paragraphs 5.2,
5.3, 5.6, Section 11 (as to satisfactory indemnity) and Section 13 shall be
limited as provided therein.
D. Notices. All notices, opinions and other communications provided for
in this Agreement shall be in writing and delivered or mailed, first class
postage prepaid, addressed (A) if to the Company, at the address set forth at
the head of this Agreement (marked for the attention of Vice President-Finance),
or at such other address as the Company may hereafter designate by notice to you
and to each other holder of any Note at the time outstanding, (B) if to you, at
your address as set forth in Schedule II hereto or at such other address as you
may hereafter designate by notice to the Company, or (C) if to any other holder
of any Note, at the address of such holder as it appears on the Note Register or
the records of the Company maintained pursuant to Section 10.
E. Reproduction of Documents. This Agreement and all related documents,
including (a) consents, waivers and modifications which may subsequently be
executed, (b) documents received by you at the closing of your purchase of the
Notes (except the Notes themselves), and (c) financial statements, certificates
and other information previously or subsequently furnished to you, may be
reproduced by you by any photographic, photostatic, microfilm, micro-card,
miniature photographic or other similar process and you may destroy any original
document so reproduced. The Company agrees and stipulates that any such
reproduction shall, to the extent permitted by applicable law, be admissible in
evidence as the original itself in any judicial or administrative proceeding
(whether or not the original is in existence and whether or not the reproduction
was made by you in the regular course of business) and that any enlargement,
facsimile or further reproduction of the reproduction shall likewise be
admissible in evidence.
F. Law Governing. This Agreement and the Notes shall be governed by and
construed in accordance with the laws of the State of New York.
G. Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect any of the terms hereof.
<PAGE>
H. 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.
<PAGE>
If you are in agreement with the foregoing, please sign the form of
acceptance in the space provided below whereupon this Agreement shall become a
binding agreement between you and the Company.
Very truly yours,
SDI OPERATING PARTNERS, L.P.
By: SDI PARTNERS I, L.P., its general partner
By: SUNSUB B INC., its general partner
By: ______________________________
Name:
Title:
SUNSOURCE INC., as Guarantor and for
purposes of making the representations and
warranties, and agreeing to the covenants
and other agreements as set forth in the
Agreement
By:____________________________________
Name:
Title:
SUNSUB A INC., as Guarantor and for purposes
of making the representations and
warranties, and agreeing to the covenants
and other agreements as set forth in the
Agreement
By:____________________________________
Name:
Title:
<PAGE>
SUNSUB B INC., as Guarantor and for purposes
of making the representations and
warranties, and agreeing to the covenants
and other agreements as set forth in the
Agreement
By:____________________________________
Name:
Title:
SDI PARTNERS I, L.P., as Guarantor and for
purposes of making the representations and
warranties, and agreeing to the covenants
and other agreements as set forth in the
Agreement
By: SUNSUB B INC., its general partner
By:_______________________________
Name:
Title:
The foregoing Agreement is
hereby accepted as of the date
first above written:
TEACHERS INSURANCE AND
ANNUITY ASSOCIATION OF
AMERICA
By: ___________________________
Name:
Title:
<PAGE>
EXHIBIT A
SDI OPERATING PARTNERS, L.P.
SENIOR NOTE DUE 2002
PPN: ____________
Note No. [Date]
$
FOR VALUE RECEIVED, the undersigned, SDI OPERATING PARTNERS, L.P., a
limited partnership organized and existing under the laws of Delaware (herein
called the "Company"), hereby promises to pay to
or registered assigns, the principal sum of
DOLLARS
(or so much thereof as shall not have been prepaid) on September 30, 2002, with
interest (computed on the basis of a 360-day year of twelve 30-day months) on
the unpaid principal hereof at the rate of 7.66% per annum (subject to increase
as provided in Paragraph 1.4 of the Note Purchase Agreement referred to below)
from the date hereof, payable quarterly in arrears on March 30, June 30,
September 30 and December 30 in each year, commencing on December 30, 1997,
until said principal shall have become due and payable, and thereafter to pay
interest (so computed) at the rate per annum equal to the greater of (i) the
prime commercial lending rate of interest announced by The Chase Manhattan Bank
(National Association) at its principal office in New York, New York, as in
effect from time to time, plus 1% or (ii) 8.66%, on any overdue principal and
premium and, to the extent permitted by applicable law, on any overdue interest,
until the same shall be paid. Payments of principal, premium, if any, and
interest are to be made at the office of Morgan Guaranty Trust Company of New
York, New York, in lawful money of the United States of America.
This Note is one of the 7.66% Senior Notes issued pursuant to the Note
Purchase Agreement dated as of September 30, 1997 between the Company and
Teachers Insurance and Annuity Association of America, and is entitled to the
benefits thereof. As provided in said Note Purchase Agreement, this Note is
subject to optional prepayments in whole or in part.
This Note is transferable on the note register of the Company upon
presentment at the principal executive office of the Company or the place of
payment named herein, duly endorsed, or accompanied by a written instrument of
transfer duly executed, by the registered holder hereof or such holder's
attorney duly authorized in writing. As provided in said Note
<PAGE>
1
Purchase Agreement, Notes may also be exchanged at such office or place of
payment for a like aggregate principal amount of Notes, as requested by the
holder presenting the same. The Company may deem and treat the person in whose
name this Note is registered as the holder and owner hereof for the purpose of
receiving payments and for all other purposes whatsoever, and the Company shall
not be affected by any notice to the contrary.
In case an Event of Default (as defined in said Note Purchase
Agreement) shall occur and be continuing, the principal of this Note may become
or be declared due and payable in the manner and with the effect provided in
said Note Purchase Agreement.
SDI OPERATING PARTNERS, L.P.
By: SDI PARTNERS I, L.P., its general partner
By: SUNSUB B INC., its general partner
By: _________________________
Name:
Title:
<PAGE>
2
EXHIBIT C
Form of Compliance Certificate
To: Each holder of a Note under the Note Purchase Agreement dated
as of September 30, 1997, between the Company and Teachers
Insurance and Annuity Association of America (as amended, the
"Agreement")
Attached hereto are the financial statements and other items required
to be delivered to you pursuant to Paragraph 5.2 or 5.3 of the Agreement. All
capitalized terms used but not defined in this certificate shall have the
meanings set forth in the Agreement.
The undersigned hereby certify that:
1. The attached financial statements were prepared in accordance with
GAAP (except that annual financial statements of SDIPI are prepared on a tax
basis) consistently applied and fairly present the financial condition of
SunSource Inc. and its Consolidated Subsidiaries as of the date made and for the
period covered.
2. As of the date of such financial statements, there exists no
violation of any provision of the Agreement and there has not been an Event of
Default or a Default, except as described in Item 3 below.
3. The following event or circumstance, is, or with the passage of time
or giving of notice will be, an Event of Default:_______________________________
________________________________________________________________________________
_______________________________________________________________________________.
4. The following actions are being taken with respect to the matter(s)
identified in Item 3 above:_____________________________________________________
________________________________________________________________________________
________________________________________________________________________________
_______________________________________________________________________________.
<PAGE>
3
5. Attached hereto as Schedule 1 are the calculations of the covenants
set forth in Paragraphs 5.12 through 5.14 and certain paragraphs in Section Six
of the Agreement.
IN WITNESS WHEREOF, the undersigned, being the chief financial officer
or controller of SunSource Inc., has executed and delivered this certificate
this ____ day of _________________, ____.
SUNSOURCE INC., for itself and on behalf
of the Obligors
By: __________________________________
Name:
Title:
<PAGE>
Consent of Independent Accountants
We consent to the incorporation by reference and inclusion in this registration
statement on Form S-2 (File No._____________) 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 our 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.
- ----------------------------
2400 Eleven Penn Center
Philadelphia, Pennsylvania
January 22, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Balance
Sheet as of September 30, 1997 and the related statement of income for the
year-to-date ended September 30, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,674
<SECURITIES> 0
<RECEIVABLES> 90,923
<ALLOWANCES> 2,438
<INVENTORY> 99,872
<CURRENT-ASSETS> 209,107
<PP&E> 52,596
<DEPRECIATION> 31,311
<TOTAL-ASSETS> 305,003
<CURRENT-LIABILITIES> 103,750
<BONDS> 60,000 <F1>
115,991 <F2>
0
<COMMON> 64
<OTHER-SE> (3097)
<TOTAL-LIABILITY-AND-EQUITY> 305,003
<SALES> 529,199
<TOTAL-REVENUES> 529,199
<CGS> 315,000
<TOTAL-COSTS> 185,046
<OTHER-EXPENSES> 83
<LOSS-PROVISION> 1,148
<INTEREST-EXPENSE> 5,587
<INCOME-PRETAX> 20,510
<INCOME-TAX> (8,932)
<INCOME-CONTINUING> 29,442
<DISCONTINUED> 0
<EXTRAORDINARY> (3,392)
<CHANGES> 0
<NET-INCOME> 26,050
<EPS-PRIMARY> 1.35
<EPS-DILUTED> 1.35
<FN>
<F1> Bonds represents all long-term debt for Senior Notes
<F2> Represents Guaranteed preferred beneficial interests in the Corporation's
junior subordinated debentures.
</FN>
</TABLE>
