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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission file number 1-13293
SunSource Inc.
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(Exact name of registrant as specified in its charter)
Delaware 23-2874736
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3000 One Logan Square
Philadelphia, Pennsylvania 19103
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 282-1290
Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of Each Exchange on Which Registered
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Common Stock, New York Stock Exchange
par value $.01 per share
Preferred Share Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. X
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The aggregate market value of the Common Shares held by non-affiliates of the
registrant on March 25, 1999 was $75,337,000. On March 25, 1999 there were
6,740,208 Common Shares outstanding.
Documents Incorporated by Reference: Portions of the Proxy Statement for the
Annual Meeting of Stockholders to be held April 27, 1999 are incorporated by
reference in Part III of this Form 10-K.
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PART I
Item I - Business
General
SunSource Inc., a Delaware corporation (the "Company" or "SunSource"), is one of
the largest providers of value-added services and products to retail and
industrial markets in North America. The Company operates its three businesses
through indirect wholly-owned subsidiary corporations which are SunSource
Industrial Services Company Inc. ("SunSource Industrial Services Company" or
"Industrial Services"), The Hillman Group, Inc. ("Hillman") and Harding Glass,
Inc. ("Harding"). These operating units represent businesses within the
distribution industry which are characterized by a potential for value-added
services, economies of scale and opportunities for further consolidation, as
follows:
Industrial Services. SunSource Industrial Services Company, with sales of $492
million in 1998, provides a broad range of products and services throughout
North America, operating in three business segments which are Technology
Services, Expediter and Integrated Supply. The Company believes that the
Technology Services segment is a leading provider of systems and parts and
engineering services for hydraulic, pneumatic, electronic and related systems to
major industrial concerns, as well as small and medium-size businesses.
Technology Services 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. The Expediter segment provides personalized,
small parts inventory management services to low volume customers. The
Integrated Supply segment provides major industrial manufacturing customers with
comprehensive inventory management services for their maintenance, repair and
operating supplies. The Expediter and Integrated Supply segments enable their
customers to reduce inventory investment and the associated expenses of
purchasing, receiving, disbursing and accounting for parts and materials.
Hardware Merchandising. Hillman, with sales of $126 million in 1998, provides
small hardware items and merchandising services to retail hardware outlets
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 hardware
retailers that cannot be managed economically by the retailer's own employees
because of the large number of items and their low prices.
Glass Merchandising. Harding, with sales of $95 million in 1998, operates one of
the largest networks of full service retail glass shops in the United States
with approximately 125 retail locations, including 1999 acquisitions to-date.
Harding sells and installs automotive glass and also sells, fabricates and
installs flat glass. Customers include individual retail consumers, insurance
companies and commercial accounts.
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The Company's current organization consists of a corporate headquarters and the
three businesses, as follows:
<TABLE>
<CAPTION>
Principal Year Acquired/
Location Organized
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SunSource Headquarters Philadelphia, PA 1975
<S> <C>
SunSource Industrial
Services Company, Inc. Chicago, IL 1996
Technology Services Companies
- SunSource Technology Services Inc. Chicago, IL (1)
- Hydra Power de Mexico, S.A. de C.V. Tlalnepantla, C.P., Mexico 1992
Expediter Companies
- Kar Products Inc. ("Kar") Chicago, IL 1977
- A&H Bolt & Nut Co., Ltd. ("A&H") Windsor, Ontario 1989
Integrated Supply Companies
- SunSource Inventory Management
Company, Inc. ("SIMCO") Lenexa, KS 1992/1981
- SIMCO de Mexico, S.A. de C.V. Mexico City, Mexico 1992
Hardware Merchandising
- The Hillman Group, Inc. Cincinnati, OH 1982
Glass Merchandising
- Harding Glass, Inc. Kansas City, MO 1980
</TABLE>
(1) Consists of various companies acquired from 1976 through 1991.
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.
(i) Manufacturers are increasing their reliance on distributors in order to
enhance their profitability and improve their returns on capital.
(ii) Customers are increasing their reliance on value-added distributors as
their contacts with the manufacturers diminish or cease altogether.
(iii) Customers are outsourcing non-core functions to high quality service
providers.
(iv) Channels of distribution are in the process of consolidation.
(v) Managerial skills required for success in industrial distribution are
changing dramatically.
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SunSource, through its applications engineers and technical support personnel,
provides customized solutions to complex problems encountered by its customers.
The Company believes that its Industrial Services business 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. In addition, the Company operates certain businesses
focused on the retail sector, delivering merchandising systems, point-of-sale
displays, product support through a field service force, national account sales
and services and installation (Hillman and Harding).
Risk Factors
Restructuring
In December 1996, the Company announced a three-year restructuring plan to
integrate and consolidate the sales, distribution and administrative operations
of its five domestic Technology Services divisions. The Company expects the
restructuring plan to result in the elimination of approximately 175 employees
in Technology Services and produce certain net annualized cost savings of
approximately $5.0 million per year upon its completion. Technology Services
consists of hydraulic and pneumatic distributors that were acquired by the
Company between 1976 and 1991. Until the restructuring, each of the Technology
Services divisions was operated on a decentralized basis.
The restructuring plan includes the consolidation of all financial, information
system and other administrative responsibilities for Technology Services in one
location, which is expected to be completed in 1999. The restructuring of the
sales organization is expected to be completed by mid-1999. Consolidation of the
distribution network is partially complete and scheduled for full completion
early in 2000, shortly beyond the projected three-year time frame of the plan,
due to the need for additional logistical studies of the geographic placement of
new distribution facilities. The failure to complete the restructuring or
successfully integrate the Technology Services divisions would have an adverse
impact on the Company's ability to fully achieve the net cost savings indicated
above. There can be no assurance that the Company will be able to complete the
plan effectively or on a timely basis.
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 suppliers 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 the suppliers 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 business are causing the industry to become more competitive. There
can be no assurance that the Company will be able to compete effectively in or
adapt to the changing industry environment.
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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 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.
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.
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.
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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. There can be no assurance that the
precautions which the Company has taken against certain events that could
disrupt the operations of its information systems will prevent the occurrence of
such a disruption. Any such disruption could have a material adverse effect on
the Company's business and results of operations.
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.
Refer to Item 7 - "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for additional information regarding the Year 2000
issue.
Segment Information
Refer to Item 7 - "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for Segment financial data for the three years ended
December 31, 1998.
Industrial Services (Technology Services, Expediter and Integrated Supply)
SunSource Industrial Services Company provides a single nationwide source for a
broad array of industrial products and supporting technical services. SunSource
Industrial Services Company operates in three segments, comprised of Technology
Services, Expediter and Integrated Supply. The common strategy of these segments
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 segments 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.
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Technology Services
Technology Services, with sales of approximately $322 million in 1998, 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.
Technology Services seeks to build strong relationships with its customers by
providing technological/problem-solving capabilities along with quality
products. Technology Services 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, Technology
Services can perform a technology review of the customer's facilities covering
areas such as electronic systems, hydraulics, pneumatics, repair activities and
inventory management. Technology Services 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. Technology Services also conducts multiple-day training programs to
help customers stay current with evolving technologies relevant to their
operations.
Technology Services has benefitted 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. Technology Services
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.
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, Technology Services 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 Technology Services achieve an expanded
relationship with many of its customers. They also provide Technology Services
with an opportunity to win new customers because many of the local distributors
do not have the resources to provide comparable repair services. Technology
Services 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.
The six distribution companies which today comprise Technology Services 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,
Technology Services operated each of its divisions on a decentralized basis with
each division having its own president and vice president of sales. In December
1996, the Company announced a three-year restructuring plan to integrate and
consolidate the five domestic Technology Services divisions. The integration of
the finance, information systems and administrative functions of Technology
Services is expected to be completed in 1999.
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The restructuring of the sales organization is expected to be completed by mid-
1999 after which the sales force will focus on account management and expanded
customer relationships in a defined geography. The outside sales representatives
will be supported by technical product specialists to assist in the delivery and
application of product. Technology Services is also 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. This process is partially complete and is
scheduled for full completion early in 2000. Centralized purchasing and
inventory management is expected to result in improved fill rates for customers
while at the same time reducing Technology Services' inventory investment,
leveraging its purchasing power with many suppliers and reducing suppliers'
operating costs.
Products and Suppliers. Technology Services believes that it carries the most
diverse selection of fluid power and related technical 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.
Technology Services has a broad supply base which includes almost all major
manufacturers of fluid power and related technical products in the United
States. Technology Services' top ten suppliers account for less than 30% of its
1998 sales. Because of the fragmented nature of the industry, manufacturers of
this type of equipment historically have awarded their franchises on a limited
geographical basis. Technology Services 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 Technology
Services' larger suppliers are Sauer-Sunstrand and Commercial, whose products
are distributed in most of Technology Services' territories.
In recent years there has been considerable consolidation among suppliers, a
trend which management believes will continue and benefit Technology Services.
In addition, Technology Services 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. Technology Services currently serves over 35,000
customers, the top ten of which accounted for approximately 11% of its 1998
sales. Approximately 60% of sales are to OEM customers who incorporate the
equipment or system purchased from Technology Services into their final
products. The remaining 40% of sales are to maintenance, repair and operation
("MRO") customers who use Technology Services products as part of their
production process.
Within the MRO and OEM markets, Technology Services 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.
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Sales and Marketing. Technology Services markets its products nationwide,
principally through a network of outside sales representatives supported by
customer service representatives and a telemarketing operation. In order to
become more responsive to the increasing demands of customers, Technology
Services has devoted substantial resources to make its sales force more
specialized both in terms of technical training and industry knowledge.
Technology Services 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. Technology
Services is in the process of adding additional industry specialists to its
sales organization.
To support the outside sales representatives, Technology Services employs
approximately 235 customer service representatives who collectively function to
take orders from customers on the telephone, answer questions and solve
problems. Technology Services 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 sales representative.
Technology Services 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 Technology Services' 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. Technology Services 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.
Expediter (Kar and A&H)
The Expediter segment of SunSource Industrial Services Company provides
inventory management services to small and medium-size accounts. The Expediter
segment, with sales of $125 million in 1998, 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 its Expediter business 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 1998, the Expediter segment sold more than 25,000 products to over 50,000
customers in the United States and Canada.
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Products and Suppliers. The Expediter segment packages and inventories over
25,000 items in nine major product categories. The largest category is
fasteners, which accounted for approximately 30% of 1998 Expediter sales. The
Expediter segment purchases the parts it needs from over 600 regular vendors,
none of which account for greater than 2% of this segment's annual purchases.
This segment has long-standing relationships with a majority of its suppliers
and continually seeks to upgrade vendor performance by measuring it and
educating vendors on the Expediter segment's quality and service standards. A
majority of the products sold by the Expediter segment are packaged by vendors
under the private brand labels of Kar Products, Inc. and A&H Bolt and Nut Co.
(as "The Fastener Centre").
To maintain its reputation for leading product lines and "one-stop shopping,"
the Expediter segment emphasizes new product innovation and is an active
participant in trade shows and trade publications. The Expediter segment works
with its vendors to introduce more than 500 new products per year.
Markets and Customers. Customers of the Expediter segment tend to be smaller
companies that make frequent small purchases. A typical expediter customer
purchases less than $10,000 per year from this segment and includes truck fleet
operators, construction and mining operations, industrial plants, paper plants,
welding shops, hospitals, schools, government facilities and automobile
dealerships.
Sales and Marketing. The Expediter sales representatives serve their customers
by providing merchandising systems, helping control inventory and physically
stocking and organizing products. 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. The Expediter segment also offers customized product
literature which is targeted to selected niche markets.
The 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 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.
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Competition. The Expediter segment 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. SunSource Industrial
Service Company's Expediter business serves all segments of the highly
fragmented MRO market and has less than 1% market share. The Company believes
that its Expediter segment can capture additional market share by increasing the
number of its qualified sales representatives and has a program in place to
improve the quality and training of its sales representatives.
Integrated Supply (SIMCO and SIMCO de Mexico)
The Integrated Supply segment of SunSource Industrial Services Company, with
sales of $46 million in 1998, is focused on major industrial manufacturing
customers. In some instances, Integrated Supply will take over complete
responsibility for a customer's purchases of maintenance, repair and operating
supplies. In those cases, Integrated Supply 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. The products and suppliers used by the Integrated Supply
segment vary considerably depending on the nature of the customer's
manufacturing activity. Integrated Supply seeks to maximize its purchasing power
by aggregating purchases of common items used by multiple customers and also by
purchasing through the other SunSource businesses. Integrated Supply often
obtains lower prices and provides improved availability for many products
without changing the customer's vendors.
Markets and Customers. Integrated Supply customers tend to be large industrial
facilities which purchase in excess of $1 million per year from this segment.
Integrated Supply's major industrial customers include Colgate Palmolive,
Mercedes Benz and Marley Cooling Tower.
Sales and Marketing. Integrated Supply 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 Integrated
Supply. 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
Integrated Supply is typically lower total costs, substantial reduction in
inventory investment and improved product availability.
Competition. The competition for the Integrated Supply segment 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. The Company's Integrated Supply segment also
competes with "strategic alliances" among established distributors of
traditional product lines.
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Hardware Merchandising (Hillman)
The Company believes that Hillman, with sales of $126 million in 1998, 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
related hardware items. More importantly, Hillman complements its extensive
product selection with value-added services for the retailer.
Fasteners and related 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 small dollar sales but large 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 dollar sales.
Hillman's service 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 service 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 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 order fill rates and rapid delivery from its eight
distribution centers across the United States. Orders are shipped within 48
hours with a 96% order fill rate.
Products and Suppliers. Hillman buys its products from approximately 500
vendors, the largest of which accounted for 14.2% of Hillman's 1998 purchases
and the top ten of which accounted for less than 49% of Hillman's 1998 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 40,000 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 the Company's
Expediter and Integrated Supply segments. The balance of purchases are made from
domestic manufacturers and master distributors.
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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 9,100 full service retail
outlets. Hillman historically has serviced individual dealers of the larger
cooperatives, such as Tru-Serv, Ace and Do it Best. 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 logistic expense 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 $17 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 5,000 smaller hardware outlets and over
6,000 non-hardware accounts that are not large enough to qualify for Hillman's
full service program, through its Tele-Source division.
Sales and Marketing. Hillman believes that it is able to be more responsive to
customers' needs than its competitors because it employs one of the largest
direct national sales and service organizations in the industry. Hillman's sales
force consists of over 200 people, managed by 23 field sales managers. Each
sales representative is responsible for approximately 50 full service accounts
that are called on by such representative every two weeks on average. The
service organization consists of 80 full-time and 20 part-time people, managed
by 13 field managers. Hillman's National Accounts group focuses on "Big Box"
retailers, large national chains and grocery stores. In addition, the sales
force is supported by Hillman's Inside Sales and Customer Service group that is
responsible for the expediting of orders, quoting special items and issuing
credits. With the efforts of the Marketing Department, the sales force not only
sells products, but can sell merchandising and technological capabilities as
well. The Marketing Department provides the support through the development of
sales collateral, promotional items, merchandising aids and marketing services,
such as advertising and trade show management. Hillman's EDI system is used by a
number of its large customers.
Competition. The principal competitors for Hillman's core business are Midwest
Fasteners, Serv-A-lite, Elco and Sharon Bolt & Screw, the latter two of which
carry mainly 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. 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.
13
<PAGE>
The primary competitors in the home center, regional and national lumberyard
markets are Crown Bolt with an estimated 50% market share and Elco and The
Newell Group. 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 $95 million in 1998, is one of the largest
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 125 retail locations throughout the United States, including 1999
acquisitions to-date. 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 de-emphasizing
lower margin businesses, such as large contract glazing, Harding has increased
its overall gross margins from 34.9% in 1994 to 40.0% in 1998. 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. 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.
14
<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 1998 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 33 person sales force of whom 22 sell both flat and automotive glass and 11
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 five 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 one
of the largest comprehensive glass retailers. 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. The
Company believes that Harding is currently the largest full service retail glass
shop business in the United States with approximately 125 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 comprehensive information system give it
significant advantages over these competitors.
15
<PAGE>
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 17 of Notes to Consolidated
Financial Statements of the Company as of and for the three years ended December
31, 1998.
Employees
As of December 31, 1998, the Company employed approximately 4,070 employees, of
which approximately 1,800 were sales personnel, approximately 1,400 were
employed as warehouse and delivery personnel, and approximately 870 held
administrative positions. The Company has collective bargaining agreements with
5 unions representing a total of approximately 75 employees. In the opinion of
management, employee relations are good.
Backlog
The Company's sales backlog was $66.4 million as of December 31, 1998, and $68.3
million as of December 31, 1997. On average, the Company's backlog is less than
one month's sales.
Item 2 - Properties.
The Company currently has approximately 189 warehouse and stocking facilities
located throughout the United States, Canada and Mexico. Most of these include
sales offices. Approximately 14% of these facilities are owned and the remainder
are leased. The Company's principal properties are warehouse facilities, as
follows:
Division Location Description
-------- -------- -----------
Hillman Cincinnati, Ohio 250,000 sq.ft. (leased)
Harding Denver, Colorado 184,000 sq.ft. (owned)
Kar Itasca, Illinois 80,000 sq.ft. (owned)
In the opinion of management, the Company's existing facilities are in good
condition.
16
<PAGE>
Item 3 - 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, upon which R&B
allegedly based its offer to purchase the assets of the Company's Dorman
Products division. Dorman and R&B seek damages of approximately $21.0 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.
Item 4 - Submission of Matters to a Vote of Security Holders.
Not applicable.
17
<PAGE>
Executive Officers of the Company
The following table sets forth certain information regarding the Company's
executive officers.
Name Age Position
- ---- --- --------
Donald T. Marshall 65 Chairman of the Board and Chief Executive Officer
John P. McDonnell 64 President and Chief Operating Officer; Chief
Executive Officer, SunSource Industrial Services
Company
Joseph M. Corvino 44 Vice President - Finance; Chief Financial Officer;
Treasurer and Secretary
Max W. Hillman, Jr. 52 Chief Executive Officer, Hillman
Harold J. Cornelius 50 Chief Executive Officer, Harding
All executive officers are currently elected for a one-year term by the Board of
Directors. There are no family relationships between any of the Company's
executive officers and directors.
The following is a summary of the business experience of the executive officers
listed above during at least the last five years. Periods prior to the
Conversion on September 30, 1997 relate to the Company's predecessor.
Donald T. Marshall has been the Chairman and Chief Executive Officer since
December 1988.
John P. McDonnell has been the President and Chief Operating Officer since
December 1994. Mr. McDonnell served as Group Vice President from December 1987
to December 1994.
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.
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.
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.
18
<PAGE>
PART II
Item 5 - Market for Registrant's Common Shares and
Related Stockholder Matters
Market Prices
As a result of the Company's September 30, 1997 conversion from partnership to
corporate form (the "Conversion"), 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:
1998 HIGH LOW
---- ---- ---
First Quarter $29 1/2 $23 5/16
Second Quarter 29 3/8 21 3/4
Third Quarter 21 3/4 15
Fourth Quarter 21 9/16 14
1997
----
Fourth Quarter $25 13/16 $23 1/2
As a result of 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:
1997 HIGH LOW
---- ---- ---
First Quarter $18 $16 1/2
Second Quarter 20 1/2 16
Third Quarter 23 1/2 19
As of March 25, 1999 there were approximately 750 holders of record of the
Common Shares. The total number of Common Shares outstanding as of March 25,
1999 was 6,740,208.
Stock Repurchase
On August 6, 1998, the Company's Board of Directors authorized $15.0 million for
management to repurchase up to 10% of the Company's outstanding common stock
through open market transactions and private block trades dependent upon market
conditions. The Company had reacquired and placed into treasury 461,100 Common
Shares through December 31, 1998 at a cost of $8.4 million and has reacquired
18,000 Common Shares from January 1, 1999 through March 16, 1999, at a cost of
$0.3 million. The Company suspended the repurchase program on March 16, 1999,
pending release of its earnings for the first quarter of 1999, but intends to
continue the repurchase program provided the investment is beneficial to the
Company's shareholders.
19
<PAGE>
Offering
On March 25, 1998 the Company closed an offering of its Common Shares (the
"Offering"). The Company issued and sold 500,000 Common Shares in addition to
Common Shares sold by certain selling stockholders in the Offering. The
underwriters in the Offering exercised their option to purchase 296,408
additional Common Shares of the Company to cover over-allotments on March 27,
1998.
Dividends
The Company paid a cash dividend of $0.10 per Common Share on January 7, 1999.
On March 29, 1999, the Board of Directors declared a dividend of $0.10 per
Common Share payable on April 19, 1999 to holders of record as of April 8, 1999.
The Company expects to declare future quarterly dividends on the Common Shares
of $0.40 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.
20
<PAGE>
Item 6 - Selected Financial Data.
The following table sets forth selected consolidated financial data of
the Company and the predecessor Partnership as of and for the five
years ended December 31, 1998. Data for all periods shown are derived
from financial statements of the Company and the Partnership which have
been audited by PricewaterhouseCoopers LLP, independent accountants, as
indicated in their reports thereon. See accompanying Notes to
Consolidated Financial Statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for
information regarding the Conversion and Refinancing as well as
acquisitions and divestitures that affect comparability.
(dollars in thousands, except for partnership interest and share data)
<TABLE>
<CAPTION>
Income Statement Data for Years
Ended December 31: 1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales $712,470 $694,707 $646,503 $626,863 $734,299
Gross profit 291,168 280,307 258,314 249,556 282,782
Income from operations 41,211 36,108 25,002 31,558 36,011
Gain on sale of divisions -- -- -- 20,644 3,523
Distributions on guaranteed preferred
beneficial interests 12,232 3,058 N/A N/A N/A
Provision (benefit) for income taxes 8,324 (6,680) (1,140) 537 100
Income before extraordinary loss
and cumulative effect of change
in accounting principle 13,817 32,532 19,267 44,745 29,544
Extraordinary loss -- (3,392) -- (629) --
Net income 13,817 29,140 19,267 44,116 29,544
Basic and diluted net income
per common share $ 2.00 N/A N/A N/A N/A
Pro forma net income per common share N/A $1.88 N/A N/A N/A
Earnings per limited partnership interest:
Income before extraordinary loss
- Class A N/A N/A $1.10 $ 1.10 $ 1.10
- Class B N/A N/A $0.32 $ 1.48 $ 0.79
Extraordinary loss
- Class A N/A N/A $ -- $ -- $ --
- Class B N/A N/A $ -- $ (0.03) $ --
Net income
- Class A N/A N/A $1.10 $ 1.10 $ 1.10
- Class B N/A N/A $0.32 $ 1.45 $ 0.79
Cash provided by operations $18,376 $ 27,913 $ 23,298 $ 17,050 $ 17,704
Dividends declared per common share $ 0.40 $ 0.10 N/A N/A N/A
Cash distributions declared per
limited partnership interest
- Class A N/A N/A $1.10 $ 1.10 $ 1.10
- Class B N/A N/A $0.33 $ 0.67 $ 0.49
Balance Sheet Data at December 31:
Total assets $341,568 $306,142 $262,555 $254,591 $266,186
Long-term debt and capitalized
lease obligations 95,842 93,728 69,150 63,934 75,168
</TABLE>
21
<PAGE>
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The following discussion provides information which management believes is
relevant to an assessment and understanding of the Company's operations and
financial condition. This discussion should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere herein.
General
SunSource Inc. (the "Company") is one of the largest providers of value-added
services and products to retail and industrial markets in North America. The
Company is organized into three businesses which are SunSource Industrial
Services Company, Hillman and Harding.
SunSource Industrial Services Company operates in three segments which are
Technology Services, Expediter and Integrated Supply. Technology Services offers
a full range of technology-based products and services to small, medium and
large manufacturers. The Expediter segment provides personalized, small parts
inventory management services to low volume customers. The Integrated Supply
segment provides major industrial manufacturing customers with comprehensive
inventory management services for their maintenance, repair and operating
supplies.
Hillman operates in the Hardware Merchandising Segment, providing small hardware
and related items and merchandising services to retail outlets, primarily
hardware stores, home centers and lumberyards.
Harding operates in the Glass Merchandising Segment, selling retail and
wholesale automotive and flat glass and providing auto glass installation and
small contract glazing services to individual consumers, insurance companies,
autobody shops, and other customers through a large network of retail glass
shops.
Stock Repurchase
On August 6, 1998, the Company's Board of Directors authorized $15.0 million for
management to repurchase up to 10% of the Company's outstanding common shares
through open market transactions and private block trades dependent upon market
conditions. The Company has reacquired and placed into treasury 479,100 common
shares through March 16, 1999, at an average cost of $18.12 per common share.
The Company intends to continue the repurchase program provided the investment
is beneficial to the Company's shareholders.
Public Offering
On March 27, 1998, the Company closed an offering of its Common Shares (the
"Offering"). Of the 2,284,471 shares sold in the Offering, 796,408 shares
("Primary") were issued and sold by the Company and 1,488,063 shares
("Secondary") were sold by selling stockholders, affiliates of Lehman Brothers,
Inc. The Company did not receive any of the proceeds from the Secondary shares
sold by the selling stockholders. The Company used the net proceeds raised (of
approximately $20.8 million) from the Primary shares sold in the Offering to
repay borrowings under its revolving credit facility.
22
<PAGE>
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 Technology
Services (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 Technology Services 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, information systems
and administrative responsibilities for Technology Services in a centralized
location which is expected to be completed in 1999. The restructuring of the
Technology Services sales organization is expected to be completed by mid-1999.
Consolidation of the distribution network is partially complete and is scheduled
for full completion early in 2000, shortly beyond the projected three-year time
frame of the plan, due to the need for additional logistical studies of the
geographic placement of new distribution facilities. Of the $4.2 million of
restructuring charges that will result in cash payments, amounts paid by the
Company during the years ended December 31, 1996, 1997 and 1998 were $0.2
million $1.8 million and $0.8 million, respectively. Of the remaining balance of
$1.4 million, approximately $1.2 million is expected to be paid during 1999 and
$0.2 million in 2000.
Acquisitions
During 1997, the Company resumed its strategy to acquire retail glass shops for
integration with Harding. From August 31, 1997 through December 31, 1997,
Harding acquired the assets of three retail glass shops which contributed $1.7
million in sales for the twelve months ended December 31, 1998.
During 1998, Harding acquired the assets of eleven retail glass shops which had
sales aggregating approximately $17.6 million for the twelve-month period prior
to acquisition and approximately $5.9 million from the date acquired through
December 31, 1998. These acquisitions expand Harding's business into the
Arizona, New Mexico, Texas, Georgia, New Hampshire and Northern California
markets.
On February 9, 1999, Harding acquired all of the outstanding common stock of
Pritchard Glass, Inc., which concurrently acquired all of the outstanding common
stock of Premier Glass Services, Inc. Sales of Pritchard and Premier aggregated
approximately $25 million for the twelve-month period prior to acquisition. This
acquisition adds twenty-one retail glass shops, expanding Harding's business
into the North and South Carolina markets.
In addition, during 1999 to-date, Harding has acquired the assets of two retail
glass shops which had sales aggregating approximately $2.0 million for the
twelve-month period prior to acquisition. These acquisitions expand Harding's
business into the Columbus, Georgia and Las Vegas, Nevada markets.
On April 22, 1998, Hillman acquired the assets of a manufacturer of letters,
numbers and signs which had sales of approximately $1.0 million for the
twelve-month period prior to acquisition.
23
<PAGE>
On May 6, 1998, Hillman acquired the assets of the franchise and independent
hardware segment of Axxess Technologies, Inc., including its PMI division, a
distributor of keys, letters, numbers and signs and other products to retail
hardware stores throughout the United States. Sales from the acquired operations
were approximately $17.0 million in 1997. Hillman integrated the sales force and
operations of the acquired business with its existing operations.
On October 21, 1998, Hillman acquired the assets of SIGN-KO, a Dallas-based
manufacturer and distributor of letters, numbers, signs and related products.
SIGN-KO serves a customer base that includes large home improvement retailers
and independent hardware stores. Sales from the acquired operations were
approximately $3.0 million in 1997.
Sales from hardware-related companies acquired by Hillman during 1998 aggregated
approximately $21.0 million for the twelve-month period prior to acquisition and
generated sales of $10.3 million from the date acquired through December 31,
1998.
Net cash consideration paid for the businesses acquired by the Company in 1998,
1997 and 1996, including transaction costs, was $22.8 million, $0.8 million and
$0.7 million, respectively, plus the assumption of certain liabilities of $3.1
million, $0.2 million and $0.1 million, respectively.
Net cash consideration paid for the businesses acquired by the Company to-date
in 1999, including transaction expenses, was $12.4 million (of which $0.8
million is held in escrow pending the resolution of post-closing adjustments),
the repayment of outstanding debt of $3.3 million plus the assumption of certain
liabilities estimated at $1.2 million.
24
<PAGE>
Results of Operations
Segment Sales and Profitability for the Three Years Ended December 31, 1998
---------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
---------------- ---------------- ----------------
(dollars in thousands)
% Total % Total % Total
Sales Sales Sales Sales
- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
SunSource Industrial Services
Technology Services $321,526 45.1% $322,148 46.4% $299,068 46.3%
Expediter 124,536 17.5% 125,911 18.1% 121,389 18.8%
Integrated Supply (1) 45,626 6.4% 54,420 7.8% 43,392 6.7%
-------- ----- -------- ----- -------- -----
Industrial Services 491,688 69.0% 502,479 72.3% 463,849 71.7%
Hillman (2) (3) 125,830 17.7% 103,970 15.0% 92,285 14.3%
Harding (4) 94,952 13.3% 88,258 12.7% 90,369 14.0%
-------- ----- -------- ----- -------- -----
Consolidated Net Sales $712,470 100.0% $694,707 100.0% $646,503 100.0%
======== ====== ======== ====== ======== ======
Gross Profit %Sales %Sales %Sales
- ------------ ------ ------ ------
SunSource Industrial Services
Technology Services (5) $ 86,257 26.8% $ 85,896 26.7% $ 77,367 25.9%
Expediter 88,175 70.8% 90,171 71.6% 87,839 72.4%
Integrated Supply 12,265 26.9% 13,669 25.1% 11,436 26.4%
-------- -------- --------
Industrial Services 186,697 38.0% 189,736 37.8% 176,642 38.1%
Hillman (3) 66,485 52.8% 54,901 52.8% 46,127 50.0%
Harding 37,986 40.0% 35,670 40.4% 35,545 39.3%
-------- -------- --------
Consolidated Gross Profit $291,168 40.9% $280,307 40.3% $258,314 40.0%
======== ======== ========
EBITA (6)
SunSource Industrial Services
Technology Services $ 13,583 4.2% $ 14,825 4.6% $ 13,690 4.6%
Expediter 20,215 16.2% 20,697 16.4% 18,770 15.5%
Integrated Supply 2,299 5.0% 3,292 6.0% 2,008 4.6%
--------- --------- ---------
Industrial Services 36,097 7.3% 38,814 7.7% 34,468 7.4%
Hillman 12,130 9.6% 10,833 10.4% 7,130 7.7%
Harding 4,128 4.3% 2,224 2.5% 3,211 3.6%
--------- --------- ---------
Total operations before
corporate expenses 52,355 7.3% 51,871 7.5% 44,809 6.9%
Corporate expenses (7,268) (1.0)% (8,062) (1.2)% (6,257) (0.9)%
--------- --------- ---------
Total operations after
corporate expenses 45,087 6.3% 43,809 6.3% 38,552 6.0%
Provision for litigation matters -
divested operations (1,600) (0.2)% -- --
-------- --------- ---------
Consolidated EBITA $ 43,487 6.1% $ 43,809 6.3% $ 38,552 6.0%
========= ========= =========
</TABLE>
<PAGE>
- ----------------
(1) Includes sales related to contracts canceled in 1998 and 1997 of $5,975,
$15,925, and $16,877 for the twelve months ended December 31, 1998, 1997
and 1996, respectively.
(2) Includes sales from acquired businesses of $10,322 for the twelve months
ended December 31, 1998.
(3) Includes a reduction in sales and gross profit of $4,680, $3,424 and
$2,751 for the twelve months ended December 31, 1998, 1997 and 1996,
respectively, to conform to current accounting for customer rebates.
(4) Includes sales from acquired businesses of $5,874 for the twelve months
ended December 31, 1998. Also includes sales from branches closed during
the three years ended December 31, 1998 of $541, $2,116 and $5,978 for
the twelve months ended December 31, 1998, 1997 and 1996, respectively.
(5) Includes commission income of $618, $453 and $471 for the twelve months
ended December 31, 1998, 1997 and 1996, respectively to conform to
current accounting.
(6) "EBITA" (earnings before interest, taxes and amortization) is defined as
income from operations before amortization, excluding $2,491 and $3,330
of management fees, $263 and $196 of expenses related to minority
ownership and $3,053 and $2,150 of transaction costs related to the
Company's conversion from partnership to corporate form (the
"Conversion"), for the twelve months ended December 31, 1997 and 1996,
respectively. The 1996 period also excludes a charge of $5,950 related
to the restructuring of Technology Services.
25
<PAGE>
Years Ended December 31, 1998 and 1997
Net sales increased $17.8 million or 2.6% in 1998 to $712.5 million from $694.7
million in 1997. Sales variances by segment are as follows:
Sales Increase
Amount (Decrease)
(In thousands) %
-------------- ----------
SunSource Industrial Services Company
Technology Services $ (622) (0.2)%
Expediter (1,375) (1.1)%
Integrated Supply (8,794) (16.2)%
---------
Industrial Services (10,791) (2.1)%
Hillman 21,860 21.0 %
Harding 6,694 7.6 %
---------
Total Company $ 17,763 2.6 %
=========
Technology Services sales decreased $0.6 million or 0.2% in 1998 to $321.5
million from $322.1 million in 1997 due primarily to the restructuring of the
sales force as well as the effects of the Asian economic crisis on its original
equipment manufacturing customers. Expediter sales decreased $1.4 million or
1.1% in 1998 to $124.5 million from $125.9 million in 1997 due to competitive
pricing pressures as well as continued deterioration in the Canadian dollar.
Integrated Supply sales decreased $8.8 million or 16.2% in 1998 to $45.6 million
from $54.4 million in 1997 due primarily to a net decrease of $10.0 million
resulting from contracts which were canceled in 1998 and 1997. Excluding
terminated contracts, Integrated Supply sales increased 3.0% in the comparison
period.
Hillman's sales increased $21.9 million or 21.0% in 1998 to $125.8 million from
$104.0 million in 1997 due to market penetration of new product lines in the
amount of $5.4 million, sales from newly acquired businesses of $10.3 million
and the balance of $6.2 million in growth from new accounts and expansion of
existing product lines.
Harding's sales increased $6.7 million or 7.6% in 1998 to $95.0 million from
$88.3 million in 1997 due to an increase of $7.0 million as a result of newly
acquired retail glass shops and an increase in retail and contract sales of $4.0
million, offset by a decrease of $2.6 million in wholesale glass and other
product line sales as a result of the planned withdrawal from certain
non-strategic markets. In addition, the discontinuation of certain low-margin
product lines resulted in reduced sales of $1.7 million. Growth in Harding's
retail glass shops is expected to continue as a result of internal sales
programs and the recent acquisitions.
The Company's sales backlog on a consolidated basis was $66.4 million as of
December 31, 1998, compared with $68.3 million at December 31, 1997, a decrease
of 2.8%.
Total Company cost of sales increased $6.9 million or 1.7% in 1998 to $421.3
million from $414.4 million in 1997 due primarily to increased sales levels in
the comparison period.
26
<PAGE>
The Company's consolidated gross margin was 40.9% in 1998 compared with 40.3% in
1997. SunSource Industrial Services Company's gross margin was 38.0% in 1998
compared with 37.8% in 1997, an increase of 0.2%. Technology Services' gross
margin increased 0.1% in 1998 due to tighter pricing controls. The Expediter
activity's gross margin declined 0.8% in 1998 due to competitive pricing
pressures and higher freight costs. The Integrated Supply activity's gross
margin increased 1.8% in 1998 due to sales mix. Hillman's gross margin remained
constant with 1997. Harding's gross margin decreased 0.4% in 1998 due to an
increase in contract sales at lower gross margins than the overall retail
business.
The Company's selling, general and administrative ("S,G&A") expenses increased
by $9.1 million or 3.9% to $241.5 million in 1998 from $232.4 million in 1997.
Selling expenses increased $5.0 million supporting increased 1998 sales levels
and increased marketing efforts at Hillman and Harding. Warehouse and delivery
expenses increased $1.8 million or 4.3%. The increase in general and
administrative expenses of $2.3 million or 3.1% is net of expense reductions of
$1.5 million associated with the replacement of cash basis deferred compensation
awards with stock options.
S,G,&A expenses as a percentage of sales increased compared with 1997, as
follows:
Twelve Months
1998 1997
---- ----
Selling Expenses 17.0% 16.7%
Warehouse and Delivery Expenses 6.2% 6.1%
General and Administrative Expenses 10.7% 10.6%
----- -----
Total S,G&A Expenses 33.9% 33.4%
===== =====
EBITA from operations after corporate expenses was $45.1 million for the twelve
months ended December 31, 1998, compared with $43.8 million for the same
prior-year period.
The Company's consolidated operating profit margin (EBITA, as a percentage of
sales) after corporate expenses remained constant at 6.3% in 1998 compared with
the prior year. SunSource Industrial Services Company's operating profit margin
declined to 7.3% in 1998 from 7.7% in 1997, primarily reflecting reduced 1998
sales and increased expenses related to the reorganization of sales and
administrative functions in the Technology Services segment. Integrated Supply's
operating profit margin decreased to 5.0% in 1998 from 6.0% in 1997 due
primarily to the previously mentioned canceled contracts. Hillman's operating
profit margin declined in 1998 to 9.6% from 10.4% in 1997 due to increased
selling expenses for new field staff related primarily to acquisition
activities. Harding's operating profit margin improved in 1998 to 4.3% from 2.5%
in 1997 due to reduced general and administrative expenses and increased sales
activity through internal growth and acquisitions.
Depreciation expense increased $1.0 million to $5.0 million in 1998 from $4.0
million in 1997 due primarily to the acquisition activity at Hillman and Harding
and an overall increase in the depreciable fixed asset base due to investment in
the Company's core businesses.
27
<PAGE>
Under partnership form, the management fee due the General Partner amounted to
$3.3 million annually. Upon Conversion, the management fee is retained by a
wholly-owned subsidiary of the Company and is eliminated in consolidation. The
amount for 1997 of $2.5 million is based on nine months only through the
Conversion date.
Other income, net, increased $0.8 million in 1998 to $0.4 million from expense
of $0.4 million in 1997 due primarily to the elimination of expenses related to
minority ownership as a result of the Conversion and other non-recurring
expenses related to divested operations.
The Company recorded a provision of $1.6 million for outstanding litigation
matters related to divested businesses in the third quarter of 1998.
The Company pays interest to the Trust on the Junior Subordinated Debentures in
the amount of 11.6% per annum on their face amount of $105.4 million. The Trust
distributes an equivalent amount to the holders of the Trust Preferred
Securities. For the years ended December 31, 1998 and 1997, the Company paid
$12.2 million and $3.1 million, respectively, in interest on the Junior
Subordinated Debentures, equivalent to the amounts distributed by the Trust. The
1997 amount of $3.1 million represents payments made from the Conversion date
through December 31, 1997. On an annual basis, the interest payments and Trust
distributions amount to $12.2 million.
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
("SFAS") 109, "Accounting for Income Taxes". Deferred income taxes represent
differences between the financial statement and tax bases of assets and
liabilities as classified on the Company's balance sheet. The Company's combined
effective tax rate was 37.6% for the year ended December 31, 1998, including the
effect of favorable non-recurring prior-year income tax adjustments related to
the Conversion. The Company expects its effective tax rate to be about 42% in
the future due to the implementation of recently identified state and local tax
planning strategies. See Note 5 of Notes to Consolidated Financial Statements of
the Company for the three years ended December 31, 1998, for income taxes and
related disclosures.
Years Ended December 31, 1997 and 1996
Net sales increased $48.2 million or 7.5% in 1997 to $694.7 million from $646.5
million in 1996. Sales variances by segment are as follows:
Sales Increase
Amount (Decrease)
(In thousands) %
-------------- ----------
SunSource Industrial Services Company
Technology Services $ 23,080 7.7%
Expediter 4,522 3.7%
Integrated Supply 11,028 25.4%
---------
Industrial Services 38,630 8.3%
Hillman 11,685 12.7%
Harding (2,111) (2.3)%
---------
Total Company $ 48,204 7.5%
=========
28
<PAGE>
Technology Services sales increased $23.1 million or 7.7% in 1997 to $322.2
million from $299.1 million in 1996 due to continued strength in existing
product markets, new product line additions and sales territory expansion.
Expediter sales increased $4.5 million or 3.7% in 1997 to $125.9 million from
$121.4 million in 1996 due to sales growth of 3.0% in the U.S. marketplace and
8.3% in Canada as a result of general economic strength.
Integrated supply sales increased $11.0 million or 25.4% in 1997 to $54.4
million from $43.4 million in 1996 due primarily to an increase in the number of
in-plant inventory management programs.
Hillman's sales increased $11.7 million or 12.7% in 1997 to $104.0 million from
$92.3 million in 1996 due to contributions from acquisitions in the amount of
approximately $5.0 million and the balance of $6.7 million in growth from new
accounts, expansion of existing product lines and market penetration of new
product lines.
Harding's sales declined $2.1 million or 2.3% in 1997 to $88.3 million from
$90.4 million in 1996 due to a decrease of $2.0 million in wholesale glass,
brokerage and other product line sales as a result of the planned withdrawal
from certain non-strategic markets. In addition, the discontinuation of certain
low margin product lines resulted in reduced sales of $0.4 million, offset by an
increase in retail glass and contract sales of $0.3 million from 1996.
Total Company cost of sales increased $26.2 million or 6.8% in 1997 to $414.4
million from $388.2 million in 1996 due primarily to increased sales levels in
the comparison period.
The Company's consolidated gross margin was 40.3% in 1997 compared with 40.0% in
1996. SunSource Industrial Services Company's gross margin was 37.8% in 1997
compared with 38.1% in 1996, a decrease of 0.3%. Technology Services' gross
margin increased 0.8% in 1997 due to labor efficiencies in its service and
repair business and lower freight costs. The Expediter activity's gross margin
declined 0.8% in 1997 due to competitive pricing pressures. The Integrated
Supply activity's gross margin declined 1.3% in 1997 due to changes in sales mix
as a result of new in-plant inventory management programs.
Hillman's gross margin increased 2.8% due primarily to reduced packaging costs
in 1997 which were much higher in 1996 as a result of costs associated with the
integration of the Curtis acquisition and for other business expansion programs.
Harding's gross margin increased 1.1% due to improved purchasing management and
the discontinuation of lower margin product lines.
The Company's S,G&A expenses increased by $15.9 million or 7.4% to $232.3
million in 1997 from $216.4 million in 1996. Selling expenses increased $6.4
million supporting increased 1997 sales levels in the SunSource Industrial
Services Company and increased marketing efforts at Harding. Warehouse and
delivery expenses increased $2.8 million due to expansion programs by certain
operating units and the addition of several large in-plant accounts by
Integrated Supply. General and administrative expenses increased $6.7 million
consisting of: (i) an increase of $5.3 million to support the overall increase
in 1997 sales levels and the increased number of systems accounts in the
Integrated Supply business, and (ii) an increase of $1.6 million in corporate
expenses compared to 1996 which included an expense reduction of $1.5 million as
a result of incentive-based compensation plans and a non-recurring reduction in
insurance reserves of $0.2 million.
29
<PAGE>
S,G,&A expenses as a percentage of sales remained constant overall with 1996, as
follows:
Twelve Months
1997 1996
---- ----
Selling Expenses 16.7% 16.1%
Warehouse and Delivery Expenses 6.1% 6.3%
General and Administrative Expenses 10.6% 11.1%
----- -----
Total S,G&A Expenses 33.4% 33.5%
===== =====
Depreciation expense increased $0.4 million to $4.0 million in 1997 from $3.6
million in 1996 due primarily to an increase in the depreciable fixed asset
base.
The Company's consolidated operating profit margin ("EBITA, as a percentage of
sales") after corporate expenses improved in 1997 to 6.3% from 5.9% in 1996.
SunSource Industrial Services Company improved its operating profit margin to
7.7% in 1997 from 7.4% in 1996 primarily as a result of expense efficiencies.
Hillman improved its operating profit margin significantly in 1997 to 10.4% from
7.7% in 1996 due to improved packaging productivity in 1997 as previously
discussed. Harding's operating profit margin declined in 1997 to 2.5% from 3.6%
in 1996 due to significant investments in sales and marketing efforts in 1997
and reduced sales as a result of discontinuation of certain low margin product
lines and markets served.
Under partnership form, the management fee due the General Partner amounted to
$3.3 million annually. Upon Conversion, the management fee was retained by a
wholly-owned subsidiary of the Company and eliminated in consolidation. The
amount for 1997 of $2.5 million is based on nine months only through the
Conversion date.
Other expense, net, increased $0.5 million to $0.4 million in 1997 from $0.1
million of income in 1996 due primarily to favorable non-recurring legal
settlements and post-closing adjustments recorded in 1996 which were related to
divisions sold in prior years.
The Company pays interest to the Trust on the Junior Subordinated Debentures in
the amount of 11.6% per annum on their face amount of $105.4 million. The Trust
distributes an equivalent amount to the holders of the Trust Preferred
Securities. For the year ended December 31, 1997, the Company paid $3.1 million
in interest on the Junior Subordinated Debentures, equivalent to the amount
distributed by the Trust from the Conversion date through December 31, 1997. On
an annual basis the interest payments and Trust distributions amount to $12.2
million.
Liquidity and Capital Resources
Earnings before interest, taxes, depreciation and amortization ("EBITDA"),
excluding the $1.6 million litigation charge recorded in 1998, increased $2.3
million or 4.8% to $50.1 million in 1998 from $47.8 million in 1997. The
Company's net interest coverage ratio for the year ended December 31, 1998,
improved slightly to 2.29X (earnings before interest, litigation charge,
distributions on Trust Preferred Securities and income taxes over net interest
expense and distributions on Trust Preferred Securities), from 2.26x on a pro
forma basis in 1997.
30
<PAGE>
The Company's cash position of $2.8 million as of December 31, 1998, decreased
$2.8 million from the balance at December 31, 1997. Cash was provided during
this period primarily from operations ($18.4 million), net borrowings on the
bank revolver ($2.0 million), proceeds from the sale of property and equipment
($0.5 million), and net proceeds from the Offering ($20.8 million). Cash was
used during this period predominantly for acquisitions ($22.8 million), cash
distributions to investors ($4.8 million), capital expenditures ($7.1 million),
purchase of treasury stock ($8.4 million), investment in life insurance ($0.9
million) and other items, net ($0.5 million).
The Company's working capital position of $121.6 million at December 31, 1998,
represents an increase of $0.7 million from the December 31, 1997 level of
$120.9 million. The Company's current ratio decreased to 2.25x at December 31,
1998 from 2.41x at December 31, 1997, principally due to increases in accounts
payable and accrued liabilities, offset by investments in accounts receivable
and inventories.
As of December 31, 1998, the Company had $36.6 million available under its
credit facilities. The Company had $95.8 million of outstanding long-term debt
at December 31, 1998, consisting of the $60.0 million Senior Note at 7.66%, bank
borrowings totaling $35.0 million at an effective interest rate of 6.49%, and
capitalized lease obligations of $0.8 million at various interest rates. An
indirect, wholly-owned Canadian subsidiary of the Company had a $2.5 million
Canadian dollar line of credit for working capital purposes, of which no amount
was outstanding at December 31, 1998.
As of December 31, 1998, the Company's total debt (including dividends payable)
as a percentage of its consolidated capitalization (total debt, Trust Preferred
Securities and stockholders' equity) was 41.5% compared with 45.6% as of
December 31, 1997. The Company's consolidated capitalization (including
dividends payable) as of December 31, 1998, was $232.8 million compared to
$212.1 million at December 31, 1997.
The Company spent $7.1 million for capital expenditures in 1998, an increase of
$2.2 million from 1997, which is primarily attributable to higher investments in
computer hardware of $1.2 million and plant equipment of $1.0 million.
The Company paid $2.1 million on February 27, 1998, for remaining tax
distributions due to Class B interest holders of the predecessor partnership,
related to taxable income for the nine months ended September 30, 1997.
On December 16, 1998, the Board of Directors declared a dividend of $0.10 per
Common Share which was paid on January 7, 1999, to holders of record as of
December 28, 1998. The Company expects to declare future quarterly dividends on
the Common Shares to aggregate $0.40 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 $15.1 million as of December 31,
1998, as determined in accordance with SFAS 109. Management believes that the
Company's deferred tax assets will be realized through the reversal of existing
temporary differences between the financial statement and tax bases, as well as
through future taxable income.
31
<PAGE>
Year 2000 Issue
The Company believes that both its proprietary and purchased computer software
systems are an integral part of its business and growth strategies. The Company
depends on these computer-based information technology ("IT") 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.
Each of the Company's five segments have distinct IT systems and therefore each
has its own plan for addressing the Year 2000 issue ("Y2K"). One individual in
the Company's Industrial Services business is responsible for the Y2K plans in
the Technology Services, Expediter and Integrated Supply segments. Hillman and
Harding each have one individual responsible for the Y2K plans in their
businesses. These individuals are required to provide senior management of the
Company with a detailed quarterly update on the status of their Y2K plans. The
individual responsible for the Y2K plan at SunSource Industrial Services
resigned in October. A replacement filled the position on November 25, 1998 and
this change has not caused any significant delay in implementing its Y2K plan.
State of Readiness
The following discussion relates primarily to the Company's IT systems. The
Company recognizes that other machinery and equipment may possibly have Y2K
exposure due to the use of micro-controllers ("non-IT" systems). In general,
however, the Company's exposure to non-IT systems is limited because most of its
operations do not require machinery and equipment with imbedded
micro-controllers.
SunSource Industrial Services
o The Expediter Segment has evaluated all its IT systems and has
identified those requiring remediation. The mainframe and financial
computer hardware and related operating systems have been determined to
be Y2K compliant. Expediter's critical proprietary application software
programs require full remediation. This process has been out-sourced to
an independent consultant, is approximately 50% complete and is targeted
for completion and testing by the end of the third quarter of 1999.
Expediter's assessment of critical hardware and software purchased from
third party vendors resulted in a determination that certain file server
and personal computer ("PC") hardware and software applications such as
inventory planning and purchasing, and its financial software, were not
Y2K compliant. Expediter recently began to upgrade or replace these
systems and expects to complete this process with full testing by the
fourth quarter of 1999.
o Technology Services is in the process of converting all of its operating
units to a third-party purchased computer system as part of the
restructuring of this segment. The new computer hardware, operating
system and application software have all been certified by the vendor as
being Y2K compliant. The conversion project is approximately 60%
complete and is targeted for full completion and testing by mid-1999.
Technology Services has also identified other purchased software
programs used in conjunction with the primary system which must be
upgraded to Y2K compliant versions. These upgrades are expected to be
installed during the second quarter of 1999.
32
<PAGE>
o The critical third-party IT system for Integrated Supply's domestic
operations has a Y2K compliant version that was installed during the
first quarter of 1999. Certain other software applications used in
conjunction with this system require upgrades which are also targeted
for installation by the end of the second quarter of 1999. Certain
hardware used by Integrated Supply requires an upgrade which is expected
to be implemented by the end of the second quarter of 1999.
o Most of the Company's international activities are conducted using IT
systems covered by the foregoing discussion. The separate operating
systems at Integrated Supply's Mexican operations are expected to be
upgraded to Y2K compliant versions by mid-1999. The Company's net sales
from foreign operations is less than 7% of its consolidated net sales.
Hillman
Hillman has completed remediation (including full testing) on approximately 93%
of its proprietary software programs. The remaining 7% of these programs include
lower priority programs (e.g., display only) which are expected to be completed
by mid-1999. Hillman's critical purchased software applications and hardware
have been certified by the vendors to be compliant, except for several
applications (i.e. payroll, telephone and shipping) which are expected to be
upgraded or replaced by mid-1999.
Harding
Harding's critical purchased point-of-sale software application is Y2K compliant
and its related hardware operating system has a Y2K compliant release which
Harding has recently started installing at each of its locations; this process
is expected to be completed by the end of the third quarter of 1999. Harding's
purchased financial software requires a version update to become Y2K compliant
which is expected to be installed by the end of April 1999. Harding completed
the necessary upgrades for network servers and PC hardware during the first
quarter of 1999. An assessment of Y2K compliance for each site's telephone
system is expected by the end of the second quarter of 1999 with corrective
action for any non-compliant systems scheduled for completion by the end of the
third quarter of 1999.
Acquisitions
All of the Company's recent acquisitions have been evaluated for Y2K compliant
systems and four have been identified as not having Y2K compliant systems. Three
of these systems will be integrated into existing systems that are already Y2K
compliant by the end of the third quarter of 1999. The other system requires
certain hardware replacements and software upgrades which are expected to be
completed by the end of July 1999. Prospectively, the Company will require
certification of Y2K compliance as part of its purchase agreements.
33
<PAGE>
Costs to Address Year 2000 Issues
The Company's Y2K costs incurred through December 1998 are approximately $0.7
million. Approximately 80% of these costs are related to remediation of
internally designed software applications. Y2K costs of $1.0 million are
expected to be incurred during 1999, with approximately 20% for remediation of
internally designed software applications, resulting in projected aggregate
costs of $1.7 million for the entire Y2K project. The source of the funds for
these Y2K costs will be from the Company's operating cash flows.
Risks of Year 2000 Compliance and Contingency Plans
The Company believes that its most significant risk associated with the Y2K
issue is that certain vendors may not be able to supply products to the
Company's operating businesses. The Company believes that this situation would
only result in a temporary interruption in service for the following reasons:
o The Company does not have any single supplier that provides more than 8%
of its total annual purchases.
o The Company's purchasing functions and distribution centers are
geographically diversified which allows greater access to various
suppliers.
As a preemptive measure, the Company's businesses have requested Y2K compliance
letters from their major suppliers and have issued second requests where
necessary. The Company has received responses from approximately 80% of its
suppliers. At this time, no significant Y2K issues have been communicated from
major suppliers that have responded. The Company recognizes, however, that
certain suppliers may not respond to these requests and therefore the Company
may not be able to fully evaluate the extent of its risk in this area. To limit
the risk of supply shortages in early 2000, however, the Company's businesses
plan to increase inventory levels for selected product lines as a measure to
ensure proper fill rates.
The Company also recognizes the risk that unresolved Y2K issues within its
customer base could result in the Company not being able to sell its products to
such customers, or to collect accounts receivable from them. The Company
believes that such risk is significantly limited due to the fact that no
individual customer accounts for more that 7% of the Company's revenue.
While the Company expects all of the critical components of its businesses'
computer systems will be Y2K compliant and tested prior to December 31, 1999, it
is possible that certain corrective action or testing may not be completed as
planned. In the event that this occurs, the Company's businesses expect to be
prepared to implement procedures from their existing business continuation plans
which may be necessary in order to minimize potential disruptions to their
operations.
The Year 2000 disclosures contained in this report involve risks and
uncertainties and may constitute forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. Such statements reflect
management's current views and are based upon certain assumptions. Given these
uncertainties, current or prospective investors are cautioned not to place undue
reliance on any such forward-looking statements. Furthermore, the Company
disclaims any obligation or intent to update any such forward-looking statement
to reflect future events or developments.
34
<PAGE>
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.
Subsequent Event
After the close of business, on December 31, 1998, the Company reorganized its
primary operating subsidiary, SDI Operating Partners, L.P. (the "Operating
Partnership"), by contributing its assets and liabilities to newly-formed
corporate subsidiaries organized according to the Company's current operating
structure (the "Reorganization"). The Reorganization allows the Company to
implement certain state and local tax planning strategies, to offer its key
employees incentive stock options and align its operating businesses in
corporate form. As a result of the Reorganization, the Operating Partnership and
its general partner, SDI Partners I, L.P. cease to exist.
Item 7A - Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable.
35
<PAGE>
Item 8 - Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Accountants 37
Financial Statements:
Consolidated Balance Sheets, December 31, 1998 and 1997 38
Consolidated Statements of Income, Years ended
December 31, 1998, 1997 and 1996 39
Consolidated Statements of Cash Flows, Years ended
December 31, 1998, 1997 and 1996 40
Consolidated Statements of Changes in Partners' Capital for the Year
ended December 31, 1996 and Changes in Stockholders' Equity (Deficit)
for the Years ended December 31, 1998 and 1997 41
Notes to Consolidated Financial Statements 42-62
Financial Statement Schedules:
I Condensed Financial Information of Registrant 63-64
II Valuation Accounts 65
</TABLE>
36
<PAGE>
Report of Independent Accountants
The Board of Directors
SunSource Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
SunSource Inc. and its subsidiaries at December 31, 1998 and 1997, and the
results of operations and cash flows for each of the three years in the period
ending December 31, 1998, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedules
listed in the accompanying index present fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedules are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits. We conducted our audits of
these statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and the significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
March 26, 1999
37
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
December 31, December 31,
ASSETS 1998 1997
--------- -------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,796 $ 5,638
Accounts receivable, net of
allowance for doubtful accounts of
$2,489 and $2,195, respectively 88,629 82,501
Inventories 112,497 103,369
Deferred income tax asset 9,886 10,791
Other current assets 5,421 4,559
------------ -----------
Total current assets 219,229 206,858
Property and equipment, net 26,770 21,939
Goodwill, net of accumulated amortization
of $16,428 and $14,367, respectively 77,544 62,588
Other intangibles, net of accumulated
amortization of $15,125 and $14,910, respectively 1,807 784
Deferred income tax asset 5,202 5,014
Cash surrender value of life insurance policies 10,262 8,407
Other assets 754 552
------------ ------------
Total assets $ 341,568 $ 306,142
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 58,353 $ 50,125
Notes payable 1,770 2,080
Current portion of capitalized lease obligations 276 156
Dividends / distributions payable 676 2,995
Deferred income tax liability 929 935
Accrued expenses:
Salaries and wages 8,379 6,891
Income and other taxes 4,194 4,286
Other accrued expenses 23,050 18,452
----------- -----------
Total current liabilities 97,627 85,920
Senior notes 60,000 60,000
Bank revolving credit 35,000 33,000
Capitalized lease obligations 566 572
Deferred compensation 11,802 10,451
Other liabilities 308 787
----------- -----------
Total liabilities 205,303 190,730
----------- -----------
Guaranteed preferred beneficial interests in the
Company's junior subordinated debentures 115,551 115,903
============ ============
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $.01 par, 1,000,000 shares
authorized, none issued -- --
Common stock, $.01 par, 20,000,000 shares authorized,
7,217,263 and 6,418,936 shares issued, respectively 72 64
Additional paid-in capital 21,099 --
Retained earnings 12,748 1,735
Unearned compensation (229) --
Accumulated other comprehensive income (4,596) (2,290)
Treasury stock, at cost, 461,100 shares
in 1998, none in 1997 (8,380) --
----------- -----------
Total stockholders' equity (deficit) 20,714 (491)
----------- -----------
Total liabilities and stockholders'
equity (deficit) $ 341,568 $ 306,142
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
38
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
(dollars in thousands, except for partnership interest and share amounts)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ----------
<S> <C> <C> <C>
Net sales $ 712,470 $ 694,707 $ 646,503
Cost of sales 421,302 414,400 388,189
--------- --------- ----------
Gross profit 291,168 280,307 258,314
--------- --------- ----------
Operating expenses:
Selling, general and administrative expenses 241,479 232,353 216,434
Management fee to general partner -- 2,491 3,330
Depreciation 5,016 4,009 3,603
Amortization 2,276 1,894 1,924
--------- --------- ----------
Total operating expenses 248,771 240,747 225,291
--------- --------- ----------
Provision for litigation matters -
divested operations 1,600 -- --
Transaction and other related costs -- 3,053 2,150
Restructuring charges -- -- 5,950
Other income (expense), net 414 (399) 79
--------- --------- ----------
Income from operations 41,211 36,108 25,002
Interest expense, net 6,838 7,198 6,875
Distributions on guaranteed preferred
beneficial interests 12,232 3,058 --
--------- --------- ----------
Income before provision for income taxes 22,141 25,852 18,127
Provision (benefit) for income taxes 8,324 (6,680) (1,140)
--------- --------- ----------
Income before extraordinary loss 13,817 32,532 19,267
Extraordinary loss from early extinguishment
of debt (note 6) -- (3,392) --
========= ========= ==========
Net income $ 13,817 $ 29,140 $ 19,267
========= ========= ==========
Basic and diluted net income
per common share (note 1) $2.00 N/A N/A
Pro forma net income per common share* (note 1) N/A $1.88 N/A
Weighted average number of
outstanding common shares (note 1) 6,907,318 6,418,936 N/A
Net income allocated to partners:
General partner N/A N/A $ 193
----------
Class A limited partners N/A N/A $ 12,210
----------
Class B limited partners N/A N/A $ 6,864
----------
Earnings per limited partnership interest:
Income before extraordinary loss
- Class A interest N/A N/A $ 1.10
- Class B interest N/A N/A $ 0.32
Extraordinary loss
- Class A interest N/A N/A --
- Class B interest N/A N/A --
Net income
- Class A interest N/A N/A $ 1.10
- Class B interest N/A N/A $ 0.32
Weighted average number of outstanding limited partnership interests:
- Class A interests N/A N/A 11,099,573
- Class B interests N/A N/A 21,675,746
</TABLE>
* Includes the effects of the Conversion and Refinancing only.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
39
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
--------- ---------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 13,817 $ 29,140 $ 19,267
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,292 5,903 5,547
Extraordinary loss -- 3,392 --
Restructuring charges -- -- 5,950
Transaction costs -- 3,053 2,150
Provision for deferred compensation -- 2,649 1,071
Decrease (increase) in deferred income taxes, net 711 (8,912) (2,163)
Increase in cash value of life insurance (846) (525) (157)
Changes in current operating items:
Increase in accounts receivable (3,616) (3,627) (2,465)
Increase in inventories (7,303) (848) (7,572)
Decrease (increase) in other current assets (792) 175 70
Increase in accounts payable 5,798 1,325 6,062
Increase (decrease) in income taxes payable 134 1,136 (32)
Decrease in accrued interest -- (473) (47)
Decrease in accrued restructuring charges
and transaction costs (1,099) (4,569) (1,899)
Increase (decrease) in other accrued liabilities 5,633 1,459 (2,737)
Other items, net (1,353) (1,365) 253
--------- ---------- ---------
Net cash provided by operating activities 18,376 27,913 23,298
--------- ---------- ---------
Cash flows from investing activities:
Proceeds from sale of property and equipment 485 802 62
Payments for acquired businesses (22,807) (793) (683)
Capital expenditures (7,078) (4,933) (4,341)
Investment in life insurance policies (903) (3,316) (1,400)
Other, net 20 144 (39)
--------- ---------- ---------
Net cash used for investing activities (30,283) (8,096) (6,401)
--------- ---------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock 20,813 -- --
Proceeds from issuance of senior notes -- 60,000 --
Borrowings under the bank credit agreement, net 2,000 22,000 11,000
Purchase of treasury stock at cost (8,380) -- --
Cash distributions / dividends to investors (4,848) (13,901) (25,641)
Cash distributions paid on Class A exchange -- (14,429) --
Prepayment of senior notes -- (63,934) --
Repayment of senior notes -- -- (6,395)
Prepayment penalties and related costs -- (4,278) --
Other, net (520) (1,303) (95)
--------- ---------- ---------
Net cash provided by (used for) financing activities 9,065 (15,845) (21,131)
--------- ---------- ---------
Net (decrease) increase in cash and cash equivalents (2,842) 3,972 (4,234)
Cash and cash equivalents at beginning of period 5,638 1,666 5,900
--------- ---------- ---------
Cash and cash equivalents at end of period $ 2,796 $ 5,638 $ 1,666
========= ========== =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
40
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL FOR THE YEAR ENDED
DECEMBER 31, 1996 AND CHANGES IN STOCKHOLDERS' EQUITY
(DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
(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> <C> <C>
Partners' Capital - December 31, 1995 $ 963 $ 67,642 $ 29,252 $ (1,514) $ (1,400)
Net income 193 12,210 6,864 - -
Cash distributions paid and/or
declared to partners (196) (12,210) (7,076) - -
Change in cumulative foreign
translation adjustment, net of tax - - - - (109)
------- ------- ------- -------- --------
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, net of tax - - - - (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)
Comprehensive income 1,676
Retained earnings (38,879) 1,514
Minority ownership (a)
Class A exchange (b)
Goodwill - Minority interest (c)
------- -------- -------- -------- --------
Stockholders' Deficit - September 30, 1997 $ - $ - $ - $ - $ -
======= ======== ======== ======== ========
Net income
Change in cumulative foreign
translation adjustment, net of tax
Adjustment to cash distributions
declared to partners
Dividends declared on common stock
Stockholders' Deficit - December 31, 1997
Net income
Change in cumulative foreign translation
adjustment, net of tax
Comprehensive income
Issuance of 796,408 shares of common stock
in public offering
Issuance of 1,988 shares of common stock
to certain non-employee directors
Dividends declared on common stock
Stock options granted at a discount
Repurchase of 461,100 shares of common stock
Stockholders' Equity - December 31, 1998
</TABLE>
<PAGE>
[RESTUBBED]
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
-----------------------------------------------------------------------
Retained Accumulated
Additional Earnings / Other
Common Paid-in Accumulated Unearned Comprehensive
Stock Capital Deficit) Compensation Income (d)
------ ---------- ----------- ------------ -------------
<S> <C> <C>
Partners' Capital - December 31, 1995
Net income
Cash distributions paid and/or
declared to partners
Change in cumulative foreign
translation adjustment, net of tax
Partners' Capital - December 31, 1996
Net income
Cash distributions paid and/or
declared to partners
Change in cumulative foreign
translation adjustment, net of tax - - - - -
------ -------- -------- ------- ---------
Partners' Capital - September 30, 1997 - - - - -
Conversion adjustments:
Common stock 64
Paid-in capital 68,659 1,070
Comprehensive income (1,676)
Retained earnings 37,365
Minority ownership (a) 1,082
Class A exchange (b) (68,659) (61,761)
Goodwill - Minority interest (c) 20,759
------ -------- -------- ------- ---------
Stockholders' Deficit - September 30, 1997 64 - (1,485) - (1,676)
Net income 3,090
Change in cumulative foreign
translation adjustment, net of tax (614)
Adjustment to cash distributions
declared to partners 772
Dividends declared on common stock (642) -
------ -------- -------- ------- ---------
Stockholders' Deficit - December 31, 1997 64 - 1,735 - (2,290)
Net income 13,817
Change in cumulative foreign translation
adjustment, net of tax (2,306)
Comprehensive income
Issuance of 796,408 shares of common stock
in public offering 8 20,806
Issuance of 1,988 shares of common stock
to certain non-employee directors 39
Dividends declared on common stock (2,804)
Stock options granted at a discount 254 (229)
Repurchase of 461,100 shares of common stock
------ -------- -------- ------- ---------
Stockholders' Equity - December 31, 1998 $ 72 $ 21,099 $ 12,748 $ (229) $ (4,596)
====== ======== ======== ======= =========
</TABLE>
<PAGE>
[RESTUBBED]
<TABLE>
<CAPTION>
----------------------------------
Total Partners'
Capital /
Treasury Stockholders'
Stock (Deficit) Equity
-------- ----------------
<S> <C> <C> <C>
Partners' Capital - December 31, 1995 $ 94,943
Net income 19,267
Cash distributions paid and/or
declared to partners (19,482)
Change in cumulative foreign
translation adjustment, net of tax (109)
--------
Partners' Capital - December 31, 1996 94,619
Net income 26,050
Cash distributions paid and/or
declared to partners (15,020)
Change in cumulative foreign
translation adjustment, net of tax - (167)
--------- --------
Partners' Capital - September 30, 1997 - 105,482
Conversion adjustments:
Common stock -
Paid-in capital -
Comprehensive income -
Retained earnings -
Minority ownership (a) 1,082
Class A exchange (b) (130,420)
Goodwill - Minority interest (c) 20,759
--------- --------
Stockholders' Deficit - September 30, 1997 - (3,097)
Net income 3,090
Change in cumulative foreign
translation adjustment, net of tax (614)
Adjustment to cash distributions
declared to partners 772
Dividends declared on common stock (642)
--------- --------
Stockholders' Deficit - December 31, 1997 - (491)
--------
Net income 13,817
Change in cumulative foreign translation
adjustment, net of tax (2,306)
--------
Comprehensive income 11,511
--------
Issuance of 796,408 shares of common stock
in public offering 20,814
Issuance of 1,988 shares of common stock
to certain non-employee directors 39
Dividends declared on common stock (2,804)
Stock options granted at a discount 25
Repurchase of 461,100 shares of common stock (8,380) (8,380)
--------- --------
Stockholders' Equity - December 31, 1998 $ (8,380) $ 20,714
========= ========
</TABLE>
(a) Minority ownership included as other liabilities by the Partnership.
(b) Each Class A limited partnership interest was exchanged for $1.30 in cash
plus 0.38 share of Trust Preferred Securities recorded at fair value based
on the price of the Class A interests upon close of trading on the New York
Stock Exchange on September 30, 1997 of $11.75. This fair value of $115,991
is recorded by the Company as Guaranteed Preferred Beneficial Interests in
the Company's Junior Subordinated Debentures.
(c) Goodwill related to the exchange of the GP minority interest (See Note 1).
(d) Cumulative foreign translation adjustment represents the only item of other
comprehensive income.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
41
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
1. Basis of Presentation:
The accompanying financial statements include the consolidated accounts of
SunSource Inc. (the "Company"), its predecessor, SunSource L.P. (the
"Partnership"), and its wholly-owned subsidiaries including SDI Operating
Partners, L.P. (the "Operating Partnership") and SunSource Capital Trust (the
"Trust"). All inter-company balances and transactions have been eliminated.
Effective the close of business on December 31, 1998, the Company reorganized
the Operating Partnership by contributing its assets and liabilities to
newly-formed, indirect, wholly-owned corporate subsidiaries organized according
to the Company's current operating structure (the "Reorganization"). As a result
of the Reorganization, the Operating Partnership and its general partner, SDI
Partners I, L.P.(the "G.P.") cease to exist. In connection with the
Reorganization, the Company amended its debt financing agreements (see Notes 9
and 10).
Nature of Operations:
The Company is one of the leading providers of value-added services and products
to retail and industrial markets in North America. The Company is organized into
three businesses which are SunSource Industrial Services Company, Inc.
("SunSource Industrial Services Company"), The Hillman Group Inc. ("Hillman")
and Harding Glass Inc. ("Harding").
SunSource Industrial Services Company operates in three business segments: (1)
Technology Services, operating as SunSource Technology Services Company, Inc.;
(2) Expediter, operating as Kar Products, Inc.; (3) Integrated Supply, operating
as SunSource Inventory Management Company, Inc. Technology Services offers a
full range of technology-based products and services to small, medium and large
manufacturers. The Expediter segment provides personalized, small parts
inventory management services to low volume customers. The Integrated Supply
segment provides major industrial manufacturing customers with comprehensive
inventory management services for their maintenance, repair and operating
supplies.
Hillman operates in the Hardware Merchandising Services Segment, providing small
hardware-related items and merchandising services to retail outlets, primarily
hardware stores, home centers and lumberyards.
Harding operates in the Glass Merchandising Segment, selling retail and
wholesale automotive and flat glass and providing auto glass installation and
small contract glazing services to individual consumers, insurance companies,
autobody shops, and other customers through a large network of retail glass
shops.
Technology Services, Expediter and Integrated Supply accounted for 45%, 18% and
6%, respectively, of the Company's consolidated 1998 net sales and Hillman and
Harding accounted for 18% and 13%, respectively. On a consolidated basis, the
Company has over 200,000 customers, the largest of which accounted for less than
7% of 1998 net sales. The Company's foreign sales in Canada and Mexico accounted
for less than 10% of its consolidated 1998 net sales. The average single sale in
1998 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.
42
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(dollars in thousands, except per share amounts)
1. Basis of Presentation, continued:
Conversion to Corporate Form
On September 25, 1997, the limited partners of the Partnership approved the
conversion of the Partnership to a corporation effective at the close of
business on September 30, 1997 (the "Conversion"). In connection with the
Conversion, the Company refinanced all of its outstanding bank revolving credit
and senior note debt (the "Refinancing"). As a result of the Conversion, the
Class A limited partnership interests in the Partnership were converted into
cash and Guaranteed Preferred Beneficial Interests in the Company's Junior
Subordinated Debentures (the "Trust Preferred Securities", which were issued by
the Trust), and the Class B limited partnership interests in the Partnership
were converted into common stock of the Company and the general and limited
partnership interests in the GP, which was also the general partner of the
Partnership, were exchanged with the Company for 1,000,000 shares of its common
stock.
The exchange represented by the GP's 1% ownership interest in the Company was
subject to purchase accounting in accordance with Accounting Principles Bulletin
("APB") No. 16 and resulted in the Company recording goodwill in the amount of
$20,759 at September 30, 1997. The Company incurred transaction and other costs
related to the Conversion of $5,171, of which $4,668 represents transaction
costs and $503 a charge for deferred compensation accelerated as a result of the
Conversion. Cash payments in 1998, 1997 and 1996 were $238, $2,698 and $1,732,
respectively.
Restructuring Charges:
In December 1996, the Company recorded a provision for restructuring charges in
the amount of $5,950 for Technology Services and Harding in accordance with the
provisions of Emerging Issues Task Force ("EITF") Abstract 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity." Restructuring charges for Technology Services in the amount of $4,400
included termination benefits for 175 employees and other exit costs.
Restructuring charges for Harding in the amount of $1,550 represent primarily
the write-off of assets in connection with the Company's decision to withdraw
from certain geographic markets which was completed in 1997. The following table
summarizes activity in the restructuring liability for Technology Services by
balance sheet classification for the twelve months ended December 31, 1998:
<TABLE>
<CAPTION>
Termination Other
Benefits Exit Costs Total
----------- ---------- -----
<S> <C> <C> <C> <C> <C>
Current - other accrued expenses:
Balance at December 31, 1997: $ 1,278 $ 484 $ 1,762
Reduction for payments (738) (123) (861)
Reclassified from long-term 259 138 397
----------- ---------- ---------
Balance at December 31, 1998: $ 799 $ 499 $ 1,298
=========== ========== =========
Long-term - other liabilities:
Balance at December 31, 1997: $ 409 $ 238 $ 647
Long-term - reclassified to current (259) (138) (397)
----------- ---------- ---------
Balance at December 31, 1998: $ 150 $ 100 $ 250
=========== ========== =========
</TABLE>
Termination payments to-date represent severance payments and other support
costs for approximately 90 employees; other exit costs include legal and
consulting costs to execute termination activities and facility shut-down costs.
43
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(dollars in thousands, except per share amounts)
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 and the goodwill associated with the GP Exchange discussed in
Note 1 is amortized on a straight-line basis over forty years. Other intangible
assets arising principally from acquisitions are amortized on a straight-line
basis over periods ranging from three to ten years.
Long-Lived Assets:
Under the provisions of Statement of Financial Accounting Standard ("SFAS") 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", the Company has evaluated its long-lived assets and certain
identifiable intangibles for financial impairment, and will continue to evaluate
them, based on the estimated future cash flows, as events or changes in
circumstances indicate that the carrying amount of such assets may not be fully
recoverable. See Note 1, "Restructuring Charges" for information on the
write-down of assets at Harding in 1996.
44
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(dollars in thousands, except per share amounts)
2. Summary of Significant Accounting Policies, continued:
Income Taxes:
Deferred income taxes are computed using the liability method. Under this
method, deferred income tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
(temporary differences) and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. As a result
of the Conversion, the Company recognized additional deferred income tax
benefits which were not previously available to the Partnership due to its
partnership status.
Retirement Benefits:
Certain employees are covered under profit-sharing retirement plans ("defined
contribution plans") for which contributions are determined on an annual basis
in accordance with the requirements of each plan. Defined benefit plan
contributions covering certain employees are funded, at a minimum, in accordance
with the requirements of the Employee Retirement Income Security Act of 1974, as
amended.
In accordance with collective bargaining agreements, annual contributions to
multi-employer pension plans are made. These contributions, which are based on
fixed contributions per month for each hour worked, are charged to income as
incurred.
Certain employees are covered under post-retirement benefit plans for which
benefits are determined in accordance with the requirements of each plan.
Fair Value of Financial Instruments:
Cash, accounts receivable, short-term borrowings, accounts payable, accrued
liabilities and bank revolving credit are reflected in the consolidated
financial statements at fair value due to short-term maturity or revolving
nature of these instruments. The fair values of the Company's debt instruments
are disclosed in Note 10. The fair value of the Trust Preferred Securities are
disclosed in Note 13.
Translation of Foreign Currencies:
The translation of applicable foreign-currency-based financial statements into
U.S. dollars is performed for balance sheet accounts using exchange rates in
effect at the balance sheet date and for revenue and expense accounts using an
average exchange rate during the period. The changes in the cumulative foreign
translation adjustment for each period relate to translation adjustments in
their entirety.
Exchange adjustments resulting from foreign currency transactions are recognized
in net income and were immaterial for the three years ended December 31, 1998.
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.
45
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(dollars in thousands, except per share amounts)
3. Acquisitions:
During 1996, the Company acquired the assets of a hydraulic parts distributor
which were integrated into its Technology Services segment
During 1998 and 1997, Harding acquired the assets of eleven and three retail
glass shops, respectively, which were integrated into its existing operations.
During 1998, Hillman acquired the assets of three companies which supply keys,
letters, numbers and signs and other products to retail hardware stores, which
were integrated into its existing operations.
For the years ended December 31, 1998, 1997 and 1996, respectively, net cash
consideration paid for the acquired businesses, including transaction costs, was
$22,807, $793 and $683, including goodwill of $18,210, $429, and $141 and the
assumption of certain liabilities of $3,085, $236 and $58.
These acquisitions have been accounted for as purchases and, accordingly, the
results of operations have been included in the accompanying consolidated
financial statements from the date of acquisition. The following disclosures
indicate the Company's estimate of financial results had these acquisitions been
consummated on January 1, 1997:
Pro forma
-------------------------
1998 1997*
-------- --------
Net sales $733,539 $726,534
Income before extraordinary items 15,431 11,770
Net income 15,431 11,770
Basic and diluted earnings per share $2.23 $1.83
* Includes the effects of the Conversion and Refinancing.
4. Related Party Transactions:
Previously under partnership form, the GP earned a management fee annually from
the Operating Partnership equal to 3% of the aggregate initial capital
investment of the holders of Class A interests. Management fees earned in each
of years 1997 and 1996 were $2,491 and $3,330, respectively. The 1997 management
fee was pro-rated through the Conversion and paid in full on September 30, 1997.
The management fee for 1996 was paid in full in March 1997.
From January 1, 1996 through September 30, 1998, a member of the Company's Board
of Directors was a partner in a law firm which represents the Company in various
matters and with which the Company had a leasing arrangement for office space
during 1996 and through September 1997. Payments to this law firm were $389,
$811 and $407 in 1998, 1997 and 1996, respectively. Amounts payable to this law
firm were $109, $10 and $25 at December 31, 1998, 1997 and 1996, respectively.
An affiliate of a firm which owned beneficially more than 5% of the Company's
Common Shares during 1998 performed investment banking services for the Company
in 1998 and 1996. Payments for these services were $361 in 1998 and $125 in
1996.
A member of the Company's Board of Directors is an officer of a firm which
performed investment banking services for the Company in 1998 and 1996. Payments
for these services were $361 in 1998 and $2 in 1996.
46
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(dollars in thousands, except per share amounts)
5. Income Taxes:
The components of the provision (benefit) for income taxes are as follows for
the three years ended:
December 31,
Current: 1998 1997 1996
--------- -------- --------
Federal $ 4,021 $ 770 $ --
State and local 915 457 418
Foreign 1,731 1,005 605
--------- -------- --------
Total current 6,667 2,232 1,023
--------- -------- --------
Deferred:
Federal 1,635 183 $(1,919)
State and local 187 42 (244)
Foreign (165) 428 --
--------- -------- --------
Total deferred 1,657 653 (2,163)
--------- -------- --------
Deferred tax benefit upon conversion -- (9,565) --
---------- -------- --------
Provision (benefit) for income taxes $ 8,324 $(6,680) $(1,140)
========== ======== ========
Upon the Conversion, the Company recorded additional deferred tax assets of
$9,565 not previously available under partnership form. The table below reflects
the significant components of the company's net deferred tax assets:
December 31,
1998 1997
---- ----
Deferred tax assets:
Inventory $ 4,917 $ 5,180
Deferred compensation 3,592 3,827
Casualty loss liability 1,046 1,560
Goodwill 274 --
Prepayment penalty 835 1,059
Bad debt reserve 931 936
Vacation pay liability 644 998
Restructuring reserve 604 780
Net operating loss - Mexico 512 489
Transaction costs 731 777
Litigation reserves 624 --
All other 378 199
-------- --------
Deferred tax assets $15,088 $15,805
-------- --------
Deferred tax liabilities:
Costs of goods sold - Mexico (929) (935)
-------- --------
Net deferred tax assets $14,159 $14,870
======== ========
47
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(dollars in thousands, except per share amounts)
5. Income Taxes, continued:
Below is a reconciliation of U.S. Federal income tax rates to the effective tax
rates for the twelve months ended December 31, 1998 and the period from the
Conversion through December 31, 1997:
12 Months 3 Months
Ended Ended
12/31/98 12/31/97
-------- --------
U.S. federal income tax rate 35.0% 35.0%
Foreign income tax rates in excess of
U.S. federal income tax rates 1.8% 8.9%
State and local income taxes, net of
U.S. federal income tax benefit 3.8% 4.2%
Non-deductible expenses 4.9% 4.3%
Tax benefits associated with the
conversion, net (7.9)% --
Recognition of deferred tax benefits relating
to cumulative temporary differences -- (10.2%)
----- -----
Effective income tax rate 37.6% 42.2%
===== =====
6. Extraordinary Losses:
In 1997, in connection with the Refinancing, the Company paid prepayment
penalties of $4,343 and recorded an extraordinary loss of $3,392 (net of
deferred tax benefits of $951) due to the early extinguishment of all of the
Company's previously outstanding Series A 9.08% and Series B 8.44% Senior Notes.
7. Property and Equipment:
Property and equipment consist of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Estimated
Useful Life December 31,
(Years) 1998 1997
----------- ------- -------
<S> <C> <C>
Land N/A $ 3,058 $ 3,196
Buildings and leasehold improvements 10-30 18,425 18,367
Machinery and equipment 3-10 27,286 20,493
Furniture and fixtures 3-5 12,010 10,592
------- -------
60,779 52,648
Less accumulated depreciation 34,009 30,709
------- -------
$26,770 $21,939
======= =======
</TABLE>
8. Notes Payable:
Notes payable consisted of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
<S> <C> <C>
Trade notes associated with glass inventory financing $ 974 $1,099
Notes associated with casualty insurance financing 796 981
------ ------
$1,770 $2,080
====== ======
</TABLE>
The weighted average interest rate on the outstanding notes payable borrowings
at December 31, 1998 and 1997 was 2.57% and 2.83%, respectively.
48
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(dollars in thousands, except per share amounts)
9. Lines of Credit:
On September 30, 1997, the Operating Partnership entered into a five-year bank
credit agreement with five lenders (the "Credit Agreement"). In connection with
the Reorganization, the Credit Agreement was amended and restated as of December
31, 1998 (the "Amended Credit Agreement"), at which time one of the five lenders
withdrew from the Credit Agreement, temporarily reducing the amount of the
facility to $75,000. On January 6, 1999, a new lender joined the Amended Credit
Agreement which restored the facility to $90,000. The Company and its newly
formed domestic corporate subsidiaries are co-borrowers under the Amended Credit
Agreement. The Amended Credit Agreement provides borrowings on a revolving
credit basis at interest rates based on the London Interbank Offered Rate
("LIBOR") plus a margin of between 1.00% and 1.50% (the "LIBOR Margin") based on
certain leverage ratios as stated in the Credit Agreement, or prime. Letters of
credit commitment fees are based on the LIBOR Margin when issued.
As of December 31, 1998, the LIBOR rate was 5.16%, the LIBOR Margin was 1.25%
and the prime rate was 7.75%. The Company's weighted-average interest rate for
borrowings under its revolving credit facility was 7.05%, 7.79% and 8.82% for
the years ended December 31, 1998, 1997 and 1996, respectively. As of December
31, 1998, the Company had $36,577 available under the temporarily reduced
facility of $75,000. The $38,423 outstanding consists of bank borrowings at
LIBOR amounting to $35,000 as reflected on the Company's consolidated balance
sheet at December 31, 1998, and letter of credit commitments aggregating $3,423.
Amounts outstanding under the Amended Credit Agreement are due upon its
termination on September 30, 2002.
The Amended Credit Agreement, among other provisions, contains financial
covenants requiring the maintenance of specific coverage ratios and levels of
financial position and restricts incurrence of additional debt and the sale of
assets. The Company is able to utilize any unused capacity under the revolving
credit line for acquisitions. If the Company sells a significant amount of
assets as defined in the Amended Credit Agreement, it must make an offer of
prepayment of note principal to the lenders determined on an applicable share
basis with the senior noteholder under the Amended Noteholder Agreement (see
Note 10).
The Company has another credit facility available in the amount of $500 for
letters of credit of which no amount was outstanding at December 31, 1998. The
letters of credit commitments are issued at varying rates. This facility,
renewable annually, is not subject to compensating balance requirements or
unused commitment fees.
An indirect, wholly-owned Canadian subsidiary of the Company has a $2,500
Canadian dollar line of credit with a local lender for working capital purposes
of which no amount was outstanding at December 31, 1998. This facility, which is
renewable annually, provides bank borrowings at an interest rate of prime plus
1/4 of 1%.
10. Long-Term Debt:
On September 30, 1997, the Company issued $60,000 of senior notes through a
private placement with an institutional investor. The senior notes are payable
in full on September 30, 2002 and were issued at a fixed rate of 7.66%. A
surcharge rate of 7.91% was in effect from September 30, 1997 through December
31, 1997, as provided in the Noteholder Agreement (the "Noteholder Agreement").
49
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(dollars in thousands, except per share amounts)
10. Long-Term Debt, continued:
In connection with the Reorganization, the Noteholder Agreement was amended and
restated (the "Amended Noteholder Agreement"). The Company and its newly formed
domestic corporate subsidiaries are co-obligors under the Amended Noteholder
Agreement. Interest is required to be paid quarterly on March 30, June 30,
September 30 and December 30 on the outstanding principal of the senior notes.
Optional prepayments, in multiples of $100, may be made at anytime, as a whole
or in part, with accrued interest thereon plus a penalty ("Make-Whole Amount"),
if any, as defined in the Amended Noteholder Agreement.
The Amended Noteholder Agreement, among other provisions, contains financial
covenants requiring the maintenance of specific coverage ratios and levels of
financial position and restricts incurrence of additional debt and the sale of
assets. If the Company sells a significant amount of assets as defined in the
Amended Noteholder Agreement, it must make an offer of prepayment of note
principal to the senior noteholder determined on an applicable share basis with
the lenders under the Credit Agreement. The prepayment offer must also include
accrued interest thereon as defined in the Amended Noteholder Agreement. A Make
Whole Amount is not required to be paid on the first $15,000 of net cash
proceeds from certain dispositions accepted as a prepayment by the senior
noteholder or upon a change in control as defined in the Amended Noteholder
Agreement.
As of December 31, 1998, the estimated fair value of the Company's senior notes
is approximately $65,000 as determined in accordance with SFAS 107. The Company
discounted the future cash flows of its senior notes based on borrowing rates
for debt with similar terms and remaining maturities. The fair value estimate is
made at a specific point in time and is subjective in nature and involves
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly affect the
estimate.
11. Leases:
Certain warehouse and office space and equipment are leased under capital and
operating leases with terms in excess of one year. Future minimum lease payments
under noncancellable leases consisted of the following at December 31, 1998:
Capital Operating
Leases Leases
------ --------
1999 $ 302 11,972
2000 302 9,754
2001 230 7,256
2002 8 5,661
2003 -- 5,197
Later years -- 9,659
------ -------
Total minimum lease payments $ 842 $49,499
=======
Less amounts representing interest (155)
------
Present value of Net Minimum Lease payments
(including $276 currently payable) $ 687
======
Total rental expenses for all operating leases amounted to $15,350 in 1998,
$15,921 in 1997, and $15,239 in 1996.
50
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(dollars in thousands, except per share amounts)
12. Deferred Compensation Plans:
The Company has adopted several deferred compensation plans since 1979, whereby
certain officers and employees earned performance-based compensation, payment of
which was deferred until future periods. The Long-Term Performance Award Plan
was effective through December 31, 1986 and was replaced by the Deferred
Compensation for Division Presidents Plan which was adopted in 1987 and amended
thereafter. The Long-Term Performance Share Plan was adopted January 1, 1994 and
amended thereafter.
The Company also adopted the Deferred Compensation Plan for Key Employees of SDI
Operating Partners, L.P. (the "Key Employees Plan") on January 1, 1996 to allow
participants eligible for accelerated payments under the change in control
provisions of the other deferred compensation plans an election to continue to
defer their balances. A change of control occurred on September 30, 1997 as a
result of the Conversion whereby all awards earned through December 31, 1996
became fully vested and eligible for distribution. However, certain employees
elected to continue to defer their awards under the Key Employees Plan. Upon
approval of the SunSource Inc. 1998 Equity Compensation Plan (the "Equity
Compensation Plan") by shareholders of the Company on April 28, 1998, awards
under the Deferred Compensation for Division Presidents and the Long-Term
Performance Share Plan ceased as of December 31, 1997. The Equity Compensation
Plan replaces the cash basis deferred compensation awards with stock options.
Effective October 1, 1998, the provisions of the Key Employees Plan which also
provide eligible employees of the Company the opportunity to defer receipt of
all or a portion of their salary and bonuses were amended to facilitate such
deferrals. The plan, as amended and restated, has been renamed the SunSource
Inc. Deferred Compensation Plan for Key Employees.
There were no amounts charged to income under the Company's deferred
compensation plans in 1998. The amounts charged to income in 1997 and 1996 were
$3,152 and $1,071, respectively. The 1997 charge includes $503 which is
classified in transaction and other related costs on the accompanying statement
of income for the year ended December 31, 1997, since this charge would not have
been incurred had the Conversion not been consummated. During the three years
ended December 31, 1998, distributions from the deferred compensation plans
aggregated $26 in 1998, $2,876 in 1997 and $1,160 in 1996. The Company's
deferred compensation liabilities amounted to $11,802 as of December 31, 1998
and $10,451 as of December 31, 1997.
The Company has established a Rabbi Trust (the "Rabbi Trust") to assist in
funding the liabilities of its deferred compensation plans. The Rabbi Trust
holds insurance policies purchased by the Company on the lives of certain
participants in the deferred compensation plans. The Rabbi Trust is the sole
beneficiary of these insurance policies of which the cash surrender value
aggregated $10,262 at December 31, 1998. Prior to a change in control and upon
direction from the Company in writing, the Rabbi Trust shall pay to the Company
all or a portion of the proceeds of any death benefits payable under any
insurance policy held by the Rabbi Trust in excess of any benefits payable under
the Company's deferred compensation plans with respect to the insured
participant.
51
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(dollars in thousands, except per share amounts)
13. Guaranteed Preferred Beneficial Interests in the Company's Junior
Subordinated Debentures:
In connection with the Conversion, Class A interests of the Partnership were
exchanged for Trust Preferred Securities of the Trust, as discussed in Note 1.
The Trust was organized in connection with the Conversion for the purpose of (a)
issuing its Trust Preferred Securities to the Company in consideration of the
deposit by the Company of Junior Subordinated Debentures in the Trust as trust
assets, and its Trust Common Securities to the Company in exchange for cash and
investing the proceeds thereof in an equivalent amount of Junior Subordinated
Debentures and (b) engaging in such other activities as are necessary or
incidental thereto.
The Trust had no operating history prior to the issuance of the Trust Preferred
Securities. The terms of the Junior Subordinated Debentures include those stated
in the Indenture (the "Indenture") between the Company and the indenture
trustee, and those made part of the Indenture by the Trust Indenture Act.
The Company has guaranteed on a subordinated basis the payment of distributions
on the Trust Preferred Securities and payments on liquidation of the Trust and
redemption of Trust Preferred Securities (the "Preferred Securities Guarantee").
The sole assets of the Trust are the Junior Subordinated Debentures and the
obligations of the Company under the Indenture, the Preferred Securities
Guarantee and the Junior Subordinated Debentures in the aggregate constitute a
full and unconditional guarantee by the Company of the Trust's obligations under
the Trust Preferred Securities.
The Trust Preferred Securities have equity characteristics but creditor's rights
and are therefore classified between liabilities and stockholders' deficit on
the balance sheet. On September 30, 1997, the Trust Preferred Securities were
recorded at fair value of $115,991 based on the price of the Class A interests
of $11.75 upon close of trading on the New York Stock Exchange on that date. The
Trust Preferred Securities have a liquidation value of $25.00 per security. The
excess of fair value of the Trust Preferred Securities on September 30, 1997
over their liquidation value of $105,446, or $10,545 is amortized over the life
of the Trust Preferred Securities. The fair value of the Trust Preferred
Securities on December 31, 1998 was $122,845, based on the closing price on the
New York Stock Exchange of $29.125 per security on that date.
The interest payments on the Junior Subordinated Debentures underlying the Trust
Preferred Securities, aggregating $12,232 per year, are deductible for federal
income tax purposes under current law and will remain an obligation of the
Company until the Trust Preferred Securities are redeemed or upon their maturity
in 2027.
14. Stockholders' Equity (Deficit):
Treasury Stock
On August 6, 1998, the Company's Board of Directors authorized $15,000 for
management to repurchase up to 10% of the Company's outstanding common stock
through open market transactions and private block trades, dependent upon market
conditions. At December 31, 1998, the number of shares purchased under this
authorization was 461,100 at an aggregate cost of $8,380. These shares are held
in treasury.
52
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(dollars in thousands, except per share amounts)
14. Stockholders' Equity (Deficit), continued:
Public Offering
On January 22, 1998, the Company filed a registration statement on Form S-2 with
the United States Securities and Exchange Commission, which was amended
thereafter, for an offering of Common Shares of the Company (the "Offering").
The registration statement became effective on March 19, 1998 and the Offering
closed in its entirety on March 27, 1998. Of the 2,284,471 shares sold in the
Offering, 796,408 shares were issued and sold by the Company and 1,488,063
shares were sold by the selling stockholders, affiliates of Lehman Brothers Inc.
The Company received net cash proceeds of $20,813 from the 796,408 shares sold
in the Offering. The Company recorded an increase of $8 in Common Stock and
$20,805 in Additional Paid-in Capital.
Common Shares Issued to Certain Non-Employee Directors
Under the Company's Stock Compensation Plan for Non-Employee Directors, certain
non-employee directors were issued 1,988 Common Shares through December 31,
1998. Prospectively, under the terms of the plan, non-employee directors will be
issued Common Shares on a quarterly basis to cover at least 50% and up to 100%
of their annual retainer fee. The number of shares to be issued will be
dependent upon the market price of the Common Shares, the number of directors
receiving shares, and the percentage of their annual retainer above 50% that
each director elects to receive in Common Shares.
Stock Options
On April 28, 1998, the Company adopted the 1998 Equity Compensation Plan (the
"Plan"), after approval by shareholders at the 1998 Annual Meeting. Grants under
the Plan may consist of options intended to qualify as incentive stock options
("ISO"), or non-qualified stock options that are not intended to so qualify
("NQSO"). In addition, grants may also consist of grants of restricted stock,
stock appreciation rights (SAR's), or performance units. The option price of any
ISO will not be less than the fair market value on the date the option is
granted (110% of fair value in certain instances). The option price of a NQSO
may be greater than, equal to, or less than the fair market value on the date
the option is granted (but not less than 85% of the fair market value). The
amount of options available for the Plan is calculated annually and cumulatively
at the rate of 5% of shares outstanding per year. The maximum number of shares
available under the Plan is 25% of the total outstanding shares or 2,000,000
million Common Shares.
The Plan is administered by a committee of the Board of Directors. The Committee
determines the term of each option, provided, however, that the exercise period
may not exceed ten years from the date of grant, and for ISO's, in certain
instances, may not exceed five years. The options granted under the Plan vest
based on the results of financial performance. If threshold financial
performance targets are not met, 100% of the options vest on the ninth
anniversary of the grant. If threshold performance targets are met, stock
options become fully vested within 3 or 5 years from the date of grant,
depending on performance.
53
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(dollars in thousands, except per share amounts)
14. Stockholders' Equity (Deficit), continued:
Stock Options, continued
A summary of the Company's stock option plan for the twelve months ended
December 31, 1998 is presented below:
<TABLE>
<CAPTION>
Weighted- Weighted-
Average Average
Number Exercise Number Exercise
of Price Of Shares Price
Options Per Share Exercisable Per Share
------- --------- ----------- ---------
<S> <C> <C>
Outstanding at January 1, 1998 -- -- -- $ --
Granted 211,495 $ 17.62 -- 17.62
Exercised -- -- -- --
Expired/Canceled -- -- -- --
Outstanding at December 31, 1998 211,495 $ 17.62 -- $ 17.62
</TABLE>
As of December 31, 1998, the 211,495 options outstanding under the Plan have
exercise prices between $15.99 and $18.81 and a weighted-average remaining
contractual life of 9.5 years.
During 1998, the Company issued certain options at and below the fair market
price of the common stock on the grant date. For those options issued with an
exercise price equal to the fair market value, the weighted-average exercise
price was $18.82 and the average fair market value was $18.84. For options
issued with an exercise price below fair market value for the stock on their
grant date, the weighted average exercise price was $15.99 and the average fair
market value was $18.81.
Compensation expense of approximately $254 is being recognized over vesting
periods for certain options which were granted at below fair market value in
1998 of which $25 was recognized in 1998. If compensation cost had been based on
the fair value of the options at the grant dates, consistent with the method
required under SFAS 123, "Accounting for Stock-Based Compensation", the
Company's net income and net income per Common Share would have been:
1998
----
Net Income As reported $ 13,817
Pro forma $ 13,769
Basic and diluted net income per common share As reported $ 2.00
Pro forma $ 1.99
The estimated weighted-average grant-date fair value of the options granted
during the year ended December 31, 1998 was $18.82 and the weighted-average
remaining contractual life of options outstanding at December 31, 1998 was 9.5
years.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes options-pricing model with the following weighted-average
assumptions used for grants in 1998: expected volatility of 28.7%; risk free
interest rates of 5.0% to 5.5% and expected lives of 6 and 9.5 years, based on
differing vesting schedules.
54
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(dollars in thousands, except per share amounts)
14. Stockholders' Equity (Deficit), continued:
Earnings Per Share
The Company computes earnings per share in accordance with SFAS 128, "Earnings
per Share". SFAS 128 requires the presentation of basic and diluted earnings per
share for companies with complex capital structures. As noted above under "Stock
Options", certain executives and key employees were granted a total of 211,495
options to purchase the Company's Common Shares during 1998 having a potentially
dilutive effect on earnings per share. Currently, due to market conditions, the
shares granted under the Plan do not have a material dilutive effect on earnings
per share for the twelve months ended December 31, 1998.
Due to the fact that the Company was not a corporation for the full year ended
December 31, 1997, a pro forma net income per Common Share has been presented
for the twelve months ended December 31, 1997. Pro forma net income per Common
Share assumes the Conversion and Refinancing occurred at the beginning of 1997
and accordingly excludes the extraordinary loss of $0.53 per Common Share. The
1997 pro forma earnings per share presented herein does not include the effect
of the Offering which increased the number of Common Shares outstanding and
provided cash which reduced the Company's bank revolving debt and interest
expense.
The number of outstanding Common Shares as of December 31, 1998 was 6,756,163.
The weighted average number of Common Shares outstanding for the twelve months
ended December 31, 1998 was 6,907,318, including the shares sold in the Offering
and the shares issued to non-employee directors, net of the 461,100 shares
repurchased and held in treasury.
Common Stock Dividend
The Board of Directors of the Company declared on December 16, 1998 a cash
dividend of $0.10 per Common Share which was paid on January 7, 1999 to holders
of record as of December 28, 1998.
15. Allocation of Partnership Taxable Income:
Prior to the Conversion, for the shortened Partnership tax year from January 1,
1997 through September 30, 1997, the Partnership earned federal taxable income
of $0.5605 per Class B limited partnership interest. For 1996 federal taxable
income amounted to $0.70, per B interest.
Under the Partnership Agreement, holders of B interests were entitled to receive
annual cash distributions sufficient to cover their tax liabilities on taxable
income allocated to the B interests. For 1997 and 1996 these cash distributions
amounted to $6,136 or $0.2775 per B interest and $7,663 or $0.3465 per B
interest, respectively.
55
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(dollars in thousands, except per share amounts)
16. Retirement Benefits:
Certain of the Company's subsidiaries provide defined benefit pension plans and
post-retirement benefits to employees. The following provides a reconciliation
of benefit obligations, plan assets, and funded status of the plans:
<TABLE>
<CAPTION>
Other
Post-retirement
Pension Benefits Benefits
Benefit Obligation: 1998 1997 1998 1997
------- --------- ------- -------
<S> <C> <C> <C> <C>
Benefit obligation - beginning of year $23,961 $23,856 $ 454 $ 477
Service cost 1,000 920 -- --
Interest cost 1,752 1,702 84 32
Amendments -- -- 734 --
Actuarial (gain) loss 1,777 290 42 (5)
Benefits paid (1,729) (2,807)* (82) (50)
-------- -------- -------- --------
Benefit obligation - end of year $26,761 $23,961 $ 1,232 $ 454
======== ======== ======== ========
Fair Value of Plan Assets:
Fair value of plan assets - beginning of year $28,597 $26,519 $ -- $ --
Actual return on plan assets 4,432 4,708 -- --
Expenses (24) (24) -- --
Plan participant contributions 199 201 -- --
Benefits paid (1,729) (2,807)* -- --
-------- ------- ------- -------
Fair value of plan assets - end of year $31,475 $28,597 $ -- $ --
======== ======== ======= =======
</TABLE>
* includes non-recurring lump-sum settlements to certain employees of $1,483.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Funded Status of Plans:
Funded status of the plans $ 4,714 $ 4,636 $(1,232) $(1,205)
Unrecognized actuarial (gain) loss (3,466) (3,312) 45 20
Unrecognized prior service cost (279) (303) 678 734
Unrecognized net transition asset (1,180) (1,414) -- --
-------- ------- -------- --------
Accrued benefit cost
recognized in the balance sheet $ (211) $ (393) $ (509) $ (451)
======== ======== ======== ========
Net periodic pension costs include the following components:
Net Periodic Pension Cost (Benefit): 1998 1997 1996
-------- ------- ------
Service cost $ 1,000 $ 920 $ 879
Interest cost 1,752 1,702 1,656
Expected return on plan assets (2,727) (3,160) (2,750)
Amortization of net asset (234) (234) (234)
Amortization of prior service cost (24) (24) (24)
Recognized net actuarial loss 52 769 493
-------- -------- ------
Net periodic pension cost (benefit) $ (181) $ (27) $ 20
======== ======== ======
Net post-retirement costs include the following components:
Net Periodic Post-retirement Cost:
Service cost $ 84 $ 32 $ 34
Amortization of prior service cost 56 -- --
------- ------- ------
Net post-retirement cost $ 140 $ 32 $ 34
======= ======= ======
</TABLE>
56
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(dollars in thousands, except per share amounts)
16. Retirement Benefits, continued:
Assumptions: 1998 1997 1996
----- ------ -----
Discount rate 7.00% 7.25% 7.25%
Rates of increase in compensation levels 6.50% 6.50% 6.50%
Expected long-term rate of return
on plan assets 9.75% 9.75% 9.75%
Health care cost trend rate on covered charges 8.50% 9.50% 9.50%
The health care cost trend rate, or the expected rate of increase in health-care
costs, is assumed to gradually decrease to 6.5% by 2004.
The impact of a 1% change in health care inflation on post-retirement benefits
is as follows:
Trend +1% Trend -1%
--------- ---------
December 31, 1998 projected benefit obligation $ 112 $ (99)
1998 service and interest cost $ 8 $ (7)
Certain employees of the Company's Kar Products, Inc., SunSource Technology
Services Inc. and its divested operations are covered by 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. Certain
employees of the Company's SunSource Technology Services Inc. subsidiary are
covered by post-retirement benefits.
Costs (income) charged to operations under all retirement benefit plans are as
follows:
1998 1997 1996
---- ---- ----
Defined contribution plans $3,052 $1,154 $1,327
Multi-employer pension plans 217 253 189
Defined benefit plans (181) (27) 20
------- ------- ------
Total $3,088 $1,380 $1,536
======= ======= ======
The Company's share of unfunded vested liabilities under multi-employer pension
plans and its benefit contributions to multi-employer health and welfare plans
are not material.
17. Commitments and Contingencies:
Performance and bid bonds are issued on the Company's behalf during the ordinary
course of business through surety bonding companies as required by certain
contractors. As of December 31, 1998, the Company had outstanding performance
and bid bonds aggregating $1,155.
Letters of credit are issued by the Company during the ordinary course of
business through major domestic banks as required by certain vendor contracts,
legal proceedings and acquisition activities. As of December 31, 1998, the
Company had outstanding letters of credit in the aggregate amount of $373
related to these activities.
As of December 31, 1998, the Company has guaranteed approximately $772 worth of
lease obligations, principally relating to businesses previously divested. The
Company is not currently aware of any existing conditions which would cause a
financial loss related to these guarantees.
57
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(dollars in thousands, except per share amounts)
17. Commitments and Contingencies, continued:
Under the Company's insurance programs, commercial umbrella coverage is obtained
for catastrophic exposure and aggregate losses in excess of normal claims.
Beginning in 1991, the Company has retained risk on certain expected losses from
both asserted and unasserted claims related to worker's compensation, general
liability and automobile as well as the health benefits of certain employees.
Provisions for losses expected under these programs are recorded based on an
analysis of historical insurance claim data and certain actuarial assumptions.
As of December 31, 1998, the Company has provided insurers letters of credit
aggregating $3,050 related to certain insurance programs.
Litigation originally instituted on February 27, 1996 is pending in the Court of
Common Pleas of Montgomery County, Pennsylvania in which Dorman Products of
America, Ltd. ("Dorman"), and its parent, R&B, Inc. ("R&B"), allege that
misrepresentations of certain facts were made by the Company, upon which R&B
allegedly based its offer to purchase the assets of the Dorman Products division
of the Company. Dorman and R&B seek damages of approximately $21,000.
Certain other legal proceedings are pending which are either in the ordinary
course of business or incidental to the Company's business. Those legal
proceedings incidental to the business of the Company are generally not covered
by insurance or other indemnity. In the opinion of management, the ultimate
resolution of the pending litigation matters will not have a material effect on
the consolidated financial position, operations or cash flows of the Company.
18. Statements of Cash Flows:
Supplemental disclosures of cash flow information are presented below:
1998 1997 1996
--------- --------- ---------
Cash paid during the period for:
Interest $ 7,725 $ 7,357 $ 6,769
========= ========= =========
Income taxes $ 8,190 $ 1,433 $ 1,189
========= ========= =========
Non-cash investing activities:
Acquisitions (see Note 3):
Fair value of assets acquired,
including goodwill $ 25,892 $ 1,029 $ 758
Less liabilities assumed (3,085) (236) (58)
Post-closing adjustments -- -- (17)
---------- ---------- ----------
Cash paid for acquired businesses $ 22,807 $ 793 $ 683
========== ========== ==========
Non-cash financing activities:
Accrued and unpaid dividends
on common shares $ 676 $ 642 $ --
Accrued and unpaid
partnership distributions $ -- $ 2,353 $ 1,857
Exchange of 11,099,573 Class A limited
partnership interests for 4,217,837
Trust Preferred Securities $ -- $ 115,991 $ --
Exchange of 21,675,246 Class B limited
partnership interests for 5,418,936
common shares $ -- $ 38,943 $ --
Exchange of GP's Minority Interest for
1,000,000 common shares $ -- $ 21,841 $
58
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(dollars in thousands, except per share amounts)
19. Quarterly Data (unaudited):
1998 Fourth Third Second First
---- -------- -------- -------- --------
Net sales (1) $168,769 $183,593 $188,931 $171,177
Gross profit (1) 72,047 75,814 75,494 67,813
Net income 3,031 4,550 4,615 1,621
Net income per
Common Share $.44 $.64 $.64 $.25
1997
Net sales (1) $168,190 $177,578 $180,696 $168,243
Gross profit (1) 68,424 71,936 73,000 66,947
Income before
extraordinary loss (2) 3,090 15,673 9,193 4,576
Extraordinary loss (Note 6) -- (3,392) -- --
Net income (2) 3,090 12,281 9,193 4,576
Net income per common share $.48 N/A N/A N/A
Pro forma net income
per common share N/A $ .58 N/A N/A
Net income (loss) per limited
partnership interest
- Class A N/A N/A $.28 $.27
- Class B N/A N/A $.28 $.07
(1) Includes amounts reclassified to conform to current accounting.
(2) Includes $2,428, $275 and $350 of non-recurring conversion and other
related costs recorded in the third, second and first quarters,
respectively and reflects operations on a partnership basis prior to the
Conversion and Refinancing transactions (see Note 1).
20. Concentration of Credit Risk:
Financial instruments which potentially subject the Company to concentration of
credit risk consist principally of cash and cash equivalents and trade
receivables. The Company places its cash and cash equivalents with high credit
quality financial institutions. Concentrations of credit risk with respect to
sales and trade receivables are limited due to the large number of customers
comprising the Company's customer base, and their dispersion across many
different industries and geographies. The Company performs periodic credit
evaluations of its customers' financial condition and generally does not require
collateral.
59
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(dollars in thousands, except per share amounts)
21. Segment Information:
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information," which replaces previous generally accepted
accounting principles on segment reporting. Adoption of SFAS 131 is required
beginning with 1998 reporting. Previously reported information has been restated
to conform to reporting under SFAS 131.
The Company has five reportable segments (see Note 1 "Nature of Operations")
which are disaggregated based on the products and services provided, markets
served, marketing strategies and delivery methods.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. Intersegment sales are immaterial.
The Company measures segment profitability and allocates corporate resources
based on each segment's Earnings Before Interest, Taxes and Amortization
("EBITA") which is defined as income from operations before amortization. The
Company also measures the segments on performance on their tangible asset base.
The table below provides the Company's segment disclosures and is followed by
reconciliations of the segment amounts to the consolidated amounts where
appropriate:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net Sales
Technology Services $ 321,526 $ 322,148 $ 299,068
Expediter 124,536 125,911 121,389
Integrated Supply 45,626 54,420 43,392
Hardware Merchandising 125,830 103,970 92,285
Glass Merchandising 94,952 88,258 90,369
--------- --------- ---------
Consolidated net sales $ 712,470 $ 694,707 $ 646,503
========= ========= =========
Gross Profit
Technology Services $ 85,639 $ 85,443 $ 76,896
Expediter 88,175 90,171 87,839
Integrated Supply 12,265 13,669 11,436
Hardware Merchandising 66,485 54,901 46,127
Glass Merchandising 37,986 35,670 35,545
--------- --------- ---------
Segment gross profit $ 290,550 $ 279,854 $ 257,843
========= ========= =========
EBITA
Technology Services $ 13,583 $ 14,825 $ 13,690
Expediter 20,215 20,697 18,770
Integrated Supply 2,299 3,292 2,008
Hardware Merchandising 12,130 10,833 7,130
Glass Merchandising 4,128 2,224 3,211
--------- --------- ---------
Segment profit $ 52,355 $ 51,871 $ 44,809
========= ========= =========
</TABLE>
60
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(dollars in thousands, except per share amounts)
21. Segment Information, continued:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Tangible Assets
Technology Services $ 85,460 $ 90,597 $ 81,720
Expediter 42,479 41,991 42,274
Integrated Supply 15,343 13,138 13,813
Hardware Merchandising 59,487 40,579 41,322
Glass Merchandising 27,642 23,879 24,427
--------- --------- ---------
Segment tangible assets $ 230,411 $ 210,184 $ 203,556
========= ========= =========
Capital Expenditures
Technology Services $ 2,058 $ 2,045 $ 1,200
Expediter 1,693 622 786
Integrated Supply 209 266 282
Hardware Merchandising 2,396 1,754 1,985
Glass Merchandising 850 373 640
--------- --------- ---------
Segment capital expenditures $ 7,206 $ 5,060 $ 4,893
========= ========== =========
Depreciation
Technology Services $ 1,607 $ 1,438 $ 1,323
Expediter 981 886 897
Integrated Supply 154 107 72
Hardware Merchandising 1,347 747 451
Glass Merchandising 824 730 775
--------- --------- ---------
Segment depreciation $ 4,913 $ 3,908 $ 3,518
========= ========= =========
Geographic Segment Data:
Net Sales
United States $ 662,277 $ 640,875 $ 606,734
Canada 32,968 34,022 30,888
Mexico 17,225 19,810 8,881
--------- --------- ---------
Consolidated net sales $ 712,470 $ 694,707 $ 646,503
========= ========= =========
Reconciliation of Segment Profit to
Income Before Income Taxes and
Extraordinary Loss:
Segment profit - EBITA $ 52,355 $ 51,871 $ 44,809
Amortization (2,276) (1,894) (1,924)
Corporate expenses (7,268) (8,062) (6,257)
---------- ---------- ----------
Income before non-recurring charges 42,811 41,915 36,628
Non-recurring charges:
Provision for litigation matters -
divested operations (1,600) -- --
Transaction and other costs -- (3,053) (2,150)
Management fee -- (2,491) (3,330)
Restructuring -- -- (5,950)
Minority ownership expense -- (263) (196)
---------- ----------- ----------
Income from operations 41,211 36,108 25,002
Interest expense, net (6,838) (7,198) (6,875)
Distribution on guaranteed
preferred beneficial interests (12,232) (3,058) --
---------- ---------- ----------
Income before income taxes and
extraordinary items $ 22,141 $ 25,852 $ 18,127
========== ========== ==========
</TABLE>
61
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(dollars in thousands, except per share amounts)
21. Segment Information, continued:
Year Ended December 31,
1998 1997 1996
--------- --------- ---------
Reconciliation of Segment Tangible
Assets to Total Assets:
Segment tangible assets $ 230,411 $ 210,184 $ 203,556
Goodwill 77,544 62,588 43,036
Other intangible assets 1,322 170 503
Deferred income taxes 15,088 15,805 5,007
Cash value of life insurance 10,262 8,407 4,566
Other corporate assets 6,941 8,988 5,887
--------- --------- ---------
Total assets $ 341,568 $ 306,142 $ 262,555
========= ========= =========
Reconciliation of Segment
Capital Expenditures to
Total Capital Expenditures:
Segment capital expenditures (1) $ 7,206 $ 5,060 $ 4,893
Corporate capital expenditures 196 130 71
--------- --------- ---------
Total capital expenditures $ 7,402 $ 5,190 $ 4,964
========= ========= =========
(1) Includes $324, $257 and $623 of assets acquired under capital leases in
1998, 1997 and 1996, respectively.
Reconciliation of Segment Depreciation
to Total Depreciation:
Segment depreciation $ 4,913 $ 3,908 $ 3,498
Corporate depreciation 103 101 105
--------- --------- ---------
Total depreciation $ 5,016 $ 4,009 $ 3,603
========= ========= =========
22. Subsequent Events:
From January 1, 1999 through March 25, 1999, Harding has acquired twenty-three
retail glass shops for a net cash consideration, including estimated transaction
expenses, of $12,417 and the assumption of certain liabilities estimated at
$1,156. These acquisitions resulted in estimated goodwill of $8,415 and the
repayment of $3,306 of outstanding debt. Sales from these acquisitions
aggregated approximately $27,000 for the twelve-month period prior to
acquisition.
On January 15, 1999, the Company's SunSource Industrial Services Company, Inc.
subsidiary entered into a long-term lease for warehouse and office space which
expires on March 10, 2009. The lease provides for annual rental payments of $712
for years one through three, $762 for years four through six and $816 for years
seven through ten.
62
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
Schedule I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(dollars in thousands)
<TABLE>
<CAPTION>
Balance Sheets as of December 31 1998 1997 1996
- -------------------------------- ----------------- ---------------- ---------------
<S> <C> <C> <C>
Assets
Cash $ 1 $ 1 $ --
Deferred income taxes 14,576 15,316 --
Investment in SDI Operating Partners, L.P. 122,148(1) 100,893 (1) 94,619
Investment in SunSource Capital Trust 3,261 3,356 --
----------------- ---------------- ---------------
Total assets $ 139,986 $ 119,566 $ 94,619
================= ================ ===============
Liabilities
Current liabilities $ 461 $ 893 $ --
Junior subordinated debentures - common 3,261 3,261 --
Junior subordinated debentures - preferred 115,551 115,903 --
----------------- ---------------- ---------------
Total liabilities 119,273 120,057 --
----------------- ---------------- ---------------
Partners' capital:
General partner -- -- 960
Limited partners - Class A interests -- -- 67,642
Limited partners - Class B interests -- -- 29,040
Class B interests held in treasury -- -- (1,514)
Cumulative foreign translation adjustment -- -- (1,509)
----------------- ---------------- ---------------
Total partners' capital -- -- 94,619
----------------- ---------------- ---------------
Stockholders' equity (deficit):
Preferred stock -- -- --
Common stock 72 64 --
Retained earnings 12,747 1,735 --
Paid in capital 21,099 -- --
Unearned compensation (229) -- --
Cumulative foreign translation adjustment (4,596) (2,290) --
Treasury stock (8,380) -- --
----------------- ---------------- ---------------
Total stockholders' equity (deficit) 20,713 (491) --
----------------- ---------------- ---------------
Total liabilities, partners' capital and
stockholders' equity (deficit) $ 139,986 $ 119,566 $ 94,619
================= ================ ===============
</TABLE>
(1) Represents an indirect investment through two wholly-owned subsidiaries.
63
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
Schedule I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(continued)
(dollars in thousands)
<TABLE>
<CAPTION>
Statements of Income for the Years Ended December 31 1998 1997 1996
- ---------------------------------------------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Equity in net income:
SDI Operating Partners, L.P. $ 32,657 (1) $ 33,562(1) $ 19,267
SunSource Capital Trust -- 95 --
Administrative expense (201) -- --
Interest expense, net (11,881) (3,065) --
Provision for income taxes (6,758) (1,452) --
----------- ------------- -----------
Net income $ 13,817 $ 29,140 $ 19,267
=========== ============= ===========
Net income allocated to partners:
General partner N/A N/A $ 193
Class A interests N/A N/A $ 12,210
Class B interests N/A N/A $ 6,864
Net income per common share $ 2.00 N/A N/A
===========
Pro forma net income per common share (note 1) N/A $ 1.88 N/A
=============
Statements of Cash Flows for the Years Ended December 31 1998 1997 1996
- ---------------------------------------------------- ----------- ------------- -----------
Cash provided by operations $ -- $ -- $ --
Cash provided from (used for) investment in
SDI Operating Partners, L.P. (7,585) 28,191 25,385
Cash provided from investment in SunSub A Inc. 12,232 3,058 --
Cash provided by issuance of common stock 20,813 -- --
Cash used for purchase of treasury stock, at cost (8,380) -- --
Cash distributions to investors (4,848) (28,191) (25,385)
Cash distributions to holders of trust preferred securities (12,232) (3,058) --
----------- ------------- -----------
Increase (decrease) in cash $ -- $ -- $ --
=========== ============= ===========
</TABLE>
(1) Includes an indirect investment through two wholly-owned subsidiaries from
October 1, 1997 through December 31, 1997.
This financial information should be read in conjunction with the consolidated
financial statements of the Company.
64
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
Schedule II - VALUATION ACCOUNTS
(dollars in thousands)
<TABLE>
<CAPTION>
Deducted From Assets in Balance Sheet
===============================================================================
Allowance Allowance
for for Accumulated Accumulated
Doubtful Obsolete Amortization Amortization
Accounts Inventories of Goodwill of Intangibles
---------- ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 1,827 3,410 11,739 13,724
Additions charged to cost
and expenses 1,280 1,440 1,409 648
Deductions 899(A) 1,010 (A) 269 (B) --
---------- --------- -------- ----------
Balance, December 31, 1996 2,208 3,840 12,879 14,372
Additions charged to cost
and expenses 1,711 1,797 1,488 538
Deductions 1,724(A) 1,272 (A) -- --
---------- --------- -------- ----------
Balance, December 31, 1997 2,195 4,365 14,367 14,910
Additions charged to cost
and expenses 1,693 1,413 2,061 215
Addition due to deferred
recognition of tax benefit
from Conversion -- -- -- --
Deductions 1,399(A) 1,478 -- --
---------- --------- -------- ----------
Balance, December 31, 1998 $ 2,489 $ 4,300 $ 16,428 $ 15,125
========== ========= ======== ==========
</TABLE>
Notes:
(A) Includes write-off of accounts receivable (net of bad debt recoveries) and
inventories.
(B) Includes write-off of Goodwill in accordance with FAS 121, Impairment of
Long-Lived Assets.
65
<PAGE>
Item 9 - Changes in and Disagreements on Accounting and
Financial Disclosure.
Not applicable.
66
<PAGE>
PART III
Item 10 - Directors and Executive Officers of the Registrant.
Information under the heading "Election of Directors" in the Proxy Statement for
the annual meeting of stockholders to be held April 27, 1999 (the "1999 Annual
Proxy Statement") is incorporated by reference herein.
Item 11 - Executive Compensation
Information under the heading "Executive Compensation" in the 1999 Annual Proxy
Statement is incorporated by reference herein.
Item 12 - Security Ownership of Certain Beneficial Owners and Management.
Information under the heading "Security Ownership of Certain Beneficial Owners
and Management" in the 1999 Annual Proxy Statement is incorporated by reference
herein.
Item 13 - Certain Relationships and Related Transactions.
Information under the heading "Certain Transactions" in the 1999 Annual Proxy
Statement is incorporated by reference herein.
67
<PAGE>
PART IV
Item 14 - Exhibits, Financial Statement Schedules, and Reports
on Form 10-K.
(a) Documents Filed as a Part of the Report:
1. Financial Statements.
The information concerning financial
statements called for by Item 14 of Form 10-K is set forth in Part II, Item 8 of
this annual report on Form 10-K.
2. Financial Statement Schedules.
The information concerning financial
statement schedules called for by Item 14 of Form 10-K is set forth in Part II,
Item 8 of this annual report on Form 10-K.
3. Exhibits, Including Those Incorporated by
Reference.
The following is a list of exhibits filed as
part of this annual report on Form 10-K. Where so indicated by footnote,
exhibits which were previously filed are incorporated by reference. For exhibits
incorporated by reference, the location of the exhibit in the previous filing is
indicated in parentheses.
Plan of Acquisition, Reorganization, Arrangement,
Liquidation or Succession
2.1 Agreement and Plan of Conversion dated as of
July 31, 1997 (4) (Exhibit 2.1)
Articles of Incorporation and By-Laws
3.1 Amended Bylaws of the Company dated as of
September 24, 1998 (1) (Exhibit 3.1)
3.2 Amended and Restated Certificate of
Incorporation of the Company (5) (Exhibit 3.1)
3.3 Bylaws of the Company (5) (Exhibit 3.2)
68
<PAGE>
Instruments Defining the Rights of Security Holders,
Including Indentures
4.1 Amended and Restated Declaration of Trust (5) (Exhibit
4.1)
4.2 Indenture between the Company and the Bank of New York (5)
(Exhibit 4.2)
4.3 Preferred Securities Guarantee (5) (Exhibit 4.3)
4.4 Rights Agreement between the Company and the Registrar and
Transfer Company (5) (Exhibit 10.5)
4.5 **Amended and Restated Note Purchase Agreement dated
December 31, 1998 between Teachers Insurance and Annuity
Association and SunSource Inc. and its Subsidiaries,
Exhibit 10.2
Material Contracts
10.1 **Second Amended and Restated Credit Agreement dated
December 31, 1998, among First Union National Bank, for
itself and as agent, The Bank of Nova Scotia, for itself
and as documentation agent, and SunSource Inc. and its
Subsidiaries Exhibit 10.1
10.2 *Deferred Compensation Plan for Key Employees of SDI
Operating Partners, L.P. (2) Exhibit 10.1
10.3 *SunSource Inc. 1998 Equity Compensation Plan (3) Exhibit
10.1
10.4 *SunSource Inc. Stock Compensation Plan for Non-Employee
Directors (3) Exhibit 10.2
10.5 *Sun Distributors Incentive Compensation Plan. (6)
(Exhibit 10.5)
10.6 *Sun Distributors, Inc. Long-Term Performance Award Plan.
(As Amended June 1985) (6) (Exhibit 10.6)
10.7 *SDI Operating Partners, L.P. Deferred Compensation Plan
for Division Presidents (As amended September 13, 1993).
(7) (Exhibit 10.7)
10.8 *SDI Operating Partners, L.P. Long-Term Performance Share
Plan dated January 1, 1994. (7) (Exhibit 10.8)
10.9 *Deferred Compensation Plan for Key Employees of SDI
Operating Partners, L.P. (2) (Exhibit 10.4)
69
<PAGE>
Subsidiaries of the Registrant
**21.1 Subsidiaries
Independent Accountants
**23.1 Consent of PricewaterhouseCoopers LLP
Financial Data Schedules
**27.1 Summary financial information as of and for the year
ended December 31, 1998.
------------------------
(1) Filed as an exhibit to Quarterly Report on Form
10-QA for the Quarter ended September 30, 1998.
(2) Filed as an exhibit to Registration Statement No.
333-63409 on Form S-8.
(3) Filed as an exhibit to Quarterly Report on Form 10-Q
for the Quarter ended March 31, 1998.
(1) Filed as an exhibit to Registration Statement No.
333-19077 on Form S-4.
(2) Filed as an exhibit to Registration Statement No.
333-44733 on Form S-2.
(3) Filed on March 31, 1993, as an exhibit to Annual
Report on Form 10K for the year ended December 31,
1992.
(4) Filed on March 31, 1994, as an exhibit to Annual
Report on Form 10K for the year ended December 31,
1993.
* Management contract or compensatory plan or
arrangement required to be filed as an Exhibit
pursuant to Item 14(c) of this report.
** Filed herewith.
(b) Reports on Form 8-K.
None
70
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SUNSOURCE INC.
Date: March 29, 1999 By:/s/ Donald T. Marshall
-------------------------
Donald T. Marshall
Title: Chairman and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of l934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Each person in so signing also makes, constitutes and appoints Donald T.
Marshall and Joseph M. Corvino, and each of them, his true and lawful
attorney-in-fact, in his name, place and stead to execute and cause to be filed
with the Securities and Exchange Commission any or all amendments to this
report.
Signature Capacity Date
--------- -------- ----
/s/ Donald T. Marshall Principal Executive March 29, 1999
- ------------------------------ Officer and Director
Donald T. Marshall
/s/ Joseph M. Corvino Principal Financial March 29, 1999
- ------------------------------ Officer
Joseph M. Corvino
/s/ John J. Dabrowski Principal Accounting March 29, 1999
- ------------------------------ Officer
John J. Dabrowski
71
<PAGE>
/s/ O. Gordon Brewer, Jr. Director March 29, 1999
- ------------------------------
O. Gordon Brewer, Jr.
/s/ Norman V. Edmonson Director March 29, 1999
- ------------------------------
Norman V. Edmonson
/s/ Arnold S. Hoffman Director March 29, 1999
- ------------------------------
Arnold S. Hoffman
/s/ Robert E. Keith, Jr. Director March 29, 1999
- ------------------------------
Robert E. Keith, Jr.
/s/ John P. McDonnell Director March 29, 1999
- ------------------------------
John P. McDonnell
/s/ Donald A. Scott Director March 29, 1999
- ------------------------------
Donald A. Scott
/s/ Geoffrey C. Shepard Director March 29, 1999
- ------------------------------
Geoffrey C. Shepard
/s/ Francis G. Ziegler Director March 29, 1999
- -----------------------------
Francis G. Ziegler
72
<PAGE>
================================================================================
SUNSOURCE INC.
AND ITS SUBSIDIARIES SET FORTH
ON SCHEDULE 1 HERETO, AS OBLIGORS,
AND ITS SUBSIDIARIES SET FORTH
ON SCHEDULE 2 HERETO, AS GUARANTORS
----------------
AMENDED AND RESTATED
NOTE PURCHASE AGREEMENT
Dated as of December 31, 1998
----------------
7.66% Senior Notes due 2002
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
BACKGROUND........................................................................................................1
SECTION 1. ISSUANCE OF NOTES.....................................................................................2
1.1. Authorization...................................................................2
1.2. Issuance of Note; the Closing...................................................2
1.3. Representations of the Purchaser................................................2
1.4. Surcharge Rate..................................................................3
SECTION 2. REPRESENTATIONS OF THE COMPANY AND SUBSIDIARIES.......................................................3
2.1. Organization and Good Standing..................................................3
2.2. Power and Authority; Validity of Agreement......................................3
2.3. No Violation of Laws or Agreements..............................................4
2.4. Material Contracts..............................................................4
2.5. Compliance......................................................................4
2.6. Litigation......................................................................4
2.7. Title to Assets.................................................................4
2.8. Capital Stock...................................................................5
2.9. Accuracy of Information; Full Disclosure........................................5
2.10. Taxes and Assessments...........................................................5
2.11. Indebtedness....................................................................6
2.12. Management Agreements...........................................................6
2.13. Subsidiaries and Investments....................................................6
2.14. ERISA...........................................................................6
2.15. Fees and Commissions............................................................7
2.16. No Extension of Credit for Securities...........................................7
2.17. Hazardous Wastes, Substances and Petroleum Products.............................8
2.18. Solvency........................................................................8
2.19. Investment Company Act..........................................................9
2.20. Private Offering by the Company.................................................9
2.21. Solvency........................................................................9
2.22. Foreign Assets Control Regulations..............................................9
2.23. Year 2000 Compliance............................................................9
SECTION 3. CONDITIONS OF CLOSING.................................................................................9
3.1. Proceedings Satisfactory.........................................................9
3.2. Intentionally Omitted...........................................................10
3.3. Opinion of Counsel for the Company..............................................10
3.4. Authorization Documents; Officer's Certificate..................................10
3.5. Legality........................................................................10
3.6. Financial Information...........................................................10
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
3.7. Private Placement Number........................................................10
3.8. Credit Agreement................................................................10
3.9. Intentionally Omitted...........................................................10
3.10. Insurance.......................................................................10
3.11. Junior Subordinated Debentures..................................................11
SECTION 4. PREPAYMENT OF THE NOTES..............................................................................11
4.1. Mandatory Repayments of the Notes...............................................11
4.2. Optional Prepayment of the Notes................................................11
4.3. Notice of Prepayment; Make-Whole Computations...................................11
4.4. Allocation of Prepayments.......................................................12
4.5. Surrender of Notes; Notation Thereon............................................12
4.6. Purchase of Notes...............................................................12
4.7. Special Prepayment for Change of Control........................................12
4.8. Prepayment in Connection with a Sale of Material Assets.........................13
SECTION 5. AFFIRMATIVE COVENANTS................................................................................13
5.1. Existence and Good Standing.....................................................13
5.2. Quarterly Financial Statements..................................................14
5.3. Annual Financial Statements.....................................................14
5.4. Annual Budget...................................................................14
5.5. Public Information..............................................................14
5.6. Books and Records...............................................................15
5.7. Properties; Insurance...........................................................15
5.8. Notices.........................................................................15
5.9. Taxes...........................................................................15
5.10. Compliance; Notification........................................................15
5.11. ERISA...........................................................................16
5.12. Capitalization Ratio............................................................16
5.13. Fixed Charge Coverage Ratio.....................................................17
5.14. Leverage Ratio..................................................................17
5.15. Management Changes..............................................................17
5.16. Subsequent Credit Terms.........................................................17
5.17. Use of Proceeds.................................................................17
5.18. Transactions Among Affiliates...................................................18
5.19. Joinder of Subsidiaries.........................................................18
5.20. Year 2000 Compliance............................................................18
5.21. Supporting Information..........................................................18
5.22. Other Information...............................................................18
SECTION 6. NEGATIVE COVENANTS. ................................................................................18
</TABLE>
-ii-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
6.1. Indebtedness....................................................................18
6.2. Guaranties......................................................................19
6.3. Loans...........................................................................19
6.4. Liens and Encumbrances..........................................................19
6.5. Additional Negative Pledge......................................................20
6.6. Restricted Payments.............................................................20
6.7. Transfer of Assets..............................................................20
6.8. Acquisitions and Investments....................................................21
6.9. Use of Proceeds.................................................................21
6.10. Amendment of Documents..........................................................21
6.11. Payment of Loan. ..............................................................21
SECTION 7. DEFINITIONS..........................................................................................22
7.1. Definitions.....................................................................22
7.2. Rules of Construction...........................................................31
SECTION 8. EVENTS OF DEFAULT; REMEDIES..........................................................................32
8.1. Events of Default...............................................................32
8.2. Acceleration; Suits for Enforcement.............................................33
8.3. Remedies Cumulative.............................................................34
8.4. Remedies Not Waived.............................................................34
SECTION 9. GUARANTY.............................................................................................34
9.1. Guaranty........................................................................34
9.2. Bankruptcy......................................................................35
9.3. Nature and Term of Guaranty.....................................................35
9.4. Rights and Remedies.............................................................35
9.5. Actions by Holders of the Notes Not Affecting Guaranty..........................35
9.6. Payment in Accordance with Notes and this Agreement.............................36
9.7. Payments Under Guaranty.........................................................36
9.8. Waivers and Modifications.......................................................36
9.9. Waiver..........................................................................36
9.10. Subordination of Rights of Subrogation..........................................37
9.11. No Setoff by Guarantors.........................................................37
9.12. Continuing Guaranty; Transfer of Note...........................................37
9.13. Representations and Warranties; Covenants.......................................37
SECTION 10. REGISTRATION, TRANSFER AND EXCHANGE OF NOTES........................................................38
SECTION 11. LOST, ETC., NOTES...................................................................................38
</TABLE>
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SECTION 12. AMENDMENT AND WAIVER................................................................................39
SECTION 13. HOME OFFICE PAYMENT.................................................................................40
SECTION 14. LIABILITIES OF THE PURCHASER........................................................................40
SECTION 15. TAXES...............................................................................................40
SECTION 16. MISCELLANEOUS.......................................................................................41
16.1. Expenses.............................................................................41
16.2. Reliance on and Survival of Representations..........................................41
16.3. Successors and Assigns...............................................................41
16.4. Notices..............................................................................42
16.5. Reproduction of Documents............................................................42
16.6. Law Governing........................................................................42
16.7. Headings.............................................................................42
16.8. Counterparts.........................................................................42
SCHEDULE 1 - The Subsidiaries Party to this Agreement as Obligors
SCHEDULE 2 - The Subsidiaries Party to this Agreement as Guarantors
SCHEDULE 3 - Manner of Payment and Notice
EXHIBIT A - Form of Note
EXHIBIT B - Disclosures of the Company and its Subsidiaries
EXHIBIT C - Covenant Compliance Certificate
</TABLE>
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SUNSOURCE INC.
AND ITS SUBSIDIARIES SET FORTH ON
SCHEDULE 1 HERETO, AS OBLIGORS, AND
ITS SUBSIDIARIES SET FORTH ON SCHEDULE 2
HERETO, AS GUARANTORS
One Logan Square
Philadelphia, Pennsylvania 19103
AMENDED AND RESTATED
NOTE PURCHASE AGREEMENT
Philadelphia, Pennsylvania
as of December 31, 1998
TEACHERS INSURANCE AND
ANNUITY ASSOCIATION OF AMERICA
730 Third Avenue
New York, NY 10017
Ladies and Gentlemen:
SUNSOURCE INC., a Delaware corporation (the "Company"), and
the Subsidiaries of the Company set forth on Schedule 1 hereto (the
"Subsidiaries" and collectively with the Company, the "Obligors"), and certain
Subsidiaries of the Company set forth on Schedule 2 hereto (the "Guarantors"),
hereby agree with you as follows:
BACKGROUND.
The Company is a Delaware corporation, and each Obligor (other
than the Company) is either a direct or indirect subsidiary of the Company.
SDI Operating Partners, L.P., a Delaware limited partnership
("SDI"), issued Sixty Million Dollars ($60,000,000) in privately-placed notes
pursuant to the Existing Note Purchase Agreement, such notes having the benefit
of a guarantee from, among others, the Company.
SunSource Investment Company, Inc. ("SSICI") is a
newly-formed, wholly-owned holding company of the Company. SunSub A will become
a direct wholly-owned subsidiary of SSICI, which is a direct subsidiary of the
Company, in the 1998 Conversion. SunSub B has agreed to merge with and into
SunSub A, which will cause the existence of SDI
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and its general partner, SDI Partners I, L.P., a Delaware limited partnership
and a guarantor under the Existing Note Purchase Agreement ("SDIPI"), to cease
and the assets and liabilities of SDI to be owned by SunSub A. SunSub A is
forming four wholly-owned subsidiaries and will contribute the assets and
liabilities of SDI to them pursuant to the 1998 Conversion.
This Agreement amends and restates, replaces and supersedes
the Existing Note Purchase Agreement. All amounts outstanding under the Existing
Note Purchase Agreement are and shall be deemed to be outstanding under this
Agreement as of the Closing Date, and from and after the Closing Date, the
Obligors jointly and severally irrevocably and unconditionally assume the
obligations of SDI under the Existing Note Purchase Agreement and the notes
issued thereunder (in each case as amended and restated by this Agreement).
SECTION 1. ISSUANCE OF NOTES.
1.1. Authorization. The Company and the Obligors, on a joint
and several basis, have has duly authorized an issue of $60,000,000 aggregate
principal amount of their 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.
1.2. Issuance of Note; the Closing. The Obligors, on a joint
and several basis, shall issue to you and, subject to the terms and conditions
hereof, you shall acquire from the Obligors, Notes in the aggregate principal
amount of $60,000,000, at a price equal to 100% of such amount. The closing of
the issuance of Note by you hereunder shall be held at 10:00 a.m., Philadelphia
time, on December 31, 1998 (the "Closing Date") at the office of Pepper Hamilton
LLP, 3000 Two Logan Square, 18th and Arch Streets, Philadelphia, PA 19103. On
the Closing Date, the Obligors will deliver to you one or more Notes, in any
denominations (multiples of $1,000), in the aggregate principal amount to be
acquired by you, all as you may specify by timely notice 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
Obligors of such purchase price.
1.3. Representations of the Purchaser. You represent to the
Obligors as follows:
(a) You are acquiring the Notes to be acquired by you
on the Closing Date 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.
(b) 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
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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.
(c) You understand that the Notes have not been
registered under 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.
1.4. 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") 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.
SECTION 2. REPRESENTATIONS OF THE COMPANY AND SUBSIDIARIES.
Each Obligor represents and warrants to you, as to itself and each Subsidiary
party hereto, and each Subsidiary party hereto represents and warrants to you as
to itself that:
2.1. Organization and Good Standing. Each Obligor and each
Subsidiary is a corporation duly formed and validly existing under the laws of
its state of formation, and has the power and authority to carry on its business
as now conducted. Each Obligor and each Subsidiary is qualified to do business
in all other states in which the failure to qualify would have a Material
Adverse Effect.
2.2. Power and Authority; Validity of Agreement. Each Obligor
and each Subsidiary has the power and authority under the law of its state of
formation 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 each Obligor's and each Subsidiary's 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 each Obligor and each Subsidiary to the extent each is a party thereto,
enforceable in accordance with their terms.
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2.3. No Violation of Laws or Agreements. The making and
performance of this Agreement, the Notes, and the other documents, agreements
and actions required of each Obligor and each Subsidiary 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 any Obligor or Subsidiary or result in any breach or violation of, or
constitute a default under, any agreement or instrument by which any Obligor,
any Subsidiary or its respective property may be bound, including without
limitation the Credit Agreement and the Indenture.
2.4. Material Contracts. No Obligor or Subsidiary is a party
to or in any manner obligated under any contract material to its respective
business except this Agreement, the Notes, its organizational documents, the
Promissory Notes, the Credit Agreement, the Indenture, and the agreements
identified on Exhibit B hereto, and no material default exists under any of such
contracts.
2.5. Compliance. Each Obligor and each Subsidiary 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; each
Obligor and each Subsidiary possesses all the material franchises,
authorizations, patents, copyrights, trademarks, permits and licenses necessary
or required in the conduct of its respective business, 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 exemption 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 any Obligor's or any Subsidiary's 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.
2.6. 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 any Obligor's or any Subsidiary's knowledge or information, threatened
against any Obligor or any Subsidiary which, if adversely resolved, would be
reasonably likely to have a Material Adverse Effect.
2.7. Title to Assets. Except as set forth on Exhibit B hereto,
each Obligor and each Subsidiary has good and marketable title to substantially
all of its properties and assets as 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.
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2.8. Capital Stock. The number of shares and classes of the
capital stock of each Obligor and each Subsidiary and the ownership thereof,
effective upon the 1998 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.
2.9. Accuracy of Information; Full Disclosure.
(a) All information furnished to you concerning the
financial condition of SunSource Inc. and its Consolidated Subsidiaries,
including their annual audited financial statements for the period ending
December 31, 1997, and their unaudited financial statements for the period
ending September 30, 1998, copies of which have been furnished to you, have been
prepared in accordance with GAAP and fairly present the financial condition of
SunSource Inc. and its Consolidated Subsidiaries as of the dates and for the
periods covered and discloses liabilities of SunSource Inc. and its Consolidated
Subsidiaries required to be disclosed under GAAP and, except for the effect of
the 1998 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 Inc. and its Consolidated 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. Each Obligor and
each Subsidiary has disclosed to you in writing any and all facts which
materially and adversely affect the business, properties, operations or
condition, financial or otherwise, of any Obligor or any Subsidiary or any
Obligor's or any Subsidiary's ability to perform its respective obligations
under this Agreement and the Notes.
2.10. Taxes and Assessments.
(a) Each Obligor and each Subsidiary 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 each Obligor and each Subsidiary
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.
(b) Each Obligor and each Subsidiary 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
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<PAGE>
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 SDI Operating Partners, L.P. or SDIPI
have been audited. Except as set forth on Exhibit B hereto, no Obligor or
Subsidiary has entered into any agreement 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 an Obligor or a Subsidiary, and there are
no suits, actions, claims, investigations, inquiries or proceedings now pending
against any Obligor or any Subsidiary in respect of taxes, governmental charges
or assessments.
2.11. Indebtedness. No Obligor or Subsidiary has any 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 the financial statements of SunSource Inc. and its
Consolidated Subsidiaries 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 Obligors
and Subsidiaries ranks either pari passu or junior to the Indebtedness evidenced
by the Notes.
2.12. Management Agreements. No Obligor or Subsidiary is a
party to any other material management or consulting agreements for the
provision of services to the Company, except as described in Exhibit B hereto.
2.13. Subsidiaries and Investments. No Obligor or Subsidiary
has any 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.
2.14. ERISA. Each Plan maintained by any Obligor, Subsidiary
or 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:
(a) No Obligor, Subsidiary or ERISA Affiliate
maintains or contributes to or has maintained or contributed to any
multiemployer plan (as defined in Section 4001 of
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ERISA) under which any Obligor, Subsidiary or ERISA Affiliate could have any
withdrawal liability;
(b) No Obligor, Subsidiary or 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 any Obligor, Subsidiary or 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) No Obligor, Subsidiary or 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 any Obligor, Subsidiary
or ERISA Affiliate under any plan, program or arrangement providing
post-retirement life or health benefits; and
(f) The matters described on Exhibit B attached
hereto referencing clauses (a) through (e) of this Paragraph 2.14 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 Obligors and Subsidiaries 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.
2.15. Fees and Commissions. The Obligors and Subsidiaries 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.
2.16. No Extension of Credit for Securities. No Obligor or
Subsidiary is now, nor at any time has it been, engaged principally, or as one
of its important activities, in the business of extending or arranging for the
extension of credit, or for the purpose of purchasing or carrying any margin
stock or margin securities; nor will the proceeds of the Notes be used by any
Obligor or Subsidiary directly or indirectly, for such purposes.
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2.17. Hazardous Wastes, Substances and Petroleum Products.
Except as set forth in Exhibit B hereto:
(a) Each Obligor and each Subsidiary: (i) has
received all permits and filed all notifications necessary to carry on its
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) No Obligor or Subsidiary has 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 any Obligor or Subsidiary
or used in connection with the conduct of its business and operations.
(c) No Obligor or Subsidiary has 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.
2.18. Solvency. SunSource Inc. and its Consolidated
Subsidiaries are, on a consolidated basis, upon the 1998 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.
No creditor of the Company, any Subsidiary, SDI, SDIPI, SunSub A or SunSub B
would have a reasonable likelihood of prevailing with respect to any claim to
set aside payments to the holders of the Notes based on applicable fraudulent
conveyance principles. For purposes of this Paragraph 2.18, 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.
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2.19. Investment Company Act. No Obligor or Subsidiary is
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.
2.20. Private Offering by the Company. No Obligor or
Subsidiary, nor anyone acting on behalf of any Obligor or Subsidiary, 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. No Obligor or Subsidiary, nor anyone
acting on behalf of any Obligor or Subsidiary 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.
2.21. Solvency. Each Obligor 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).
2.22. 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).
2.23. Year 2000 Compliance. Obligors and Subsidiaries have
conducted a comprehensive review and assessment of their computer systems and
applications, microprocessor based goods and equipment owned or used by them in
their business and are making inquiry of their material suppliers, vendors and
customers, with respect to functionality before, during and after the year 2000
(the "Year 2000 Problem"). Obligors and Subsidiaries have prepared a plan
designed to ensure that all such systems, goods, equipment and products owned or
used by them and material to the conduct of their business will be Year 2000
Compliant in a timely manner. The Company's report on Form 10-Q for the quarter
ended September 30, 1998 describes such plan in all material respects. Obligors
reasonably believe, based on the foregoing review, assessment and inquiry that
the Year 2000 Problem will not result in a Material Adverse Effect.
SECTION 3. 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:
3.1. 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 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.
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3.2. Intentionally Omitted.
3.3. Opinion of Counsel for the Company. You shall have
received an opinion dated the Closing Date from Morgan, Lewis & Bockius LLP,
counsel for the Obligors and Subsidiaries, in form and substance satisfactory to
you.
3.4. 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.
3.5. 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.
3.6. Financial Information. The Company shall have furnished
to you: (i) cash flow projections for SunSource Inc. and its Consolidated
Subsidiaries on a consolidated basis, for the two (2) year period immediately
following the date hereof, satisfactory to you and certified as reasonable by
the chief financial officer or controller of the Company (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 two year period); (ii) financial projections for
SunSource Inc. and its Consolidated Subsidiaries for the period from the Closing
Date through December 31, 2001 on a consolidated basis satisfactory to you and
(iii) a certificate with respect to the matters set forth in Paragraph 2.19
hereof.
3.7. 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.
3.8. 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.
3.9. Intentionally Omitted.
3.10. 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.
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3.11. Junior Subordinated Debentures. The Company shall
provide you with (i) evidence satisfactory to you that: (a) the Junior
Subordinated Debentures shall, after the Closing Date, remain outstanding under
terms of subordination satisfactory to you; and (b) all required consents under
the Indenture or otherwise in connection with the Junior Subordinated Debentures
have been obtained and delivered and (ii) a duly executed copy of the
Reassignment and Reassumption Agreement in connection with the 1998 Conversion.
3.12. Other Documents. The Company shall provide you with such
additional documents as you reasonably may request.
SECTION 4. PREPAYMENT OF THE NOTES.
4.1. 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.
4.2. Optional Prepayment of the Notes.
(a) Upon notice given as provided in Paragraph 4.3,
the Company, on behalf of the Obligors, at their 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.
(b) Notwithstanding anything to the contrary in
Paragraph 4.2(a) above, the Company, on behalf of the Obligors, 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.
4.3. Notice of Prepayment; Make-Whole Computations.
(a) The Company, on behalf of the Obligors, 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, on behalf of the Obligors, 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).
(b) Three business days prior to any prepayment
pursuant to Paragraph 4.2, the Company, on behalf of the Obligors, will furnish
to each holder of a Note an Officer's
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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.
4.4. Allocation of Prepayments. In the event of any prepayment
of less than all of the outstanding Notes pursuant to Paragraph 4.2, the
Company, on behalf of the Obligors, 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.
4.5. Surrender of Notes; Notation Thereon. Subject to the
provisions of Section 13, the Company, on behalf of the Obligors, 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.
4.6. Purchase of Notes. The Company, on behalf of the
Obligors, will not, and will not permit any other Obligor or any Subsidiary 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.
4.7. Special Prepayment for Change of Control. Promptly and in
any event within five days after a Change of Control, the Company, on behalf of
the Obligors, 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.
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4.8. Prepayment in Connection with a Sale of Material Assets.
If at any time the Company, on behalf of the Obligors, 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' 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.
SECTION 5. AFFIRMATIVE COVENANTS. Each Obligor and each Subsidiary
covenants and agrees that so long as any Note shall be outstanding hereunder,
each Obligor and each Subsidiary will (and with respect to Paragraph 5.11, the
Obligors will cause each ERISA Affiliate) to:
5.1. Existence and Good Standing. Preserve and maintain its
existence as a corporation 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.
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5.2. 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 the Company 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.
5.3. Annual Financial Statements. Furnish each holder of a
Note within ninety (90) days after the close of each fiscal year commencing with
fiscal 1998 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 the Company's independent certified public
accountants have concurred) by an independent certified public accounting firm
satisfactory to the Required Holders; and the Company 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 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.
5.4. Annual Budget. Furnish to each holder of a Note, on or
before March 31 of each year, commencing with fiscal year 1999, an annual budget
of SunSource Inc. and its Consolidated Subsidiaries, showing net income and cash
flows of SunSource Inc. and its Consolidated Subsidiaries on a consolidated
basis for the twelve (12) month period ending on December 31 of each year.
5.5. 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
shareholders 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 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 the Company.
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5.6. 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 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 any Obligor or any
Subsidiary and also with outside auditors and accountants of any Obligor or any
Subsidiary.
5.7. 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, 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.
5.8. 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 the Company or the holder of
any Senior Indebtedness (as defined in the Indenture) in respect of Section
14.06 of the Indenture.
5.9. 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.
5.10. 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 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 any Obligor or any Subsidiary; 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.
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(b) With respect to the Environmental Control
Statutes, promptly notify each holder of a Note when, in connection with the
conduct of any Obligor's or Subsidiary's business(es) or operation(s), any
person (including, without limitation, EPA or any state or local agency)
provides oral or written notification to any Obligor or Subsidiary or any
Obligor or Subsidiary 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 any Obligor
or Subsidiary 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 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
any Obligor or Subsidiary, 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.
5.11. ERISA. (a) Comply, and cause any Plan maintained for the
employees of any Obligor or Subsidiary 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 any Obligor or Subsidiary 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 any Obligor's or Subsidiary's
properties or assets.
5.12. 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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5.13. 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 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
5.14. Leverage Ratio. Maintain on the last day of each fiscal
quarter a Leverage Ratio of not greater than 3.25:1.
5.15. 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.
5.16. Subsequent Credit Terms.
(a) 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 any Obligor or Subsidiary agrees to financial
covenants which are more restrictive to such Obligor or Subsidiary 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.
(b) Each Obligor and each Subsidiary hereby agrees
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.
5.17. Use of Proceeds. Use the proceeds of the Notes solely
for general corporate purposes, including working capital, acquisition
financing, and related reasonable transaction expenses.
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5.18. 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.
5.19. Joinder of Subsidiaries. If any Subsidiary or any newly
created or acquired Subsidiary (i) is or becomes a Material Subsidiary and (ii)
is not at such time of determination an Obligor or Guarantor, promptly notify
you of the same and cause such Material Subsidiary to execute joinder documents
in form and substance satisfactory to you, joining such Subsidiary under this
Agreement as either an Obligor or a Guarantor, which determination shall be made
in your discretion, and cause to be delivered such opinions and certificates as
you shall reasonably request.
5.20. Year 2000 Compliance. Take all action necessary to
assure that a Material Adverse Effect shall not result from any failure of
Obligors' computer systems and applications, micro-processor based goods and
equipment owned or used by them in their business to be Year 2000 Compliant; and
use reasonable best efforts to assure the Year 2000 Compliance of their material
vendors and suppliers or to assure that failures to be Year 2000 Compliant by
such vendors and suppliers will not have a Material Adverse Effect to the extent
that any such information shall not be included in the Company's periodic
reports filed with the Securities and Exchange Commission from time to time.
Obligors shall provide each holder of a Note any material updates or revisions
to its plan for Year 2000 Compliance referred to in Paragraph 2.23 and notice of
any material increase in the estimated costs to Obligors of achieving Year 2000
Compliance in accordance with such plan; and, at the request of any such holder,
Obligors shall provide such holder assurances acceptable to such holder
regarding the Year 2000 Compliance and/or contingency plans related thereto, of
Obligors and their material vendors and suppliers.
5.21. Supporting Information. Use reasonable efforts to obtain
from the Company's accountants such supporting opinions or information with
respect to the matters set forth in Paragraph 2.18 hereof as the holders of the
Notes shall reasonably request.
5.22. Other Information. Provide you with any other documents
and information, financial or otherwise, reasonably requested by you from time
to time.
SECTION 6. NEGATIVE COVENANTS. So long as any Note shall be outstanding
hereunder, each Obligor and each Subsidiary covenants and agrees that it will
not:
6.1. 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 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
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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 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 any Obligor by any Obligor; (vii)
borrowings from any Obligor by any Subsidiary which is not an Obligor, to the
extent the Obligors are permitted to make such loans pursuant to Paragraph
6.3(ii) or (iii) hereof; (viii) Indebtedness outstanding on the date hereof and
disclosed on Exhibit B hereto, but without any increase in the outstanding
principal amount thereof; (ix) Indebtedness of non- Obligor, non-Guarantor
Subsidiaries incorporated in a jurisdiction in the United States, up to Ten
Million Dollars ($10,000,000) principal amount outstanding at any time; (x)
Indebtedness of non-Obligor, non-Guarantor Subsidiaries incorporated in a
jurisdiction outside of the United States, up to 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 (xi)
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
non-Obligor, non-Guarantor Subsidiaries under clauses (v), (ix) and (x) hereof
shall in no event exceed in the aggregate outstanding at any time Ten Million
Dollars ($10,000,000).
6.2. 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 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.
6.3. Loans. Make any loans or advances to others, provided
that any Obligor may make loans and advances to (i) any other Obligor; (ii)
non-Obligor, non-Guarantor Subsidiaries incorporated in a jurisdiction in the
United States; (iii) non-Obligor, non-Guarantor Subsidiaries incorporated in a
jurisdiction outside of the United States, such that loans and advances from all
Obligors to all such non-Obligor, non-Guarantor Subsidiaries shall not exceed
Ten Million Dollars ($10,000,000) in aggregate outstanding principal amount at
any time, and (iv) its sales personnel in the ordinary course of business.
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6.4. 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 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.
6.5. 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.
6.6. 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) the Company may pay dividends on its common stock; and (ii) the Company may
make regularly scheduled interest payments on the Junior Subordinated Debentures
as in effect on the date hereof; 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 the Company and delivered to each holder of a Note, then the Company may
purchase or redeem its common stock or purchase Trust Preferred Securities,
provided a like amount of the Junior Subordinated Debentures are simultaneously
purchased.
6.7. 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, the Obligors 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); (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 Obligors on account of such sale(s), to the extent such sale(s),
in the
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aggregate, exceed Fifteen Million Dollars ($15,000,000) and (iii) consummate the
1998 Conversion.
6.8. 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 Material Subsidiary not listed on Schedule 1
or 2 hereto, except if the Subsidiary executes a joinder to this Agreement and
the Notes to become a joint and several Obligor hereunder or a Guarantor
hereunder, in each case pursuant to Paragraph 5.19 hereof; (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 any Subsidiary may be merged into the Company if the
Company is the surviving entity and any Subsidiary may merge into any other
Subsidiary; 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, Obligors 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 Obligors.
Obligors shall provide to you a financial projection, including an income
statement and cash flow, from the date of any proposed acquisition with a
purchase 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 and a pro forma combined historical balance sheet as
of the end of the most recent fiscal quarter for the Company and the target.
6.9. 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.
6.10. Amendment of Documents. (a) Without the consent of the
Required Holders, which consent shall not be withheld unreasonably, amend or
permit any amendments to: any Obligor's or Subsidiary's organizational
documents; 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), 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.
6.11. 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.
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SECTION 7. DEFINITIONS.
7.1. Definitions. When used in this Agreement, the following
terms shall have the respective meanings set forth below.
"1997 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.
"1998 Conversion" means: (i) the creation of SunSource
Investment Company, Inc. ("SSICI"), a wholly-owned holding company of the
Company, of which SunSub A will become a direct, wholly-owned subsidiary; (ii)
the merger of SunSub B with and into SunSub A, causing the existence of SDI
Operating Partners, L.P. and its general partner, SDIPI, to cease and the assets
and liabilities of both partnerships to be owned by SunSub A and (iii) the
formation by SunSub A of four wholly-owned subsidiaries to which it will
contribute the assets and liabilities of SDI Operating Partners, L.P.
"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 the Company; (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 the Company or an Affiliate; (iii)
any entity which directly or indirectly is under common control with the
Company; (iv) any officer, director or partner of the Company 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 First Union National Bank, successor by merger
to 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 Amended and Restated Note Purchase
Agreement and all exhibits and schedules hereto, as each may be amended,
modified or supplemented from time to time.
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"Bank" means individually and "Banks" means collectively, the
banks identified on Schedule 3 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: (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 the Company (or other securities convertible into such securities)
representing twenty percent (20%) or more of the combined voting power of all
securities of the Company entitled to vote in the election of directors other
than 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 the Company shall cease for any reason to consist of (1)
individuals who on the date hereof are serving as directors of the Company 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 the Company. For purposes of
clause (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
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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 (i) above.
"Closing Date" means 11:59 p.m. on December 31, 1998.
"Code" means the Internal Revenue Code of 1986, as amended
from time to time and regulations in effect from time to time.
"Credit Agreement" means the Second Amended and Restated
Credit Agreement dated December 31, 1998 among the Company and its Subsidiaries
set forth on Schedule 1 thereto as Borrowers, the Company's Subsidiaries set
forth on Schedule 2 thereto, as Guarantors, Agent, for itself and as Agent, the
Bank of Nova Scotia, Agent, for itself and as Documentation Agent, and the Banks
set forth on Schedule 3 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) Interest Expense (including
all interest paid on the Junior Subordinated Debentures (whether paid in cash or
in kind)), (ii) all provisions for income taxes, (iii) depreciation and
amortization expense, and (iv) extraordinary losses, minus extraordinary gains,
as each such item is determined in accordance with GAAP.
"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.
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"Environmental Material Adverse Effect" means a material
adverse effect on the business, financial condition on prospects of Obligors and
Subsidiaries 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 Amended and
Restated Credit Agreement among SDI Operating Partners L.P. and its Subsidiaries
as set forth on Schedule 1 attached thereto, as Borrowers, SDIPI, the Company,
SunSub A Inc. and SunSub B Inc., as Guarantors, Agent, 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 dated as of September 30, 1997.
"Existing Note Purchase Agreement" means that Note Purchase
Agreement dated as of September 30, 1997, as amended, issued by SDI Operating
Partners, L.P. for Sixty Million Dollars ($60,000,000) 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) rent expense;
(iii) scheduled maturities paid on Funded Debt (excluding the Loan); and (iv)
cash dividends paid by the Company, 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
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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.
"Guarantors" means, individually and collectively, those
Subsidiaries set forth on Schedule 2 attached hereto 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.
"Indenture" means the Indenture dated as of September 5, 1997
between the Company and Bank of New York, as trustee, providing for the issuance
of the Junior Subordinated Debentures.
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"Junior Subordinated Debentures" means the unsecured
subordinated obligations of the Company which were deposited in the Trust as
trust assets upon the 1997 Conversion and the terms of which are included in the
Indenture.
"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 Statistical Release
H.15(519), that became publicly available at least four Business Days prior to
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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 and Subsidiaries
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 and Subsidiaries
taken as a whole as a result of any condition, circumstance or contingency,
either singly or in the aggregate.
"Material Subsidiary" means any Subsidiary which either (i)
comprised five percent (5%) or more of the assets of SunSource Inc. and its
Consolidated Subsidiaries as of the most recent date for which a balance sheet
has been delivered (or is required to have been delivered) hereunder or (ii) was
responsible for five percent (5%) or more of EBITDA for the most recent Rolling
Period.
"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
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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.
"Officer's Certificate" means a certificate signed on behalf
of the Company by the chief financial officer or controller of the Company.
"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.
"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.
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"Restricted Payments" means (i) any dividend or distribution
on, or the purchase, redemption, prepayment or other retirement of the common
securities of the Company and (ii) the payment of principal or interest on or
the purchase, redemption, prepayment or other retirement of the Junior
Subordinated Debentures.
"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 any Obligor's or any Subsidiary's assets in transactions (not
related to the 1998 Conversion) in which the total consideration paid or payable
to any Obligor or Subsidiary (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 set forth on
Schedule 1 attached hereto are, collectively with the Company, the Obligors, and
those Subsidiaries of the Company set forth on Schedule 2 attached hereto are
the Guarantors.
"SunSource Inc." means the Company, SunSource Inc., a Delaware
corporation.
"SunSource Inc. and its Consolidated Subsidiaries" means the
Company 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.
"Total Assets" means, as of any date of determination, all
assets of SunSource Inc. and its Consolidated Subsidiaries, as set forth on
SunSource Inc. and its Consolidated Subsidiaries' financial statements most
recently delivered to you pursuant to Paragraphs 3.6, 5.2 and 5.3 hereof, as
defined in accordance with GAAP.
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"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. and its Consolidated Subsidiaries'
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 the Company.
"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.
"Year 2000 Compliant" means, as to any computer system or
application or micro-processor dependent good or equipment, that it is designed
and intended to be used prior to, during and after the calendar year 2000 AD and
that it will operate as designed and intended during each such time period
without error relating to date data or date information, specifically including
any error relating to, or the product of, date data or date information that
represents or references different centuries or more than one century.
7.2. 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 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
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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
this Section 7, when modified by the word "Consolidated" shall have the meaning
given to such term herein as to the Company 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 the Company in accordance with GAAP.
SECTION 8. EVENTS OF DEFAULT; REMEDIES.
8.1. Events of Default. Each of the following events shall be
an Event of Default hereunder:
(a) If any Obligor or Guarantor 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;
(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 Obligor 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 5.12 through 5.14
or Section Six hereof;
(e) If any Obligor 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 Obligor having actual knowledge of
such default, and (ii) notice thereof to the Company given by any holder of a
Note;
(f) [Intentionally omitted];
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(g) If custody or control of any substantial part of
the property of any of the Obligor 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 Obligor or Guarantor as now conducted;
(h) If any Obligor 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 Obligor; if any order for
relief is entered relating to any of the foregoing proceedings; if any Obligor
or Guarantor shall call a meeting of its creditors with a view to arranging a
composition or adjustment of its debts; or if any Obligor or Guarantor shall by
any act or failure to act indicate its consent to, approval of or acquiescence
in any of the foregoing;
(i) 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 Obligor or
Guarantor 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;
(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 Obligor or
Guarantor 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 the Company 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.
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8.2. 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 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.
8.3. 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.
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<PAGE>
8.4. 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.
SECTION 9. GUARANTY.
9.1. 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"), 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").
9.2. 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.
9.3. 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).
9.4. 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
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<PAGE>
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.
9.5. 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.
9.6. 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.
9.7. Payments Under Guaranty. All payments by Guarantors
hereunder shall be made in the manner set forth on Schedule 3 hereto.
9.8. 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
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<PAGE>
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.
9.9. 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 Nine, except notice of demand
for payment hereunder.
9.10. 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
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.
9.11. 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 any of the Obligors or any holder of
the Notes shall be available hereunder to Guarantors.
9.12. 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
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<PAGE>
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.
9.13. 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 10. 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 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.
SECTION 11. 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
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<PAGE>
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.
SECTION 12. 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:
(1) (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,
(2) extend to or affect any obligation not expressly waived
or impair any right consequent thereon, and
(3) 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
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<PAGE>
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.
SECTION 13. 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 3 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.
SECTION 14. 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.
SECTION 15. 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. In addition and not in
limitation of the
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<PAGE>
foregoing, the Obligors jointly and severally agree to indemnify and hold each
holder of a Note free and harmless from and against any federal, state or local
income or franchise taxes or any interest, penalties, or additions to tax with
respect thereto, that are incurred by any holder of a Note in whole or in part
by reason of any assumption by the Obligors of the obligations under the
Existing Note Purchase Agreement and the Notes issued thereunder or the receipt
of any payment in respect of such taxes or other amounts. The obligations of the
Company under this Section shall survive the payment of the Notes.
SECTION 16. MISCELLANEOUS.
16.1. 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 LLP which are reflected in the statements 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).
16.2. 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 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.
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<PAGE>
16.3. 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.
16.4. 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 3 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.
16.5. 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.
16.6. Law Governing. This Agreement and the Notes shall be
governed by and construed in accordance with the laws of the State of New York.
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16.7. Headings. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect any of the
terms hereof.
16.8. 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.
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<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 and its Subsidiaries.
Very truly yours,
SUNSOURCE INC.
By:____________________________________
Name: Joseph M. Corvino
Title: Vice President - Finance
SUNSOURCE INVESTMENT COMPANY, INC.
By:____________________________________
Name: Joseph M. Corvino
Title: Vice President - Finance
SUNSUB A INC.
By:____________________________________
Name: Joseph M. Corvino
Title: Vice President - Finance
THE HILLMAN GROUP, INC.
By:____________________________________
Name: Joseph M. Corvino
Title: Vice President - Finance
[EXECUTIONS CONTINUED]
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<PAGE>
HARDING GLASS, INC.
By:____________________________________
Name: Joseph M. Corvino
Title: Vice President - Finance
SUNSOURCE INDUSTRIAL SERVICES
COMPANY, INC.
By:____________________________________
Name: Joseph M. Corvino
Title: Vice President - Finance
SUNSOURCE CORPORATE GROUP, INC.
By:____________________________________
Name: Joseph M. Corvino
Title: Vice President - Finance
KAR PRODUCTS INC.
By:____________________________________
Name: Joseph M. Corvino
Title: Vice President - Finance
SUNSOURCE INVENTORY MANAGEMENT
COMPANY, INC.
By:____________________________________
Name: Joseph M. Corvino
Title: Vice President - Finance
[EXECUTIONS CONTINUED]
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<PAGE>
SUNSOURCE TECHNOLOGY SERVICES INC.
By:____________________________________
Name: Joseph M. Corvino
Title: Vice President - Finance
The foregoing Agreement is
hereby accepted as of the date
first above written:
TEACHERS INSURANCE AND
ANNUITY ASSOCIATION OF
AMERICA
By: ___________________________
Name:
Title:
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SCHEDULE I
SUBSIDIARIES OF SUNSOURCE INC.
THAT ARE OBLIGORS UNDER THE NOTE PURCHASE AGREEMENT
SunSource Investment Company, Inc.
SunSub A Inc.
The Hillman Group, Inc.
Harding Glass, Inc.
SunSource Industrial Services Company, Inc.
SunSource Corporate Group, Inc.
SunSource Inventory Management Company, Inc.
SunSource Technology Services Inc.
Kar Products Inc.
<PAGE>
SCHEDULE II
SUBSIDIARIES OF SUNSOURCE INC.
THAT ARE GUARANTORS UNDER THE NOTE PURCHASE AGREEMENT
None
<PAGE>
SCHEDULE 3
MANNER OF PAYMENT AND NOTICE
<TABLE>
<CAPTION>
Principal Amount of
Name and Address of Purchaser Notes to be Purchased
- ----------------------------- ---------------------
<S> <C>
TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA $60,000,000
XVII. All payments on account of the Notes shall be made in immediately
available funds prior to 12:00 noon (New York time) on the due date by
electronic funds transfer through the Automated Clearing House System
identifying each payment as to:
The Chase Manhattan Bank
ABA No. 021-000-021
New York, New York
Account of: Teachers Insurance and Annuity
Association of America
Account Number: 900-9-000200
For Further Credit to Account Number G07040
XVIII. Contemporaneous with the above electronic funds transfer payment, written
confirmation of each such payment setting forth: (a) the full name, private
placement number, interest rate and maturity date of the Notes; (b) allocation
of payment between principal, interest and Make-Whole Amount; and (c) the name
and address of the bank from which such electronic funds transfer was sent shall
be delivered, mailed or faxed to:
Teachers Insurance and Annuity Association
of America
730 Third Avenue
New York, NY 10017
Attention: Securities Accounting Division
Telephone Number: (212) 916-6004
Facsimile Number: (212) 916-6955
XIX. All other communications shall be delivered or mailed to:
Teachers Insurance and Annuity
Association of America
730 Third Avenue
New York, NY 10017
Attention: Securities Division,
Private Placements
General Telephone Number: (212) 490-9000
Facsimile Number: (212) 916-6901
XX. Taxpayer I.D. Number: 13-1624203
</TABLE>
<PAGE>
EXHIBIT A
SUNSOURCE INC. AND ITS SUBSIDIARIES SET FORTH ON
SCHEDULE 1 TO THE NOTE PURCHASE AGREEMENT
SENIOR NOTE DUE 2002
PPN: ____________
Note No. [Date]
$
FOR VALUE RECEIVED, the undersigned, SUNSOURCE INC.,
a corporation organized and existing under the laws of Delaware (herein called
the "Company") and its subsidiaries set forth on Schedule 1 to the Note Purchase
Agreement referred to below (together with the Company, the "Obligors"), hereby
jointly and severally promise 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 December 30, 1998, 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 Amended and Restated Note Purchase Agreement dated as of
December 31, 1998 between the Obligors, the Subsidiaries of the Company set
forth on Schedule 2 thereto, as Guarantors, and Teachers Insurance and Annuity
Association of America (the "Note Purchase Agreement"), 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.
<PAGE>
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 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.
SUNSOURCE, INC.
By:______________________________
Name:
Title:
SUNSOURCE INVESTMENT COMPANY, INC.
By:______________________________
Name:
Title:
SUNSUB A INC.
By:______________________________
Name:
Title:
THE HILLMAN GROUP, INC.
By:______________________________
Name:
Title:
<PAGE>
[EXECUTIONS CONTINUED]
HARDING GLASS INC.
By:______________________________
Name:
Title:
SUNSOURCE INDUSTRIAL SERVICES
COMPANY, INC.
By:______________________________
Name:
Title:
SUNSOURCE CORPORATE GROUP, INC.
By:______________________________
Name:
Title:
KAR PRODUCTS INC.
By:______________________________
Name:
Title:
SUNSOURCE INVENTORY MANAGEMENT
COMPANY, INC.
By:______________________________
Name:
Title:
SUNSOURCE TECHNOLOGY SERVICES INC.
By:_______________________________
Name:
Title:
<PAGE>
EXHIBIT B Page 1 of 4
DISCLOSURE PURSUANT TO REPRESENTATIONS AND WARRANTIES
2.4 Material Contracts
None
2.5 Compliance
None
2.6 Litigation
On February 27, 1996, a lawsuit was filed against the Company by
the buyer of its Dorman Products division, R&B, Inc. ("R&B") for
alleged misrepresentation of certain facts by the Company upon
which R&B allegedly based its offer to purchase Dorman. The
complaint seeks damages of approximately $21,000,000, although
the Company believes that any recovery by R&B will be
substantially lower. In 1998, the Company and R&B agreed to an
arbitration process with respect to certain unresolved
post-closing adjustments. In the third quarter the Company
recorded a pre-tax charge of $1,300,000 which management
estimates is the Company's maximum exposure related to these
post-closing issues. On December 4, 1998 a hearing was held by
the arbitrator on these matters and his decision is expected by
January 7, 1998. It is unclear what impact the arbitration
decision will have on the ultimate resolution of this
litigation. R&B has offered to settle the arbitration and
litigation for the amount of $10,000,000. The Company is in the
process of determining its response to this settlement offer but
would not expect to exceed the amount of the reserve indicated
above.
2.7 Title to Assets
See the Attached Schedule of Indebtedness and Obligations for
Secured Assets and Lease Obligations as of November 30, 1998
also as described in Notes 9, 10 and 11 to Consolidated
Financial Statements of the Company and Subsidiaries as of and
for the period ended December 31, 1997, previously furnished to
the holder of the Note.
<PAGE>
2.8 Capital Stock Page 2 of 4
The number of shares and classes of capital stock of each
Borrower and each Subsidiary and the ownership thereof effective
upon the 1998 Conversion are as follows:
Ownership of the Company
Authorized Shares: 1,000 shares of Preferred Stock, $.01 par
value per share 20,000,000 shares of Common Stock , $.01 par
vaule per share
Outstanding: Preferred stock: none
Common stock: 6,756,129 shares (directors and executive officers
ownership is approximately 21% of shares outstanding).
Treasury: 461,100 common shares.
Ownership of SunSource Investment Company, Inc.
Authorized Shares: 100 shares of Common Stock, $.01 par value
per share Outstanding: 100 shares issued to SunSource, Inc.
Ownership of SunSub A Inc.
Authorized Shares: 100 shares of Common Stock, $.01 par value
per share Outstanding: 100 shares issued to SunSource Investment
Company, Inc.
Ownership of The Hillman Group, Inc.
Authorized Shares: 100 shares of Common Stock, $.01 par value
per share Outstanding: 100 shares issued to SunSub A Inc.
Ownership of Harding Glass, Inc.
Authorized Shares: 100 shares of Common Stock, $.01 par value
per share Outstanding: 100 shares issued to SunSub A Inc.
Ownership of SunSource Industrial Services Company, Inc.
Authorized Shares: 100 shares of Common Stock, $.01 par value
per share Outstanding: 100 shares issued to SunSub A Inc.
Ownership of SunSource Corporate Group, Inc.
Authorized Shares: 100 shares of Common Stock, $.01 par value
per share Outstanding: 100 shares issued to SunSub A Inc.
Ownership of SunSource Inventory Management Company, Inc.
Authorized Shares: 100 shares of Common Stock, $.01 par value
per share Outstanding: 100 shares issued to SunSource Industrial
Services Company, Inc.
<PAGE>
2.8 Capital Stock, continued Page 3 of 4
Ownership of SunSource Technology Services Inc.
Authorized Shares: 100 shares of Common Stock, $.01 par value
per share Outstanding: 100 shares issued to SunSource Industrial
Services Company, Inc.
Ownership of Kar Products, Inc.
Authorized Shares: 100 shares of Common Stock, $.01 par value
per share Outstanding: 100 shares issued to SunSource Industrial
Services Company, Inc.
Ownership of A & H Holding Co., Inc.
Outstanding: 100 shares issued to Kar Products Inc.
Ownership of Hydra Power de Mexico
Outstanding: 49,998 shares of Common Stock issued to A&H Holding
Co., Inc.
Ownership of SIMCO de Mexico
Outstanding: 98 shares of Common Stock issued to A&H Holding
Co., Inc.
Ownership of SunSource Canada Investment company LLC
Outstanding:100 shares of Common Stock issued to A&H Holding
Co., Inc.
Ownership of J. N. Fauver (Canada), Ltd.
Outstanding: 5 shares of Common Stock issued to SunSource Canada
Investment Company LLC.
Ownership of A & H Bolt & Nut Company, Ltd.
Outstanding: 306 Class B special shares issued to SunSource
Canada Investment Company LLC
2.10 (c) Taxes and Assessments
The Internal Revenue Service and/or various State Taxing
Authorities have in progress income tax audits of records for
the years 1982 through 1984. The Company has assumed the
agreements of Sun Distributors, Inc., to extend the time for
assessment of tax for tax periods 1985, 1986 and January 1, 1987
through February 11, 1987. There have been no tax audits by the
Internal Revenue Service of records of the Company, SDI, SDIPI,
SunSub A and SunSub B to date nor have agreements to extend the
time for assessment been executed to date. Various State taxing
authorities have in progress tax audits of records of the
Company.
<PAGE>
2.11 Indebtedness Page 4 of 4
- See the Attached Schedule of Indebtedness and Obligations
- Lease Obligations as described in Note 11 to Consolidated
Financial Statements of SunSource Inc. and Subsidiaries as of
and for the period ended December 31, 1997, furnished to the
Banks.
2.12 Management Agreements
Arthur Anderson -- Restructuring Consulting
PricewaterhouseCoopers -- Annual Audit and Tax Compliance
Registrar & Transfer Co. -- Transfer Agent
Frank Russell Trust Co. -- Investment Manager, Retirement Plans
2.13 Subsidiaries and Investments
Employee advances aggregating $ 20,000 as of September 30, 1998.
2.14 ERISA
Unfunded liabilities for post-retirement life or health benefits
are estimated for the following Operating Division: J. N. Fauver
Company $452,000
The Company is a party to multi-employer pension plans of which
there was no withdrawal liability as of December 31, 1997, but
which could have withdrawal liability in the future. The
multi-employer pension plans are as follows:
Harding Glass Industries - International Brotherhood of Painters
and Allied Trades Pension Trust--Glaziers, Architectural Metal
and Glass-workers Local #930 and Glaziers Local #911
- Glaziers Local #930 Pension Trust
- Western Conference of Teamsters Pension Trust
2.17 Hazardous Wastes, Substances and Petroleum Products
Philips & Company
Mid-MO Superfund Site --Limited Liability Expected
Downey Glass Company
Operating Industries, Inc. Landfill Superfund Site
Liability not expected to exceed $300,000 recorded on the books
of SunSource Inc. as of September 30, 1998.
<PAGE>
SDI OPERATING PARTNERS, L.P.
EXISTING LETTERS OF CREDIT
AS OF 11/30/98
(in thousands)
<TABLE>
<CAPTION>
DIVISION ISSUING BANK BENEFICIARY AMOUNT
-------- ------------ ----------- ------
<S> <C> <C> <C>
Stand-By Letters of Credit:
Business Insurance - Loss Casualty Program:
SunSource Headquarters First Union Legion Ins. Co. - 5th/6th Policy Years $1,750
SunSource Headquarters First Union Mutual Indemnity - 1st - 4th Policy Years(1) 1,300
------
Total Stand-By Letters of Credit $3,050
======
- ----------------------------------------------------------------------------------------------------------------------
Documentary or Trade Letters of Credit:
Hillman Fastener First Union 467
Kar Products First Union 23
------
Total Documentary Letters of Credit $ 490
======
Grand Total - All LOC's $3,540
======
</TABLE>
(1) Issued on December 15, 1998
<PAGE>
SDI OPERATING PARTNERS, L.P.
SCHEDULE OF INDEBTEDNESS
AS OF 11/30/98
(in thousands)
<TABLE>
<CAPTION>
TOTAL
OUTSTANDING
PRINCIPAL
OBLIGOR HOLDER BALANCE SECURITY
------- ------ ------- -----------
<S> <C> <C> <C>
SDI Operating Partners, L.P. Teachers Insurance Co. $ 60,000 Unsecured Senior Debt
SDI Operating Partners, L.P. Cananwell Finance Co. 884 Unsecured Debt
SDI Operating Partners, L.P. First Union National Bank - Revolving Credit 11,440 Unsecured Senior Debt
The Bank of Nova Scotia - Revolving Credit 11,440 Unsecured Senior Debt
Fifth Third Bank - Revolving Credit 6,160 Unsecured Senior Debt
SunTrust Banks, Inc. - Revolving Credit 6,160 Unsecured Senior Debt
The Fuji Bank, Limited - Revolving Credit 8,800 Unsecured Senior Debt
--------
Total Revolving Credit 44,000
--------
A&H Bolt - A division of SDI
Operating Partners, L.P. Bank of Nova Scotia - Unsecured line of
credit
arding Glass - A division of SDI
Operating Partners, L.P. L.O.F. Trade Notes 974 Glass Inventory
Hillman Fastener - A division of SDI
Operating Partners, L.P. Fifth Third 862 Capital Leases - Packaging
-------- Equipment
Total $106,720
========
</TABLE>
<PAGE>
EXHIBIT C
Form of Compliance Certificate
To: Each holder of a Note under the Amended and Restated
Note Purchase Agreement dated as of December 31, 1998
among SunSource Inc. (the "Company"), its Subsidiaries as
set forth on Schedule 1 thereto (together with the
Company, the "Obligors"), its Subsidiaries as set forth
on Schedule 2 thereto, as Guarantors, and Teachers
Insurance and Annuity Association of America (as may be
further 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 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>
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 other Obligors
By:_____________________________________
Name:
Title:
<PAGE>
SCHEDULE 1
I. CAPITALIZATION RATIO (Paragraph 5.12 of the Note Purchase Agreement)
A. Funded Debt
Indebtedness for borrowed money $__________
Indebtedness evidenced by notes, debentures $__________
or similar instruments
Capital Leases $__________
Guarantees of Indebtedness or Capital Leases $__________
Letters of Credit and letter of credit $__________
reimbursement obligations
(A) $__________
B. Net Worth
Total Assets $__________
Minus Total Liabilities $__________
(B) $__________
C. Total Capital
Funded Debt (Line A above) $__________
Outstanding principal amount of Junior $__________
Subordinated Debentures
Net Worth (Line B Above) $__________
(C) $__________
Capitalization Ratio (ratio of (A) to (C)): ________
<PAGE>
Covenant:
(i) last day of each of the first two fiscal quarters of each
fiscal year: 62%
(ii) last day of each of the last two fiscal quarters of each
fiscal year: 60%
Compliance: ____YES ____NO
II. FIXED CHARGE COVERAGE RATIO (Paragraph 5.13 of the Note Purchase
Agreement)
A. Adjusted EBITDAR for the most recent Rolling
Period
1. EBITDA
a. Net Income
Gross revenue (excluding $__________
extraordinary gains and
losses)
minus all expenses and other proper $__________
charges (including taxes on
income)
$__________
b. Interest Expense (including all $__________
interest paid on the Junior
Subordinated Debentures
(whether paid in cash or in
kind))
c. All provisions for income taxes $__________
<PAGE>
d. Depreciation and amortization $__________
expense
e. Extraordinary losses minus $__________
extraordinary gains
(A) $__________
2. Adjusted EBITDAR
a. EBITDA (Total (A) above) $__________
b. Rent expense $__________
c. minus Capital Expenditures $__________
(B) $__________
3. Fixed Charges
a. Interest Expense (including $__________
interest paid on the
Junior Subordinated
Debentures to the extent
paid in cash)
b. Rent expense $__________
c. Scheduled maturities paid on $__________
Funded Debt (excluding
the Loan)
d. Cash dividends paid by $__________
SunSource Inc.
(C) $__________
Fixed Charge Coverage Ratio (ratio of (B) to (C)): __________
Covenant: As of the last day of each fiscal quarter set forth
in the left hand column, for the Rolling Period ending on such
date, the ratio must not be less than the amount set forth in
the right hand column:
<PAGE>
Period Minimum Ratio
------ -------------
Date of Agreement 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 1.50
quarter thereafter
Compliance: ____YES ____NO
III. LEVERAGE RATIO (Paragraph 5.14 of the Note Purchase Agreement)
A. Funded Debt (as calculated above) (A) $__________
B. EBITDA (as calculated above) (B) $__________
Leverage Ratio (ratio of (A) to (B)): __________
Covenant: ratio must not be greater than 3.25:1.
Compliance: ____YES ____NO
IV. INDEBTEDNESS (Paragraph 6.1 of the Note Purchase Agreement)
A. Trade Indebtedness (6.1(iv)) $__________
B. Indebtedness for purchase or lease of fixed
assets (6.1(v)) $__________
C. Additional principal amounts outstanding of domestic
non-Obligor, non-Guarantor Subsidiaries (6.1(ix)) $__________
D. Additional principal amounts outstanding of foreign
non-Obligor, non-Guarantor Subsidiaries (6.1(x)) $__________
E. Purchase money indebtedness (6.1(xi)) $__________
Compliance ____ YES ____ NO
<PAGE>
V. GUARANTIES (Paragraph 6.2 of the Note Purchase Agreement)
A. Guaranties (6.2(i)) $__________
Compliance ____ YES ____ NO
VI. LOANS (Paragraph 6.3 of the Note Purchase Agreement)
A. Loans to domestic non-Obligor, non-Guarantor
Subsidiaries (6.3(ii)) $__________
B. Loans to foreign non-Obligor, non-Guarantor
Subsidiaries (6.3(iii)) $__________
Compliance ____ YES ____ NO
<PAGE>
EXHIBIT 10.1
SECOND AMENDED AND RESTATED
CREDIT AGREEMENT
AMONG
SUNSOURCE, INC.,
ITS SUBSIDIARIES AS SET FORTH
ON SCHEDULE 1 ATTACHED HERETO
("BORROWERS"),
AND ITS SUBSIDIARIES AS SET FORTH
ON SCHEDULE 2 ATTACHED HERETO
("GUARANTORS"),
FIRST UNION NATIONAL BANK
for itself and as Agent,
THE BANK OF NOVA SCOTIA
for itself and as Documentation Agent
and
THE BANKS AS SET FORTH ON SCHEDULE 3 ATTACHED HERETO
("BANKS")
December 31, 1998
-1-
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C> <C>
SECTION ONE - DEFINITIONS.........................................................................................3
1.1. Definitions........................................................................................3
1.2. Rules of Construction.............................................................................12
SECTION TWO - REVOLVING CREDIT LOAN..............................................................................13
2.1. (a) The Facility..........................................................................13
(b) Amendment and Restatement.............................................................13
(c) Authority of the Company..............................................................13
(d) Potential Increase of Commitment. ...................................................13
2.2. Promissory Notes..................................................................................14
2.3. Banks' Participation..............................................................................14
2.4. Use of Proceeds...................................................................................14
2.5. Repayment.........................................................................................14
2.6. Interest..........................................................................................14
2.7. Advances..........................................................................................19
2.8. Reduction and Termination of Commitment; Voluntary and Mandatory
Prepayment.....................................................................................21
2.9. Prepayment........................................................................................22
2.10. Funding Costs; Loss of Earnings...................................................................22
2.11. Payments..........................................................................................22
2.12. Commitment Fee....................................................................................22
2.13. Swing Line Loans..................................................................................23
2.14. Regulatory Changes in Capital Requirements........................................................25
2.15. Taxes.............................................................................................26
SECTION THREE - LETTERS OF CREDIT................................................................................27
3.1. (a) Availability of Letters of Credit.....................................................27
(b) Evergreen Letters of Credit...........................................................28
(c) Existing Letters of Credit............................................................28
3.2. Commitment Availability...........................................................................28
3.3. Approval and Issuance.............................................................................28
3.4. Obligations of the Borrowers......................................................................29
3.5. Payment by Banks on Letters of Credit.............................................................30
3.6. Collateral........................................................................................30
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
-i-
<PAGE>
Page
----
4.3. No Violation of Laws or Agreements................................................................33
4.4. Material Contracts................................................................................33
4.5. Compliance........................................................................................34
4.6. Litigation........................................................................................34
4.7. Title to Assets...................................................................................34
4.8. Capital Stock.....................................................................................34
4.9. Accuracy of Information; Full Disclosure..........................................................34
4.10. Taxes and Assessments.............................................................................35
4.11. Indebtedness......................................................................................35
4.12. Management Agreements.............................................................................36
4.13. Subsidiaries and Investments......................................................................36
4.14. ERISA.............................................................................................36
4.15. Fees and Commissions..............................................................................37
4.16. No Extension of Credit for Securities.............................................................37
4.17. Hazardous Wastes, Substances and Petroleum Products...............................................37
4.18. Solvency..........................................................................................37
4.19. Year 2000 Compliance..............................................................................38
4.20. Foreign Assets Control Regulations................................................................38
4.21. Investment Company Act............................................................................38
SECTION FIVE - CONDITIONS........................................................................................39
5.1. First Advance.....................................................................................39
5.2. Subsequent Advances...............................................................................40
5.3. Additional Condition to Banks' Obligations........................................................40
SECTION SIX - AFFIRMATIVE COVENANTS..............................................................................41
6.1. Existence and Good Standing.......................................................................41
6.2. Quarterly Financial Statements....................................................................41
6.3. Annual Financial Statements.......................................................................41
6.4. Annual Budget.....................................................................................41
6.5. Public Information................................................................................42
6.6. Books and Records.................................................................................42
6.7. Properties; Insurance.............................................................................42
6.8. Notices to Banks..................................................................................42
6.9. Taxes.............................................................................................42
6.10. Costs and Expenses................................................................................42
6.11. Compliance; Notification..........................................................................43
6.12. ERISA.............................................................................................44
-ii-
<PAGE>
Page
----
6.13. Capitalization Ratio..............................................................................44
6.14. Fixed Charge Coverage Ratio.......................................................................44
6.15. Leverage Ratio....................................................................................44
6.16. Management Changes................................................................................44
6.17. Subsequent Credit Terms...........................................................................45
6.18. Use of Proceeds...................................................................................45
6.19. Successor Agent...................................................................................45
6.20. Transactions Among Affiliates.....................................................................45
6.21. Joinder of Subsidiaries...........................................................................45
6.22. Year 2000 Compliance..............................................................................45
6.23. Supporting Information............................................................................46
6.24. Other Information.................................................................................46
SECTION SEVEN - NEGATIVE COVENANTS...............................................................................46
7.1. Indebtedness......................................................................................46
7.2. Guaranties........................................................................................47
7.3. Loans.............................................................................................47
7.4. Liens and Encumbrances............................................................................47
7.5. Additional Negative Pledge........................................................................47
7.6. Restricted Payments...............................................................................48
7.7. Transfer of Assets................................................................................48
7.8. Acquisitions and Investments......................................................................48
7.9. Use of Proceeds...................................................................................49
7.10. Amendment of Documents............................................................................49
7.11. Payment of Senior Notes...........................................................................49
SECTION EIGHT - RIGHT OF SETOFF..................................................................................49
SECTION NINE - DEFAULT...........................................................................................50
9.1. Events of Default.................................................................................50
9.2. Remedies..........................................................................................51
SECTION TEN - THE BANKS..........................................................................................52
10.1. Application of Payments...........................................................................52
10.2. Setoff............................................................................................52
10.3. Modifications and Waivers.........................................................................52
10.4. Obligations Several...............................................................................53
10.5. Banks' Representations............................................................................53
-iii-
<PAGE>
Page
----
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. Responsibility for Representations or Validity, etc...............................................53
10.10. Action on Instruction of Banks; Right to Indemnity................................................54
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...................................................................................55
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.......................................................................56
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....................................................................59
12.3. Binding and Governing Law.........................................................................59
12.4. Survival..........................................................................................59
12.5. No Waiver; Delay..................................................................................60
12.6. Modification......................................................................................60
12.7. Headings..........................................................................................60
12.8. Notices...........................................................................................60
-iv-
<PAGE>
Page
----
12.9. Payment on Non-Business Days......................................................................60
12.10. Time of Day.......................................................................................60
12.11. Severability......................................................................................60
12.12. Counterparts......................................................................................60
12.13. Consent to Jurisdiction and Service of Process....................................................61
12.14. WAIVER OF JURY TRIAL..............................................................................61
12.15. ACKNOWLEDGMENTS...................................................................................61
12.16. Complete Agreement................................................................................61
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</TABLE>
<PAGE>
LIST OF EXHIBITS
----------------
Schedule 1: The Subsidiaries that are Borrowers under this Agreement
Schedule 2: The Subsidiaries that are Guarantors under this Agreement
Schedule 3: 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>
SECOND AMENDED AND RESTATED
CREDIT AGREEMENT
----------------
THIS SECOND AMENDED AND RESTATED CREDIT AGREEMENT (this
"Agreement") is made this 31st day of December, 1998, by and among SUNSOURCE
INC. (the "Company"), a Delaware corporation with offices at 3000 One Logan
Square, Philadelphia, Pennsylvania 19103, the subsidiaries of the Company
identified on Schedule 1 attached hereto on a joint and several basis
(individually and collectively with the Company, the "Borrowers") and the
subsidiaries of the Company identified on Schedule 2 attached hereto
(individually and collectively, the "Guarantors"); and FIRST UNION NATIONAL
BANK, a national banking association and successor by merger to CoreStates Bank,
N.A. with offices at 1339 Chestnut Street, 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 3 attached hereto (the Agent, the Documentation Agent and the banks
identified on Schedule 3, each individually a "Bank" and collectively the
"Banks").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Company is a Delaware corporation, and each
Borrower (other than the Company) is either a direct or indirect subsidiary of
the Company;
WHEREAS, the Company, the Agent, the Documentation Agent, Fuji
Bank, Limited, New York Branch ("Fuji") and the Banks (the "Existing Banks") are
parties to that certain Amended and Restated Credit Agreement dated September
30, 1997 (the "Existing Credit Agreement"), and SunSub A Inc. ("SunSub A") and
SunSub B Inc. ("SunSub B") are guarantors under the Existing Credit Agreement;
WHEREAS, the Company issued Sixty Million Dollars
($60,000,000) in privately-placed notes pursuant to a Note Purchase Agreement
dated September 30, 1997 (as amended, the "Existing Note Purchase Agreement");
WHEREAS, Junior Subordinated Debentures (as defined herein)
issued by the Company pursuant to the 1997 Conversion (as defined herein) are
the assets of SunSource Capital Trust (the "Trust"), a Delaware statutory
business trust, and the subject of a Reassignment and Reassumption Agreement as
part of the 1998 Conversion (as defined herein);
WHEREAS, payments of interest and principal on the Junior
Subordinated Debentures to the Trust are 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;
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<PAGE>
WHEREAS, SunSource Investment Company, Inc. ("SSICI") is a
newly-formed, wholly-owned holding company of the Company;
WHEREAS, SunSub A will become a direct wholly-owned subsidiary
of SSICI, which is a direct subsidiary of the Company in the 1998 Conversion;
WHEREAS, SunSub B has agreed to merge with and into SunSub A,
which will cause the existence of SDI Operating Partners, L.P., a Delaware
limited partnership and a borrower under the Existing Credit Agreement ("SDI"),
and its general partner, SDI Partners I, L.P., a Delaware limited partnership
and a guarantor under the Existing Credit Agreement ("SDIPI"), to cease and the
assets and liabilities of SDI to be owned by SunSub A;
WHEREAS, SunSub A is forming four wholly-owned subsidiaries
and contribute the assets and liabilities of SDI to them (the "1998
Conversion");
WHEREAS, the Company is a wholesale distributor of industrial
products and services in the United States; and it is organized in three
businesses: industrial services, hardware merchandising and glass merchandising;
WHEREAS, pursuant to the 1998 Conversion, various operating
divisions within the Company will be formed into separate legal entities, which
will be direct and indirect wholly-owned subsidiaries of SunSub A;
WHEREAS, on the Effective Date, Sun Trust Bank, Atlanta is
purchasing Three Million Dollars ($3,000,000) of the interest of Fuji, which was
a Bank under the Existing Credit Agreement and, the Commitment, which was Ninety
Million Dollars ($90,000,000) under the Existing Credit Agreement will decrease
to Seventy-Five Million Dollars ($75,000,000);
WHEREAS, PNC Bank, National Association ("PNC"), may, upon the
terms and conditions set forth herein, join in this Agreement as a Bank, and the
Commitment will thereupon increase by up to an additional FIFTEEN MILLION
DOLLARS ($15,000,000);
WHEREAS, in connection with the 1998 Conversion, Borrowers
desire to amend and restate the terms of the revolving credit facility under the
Existing Credit Agreement, which as of the Effective Date will be in the amount
of SEVENTY-FIVE MILLION DOLLARS ($75,000,000), and which may be increased by up
to an additional FIFTEEN MILLION DOLLARS ($15,000,000) upon the joinder of PNC
and the fulfillment of the terms and conditions set forth herein; and
WHEREAS, the Banks are willing to amend and restate the terms
of the Existing Credit Agreement, which as of the Effective Date will be in the
amount of SEVENTY-FIVE MILLION DOLLARS ($75,000,000), and which may be increased
by up to an additional
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<PAGE>
FIFTEEN MILLION DOLLARS ($15,000,000) upon the joinder of PNC and the
fulfillment of the terms and conditions set forth herein, 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.
"1997 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.
"1998 Conversion" has the meaning set forth in the recitals of
this Agreement.
"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.
"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 the Company; (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 the Company or an Affiliate; (iii)
any entity which directly or indirectly is under common control with the Company
or any Affiliate; (iv) any officer, director or partner of the Company or any
Affiliate; or (v) any immediate family member of any person who is an Affiliate.
For purposes of this definition, the
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<PAGE>
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 First Union National Bank, successor by merger
to 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 Second 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 3 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 2.1(d)(i) or 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" means, jointly and severally, SunSource Inc., a
Delaware corporation, and its Subsidiaries as set forth on Schedule 1 hereto.
"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.
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<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: (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 the Company (or other securities convertible into such securities)
representing twenty percent (20%) or more of the combined voting power of all
securities of the Company entitled to vote in the election of directors, other
than 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 the Company shall cease for any reason to consist of (1)
individuals who on the date hereof are serving as directors of the Company 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 the Company. For purposes of
clause (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, on the Effective Date,
Seventy-Five Million Dollars ($75,000,000), subject to increase by up to an
additional Fifteen Million Dollars ($15,000,000) pursuant to the terms of
Paragraph 2.1(d) 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.
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<PAGE>
"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) Interest Expense (including
all interest paid on the Junior Subordinated Debentures (whether paid in cash or
in kind)), (ii) all provisions for income taxes, (iii) depreciation and
amortization expense, and (iv) extraordinary losses, minus extraordinary gains,
as each such item is determined in accordance with GAAP.
"Effective Date" means the date that all of the conditions set
forth in Paragraph 5.1 hereof have been satisfied which is 11:59 p.m. on
December 31, 1998.
"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 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.
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<PAGE>
"Existing Credit Agreement" means that certain Amended and
Restated Credit Agreement among the Company, the Agent, the Banks and SunSub A
and SunSub B, as guarantors, dated September 30, 1997.
"Existing Note Purchase Agreement" means that Note Purchase
Agreement dated September 30, 1997, as amended, issued by SDI and its
Subsidiaries set forth on Schedule I thereto for Sixty Million Dollars
($60,000,000) 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) rent expense;
(iii) scheduled maturities paid on Funded Debt (excluding the Loan); and (iv)
cash dividends paid by the Company, 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 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 Company's outside auditors.
"Guarantors" means, individually, and individually and
collectively, those Subsidiaries set forth on Schedule 2 attached hereto.
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<PAGE>
"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, without duplication, 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 the Company 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 the Company deposited in the Trust as trust assets
upon the 1997 Conversion, 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.
"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.
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<PAGE>
"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.
"Material Subsidiary" means any Subsidiary which either: (i)
comprised five percent (5%) or more of the assets of SunSource Inc. and its
Consolidated Subsidiaries as of the most recent date for which a balance sheet
has been delivered (or is required to have been delivered) hereunder, or (ii)
was responsible for five percent (5%) or more of EBITDA for the most recent
Rolling Period.
"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 3 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.
"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 6.2 and 6.3 hereof, as applicable.
"Note Purchase Agreement" means the Amended and Restated Note
Purchase Agreement dated as of the date hereof between Borrowers 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.
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"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.
"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 the Company; and (ii) the payment of principal or interest on or
the purchase, redemption, prepayment or other retirement of the Junior
Subordinated Debentures.
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"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 any Borrower's or any Subsidiary's assets in transactions (not
related to the 1998 Conversion) 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).
"SDIPI" means SDI Partners I, L.P., the general partner of SDI
Operating Partners, L.P.
"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. Those Subsidiaries of the Company set forth on
Schedule 1 attached hereto are, collectively with the Company, the Borrowers,
and those Subsidiaries of the Company set forth on Schedule 2 attached hereto
are the Guarantors.
"SunSource Inc. and its Consolidated Subsidiaries" means the
Company and its consolidated subsidiaries as defined in accordance with GAAP.
"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.
"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. and its Consolidated Subsidiaries' financial statements most
recently delivered to Banks pursuant to Paragraphs 5.1, 6.2 and 6.3 hereof, as
defined in accordance with GAAP.
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<PAGE>
"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. and its Consolidated Subsidiaries'
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 1997 Conversion.
"Trust Common Securities" means the common securities issued
by the Trust pursuant to the 1997 Conversion.
"Year 2000 Compliant" means, as to any computer system or
application or micro-processor dependent good or equipment, that it is designed
and intended to be used prior to, during and after the calendar year 2000 AD and
that it will operate as designed and intended during each such time period
without error relating to date data or date information, specifically including
any error relating to, or the product of, date data or date information that
represents or references different centuries or more than one century.
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.
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(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 the Company 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 the Company 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.
Subject to receipt by Agent of an appropriately completed Advance/Credit Request
Form, all amounts outstanding under the Existing Credit Agreement are and shall
be deemed to be outstanding under this Agreement as of the Effective Date.
(c) Authority of the Company. Each of the Borrowers
hereby irrevocably authorizes and requests that the Company execute all
Advance/Credit Request 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) Potential Increase of Commitment.
(i) For a period of up to thirty (30) days after the
Effective Date, upon the consent of Agent and Borrowers, PNC may join in and
become a Bank under this Agreement. Upon such joinder, the Commitment shall be
increased by up to an additional Fifteen Million Dollars ($15,000,000) (the
"Additional Commitment"). Upon such joinder, PNC
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and Borrowers shall execute appropriate joinder documentation (including without
limitation, promissory notes, resolutions, certificates and opinions) in form
and substance acceptable to Agent.
(ii) Banks (excluding PNC), shall have no obligation
to increase their Pro Rata Share of the Commitment upon the joinder of PNC
pursuant to clause (i) above. Banks hereby acknowledge that the Commitment may
be increased by the Additional Commitment, and that no approval of any Bank
(other than Agent) is required for such increase.
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
3 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 3
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 and related reasonable transaction expenses.
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:
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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.
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.
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"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.
"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,
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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.
(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).
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(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(a) 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.
(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
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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(b) 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 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
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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 the Company
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;
(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
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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 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 Material 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
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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 Day's notice of a payment on a
Portion bearing interest at the Base Rate; and (ii) 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.
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2.13. Swing Line Loans.
(a) Swing Line Commitment. Subject to the terms and
conditions hereof, Agent, on behalf of the Banks, 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, however, 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 the chief financial officer or controller of the Company and shall
be in the form of the Advance/Credit Request Form attached hereto as Exhibit A.
Within 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.
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(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, and each
such Notice of Swing Line Refunding shall be deemed to constitute delivery by
the Company of an Advance/Credit Request Form for an Advance 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, 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
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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 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.
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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 thirty (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 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
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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.
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;
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(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, N.A. or First Union
National 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
Effective Date, subject to receipt by Agent of an appropriately completed
Advance/Credit Request Form, 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 ("Letter of Credit
Application"). 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 the Company
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
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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 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.
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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.
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
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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:
(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
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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 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.
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SECTION FOUR
REPRESENTATIONS AND WARRANTIES
------------------------------
Each Borrower represents and warrants as to itself and each of
its Subsidiaries party hereto, and each Subsidiary party hereto represents and
warrants as to itself, as follows:
4.1. Organization and Good Standing. Each Borrower and each
Subsidiary is a corporation duly formed and validly existing under the laws of
its state of formation and has the power and authority to carry on its business
as now conducted. Each Borrower and each Subsidiary 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 Borrower
and each Subsidiary has the power and authority under Delaware law (or the law
of its state of formation) and under its organizational documents to enter into
and perform this Agreement, the Promissory 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 each Borrower's and each
Subsidiary's 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, have been taken, and, upon their execution, the
same will constitute the valid and binding obligations of each Borrower and each
Subsidiary, 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 each Borrower and each Subsidiary 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 any Borrower or Subsidiary or result in any breach or violation of,
or constitute a default under, any agreement or instrument by which any
Borrower, Subsidiary or its respective property may be bound, including without
limitation the Note Purchase Agreement and the Indenture.
4.4. Material Contracts. No Borrower or Subsidiary is a party
to or in any manner obligated under any contracts material to its respective
business except this Agreement, its 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 Borrower and each Subsidiary 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; each
Borrower and each Subsidiary possesses all the material franchises,
authorizations, patents, copyrights, trademarks, permits and licenses necessary
or
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required in the conduct of its respective business, 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 any Borrower's or Subsidiary's 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 Borrowers' and Subsidiaries' knowledge or information, threatened
against any Borrower or Subsidiary 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 each Subsidiary has good and marketable title to substantially
all of its properties and assets as 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. Capital Stock. The number of shares and classes of the
capital stock of each Borrower and each Subsidiary and the ownership thereof,
effective upon the 1998 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.
4.9. Accuracy of Information; Full Disclosure.
(a) All information furnished to Banks concerning the
financial condition of SunSource Inc. and its Consolidated Subsidiaries,
including their annual audited financial statements for the period ending
December 31, 1997 and their unaudited financial statements for the period ending
September 30, 1998, copies of which have been furnished to Banks, have been
prepared in accordance with GAAP and fairly present the financial condition of
SunSource Inc. and its Consolidated Subsidiaries as of the dates and for the
periods covered and discloses liabilities of SunSource Inc. and its Consolidated
Subsidiaries required to be disclosed under GAAP and, except on the date hereof
for the effect of the 1998 Conversion, there has been no Material Adverse Change
from the date of such statements to the date hereof; and
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(b) All financial statements and other documents
furnished by SunSource Inc. and its Consolidated 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. Each
Borrower and each Subsidiary has 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 any Borrower or Subsidiary or any
Borrower's or Subsidiary's ability to perform its respective obligations under
this Agreement and the Promissory Notes.
4.10. Taxes and Assessments.
(a) Each Borrower and each Subsidiary 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 any Borrower or Subsidiary 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 Borrower and each Subsidiary has properly
withheld all amounts determined by it 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 SDI or SDIPI have been audited. Except
as set forth on Exhibit E hereto, no Borrower or Subsidiary has entered into any
agreement 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
any Borrower or Subsidiary, and there are no suits, actions, claims,
investigations, inquiries or proceedings now pending against any Borrower or
Subsidiary in respect of taxes, governmental charges or assessments.
4.11. Indebtedness. No Borrower or Subsidiary has any
presently outstanding Indebtedness or obligations, including contingent
obligations and obligations under leases of property from others which presents
a liability in excess of One Million Dollars ($1,000,000), except the Senior
Notes, the Junior Subordinated Debentures and the Indebtedness and obligations
described either on Exhibit E hereto or in the financial statements of
SunSource, Inc. and its Consolidated Subsidiaries which have been furnished to
Banks, and Indebtedness
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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 any Borrower or Subsidiary
ranks either pari passu or junior to the Indebtedness to the Banks.
4.12. 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.
4.13. Subsidiaries and Investments. No Borrower or Subsidiary
has any 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.
4.14. ERISA. Each Plan maintained by any Borrower, Subsidiary
or 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) No Borrower, Subsidiary or ERISA Affiliate
maintains or contributes to or has maintained or contributed to any
multiemployer plan (as defined in Section 4001 of ERISA) under which any
Borrower, Subsidiary or ERISA affiliate could have any withdrawal liability;
(b) No Borrower, Subsidiary or 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 any Borrower, Subsidiary or 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) No Borrower, Subsidiary or 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 any Borrower, Subsidiary
or ERISA Affiliate under any plan, program or arrangement providing
post-retirement life or health benefits; and
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(f) The matters described on Exhibit E attached
hereto referencing clauses (a) through (e) of this Paragraph 4.14, would not,
either singly or in the aggregate, have a Material Adverse Effect.
4.15. Fees and Commissions. No Borrower or Subsidiary owes any
fees or commissions of any kind, or knows of any claim for any fees or
commissions, in connection with Borrowers' obtaining the Commitment or the Loan
from Banks, except those provided herein and fees payable to the Banks as may be
agreed upon from time to time.
4.16. No Extension of Credit for Securities. No Borrower or
Subsidiary is now, nor at any time has it been, engaged principally, or as one
of its 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 any Borrower
directly or indirectly, for such purposes.
4.17. Hazardous Wastes, Substances and Petroleum Products.
Except as set forth in Exhibit E hereto:
(a) Each Borrower and each Subsidiary: (i) has received
all permits and filed all notifications necessary to carry on its 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) No Borrower or Subsidiary has 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 a Borrower or Subsidiary
or used in connection with the conduct of its business and operations.
(c) No Borrower or Subsidiary has 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.
4.18. Solvency. SunSource Inc. and its Consolidated
Subsidiaries are, on a consolidated basis, upon the 1998 Conversion, 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
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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. No creditor of the Company, any Subsidiary, SDI,
SDIPI, SunSub A or SunSub B would have a reasonable likelihood of prevailing
with respect to any claim to set aside payments to the Banks based on applicable
fraudulent conveyance principles. For purposes of this Paragraph 4.18, 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.
4.19. Year 2000 Compliance. Borrowers and Subsidiaries have
conducted a comprehensive review and assessment of their computer systems and
applications, microprocessor based goods and equipment owned or used by them in
their business and are making inquiry of their material suppliers, vendors and
customers, with respect to functionality before, during and after the year 2000
(the "Year 2000 Problem"). Borrowers and Subsidiaries have prepared a plan
designed to ensure that all such systems, goods, equipment and products owned or
used by them and material to the conduct of their business will be Year 2000
Compliant in a timely manner. The Company's report on Form 10-Q for the quarter
ended September 30, 1998 describes such plan in all material respects. Borrowers
reasonably believe, based on the foregoing review, assessment and inquiry that
the Year 2000 Problem will not result in a Material Adverse Effect.
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. No Borrower or Subsidiary is
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.
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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 of each Borrower, attaching and certifying as to (i) the certificate
or articles of incorporation and bylaws of such entity; (ii) resolutions or
other evidence of authorization by the board of directors of such entity,
authorizing its execution and full performance of this Agreement, the Promissory
Notes, and all other documents and actions required hereunder; and (iii) an
incumbency certificate setting forth the name, titles and specimen signature of
each officer of such entity who is authorized to execute the Loan Documents on
behalf of such entity.
(c) Opinion of Counsel. An opinion letter from
counsel for Borrowers in form and substance reasonably satisfactory to Banks.
(d) Insurance. Certificates of insurance with respect
to all of Borrowers' fire, casualty, liability and other insurance covering
their respective property and business.
(e) Financial Information. A certificate signed by
the chief financial officer or controller of the Company attaching: (i) cash
flow projections for SunSource Inc. and its Consolidated Subsidiaries on a
consolidated basis, for the two (2) 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 two year period); and (ii) 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 4.18 hereof.
(f) Advance Request. A completed Advance/Credit
Request Form required under Paragraphs 2.1(b), 2.7 and 3.1(c) 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.
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(h) Officer's Certificate. A certificate signed by
the chief financial officer or controller of the Company stating: (i) that there
exists no Default or Event of Default hereunder, (ii) except for the 1998
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 Subsidiaries since September 30, 1998, (iii) that there exists no
default under any Indebtedness of any Borrower or Subsidiary and (iv) that the
1998 Conversion, as outlined in the letter from the Company to the Agent dated
December 9, 1998, will be completed simultaneously with the effectiveness of
this Agreement.
(i) Senior Notes. Borrowers shall, simultaneously
with the 1998 Conversion, have amended and restated the Existing Note Purchase
Agreement and provided copies of the Note Purchase Agreement, as amended, to
Banks.
(j) 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.
(k) Junior Subordinated Debentures. (i) Evidence
satisfactory to Agent that: (a) the Junior Subordinated Debentures shall, after
the Effective Date, remain outstanding under terms of subordination satisfactory
to the Required Banks and (b) all required consents under the Indenture or
otherwise in connection with the Junior Subordinated Debentures have been
obtained and delivered and (ii) a duly executed copy of the Reassignment and
Reassumption Agreement executed in connection with the 1998 Conversion.
(l) Other Documents. 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 hereunder have been paid as and when due, and
there shall have been no Material Adverse Change since the date hereof.
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SECTION SIX
AFFIRMATIVE COVENANTS
---------------------
Each Borrower and each Subsidiary covenants and agrees that so
long as the Commitment of Banks to Borrowers or any Indebtedness of Borrowers to
Banks is outstanding hereunder, each Borrower and each Subsidiary 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 corporation 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 the Company 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 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 1998 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 the Company's independent certified public
accountants have concurred) by an independent certified public accounting firm
satisfactory to Banks; and the Company 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. Annual Budget. Furnish to Banks, on or before March 31 of
each year, commencing with fiscal year 1999, an annual budget of SunSource Inc.
and its Consolidated Subsidiaries, showing net income and cash flows of
SunSource Inc. and its Consolidated
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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 shareholders 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 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 the Company.
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 any Borrower or Subsidiary and also
with outside auditors and accountants of any Borrower or Subsidiary.
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, 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 (as defined in the Indenture) from the Company 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
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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 any
Borrower or Subsidiary; 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 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 any
Borrower's or Subsidiary's business(es) or operation(s), any person (including,
without limitation, EPA or any state or local agency) provides oral or written
notification to any Borrower or Subsidiary or any Borrower or Subsidiary
otherwise becomes 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 any Borrower or Subsidiary 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
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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 any Borrower or
Subsidiary, 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 any Borrower or Subsidiary 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 any Borrower or Subsidiary 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 any Borrower's or
Subsidiary's 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%).
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 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.
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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 any Borrower or Subsidiary agrees to financial covenants which are more
restrictive to such Borrower or Subsidiary 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) Each Borrower and each Subsidiary hereby agrees
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 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. Joinder of Subsidiaries. If any Subsidiary or any newly
created or acquired Subsidiary: (i) is or becomes a Material Subsidiary and (ii)
is not at such time of determination a Borrower or Guarantor, promptly notify
Agent of the same and cause such Material Subsidiary to execute joinder
documents in form and substance satisfactory to Agent, joining such Subsidiary
under this Agreement as either a Borrower or a Guarantor, which determination
shall be made in the discretion of Agent, and cause to be delivered such
opinions and certificates as Agent shall reasonably request.
6.22. Year 2000 Compliance. Take all action necessary to
assure that a Material Adverse Effect shall not result from any failure of
Borrowers' computer systems and applications, micro-processor based goods and
equipment owned or used by them in their business to be Year 2000 Compliant; and
use reasonable best efforts to assure the Year 2000
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Compliance of their material vendors and suppliers or to assure that failures to
be Year 2000 Compliant by such vendors and suppliers will not have a Material
Adverse Effect to the extent that any such information shall not be included in
the Company's periodic reports filed with the Securities and Exchange Commission
from time to time. Borrowers shall provide to Bank any material updates or
revisions to its plan for Year 2000 Compliance referred to in Paragraph 4.19 and
notice of any material increase in the estimated costs to Borrowers of achieving
Year 2000 Compliance in accordance with such plan; and, at the request of Bank,
Borrowers shall provide Bank assurances acceptable to Bank regarding the Year
2000 Compliance and/or contingency plans related thereto, of Borrowers and their
material vendors and suppliers.
6.23. Supporting Information. Use reasonable efforts to obtain
from the Company's accountants such supporting opinions or information with
respect to the matters set forth in Paragraph 4.18 hereof as the Banks shall
reasonably request.
6.24. 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 Borrower and each Subsidiary 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 any Borrower by any Borrower; (vii) borrowings from any Borrower
by a Subsidiary which is not a Borrower to the extent Borrowers are permitted to
make such loans pursuant to Paragraph 7.3(ii) hereof; (viii) Indebtedness
outstanding on the date hereof and disclosed on Exhibit E hereto, but without
any increase in the outstanding principal amount thereof; (ix) Indebtedness of
non-Borrower, non-Guarantor Subsidiaries incorporated in a jurisdiction in the
United States, up to Ten Million Dollars ($10,000,000) aggregate principal
amount outstanding at any time; (x) Indebtedness of non-
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Borrower, non-Guarantor Subsidiaries incorporated in a jurisdiction outside of
the United States, up to 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 (xi) 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 non-Borrower, non-Guarantor Subsidiaries
under clauses (v), (ix) and (x) hereof shall in no event exceed in the aggregate
outstanding at any time Ten Million Dollars ($10,000,000).
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 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 any Borrower may make loans and advances to (i) any other Borrower; (ii)
non-Borrower, non-Guarantor Subsidiaries incorporated in a jurisdiction in the
United States or (iii) non-Borrower, non- Guarantor Subsidiaries incorporated in
a jurisdiction outside of the United States, such that loans or advances from
all Borrowers to all such non-Borrower, non-Guarantor Subsidiaries shall not
exceed Ten Million Dollars ($10,000,000) in aggregate outstanding principal
amount at any time, and (iv) 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
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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) the Company may pay dividends on its common stock; and (ii) the Company may
make regularly scheduled interest payments on the Junior Subordinated Debentures
as in effect on the date hereof; 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 the Company and delivered to Agent, then the Company may purchase or redeem
its common stock or purchase Trust Preferred Securities, provided a like amount
of the Junior Subordinated Debentures are simultaneously purchased.
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) 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) and (ii) consummate the 1998 Conversion.
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 Material Subsidiary not listed on Schedule 1
or 2 hereto, except if the Subsidiary executes a joinder to this Agreement and
the Promissory Notes to become a joint and several obligor hereunder or a
Guarantor hereunder, in each case pursuant to Paragraph 6.21 hereof; (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 any Subsidiary may be merged into the Company if the
Company is the surviving entity and any Subsidiary may merge into any other
Subsidiary; 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 financial projection, including an income
statement and cash flow, 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 and a pro forma combined historical balance sheet
as of the end of the most recent fiscal quarter for the Company and the target.
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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: any Borrower's or any Subsidiary's organizational documents; 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 (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 the holders 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.
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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 Subsidiary 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;
(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 Subsidiary 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 Subsidiary 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 Subsidiary 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 Subsidiary as now conducted;
(h) If any Borrower or Subsidiary: 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
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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 Subsidiary shall call a meeting of
its creditors with a view to arranging a composition or adjustment of its debts;
or if any Borrower or Subsidiary shall by any act or failure to act indicate its
consent to, approval of or acquiescence in any of the foregoing;
(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 Borrower or Subsidiary
has incurred or in the opinion of such Borrower or Subsidiary is 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 Borrower or
Subsidiary 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 the Company 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.
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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 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
increase in the Commitment pursuant to Paragraph 2.1(d) shall not require the
consent of any Bank (except Agent) and each Bank hereby agrees to execute such
documentation as is requested by Agent to implement the Additional Commitment.
The Borrowers hereby agree to execute such further documents, including without
limitation certificates and amendments to this Agreement and the Promissory
Note(s), 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
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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 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,
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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. 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.
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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.
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
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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).
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
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<PAGE>
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.
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 1339 Chestnut Street,
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
-57-
<PAGE>
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.
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, including the Federal Reserve, 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 Borrower's or
Subsidiary's properties or assets, provided, that no Borrower or Subsidiary
shall be liable for any portion of such losses, liabilities, claims,
-58-
<PAGE>
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 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.
-59-
<PAGE>
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, 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 3 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 each Subsidiary irrevocably appoints each and every officer of the
Company as its attorney
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<PAGE>
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 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 EACH SUBSIDIARY
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 EACH SUBSIDIARY 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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<PAGE>
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.
SUNSOURCE INC.
By: ________________________________
Name: Joseph M. Corvino
Title: Vice President - Finance
SUNSOURCE INVESTMENT COMPANY,
INC.
By: ________________________________
Name: Joseph M. Corvino
Title: Vice President - Finance
SUNSUB A INC.
By: ________________________________
Name: Joseph M. Corvino
Title: Vice President - Finance
THE HILLMAN GROUP, INC.
By: ________________________________
Name: Joseph M. Corvino
Title: Vice President - Finance
[EXECUTIONS CONTINUED]
-62-
<PAGE>
HARDING GLASS, INC.
By: ________________________________
Name: Joseph M. Corvino
Title: Vice President - Finance
SUNSOURCE INDUSTRIAL SERVICES
COMPANY, INC.
By: ________________________________
Name: Joseph M. Corvino
Title: Vice President - Finance
SUNSOURCE CORPORATE GROUP, INC.
By: ________________________________
Name: Joseph M. Corvino
Title: Vice President - Finance
KAR PRODUCTS INC.
By: ________________________________
Name: Joseph M. Corvino
Title: Vice President - Finance
SUNSOURCE INVENTORY
MANAGEMENT COMPANY, INC.
By: ________________________________
Name: Joseph M. Corvino
Title: Vice President - Finance
[EXECUTIONS CONTINUED]
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<PAGE>
SUNSOURCE TECHNOLOGY SERVICES
INC.
By: ________________________________
Name: Joseph M. Corvino
Title: Vice President - Finance
FIRST UNION NATIONAL BANK, successor
by merger to CoreStates Bank, N.A.,
individually and in its capacity as
Agent hereunder
By: ________________________________
Name:
Title:
THE BANK OF NOVA SCOTIA
By: ________________________________
Name:
Title:
FIFTH THIRD BANK
By: ________________________________
Name:
Title:
SUNTRUST BANK, ATLANTA
By: ________________________________
Name:
Title:
By: ________________________________
Name:
Title:
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<PAGE>
SCHEDULE I
SUBSIDIARIES OF SUNSOURCE INC.
THAT ARE BORROWERS UNDER THE CREDIT AGREEMENT
SunSource Investment Company, Inc.
SunSub A Inc.
The Hillman Group, Inc.
Harding Glass, Inc.
SunSource Industrial Services Company, Inc.
SunSource Corporate Group, Inc.
SunSource Inventory Management Company, Inc.
SunSource Technology Services Inc.
Kar Products Inc.
<PAGE>
SCHEDULE II
SUBSIDIARIES OF SUNSOURCE INC.
THAT ARE GUARANTORS UNDER THE CREDIT AGREEMENT
None
<PAGE>
Superseded by Exhibit B to Joinder
SCHEDULE 3
----------
Maximum
Principal Percentage of
Banks Amount Commitment
----- --------- -------------
First Union National Bank
1339 Chestnut Street
Philadelphia, Pennsylvania 19101 $23,000,000 30.67%
Attention: Robert Brown
Telecopy No.: (215) 786-2877
The Bank of Nova Scotia
26th Floor
One Liberty Plaza $23,000,000 30.67%
New York, New York 10006
Attention: Philip N. Adsetts
Telecopy No.: (212) 225-5091
Fifth Third Bank
38 Fountain Square Plaza
MD 109054 $13,000,000 17.33%
Cincinnati, Ohio 45263
Attention: Thomas G. Welch, Jr.
Telecopy No.: (513) 579-5226
SunTrust Banks, Inc.
711 Fifth Avenue, 16th Floor $16,000,000 21.33%
New York, New York 10022
Attention: Maria Mamilovich
Telecopy No.: (212) 371-9386
----------- --------
Total $75,000,000 100%
<PAGE>
EXHIBIT A
ADVANCE/CREDIT REQUEST FORM
---------------------------
In accordance with Paragraph 2.7, 2.13 or 3.3 (as applicable)
of the Second Amended and Restated Credit Agreement (as amended, the
"Agreement") dated December 31, 1998 among First Union National Bank, for itself
and as Agent, The Bank of Nova Scotia, for itself and as Documentation Agent,
and the Banks set forth on Schedule 3 to the Agreement (collectively referred to
herein as the "Banks"); SunSource, Inc. and its Subsidiaries as set forth on
Schedule 1 to the Agreement (the "Borrowers"); and the Subsidiaries as set forth
on Schedule 2 to the Agreement (the "Guarantors"), Borrowers hereby request an
Advance and/or a Letter of Credit under the Commitment.
The undersigned hereby requests, represents and certifies that
as of the date hereof and the date of the requested Advance and/or Letter(s) of
Credit (receipt of such Advance and/or issuance of such Letter(s) of Credit, as
applicable, being deemed an affirmation of paragraphs (a) through (i) below):
(a) The aggregate amount of the requested Advance is
$____________(1) and/or the aggregate face amount of the requested Letter(s) of
Credit is ________________(2);
(b) The interest rate options which the Borrowers elect to
apply to the Advance are the Adjusted Libor Rate for a Portion of
$_______________ with an Interest Period of ____ month(s); and the Base Rate for
a Portion of $_______________;
(c) The Advance is to be used for purposes permitted by
Paragraph 2.4 of the Agreement;
(d) The date on which the requested Advance is to be made
and/or Letter(s) of Credit is (are) to be issued is ____________.
- --------
(1) Advances for Base Rate Loans and Adjusted Libor Rate Loans must be in
multiples of $100,000, but not less than the lesser of $2,000,000 or the
unborrowed balance of the Commitment.
(2) If a Letter of Credit is requested, a completed Letter of Credit
Application shall accompany this Advance Request Form.
<PAGE>
(e) The Borrowers are in compliance and will be in compliance
following receipt of the requested Advance or the issuance of the Letter of
Credit, as applicable, with Paragraphs 6.13 through 6.15 and Section Seven of
the Agreement;
(f) The representations and warranties set forth in Section
Four of the Agreement are true and correct;
(g) No Default or Event of Default under the Agreement has
occurred and is continuing or will be caused by the requested Advance and/or
Letter of Credit; and
(h) There has been no Material Adverse Change since the date
of the quarterly and audited annual financial statements most recently delivered
to Banks pursuant to Paragraph 5.1(e), 6.2 or 6.3 of the Agreement (as
applicable).
Capitalized terms used herein and not defined shall have the
respective meanings set forth in the Agreement.
IN WITNESS WHEREOF, the undersigned, being the Chief Financial
Officer or Controller of SunSource Inc., has executed this Advance/Credit
Request Form this ____ day of _______________, ____.
SUNSOURCE INC., for itself and on behalf of
the other Borrowers
By: _______________________________________
Name:
Title:
<PAGE>
EXHIBIT B
FORM OF PROMISSORY NOTE
$____________________ December __, 1998
FOR VALUE RECEIVED, the undersigned, SUNSOURCE, INC., a
Delaware corporation, and its Subsidiaries set forth on Schedule 1 to the Credit
Agreement referenced below (the "Borrowers"), promise on a joint and several
basis to pay to the order of ____________________, a _______________________
(herein "Bank") at the office designated below of First Union National Bank (the
"Agent") the principal sum of __________________________________ ($_________)
(the "Loan") or such lesser amount as set forth below, payable on the
Termination Date (as defined in accordance with the Credit Agreement); together
with interest on the unpaid balance hereof in accordance with Paragraphs 2.6 and
2.13 of the Credit Agreement.
This Promissory Note arises out of a certain Second Amended
and Restated Credit Agreement dated the date hereof among Bank, First Union
National Bank, for itself and as Agent, The Bank of Nova Scotia, for itself and
as Documentation Agent, and the Banks set forth on Schedule 3 attached thereto
(collectively, the "Banks"), Borrowers, and the Subsidiaries of SunSource, Inc.
set forth on Schedule 2 thereof ("Guarantors") (as amended and as may be further
amended from time to time, the "Credit Agreement"). Reference is made to the
Credit Agreement for a statement of the respective rights and obligations of the
parties and the terms and conditions therein provided under which all or any
part of the principal hereof, accrued interest thereon, and other amounts
payable under the Credit Agreement may become immediately due and payable.
Capitalized terms used, but not otherwise defined, in this Promissory Note shall
have the meanings given to them in the Credit Agreement.
Notwithstanding the face amount of this Promissory Note, the
Borrowers' liability hereunder shall be limited to their actual outstanding
principal indebtedness to the Bank under the Credit Agreement comprising the
aggregate outstanding principal amount of the Bank's Pro Rata Share of all
Advances of the Loan, reimbursement obligations with respect to Letters of
Credit and all interest, fees and expenses in connection with the foregoing.
All principal and interest shall be payable in lawful money of
the United States of America in immediately available funds at the office of
1339 Chestnut Street, Philadelphia, Pennsylvania 19101, as Agent.
<PAGE>
The occurrence of an Event of Default under the Credit
Agreement constitutes an Event of Default under this Promissory Note and
entitles the Banks, in accordance with the Credit Agreement, to declare this
Promissory Note immediately due and payable.
The Borrowers hereby waive presentment, demand for payment,
notice of dishonor or acceleration, protest and notice of protest, and any and
all other notices or demands in connection with the delivery, acceptance,
performance, default or enforcement of this Promissory Note, except any notice
requirements set forth in the Credit Agreement.
This Promissory Note shall be binding upon the Borrowers and
their successors and assigns and shall inure to the benefit of the Bank and its
successors and assigns. This Promissory Note shall be governed as to validity,
interpretation and effect by the laws of the Commonwealth of Pennsylvania.
In the event any interest rate applicable hereto is in excess
of the highest rate allowable under applicable law, then the rate of such
interest will be reduced to the highest rate not in excess of such maximum
allowable interest and any excess previously paid by the Borrowers shall be
deemed to have been applied against the principal of the Loan.
THE BORROWERS HEREBY KNOWINGLY, VOLUNTARILY, AND INTENTIONALLY
WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION
BASED HEREON OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS PROMISSORY NOTE
OR THE CREDIT AGREEMENT 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 BANKS' ENTERING INTO THE CREDIT AGREEMENT.
THE BORROWERS ACKNOWLEDGE THAT THEY HAVE HAD THE ASSISTANCE OF
COUNSEL IN THE REVIEW AND EXECUTION OF THIS PROMISSORY NOTE AND THAT THE MEANING
AND EFFECT OF THE FOREGOING WAIVER OF JURY TRIAL HAS BEEN FULLY EXPLAINED TO THE
BORROWERS BY SUCH COUNSEL.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this
Promissory Note under seal the day and year first above written.
SUNSOURCE INC.
By: ___________________________
Name:
Title:
SUNSOURCE INVESTMENT COMPANY,
INC.
By: ___________________________
Name:
Title:
SUNSUB A INC.
By: ___________________________
Name:
Title:
THE HILLMAN GROUP, INC.
By: ___________________________
Name:
Title:
[EXECUTIONS CONTINUED]
<PAGE>
HARDING GLASS, INC.
By: ___________________________
Name:
Title:
SUNSOURCE INDUSTRIAL SERVICES
COMPANY, INC.
By: ___________________________
Name:
Title:
SUNSOURCE CORPORATE GROUP, INC.
By: ___________________________
Name:
Title:
KAR PRODUCTS INC.
By: ___________________________
Name:
Title:
SUNSOURCE INVENTORY MANAGEMENT
COMPANY, INC.
By: ___________________________
Name:
Title:
SUNSOURCE TECHNOLOGY SERVICES
INC.
By: ___________________________
Name:
Title:
<PAGE>
EXHIBIT C
FUNDING COSTS CALCULATION
-------------------------
If a Borrower is liable to a Bank for funding costs pursuant
to Paragraph 2.6(d), 2.7(c) or 2.10 of the Credit Agreement, then on (i) the
date of failure to meet the conditions to an Advance for which the Libor-Based
Rate has been selected or (ii) the repayment or prepayment date, as the case may
be, such Borrower shall pay such Bank an amount, not less than zero, as
calculated by Agent in accordance with the following formula:
(Libor-Based Rate, applicable to the Portion not funded or
being repaid or prepaid minus one and one-fourth percent (1 1/4%) per annum) -
(the Applicable Libor Rate)
X
(the principal amount of the Portion not funded or being repaid or prepaid)
X
(the number of days in the Interest Period selected for any
Portion not funded or the number of days to but excluding the last day in the
Interest Period for any Portion being repaid or prepaid) divided by 365
The "Applicable Libor Rate" shall mean the Adjusted Libor Rate
as defined in the Credit Agreement, determined at or about 11:00 a.m. London
time on the first Business Day in London following the date of failure to meet
the conditions to an Advance or of repayment or prepayment for deposits of
United States Dollars in amount or amounts substantially equal in the aggregate
to the amount not funded or being repaid or prepaid and with a maturity or
maturities substantially equal to the period or periods of time between the date
of failure to fund or date of repayment or prepayment and the date or dates such
amount would otherwise have matured and become repayable under the Credit
Agreement.
<PAGE>
EXHIBIT E Page 1 of 4
DISCLOSURE PURSUANT TO REPRESENTATIONS AND WARRANTIES
4.4 Material Contracts
- ----------------------
None
4.5 Compliance
- --------------
None
4.6 Litigation
- --------------
On February 27, 1996, a lawsuit was filed against the Company by the buyer of
its Dorman Products division, R&B, Inc. ("R&B") for alleged misrepresentation of
certain facts by the Company upon which R&B allegedly based its offer to
purchase Dorman. The complaint seeks damages of approximately $21,000,000,
although the Company believes that any recovery by R&B will be substantially
lower. In 1998, the Company and R&B agreed to an arbitration process with
respect to certain unresolved post-closing adjustments. In the third quarter the
Company recorded a pre-tax charge of $1,300,000 which management estimates is
the Company's maximum exposure related to these post-closing issues. On December
4, 1998 a hearing was held by the arbitrator on these matters and his decision
is expected by January 7, 1998. It is unclear what impact the arbitration
decision will have on the ultimate resolution of this litigation. R&B has
offered to settle the arbitration and litigation for the amount of $10,000,000.
The Company is in the process of determining its response to this settlement
offer but would not expect to exceed the amount of the reserve indicated above.
4.7 Title to Assets
- -------------------
See the Attached Schedule of Indebtedness and Obligations for Secured
Assets and Lease Obligations as of November 30, 1998 also as described
in Notes 9, 10 and 11 to Consolidated Financial Statements of the
Company and Subsidiaries as of and for the period ended December 31,
1997, previously furnished to the Banks.
<PAGE>
Page 2 of 4
4.8 Capital Stock
- ------------------
The number of shares and classes of capital stock of each Borrower and
each Subsidiary and the ownership thereof effective upon the 1998
Conversion are as follows:
Ownership of the Company
- ------------------------
Authorized Shares: 1,000 shares of Preferred Stock, $.01 par value per share
20,000,000 shares of Common Stock , $.01 par vaule per share
Outstanding: Preferred stock: none
Common stock: 6,756,129 shares (directors and executive
officers ownership is approximately 21% of shares
outstanding).
Treasury: 461,100 common shares.
Ownership of SunSource Investment Company, Inc.
- -----------------------------------------------
Authorized Shares: 100 shares of Common Stock, $.01 par value per share
Outstanding: 100 shares issued to SunSource, Inc.
Ownership of SunSub A Inc.
- --------------------------
Authorized Shares: 100 shares of Common Stock, $.01 par value per share
Outstanding: 100 shares issued to SunSource Investment Company, Inc.
Ownership of The Hillman Group, Inc.
- ------------------------------------
Authorized Shares: 100 shares of Common Stock, $.01 par value per share
Outstanding: 100 shares issued to SunSub A Inc.
Ownership of Harding Glass, Inc.
- --------------------------------
Authorized Shares: 100 shares of Common Stock, $.01 par value per share
Outstanding: 100 shares issued to SunSub A Inc.
Ownership of SunSource Industrial Services Company, Inc.
- --------------------------------------------------------
Authorized Shares: 100 shares of Common Stock, $.01 par value per share
Outstanding: 100 shares issued to SunSub A Inc.
Ownership of SunSource Corporate Group, Inc.
- --------------------------------------------
Authorized Shares: 100 shares of Common Stock, $.01 par value per share
Outstanding: 100 shares issued to SunSub A Inc.
Ownership of SunSource Inventory Management Company, Inc.
- ---------------------------------------------------------
Authorized Shares: 100 shares of Common Stock, $.01 par value per share
Outstanding: 100 shares issued to SunSource Industrial Services Company,
Inc.
<PAGE>
Page 3 of 4
4.8 Capital Stock, continued
- -----------------------------
Ownership of SunSource Technology Services Inc.
- -----------------------------------------------
Authorized Shares: 100 shares of Common Stock, $.01 par value per share
Outstanding: 100 shares issued to SunSource Industrial Services Company,
Inc.
Ownership of Kar Products, Inc.
- -------------------------------
Authorized Shares: 100 shares of Common Stock, $.01 par value per share
Outstanding: 100 shares issued to SunSource Industrial Services Company,
Inc.
Ownership of A & H Holding Co., Inc.
- ------------------------------------
Outstanding: 100 shares issued to Kar Products Inc.
Ownership of Hydra Power de Mexico
- ----------------------------------
Outstanding 49,998 shares of Common Stock issued to A&H Holding Co., Inc.
Ownership of SIMCO de Mexico
- ----------------------------
Outstanding 98 shares of Common Stock issued to A&H Holding Co., Inc.
Ownership of SunSource Canada Investment company LLC
- ----------------------------------------------------
Outstanding 100 shares of Common Stock issued to A&H Holding Co., Inc.
Ownership of J. N. Fauver (Canada), Ltd.
- ---------------------------------------
Outstanding: 5 shares of Common Stock issued to SunSource Canada
Investment Company LLC.
Ownership of A & H Bolt & Nut Company, Ltd.
- -------------------------------------------
Outstanding: 306 Class B special shares issued to SunSource Canada
Investment Company LLC
4.10 (c) Taxes and Assessments
- ------------------------------
The Internal Revenue Service and/or various State Taxing Authorities have in
progress income tax audits of records for the years 1982 through 1984. The
Company has assumed the agreements of Sun Distributors, Inc., to extend the time
for assessment of tax for tax periods 1985, 1986 and January 1, 1987 through
February 11, 1987. There have been no tax audits by the Internal Revenue Service
of records of the Company, SDI, SDIPI, SunSub A and SunSub B to date nor have
agreements to extend the time for assessment been executed to date. Various
State taxing authorities have in progress tax audits of records of the Company.
Page 4 of 4
<PAGE>
4.11 Indebtedness
- -----------------
- - See the Attached Schedule of Indebtedness and Obligations
- - Lease Obligations as described in Note 11 to Consolidated Financial
Statements of SunSource Inc. and Subsidiaries as of and for the period ended
December 31, 1997, furnished to the Banks.
4.12 Management Agreements
- --------------------------
Arthur Anderson -- Restructuring Consulting
PricewaterhouseCoopers -- Annual Audit and Tax Compliance
Registrar & Transfer Co. -- Transfer Agent
Frank Russell Trust Co. -- Investment Manager, Retirement Plans
4.13 Subsidiaries and Investments
- ---------------------------------
Employee advances aggregating $ 20,000 as of September 30, 1998.
4.14 ERISA
- ----------
Unfunded liabilities for post-retirement life or health benefits are estimated
for the following Operating Division: J. N. Fauver Company $452,000
The Company is a party to multi-employer pension plans of which there was no
withdrawal liability as of December 31, 1997, but which could have withdrawal
liability in the future. The multi-employer pension plans are as follows:
Harding Glass Industries - International Brotherhood of Painters and Allied
Trades Pension Trust--Glaziers, Architectural
Metal and Glassworkers Local #930 and Glaziers
Local #911
- Glaziers Local #930 Pension Trust
- Western Conference of Teamsters Pension Trust
4.17 Hazardous Wastes, Substances and Petroleum Products
- --------------------------------------------------------
Philips & Company
- -----------------
Mid-MO Superfund Site --Limited Liability Expected
Downey Glass Company
- --------------------
Operating Industries, Inc. Landfill Superfund Site
Liability not expected to exceed $300,000 recorded on the books of SunSource
Inc. as of September 30, 1998.
<PAGE>
<TABLE>
<CAPTION>
SDI OPERATING PARTNERS, L.P.
SCHEDULE OF INDEBTEDNESS
AS OF 11/30/98
(in thousands)
TOTAL
OUTSTANDING
PRINCIPAL
OBLIGOR HOLDER BALANCE SECURITY
=============================================== ============================================ =================== ============
<S> s <C> <C> <C>
SDI Operating Partners, L.P. Teachers Insurance Co. $ 60,000 Unsecured
Senior Debt
SDI Operating Partners, L.P. Cananwell Finance Co. 884 Unsecured
Debt
SDI Operating Partners, L.P. First Union National Bank - Revolving Credit 11,440 Unsecured
Senior Debt
The Bank of Nova Scotia - Revolving Credit 11,440 Unsecured
Senior Debt
Fifth Third Bank - Revolving Credit 6,160 Unsecured
Senior Debt
SunTrust Banks, Inc. - Revolving Credit 6,160 Unsecured
Senior Debt
The Fuji Bank, Limited - Revolving Credit 8,800 Unsecured
----------------- Senior Debt
Total Revolving Credit 44,000
-----------------
A&H Bolt - A division of SDI Operating Partners, L.P. Bank of Nova Scotia - Unsecured
line of
credit
Harding Glass - A division of SDI Operating Partners, L.P. L.O.F. Trade Notes 974 Glass
Inventory
Hillman Fastener - A division of SDI Operating Partners, L.P. Fifth Third 862 Capital
Leases -
Packaging
Equipment
------------------
Total $ 106,720
==================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SDI OPERATING PARTNERS, L.P.
EXISTING LETTERS OF CREDIT
AS OF 11/30/98
(in thousands)
DIVISION ISSUING BANK BENEFICIARY AMOUNT
=============================== ==================== =================================================== ===============
<S> <C> <C> <C>
Stand-By Letters of Credit:
Business Insurance - Loss Casualty Program:
SunSource Headquarters First Union Legion Ins. Co. - 5th/6th Policy Years $ 1,750
SunSource Headquarters First Union Mutual Indemnity - 1st - 4th Policy Years(1) 1,300
---------------
Total Stand-By Letters of Credit $ 3,050
---------------
................................................................................................................... ...............
Documentary or Trade Letters of Credit:
Hillman Fastener First Union 467
Kar Products First Union 23
---------------
Total Documentary Letters of Credit $ 490
===============
---------------
Grand Total - All LOC's $ 3,540
===============
</TABLE>
(1) Issued on December 15, 1998
<PAGE>
EXHIBIT F
Form of Compliance Certificate
------------------------------
To: The Banks, as defined in the Second Amended and Restated Credit
Agreement dated December 31, 1998 (as may be further amended,
the "Agreement")
Attached hereto are the financial statements and other items required to
be delivered to Banks pursuant to Paragraph 6.2 or 6.3 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 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:_______________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
_______________________________________________________________________________.
5. Attached hereto as Schedule 1 are the calculations of the covenants
set forth in Paragraphs 6.13 through 6.15 and certain paragraphs in
Section Seven 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 other Borrowers
By: _______________________________
Name:
Title:
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE 1
<S> <C> <C> <C>
I. CAPITALIZATION RATIO (Paragraph 6.13 of the Credit Agreement)
A. Funded Debt
Indebtedness for borrowed money $__________
Indebtedness evidenced by notes, debentures $__________
or similar instruments
Capital Leases $__________
Guarantees of Indebtedness or Capital Leases $__________
Letters of Credit and letter of credit $__________
reimbursement obligations
(A) $__________
B. Net Worth
Total Assets $__________
Minus Total Liabilities $__________
(B) $__________
C. Total Capital
Funded Debt (Line A above) $__________
Outstanding principal amount of Junior $__________
Subordinated Debentures
Net Worth (Line B Above) $__________
(C) $__________
Capitalization Ratio (ratio of (A) to (C)): ________
<PAGE>
Covenant:
(i) last day of each of the first two fiscal quarters of each
fiscal year: 62%
(ii) last day of each of the last two fiscal quarters of each
fiscal year: 60%
Compliance: ____YES ____NO
II. FIXED CHARGE COVERAGE RATIO (Paragraph 6.14 of the Credit Agreement)
A. Adjusted EBITDAR for the most recent Rolling
Period
1. EBITDA
a. Net Income
Gross revenue (excluding $__________
extraordinary gains and
losses)
minus all expenses and other proper $__________
charges (including taxes on
income)
$__________
b. Interest Expense (including all $__________
interest paid on the Junior
Subordinated Debentures
(whether paid in cash or in
kind))
c. All provisions for income taxes $__________
<PAGE>
d. Depreciation and amortization $__________
expense
e. Extraordinary losses minus $__________
extraordinary gains
(A) $__________
2. Adjusted EBITDAR
a. EBITDA (Total (A) above) $__________
b. Rent expense
$----------
c. minus Capital Expenditures $__________
(B) $__________
3. Fixed Charges
a. Interest Expense (including $__________
interest paid on the
Junior Subordinated
Debentures to the extent
paid in cash)
b. Rent expense $__________
c. Scheduled maturities paid on $__________
Funded Debt (excluding
the Loan)
d. Cash dividends paid by $__________
SunSource Inc.
(C) $__________
Fixed Charge Coverage Ratio (ratio of (B) to (C)): __________
Covenant: As of the last day of each fiscal quarter set forth
in the left hand column, for the Rolling Period ending on such
date, the ratio must not be less than the amount set forth in
the right hand column:
<PAGE>
Period Minimum Ratio
------ -------------
Date of Agreement 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 1.50
quarter thereafter
Compliance: ____YES ____NO
III. LEVERAGE RATIO (Paragraph 6.15 of the Credit Agreement)
A. Funded Debt (as calculated above) (A) $__________
B. EBITDA (as calculated above) (B) $__________
Leverage Ratio (ratio of (A) to (B)): __________
Covenant: ratio must not be greater than 3.25:1.
Compliance: ____YES ____NO
IV. INDEBTEDNESS (Paragraph 7.1 of the Credit Agreement)
A. Trade Indebtedness (7.1(iv)) $__________
B. Indebtedness for purchase or lease of fixed assets (7.1(v)) $__________
C. Additional principal amounts outstanding of domestic
non-Borrower, non-Guarantor Subsidiaries (7.1(ix)) $__________
D. Additional principal amounts outstanding of foreign
non-Borrower, non-Guarantor Subsidiaries (7.1(x)) $__________
E. Purchase money indebtedness (7.1(xi)) $__________
Compliance ____ YES ____ NO
<PAGE>
V. GUARANTIES (Paragraph 7.2 of the Credit Agreement)
A. Guaranties (7.2(i)) $__________
Compliance ____ YES ____ NO
VI. LOANS (Paragraph 7.3 of the Credit Agreement)
A. Loans to domestic non-Borrower, non-Guarantor
Subsidiaries (7.3(ii)) $__________
B. Loans to foreign non-Borrower, non-Guarantor
Subsidiaries (7.3(iii)) $__________
Compliance ____ YES ____ NO
</TABLE>
<PAGE>
JOINDER
-------
THIS JOINDER is made this __ day of January, 1999 by and among
SUNSOURCE INC. (the "Company"), a Delaware corporation with offices at 3000 One
Logan Square, Philadelphia, Pennsylvania 19103, the subsidiaries of the Company
identified on Schedule 1 attached to the Credit Agreement (as defined below)
(individually and collectively with the Company, the "Borrowers") and the
subsidiaries of the Company identified on Schedule 2 attached to the Credit
Agreement (individually and collectively, the "Guarantors"); FIRST UNION
NATIONAL BANK, a national banking association and successor by merger to
CoreStates Bank, N.A. with offices at 1339 Chestnut Street, 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 3 to the Credit Agreement (the
Agent, the Documentation Agent and the banks identified on Schedule 3, each
individually an "Existing Bank" and collectively the "Existing Banks") and PNC
BANK, NATIONAL ASSOCIATION ("PNC"), a national banking association with offices
at 1600 Market Street, Philadelphia, Pennsylvania 19103.
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Agent, the Documentation Agent, the Borrowers,
Guarantors and Existing Banks are party to that Second Amended and Restated
Credit Agreement dated December 31, 1998 (as may be amended, the "Credit
Agreement");
WHEREAS, PNC wishes to join in and become a Bank pursuant to
Paragraph 2.1(d) of the Credit Agreement; and
WHEREAS, pursuant to Paragraph 2.1(d) of the Credit Agreement
and this Joinder, the Commitment is being increased by the Additional Commitment
for a total commitment of Ninety Million Dollars ($90,000,000), and the Banks'
respective Maximum Principal Amounts are being amended and restated as set forth
on Exhibit B attached to this Joinder.
NOW, THEREFORE, in consideration of the foregoing premises and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, and intending to be legally bound, the undersigned
hereby agree as follows:
1. PNC is hereby made a Bank under the Credit Agreement
pursuant to the terms of Paragraph 2.1(d) thereof, and in
furtherance thereof:
a.. PNC hereby expressly agrees that it shall be
bound by all the terms and conditions of the Credit Agreement,
and shall have the same rights and obligations as the Existing
Banks thereunder.
<PAGE>
b. Borrowers shall execute and deliver a Promissory
Note in favor of PNC (the "PNC Note") in the form of Exhibit A
attached hereto.
c.. Banks and Borrowers hereby acknowledge and agree
that the Commitment under the Credit Agreement (which was
Seventy-Five Million Dollars ($75,000,000) on the Effective
Date) is hereby increased by the amount of the Additional
Commitment to a Commitment of Ninety Million Dollars
($90,000,000), and all references in the Credit Agreement to
the term "Commitment" shall hereafter include the Additional
Commitment.
d. Schedule 3 to the Credit Agreement (Banks and
their Maximum Principal Amounts) is hereby amended and
restated in its entirety as set forth on Exhibit B attached
hereto.
2. Representations and Warranties. Borrowers hereby represent
and warrant to Banks as follows:
a. Representations. The representations and
warranties set forth in the Credit Agreement
are true and correct in all respects as of
the date hereof; there is no Event of
Default or Default under the Credit
Agreement; and there has been no Material
Adverse Change since the date of the Credit
Agreement.
b. Power and Authority. Each Borrower has the
power and authority under the law of the
jurisdiction of its incorporation and under
its certificate of incorporation and bylaws
to enter into and perform this Joinder, the
PNC Note and all other agreements, documents
and actions required hereunder to which it
is a party (hereinafter collectively
referred to as the "Joinder Documents"); and
all actions (corporate or otherwise)
necessary or appropriate for the execution
and performance by each Borrower of the
Joinder Documents have been taken and, upon
their execution, the Joinder Documents will
constitute the valid and binding obligations
of each Borrower, enforceable in accordance
with their respective terms.
c. No Violations of Law or Agreements. The
making and performance of the Joinder
Documents by each Borrower will not violate
any provisions of any law or regulation,
foreign, federal, state or local, or the
certificate of incorporation or bylaws of
any Borrower, or result in any breach or
violation of, or constitute a default or
require the obtaining of any consent under,
any agreement or instrument by which any
Borrower or its property may be bound.
<PAGE>
3. Miscellaneous.
-------------
a. This Joinder and the Joinder Documents shall
be governed by and construed in accordance
with the laws of the Commonwealth of
Pennsylvania.
b. All terms and provisions of this Joinder and
the Joinder Documents shall be for the
benefit of and be binding upon and
enforceable by the respective successors and
assigns of the parties hereto.
c. This Joinder 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 an original.
d. The execution, delivery and performance of
this Joinder and the Joinder Documents shall
not operate as a waiver of any right, power
or remedy of Banks under the Credit
Agreement and the agreements and documents
executed in connection therewith or
constitute a waiver of any provision
thereof.
<PAGE>
e. Capitalized terms used and not otherwise
defined herein shall have the meanings
assigned to them in the Credit Agreement.
IN WITNESS WHEREOF, the undersigned have executed this Joinder
under seal the day and year first above written.
PNC BANK, NATIONAL ASSOCIATION
By: ________________________________
Name:
Title:
SUNSOURCE INC.
By: ________________________________
Name: Joseph M. Corvino
Title: Vice President - Finance
SUNSOURCE INVESTMENT COMPANY, INC.
By: ________________________________
Name: Joseph M. Corvino
Title: Vice President - Finance
SUNSUB A INC.
By: ________________________________
Name: Joseph M. Corvino
Title: Vice President - Finance
THE HILLMAN GROUP, INC.
By: ________________________________
Name: Joseph M. Corvino
Title: Vice President - Finance
[EXECUTIONS CONTINUED]
<PAGE>
HARDING GLASS, INC.
By: _________________________________
Joseph M. Corvino
Title: Vice President - Finance
SUNSOURCE INDUSTRIAL SERVICES
COMPANY, INC.
By: _________________________________
Name: Joseph M. Corvino
Title: Vice President - Finance
SUNSOURCE CORPORATE GROUP, INC.
By: _________________________________
Name: Joseph M. Corvino
Title: Vice President - Finance
KAR PRODUCTS INC.
By: _________________________________
Name: Joseph M. Corvino
Title: Vice President - Finance
SUNSOURCE INVENTORY MANAGEMENT
COMPANY, INC.
By: _________________________________
Name: Joseph M. Corvino
Title: Vice President - Finance
[EXECUTIONS CONTINUED]
<PAGE>
SUNSOURCE TECHNOLOGY SERVICES INC.
By: ___________________________________
Name: Joseph M. Corvino
Title: Vice President - Finance
FIRST UNION NATIONAL BANK, successor by
merger to CoreStates Bank, N.A.,
individually and in its capacity as Agent
hereunder
By: ___________________________________
Name:
Title:
THE BANK OF NOVA SCOTIA
By: ___________________________________
Name:
Title:
FIFTH THIRD BANK
By: ___________________________________
Name:
Title:
SUNTRUST BANK, ATLANTA
By: ___________________________________
Name:
Title:
By: ___________________________________
Name:
Title:
<PAGE>
EXHIBIT A
ADVANCE/CREDIT REQUEST FORM
---------------------------
In accordance with Paragraph 2.7, 2.13 or 3.3 (as applicable)
of the Second Amended and Restated Credit Agreement (as amended, the
"Agreement") dated December 31, 1998 among First Union National Bank, for itself
and as Agent, The Bank of Nova Scotia, for itself and as Documentation Agent,
and the Banks set forth on Schedule 3 to the Agreement (collectively referred to
herein as the "Banks"); SunSource, Inc. and its Subsidiaries as set forth on
Schedule 1 to the Agreement (the "Borrowers"); and the Subsidiaries as set forth
on Schedule 2 to the Agreement (the "Guarantors"), Borrowers hereby request an
Advance and/or a Letter of Credit under the Commitment.
The undersigned hereby requests, represents and certifies that
as of the date hereof and the date of the requested Advance and/or Letter(s) of
Credit (receipt of such Advance and/or issuance of such Letter(s) of Credit, as
applicable, being deemed an affirmation of paragraphs (a) through (i) below):
(a) The aggregate amount of the requested Advance is
$____________(3) and/or the aggregate face amount of the requested Letter(s) of
Credit is ________________(4);
(b) The interest rate options which the Borrowers elect to
apply to the Advance are the Adjusted Libor Rate for a Portion of
$_______________ with an Interest Period of ____ month(s); and the Base Rate for
a Portion of $_______________;
(c) The Advance is to be used for purposes permitted by
Paragraph 2.4 of the Agreement;
(d) The date on which the requested Advance is to be made
and/or Letter(s) of Credit is (are) to be issued is ____________.
(e) The Borrowers are in compliance and will be in compliance
following receipt of the requested Advance or the issuance of the Letter of
Credit, as applicable, with Paragraphs 6.13 through 6.15 and Section Seven of
the Agreement;
(f) The representations and warranties set forth in Section
Four of the Agreement are true and correct;
(g) No Default or Event of Default under the Agreement has
occurred and is continuing or will be caused by the requested Advance and/or
Letter of Credit; and
_________________________
(3) Advances for Base Rate Loans and Adjusted Libor Rate Loans must be in
multiples of $100,000, but not less than the lesser of $2,000,000 or the
unborrowed balance of the Commitment.
(4) If a Letter of Credit is requested, a completed Letter of Credit
Application shall accompany this Advance Request Form.
<PAGE>
(h) There has been no Material Adverse Change since the date
of the quarterly and audited annual financial statements most recently delivered
to Banks pursuant to Paragraph 5.1(e), 6.2 or 6.3 of the Agreement (as
applicable).
Capitalized terms used herein and not defined shall have the
respective meanings set forth in the Agreement.
IN WITNESS WHEREOF, the undersigned, being the Chief Financial
Officer or Controller of SunSource Inc., has executed this Advance/Credit
Request Form this ____ day of __________________, ____.
SUNSOURCE INC., for itself and on
behalf of the other Borrowers
By: ____________________________
Name:
Title:
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES PRIOR TO JANUARY 1, 1999
* SunSource Capital Trust
Organized in the State of Delaware
* SunSub A Inc.
Incorporated in the State of Delaware
* SunSub B Inc.
Incorporated in the State of Delaware
* SDI Partners I, L.P.
Organized in the State of Delaware
* SDI Operating Partners, L.P.;
Organized in the State of Delaware
* A & H Holding Company, Inc.;
Incorporated in the State of Michigan
* SunSource Canada Investment Co.
Incorporated in the Province of Ontario
* J. N. Fauver (Canada) Limited;
Incorporated in the Province of Ontario
* A & H Bolt & Nut Company Limited;
Incorporated in the Province of Nova Scotia
* The Fastener Centre, Inc.;
Incorporated in the State of Michigan
* Hydra Power de Mexico;
Incorporated in Bravos Judicial District,
Juarez, Chihuahua, Mexico
* Simco de Mexico;
Incorporated in Ciudad de Mexico, Mexico
<PAGE>
EXHIBIT 21.1 (continued)
SUBSIDIARIES - AFTER DECEMBER 31, 1998
* SunSource Capital Trust
Organized in the State of Delaware
* SunSource Investment Company, Inc.
Incorporated in the State of Delaware
* SunSub A Inc.
Incorporated in the State of Delaware
* SunSource Corporate Group, Inc.
Incorporated in the State of Delaware
* The Hillman Group, Inc.
Incorporated in the State of Delaware
* Harding Glass, Inc.
Incorporated in the State of Delaware
* SunSource Industrial Services Company, Inc.
Incorporated in the State of Delaware
* SunSource Technology Services, Inc.
Incorporated in the State of Delaware
* SunSource Inventory Management Company, Inc.
Incorporated in the State of Delaware
* Kar Products, Inc.
Incorporated in the State of Delaware
* A&H Holding Company, Inc.
Incorporated in the State of Michigan
* SunSource Canada Investment Co.
Incorporated in the Province of Ontario
* J.N. Fauver (Canada) Limited
Incorporated in the Province of Ontario
* A&H Bolt & Nut Company Limited
Incorporated in the Province of Nova Scotia
* Hydra Power de Mexico
Incorporated in Bravos Judicial District, Juarez
Chihuahua, Mexico
* SIMCO de Mexico
Incorporated in Ciudad de Mexico, Mexico
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
SunSource Inc. on Forms S-8 (File No. 333-53121, 333-53123 and 333-63409) of our
report dated March 26, 1999, on our audits of the consolidated financial
statements and financial statement schedules of SunSource Inc. as of December
31, 1998 and 1997, and for the three years in the period ending December 31,
1998, which report is included in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Balance
Sheet as of December 31, 1998 and the related Statement of Income for the year
to date ended December 31, 1998.
</LEGEND>
<CIK> 0001029831
<NAME> SunSource Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,796
<SECURITIES> 0
<RECEIVABLES> 91,118
<ALLOWANCES> 2,489
<INVENTORY> 112,497
<CURRENT-ASSETS> 219,229
<PP&E> 60,779
<DEPRECIATION> 34,009
<TOTAL-ASSETS> 341,568
<CURRENT-LIABILITIES> 97,627
<BONDS> 60,000<F1>
115,551<F2>
0
<COMMON> 72
<OTHER-SE> 20,714
<TOTAL-LIABILITY-AND-EQUITY> 341,568
<SALES> 712,470
<TOTAL-REVENUES> 712,470
<CGS> 421,302
<TOTAL-COSTS> 250,371
<OTHER-EXPENSES> (414)
<LOSS-PROVISION> 1,645
<INTEREST-EXPENSE> 6,838
<INCOME-PRETAX> 22,141
<INCOME-TAX> 0
<INCOME-CONTINUING> 13,817
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,817
<EPS-PRIMARY> 2.00
<EPS-DILUTED> 2.00
<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>
