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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, 1999
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 ______
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. ______
The aggregate market value of the Common Shares held by non-affiliates of the
registrant on March 24, 2000 was $25,117,107. On March 24, 2000 there were
6,854,634 Common Shares outstanding.
Documents Incorporated by Reference: Portions of the Proxy Statement for the
Annual Meeting of Stockholders to be held May 11, 2000 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 through indirect
wholly-owned subsidiaries in four business segments which are: (1) Technology
Services, operating as SunSource Technology Services Inc. ("STS"); (2) Hardware
Merchandising, operating as The Hillman Group, Inc. ("Hillman"); (3) Expediter,
operating as Kar Products, Inc., and A. & H. Bolt & Nut Company Limited
(collectively, "Kar" or "Kar Products"); (4) Integrated Supply, operating as
SunSource Integrated Services de Mexico, S.A. DE C.V. 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.
In December, 1999, the Company's Board of Directors approved management's plan
to dispose of the Company's Glass Merchandising segment, operating as Harding
Glass, Inc.("Harding"). Accordingly, Harding has been accounted for as a
discontinued operation and its results of operations have been segregated from
results of the Company's continuing operations.
On March 2, 2000, the Company contributed its Kar Products operations to a newly
formed partnership affiliated with Glencoe Capital L.L.C. ("Glencoe"). Glencoe
contributed cash equity to the new partnership in exchange for a 51% controlling
interest with the remaining 49% interest retained by SunSource. The Company
received $105 million in cash proceeds from the transaction through repayment of
assumed debt by the new partnership, G-C Sun Holdings L.P. ("G-C"). The Company
will account for its investment in G-C in accordance with the equity method.
On October 28, 1999, the Company entered into a merger agreement to acquire
Axxess Technologies, Inc.("Axxess"), a Tempe, Arizona, manufacturer and marketer
of key duplication and identification systems through a merger transaction.
Axxess had sales of $82 million in 1999. Its product lines include keys and
related accessories, identification tags and letters, numbers and signs. The
transaction is expected to close on or about March 31, 2000, subject to certain
closing conditions.
Technology Services (STS). Technology Services, with sales of $243 million in
1999 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 previously were
performed in-house.
Hardware Merchandising (Hillman). Hillman, with sales of $152 million in 1999,
is a leading provider of small hardware items and merchandising services to
retail 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
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hardware retailers that cannot be managed economically by the retailer's own
employees because of the large number of items and their low prices.
Expediter (Kar Products). Kar Products, with sales of $125 million in 1999,
provides personalized, small parts inventory management services to low volume
customers. Kar Products allows its customers to reduce the expenses of
purchasing, receiving and accounting for parts and materials while maintaining
inventory levels critical to its customers' operations.
Integrated Supply. Integrated Supply, with sales of $36 million in 1999,
provides major industrial manufacturing customers with comprehensive inventory
management services for their maintenance, repair and operating supplies. On
July 1, 1999 the Company sold the assets of Integrated Supply's OEM Fastener
Business. Sales from the OEM Fastener Business aggregated $11 million and $22
million for the six and twelve months ended June 30, 1999, respectively.
Integrated Supply enables its customers to reduce inventory investment and the
associated expenses of purchasing, receiving, disbursing and accounting for
parts and materials.
The Company's current organization including its principal subsidiaries and
affiliates is as follows:
<TABLE>
<CAPTION>
Principal Year Acquired/
Location Organized
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<S> <C>
SunSource Corporate Group, Inc. Philadelphia, PA 1975
Technology Services
- SunSource Technology Services Inc. Chicago, IL 1976-1991 (1)
Hardware Merchandising
- The Hillman Group, Inc. Cincinnati, OH 1982
Expediter
- Kar Products, LLC Chicago, IL 1977
- A. & H. Bolt & Nut Co. Ltd. Windsor, Ontario 1989
Integrated Supply
- SunSource Integrated Services
de Mexico, S.A. DE C.V. Mexico City, Mexico 1992
Glass Merchandising
- Harding Glass, Inc. Kansas City, MO 1980
</TABLE>
(1) Consists of various companies acquired from 1976 through 1991.
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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 vulnerable 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.
SunSource, through its applications engineers and technical support personnel in
Technology Services, provides customized solutions to complex problems
encountered by its customers. The Company believes that its Technology 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's Hillman business
focuses on the retail sector, delivering merchandising systems, point-of-sale
displays, product support and sales installation services through its nationwide
field service force.
The industrial distribution industry will be impacted by electronic commerce
changing channels of distribution in the future. It is SunSource's opinion that
distributors will capture the vast majority of industrial supply sales
transacted through the internet as a result of their market and product
knowledge and services, including fulfillment capabilities. A number of new
business-to- business companies forming electronic marketplaces have emerged as
intermediaries in the industrial channel. However, all are dependent on existing
distributors for fulfillment of transactions negotiated through these exchanges.
To survive and prosper in this evolving channel, SunSource believes that the
critical requirements for success among existing distributors will be market
knowledge and value-added services including superior support and fulfillment
capabilities.
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Risk Factors
Restructuring
In December 1996, the Company announced a three-year restructuring plan to
integrate and consolidate the sales, distribution, finance and administrative
operations of its six domestic Technology Services divisions (hydraulic and
pneumatic distributors that were acquired by the Company between 1976 and 1991;
the "December 1996 Restructuring Plan"). The Company expected the December 1996
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 experienced a reduction of over $75 million in 1999 revenues
from the prior year level caused by its implementation problems with its
integration plan resulting in a loss of $12.5 million in 1999 from earnings
before interest, taxes, depreciation and amortization and non-recurring charges.
In June 1999, as a result of existing business conditions in Technology
Services, the Company announced additional steps to further reduce STS'
workforce by 100 employees, reduce inventories and implement corrective actions
(the "June Restructuring 1999 Plan").
The restructuring activities have resulted in consolidation of the sales
organizations, finance, information systems, distribution networks and
administrative responsibilities for the Technology Services divisions.
The failure to successfully integrate the Technology Services divisions would
have an adverse impact on the Company's ability to restore profitability in STS
and fully achieve the net cost savings from the restructuring plans. There can
be no assurance that the Company's restructuring plans will be successful or
that profitability in STS will be restored to historical levels.
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 reliant 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 currently a party to a merger agreement to acquire Axxess, a
manufacturer and marketer of key duplication and identification systems. The
Company is also pursuing discussions with a number of other 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
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.
New York Stock Exchange Listing
In December 1999, SunSource Inc. was notified that the New York Stock Exchange
("NYSE" or the "Exchange") was reviewing the continued listing of the Company's
common stock on the Exchange in connection with the amendments adopted by the
Exchange relating to continued listing criteria. The new standards require not
less than $50 million in total market capitalization and not less than $50
million in stockholders' equity.
The Company developed business plans for the fiscal years 2000 and 2001 which
were presented to and reviewed by the NYSE in January 2000. The NYSE accepted
the Company's business plans which are expected to restore compliance with the
Exchange's new continued listing standards within 18 months.
While the Company will undertake to maintain its NYSE listing, there can be no
assurance that the Company will be successful in implementing the business plans
submitted to the Exchange and achieve compliance with the required listing
standards or that the NYSE will continue to list the Company's common stock on
the Exchange.
Segment Information
Refer to Item 7 - "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Note 21 of Notes to Consolidated Financial
Statements for Segment financial data for the three years ended December 31,
1999.
Technology Services
SunSource Technology Services, Inc., with sales of approximately $243 million in
1999, 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, product upgrades, and assembly of subsystems.
STS 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
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is performing relative to industry best practices, STS can perform a technology
review of the customer's facilities covering areas such as electronic systems,
hydraulics, pneumatics, repair activities and inventory management. Technology
Services can demonstrate to its customers those areas in which they meet
industry best practices and, when they do not, offer detailed, cost-efficient
steps to improve their performance to meet those standards. The Technology Group
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
toward increased standardization of products. The result is that many such
products have to be modified and used in combination with other components in
order to meet customers' performance requirements. STS recognized this trend as
an opportunity to set up a formal system to customize standardized products to
meet the more specialized needs of its customers. 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.
Technology Services has 23 repair centers throughout the United States to
provide customers with convenient and reliable sources for the repair of
worn-out hydraulic power equipment. Repair centers have been useful in gaining
market share as they have helped STS achieve an expanded relationship with many
of its customers. They also provide 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. STS plans to continue its
successful program of establishing service centers for the repair and overhaul
of hydraulic equipment in major industrial markets around the country.
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,
STS 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 six domestic Technology Services divisions. The integration of the sales
organization, finance, information systems and administrative functions of
Technology Services was completed in 1999. Consolidation of the distribution
network was completed in the first quarter of 2000.
With the completion of restructuring of the sales organization in 1999, the
sales force is now focused on account management and expanded customer
relationships in a defined geography. The outside sales representatives are also
supported by technical product specialists to assist in the delivery and
application of product.
Technology Services completed in the first quarter of 2000 the consolidation of
36 inventory stocking locations into six principal distribution centers which
the Company believes will result in significantly lower operating costs and
better product availability. Centralized purchasing and inventory management is
expected to result in improved fill rates for customers while at the same time
reducing STS' inventory investment, leveraging its purchasing power with many
suppliers and reducing suppliers' operating costs.
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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 35,000 items in four
major product categories, as follows: hydraulics, pneumatics, electronics and
filtration. 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.
STS has a broad supply base which includes most major manufacturers of fluid
power and related technical products in the United States. Technology Services'
top five suppliers account for approximately 30% of its 1999 purchases. Because
of the fragmented nature of the industry, manufacturers of this type of
equipment historically have awarded their franchises on a limited geographical
basis. One of Technology Services' larger suppliers is Sauer-Sunstrand, whose
products are distributed in most of Technology Services' territories.
In 1999, Technology Services has lost certain vendor relationships in limited
geographic regions which for the most part have been replaced with other vendor
product lines. 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 25,000
customers, the top five of which accounted for approximately 10% of its 1999
sales. Approximately 50% of sales are to OEM customers who incorporate the
equipment or systems purchased into their final products. The remaining 50% of
sales are primarily to maintenance, repair and operation ("MRO") customers.
Within the MRO and OEM markets, Technology Services sells to construction
equipment manufacturers, industrial wholesale distributors, metalworking
equipment manufacturers, farm and garden equipment manufacturers, industrial
specialized machinery manufacturers and automobile and auto parts manufacturers.
Sales and Marketing. STS markets its products nationwide, principally
through a network of outside account managers supported by application
engineers, customer service representatives and a telemarketing operation
("SunSource Direct"). 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.
The STS group employs approximately 230 outside sales representatives. Each
customer has a primary sales representative who might be assisted by technology
specialists or industry specialists. Technology specialists are available in the
fields of hydraulics, pneumatics, mobile equipment, lubrication, filtration,
automation and other specialties while industry specialists bring particular
expertise in industries such as pulp and paper, construction equipment,
injection molding or heavy metal working. STS is in the process of adding
additional industry specialists to its sales organization.
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To support the outside sales representatives, Technology Services employs
approximately 170 customer service representatives who collectively function to
take orders from customers on the telephone, answer questions and solve
problems. STS also employs approximately 25 people in its SunSource Direct
operation which is responsible for customers with sales potential not large
enough to justify the cost of service by an outside sales representative. In
addition, an electronic data interchange ("EDI") capability has been established
for use with selected customers and vendors and the group is in the early stages
of designing a presence on the Internet.
Competition. The great majority of Technology Services' competitors are
relatively small companies with sales of less than $20 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 Sophus Berendsen.
The Hillman Group
The Company believes that The Hillman Group, Inc., with sales of $152 million in
1999, 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. 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. Periodically Hillman 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
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provides the retailer with inventory management software that ties to the
retailer's point-of-sale system. In effect, the Hillman Group functions as a
merchandising manager for hardware retailers. Hillman supports these services
with high order fill rates and rapid delivery from its eight distribution
centers across the United States. Orders are normally shipped within 48 hours
with a 96% order fill rate.
Products and Suppliers. The Hillman Group buys its products from
approximately 500 vendors, the largest of which accounted for 10% of Hillman's
1999 purchases and the top ten of which accounted for less than 50% of its 1999
total purchases. About half of its purchases are from overseas suppliers, with
the balance from domestic manufacturers and master distributors. Hillman's
product line includes both standard and specialty nuts, bolts, washers, screws
and anchors. The line also includes brass, plastic, stainless steel, and other
miscellaneous fasteners. The depth of the line, over 35,000 products, is
believed to be the largest in today's industry. Non-fastener products feature a
complete line of picture hanging items and accessories, keys, letters, numbers,
signs, rope and chain accessories, and an extensive list of specialty items with
fuses, electrical connectors and small bulbs heading the list.
To assure quality from its vendors, the Hillman Group 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 and historically has serviced individual dealers of the
larger cooperatives, such as Tru-Serv, Ace and Do it Best. The Hillman Group
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.
The Hillman Group 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. In the later part of
1998 and 1999, Hillman began selling to the "Big Box" home centers such as Home
Depot as well as capturing some "Farm and Fleet" business. New business is also
being cultivated internationally in such places as Mexico, South and Central
America, and the Caribbean.
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Sales and Marketing. The Hillman Group has always been able to be more
responsive to customers' needs than its competitors because they employ the
largest direct national sales and service organization in the industry.
Hillman's sales force consists of over 220 people, managed by 23 field managers.
Each sales representative is responsible for approximately 50 full service
accounts that they call on every two weeks on average. The service organization
consists of 120 full-time and 10 part-time people, managed by 15 field managers.
The 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. Coupled with
the efforts of the Marketing Department, the sales force not only sells
products, but can sell merchandising and technological support capabilities as
well. The Marketing Department provides support through the development of new
products, sales collateral, promotional items, merchandising aids and marketing
services such as advertising and trade show management. Its 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
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.
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.
Kar Products
Kar Products, Inc., with sales of $125 million in 1999, offers personalized,
small parts inventory management service to the low volume customer (small and
medium-size accounts). The Kar 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 the Kar 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 1999, Kar sold more than
40,000 products to over 50,000 customers in the United States and Canada.
Products and Suppliers. Kar packages and inventories over 40,000 items
in nine major product categories. The largest category is fasteners, which
accounted for approximately 30% of 1999 Kar sales. Parts are purchased from over
700 regular vendors, none of which account for greater than 10% of its annual
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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 Kar's quality and service standards. A majority of the
products sold by Kar 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,"
Kar emphasizes new product innovation and is an active participant in trade
shows and trade publications. Kar works with its vendors to introduce more than
500 new products per year.
Markets and Customers. Customers of Kar 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 Kar 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 40% of total Kar sales. Kar also offers customized product
literature which is targeted to selected niche markets.
The Kar sales force consists of approximately 700 sales representatives, each of
whom sells the entire product line and serves an average of 70 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 nine strategically located distribution centers and a
computerized material management system which assures fast, accurate and
complete shipments.
Competition. Kar competes primarily with other national expediters that
provide a similarly 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. Kar's business serves all segments
of the highly fragmented MRO market and has less than 1% market share. The
Company believes that Kar Products 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.
13
<PAGE>
Integrated Supply
The Integrated Supply segment, with sales of $36 million in 1999, 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 Mercedes Benz,
Colgate and Dirona.
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 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.
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, 1999.
14
<PAGE>
Employees
As of December 31, 1999, the Company's total operations employed approximately
4,010 employees, of which approximately 1,780 were sales personnel,
approximately 1,430 were employed as warehouse and delivery personnel, and
approximately 800 held administrative positions. The Company's total operations
have collective bargaining agreements with five unions representing a total of
approximately 78 employees. In the opinion of management, employee relations are
good.
Backlog
The Company's sales backlog for continuing operations was $50.1 million as of
December 31, 1999, and $60.0 million as of December 31, 1998.
Item 2 - Properties.
The Company currently has approximately 164 warehouse and stocking facilities
located throughout the United States, Canada and Mexico. Most of these include
sales offices. Approximately 21 of these facilities are owned and the remainder
are leased. The Company's principal properties are owned or leased warehouse
facilities, as follows:
Division Location Description
-------- -------- -----------
Hillman Cincinnati, Ohio 250,000 sq.ft.(leased)
Harding Denver, Colorado 184,000 sq.ft.(owned)
Technology Services Addison, Illinois 153,000 sq.ft.(leased)
Kar Itasca, Illinois 80,000 sq.ft.(leased)
In the opinion of management, the Company's existing facilities are in good
condition.
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.
15
<PAGE>
Executive Officers of the Company
The following table sets forth certain information regarding the Company's
executive officers:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Donald T. Marshall 66 Chairman of the Board of Directors, SunSource Inc.
Maurice P. Andrien, Jr. 58 President and Chief Executive Officer, SunSource
Inc.
John P. McDonnell 65 Retired as Chief Executive Officer, SunSource
Industrial Services Company, Inc. on December 31,
1999
Joseph M. Corvino 45 Vice President - Finance; Chief Financial Officer;
Treasurer and Secretary, SunSource Inc.
Max W. Hillman, Jr. 53 Chief Executive Officer, The Hillman Group, Inc.
Harold J. Cornelius 51 Chief Executive Officer, Harding Glass, Inc.
</TABLE>
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, SunSource
L.P. (the "Partnership").
Donald T. Marshall has been the Chairman since April, 1999. Mr. Marshall served
as Chairman and Chief Executive Officer from December 1988 to April 1999.
Maurice P. Andrien, Jr. has been President and Chief Executive Officer since
April, 1999. Mr. Andrien served as President and Chief Operating Officer of
Unican Security Systems, Ltd. from June 1998 to April 1999. Mr. Andrien served
as Chief Executive Officer of Curtis Industries, Inc. from April 1992 to May
1998.
John P. McDonnell has been Chief Executive Officer of SunSource Industrial
Services Company, Inc. from December 1996 to December, 1999. Mr. McDonnell
served as President and Chief Operating Officer of the Company from December
1994 to April 1999. 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 The Hillman Group,
Inc., 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 Glass, Inc.,
since March 1995. Mr. Cornelius served as Group Vice President from December
1988 to December 1996.
16
<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:
1999 HIGH LOW
---- ------ -----
First Quarter $18.9375 $13.8750
Second Quarter 16.3125 12.6875
Third Quarter 11.0000 4.8750
Fourth Quarter 7.2500 3.5000
1998
First Quarter $29.5000 $23.3125
Second Quarter 29.3750 21.7500
Third Quarter 21.7500 15.0000
Fourth Quarter 21.5625 14.0000
As of March 24, 2000 there were approximately 492 holders of record of the
Common Shares. The total number of Common Shares outstanding as of March 24,
2000 was 6,854,634.
NYSE Listing Requirements
In December 1999, SunSource Inc. was notified that the New York Stock Exchange
("NYSE" or the "Exchange") was reviewing the continued listing of the Company's
common stock on the Exchange in connection with the amendments adopted by the
NYSE relating to continued listing criteria. The new standards require not less
than $50 million in total market capitalization and not less than $50 million in
stockholders' equity. The Company developed business plans for the fiscal years
2000 and 2001, which were presented to and reviewed by the Exchange in January
2000. The NYSE accepted the Company's business plans which are expected to
restore compliance with the Exchange's new continued listing standards within 18
months.
Dividends
On June 30, 1999, the Board of Directors of the Company suspended indefinitely
the quarterly cash dividend of $0.10 per Common Share.
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 subsequently suspended the repurchase program on March
16, 1999. The Company has acquired and placed into treasury 479,100 common
shares through December 31, 1999, at an average cost of $18.12 per common share.
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.
17
<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, 1999. 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.
<TABLE>
<CAPTION>
(dollars in thousands, except for partnership interest and share data)
Income Statement Data for Years
Ended December 31: 1999 1998 1997 1996 1995
-------- -------- -------- -------- ------
Continuing Operations
<S> <C> <C> <C> <C> <C>
Net sales $555,652 $617,518 $606,449 $558,885 $537,374
Gross profit 227,123 253,182 244,637 225,489 218,503
Income (loss) (11,114) 11,857 30,842 16,260 21,016
Gain on sale of division -- -- -- -- 20,644
Income (loss) from discontinued
Harding segment (26,022) 1,960 1,690 3,007 3,085
Extraordinary loss (235) -- (3,392) -- (629)
Net income (loss) $(37,371) $ 13,817 $ 29,140 $ 19,267 $ 44,116
Basic and diluted net income (loss) per
common share:
Income (loss) from continuing
operations $ (1.65) $ 1.72 N/A N/A N/A
Income (loss) from discontinued
Harding segment $ (3.86) $ 0.28 N/A N/A N/A
Extraordinary loss $ (0.03) $ - N/A N/A N/A
Net income (loss) $ (5.54) $ 2.00 N/A N/A N/A
Pro forma net income per common share N/A N/A $ 1.88 N/A N/A
Earnings per limited partnership interest:
Income from continuing operations
- Class A N/A N/A N/A $ 1.10 $ 1.10
- Class B N/A N/A N/A $ 0.18 $ 0.40
Income from discontinued Harding segment
- Class A N/A N/A N/A $ -- $ --
- Class B N/A N/A N/A $ 0.14 $ 0.14
Extraordinary loss
- Class A N/A N/A N/A $ -- $ --
- Class B N/A N/A N/A N/A $ (0.03)
Net income
- Class A N/A N/A N/A $ 1.10 $ 1.10
- Class B N/A N/A N/A $ 0.32 $ 1.45
Dividends declared per common share $ 0.10 $ 0.40 $ 0.10 N/A N/A
Cash distributions declared per
limited partnership interest
- Class A N/A N/A N/A $ 1.10 1.10
- Class B N/A N/A N/A $ 0.33 $ 0.67
Balance Sheet Data at December 31:
Total assets $323,017 $330,240 $297,541 $254,806 $246,075
Long-term debt and capitalized
lease obligations $122,973 $95,842 $93,728 $ 69,150 $ 63,934
</TABLE>
18
<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" or "SunSource") 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 four business segments which are
SunSource Technology Services Company, Inc. ("Technology Services" or "STS"),
The Hillman Group, Inc.("Hillman"), Kar Products, Inc. ("Kar Products" or "Kar")
and Integrated Supply, operating as SunSource Integrated Services de Mexico,
S.A. DE C.V.
Technology Services offers a full range of technology-based products and
services to small, medium and large manufacturers. The Hillman Group provides
small hardware and related items and merchandising services to retail outlets,
primarily hardware stores, home centers and lumberyards. Kar Products provides
personalized, small parts inventory management services to low volume customers.
Integrated Supply provides major industrial manufacturing customers with
comprehensive inventory management services for their maintenance, repair and
operating supplies.
In December 1999, the Board of Directors approved a plan to dispose of the
Company's Harding Glass, Inc. subsidiary ("Harding"). Harding has been accounted
for as a discontinued operation and, accordingly, its results of operations were
segregated from results of the Company's ongoing businesses including
restatement of prior periods presented. In 1999, the Company recorded a loss of
$2.2 million after-tax from Harding's operations and an estimated loss on its
expected disposal of $23.8 million unadjusted for any potential future tax
benefits.
Refinancing
On December 15, 1999, the Company refinanced its $90 million bank revolving
credit and $60 million senior notes with $155 million in senior secured credit
facilities (the "Refinancing").
The new senior debt arrangement has a five-year term which consists of a $25
million term loan and a $130 million revolving credit line. The availability of
the revolving credit line is based on the Company's balances in receivables and
inventories, evaluated on a monthly basis.
Related to the Refinancing, the Company incurred an extraordinary loss of $0.2
million (net of $0.1 million in deferred tax benefits) due to the write-off of
capitalized financing costs as a result of the early extinguishment of the
former credit facilities.
19
<PAGE>
Corporate Reorganization
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.
Restructuring Charges and Asset Write-downs
In the second quarter of 1999, the Company recorded restructuring charges and
asset write-downs aggregating $10.2 million. These non-recurring charges and
write-downs were a result of the Company's plan to reposition Technology
Services and Kar Products, write-off key machines at the Hillman division, and
realign corporate overhead expenses (the "1999 Restructuring Plan"). These
charges and write-downs were composed of $5.4 million related to Technology
Services, $1.0 million related to Kar Products, $3.3 million related to Hillman,
and $0.5 million related to Corporate Headquarters. The Company completed the
1999 Restructuring Plan during the fourth quarter of 1999.
The Technology Services charges and write-downs of $5.4 million includes
termination benefits of $2.8 million, an inventory write-down of $2.1 million,
other exit costs of $0.4 million and a write-down of unamortized leasehold
improvements of $0.1 million. STS terminated 94 employees as a result of the
1999 Restructuring Plan.
The Kar Products charge of $1.0 million was comprised solely of termination
benefits. Kar terminated 10 employees as a result of the 1999 Restructuring
Plan.
The Hillman asset write-off of $3.3 million was primarily the result of
Hillman's inability to recover key machines from retailers and represents the
remaining net book value of key machine capitalized costs as of June 30, 1999.
The Corporate Headquarters component of the restructuring charge was comprised
of other exit costs of $0.4 million and termination benefits of $0.1 million.
See Note 1 of "Notes to Consolidated Financial Statements" for the accounting
recognition of the restructuring charges.
Acquisitions
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.
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 and the twelve-month period prior to
acquisition. Hillman integrated the sales force and operations of the acquired
businesses with its existing operations.
20
<PAGE>
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 served a customer base that included large home improvement retailers
and independent hardware stores. Sales from the acquired operations were
approximately $3.0 million in 1997 and the twelve-month period prior to
acquisition.
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. Sales in 1999 from these acquired businesses aggregated approximately
$18.8 million.
Net cash consideration paid for the businesses acquired by the Company in 1998,
including transaction costs, was $10.8 million, plus the assumption of certain
liabilities of $1.1 million.
On October 28, 1999, the Company entered into a merger agreement to acquire
Axxess Technologies, Inc. ("Axxess") of Tempe, Arizona through a stock merger
transaction. Axxess is a manufacturer of key duplication and identification
systems. The transaction is being structured as a purchase of 100% of the stock
of the privately held company and repayment of outstanding Axxess debt in
exchange for $110 million in cash and subordinated notes. The transaction is
expected to close on or about March 31, 2000 subject to certain closing
conditions.
Divestitures
On March 2, 2000 the Company contributed the interests in its Kar Products, Inc.
and A. & H. Bolt & Nut Company Limited operations (collectively, the "Kar"
business) to a newly-formed partnership affiliated with Glencoe Capital, L.L.C.
("Glencoe"). Glencoe contributed cash equity to the new partnership, G-C Sun
Holdings L.P. ("G-C"). The Company received $105 million in cash proceeds from
the transaction though repayment of assumed debt by G-C. Affiliates of Glencoe
will hold a 51% controlling interest with the remaining 49% interest held by
SunSource. The Company will account for its investment in the partnership in
accordance with the equity method and expects to record an after-tax gain on the
transaction of approximately $51 million in the first quarter of 2000.
On January 10, 2000, the Company signed a letter of intent to sell its Harding
Glass operation to a strategic purchaser. The transaction is expected to result
in the sale of Harding's assets for cash plus the assumption of certain
liabilities. SunSource recorded an expected loss on the sale of Harding in 1999
in the amount of $23.8 million or $3.53 per common share. Sales from Harding
were $118.3 million for the year ended December 31, 1999. The Company expects to
consummate the sale of Harding in the second quarter 2000.
21
<PAGE>
<TABLE>
<CAPTION>
Results of Operations
Segment Sales and Profitability from Continuing Operations for the Three Years Ended December 31, 1999
- ------------------------------------------------------------------------------------------------------
(dollars in thousands)
1999 1998 1997
--------------------------- --------------------------- ---------------------------
% Total % Total % Total
Sales -- continuing operations Sales Sales Sales
------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Technology Services (STS) $ 242,643 43.7% $ 318,500 51.6% $ 318,984 52.6%
Hardware Merchandising (Hillman) (1) (2) 151,884 27.3% 125,830 20.4% 103,971 17.1%
Expediter (Kar) 124,724 22.5% 124,536 20.2% 125,911 20.8%
Integrated Supply - remaining business 20,125 3.6% 16,825 2.7% 11,164 1.8%
Integrated Supply - sold business
and terminated contracts (3) 16,276 2.9% 31,827 5.1% 46,419 7.7%
---------- --------- --------- ------- --------- --------
Consolidated net sales $ 555,652 100.0% $ 617,518 100.0% $ 606,449 100.0%
========== ========= ========= ======= ========= ========
% SALES % SALES % SALES
------- ------- -------
Gross Profit -- continuing operations
Technology Services (STS) (4) $ 55,117 22.7% $ 85,215 26.8% $ 84,826 26.6%
Hardware Merchandising (Hillman) (2) 81,045 53.4% 66,485 52.8% 54,901 52.8%
Expediter (Kar) 86,204 69.1% 88,175 70.8% 90,171 71.6%
Integrated Supply - remaining business 4,403 21.9% 4,217 25.1% 2,260 20.2%
Integrated Supply - sold business
and terminated contracts (3) 2,484 15.3% 9,090 28.6% 12,479 26.9%
--------- --------- ---------
Consolidated gross profit
before inventory write-down
related to restructuring 229,253 41.3% 253,182 41.0% 244,637 40.3%
Inventory write-down
related to restructuring (2,130) - -
--------- ---------- ---------
Consolidated gross profit $ 227,123 40.9% $ 253,182 41.0% $ 244,637 40.3%
========= ========== =========
EBITDA -- continuing operations (7)
Technology Services (STS) (5) $ (12,477) (5.1%) $ 15,138 4.8% $ 16,072 5.0%
Hardware Merchandising (Hillman) 15,816 10.4% 13,477 10.7% 11,580 11.1%
Expediter (Kar) 18,965 15.2% 21,196 17.0% 21,583 17.1%
Integrated Supply - remaining business 954 4.7% 977 5.8% 257 2.3%
Integrated Supply - sold business
and terminated contracts (3) (2,104) (12.9%) 1,528 4.8% 3,333 7.2%
--------- --------- ---------
Total operations before
corporate expenses 21,154 3.8% 52,316 8.5% 52,825 8.7%
Corporate expenses, net (6) (9,653) (1.7%) (7,165) (1.2%) (7,961) (1.3%)
--------- --------- ---------
Consolidated EBITDA before
non-recurring items 11,501 2.1% 45,151 7.3% 44,864 7.4%
Gain on curtailment
of pension plan 5,608 - -
Restructuring charges including
asset and inventory write-downs (10,248) - -
Provision for litigation matters
- divested operations - (1,600) -
--------- --------- ---------
Consolidated EBITDA $ 6,861 1.2% $ 43,551 7.1% $ 44,864 7.4%
========= ========= =========
</TABLE>
<PAGE>
(1) Includes sales from businesses acquired in 1998 of $18,883 and $10,322 for
the twelve months ended December 31, 1999 and 1998, respectively.
(2) Includes a reduction in sales and gross profit of $4,680 and $3,424 for the
twelve months ended December 31, 1998 and 1997, respectively to conform to
current accounting for customer rebates.
(3) Represents sales, gross profit and EBITDA from the OEM Fastener Business,
which was sold on July 1, 1999 and terminated contracts from 1999, 1998 and
1997.
(4) Includes other nonrecurring charges related to warranty claims, customer
credits and other inventory adjustments in the Technology Services
divisions of $5,030 for the twelve months ended December 31, 1999.
Excluding these charges, Technology Services gross profit was $60,147 or
24.8% for the twelve months ended December 31, 1999.
(5) Includes other nonrecurring charges related to the integration and
consolidation of the Technology Services divisions of $8,956 for the twelve
months ended December 31, 1999. Excluding these charges, Technology
Services EBITDA was ($3,521) or (1.5%) for the twelve months ended December
31, 1999.
(6) Includes other income of $420, $428 and $394 for the twelve months ended
December 31, 1999, 1998 and 1997, respectively.
(7) "EBITDA" (earnings before interest, taxes, depreciation and amortization)
is defined as income (loss) from continuing operations before depreciation,
amortization and results of the discontinued Harding segment. 1997 excludes
$2,491 of management fees, $263 of expenses related to minority ownership
and $3,053 of trasaction costs related to the Company's conversion from
partnership to corporate form (the "Conversion").
22
<PAGE>
Years Ended December 31, 1999 and 1998
Net sales from continuing operations decreased $61.8 million or 10.0% in 1999 to
$555.7 million from $617.5 million in 1998. Sales variances by business segment
are as follows:
Sales Increase (Decrease)
-------------------------
Amount %
------ ---
(In thousands)
--------------
Technology Services $(75,857) (23.8)%
Hillman 26,054 20.7 %
Kar Products 188 0.2 %
Integrated Supply (12,251) (25.2)%
--------
Total Company $(61,866) (10.0)%
========
Technology Services sales decreased $75.9 million or 23.8% in 1999 to $242.6
million from $318.5 million in 1998 as a result of the restructuring of the
sales force as well as the effects of the global economy on original equipment
manufacturers' end markets. Hillman's sales increased $26.1 million or 20.7% in
1999 to $151.9 million from $125.8 million in 1998 as a result of growth from
new accounts and expansion of new and existing product lines. Kar sales
increased slightly in 1999 to $124.7 million from $124.5 million in 1998.
Integrated Supply sales decreased $12.3 million or 25.2% in 1999 from $48.7
million in 1998 as a result of the sale of the OEM Fastener Business on July 1,
1999 which contributed sales of $11.0 million in 1999 versus $23.0 million in
the prior-year and terminated contracts which generated sales of $5.3 million in
1999 versus $8.8 million in 1998. Excluding sales from the sold OEM Fastener
Business and terminated contracts, Integrated Supply sales increased 19.6% in
the comparison period.
The Company's sales backlog on a consolidated basis was $50.1 million as of
December 31, 1999, compared with $60.0 million at December 31, 1998, a decrease
of 16.5%.
The Company's consolidated gross margin from continuing operations was 42.2% in
1999 (before the inventory write-down of $2.1 million related to the
Restructuring Plan and non-recurring charges of $5.0 million related to
integration of the Technology Services divisions) compared with 41.0% in 1998.
Technology Services' gross margin before the aforementioned charges decreased
2.0% in 1999 as a result of the decrease in sales levels in relation to the
fixed cost component of cost of goods sold for service and repair facilities and
sales mix. Hillman's gross margin increased 0.6% in the comparison period as a
result of substantial increases in sales of keys to major U.S. hardware chains
and home centers carrying higher margins than hardware and related products.
Kar's gross margin declined 1.7% in 1999 as a result of increased packaging cost
absorption in the 1999 period, a change in sales mix and competitive pricing
pressures. The Integrated Supply segment's gross margin decreased 8.5% in 1999
resulting mainly from the sale of the OEM Fastener Business and cancellation of
certain contracts which carried higher margins than the retained Integrated
Supply business.
The Company's selling, general and administrative expenses ("S,G&A") from
continuing operations, before non-recurring charges of $4.0 million related to
integration of STS, increased by $6.2 million to $214.5 million in 1999 from
$208.3 million in 1998. Selling expenses on a consolidated basis remained
constant with 1998 but decreased in most businesses as a result of cost savings
associated with the 1999 Restructuring Plan and reduced sales levels offset by
an increase at Hillman as a result of 1998 acquisition activity. Warehouse and
delivery expenses
23
<PAGE>
increased $4.3 million as a result of integration costs for the 1998
acquisitions at Hillman and facility reorganization costs at Technology Services
offset slightly by decreases from cost savings associated with the 1999
Restructuring Plan. The increase in general and administrative expenses of $1.9
million is attributable to the integration of the newly acquired businesses at
Hillman and increased facilities costs in the Technology Services division
offset by cost savings associated with the 1999 Restructuring Plan.
S,G&A expenses from continuing operations as a percentage of sales excluding the
previously mentioned non-recurring charges compared with 1998 are as follows:
Twelve Months ended December 31,
--------------------------------
1999 1998
---- ----
Selling Expenses 20.5% 18.4%
Warehouse and Delivery Expenses 6.8% 5.5%
General and Administrative Expenses 11.3% 9.8%
----- -----
Total S,G&A Expenses 38.6% 33.7%
====== =====
Overall, as a percentage of sales, total S,G&A expenses increased due mainly to
the decrease in sales levels in relation to the fixed cost component of S,G&A
expenses.
EBITDA from continuing operations was $20.5 million for the year ended December
31, 1999 after corporate expenses and before the 1999 Restructuring Plan charges
of $10.2 million, and non-recurring charges of $9.0 million related to the
integration and consolidation of the Technology Services divisions, compared
with $43.6 million for the prior-year. The 1998 period includes a nonrecurring
charge of $1.6 million for outstanding litigation matters related to divested
businesses.
The Company's consolidated operating profit margin (EBITDA from continuing
operations, as a percentage of sales) after corporate expenses and before the
aforementioned non-recurring charges declined to 3.7% in 1999 compared with 7.1%
in the prior-year. Technology Services operating profit margin decreased to
(1.5%) from 4.8% in 1998, primarily reflecting reduced 1999 sales and increased
expenses related to the reorganization of sales and administrative functions.
Hillman's operating profit margin excluding the 1999 Restructuring Plan charges
decreased to 10.4% in 1999 from 10.7% in 1998 as a result of sales discounts and
allowances to attract new accounts and increased selling expenses for new field
staff related primarily to 1998 acquisition activities. Kar's operating profit
margin decreased to 15.2% from 17.0% as a result of the gross margin decline
discussed above.
Interest expense, net increased $2.9 million in 1999 from $6.8 million in 1998
due primarily to increased borrowings on the Company's revolving credit facility
as a result of cash requirements to fund the Company's acquisition activities
and working capital requirements.
The Company pays interest to the Trust on the Junior Subordinated Debentures
underlying the Trust Preferred Securities at the rate of 11.6% per annum on
their face amount of $105.4 million, or $12.2 million per annum in the
aggregate. The Trust distributes an equivalent amount to the holders of the
Trust Preferred Securities. For the years ended December 31, 1999 and 1998, the
Company paid $12.2 million in interest on the Junior Subordinated Debentures,
equivalent to the amounts distributed by the Trust on the Trust Preferred
Securities.
24
<PAGE>
The Company is subject to federal, state and local income taxes on its domestic
operations and foreign income taxes on its Canadian and Mexican operations as
accounted for in accordance with Statement of Financial Accounting Standard
("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. See Note 5 of Notes to
Consolidated Financial Statements of the Company for the three years ended
December 31, 1999, for income taxes and related disclosures.
Years Ended December 31, 1998 and 1997
Net sales from continuing operations increased $11.1 million or 1.8% in 1998 to
$617.5 million from $606.4 million in 1997. Sales variances by segment are as
follow:
Sales Increase (Decrease)
-------------------------
Amount %
------ ---
(In thousands)
--------------
Technology Services $ (484) (0.2)%
Hillman 21,859 21.0 %
Kar Products (1,375) (1.1)%
Integrated Supply (8,931) (15.5)%
--------
Total Company $ 11,069 1.8 %
========
Technology Services sales decreased slightly in 1998 to $318.5 million from
$319.0 million in 1997 as a result of the restructuring of the sales force as
well as the effects of the Asian economic crisis on STS' original equipment
manufacturing customers. Hillman's sales increased $21.9 million or 21.0% in
1998 to $125.8 million from $104.0 million in 1997 resulting from 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. Kar sales decreased
$1.4 million or 1.1% in 1998 to $124.5 million from $125.9 million in 1997 as a
result of competitive pricing pressures as well as continued deterioration in
the Canadian dollar. Integrated Supply sales decreased $8.9 million or 15.5% in
1998 to $48.7 million from $57.6 million in 1997 as a result of a net decrease
of $14.6 million resulting from contracts which were canceled in 1998 and 1997
and a decline in the OEM Fastener business which was sold in 1999.
The Company's consolidated gross margin from continuing operations was 41.0% in
1998 compared with 40.3% in 1997. Technology Services' gross margin increased
0.2% in 1998 as a result of tighter pricing controls. Hillman's gross margin
remained constant with 1997. Kar's gross margin declined 0.8% in 1998 as a
result of competitive pricing pressures and higher freight costs. Integrated
Supply's gross margin increased 1.8% in 1998 as a result of sales mix.
The Company's S,G&A expenses increased by $8.8 million or 4.4% to $208.3 million
in 1998 from $199.5 million in 1997. Selling expenses increased $4.1 million
supporting increased 1998 sales levels and increased marketing efforts at
Hillman. Warehouse and delivery expenses increased $1.9 million or 6.0%
principally at Hillman to support increased sales levels. The increase in
general and administrative expenses of $2.7 million or 4.6% is net of expense
reductions of $1.5 million associated with the replacement of cash basis
deferred compensation awards with stock options.
25
<PAGE>
S,G,&A expenses as a percentage of sales increased compared with 1997, as
follow:
Twelve Months
-------------
1998 1997
---- ----
Selling Expenses 18.4% 18.0%
Warehouse and Delivery Expenses 5.5% 5.2%
General and Administrative Expenses 9.8% 9.7%
------ -----
Total S,G&A Expenses 33.7% 32.9%
====== =====
EBITDA from continuing operations after corporate expenses was $43.6 million for
the twelve months ended December 31, 1998, compared with $44.9 million for the
same prior-year period. The 1998 period includes a nonrecurring charge of $1.6
million for outstanding litigation matters related to divested businesses.
The Company's consolidated operating profit margin (EBITDA from continuing
operations, as a percentage of sales) after corporate expenses decreased
slightly to 7.1% in 1998 compared with 7.4% in the prior year. Technology
Services' operating profit margin declined to 4.8% in 1998 from 5.0% in 1997,
primarily reflecting increased expenses related to the reorganization of sales
and administrative functions. Hillman's operating profit margin declined in 1998
to 10.7% from 11.1% in 1997 due to increased selling expenses for new field
staff related primarily to acquisition activities. Integrated Supply's operating
profit margin decreased to 5.1% in 1998 from 6.2% in 1997 due primarily to the
previously mentioned canceled contracts.
Depreciation expense increased $0.9 million to $4.2 million in 1998 from $3.3
million in 1997 due primarily to the acquisition activity at Hillman and an
overall increase in the depreciable fixed asset base due to investment in the
Company's core businesses.
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 $0.7 million in 1998 to $0.2 million from an
expense of $0.5 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 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.
26
<PAGE>
Liquidity and Capital Resources
The Company's cash position of $5.2 million as of December 31, 1999, increased
$2.5 million from the balance at December 31, 1998. Cash was provided during
this period primarily from net borrowings under the bank revolver ($67.8
million), proceeds from issuance of a senior secured term loan ($25.0 million),
proceeds from sale of the OEM Fastener Business ($8.8 million))and proceeds from
the sale of property and equipment($5.1 million). Cash was used during this
period predominantly for early extinguishment of senior notes ($60.0 million),
an increase in net assets held for sale of the discontinued Harding operation
($17.6 million), cash used in operations ($10.3 million), capital expenditures
($4.8 million), financing fees and other costs related to debt refinancing ($3.5
million), repayment of senior secured term loan ($3.5 million) and other
disbursements, net ($4.5 million).
The Company's net interest coverage ratio from continuing operations for 1999
declined to 0.65X (earnings before interest, distributions on trust preferred
securities and income taxes, excluding non-recurring items, over net interest
expense and distributions on trust preferred securities), from 2.06X in 1998 as
a result of reduced earnings and increased interest expense.
The Company's working capital position of $135.6 million at December 31, 1999,
represents a decrease of $14.9 million from the December 31, 1998 level of
$150.5 million. The Company's current ratio decreased to 2.56x at December 31,
1999 from 2.74x at December 31, 1998.
As of December 31, 1999, the Company had $14.1 million available under its
senior secured credit facilities. The Company had $126.7 million of outstanding
long-term debt at December 31, 1999, consisting of a $21.5 million senior
secured term loan at 8.50% as of December 31, 1999, bank revolver borrowings
totaling $102.8 million at an effective interest rate of 8.50%, and capitalized
lease obligations of $2.4 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, 1999.
As of December 31, 1999, the Company's senior debt (including distributions
payable) as a percentage of its consolidated capitalization (senior debt, trust
preferred securities and stockholders' equity) was 56.6% compared with 41.5% at
December 31, 1998. The Company's consolidated capitalization (including
distributions payable) as of December 31, 1999, was $225.7 million compared to
$232.8 million at December 31, 1998.
On December 15, 1999, the Company refinanced its $90 million bank revolver and
$60 million senior notes with $155 in senior secured credit facilities. The new
financing which has a five-year term provides SunSource with adequate funds for
working capital and other corporate requirements.
On March 2, 2000, SunSource contributed the interests in the Company's Kar
Products subsidiary including its Canadian operation, to a newly formed
partnership affiliated with Glencoe as previously mentioned. The Company
received $105 million in cash proceeds from the transaction and expects to
record an after-tax gain of approximately $51 million which has restored the
Company's stockholders' equity to a significant positive position of over $33
million from its deficit balance of $17 million at December 31, 1999. In
addition, SunSource's remaining $25 million investment in Kar or 49% ownership
interest allows the Company to participate in the capital appreciation of Kar in
the future with Glencoe.
27
<PAGE>
With the proceeds from the Kar transaction, the Company expects to complete the
acquisition of Axxess. With the Axxess merger into the Company's Hillman Group,
management expects integration cost savings of over $5 million annualized from
the combined operations.
The Company expects to further strengthen its financial position upon
consummation of the sale of the Harding Glass business, which was announced on
January 10, 2000. Proceeds from this sale will be used to repay debt, thus
allowing the outstanding borrowings to be supported almost entirely by the
Company's investment in receivables and inventories in SunSource's remaining
businesses. The Harding transaction is expected to close in the second quarter
2000. Senior debt as a percentage of consolidated capitalization is expected to
be approximately 40% with the divestment of the Kar and Harding Glass Segments
and the inclusion of the Axxess acquisition.
The Company spent $4.8 million for capital expenditures in 1999, primarily for
warehouse improvements, machinery and equipment, computer hardware and software.
On June 30, 1999, the Board of Directors of the Company suspended indefinitely
the quarterly cash dividend of $.10 per common share.
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 subsequently suspended the repurchase program on March
16, 1999. The Company has acquired and placed into treasury 479,100 common
shares through December 31, 1999, at an average cost of $18.17 per common share.
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.
The Company has deferred tax assets aggregating $16.1 million as of December 31,
1999, 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.
Year 2000 Issue
All of the Company's operating segments successfully met the year 2000
compliance requirement for proprietary and purchased software, and machinery and
equipment utilized in the daily business process. In addition, the Company's
suppliers or customers did not experience any material year 2000
compliance-related problems of which the Company is aware.
All operating divisions will continue to monitor their non-critical processing
software to ensure that all non-critical programs have been successfully
executed in the year 2000.
The Company's established Year 2000 compliance budget of $1.7 million, funded
from operating cash flows, was not exceeded. In addition, the Company expects
only minimal additional expenses, if any, during 2000 related to the Year 2000
compliance issue.
28
<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.
Forward Looking Statements
Certain disclosures related to NYSE listing, acquisitions and divestitures, the
1999 Restructuring Plan, Refinancing and capital expenditures 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. We have based these forward-looking statements on our current
expectations, assumptions and projections about future events. These
forward-looking statements are subject to known and unknown risks, uncertainties
and assumptions that may cause our actual results, levels of activity,
performance, or achievements to be materially different from any future results,
levels of activity, performance, or achievements expressed or implied by such
forward-looking statements. Actual results could differ materially from those
currently anticipated as a result of a number of factors, including the risks
and uncertainties discussed under captions "Risk Factors" - Restructuring, Risks
Associated with Acquisitions and the New York Stock Exchange Listing set forth
in Item 1 of this Form 10-K. Given these uncertainties, current or prospective
investors are cautioned not to place undue reliance on any such forward-looking
statements.
In some cases, you can identify forward-looking statements by terminology such
as "may," "will," "should," "could," "would," "expect," "plan," "anticipate,"
"believe," "estimate," "continue" or the negative of such terms or other similar
expressions. All forward-looking statements attributable to us or persons acting
on our behalf are expressly qualified in their entirety by the cautionary
statements included in this Report. We undertake no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. In light of these risks, uncertainties
and assumptions, the forward-looking events discussed in this Report might not
occur.
Item 7A - Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable.
29
<PAGE>
Item 8 - Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
Page
Report of Independent Accountants 31
Financial Statements:
Consolidated Balance Sheets, December 31, 1999 and 1998 32
Consolidated Statements of Operations, Years ended
December 31, 1999, 1998 and 1997 33
Consolidated Statements of Cash Flows, Years ended
December 31, 1999, 1998 and 1997 34
Consolidated Statements of Changes in Partners' Capital
and Stockholder's Equity for the Year ended December 31, 1997
and Changes in Stockholders' Equity (Deficit) for the
Years ended December 31, 1998 and 1999 35
Notes to Consolidated Financial Statements 36-61
Financial Statement Schedule:
Valuation Accounts 62
30
<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, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ending December 31, 1999, in conformity with accounting principles
generally accepted in the United States. In addition, in our opinion, the
financial statement schedule listed in the accompanying index presents 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 schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States 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
February 9, 2000
31
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
December 31, December 31,
ASSETS 1999 1998
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,186 $ 2,673
Accounts receivable, net of
allowance for doubtful accounts of
$2,272 and $2,184, respectively 65,141 77,239
Inventories 92,691 102,190
Deferred income taxes 10,218 9,043
Net assets held for sale 35,249 40,987
Income taxes receivable 8,561 --
Other current assets 5,226 4,701
--------- ---------
Total current assets 222,272 236,833
Property and equipment, net 17,282 21,744
Goodwill and other intangibles (net of accumulated amortization
of $19,798 and $18,827, respectively) 52,404 55,957
Deferred financing fees 3,493 485
Deferred income taxes 5,865 4,281
Cash surrender value of life insurance policies 14,190 10,262
Other assets 7,511 678
--------- ---------
Total assets $ 323,017 $ 330,240
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 44,358 $ 51,971
Notes payable 376 796
Current portion of capitalized lease obligations 923 276
Dividends / distributions payable 1,019 676
Deferred tax liability 929 929
Current portion of long term debt 3,750 --
Accrued expenses:
Salaries and wages 5,343 6,698
Income and other taxes 3,299 3,830
Accrued liabilities on discontinued operation 2,703 --
Other accrued expenses 23,961 21,123
--------- ---------
Total current liabilities 86,661 86,299
Long term debt 17,750 60,000
Bank revolving credit 102,791 35,000
Capitalized lease obligations 1,509 566
Deferred compensation 14,173 11,802
Other liabilities 2,148 308
--------- ---------
Total liabilities 225,032 193,975
--------- ---------
Guaranteed preferred beneficial interests in the
Company's junior subordinated debentures 115,200 115,551
--------- ---------
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,
7,228,556 issued and 6,749,456 outstanding at December 31, 1999,
7,217,263 issued and 6,756,163 outstanding at December 31, 1998 72 72
Additional paid-in capital 21,342 21,099
Retained earnings (accumulated deficit) (25,297) 12,748
Unearned compensation (283) (229)
Accumulated other comprehensive income (4,344) (4,596)
Treasury stock, at cost, 479,100 shares at
December 31, 1999; 461,100 shares at December 31, 1998 (8,705) (8,380)
--------- ---------
Total stockholders' equity (deficit) (17,215) 20,714
--------- ---------
Total liabilities and stockholders'
equity (deficit) $ 323,017 $ 330,240
========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
32
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
(dollars in thousands, except for share amounts)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales $ 555,652 $ 617,518 $ 606,449
Cost of sales 326,399 364,336 361,812
Cost of sales - Inventory write-down
related to restructuring (Note 1) 2,130 -- --
----------- ----------- -----------
Gross profit 227,123 253,182 244,637
----------- ----------- -----------
Operating expenses:
Selling, general and administrative expenses 218,437 208,281 199,544
Management fee to general partner -- -- 2,491
Depreciation 4,272 4,192 3,279
Amortization 1,847 1,670 1,370
----------- ----------- -----------
Total operating expenses 224,556 214,143 206,684
----------- ----------- -----------
Restructuring charges and asset write-off (Note 1) 8,118 -- --
Gain on curtailment of defined benefit
pension plan (Note 16) 5,608 -- --
Provision for litigation matters -
divested operations -- 1,600 --
Transaction and other related costs (Note 1) -- -- 3,053
Other income (expense) 685 250 (492)
----------- ----------- -----------
Income from operations 742 37,689 34,408
Interest expense, net 9,724 6,838 7,193
Distributions on guaranteed preferred
beneficial interests 12,232 12,232 3,058
----------- ----------- -----------
Income (loss) from continuing operations
before provision (benefit) for income taxes (21,214) 18,619 24,157
Provision (benefit) for income taxes (10,100) 6,762 (6,685)
----------- ----------- -----------
Income (loss) from continuing operations (11,114) 11,857 30,842
----------- ----------- -----------
Discontinued operations (Note 1)
Income (loss) from operations of discontinued
Harding segment, less applicable income
taxes of ($1,080), $1,562 and $5, respectively (2,188) 1,960 1,690
Estimated loss on disposal of discontinued Harding
segment (23,834) -- --
----------- ----------- -----------
Income (loss) from discontinued operations (26,022) 1,960 1,690
----------- ----------- -----------
Income (loss) before extraordinary item (37,136) 13,817 32,532
Extraordinary loss from early extinguishment
of debt, less applicable income taxes of ($126)
and ($951) in 1999 and 1997, respectively (Note 6) (235) -- (3,392)
----------- ----------- -----------
Net income (loss) $ (37,371) $ 13,817 $ 29,140
=========== =========== ===========
Basic and diluted income (loss) per common share:
Income (loss) from continuing operations $ (1.65) $ 1.72 NA
Income (loss) from operations of discontinued
Harding segment, net of taxes (0.33) 0.28 NA
Estimated loss on disposal of discontinued
Harding segment (3.53) -- NA
----------- -----------
Income (loss) before extraordinary item (5.51) 2.00 NA
Extraordinary loss from early extinguishment
of debt, net of taxes (0.03) -- NA
----------- -----------
Net income (loss) $ (5.54) $ 2.00 NA
=========== ===========
Pro forma net income per common share (Note 1) NA NA $ 1.88
===========
Weighted average number of
outstanding common shares (Note 1) 6,747,142 6,907,318 6,418,936
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
33
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(dollars in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(37,371) $ 13,817 $ 29,140
Adjustments to reconcile net income (loss) to net
cash (used for) provided by operating activities:
Depreciation and amortization 6,119 5,862 4,649
Restructuring charges and asset write-down 10,248 -- --
Transaction costs -- -- 3,053
Extraordinary loss 235 -- 3,392
Loss (income) from discontinued Harding segment 26,022 (1,960) (1,690)
Increase in cash value of life insurance (1,598) (846) (525)
Provision for deferred compensation -- -- 2,649
Provision (benefit) for deferred income taxes (2,759) 996 (7,433)
Gain on sale of division (365) -- --
Gain on curtailment of defined benefit pension plan (5,608) -- --
Changes in current operating items:
Decrease (increase) in accounts receivable 9,070 (2,199) (4,240)
Decrease (increase) in inventories 1,401 (7,291) (805)
Increase in income taxes receivable (8,561) -- --
Decrease (increase) in other current assets (619) (614) 303
Increase (decrease) in accounts payable (5,775) 5,893 1,684
Increase (decrease) in income taxes payable (546) 134 1,136
Decrease in accrued interest -- -- (473)
Decrease in accrued restructuring charges
and transaction costs (3,597) (1,099) (4,522)
Increase in other accrued liabilities 1,459 4,899 197
Other items, net 1,913 (1,384) (1,365)
-------- -------- --------
Net cash provided by (used for) operating activities (10,332) 16,208 25,150
-------- -------- --------
Cash flows from investing activities:
Proceeds from sale of property and equipment 5,131 284 713
Proceeds from sale of division 8,827 -- --
Increase in net assets held for sale (17,581) (10,465) 1,634
Payments for acquired businesses, net of cash -- (10,839) --
Capital expenditures (4,755) (6,228) (4,560)
Investment in life insurance policies (1,300) (903) (3,316)
Other, net (851) 30 139
-------- -------- --------
Net cash used for investing activities (10,529) (28,121) (5,390)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of long term debt 25,000 -- 60,000
Borrowings under bank credit agreements, net 67,791 2,000 22,000
Net proceeds from issuance of common stock -- 20,813 --
Purchase of treasury stock at cost (325) (8,380) --
Cash distributions / dividends to investors (1,350) (4,848) (13,901)
Cash distributions paid on Class A exchange -- -- (14,429)
Repayment of long term debt (63,500) -- (63,934)
Prepayment penalties and related costs -- -- (4,278)
Repayments under other credit facilities, net (420) (185) (496)
Principal payments under capitalized lease obligations (300) (210) (140)
Other, net (3,522) -- (573)
-------- -------- --------
Net cash provided by (used for) financing activities 23,374 9,190 (15,751)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 2,513 (2,723) 4,009
Cash and cash equivalents at beginning of period 2,673 5,396 1,387
-------- -------- --------
Cash and cash equivalents at end of period $ 5,186 $ 2,673 $ 5,396
======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
34
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL AND STOCKHOLDER'S
EQUITY FOR THE YEAR ENDED DECEMBER 31, 1997 AND
CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) FOR THE YEARS
ENDED DECEMBER 31, 1998 AND 1999
(dollars in thousands)
<TABLE>>
<CAPTION>
PARTNERS' CAPITAL
----------------------------------------------------------
Cumulative
Foreign
General Class A Class B Class B Translation
Partner Limited Limited Treasury Adjustment
------- ------- ------- -------- -----------
<S> <C> <C> <C> <C> <C>
Partners' Capital - December 31, 1996 960 67,642 29,040 (1,514) (1,509)
Net income 260 9,157 16,633
Cash distributions paid and/or
declared to partners (150) (8,140) (6,730)
Change in cumulative foreign
translation adjustment, 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
Net loss
Change in cumulative foreign translation
adjustment, net of tax
Comprehensive income
Issuance of 11,293 shares of common stock
to certain non-employee directors
Dividends declared on common stock
Repurchase of 18,000 shares of common stock
Stock options granted at a discount
Amortization of stock option discount
Stockholders' Deficit - December 31, 1999
</TABLE>
<PAGE>
[RESTUBBED]
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
---------------------------------------
Retained
Additional Earnings /
Common Paid-in (Accumulated
Stock Capital Deficit)
--------- ---------- ------------
<S> <C> <C> <C>
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
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)
Net income 3,090
Change in cumulative foreign
translation adjustment, net of tax
Adjustment to cash distributions
declared to partners 772
Dividends declared on common stock (642)
-------- -------- ---------
Stockholders' Deficit - December 31, 1997 64 -- 1,735
Net income 13,817
Change in cumulative foreign translation
adjustment, net of tax
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
Repurchase of 461,100 shares of common stock
-------- -------- ---------
Stockholders' Equity - December 31, 1998 $ 72 $ 21,099 $ 12,748
Net loss (37,371)
Change in cumulative foreign translation
adjustment, net of tax
Comprehensive income
Issuance of 11,293 shares of common stock
to certain non-employee directors 119
Dividends declared on common stock (674)
Repurchase of 18,000 shares of common stock
Stock options granted at a discount 124
Amortization of stock option discount
-------- -------- ---------
Stockholders' Deficit - December 31, 1999 $ 72 $ 21,342 $(25,297)
======== ======== ========
</TABLE>
<PAGE>>
[RESTUBBED]
<TABLE>>
<CAPTION> STOCKHOLDERS' EQUITY (DEFICIT)
STOCKHOLDERS' EQUITY (DEFICIT)
---------------------------------------------------------------
Accumulated Total Partners'
Other Capital /
Unearned Comprehensive Treasury Stockholders'
Compensation Income (d) Stock (Deficit) Equity
------------ ------------- -------- ----------------
<S> <C> <C> <C> <C>
Partners' Capital - December 31, 1996 94,619
Net income 26,050
Cash distributions paid and/or
declared to partners (15,020)
Change in cumulative foreign
translation adjustment, net of tax -- -- -- (167)
-------- -------- -------- --------
Partners' Capital - September 30, 1997 -- -- -- 105,482
Conversion adjustments:
Common stock
Paid-in capital --
Comprehensive income (1,676) --
Retained earnings --
Minority ownership (a) 1,082
Class A exchange (b) (130,420)
Goodwill - Minority interest (c) 20,759
-------- -------- -------- --------
Stockholders' Deficit - September 30, 1997 -- (1,676) -- (3,097)
Net income 3,090
Change in cumulative foreign
translation adjustment, net of tax (614) (614)
Adjustment to cash distributions
declared to partners 772
Dividends declared on common stock -- (642)
-------- -------- -------- --------
Stockholders' Deficit - December 31, 1997 -- (2,290) -- (491)
--------
Net income 13,817
Change in cumulative foreign translation
adjustment, net of tax (2,306) (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 (229) 25
Repurchase of 461,100 shares of common stock (8,380) (8,380)
-------- -------- -------- --------
Stockholders' Equity - December 31, 1998 $ (229) $ (4,596) $ (8,380) $ 20,714
Net loss (37,371)
Change in cumulative foreign translation
adjustment, net of tax 252 252
--------
Comprehensive income (37,119)
--------
Issuance of 11,293 shares of common stock
to certain non-employee directors 119
Dividends declared on common stock (674)
Repurchase of 18,000 shares of common stock (325) (325)
Stock options granted at a discount (124) --
Amortization of stock option discount 70 70
-------- -------- -------- --------
Stockholders' Deficit - December 31, 1999 $ (283) $ (4,344) $ (8,705) $(17,215)
======== ======== ======== ========
</TABLE>
<PAGE>
(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
35
<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" or "SunSource") and its direct and indirect
wholly-owned subsidiaries including SunSource Capital Trust (the "Trust"). For
1998 and prior periods, the accompanying financial statements include the
consolidated accounts of the Company, its predecessor, SunSource L.P. (the
"Partnership"), and its wholly-owned subsidiaries including SDI Operating
Partners, L.P. (the "Operating Partnership") and SunSource Capital Trust (the
"Trust"). All significant inter-company balances and transactions have been
eliminated.
Effective with 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 operates in four
segments: (1) Technology Services, operating as SunSource Technology Services
Company, Inc. ("STS"); (2) Hardware Merchandising, operating as The Hillman
Group, Inc. ("Hillman") (3) Expediter, operating as Kar Products, Inc. and A & H
Bolt & Nut Company Limited (collectively, "Kar" or "Kar Products"); and (4)
Integrated Supply. In December 1999, the Company's Board of Directors approved
management's plan to dispose of the Company's Glass Merchandising segment,
operating as Harding Glass, Inc. ("Harding"). Accordingly, Harding has been
accounted for as a discontinued operation and its results of operations were
segregated from results of the Company's continuing operations including
restatement of the prior periods presented.
STS offers a full range of technology-based products and services to small,
medium and large manufacturers. Hillman provides small hardware-related items
and merchandising services to retail outlets, primarily hardware stores, home
centers and lumberyards. Kar Products provides personalized, small parts
inventory management services to low volume customers. Integrated Supply
provides major industrial manufacturing customers with comprehensive inventory
management services for their maintenance, repair and operating supplies.
Harding sells retail and wholesale automotive and flat glass and provides auto
glass installation and small contract glazing services to individual consumers,
insurance companies, auto body shops, and other customers through a large
network of retail glass shops.
STS, Hillman, Kar and Integrated Supply accounted for 44%, 27%, 23% and 6%,
respectively, of the Company's consolidated 1999 net sales. On a consolidated
basis, the Company has over 110,000 customers, the largest of which accounted
for less than 9% of net sales. The Company's foreign sales in Canada and Mexico
36
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(dollars in thousands, except per share amounts)
1. Basis of Presentation, continued:
accounted for less than 10% of its consolidated 1999 net sales. The average
single sale 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.
Discontinued Operations:
In December 1999, the Company's Board of Directors approved management's plan to
dispose of the Company's Harding business. Accordingly, Harding has been
accounted for as a discontinued operation and its results of operations were
segregated from results of the Company's ongoing businesses including
restatement of the prior periods presented. In January 2000, the Company
announced that it had signed a letter of intent to sell Harding.
The estimated loss recorded during the year ended December 31, 1999 on the sale
of Harding was $23.8 million.
Following is summary financial information for the Company's discontinued Glass
Merchandising segment:
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales $ 118,282 $94,952 $88,258
- --------------------------------------------------------------------------------------------------------
Income (loss) from discontinued operations:
Before income taxes $(3,268) $ 3,522 $ 1,695
Income tax provision (benefit) (1,080) 1,562 5
- --------------------------------------------------------------------------------------------------------
Net (2,188) 1,960 1,690
Estimated loss on disposal (23,834) -- --
- --------------------------------------------------------------------------------------------------------
Total income (loss) from
discontinued operations $(26,022) $ 1,960 $ 1,690
========================================================================================================
</TABLE>
As of December 31, 1999, net assets held for sale of the discontinued Harding
operation were $35,249 consisting of receivables, inventories, prepaid assets,
property and equipment and intangible assets, less an allowance for the
estimated loss on disposal and current liabilities.
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.
37
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(dollars in thousands, except per share amounts)
1. Basis of Presentation, continued:
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. Of these costs, $3,053 was charged to operations in 1997. Cash
payments for transaction costs in 1998 and 1997 were $238 and $2,698,
respectively.
1996 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 approximately 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, 1999:
<TABLE>
<CAPTION>
Termination Other
Benefits Exit Costs Total
----------- ---------- --------
<S> <C> <C> <C>
Current - other accrued expenses:
Balance at December 31, 1998: $ 799 $ 499 $ 1,298
Reduction for payments/adjustments (949) (599) (1,548)
Reclassified from long-term 150 100 250
----------- -------- -------
Balance at December 31, 1999: $ -0- $ -0- $ -0-
=========== ======== =======
Long-term - other liabilities:
Balance at December 31, 1998: $ 150 $ 100 $ 250
Long-term - reclassified to current (150) (100) (250)
---------- -------- ---------
Balance at December 31, 1999: $ -0- $ -0- $ -0-
========== ======== =========
</TABLE>
Termination payments to-date represent severance payments and other support
costs for 176 employees. Other exit costs include legal and consulting costs to
execute termination activities and facility shut-down costs.
1999 Restructuring Charges and Asset Write-downs
On June 29, 1999, the Board of Directors of SunSource Inc. approved the
Company=s restructuring plan to reposition Technology Services and Kar Products,
write-down key machines at the Hillman division, and realign corporate overhead
expenses. As a result of this plan, the Company recorded a restructuring charge
of $4,818, a key machine write-down of $3,300 and an inventory write-down
related to restructuring of $2,130. Included in these charges and write-downs is
$5,392 related to Technology Services, $1,020 related to Kar Products, $3,300
related to Hillman, and $536 related to Corporate Headquarters.
38
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(dollars in thousands, except per share amounts)
1. Basis of Presentation, continued:
1999 Restructuring Charges and Asset Write-downs, continued
The Technology Services charge of $5,392 includes termination benefits of
$2,744, an inventory write-down of $2,130, other exit costs of $415 and a
write-down of unamortized leasehold improvements of $103. The termination
benefits of $2,744 cover approximately 94 employees. The other exit costs and
write-down of unamortized leasehold improvements are related to lease buyouts
and losses on the sale of owned facilities as a result of Technology Services'
facilities consolidation. The inventory write-down of $2,130 is the result of a
reduction in vendor lines resulting principally from the facility consolidation
process.
The Kar Products charge of $1,020 is comprised solely of termination benefits
for about 10 employees.
The Hillman charge of $3,300 is primarily the result of Hillman=s inability to
recover key machines from retailers. The $3,300 charge represents the total net
book value of key machines that had been capitalized as of June 30, 1999.
The Corporate Headquarters component of the restructuring charge aggregates $536
comprised of other exit costs of $434 and termination benefits of $102 for two
employees. The other exit costs include lease termination costs of $101 and
unamortized leasehold improvements of $333 on certain assets.
39
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(dollars in thousands, except per share amounts)
1. Basis of Presentation, continued:
The following table summarizes the restructuring costs and asset write-downs
charged, the balance sheet classification, and payments or adjustments made
during 1999.
<TABLE>
<CAPTION>
Termina- Other
Asset tion Exit
Write-Downs Benefits Costs Total
----------- -------- ------- -------
<S> <C> <C> <C> <C>
Balance Sheet Classification
Opening Balance June 29, 1999:
Inventory Write-down $ 2,130 -- -- $ 2,130
Unamortized Key Machines 3,300 -- -- 3,300
Unamortized leasehold
improvements 436 -- -- 436
Current - other accrued expense -- $ 3,096 $ 435 3,531
Long-term - other liabilities -- 770 81 851
-------- ------- ------- -------
Totals $ 5,866 $ 3,866 $ 516 $10,248
-------- ------- ------- -------
Payments/charges during year-
ended December 31, 1999:
Inventory write-down $ (2,130) -- -- $(2,130)
Unamortized Key Machines $ (3,300) -- -- $(3,300)
Unamortized leasehold
improvements (436) -- -- $ (436)
Current-other accrued expense
payments -- (1,650) (405) (2,055)
Current - other accrued expense
(reclassified from long-term -
other liabilities -- 276 81 357
Long-Term - other liabilities
(reclassified to current - other
accrued expense) -- (276) (81) (357)
-------- ------- ------- -------
Totals $ (5,866) $(1,650) $(405) $(7,921)
-------- ------- ------- -------
Ending Balance Dec. 31, 1999:
Inventory Write-down $ -- -- -- --
Unamortized key machines -- -- -- --
Unamortized leasehold
improvements -- -- --
Current - other accrued expense -- 1,722 111 1,833
Long-term - other liabilities -- 494 -- $ 494
-------- ------- ------- -------
Totals $ -- $ 2,216 $ 111 $ 2,327
======== ======= ======= =======
</TABLE>
The Board's approval of the restructuring plan provided the Company's management
with the authority to involuntarily terminate employees. The Company established
the levels of benefits that the terminated employees received and informed the
employees of their termination benefits prior to the close of business on June
30, 1999. Termination payments to date represent severance payments for
approximately 106 employees. Three employees have termination agreements that
provide severance payments for a period that is more than 12 months beyond
December 31, 1999. The $494 balance in long-term other liabilities represents
the remaining payments for these employees.
40
<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 including goodwill for financial impairment, and will
continue to evaluate them, based on the estimated undiscounted 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 related to Hillman's inability to
recover key machines from retailers in 1999.
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
41
<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:
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.
Revenue Recognition:
Revenue from sales of products is recorded upon the passing of title which
usually occurs upon the shipment of goods.
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.
Exchange adjustments resulting from foreign currency transactions are recognized
in net income and were immaterial for the three years ended December 31, 1999.
Use of Estimates in the Preparation of Financial Statements:
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.
42
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(dollars in thousands, except per share amounts)
3. Acquisitions:
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. Net cash consideration paid for
the acquired businesses, including transaction costs, was $10,839, including
goodwill of $7,009, and the assumption of certain liabilities of $1,132.
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 amounts
represent the pro forma financial results for the year ended December 31, 1998
had these acquisitions been consummated on January 1, 1998:
Net sales $618,498
Income before extraordinary items 13,849
Net income 13,849
Basic and diluted earnings per share $2.00
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 1997
were $2,491. The 1997 management fee was pro-rated through the Conversion and
paid in full on September 30, 1997.
From January 1, 1997 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 and
$811 in 1998 and 1997, respectively. Amounts payable to this law firm were $109
and $10 at December 31, 1998 and 1997, 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. Payments for these services were $361 in 1998.
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. Payments for
these services were $361 in 1998.
43
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(dollars in thousands, except per share amounts)
5. Income Taxes:
The total income tax provision (benefit) was allocated for the three years ended
December 31, of 1999 as follows:
1999 1998 1997
--------- ------- --------
Continuing operations $(10,100) $ 6,762 $(6,685)
Discontinued operations (1,080) 1,562 5
Extraordinary item--early
extinguishment of debt 126 951
--------- -------- -------
Total tax provision (benefit) $(11,054) $ 8,324 $(5,729)
========= ======== ========
The components of the Company's provision (benefit) for income taxes from
continuing operations are as follows for the three years ended December 31,
1999, as follows:
1999 1998 1997
--------- ------- --------
Current:
Federal & State $( 7,318) $ 3,600 $ 1,222
Foreign 413 1,505 1,005
--------- ------- -------
Total current (6,905) 5,105 2,227
--------- ------- -------
Deferred:
Federal & State (3,404) 1,822 $ 225
Foreign 209 (165) 428
--------- ------- -------
Total deferred (3,195) 1,657 653
--------- ------- -------
Deferred tax benefit upon conversion -- -- (9,565)
--------- ------- -------
Provision (benefit) for income taxes $(10,100) $ 6,762 $(6,685)
========= ======= ========
As of December 31, 1999, the Company had approximately $23,000 of capital loss
carryforwards available to reduce future capital gains in the U.S. The capital
loss carryforwards are primarily a result of losses on the divestiture of
Harding Glass, Inc. and losses on the sale of certain assets of the SIMCO OEM
business. The capital loss carryforwards expire in 2004. A valuation allowance
has been provided for the full value of the deferred tax asset related to these
carryforwards as of December 31, 1998.
The Company has net operating loss ("NOL") carryforward, for tax purposes,
totaling $8,900 as of December 31, 1999, that is available to offset future
taxable income. This carryforward expires in 2014. The Company has provided a
valuation allowance totaling $2,700 to reduce this loss carryforward.
Upon the Conversion, the Company recorded additional deferred tax assets of
$9,565 not previously available under partnership form.
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of the assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
44
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(dollars in thousands, except per share amounts)
5. Income Taxes, continued:
The table below reflects the significant components of the Company's net
deferred tax assets at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------------------------------ ---------------------------------
Deferred tax assets: Current Non-Current Total Current Non-Current Total
-------- ------------ -------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Inventory $ 5,441 $ -- $ 5,441 $ 4,106 $ -- $ 4,106
Accruals and reserves 3,643 5,674 9,317 4,425 4,575 9,000
Capital loss carryforwards 6,857 -- 6,857 -- --
Net operating loss carryforward 3,108 -- 3,108 -- -- --
Depreciation and amortization -- 1,402 1,402 -- 1,362 1,362
Other (451) -- (451) 512 -- 512
------- ------- ------- ------- ------ -------
Total gross deferred assets 18,598 7,076 25,674 9,043 5,937 14,980
Less: valuation allowance - related
to capital loss carryforwards (6,857) -- (6,857) -- -- --
Less: valuation allowance - general (1,523) (1,211) (2,734) -- (1,656) (1,656)
------- ------- ------- ------- ------ -------
Net deferred assets $10,218 $ 5,865 $16,083 $ 9,043 $ 4,281 $13,324
======= ======= ======= ======= ======= =======
</TABLE>
Realization of the net deferred tax assets is dependent on generating sufficient
taxable income prior to their expiration. Although realization is not assured,
management believes it is more likely than not that the net deferred tax asset
will be realized. The amount of the net deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced.
Below is a reconciliation of statutory federal income tax rates to the effective
tax rates for the twelve months ended December 31, 1999 and December 31, 1998
and the three months ended December 31, 1997:
12 Months 12 Months 3 Months
Ended Ended Ended
12/31/99 12/31/98 12/31/97
--------- --------- --------
Statutory federal income tax rate (35.0%) 35.0% 35.0%
Foreign income tax rates in excess of
U.S. federal income tax rates 0.4% 2.2% 9.1%
State and local income taxes, net of
U.S. federal income tax benefit (8.3%) 3.4% 4.2%
Non-deductible expenses (4.7%) 5.1% 5.2%
Tax benefits associated with the
conversion, net -- (9.4%) --
Recognition of deferred tax benefits
relating to cumulative temporary
differences -- -- (10.5%)
------ ----- ------
Effective income tax rate (47.6%) 36.3% 43.0%
====== ===== ======
6. Extraordinary Losses:
In 1999, in connection with the early extinguishment of debt, the Company wrote
off capitalized financing costs of $361 and recorded an extraordinary loss of
$235 (net of deferred tax benefits of $126). (See Note 9.)
In 1997 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 Senior
Notes.
45
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(dollars in thousands, except per share amounts)
7. Property and Equipment:
Property and equipment consist of the following at December 31, 1999 and 1998:
Estimated
December 31,
Useful Life -------------------
(Years) 1999 1998
----------- ------- -------
Land N/A $ 853 $ 1,797
Buildings and leasehold improvements 10-30 7,406 10,875
Machinery and equipment 3-10 21,857 23,845
Furniture and fixtures 3-5 10,038 9,967
------- -------
40,154 46,484
Less accumulated depreciation 22,872 24,740
------- -------
$17,282 $21,744
======= =======
8. Notes Payable:
Notes payable consisted of casualty insurance financing of $376 at December 31,
1999 and $796 at December 31, 1998. The interest rate on the outstanding notes
payable borrowings at December 31, 1999 and 1998 was 6.18% and 5.72%,
respectively.
9. Revolving Credit Line:
On December 15, 1999, the Company refinanced its $60,000 senior notes and
$90,000 bank revolving credit with $155,000 in senior secured credit facilities
(the "Refinancing") consisting of $130,000 in revolving bank credit (the
"Revolver") and a $25,000 term loan (the "Term Loan", see Note 10). The new
credit agreement has a five-year term (the "Credit Agreement") whose Revolver
availability is based on the Company's receivables and inventory balances (the
"Borrowing Base") evaluated on a monthly basis. The Company and its domestic and
foreign corporate subsidiaries are borrowers and guarantors ("Credit Parties")
under the Credit Agreement. Each credit party assigned, pledged and granted a
security interest in and to all its assets as collateral. The Credit Agreement
provides borrowings at interest rates based on the London Interbank Offered
Rates ("LIBOR") plus a margin of between 2.50% and 3.00% (the "LIBOR Margin") in
accordance with certain leverage ratios as stated in the Credit Agreement, or
prime. Letters of Credit commitment fees are based on the average daily face
amount of each outstanding Letter of Credit multiplied by one and one half
percent (1.50%) per annum.
As of December 31, 1999, the Company's Borrowing Base was $117,049 consisting of
receivables and inventory balances totaling $122,254 less letter of credit
commitments outstanding of $5,205. The Revolver balance was $102,791 as
reflected on the Company's consolidated balance sheet at December 31, 1999. As
of December 31, 1999, the Company had $14,089 available under the revolver.
Amounts outstanding under the Credit Agreement are due upon its termination on
December 14, 2004.
The Credit Agreement, among other provisions, contains financial covenants
requiring the maintenance of specific coverage ratios, levels of undrawn
availability and restricts the incurrence of additional debt and the sale of
assets. If the Company sells any assets other than inventory, it must repay the
advances under the Credit Agreement in an amount equal to the net proceeds of
such sale. Such repayments shall be applied first to the outstanding principal
installments of the Term Loan (see Note 10) and second, to the remaining
advances in such order as the lenders may determine.
46
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(dollars in thousands, except per share amounts)
9. Revolving Credit Line, continued
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, 1999. 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, 1999. This facility, which is
renewable annually, provides bank borrowings at an interest rate of prime plus
1/4 of 1%.
On September 30, 1997, the Operating Partnership entered into a five-year bank
credit agreement which was amended and restated as of December 31, 1998, in
connection with the Reorganization (the "Former Credit Agreement"). The Company
and its newly formed domestic corporate subsidiaries were co-borrowers under the
Former Credit Agreement. The Former Credit Agreement provided borrowings on a
revolving credit basis at interest rates based on LIBOR plus a margin of between
1.00% and 1.50% (the "Former LIBOR Margin") in accordance with certain leverage
ratios as stated in the Former Credit Agreement, or prime. Letters of credit
commitment fees were based on the Former LIBOR Margin when issued.
As of December 31, 1999, the LIBOR rate was 5.82%, the LIBOR Margin was 3.00%
and the prime rate was 8.50%. The Company's weighted-average interest rate for
borrowings under its revolving credit facilities was 7.11%, 7.05% and 7.79% for
the years ended December 31, 1999, 1998 and 1997, respectively.
10. Long-Term Debt:
On December 15, 1999, the Company as part of the Credit Agreement entered into a
five-year $25,000 Term Loan. Upon closing of the Credit Agreement, the Company
made a principal payment of $3,500 on the Term Loan. The Term Loan is
collateralized in accordance with the provisions of the Credit Agreement (See
Note 9). The Term Loan provides borrowings at interest rates based on LIBOR plus
the LIBOR Margin in accordance with certain leverage ratios as stated in the
Credit Agreement, or prime.
As of December 31, 1999, the Company's weighted-average interest rate for the
Term Loan was 8.50%. Interest is required to be paid monthly on the daily
outstanding principal of the Term Loan. Principal payments of $1,250 are
required to be paid quarterly commencing on April 1, 2000, until the Term Loan
is repaid in full.
On September 30, 1997, the Company issued $60,000 of senior notes through a
private placement with an institutional investor. The senior notes were due on
September 30, 2002 and issued at a fixed rate of 7.66%. A surcharge rate of
7.91% was in effect from September 30, 1997 through the date of Refinancing as
provided in the noteholder agreement (the "Noteholder Agreement").
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 were co-obligors under the Amended Noteholder
Agreement. Interest was required to be paid quarterly on March 30, June 30,
September
47
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(dollars in thousands, except per share amounts)
10. Long-Term Debt, continued:
30 and December 30 on the outstanding principal of the senior notes. Optional
prepayments, in multiples of $100, could be made at anytime, as a whole or in
part, with accrued interest thereon plus a penalty, if any, as defined in the
Amended Noteholder Agreement.
As of December 31, 1999, the estimated fair value of the Company's Term Loan is
approximately $18,000 as determined in accordance with SFAS 107. The Company
discounted the future cash flows of its Term Loan 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, 1999:
Capital Operating
Leases Leases
------- ---------
2000 $1,172 $10,383
2001 1,024 7,692
2002 501 4,765
2003 106 4,031
2004 30 3,353
Later years -- 9,849
------ -------
Total minimum lease payments $2,833 $40,073
=======
Less amounts representing interest (401)
------
Present value of Net Minimum Lease payments
(including $923 currently payable) $2,432
======
Total rental expenses for all operating leases from continuing operations
amounted to $12,604 in 1999, $11,101 in 1998, and $11,881 in 1997.
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 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 other deferred compensation plans ceased
48
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(dollars in thousands, except per share amounts)
12. Deferred Compensation Plans, continued:
as of December 31, 1997. The Equity Compensation Plan replaces the former cash
basis deferred compensation plan 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 1999 and 1998. The amount charged to income in 1997 was
$3,152. 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, 1999,
distributions from the deferred compensation plans aggregated $252 in 1999, $26
in 1998, and $2,876 in 1997. The Company's deferred compensation liabilities
amounted to $14,728 as of December 31, 1999 and $11,802 as of December 31, 1998.
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 $14,190 at December 31, 1999. 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
participants.
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
49
<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, continued:
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, 1999 was $51,141, based on the closing price on the
New York Stock Exchange of $12.125 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 shares
through open market transactions and private block trades dependent upon market
conditions. The Company subsequently suspended the repurchase program on March
16, 1999. The Company has acquired and placed into treasury 479,100 common
shares through December 31, 1999, at an average cost of $18.17 per common share.
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 11,293 and 1,988 Common Shares for the years
ended December 31, 1999 and 1998, respectively. Under the terms of the plan,
non-employee directors are 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 is dependent
50
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(dollars in thousands, except per share amounts)
14. Stockholders' Equity (Deficit), continued:
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. The Company recognized an expense of $119
and $39 with respect to the issuance of common shares to non-employee directors
in 1999 and 1998, respectively.
Stock Options
On April 28, 1998, the Company adopted the 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 (the "Applicable Percentage") is
calculated annually and cumulatively at the rate of 5% of shares outstanding per
year. Prior to April 27, 1999, the maximum number of shares available under the
Plan was 25% of the total outstanding shares or 2,000,000 million Common Shares.
On April 27, 1999, the shareholders of the Company approved a proposal to amend
the 1998 Equity Compensation Plan to increase the aggregate number of shares
that may be issued or transferred under the Plan to 2,150,000 shares. However,
no more than the Applicable Percentage of the number of shares issued and
outstanding on the effective date of the Plan and at any time thereafter may be
issued or transferred under the Plan; provided however, that up to 150,000
shares may be issued under the Plan without reference to the Applicable
Percentage in connection with the hiring of a new chief executive officer of the
Company.
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.
51
<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, 1999 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> <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
Granted 562,000 $15.49 204,399 $16.20
Exercised -- - -- -
Expired/Canceled 4,000 $17.86 -- -
------- -------
Outstanding at December 31, 1999 769,495 $16.06 204,399 $16.20
======= =======
</TABLE>
As of December 31, 1999, the 769,495 options outstanding under the Plan have
exercise prices between $12.75 and $18.88 and a weighted-average remaining
contractual life of 9.12 years.
During 1999 and 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 $15.79 and $18.82 and the average fair market value was
$16.00 and $18.84 in 1999 and 1998, respectively. For options issued with an
exercise price below fair market value for the stock on their grant date, the
weighted average exercise price was $12.75 and $15.99 and the average fair
market value was $15.00 and $18.81 in 1999 and 1998, respectively.
Compensation expense of approximately $378 is being recognized over vesting
periods for certain options which were granted at below fair market value in
1999 and 1998 of which $70 was recognized in 1999 and $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:
1999 1998
--------- --------
Net Income (Loss) As reported $(37,371) $ 13,817
Pro forma $(38,013) $ 13,769
Basic and diluted net income
per common share As reported $ (5.54) $ 2.00
Pro forma $ (5.63) $ 1.99
The estimated weighted-average grant-date fair value of the options granted
during the year ended December 31, 1999 was $15.71 and the weighted-average
remaining contractual life of options outstanding at December 31, 1999 was 9.12
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 1999 and 1998: expected volatility of 23.1% for
1999 and 28.7% for 1998;
52
<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
risk free interest rates of 5.3% to 5.6% and expected lives of 5 and 9.5 years,
based on differing vesting schedules.
On April 27, 1999, a grant of 150,000 non-qualified stock options was made to
attract and retain a new Chief Executive Officer, (the "CEO Grant"). On January
26, 2000, the Compensation Committee of the Board of Directors amended the New
CEO Grant by reducing the number of shares from 150,000 to 50,000 and issued a
grant of 100,000 shares of restricted stock. One-third of the restricted shares
will vest six months from the date of grant. Vesting of the remaining two-thirds
of the restricted shares will be based on achievement of certain performance
goals. In the event that all or some of the performance goals are not achieved
within a three-year period from the date of grant, the then remaining shares
will vest on the third anniversary from their date of grant.
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 769,495
options through December 31, 1999 to purchase the Company's Common Shares having
a potentially dilutive effect on earnings per share. Due to market conditions,
the shares granted under the Plan did not have a material dilutive effect on
earnings per share for the twelve months ended December 31, 1999 and 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, 1999 was 6,749,456.
The weighted average number of Common Shares outstanding for the twelve months
ended December 31, 1999 was 6,747,142, including shares issued to non-employee
directors, net of the 479,100 shares repurchased and held in treasury.
Common Stock Dividend
On June 30, 1999, the Board of Directors of the Company suspended indefinitely
the quarterly cash dividend of $0.10 per Common Share.
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. 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 these cash distributions amounted to
$6,136 or $0.2775 per B interest.
53
<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>
Pension Benefits Benefits
--------------------- ---------------------
Benefit Obligation: 1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Benefit obligation - beginning of year $26,761 $23,961 $ 951 $ 524
Service cost 614 1,000 -- --
Interest cost 1,483 1,752 65 66
Plan participant contributions 191 -- -- --
Amendments -- -- -- 421
Curtailment Gain (5,329) -- -- --
Actuarial (gain) loss (2,481) 1,777 (46) 19
Benefits paid (1,512) (1,729) (90) (79)
-------- -------- -------- --------
Benefit obligation - end of year $19,727 $26,761 $ 880 $ 951
======== ======== ======== =======
Fair Value of Plan Assets:
Fair value of plan assets - beginning of year $31,475 $28,597 $ -- $ --
Actual return on plan assets 3,690 4,432 -- --
Expenses (178) (24) -- --
Employer contributions -- -- 90 79
Plan participant contributions 191 199 -- --
Benefits paid (1,512) (1,729) (90) (79)
-------- -------- -------- --------
Fair value of plan assets - end of year $33,666 $31,475 $ -- $ --
======== ======== ======== =======
Funded Status of Plans:
Funded status of the plans $13,939 $ 4,714 $ (880) $ (951)
Unrecognized actuarial (gain) loss (6,545) (3,466) (27) 19
Unrecognized prior service cost -- (279) 357 389
Unrecognized net transition asset (946) (1,180) 454 489
-------- -------- -------- --------
Accrued benefit cost
recognized in the balance sheet $ 6,448 $ (211) $ (96) $ (54)
======== ======== ======== =======
</TABLE>
54
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(dollars in thousands, except per share amounts)
16. Retirement Benefits, continued:
Net periodic pension costs include the following components:
<TABLE>
<CAPTION>
Net Periodic Pension Cost (Benefit): 1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Service cost $ 614 $ 1,000 $ 920
Interest cost 1,484 1,752 1,702
Expected return on plan assets (2,985) (2,727) (3,160)
Amortization of net asset (234) (234) (234)
Amortization of prior service cost -- (24) (24)
Recognized net actuarial loss 70 52 769
-------- -------- -------
Net periodic pension cost (benefit) $(1,051) $ (181) $ (27)
======== ======== ========
Net post-retirement costs include the following components:
Net Periodic Post-retirement Cost:
Service cost $ -- $ -- $ 32
Interest Cost 65 66 --
Amortization of Transition obligation 35 35 --
Amortization of prior service cost 32 32 --
-------- -------- -------
Net post-retirement cost $ 132 $ 133 $ 32
======== ======== ========
Assumptions: 1999 1998 1997
-------- ------- -------
Discount rate 8.00% 7.00% 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% 8.50% 9.50%
</TABLE>
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:
<TABLE>
<CAPTION>
Trend +1% Trend -1%
--------- ---------
<S> <C> <C>
December 31, 1999 projected benefit obligation $ 74 $ (66)
1999 service and interest cost $ 6 $ (5)
</TABLE>
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.
In December 1999, the Board of Directors of the Company approved a proposal to
freeze the benefit accruals under the Technology Services defined benefit
retirement plan. As a result, the Company recorded a curtailment gain of $5,608
in accordance with Statement of Financial Accounting Standards No. 88,
Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits. The related deferred assets of
$5,608 associated with this curtailment is included in other assets on December
31, 1999.
55
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(dollars in thousands, except per share amounts)
16. Retirement Benefits, continued:
Costs (income) charged to operations under all retirement benefit plans are as
follows:
1999 1998 1997
-------- ------ -------
Defined contribution plans $ 2,154 $3,052 $1,154
Defined benefit plans (6,818) (181) (27)
-------- ------ ------
Total $(4,664) $2,871 $1,127
======== ====== ======
17. Commitments and Contingencies:
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, 1999, the
Company had outstanding letters of credit in the aggregate amount of $2,155
related to these activities.
As of December 31, 1999, the Company has guaranteed lease obligations of
approximately $520, principally relating to businesses previously divested. The
Company is not currently aware of any existing conditions which would cause a
financial loss related to these guarantees.
Under the Company's insurance programs, commercial umbrella coverage is obtained
for catastrophic exposure and aggregate losses in excess of normal claims.
Beginning in 1991, the Company has retained risk on certain expected losses from
both asserted and unasserted claims related to worker's compensation, general
liability and automobile as well as the health benefits of certain employees.
Provisions for losses expected under these programs are recorded based on an
analysis of historical insurance claim data and certain actuarial assumptions.
As of December 31, 1999, 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.
56
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(dollars in thousands, except per share amounts)
18. Statements of Cash Flows:
Supplemental disclosures of cash flow information are presented below:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- -------
<S> <C> <C> <C>
Cash paid during the period for:
Interest $ 9,729 $ 7,725 $ 7,352
========= ========= =========
Income taxes $ 1,693 $ 8,190 $ 1,433
========= ========= =========
Non-cash investing activities:
Acquisitions (see Note 3):
Fair value of assets acquired,
including goodwill $ -- $ 11,971 $ --
Less liabilities assumed -- 1,132 --
---------- --------- ---------
Cash paid for acquired businesses $ -- $ 10,839 $ --
========== ========= =========
Non-cash financing activities:
Accrued and unpaid
distributions on trust preferred
securities, common shares and
partnership interests $ 1,019 $ 676 $ 2,995
Exchange of 11,099,573 Class A limited
partnership interests for 4,217,837
Trust Preferred Securities $ -- $ -- $ 115,991
Exchange of 21,675,246 Class B limited
partnership interests for 5,418,936
common shares $ -- $ -- $ 38,943
Exchange of GP's Minority Interest for
1,000,000 common shares $ -- $ -- $ 21,841
</TABLE>
57
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(dollars in thousands, except per share amounts)
19. Quarterly Data (unaudited):
<TABLE>
<CAPTION>
1999 Fourth Third Second First
---- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $124,314 $138,238 $148,250 $144,850
Gross profit 49,162 56,444 59,960 61,557
Income (loss) from
continuing operations (2,397) (21) (9,868) 1,172
Income (loss) from
discontinued operations (26,015) 97 163 (267)
Extraordinary loss (235) -- -- --
Net income (loss) (28,647) 76 (9,705) 905
Basic and diluted income
(loss) per common share:
Income (loss) from
continuing operations $ (0.36) $ -- $ (1.46) $ 0.17
Income(loss) from dis-
continued operations $ (3.85) $0.01 $ 0.02 $ (0.04)
Extraordinary loss $ (0.03) $ -- $ -- $ --
Net income (loss) $ (4.24) $0.01 $ (1.44) $ 0.13
1998 Fourth Third Second First
---- -------- -------- -------- --------
Net sales (1) $143,980 $157,852 $165,006 $150,680
Gross profit (1) 62,408 65,444 65,601 59,729
Income (loss) from
continuing operations 2,759 3,556 3,830 1,712
Income (loss) from
discontinued operations 272 994 785 (91)
Net income (loss) 3,031 4,550 3,330 1,621
Basic and diluted income
(loss) per common share:
Income (loss) from
continuing operations $ 0.40 $ 0.50 $ 0.53 $ 0.26
Income(loss) from dis-
continued operations $ 0.04 $ 0.14 $ 0.11 $ (0.01)
Net income (loss) $ 0.44 $ 0.64 $ 0.46 $ 0.25
</TABLE>
(1) Includes amounts reclassified to conform to current accounting.
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.
58
<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 four 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, Depreciation and
Amortization ("EBITDA") which is defined as income from operations before
depreciation and 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,
---------------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net Sales
Technology Services (STS) $ 242,643 $ 318,500 $ 318,984
Hardware Merchandising (Hillman) 151,884 125,830 103,971
Expediter (Kar) 124,724 124,536 125,911
Integrated Supply 36,401 48,652 57,583
--------- --------- ---------
Consolidated net sales $ 555,652 $ 617,518 $ 606,449
========= ========= =========
Gross Profit
Technology Services (STS) $ 52,987 $ 85,215 $ 84,826
Hardware Merchandising (Hillman) 81,045 66,485 54,901
Expediter (Kar) 86,204 88,175 90,171
Integrated Supply 6,887 13,307 14,739
--------- ---------- ---------
Segment gross profit $ 227,123 $ 253,182 $ 244,637
========= ========= =========
EBITDA
Technology Services (STS) $ (12,477) $ 15,138 $ 16,072
Hardware Merchandising (Hillman) 15,816 13,477 11,580
Expediter (Kar) 18,965 21,196 21,583
Integrated Supply (1,150) 2,505 3,590
---------- --------- ---------
Segment profit $ 21,154 $ 52,316 $ 52,825
========== ========= =========
Tangible Assets
Technology Services (STS) $ 79,675 $ 83,752 $ 88,259
Hardware Merchandising (Hillman) 56,963 59,487 40,579
Expediter (Kar) 44,536 42,479 41,991
Integrated Supply 9,792 17,051 15,476
--------- --------- ---------
Segment tangible assets $ 190,966 $ 202,769 $ 186,305
========= ========= =========
Capital Expenditures
Technology Services (STS) $ 1,026 $ 2,051 $ 2,034
Hardware Merchandising (Hillman) 2,271 2,072 1,497
Expediter (Kar) 1,023 1,693 622
Integrated Supply 252 216 277
--------- --------- ---------
Segment capital expenditures $ 4,572 $ 6,032 $ 4,430
========= ========= =========
</TABLE>
59
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(dollars in thousands, except per share amounts)
21. Segment Information, continued:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Depreciation
Technology Services (STS) $ 1,578 $ 1,596 $ 1,421
Hardware Merchandising (Hillman) 1,408 1,347 747
Expediter (Kar) 1,060 981 886
Integrated Supply 124 165 124
--------- --------- ---------
Segment depreciation $ 4,170 $ 4,089 $ 3,178
========= ========= =========
Geographic Segment Data:
Net Sales
United States $ 508,835 $ 567,325 $ 552,617
Canada 32,415 32,968 34,022
Mexico 14,402 17,225 19,810
--------- --------- ---------
Consolidated net sales $ 555,652 $ 617,518 $ 606,449
========= ========= =========
Reconciliation of Segment Profit to
Income (loss) from continuing operations
Before Income Taxes and
Extraordinary Loss:
Segment profit - EBITDA from continuing
Operations $ 21,154 $ 52,316 $ 52,825
Depreciation (4,272) (4,192) (3,279)
Amortization (1,847) (1,670) (1,370)
Corporate expenses (9,653) (7,165) (7,961)
---------- ---------- ----------
Income before non-recurring charges 5,382 39,289 40,215
Non-recurring charges:
Gain on Curtailment of Defined
Benefit Plan 5,608 -- --
Restructuring Charges and Asset
Write-off (10,248) -- --
Provision for litigation matters -
divested operations -- (1,600) --
Transaction and other costs -- -- (3,053)
Management fee -- -- (2,491)
Minority ownership expense -- -- (263)
---------- ----------- ----------
Income from operations 742 37,689 34,408
Interest expense, net (9,724) (6,838) (7,193)
Distribution on guaranteed
preferred beneficial interests (12,232) (12,232) (3,058)
---------- ---------- ----------
Income(loss)from continuing operations
Before Income Taxes and
Extraordinary Loss $ (21,214) $ 18,619 $ 24,157
========== =========== =========
Year Ended December 31,
---------------------------------------------
1998 1997 1996
--------- --------- ---------
Reconciliation of Segment Tangible
Assets to Total Assets:
Segment tangible assets $ 190,966 $ 202,769 $ 186,305
Goodwill 51,642 54,997 50,791
Other intangible assets 762 960 16
Deferred income taxes 12,975 13,324 14,326
Cash value of life insurance 14,190 10,262 8,407
Assets held for sale 35,249 40,987 28,562
Other corporate assets 17,233 6,941 9,134
--------- --------- ---------
Total assets $ 323,017 $ 330,240 $ 297,541
========= ========= =========
</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>
<S> <C> <C> <C>
Reconciliation of Segment
Capital Expenditures to
Total Capital Expenditures:
Segment capital expenditures $ 4,572 $ 6,032 $ 4,430
Corporate capital expenditures 183 196 130
--------- --------- ---------
Total capital expenditures $ 4,755 $ 6,228 $ 4,560
========= ========= =========
Reconciliation of Segment Depreciation
to Total Depreciation:
Segment depreciation $ 4,170 $ 4,089 $ 3,178
Corporate depreciation 102 103 101
--------- --------- ---------
Total depreciation $ 4,272 $ 4,192 $ 3,279
========= ========= =========
</TABLE>
22. Sale Leaseback Transaction:
The Company sold certain real property of its Kar segment for $5,025 on
September 30, 1999 which were leased back from the same purchaser under two
separate lease agreements over periods of five and seven years, respectively.
The related leases are being accounted for as operating leases, and the
resulting gains aggregating $2,132 are being amortized over the respective lives
of the leases. As of December 31, 1999, the Company has outstanding $2,027 of
deferred gains relating to the sale leaseback transaction of which $372 is
included in other accrued expenses and $1,655 is included in other liabilities.
Both leases require the Company to pay customary operating and repair expenses
and to observe certain operating restrictions.
23. Subsequent Events:
On January 10, 2000, the Company signed a letter of intent to sell its Harding
Glass operation to a strategic purchaser. The transaction is expected to result
in the sale of Harding's assets for cash plus the assumption of certain
liabilities. SunSource recorded an expected loss on the sale of Harding in 1999
in the amount of $23,834 or $3.53 per common share. Sales from Harding were
$118,282 for the year ended December 31, 1999. The Company expects to consummate
the sale of Harding in the second quarter of 2000.
On March 2, 2000 the Company completed an agreement with a newly-formed
partnership affiliated with Glencoe Capital, L.L.C. ("Glencoe"). The Company
contributed the interests in its Kar Products, Inc. and A & H Bolt & Nut Company
Limited operations (collectively, the "Kar" business) and Glencoe contributed
cash equity to the new partnership, G-C Sun Holdings L.P. ("G-C"). The Company
received $105,000 in cash proceeds from the transaction though repayment of
assumed debt by G-C. Affiliates of Glencoe will hold a 51% controlling interest
with the remaining 49% interest held by SunSource. The Company will account for
its investment in the partnership in accordance with the equity method and
expects to record an after-tax gain on the transaction of approximately $51,000
in the first quarter of 2000.
61
<PAGE>
SUNSOURCE INC. AND SUBSIDIARIES
Schedule II - Valuation Accounts
(dollars in thousands)
Deducted From Assets in Balance Sheet
---------------------------------------------
Accumulated
Allowance for Allowance for Amortization
Doubtful Obsolete of Goodwill
Accounts Inventories and Tangibles
------------- ------------- -------------
Balance, December 31, 1996 1,810 3,228 15,787
Additions charged to cost
and expenses 1,482 1,581 1,370
Deductions 1,456(A) 1,138(A) --
------ ----- -------
Balance, December 31, 1997 1,836 3,671 17,157
Additions charged to cost
and expenses 1,634 1,359 1,670
Addition due to deferred
recognition of tax benefit
from Conversion -- -- --
Deductions 1,286(A) 1,584(A) --
------ ----- -------
Balance, December 31, 1998 2,184 3,446 18,827
Additions charged to cost
and expenses 1,494 4,982 1,847
Addition due to the carryforward
of capital losses -- -- --
Deductions due to:
Sale of division 209 429 876
Others 1,197(A) 1,150(A) --
------ ----- -------
Balance, December 31, 1999 $2,272 $6,849 $19,798
====== ====== =======
Notes:
(A) Includes write-off of accounts receivable (net of bad debt recoveries) and
inventories.
62
<PAGE>
Item 9 - Changes in and Disagreements on Accounting and
Financial Disclosure.
Not applicable.
63
<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 May 11, 2000 (the "2000 Annual
Proxy Statement") is incorporated by reference herein.
Item 11 - Executive Compensation
Information under the heading "Executive Compensation" in the 2000 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 2000 Annual Proxy Statement is incorporated by reference
herein.
Item 13 - Certain Relationships and Related Transactions.
Information under the heading "Certain Transactions" in the 2000 Annual Proxy
Statement is incorporated by reference herein.
64
<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 Contribution Agreement by and among SunSource Inc., SunSource
Industrial Services Company, Inc., KAR Products Inc., A & H
Holding Company, Inc., SunSource Canada Investment Company, A.
& H. Bolt & Nut Company Limited and GC-Sun Holdings, L.P.
dated as of February 10, 2000 (9) (Exhibit 2.1)
2.2 Amendment No. 1 to Contribution Agreement by and among
SunSource Inc., SunSource Industrial Services Company, Inc.,
Kar Products LLC (as successor by merger to Kar Products,
Inc.), A&H Holding Company, Inc., SunSource Canada Investment
Company, A. & H. Bolt & Nut Company Limited and GC-Sun
Holdings, L.P. dated as of March 2, 2000. (9) (Exhibit 2.2)
**2.3 Asset Purchase Agreement by and among Lawson Products,
Inc., ACS/SIMCO, Inc. and SunSource Inc. and certain
subsidiaries dated as of July 1, 1999.
**2.4 Transitional Services and Supply Agreement dated as of
July 1, 1999.
2.5 Agreement and Plan of Conversion dated as of July 31, 1997 (4)
(Exhibit 2.1)
65
<PAGE>
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)
Instruments Defining the Rights of Security Holder 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 1998 Equity Compensation Plan-Amendment to Nonqualified
Stock Option Grant dated as of January 26, 2000.
** 10.2 1998 Equity Compensation Plan - Restricted Stock Grant
dated as of January 26, 2000.
** 10.3 Note and Pledge Agreement between Maurice P. Andrien,
Jr., and SunSource Inc. dated as of February , 2000.
** 10.4 Revolving Credit, Term Loan, Guaranty and Security
Agreement between PNC, National Association (as lender and
agent) and SunSource Inc. and subsidiaries dated as of
December 15, 1999.
** 10.5 Employment Agreement between SunSource Inc. and Donald T.
Marshall dated as of April 28, 1999.
** 10.6 Employment Agreement between SunSource Inc. and SunSource
Corporate Group, Inc. and Maurice P. Andrien, Jr.
10.7 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
(8) (Exhibit 10.1)
66
<PAGE>
10.8 *Deferred Compensation Plan for Key Employees of SDI Operating
Partners, L.P. (2) Exhibit 10.1
10.9 *SunSource Inc. 1998 Equity Compensation Plan (3) Exhibit 10.1
10.10 *SunSource Inc. Stock Compensation Plan for Non-Employee
Directors (3) Exhibit 10.2
10.11 *Sun Distributors Incentive Compensation Plan. (6) (Exhibit
10.5)
10.12 *Sun Distributors, Inc. Long-Term Performance Award Plan. (As
Amended June 1985) (6) (Exhibit 10.6)
10.13 *SDI Operating Partners, L.P. Deferred Compensation Plan for
Division Presidents (As amended September 13, 1993). (7)
(Exhibit 10.7)
10.14 *SDI Operating Partners, L.P. Long-Term Performance Share Plan
dated January 1, 1994. (7) (Exhibit 10.8)
10.15 *Deferred Compensation Plan for Key Employees of SDI Operating
Partners, L.P. (2) (Exhibit 10.4)
Subsidiaries of the Registrant
**21.1 Subsidiaries
Consent of 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, 1999.
------------------------
(1) Filed as an exhibit to Quarterly Report on Form 10-Q 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.
(4) Filed as an exhibit to Registration Statement No. 333-19077 on
Form S-4.
(5) Filed as an exhibit to Registration Statement No. 333-44733 on
Form S-2.
(6) Filed on March 31, 1993, as an exhibit to Annual Report on Form
10K for the year ended December 31, 1992.
67
<PAGE>
(7) Filed on March 31, 1994, as an exhibit to Annual Report on Form
10K for the year ended December 31, 1993.
(8) Filed on March 30, 1999 as an exhibit to Annual Report on Form 10K
for the year ended December 31, 1998.
(9) Filed on March 17, 2000 as an exhibit to Current Report on Form
8-K
* 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.
A Current Report on Form 8-K was filed on March 17, 2000 reporting
a disposition under Item 2 of form 8-K (See exhibit 2.1 and 2.2
hereto)
68
<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 28, 2000 By:/s/ Maurice P. Andrien, Jr.
------------------------------
Maurice P. Andrien, Jr.
Title: 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 Maurice P.
Andrien, Jr., 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/ Maurice P. Andrien, Jr. Principal Executive March 28, 2000
- ----------------------------- Officer and Director
Maurice P. Andrien, Jr.
/s/ Joseph M. Corvino Principal Financial March 28, 2000
- ----------------------------- Officer
Joseph M. Corvino
/s/ Edward L. Tofani Principal Accounting March 28, 2000
- ----------------------------- Officer
Edward L. Tofani
/s/ O. Gordon Brewer, Jr. Director March 28, 2000
- -----------------------------
O. Gordon Brewer, Jr.
69
<PAGE>
/s/ Norman V. Edmonson Director March 28, 2000
- ------------------------------
Norman V. Edmonson
/s/ Arnold S. Hoffman Director March 28, 2000
- ------------------------------
Arnold S. Hoffman
/s/ Robert E. Keith, Jr. Director March 28, 2000
- ------------------------------
Robert E. Keith, Jr.
/s/ Donald T. Marshall Director March 28, 2000
- ------------------------------
Donald T. Marshall
/s/ John P. McDonnell Director March 28, 2000
- ------------------------------
John P. McDonnell
/s/ Donald A. Scott Director March 28, 2000
- ------------------------------
Donald A. Scott
/s/ Geoffrey C. Shepard Director March 28, 2000
- ------------------------------
Geoffrey C. Shepard
/s/ Francis G. Ziegler Director March 28, 2000
- -----------------------------
Francis G. Ziegler
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ASSET PURCHASE AGREEMENT
by and among
LAWSON PRODUCTS, INC.
ACS/SIMCO, INC.
SUNSOURCE INVENTORY MANAGEMENT COMPANY, INC.
SUNSOURCE INDUSTRIAL SERVICES COMPANY, INC.
and
SUNSOURCE INC.
July 1, 1999
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TABLE OF CONTENTS
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ARTICLE 1.PURCHASE AND SALE OF ASSETS.............................................................................1
1.1 Purchased Assets.......................................................................1
1.2 Excluded Assets........................................................................3
1.3 Assumption of Liabilities..............................................................4
1.4 Excluded Liabilities...................................................................4
ARTICLE 2.CONSIDERATION FOR THE PURCHASED ASSETS..................................................................5
2.1 Purchase Price.........................................................................5
2.2 Purchase Price Allocation..............................................................5
2.3 Purchase Price Adjustment..............................................................5
2.4 Procedures for Final Determination of Closing Tangible Net Worth.......................6
2.5 Closing Tangible Net Worth Definition..................................................7
2.6 Uncollectible Accounts Receivable......................................................7
2.7 Warranty Claims........................................................................8
ARTICLE 3.REPRESENTATIONS AND WARRANTIES OF SELLER AND PARENT.....................................................8
3.1 Organization and Power.................................................................8
3.2 Subsidiaries...........................................................................9
3.3 Authorization; No Breach...............................................................9
3.4 Financial Statements...................................................................9
3.5 Absence of Undisclosed Liabilities.....................................................9
3.6 No Material Adverse Changes...........................................................10
3.7 Absence of Certain Developments.......................................................10
3.8 Title and Condition of Properties.....................................................11
3.9 Accounts Receivable...................................................................12
3.10 Inventories and Specifications........................................................12
3.11 Tax Matters...........................................................................13
3.12 Contracts and Commitments.............................................................14
3.13 Proprietary Rights....................................................................16
3.14 Litigation; Proceedings...............................................................16
3.15 Brokerage.............................................................................16
3.16 Governmental Consent, etc.............................................................17
3.17 Employees and Agents..................................................................17
3.18 Employee Benefit Plans................................................................17
3.19 Insurance.............................................................................18
3.20 Affiliated Transactions...............................................................18
3.21 Compliance with Laws; Permits; Certain Operations.....................................18
3.22 Environmental Matters.................................................................19
3.23 Product and Warranty Claims...........................................................20
3.24 Disclosure............................................................................20
3.25 Year 2000.............................................................................21
3.26 Closing Date..........................................................................21
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ARTICLE 4.REPRESENTATIONS AND WARRANTIES OF PURCHASERS...........................................................21
4.1 Corporate Organization and Power......................................................21
4.2 Authorization.........................................................................21
4.3 No Violation..........................................................................21
4.4 Litigation............................................................................22
4.5 Financial Statements; SEC Reports.....................................................22
4.6 Closing Date..........................................................................22
ARTICLE 5.CERTAIN COVENANTS......................................................................................22
5.1 Affirmative Covenants.................................................................22
5.2 Negative Covenants....................................................................23
5.3 Guaranty..............................................................................24
ARTICLE 6.CONDITIONS TO PURCHASER'S OBLIGATION TO CLOSE..........................................................24
6.1 Conditions to Purchaser's Obligation..................................................24
ARTICLE 7.CONDITIONS TO SELLER'S OBLIGATION TO CLOSE.............................................................26
7.1 Conditions to Seller's Obligation to Close............................................26
ARTICLE 8.CLOSING TRANSACTIONS...................................................................................27
8.1 The Closing...........................................................................27
8.2 Action to Be Taken at the Closing.....................................................27
8.3 Closing Documents.....................................................................27
8.4 Possession............................................................................29
8.5 Nonassignable Contracts...............................................................29
ARTICLE 9.INDEMNIFICATION........................................................................................30
9.1 Indemnification by Seller.............................................................30
9.2 Indemnification by Purchaser..........................................................30
9.3 Method of Asserting Claims............................................................31
9.4 Limitations...........................................................................32
9.5 Pre-Closing Remedies..................................................................32
ARTICLE 10.TERMINATION...........................................................................................33
10.1 Termination...........................................................................33
10.2 Effect of Termination.................................................................33
10.3 Effect of Closing.....................................................................33
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ARTICLE 11.ADDITIONAL AGREEMENTS.................................................................................34
11.1 Survival..............................................................................34
11.2 Mutual Assistance.....................................................................34
11.3 Press Release and Announcements.......................................................34
11.4 Expenses..............................................................................34
11.5 Further Transfers.....................................................................34
11.6 Transition Assistance.................................................................34
11.7 Confidentiality.......................................................................35
11.8 Non-Compete; Non-Solicitation.........................................................35
11.9 Specific Performance..................................................................37
11.10 Remittances...........................................................................37
11.11 Efforts To Consummate Closing Transactions............................................37
11.12 Employees and Agents of Seller........................................................37
11.13 Implied Representations or Warranties.................................................38
ARTICLE 12.MISCELLANEOUS.........................................................................................38
12.1 Amendment and Waiver..................................................................38
12.2 Notices...............................................................................38
12.3 Assignment............................................................................40
12.4 Severability..........................................................................40
12.5 No Third Party Beneficiaries..........................................................40
12.6 No Strict Construction................................................................40
12.7 Captions..............................................................................40
12.8 Complete Agreement....................................................................40
12.9 Counterparts..........................................................................40
12.10 Governing Law; Consent to Forum.......................................................40
12.11 Knowledge.............................................................................41
12.12 Bulk Sales............................................................................41
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EXHIBITS
Exhibit A -- Escrow Agreement
Exhibit B -- Allocation of Purchase Price
Exhibit C -- Opinion of Seller's Counsel
Exhibit D -- Employment Agreement
Exhibit E -- Transition Agreement
Exhibit F -- Opinion of Purchaser's Counsel
Exhibit G -- Officer's Certificate of Seller
Exhibit H -- Officer's Certificate of Purchaser
DISCLOSURE SCHEDULES
Schedule 1.1(a) -- Receivables Schedule
Schedule 1.1(d) -- Leases Schedule
Schedule 1.1(e) -- Equipment Schedule
Schedule 1.1(q) -- Hillman Retained Property Schedule
Schedule 1.1(r) -- Hillman Equipment Schedule
Schedule 1.2 -- MRO Schedule
Schedule 1.3 -- Assumed Liabilities Schedule
Schedule 2.7 -- Warranty Claims Schedule
Schedule 3.1 -- Qualifications Schedule
Schedule 3.5 -- Outstanding Liabilities
Schedule 3.11 -- Tax Matters Schedule
Schedule 3.12(a) -- Contracts Schedule
Schedule 3.12(d) -- Customer Contracts Schedule
Schedule 3.15 -- Brokers Schedule
Schedule 3.16 -- Consents Schedule (including Material Consents)
Schedule 3.18 -- Employee Benefits Schedule
Schedule 3.19 -- Insurance Schedule
Schedule 3.21(a) -- Compliance Schedule
Schedule 3.22 -- Environmental Matters Schedule
Schedule 3.23 -- Claims Schedule
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ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT is made as of July 1, 1999 (this
"Agreement"), by and among LAWSON PRODUCTS, INC., a Delaware corporation
("Lawson"), ACS/SIMCO INC., an Illinois corporation and indirect subsidiary of
Lawson ("Purchaser" and, together with Lawson, "Purchasers"), SUNSOURCE
INVENTORY MANAGEMENT COMPANY, INC., a Delaware corporation ("Seller"), SUNSOURCE
INDUSTRIAL SERVICES COMPANY, INC., a Delaware corporation ("SISC"), and
SUNSOURCE INC., a Delaware corporation ("SunSource") (SISC and SunSource are
collectively referred to herein as "Parent").
W I T N E S S E T H
WHEREAS, Seller is engaged in, among other things, the businesses of
selling and distributing industrial products including, but not limited to, the
business of selling and distributing industrial fasteners for production and, on
an ancillary basis, for maintenance and repair operations purposes, and
providing inventory management and integrated supply services to original
equipment manufacturer ("OEM") customers (the "Business");
WHEREAS, Seller is a wholly-owned subsidiary of SISC, which is a
wholly-owned indirect subsidiary of SunSource; and
WHEREAS, on the terms and subject to the conditions of this Agreement,
Purchaser desires to acquire from Seller, and Seller desires to sell to
Purchaser, substantially all of the assets and personal property of Seller
related to the Business, both tangible and intangible, as described herein on
the terms and conditions hereinafter set forth.
NOW, THEREFORE, the parties agree as follows:
ARTICLE 1.
PURCHASE AND SALE OF ASSETS
1.1 Purchased Assets. On the terms and subject to the conditions of
this Agreement, at the Closing (as defined in Section 8.1), Purchaser shall
purchase from Seller, and Seller shall sell, convey, assign, transfer and
deliver to Purchaser, all of Seller's right, title and interest in and to all
properties, assets, rights and interests of every kind and nature, whether real
or personal, tangible or intangible, and wherever located and by whomever
possessed, owned by Seller as of the Closing or arising therefrom or in
connection therewith, related to or used in, or otherwise associated with, the
Business, including, without limitation, all of the following assets (but
excluding all Excluded Assets as defined in Section 1.2 below):
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(1) all accounts and notes receivable (whether current or
noncurrent) as of the Closing Date (collectively referred to herein as the
"Receivables"), a list, description and aging of which as of May 31, 1999, is
set forth on the "Receivables Schedule" attached hereto as Schedule 1.1(a);
(2) all prepayments, prepaid expenses, deferred charges, advance
payments and security deposits as of the Closing Date;
(3) all inventories and related supplies;
(4) all interests in leased real estate (including, without
limitation, land, buildings and improvements), whether any such buildings or
improvements are owned in fee, leased or otherwise, including but not limited
to, the leases of the real estate and all buildings located thereon, which are
described in the "Leases Schedule" attached hereto as Schedule 1.1(d);
(5) all interests in plant, machinery and equipment, fixtures,
fittings, furniture, automobiles, trucks, tractors, trailers and other vehicles,
tools, spare parts and supplies and other tangible personal property, whether
owned, leased or otherwise (including, without limitation, items which have been
fully depreciated or expensed), including, without limitation, such items as are
set forth in the "Equipment Schedule" attached hereto as Schedule 1.1(e);
(6) all insurance reserves and deposits (including, without
limitation, reserves and deposits relating to workmen's compensation) included
in the Latest Balance Sheet (defined below);
(7) all intangible assets and intellectual property (including,
without limitation, registered and unregistered trademarks, service marks and
trade names, trade dress and other names, marks and slogans, including the name
"SIMCO" and all variations and permutations thereof except as otherwise
specifically provided in Section 1.2 hereof), all publishing and distribution
rights, and all associated goodwill; all statutory, common law and registered
copyrights; all inventions, shop rights, know-how, trade secrets and
confidential information; and all registration applications for any of the
foregoing; together with all rights to use all of the foregoing forever and all
other rights in, to, and under the foregoing in all countries (collectively, the
"Proprietary Rights");
(8) all discoveries, improvements, processes, formulae (secret or
otherwise), data, confidential information, engineering, technical and shop
drawings, specifications and ideas, whether patentable or not, all licenses and
other similar agreements, and all drawings, records, books or other indicia,
however evidenced, of the foregoing;
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(9) all rights existing under contracts, leases, licenses, permits,
supply and distribution arrangements, sales and purchase agreements and orders,
employment and consulting agreements, consignment arrangements, warranties,
consents, orders, registrations, privileges, franchises, memberships,
certificates, approvals or other similar rights and all other agreements,
arrangements and understandings, including, without limitation, all rights
existing under the contracts listed on the Contracts Schedule and the Customer
Contracts Schedule (as defined in Section 3.12 hereto);
(10) the right to receive all mail and other communications
addressed to Seller (including, without limitation, mail and communications from
customers, suppliers, agents and others and accounts receivable payments);
(11) all lists and records pertaining to customers, suppliers,
personnel and agents and all other books, ledgers, files, documents,
correspondence, plats, architectural plans, drawings and specifications,
computer programs and business records of every kind and nature;
(12) all business and marketing plans and proposals and pricing and
cost information;
(13) all computer software and systems, including licenses related
thereto, proprietary or otherwise, and related source codes, data and
documentation;
(14) all creative materials (including, without limitation,
photographs, films, art work, color separations and the like), advertising and
promotional materials and all other printed or written materials;
(15) all claims, refunds, causes of action, choses in action,
rights of recovery and rights of set-off of every kind and nature;
(16) all goodwill as a going concern and all other intangible
property;
(17) all interest in and to telephone numbers, property addresses,
e-mail addresses and all listings pertaining to Seller in all telephone books
and other directories and other communications media, except those to be
retained by The Hillman Group, Inc. as set forth in the "Hillman Retained
Property Schedule" attached hereto as Schedule 1.1(q) ;
(18) certain assets used by Seller to conduct the "Hillman
Industrial" division business of Seller as set forth in the "Hillman Equipment
Schedule" attached hereto as Schedule 1.1(r); and
(19) all other property not referred to above which is represented
on Seller's Latest Balance Sheet (as defined in Section 3.4) or acquired by
Seller thereafter (except for such property which has been sold or otherwise
disposed of in the ordinary course of business).
For purposes of this Agreement, the term "Purchased Assets" means all
properties, assets and rights which Seller shall convey to Purchaser or shall be
obligated to convey to Purchaser under this Agreement.
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1.2 Excluded Assets. Notwithstanding the foregoing, the following
assets (the "Excluded Assets") are expressly excluded from the purchase and sale
contemplated hereby and, as such, are not included in the Purchased Assets:
(1) the minute books, capital stock records, certificate of
incorporation, by-laws and corporate seal of Seller, together with annual and
other corporate reports filed with the State of Delaware and other states in
which Seller is qualified to do business and other documents and correspondence
that relate to Seller's corporate organization and maintenance thereof;
(2) the assets of Seller relating to the maintenance and repair
operations ("MRO") with respect to Seller's four integrated supply accounts (the
"MRO Accounts"), each of which is specifically identified on the "MRO Schedule"
attached hereto as Schedule 1.2(b);
(3) all rights of Seller and Parent with respect to the claims,
refunds, causes of action, choses in action, rights of recovery, rights of
set-off and all other rights and assets of every kind and nature related to the
Excluded Liabilities;
(4) the name "SIMCO de Mexico" in the country of Mexico and the
names "Hillman", "The Hillman Group" and "SunSource Inventory Management
Company";
(5) all of Seller's tax records and all receivables and rights to
payment or refund to Seller or its affiliates relating to federal, state,
foreign or local income taxes and other taxes;
(6) all monies to be received by Seller from Purchaser and all
other rights of Seller and Parent under this Agreement; and
(7) all cash, cash equivalents and marketable securities.
1.3 Assumption of Liabilities. Subject to the conditions specified in
this Agreement, on the Closing Date, Purchaser shall assume and agree to pay,
defend, discharge and perform as and when due only the following liabilities and
obligations of Seller, but only to the extent that Seller's rights and benefits
under such agreements, leases, contracts and commitments have been validly
assigned to Purchaser pursuant to this Agreement and are in full force and
effect in accordance with their respective terms (the "Assumed Liabilities"):
(1) liabilities and obligations under the agreements, leases,
contracts and commitments listed on the Leases Schedule, the Contracts Schedule
and the Customer Contracts Schedule for any activity following the Closing Date
(excluding any liability or obligation for any breach thereof occurring prior to
the Closing Date);
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(2) those certain liabilities and obligations reflected in the
Latest Balance Sheet and listed on the "Assumed Liabilities Schedule" attached
hereto as Schedule 1.3 and liabilities and obligations of the same types that
have arisen in the ordinary course of business since the date of the Latest
Balance Sheet (other than any liability or obligation for a breach of contract,
breach of warranty, tort, infringement, claim or lawsuit).
1.4 Excluded Liabilities. Notwithstanding anything to the contrary
contained in this Agreement, Purchaser shall not assume or be liable for any
liabilities or obligations of Seller other than the Assumed Liabilities, and all
such other liabilities or obligations shall be the responsibility of Seller (the
"Excluded Liabilities").
ARTICLE 2.
CONSIDERATION FOR THE PURCHASED ASSETS
1.5 Purchase Price. In addition to the assumption of the Assumed
Liabilities, the aggregate purchase price for the Purchased Assets shall be an
amount equal to Ten Million and no/100 Dollars ($10,000,000) (the "Purchase
Price"), as adjusted pursuant to Section 2.3 hereof, which shall be payable to
Seller on the Closing Date by wire transfer of immediately available funds to
such account or accounts as shall have been designated in writing by Seller not
less than three (3) days prior to the Closing Date.
The sum of Five Hundred Thousand and no/100 Dollars ($500,000) shall be
held back from the Purchase Price paid to Seller at Closing and deposited into
an escrow account to be established pursuant to that certain escrow agreement in
the form of Exhibit A attached hereto (the "Escrow Agreement"), with such
changes as LaSalle National Bank, as the escrow agent (the "Escrow Agent"), may
request, to secure payment of (a) the Purchase Price Adjustment (defined below),
if any, (b) uncollectible Receivables pursuant to Section 2.6 hereof, (c) the
Warranty Deficiency, if any, under Section 2.7, and (d) any amounts due and
owing to Purchaser under the Transition Agreement (as hereinafter defined). Such
sum shall be held in escrow until the later of the date on which the Purchase
Price Adjustment is fully and finally determined as provided below and one
hundred eighty (180) days after the Closing Date. The escrow deposit shall be
disbursed in accordance with Sections 2.3, 2.6 and 2.7 and shall be subject to
offset pursuant to Sections 2.6 and 2.7.
1.6 Purchase Price Allocation. The Purchase Price shall be allocated
among the Purchased Assets as set forth in Exhibit B attached hereto. The
parties agree that the allocation set forth in Exhibit B shall be used by them
and respected for all purposes, including income tax purposes if in conformance
with the rules and regulations of the Internal Revenue Code of 1986, as amended
(the "Code"), and that the parties shall follow such allocation for all
reporting purposes, including, without limitation, Internal Revenue Service
("IRS") Form 8594.
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1.7 Purchase Price Adjustment. The Purchase Price set forth in this
Agreement is based upon the assumption that the "Tangible Net Worth" of the
Business as of the Closing Date will equal or exceed Six Million Six Hundred
Thousand and no/100 Dollars ($6,600,000). For purposes of this Agreement,
"Tangible Net Worth" shall be defined as the total of accounts receivable, net
of adequate reserves for doubtful accounts, plus inventory at the lower of cost
or market, net of reserves for obsolete and slow-moving accounts of not less
than $422,000 and reflecting a reduction of $44,000 from the Latest Balance
Sheet for "scrapped" inventory, plus property and equipment at cost, net of
accumulated depreciation, plus any other tangible Purchased Assets at their
historical cost net of any applicable reserves, minus all Assumed Liabilities in
accordance with Section 1.3(b). For purposes of this definition, all amounts
included in this calculation shall be determined in accordance with generally
accepted accounting principles, consistently applied and consistent with the
Latest Balance Sheet, as adjusted. Following the Closing, the Purchase Price
will be adjusted based on the closing Tangible Net Worth of the Business as
determined in accordance with Sections 2.3 and 2.4 (the "Closing Tangible Net
Worth"). If the Closing Tangible Net Worth is less than Six Million Six Hundred
Thousand Dollars ($6,600,000), the Purchase Price shall be decreased by the
amount of such deficiency. If the Closing Tangible Net Worth is greater than Six
Million Six Hundred Thousand Dollars ($6,600,000), the Purchase Price shall be
increased by the amount of such excess. Such deficiency and such excess are
herein referred to as the "Purchase Price Adjustment."
Upon the final determination of the Closing Tangible Net Worth,
Purchaser and Seller shall, if necessary, recompute the Purchase Price based
upon the Closing Tangible Net Worth as finally determined. If the Purchase Price
Adjustment shall decrease the Purchase Price (a "Purchase Price Reduction"),
Seller and Parent shall be jointly and severally liable to pay the Purchase
Price Reduction to Purchaser. Such obligation shall be satisfied first from any
remaining balance of the escrow deposit. Following such final determination of
the Closing Tangible Net Worth, Seller and Purchaser shall cause a joint written
instruction to be delivered pursuant to the terms of the Escrow Agreement
instructing the Escrow Agent to pay to Purchaser the Purchase Price Reduction.
To the extent that the then remaining balance of the escrow deposit may be
insufficient to pay the Purchase Price Reduction, the Seller and Parent shall be
jointly and severally responsible to pay such amount to Purchaser within three
(3) business days after the final determination of the Closing Tangible Net
Worth. If the Purchase Price Adjustment shall increase the Purchase Price (a
"Purchase Price Increase"), Purchasers shall be jointly and severally liable to
pay the Purchase Price Increase to Seller within three (3) business days after
the final determination of the Closing Tangible Net Worth. In addition, upon the
later of (a) one hundred eighty (180) days from the Closing Date and (b) three
(3) days after the final determination of the Purchase Price Adjustment, Seller
and Purchaser shall cause a joint written instruction to be delivered pursuant
to the terms of the Escrow Agreement instructing the Escrow Agent to pay to
Seller the then remaining balance of the escrow deposit, if any, net of any
amount to be paid to Purchaser with respect to uncollectible Receivables under
Section 2.6, the Warranty Deficiency under Section 2.7 and any amounts due and
owing to Purchaser under the Transition Agreement (as hereinafter defined).
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1.8 Procedures for Final Determination of Closing Tangible Net Worth.
Within forty-five days after the Closing Date, Seller shall prepare and deliver
to Purchaser an unaudited balance sheet for the Business as of the opening of
business on the Closing Date as determined in accordance with Section 2.3 (the
"Closing Balance Sheet"). Within the later of 30 days after Purchaser's receipt
of the Closing Balance Sheet or 75 days after the Closing Date, Seller's and
Purchaser's respective independent certified public accountants (the "Auditors")
shall each prepare a statement setting forth the Closing Tangible Net Worth for
the Business and deliver it to the Seller and Purchaser. The Seller shall make
available to the Purchaser, Auditors and other representatives the workpapers
used in preparing the Closing Balance Sheet and such other documents as the
Purchaser and Auditors may reasonably request. The Auditors shall consult with
each other during their preparation of the statement of Closing Tangible Net
Worth and shall mutually agree on the audit procedures ("Agreed Upon
Procedures") to be applied to the Closing Balance Sheet in preparation of the
statement of Closing Tangible Net Worth. If the Auditors agree on the final
Closing Tangible Net Worth, they shall deliver their mutually approved
determination thereof to Seller and Purchaser. If the Auditors cannot agree on
the final Closing Tangible Net Worth, then each Auditor shall deliver to the
Seller and Purchaser its own determination of Closing Tangible Net Worth. Within
thirty (30) days after the receipt of the statement of Closing Tangible Net
Worth, Seller and Purchaser shall deliver to each other a detailed written
statement describing its objections, if any, to the Closing Tangible Net Worth.
If Seller or Purchaser does not raise any objections within such thirty (30) day
period, the Closing Tangible Net Worth shall become final and binding upon all
parties. If Seller or Purchaser does raise any objections, Seller and Purchaser
shall use reasonable efforts to resolve any such disputes. If a final resolution
is not obtained within thirty (30) days after Seller or Purchaser shall have
submitted its objections to each other, any remaining disputes shall be resolved
by an accounting firm mutually agreeable to Seller and Purchaser. If Seller and
Purchaser are unable to mutually agree on such an accounting firm within five
(5) days after the expiration of said thirty (30) day period, a "big-five"
accounting firm shall be selected by lot after elimination of one firm
designated as objectionable by each of Seller and Purchaser. The determination
of the accounting firm so selected shall be set forth in writing and shall be
conclusive and binding upon the parties, and the fees and expenses of such
accounting firm shall be paid one-half by Seller and one-half by Purchaser.
1.9 Closing Tangible Net Worth Definition. For purposes hereof, the
Closing Tangible Net Worth shall be determined as of the opening of business on
the Closing Date and shall be equal to the Tangible Net Worth at such time. The
Net Worth reports shall be prepared, and the Closing Tangible Net Worth shall be
determined, in accordance with GAAP applied consistently with the Latest Balance
Sheet.
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1.10 Uncollectible Accounts Receivable. If, within ninety (90) days
after the Closing Date, Purchaser is unable to collect any of the Receivables or
the AFI Industries, Inc. vendor receivable sold to Purchaser hereunder,
Purchaser shall so notify Seller (the "AR Notice") and reconvey and assign to
Seller such uncollectible Receivables, and Seller and Parent shall be jointly
and severally liable to reimburse Purchaser therefor at the value of such
uncollectible Receivables shown on Seller's books and records used for the
purpose of determining Closing Tangible Net Worth, net of (a) any reserve for
doubtful accounts on the Closing Balance Sheet (including any reserve
specifically identifiable to Labconco Corporation) and (b) any payments received
by Purchaser during such 90-day period with respect to accounts receivable
previously written off by Seller prior to the Closing Date (the "Receivables
Deficiency"). Such reimbursement obligation shall be satisfied first from any
remaining balance of the escrow deposit pursuant to Section 2.1. No later than
five (5) days after delivery of the AR Notice, Seller and Purchaser shall cause
a joint written instruction to be delivered pursuant to the terms of the Escrow
Agreement instructing the Escrow Agent to pay to Purchaser the Receivables
Deficiency. To the extent that the then remaining balance of the escrow deposit
is insufficient to pay the Receivables Deficiency, Seller and Parent shall be
jointly and severally liable to pay such amount to Purchaser within five (5)
business days after receipt of the AR Notice under this Section 2.6. In
determining which Receivables shall be uncollectible, Purchaser shall credit any
payments received from a particular customer against the oldest Receivable
outstanding from such customer, and Purchaser shall exclude any Receivables the
value of which was excluded from the determination of the Closing Tangible Net
Worth. In addition, Purchaser shall use commercially reasonable efforts to
collect the Receivables during such 90-day period and shall not take or omit to
take any actions with respect to the obligors thereunder that would permit such
obligors to pay any portion of their respective Receivables after expiration of
such 90-day period.
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1.11 Warranty Claims. If, within ninety (90) days after the Closing
Date, Purchaser is unable to sell or return to Seller's vendors any of the
inventory on-hand as of the Closing Date specifically held on behalf of any of
the claimants listed on the "Warranty Claims Schedule" attached hereto as
Schedule 2.7 (the "Warranty Claim Inventory"), Purchaser shall give Seller
notice thereof (the "Warranty Notice") and assign, convey and transfer to Seller
any such Warranty Claim Inventory. Seller and Parent shall be jointly and
severally liable to repurchase any Warranty Claim Inventory then remaining for
an amount equal to the value of such Warranty Claim Inventory shown on Seller's
books and records used for the purpose of determining Closing Tangible Net
Worth, net of any specific Warranty Reserve that is part of the Closing Tangible
Net Worth (the "Warranty Deficiency") within five (5) business days after
delivery of the Warranty Notice. If Purchaser incurs any costs associated with
returning Warranty Claim Inventory to Seller's vendors, including, but not
limited to, re-stocking fees and other related costs, then Seller shall
reimburse Purchaser promptly when presented with Purchaser's invoices therefor.
The repurchase obligation of Seller and Parent provided in this Section 2.7
shall be satisfied first from any remaining balance of the escrow deposit
pursuant to Section 2.1. Within five (5) days after delivery of the Warranty
Notice, Seller and Purchaser shall cause a joint written instruction to be
delivered to the Escrow Agent pursuant to the terms of the Escrow Agreement to
pay to Purchaser the Warranty Deficiency. To the extent the remaining balance of
the escrow deposit is insufficient to pay the Warranty Deficiency, Seller and
Parent shall be jointly and severally liable to pay such amount to Purchaser
within five (5) business days after receipt of the Warranty Notice.
ARTICLE 3.
REPRESENTATIONS AND WARRANTIES OF SELLER AND PARENT
As an inducement to Purchaser to enter into this Agreement, Seller and
Parent, jointly and severally, hereby represent and warrant to Purchasers as of
the date hereof and as of the Closing Date that:
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1.12 Organization and Power. Seller is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware,
and Seller is qualified to do business as a foreign corporation and is in good
standing and pays taxes in the jurisdictions specified on the "Qualifications
Schedule" attached hereto as Schedule 3.1, which are all jurisdictions in which
the ownership of Seller's properties or the conduct of Seller's business
requires Seller to be so qualified. Seller has all requisite power and authority
and all material licenses, permits and other authorizations necessary to own and
operate its properties and to carry on its businesses as now conducted as they
relate to the Business. The copies of the certificate of incorporation and
by-laws of Seller which have been previously furnished to Purchaser reflect all
amendments made thereto at any time prior to the date of this Agreement and are
correct and complete in all material respects. On the date hereof (a) SunSource
indirectly owns, and on the Closing Date shall indirectly own, all of the issued
and outstanding capital stock of SISC, and (b) SISC owns, and on the Closing
Date shall own, all of the issued and outstanding capital stock of Seller.
1.13 Subsidiaries. Seller owns no stock, partnership interest, joint
venture interest or other security or interest in any corporation, organization
or entity.
1.14 Authorization; No Breach. The execution, delivery and performance
of this Agreement and the other agreements contemplated hereby and the
transactions contemplated hereby and thereby have been duly and validly
authorized by Seller, Parent and SISC. No other corporate act or proceeding on
the part of Seller or Parent or their respective Boards of Directors is
necessary to authorize the execution, delivery or performance of this Agreement,
any other agreement contemplated hereby or the consummation of the transactions
contemplated hereby or thereby. This Agreement has been duly executed and
delivered by Seller and Parent, and this Agreement constitutes and the other
agreements contemplated hereby upon execution and delivery by Seller and Parent
shall each constitute, a valid and binding obligation of Seller and Parent,
enforceable in accordance with their respective terms. Except for the consents
from the parties to the contracts identified on Schedule 3.16 (other than the
"Material Consents" which are conditions to Closing under Section 6.1(d)), the
execution, delivery and performance of this Agreement and the other agreements
contemplated hereby by Seller and Parent and the consummation of the
transactions contemplated hereby and thereby do not and shall not (a) conflict
with or result in any breach of any of the provisions of, (b) constitute a
default under, result in a violation of, or cause the acceleration of any
obligation under, (c) result in the creation of any lien, security interest,
charge or encumbrance upon any of the Purchased Assets under, or (d) require any
authorization, consent, approval, exemption or other action by or notice to any
court or other governmental body under the provisions of Seller's or Parent's
certificate of incorporation or by-laws or any indenture, mortgage, lease, loan
agreement or other agreement or instrument to which Parent or Seller is bound or
affected or any law, statute, rule, regulation, judgement, order or decree to
which Parent or Seller is subject or by which any of the Purchased Assets is
bound.
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1.15 Financial Statements. Seller has furnished Purchaser with copies
of (a) its unaudited balance sheets of the Business as of December 31, 1998 and
as of March 31, 1999 (the "Latest Balance Sheet") and the related unaudited
income statements for the twelve month period ended December 31, 1998 and the
3-month period ended March 31, 1999 (collectively with the Latest Balance Sheet,
the "Seller Statements") and (b) the audited balance sheet of Parent as of
December 31, 1998 and the related audited financial statements for the fiscal
years then ended. Each of the Seller Statements has been based upon the
information contained in Seller's books and records (which are accurate and
complete in all material respects) and accurately and completely present the
financial condition and results of operations of the Business as of the times
and for the periods referred to therein, and such financial statements contain
proper accruals and adequate reserves and have been prepared in accordance with
generally accepted accounting principles, consistently applied throughout the
periods indicated, except for normal year-end adjustments, the absence of
footnotes and as otherwise noted therein.
1.16 Absence of Undisclosed Liabilities. Except as disclosed in the
"Outstanding Liabilities" Schedule attached hereto as Schedule 3.5, as of the
Closing, Seller shall have no liabilities or obligations with respect to the
Business whether accrued, absolute, contingent, unliquidated or otherwise,
whether or not known to Seller, whether due or to become due, arising out of or
related to transactions entered into at or prior to the Closing, or out of any
action or inaction by Seller, Parent, SISC or any employee, agent, licensee or
contractor of any of them at or prior to the Closing, or out of any state of
facts existing at or prior to the Closing, regardless of when any such liability
or obligation is asserted, including, without limitation, taxes with respect to
or based upon transactions or events occurring on or before the Closing, except
(a) liabilities and obligations under agreements, contracts, leases or
commitments described on the Leases Schedule (as defined in Section 3.8(b)
hereof) and the Contracts Schedule (as defined in Section 3.12 hereof) or under
agreements, leases, contracts and commitments which are not required pursuant to
this Agreement to be disclosed thereon (but not liabilities for breaches
thereof), (b) liabilities and obligations reflected on the Latest Balance Sheet,
(c) liabilities and obligations which have arisen after the date of the Latest
Balance Sheet in the ordinary course of business (none of which is a liability
for breach of contract, breach of warranty, tort, infringement, claim or
lawsuit), and (d) liabilities and obligations otherwise expressly disclosed in
this Agreement or the "Assumed Liabilities Schedule" attached hereto as Schedule
1.3.
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1.17 No Material Adverse Changes. Since the date of the Latest Balance
Sheet through the date hereof, there has been no material adverse change in the
financial condition, operating results, assets, operations, employee relations
or customer relations of the Business.
1.18 Absence of Certain Developments. Since the date of the Latest
Balance Sheet, Seller has not:
(1) borrowed or agreed to borrow any amount or incurred or become
subject to any material liabilities, except current liabilities incurred in the
ordinary course of business and liabilities under contracts entered into in the
ordinary course of business;
(2) discharged or satisfied, or agreed to discharge or satisfy, any
material lien or encumbrance or paid any material liability, other than current
liabilities paid in the ordinary course of business;
(3) mortgaged, pledged or subjected to any lien, charge or any
other encumbrance, any portion of the Purchased Assets, except liens for current
property taxes not yet due and payable;
(4) sold, assigned or transferred, or agreed to do so, any of the
Purchased Assets, except in the ordinary course of business or canceled without
fair consideration any material debts or claims owing to or held by it;
(5) sold, assigned, transferred, abandoned or permitted to lapse
any patents, trademarks, trade names, copyrights, trade secrets or other
intangible assets, or disclosed any material proprietary confidential
information to any person;
(6) made or granted, or agreed to make or grant, any bonus or any
wage or salary increase to any employee or group of employees or made or granted
any increase in any employee benefit plan or arrangement (except in accordance
with past custom and practice), or amended or terminated, or agreed to terminate
or amend, any existing employee benefit plan or arrangement or adopted any new
employee benefit plan or arrangement;
(7) made, or agreed to make, any capital expenditures or capital
commitments therefor that aggregate in excess of $10,000 without Purchaser's
prior written approval;
(8) made, or agreed to make, any loans or advances to, or
guarantees for the benefit of, any persons;
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(9) suffered any extraordinary losses or waived any rights of
material value with respect to the Purchased Assets or the Assumed Liabilities,
whether or not in the ordinary course of business or consistent with past
practice;
(10) entered into, or agreed to enter into, any other transaction
other than in the ordinary course of business;
(11) made, or agreed to make, any charitable contributions or
pledges other than in accordance with past practices and in excess of $5,000 in
the aggregate;
(12) suffered any damage, destruction or casualty loss to the
Purchased Assets, whether or not covered by insurance;
(13) made any purchase commitment of services or goods in excess of
the then current market price therefor or upon terms and conditions more onerous
than those usual and customary in the industry, or made any change in its
selling, pricing, advertising or personnel practice inconsistent with its prior
practice and prudent business practices prevailing in the industry; or
(14) made, or agreed to make, any declaration or payment to its
stockholder of any non-cash dividend or other non-cash distribution in respect
to its stock.
1.19 Title and Condition of Properties.
(1) Seller owns no real estate.
(2) The leases described on the "Leases Schedule" attached hereto
as Schedule 1.1(d) (individually, a "Lease" and, collectively, the "Leases") are
in full force and effect, and Seller (as indicated on such schedule) holds a
valid and existing leasehold interest under each of the Leases for the term set
forth on the Leases Schedule. The Leases constitute all of the leases under
which Seller holds a leasehold interest in real estate. Seller has delivered to
Purchaser complete and accurate copies of each of the Leases, and none of the
Leases has been modified in any respect, except to the extent that such
modifications are disclosed by the copies delivered to Purchaser. Seller is not
in default under any of the Leases, and no other party to the Leases has the
right to terminate, accelerate performance under or otherwise modify any of the
Leases, including upon the giving of notice or the passage of time. To the best
of Seller's knowledge, no third party to any Lease is in default under such
Lease. At the Closing, Seller shall assign and legally transfer to Purchaser its
leasehold interest in the Leases, subject to obtaining the consent of the lessor
under each of the Leases if required by the terms of the applicable Lease or
governing law, free and clear of all liens, security interests, charges and
other encumbrances.
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(3) The real estate demised by the Leases constitutes all of the
real estate used or occupied by Seller, and no other real estate is necessary
for the conduct of the Business in the manner conducted by Seller.
(4) Seller owns good and marketable title, free and clear of all
liens, charges, security interests, encumbrances, encroachments and claims of
others, to all of the personal property and assets shown on the Latest Balance
Sheet or acquired thereafter in the ordinary course of business (or otherwise
with Purchaser's approval) or located on any of its premises, except for liens
of current taxes not yet due and payable (which shall be pro-rated) and liens
disclosed on the Latest Balance Sheet. At the Closing, Seller shall sell,
assign, transfer and convey to Purchaser by customary bill of sale good and
marketable title to all of the personal property included within the Purchased
Assets, free and clear of all liens, security interests, charges, encumbrances
and claims of others, other than liens for current taxes not yet due and
payable.
(5) Seller's buildings, machinery, equipment and other tangible
assets used in the operation of the Business (including, without limitation, the
equipment listed in Schedule 1.1(e)) are in good operating condition and repair,
have been maintained in accordance with normal industry standards and are usable
in the ordinary course of business. Seller owns or leases under valid leases all
buildings, machinery, equipment and other tangible assets necessary for the
conduct of the Business in the manner conducted by Seller.
(6) Seller is not aware of any violation of any applicable zoning,
building, fire or other ordinance or other law, regulation or requirement
relating to the operation of any of its leased or occupied properties,
including, without limitation, any applicable environmental protection or
occupational health and safety laws and regulations ("OSHA") except for any
non-OSHA violations that, in the aggregate, would not have a material adverse
effect on the Business. Within the three (3) years prior to the date of this
Agreement, neither Seller nor Parent has received any written notice of any such
violation (except with respect to any non-OSHA violation that no longer exists)
or any condemnation proceeding with respect to any properties used or leased by
Seller.
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1.20 Accounts Receivable. All accounts receivable of Seller reflected
on the Latest Balance Sheet, and to be reflected on its books of the Closing
Date, are and shall be valid receivables, and are and shall be subject to no
valid counterclaims or setoffs in excess of any reserves therefor.
1.21 Inventories and Specifications.
(1) Seller's inventories reflected on the Latest Balance Sheet and
as of the Closing Date, net of any applicable reserve for slow-moving, obsolete
or damaged goods established consistent with past practices, consisted and shall
consist of a quality and quantity usable and saleable in the ordinary course of
business, net of such reserve, and otherwise were not and will not be
slow-moving, obsolete or damaged. All of such inventory was and will be valued
using the first-in, first-out method of valuation, and consisted and will
consist of items which are of merchantable quality, in good, salable and usable
condition, net of such reserve, and were and will be salable in the ordinary
course of business, net of such reserve. All such inventory was and will be
located on the Seller's owned or leased premises, except such thereof as is in
the process of being delivered to or, pursuant to a consignment agreement or
customized inventory management system agreement, is located at a customer's
facility.
(2) Seller's inventories reflected on the Latest Balance Sheet and
as of the Closing Date met or exceeded and meets or exceeds Industrial Fastener
Industry ("IFI") standards or specifications and/or any specifications
designated by a customer drawing, blueprint or purchase order for which it was
purchased.
1.22 Tax Matters.
(1) Each of Parent and Seller has duly filed all federal, foreign,
state and local tax information and tax returns of any and every nature and
description with respect to the Business (the "Returns") and required to be
filed by it (all such returns being accurate and complete in all respects) and
has duly paid or made provision for the payment of all taxes and other
governmental charges (including without limitation any interest, penalty or
additions to tax thereto) which have been incurred or are shown to be due on
said Returns or are claimed in writing to be due from or imposed on Seller or
Parent or their respective properties, assets, income, franchises, leases,
licenses, sales or use with respect to the Business by any federal, state, local
or foreign taxing authorities (collectively, the "Taxes") on or prior to the
date hereof, other than Taxes which are being contested in good faith and by
appropriate proceedings and as to which each of Parent and Seller has set aside
on its books adequate reserves or which may be attributable to the transactions
contemplated hereby. The amounts recorded as reserves for Taxes on a gross or
net basis on the Latest Balance Sheet are sufficient in the aggregate for
payment by Seller of all unpaid Taxes (including any interest or penalties
thereon) for the period ended as of the date of the Latest Balance Sheet or for
any year or period prior thereto. Neither the IRS nor any state, local or
foreign taxing authority has ever examined any income tax return of Parent or
Seller with respect to the Business, whether singly or as a member of an
affiliated group, except as otherwise specifically disclosed on the "Tax Matters
Schedule" attached hereto as Schedule 3.11, which sets forth the date or dates
since December 31, 1991, through which any foreign, state, local or other taxing
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authority has examined or is in the process of examining any foreign, state,
local or other returns with respect to the Business of Parent or Seller. Except
as set forth on the "Tax Matters Schedule", neither the IRS nor any foreign,
state, local or other taxing authority is in the process of examining any
federal, foreign, state, local or other tax return of Parent or Seller. There
are no disputes pending, or claims asserted, for Taxes upon Parent or Seller.
Neither Parent nor Seller has been required to give any currently effective
waivers extending the statutory period of limitation applicable to any foreign,
federal, state or local return or for any period or agreed to an extension of
time with respect to a Tax assessment or deficiency. Neither Parent nor Seller
has in effect any power of attorney or authorization to anyone to represent it
with respect to any Taxes. No claim has ever been made by an authority in a
jurisdiction where Parent or Seller does not file Returns that Parent or Seller
is or may be subject to taxation by that jurisdiction. Neither Parent nor Seller
has filed any consolidated federal income tax return with an "affiliated group"
(within the meaning of Section 1504 of the Code), where Seller was not the
common parent of the group. Neither Parent nor Seller is or has been, a party to
any tax allocation agreement or arrangement pursuant to which it has any
contingent or outstanding liability to anyone. Neither Parent nor Seller has any
liability for Taxes as a transferee of, or successor to, any other person.
Neither Parent nor Seller has filed a consent under Section 341(f) of the Code.
Parent and Seller have provided to Purchaser or its representatives complete and
correct copies of its federal, state and local income tax returns filed on or
prior to the date hereof and all examination reports, if any, relating to the
audit of such returns by the IRS or other tax authority for each taxable year
beginning on or after January 1, 1993. Except as disclosed in Schedule 3.11,
there exists no proposed assessment against Parent or Seller or notice, whether
formal or informal, of any deficiency or claim for additional Tax (including,
without limitation, interest, additions to tax or penalties).
(2) All monies required to be withheld from employees, independent
contractors, stockholders, or creditors of Seller for Taxes, including, but not
limited to, income taxes, back-up withholding taxes, social security and
unemployment insurance taxes or collected from customers or others as Taxes,
including, but not limited to, sales, use or other taxes, have been withheld as
appropriate and collected and paid, when due, to the appropriate governmental
authority, or if such payment is not yet due, an adequate reserve has been
established for such Taxes.
(3) Seller has not made any payments, is not obligated to make any
payments, nor is Seller a party to any agreement that could obligate it to make
any payments that will not be deductible under Code Section 280G. Seller has not
been a United States real property holding corporation within the meaning of
Code Section 897(c)(2) during the applicable period specified in Code Section
897(c)(1)(A)(ii). Seller has not acquired any United States real property
interest, as defined in Code Section 897(c), from a foreign person without
complying with the withholding requirements contained in Code Section 1445.
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1.23 Contracts and Commitments.
(1) Except as set forth in Section 3.18 or in the "Contracts
Schedule" attached hereto as Schedule 3.12(a) or in the "Customer Contracts
Schedule" attached hereto as Schedule 3.12(d), and except for any contract
entered into in the ordinary course of the Business as to which Seller's
remaining obligation is less than $10,000 as of the date hereof (provided that
all of such contracts do not exceed $50,000 in the aggregate), Seller is not a
party to or bound by any:
(1) bonus, pension, profit sharing, retirement or deferred
compensation plan or stock purchase, stock option, hospitalization
insurance or similar plan or practice, whether formal or informal, or
severance agreements or arrangements or contracts requiring Seller to
pay post-retirement medical benefits;
(2) contract with any labor union or contract for the
employment of any officer, individual employee or other person on a
full-time, part-time or consulting basis;
(3) agreement or indenture relating to the borrowing of money
or to mortgaging, pledging or otherwise placing a lien on any of the
Purchased Assets;
(4) guarantee of any obligation for borrowed money or
otherwise, other than endorsements made for collection in the ordinary
course of business;
(5) agreement or commitment with respect to the lending or
investing of funds to or in other persons or entities;
(6) license or royalty agreement;
(7) lease or agreement under which it is lessee of or holds or
operates any personal property owned by any other party;
(8) lease or agreement under which it is lessor of or permits
any third party to hold or operate any property, real or personal,
owned or controlled by it;
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(9) contract or group of related contracts with the same party
for the purchase or sale of products or services other than the
Customer Contracts (as defined in Section 3.12(d) hereof);
(10) other contract with any party continuing over a period of
more than six months from the date or dates thereof, not terminable by
it on thirty (30) days' or less notice without penalties;
(11) contract which prohibits it from freely engaging in
business or in any way restrains its business activities anywhere in
the world;
(12) contract relating to the distribution of its products;
(13) contract with any officer, director, partner, shareholder
or other insider; or
(14) other agreements whether or not entered into in the
ordinary course of business.
(2) Except as specifically disclosed in the Contracts Schedule, (i)
to Seller's knowledge, no contract or commitment has been breached in any
respect or canceled by the other party, (ii) since the date of the Latest
Balance Sheet, no supplier has notified Seller that it shall stop or decrease in
any material respect the rate of business done with Seller, (iii) Seller has in
all material respects performed all the obligations required to be performed by
it to the date of this Agreement and is not in receipt of any claim of default
under any material lease, contract, commitment or other agreement to which it is
a party; and (iv) no event has occurred which with the passage of time or the
giving of notice or both would result in a material breach or default under any
lease, contract, instrument or other agreement to which Seller is a party.
(3) Purchaser has been supplied with a true and correct copy of all
written contracts which are referred to on the Contract Schedule, together with
all amendments, waivers or other changes thereto.
(4) Seller has no knowledge of any (i) pending or threatened
termination, cancellation, limitation, modification or change in any of Seller's
business relationship with any customer or group of customers related to the
Business or (ii) changes or pending changes in any law, rule, regulation,
technology, or business relationship or other circumstance that is reasonably
likely to result in the loss of any customers related to the Business after the
date hereof. Each contract, agreement or lease with customers of Seller relating
to the Business ("Customer Contracts") is in one of the forms attached to the
"Customer Contract Schedule" attached hereto as Schedule 3.12(d), except for
completion of blanks and has not been modified with respect to the limitations
on liability or service charge increase provisions, whether in writing, orally,
by course of dealings or otherwise, and Seller is not providing or obligated to
provide goods or services to others except pursuant to a written contract in
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such form in each case. Except as indicated on the Customer Contract Schedule,
(A) to the Seller's knowledge, each of the Customer Contracts is valid,
enforceable and in full force and effect in accordance with the terms thereof,
(B) to the Seller's knowledge, there is no existing material default or event or
condition which, with notice or lapse of time or both, would constitute an event
of material default under any Customer Contract, (C) no Customer Contract has
been amended, modified, supplemented or otherwise altered orally, in writing or
by course of conduct, (D) except as set forth on Schedule 3.12(d), no Customer
Contract requires the consent of the Customer or any other party to affect a
valid assignment thereof to Purchaser without causing a default or giving rise
to a right of termination thereunder, and (E) each Customer Contract complies
with all applicable laws, rules and regulations.
1.24 Proprietary Rights. Seller owns and possesses all right, title and
interest in and to the Proprietary Rights, including, but not limited to, those
proprietary rights necessary to conduct the Business in the manner conducted by
Seller. Seller has not received any notices of infringement, misappropriation,
invalidity or conflict from any third party with respect to such Proprietary
Rights. Seller has not infringed, misappropriated or otherwise conflicted with
any Proprietary Rights of any third parties and, to the best of Seller's
knowledge, Seller's Proprietary Rights have not been infringed by any third
parties.
1.25 Litigation; Proceedings. There are no actions, suits, proceedings,
orders or investigations pending or, to the best of Seller's knowledge,
threatened against or affecting Seller at law or in equity, or before or by any
federal, state, municipal or other governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, except for any such item
that would not have a material adverse effect on the Business. No officer,
director, employee or agent of Seller has been or is authorized to make or
receive, and Seller knows of no such person making or receiving, any bribe,
kickback or other illegal payment at any time. Within the three (3) years
preceding the date hereof, Seller has received no opinion or legal advice in
writing to the effect that Seller is exposed from a legal standpoint to any
liability or disadvantage which may be material to the Business as previously or
presently conducted.
1.26 Brokerage. Except as set forth on the "Brokers Schedule" attached
hereto as Schedule 3.15, there are no claims for brokerage commissions, finders
fees or similar compensation in connection with the transactions contemplated by
this Agreement based on any arrangement or agreement made by or on behalf of
Seller.
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1.27 Governmental Consent, etc. No permit, consent, approval or
authorization of, or declaration to or filing with, any governmental or
regulatory authority is required in connection with the execution, delivery or
performance of this Agreement by Seller, or the consummation by Seller of any of
the transactions contemplated hereby and thereby, except as disclosed on the
"Consents Schedule" attached hereto as Schedule 3.16 on which the "Material
Consents" for purposes of Section 6.1(d) have been designated.
1.28 Employees and Agents. Seller has not received written notice that
any key employee or agent, or group of Seller's employees or agents, has any
plans to terminate employment with Seller. Seller has complied in all material
respects with all applicable laws relating to the employment of labor and
independent contractors, including provisions thereof relating to wages, hours,
equal opportunity, immigration, collective bargaining, disabilities, family
leave and the payment of social security and other taxes. Seller has no existing
relationships with any union or employee representative or any labor relations
problems, and there has been no union organization efforts by any employee of
Seller. Seller has no reason to believe that (if Purchaser elects to hire them)
the services of any of the present employees of Seller will not be available for
continued conduct of the Business after the Closing on substantially the same
terms as now conducted.
1.29 Employee Benefit Plans.
(1) The "Employee Benefits Schedule" attached hereto as Schedule
3.18 contains a list of all employee benefit plans (as defined in Section 3(3)
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"))
and any other arrangement, program or plan providing medical, life, disability,
severance, deferred compensation, education, dependent care, or other retirement
or welfare benefits, maintained by Seller and/or any ERISA affiliate (within the
meaning of Code Section 414) in which any employee of the Business, or any
beneficiary thereof, participates or to which Seller is or was obligated to
contribute (the "benefit plans"). Seller has provided true and correct copies of
the benefit plans to Purchaser.
(2) All benefit plans have been administered in all material
respects in compliance with all applicable requirements of ERISA and the Code,
and Seller has not incurred, and as of the Closing Date will not incur, any
liability with respect to any benefit plan which creates a lien upon, or can be
collected from, the Assets being purchased under this Agreement, nor which may
impose, directly or indirectly, any obligation or liability on Purchaser, as a
successor employer or otherwise, including without limitation any liabilities
with respect to the health care continuation requirements of Code Section 4980B.
It is expressly understood and agreed that Purchaser is not assuming any of the
benefit plans and that Seller shall retain all liabilities with respect to the
benefit plans.
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(3) Except as set forth in Schedule 3.18, all accrued contributions
and other payments to be made by Seller or any ERISA Affiliate to any Benefit
Plan through the date of the Latest Balance Sheet have been made or reserves
adequate therefor have been set aside and reflected on the Latest Balance Sheet.
1.30 Insurance. The "Insurance Schedule" attached hereto as Schedule
3.19 lists and briefly describes each insurance policy maintained by Seller with
respect to the Purchased Assets and the Business. Seller has delivered to
Purchaser complete and correct copies of all such policies together with all
riders and amendments thereto. All of such insurance policies are in full force
and effect, and Seller is not and has never been in material default with
respect to its obligations under any of such insurance policies. During the
three-year period ending on the date hereof, Seller has never been refused any
insurance coverage for which it has applied or had any insurance policy
canceled.
1.31 Affiliated Transactions. No officer, director, stockholder or
affiliate of Seller or any person related by blood or marriage to any such
person or any entity in which any such person owns any beneficial interest is a
party to any agreement, contract, commitment or transaction with Seller or has
any interest in any property used by Seller.
1.32 Compliance with Laws; Permits; Certain Operations.
(1) Seller and its officers, directors, agents and employees have
complied in all material respects with all applicable laws and regulations of
foreign, federal, state and local governments and all agencies thereof which
apply to the Business or the Purchased Assets or to which Seller may otherwise
be subject, and Seller has not received notice of any violation of any such law
or regulation, except (i) any such violations that have been corrected, (ii) any
such violations that, in the aggregate, would not have a material adverse effect
on the Business and (iii) any such violations as are set forth on the
"Compliance Schedule" attached hereto as Schedule 3.21(a), which schedule
includes all OSHA violations. In particular, but without limiting the generality
of the foregoing, Seller has not violated or received a notice or charge
asserting any violation of the Immigration Reform and Control Act of 1986, the
Occupational Safety and Health Act of 1970, the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, the Resource Conservation and
Recovery Act of 1976, the Toxic Substances Control Act of 1976, the Americans
With Disabilities Act, or any other state or federal act (including rules and
regulations thereunder) regulating or otherwise affecting the employment of
aliens, employee health and safety, the environment, zoning, building, fire or
other ordinances or any other aspect of the Business, except for (A) any such
violations that have been corrected, and (B) any such violations that, in the
aggregate, would not have a material adverse effect on the Business.
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(2) Except for any such items the absence of which would not, in
the aggregate, have a material adverse effect on the Business, Seller holds all
of the permits, licenses, certificates and other authorizations of foreign,
federal, state and local governmental agencies required for the conduct of the
Business all of which are set forth in the "Permits Schedule" attached hereto as
Schedule 3.21(b). Seller has not received any notice (and Seller has no reason
to believe) that revocation is being considered with respect to any of such
licenses, permits, certificates or authorizations, or that Seller is in material
violation of any such license, permit, certificate or authorization.
1.33 Environmental Matters.
(1) As used in this Section 3.22, the following terms shall have
the following meanings:
(1) "Hazardous Materials" means any dangerous, toxic, hazardous
or radioactive pollutant, contaminant, chemical, waste, material or
substance as defined in or governed by any federal, state or local law,
statute, code, ordinance, regulation, rule or other requirement
relating to such substance or otherwise relating to the environment or
human health or safety, including without limitation any waste,
material, substance, pollutant or contaminant that might cause any
injury to human health or safety or to the environment or might subject
Seller to any imposition of costs or liability under any Environmental
Law.
(2) "Environmental Laws" means all applicable federal, state,
local and foreign laws, rules, regulations, codes, ordinances, orders,
decrees, directives, permits, licenses and judgments relating to
pollution, contamination or protection of the environment (including,
without limitation, all applicable federal, state, local and foreign
laws, rules, regulations, codes, ordinances, orders, decrees,
directives, permits, licenses and judgments relating to Hazardous
Materials in effect as of the date of this Agreement).
(3) "Release" shall mean the spilling, leaking, disposing,
discharging, emitting, depositing, ejecting, leaching, escaping or any
other release or threatened release, however defined, whether
intentional or unintentional, of any Hazardous Material.
(2) Seller's operation of the Business at or from all real estate
owned, leased or operated by Seller and its operation of the Purchased Assets
comply in all material respects with all applicable Environmental Laws. All real
estate owned or leased by Seller, whether occupied by Seller or third parties or
vacant, comply in all material respects with all applicable Environmental Laws.
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(3) Seller has obtained and maintained in full force and effect all
environmental permits, licenses, certificates of compliance, approvals and other
authorizations necessary to own or operate the Purchased Assets (collectively,
the "Environmental Permits") all of which are disclosed in the "Environmental
Matters Schedule" attached hereto as Schedule 3.22. Seller has filed all reports
and notifications required to be filed under and pursuant to all applicable
Environmental Laws with respect to the operation of the Business and the
operation of the Purchased Assets, the Real Estate, and all leased premises and
any other property owned, operated, or leased by Seller at any time.
(4) Except as set forth in the "Environmental Matters Schedule":
(i) no Hazardous Materials have been generated, stored, treated, contained,
handled, located, used, manufactured, processed, buried, incinerated, deposited,
or released by Seller on, under or about any part of any real property owned,
leased or operated by Seller in violation of any Environmental Law, and (ii) no
real property owned, leased or operated by Seller or any of the other Purchased
Assets contain any asbestos, urea, formaldehyde, radon, polychlorinated
biphenyls ("PCBs") or pesticides at levels or amounts, or in a condition, that
violate any Environmental Law.
(5) Except as set forth in the "Environmental Matters Schedule",
Seller has received no notice alleging in any manner that Seller is, or might be
potentially, responsible for any Release of Hazardous Materials, or any costs
arising under or in violation of Environmental Laws with respect to the
Purchased Assets, the leased premises, or the operation of the Business.
(6) None of the real estate leased or operated by Seller is or has
been listed on the United States Environmental Protection Agency National
Priorities List of Hazardous Waste Sites, or any other list, schedule, law,
inventory or record of hazardous or solid waste sites maintained by any federal,
state or local agency.
(7) No condition exists at any property which Seller operates or
leases, and to the best of Seller's knowledge, any property which Seller
formerly owned, operated, or leased or where any wastes generated at any time by
Seller may have been stored, treated, or disposed, which constitutes or which,
with the passage of time, could reasonably be expected to constitute a violation
of or give rise to liability under any Environmental law.
(8) Seller has disclosed and delivered to Purchaser all
environmental reports and investigations which Seller has obtained or ordered
with respect to the Purchased Assets, the leased premises or the Business.
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(9) No lien has been attached or filed against Seller with respect
to the Purchased Assets or any leased premises in favor of any governmental or
private entity for (i) any liability or imposition of costs under or in
violation of any applicable Environmental Law; or (ii) any Release of Hazardous
Materials.
1.34 Product and Warranty Claims. Except as disclosed in the "Claims
Schedule" attached hereto as Schedule 3.23, Seller has no knowledge of and has
not received during the past five (5) years any claim or notice (a) with respect
to any occurrences arising out of the use or operation of products engineered,
designed, manufactured, sold, installed, monitored or serviced by or on behalf
of Seller, which has resulted in any injury or death to person or damage to
property, or (b) any claim or notice that such products do not conform to any
agreement, representation or warranty made by Seller (or implied by law) with
respect to such products that is unresolved as of the date hereof that, in the
case of (a) or (b) involved complaints which were filed against Seller or which
were submitted to an insurance carrier for coverage. Subject to the terms of the
policies of insurance described on the Insurance Schedule, Seller is covered
against all damages, liability and expenses for any claims based upon products
engineered, designed, manufactured, sold, installed, monitored or serviced by or
on behalf of Seller (including, but not limited to, costs of investigation and
attorneys' fees and expenses) under policies of insurance described on the
Insurance Schedule.
1.35 Disclosure. Neither this Agreement nor any of the schedules,
attachments or exhibits hereto contain any untrue statement of a fact or omit a
fact necessary to make the statements contained herein or therein, in light of
the circumstances in which they were made, not misleading.
1.36 Year 2000. Except with respect to the Hillman Industrial division,
all of Seller's main frame computer hardware and related material software
programs used in the operation of the Business, whether owned or licensed, are
able to recognize and to perform properly any date-sensitive functions involving
certain dates prior to and any dates after December 31, 1999 (the "Year 2000
Problem"), and Seller has made a related appropriate inquiry of each of its
suppliers and vendors. Seller and Parent believe that the Year 2000 Problem will
not have an adverse effect on Seller's Business.
1.37 Closing Date. All of the representations and warranties of Seller
in this Article 3 and elsewhere in this Agreement and all information delivered
in any schedule, attachment or exhibit hereto or in any certificate delivered to
Purchaser are true and correct in all respects on the date of this Agreement and
shall be true and correct in all material respects on the Closing Date, except
for any representations and warranties made as of a specific date and for any
modifications or updates specifically contemplated or permitted by this
Agreement.
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ARTICLE 4.
REPRESENTATIONS AND WARRANTIES OF PURCHASERS
Purchasers hereby jointly and severally represent and warrant to Seller
as of the date hereof and as of the Closing Date that:
1.38 Corporate Organization and Power. Purchaser is a corporation duly
organized and validly existing under the laws of the State of Illinois with full
corporate power and authority to enter into this Agreement and the other
agreements contemplated hereby and to perform its obligations hereunder and
thereunder. On the date hereof, Lawson indirectly owns, and on the Closing Date,
Lawson shall indirectly own, all of the issued and outstanding capital stock of
Purchaser.
1.39 Authorization. The execution, delivery and performance by
Purchasers of this Agreement and the other agreements contemplated hereby and
the consummation of the transactions contemplated hereby and thereby have been
duly and validly authorized by all requisite corporate action, and no other
corporate proceedings on the part of Purchasers are necessary to authorize the
execution, delivery or performance of this Agreement or the other agreements
contemplated hereby. This Agreement constitutes and, upon execution and delivery
by Purchasers, the other agreements contemplated hereby to which each Purchaser
is a party shall each constitute the valid and binding obligation of Purchasers,
respectively, enforceable against Purchasers in accordance with their respective
terms.
1.40 No Violation. The execution, delivery and performance of this
Agreement and the other agreements contemplated hereby by Purchaser and Lawson
and the consummation of the transactions contemplated hereby and thereby do not
and shall not (a) conflict with or result in any breach of any of the provisions
of, (b) constitute a default under, result in a violation of, or cause the
acceleration of any obligation under, or (c) require any authorization, consent,
approval, exemption or other action by or notice to any court or other
governmental body under the provisions of Purchaser's or Lawson's certificate of
incorporation or by-laws or any indenture, mortgage, lease, loan agreement or
other agreement or instrument to which Purchaser or Lawson is bound or affected
or any law, statute, rule, regulation, judgement, order or decree to which
Purchaser or Lawson is subject.
1.41 Litigation. There are no actions, suits, proceedings, orders or
investigations pending or, to the best of Purchaser's knowledge, threatened
against or affecting Purchaser, at law or in equity, or before or by any
federal, state, municipal or other governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, which would materially
adversely affect Purchaser's performance under this Agreement or the
consummation of the transactions contemplated hereby.
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1.42 Financial Statements; SEC Reports. Lawson has filed all required
forms, reports and documents required to be filed by it with the Securities and
Exchange Commission ("SEC") since December 31, 1998, including its Annual Report
on Form 10-K for the year ended December 31, 1998 and its Quarterly Report on
Form 10-Q for the quarter ended March 31, 1999 (collectively, the "SEC
Reports"). The financial statements of Lawson included in the SEC Reports were
prepared in accordance with GAAP, consistently applied during the applicable
periods (except in the case of unaudited interim statements, to the extent such
statements do not include footnotes or may be condensed or summary statements),
and fairly present in all material respects the consolidated financial condition
of Lawson and its consolidated subsidiaries as of the dates thereof and the
consolidated results of their operations and cash flows for the periods then
ended (subject, in the case of unaudited statements, to normal year-end audit
adjustments and footnotes).
1.43 Closing Date. All of the representations and warranties of
Purchasers contained in this Article 4 and elsewhere in this Agreement and all
information delivered in any schedule, attachment or exhibit hereto or in any
certificate delivered to Seller are true and correct as of the date of this
Agreement and shall be true and correct in all material respects as of the
Closing Date.
ARTICLE 5.
CERTAIN COVENANTS
1.44 Affirmative Covenants. Prior to the Closing, Seller shall and
Parent shall cause Seller to:
(1) conduct the Business only in the usual and ordinary course of
business in accordance with past custom and practice (including placing purchase
orders only for reasonable quantities and at reasonable prices and accepting
customer orders only for reasonable quantities on reasonable terms);
(2) keep in full force and effect its corporate existence and all
material rights, franchises and intellectual property relating to or pertaining
to the Business;
(3) use commercially reasonable efforts to retain its employees and
sales agents and preserve its present business relationships, and continue to
compensate its employees and sales and other agents in accordance with past
custom and practice, but such efforts shall not require the payment of any
compensation in excess of Seller's and/or Parent's current customary
compensation to such employees and past custom and practice;
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(4) maintain the Purchased Assets in good and customary repair,
order and condition in accordance with past practice and maintain insurance
reasonably comparable to that in effect on the date of this Agreement; replace
in accordance with past practice its inoperable, worn out and obsolete assets
with assets of comparable quality; in the event of any casualty, loss or damage
to any of the material Purchased Assets prior to Closing, either repair or
replace such assets with assets of comparable quality or, if Purchaser agrees,
transfer to Purchaser at Closing the proceeds of any insurance recovery with
respect thereto;
(5) maintain its books, accounts and records in accordance with
past custom and practice as used in the preparation of the financial statements
described in Section 3.4 hereof and file with the appropriate taxing authorities
any and all returns required to be filed by it for the periods covered thereby;
(6) permit Purchaser and its employees, agents, accounting and
legal representatives and potential lenders and their representatives to have
access to its books, records, invoices, contracts, leases, key personnel,
independent accountants, property, facilities, equipment and other things
reasonably related to the Business or the Purchased Assets;
(7) use commercially reasonable efforts to obtain all consents and
approvals necessary or desirable to consummate the transactions contemplated
hereby, including, but not limited to, with respect to each Lease, a consent to
the assignment of such Lease to Purchaser (which efforts shall not require the
payment of any amount or the undertaking of any obligation not referred to in
the particular document or agreement for which consent is being obtained), and
to cause the other conditions to Purchaser's obligation to close to be
satisfied; and
(8) from time to time prior to the Closing, supplement or amend any
of the Schedules referred to herein with respect to any matter that, if existing
or occurring at or prior to the date of this Agreement, would have been required
to be set forth or described in any of the Schedules or that is necessary to
correct any information in any of the Schedules that has been rendered
inaccurate by an event occurring after the date hereof.
1.45 Negative Covenants. Prior to the Closing, without the prior
written consent of Purchaser, Seller shall not:
(1) take any action that would require disclosure under Section
5.1(h) of this Agreement;
(2) directly or indirectly (including through any agent, broker,
finder or other third party), offer to sell, merge, consolidate or otherwise
dispose of, negotiate for the sale, merger, consolidation or other disposition
of, initiate or continue discussions concerning the sale, merger, consolidation
or other disposition of, Seller as a whole, or the sale or other disposition of
any of its shares of capital stock or any of the Purchased Assets (other than
inventory in the ordinary course of business);
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(3) take or omit to take any action, or permit its affiliates to
take or omit to take any action, which would reasonably be anticipated to have a
material and adverse effect upon the Business or the Purchased Assets;
(4) declare or pay any non-cash dividend or other non-cash
distribution with respect to the capital stock of Seller; or
(5) except as provided in Section 11.3 hereof, disclose to any
third party, except its representatives in connection with the transactions
contemplated by this Agreement on a need-to-know basis, any information
regarding the Purchaser, its business operations, its customers or suppliers and
the existence of this Agreement or the transactions contemplated hereunder.
1.46 Guaranty. Lawson shall cause Purchaser to comply with all of its
obligations in this Agreement and in any other document contemplated by this
Agreement. Lawson hereby guarantees the performance by Purchaser of all
Purchaser's obligations in this Agreement and in any other document contemplated
by this Agreement in a manner consistent with the terms of this Agreement.
ARTICLE 6.
CONDITIONS TO PURCHASER'S OBLIGATION TO CLOSE
1.47 Conditions to Purchaser's Obligation. The obligation of Purchaser
to consummate the transactions contemplated by this Agreement is subject to the
satisfaction of the following conditions on or before the Closing Date:
(1) the representations and warranties set forth in Article 3
hereof shall be true and correct in all material respects at and as of the
Closing as though then made and as though the Closing Date was substituted for
the date of this Agreement, except for any representations and warranties made
as of a certain date and for any changes contemplated or permitted by this
Agreement;
(2) Seller and Parent shall have performed in all material respects
all of the covenants and agreements required to be performed by them under this
Agreement prior to the Closing;
(3) there shall have been no adverse change in the operations,
financial condition, operating results or assets of the Business since the date
of the Latest Balance Sheet other than any effect resulting from general
national economic conditions or any occurrence or condition affecting the entire
industry in which the Business is conducted that does not have a material
adverse effect on the Business;
(4) all consents by third parties that are identified as "Material
Consents" on Schedule 3.16 shall have been obtained on terms and conditions
satisfactory to Purchaser in its sole discretion;
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(5) no action or proceeding before any court or government body
shall be pending or threatened which, in the reasonable judgment of Purchaser,
made in good faith and upon the advice of counsel, makes it inadvisable to
consummate the transactions contemplated hereby by reason of the probability
that the action or proceeding shall result in a judgment, decree or order which
would prevent the carrying out of this Agreement or any of the transactions
contemplated hereby, declare unlawful the transactions contemplated by this
Agreement, cause such transactions to be rescinded or affect the value or use of
the Purchased Assets or Business;
(6) Purchaser shall have received from Seller's and Parent's
counsel, Morgan, Lewis & Bockius LLP, an opinion with respect to the matters set
forth in Exhibit C attached hereto (the "Seller's Opinion"), addressed to
Purchaser and dated the Closing Date, in form and substance satisfactory to
Purchaser;
(7) not less than five (5) business days prior to the Closing Date,
Seller shall have provided Purchaser, at Seller's expense, with UCC search
reports ("UCC Searches") of Seller disclosing no liens or encumbrances against
the Purchased Assets other than (i) statutory liens not yet delinquent, (ii)
such imperfections or irregularities of title or liens that do not (A)
materially detract from or interfere with the proposed use by Purchaser of the
Purchased Assets subject thereto or affected thereby, (B) otherwise impair the
present business operations at such properties, (C) detract from the value of
such properties and assets, (iii) the rights of customers of Seller with respect
to inventory under orders or contracts entered into by Seller in the ordinary
course of business, (iv) mechanics', carriers', workers', repairmen's,
warehousemen's, or other similar liens arising in the ordinary course of
business in respect of obligations not overdue or which are being contested in
good faith, and (v) deposits or pledges that are statutory obligations to secure
workmen's compensation, unemployment insurance, old age benefits or other social
security obligations;
(8) all proceedings to be taken by Seller and Parent in connection
with the consummation of the Closing and the other transactions contemplated
hereby and all certificates, opinions, instruments and other documents specified
for delivery hereunder or reasonably requested by Purchaser shall be reasonably
satisfactory in form and substance to Purchaser and its counsel;
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(9) Richard J. Schwind shall have entered into an employment
agreement with Purchaser in substantially the form attached hereto as Exhibit D
(the "Employment Agreement);
(10) Seller and Purchaser shall have entered into a Transitional
Services and Supply Agreement in the form attached hereto as Exhibit E (the
"Transition Agreement"); and
(11) Purchaser shall have reviewed and approved any and all
supplements or amendments to the schedules made by Seller or Parent pursuant to
Section 5.1(h).
Any conditions specified in this Section 6.1 may be waived by Purchaser;
provided that no such waiver shall be effective unless it is set forth in a
writing executed by Purchaser, except as otherwise provided in Section 10.3.
ARTICLE 7.
CONDITIONS TO SELLER'S OBLIGATION TO CLOSE
1.48 Conditions to Seller's Obligation to Close. The obligation of
Seller to consummate the transactions contemplated by this Agreement is subject
to the satisfaction of the following conditions on or before the Closing Date:
(1) the representations and warranties set forth in Article 4
hereof shall be true and correct in all material respects at and as of the
Closing as though then made and as though the Closing Date was substituted for
the date of this Agreement throughout such representations and warranties;
(2) Purchaser shall have performed in all material respects all the
covenants and agreements required to be performed by it under this Agreement
prior to the Closing;
(3) Seller shall have received from Purchaser's counsel, Vedder,
Price, Kaufman & Kammholz, an opinion with respect to the matters set forth in
Exhibit F attached hereto (the "Purchaser's Opinion"), addressed to Seller and
dated the Closing Date, in form and substance reasonably satisfactory to Seller;
(4) all proceedings to be taken by Purchaser in connection with the
consummation of the Closing and the other transactions contemplated hereby and
all certificates, opinions, instruments and other documents required to effect
the transactions contemplated hereby reasonably requested by Seller shall be
reasonably satisfactory in form and substance to Seller and its counsel.
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Any condition specified in this Section 7.1 may be waived by Seller; provided
that no such waiver shall be effective against Seller unless it is set forth in
a writing executed by Seller, except as otherwise provided in Section 10.3.
ARTICLE 8.
CLOSING TRANSACTIONS
1.49 The Closing. Subject to the conditions contained in this
Agreement, the closing of the transactions contemplated by this Agreement (the
"Closing") shall take place at the offices of Vedder, Price, Kaufman & Kammholz
in Chicago, Illinois at 10:00 a.m. local time on or before June 30, 1999, or at
such other place or on such other date as may be mutually agreeable to the
parties. The date and time of the Closing are referred to herein as the "Closing
Date."
1.50 Action to Be Taken at the Closing. The sale, conveyance,
assignment and delivery of the Purchased Assets and the payment of the Purchase
Price pursuant to the terms of this Agreement shall take place at the Closing
and, simultaneously, the other transactions contemplated by this Agreement shall
take place by the delivery of all of the closing documents set forth in Section
8.3.
1.51 Closing Documents.
(1) Seller shall deliver to Purchaser at the Closing the following
documents, duly executed by Seller where necessary to make them effective:
(1) an officer's certificate in the form set forth in Exhibit G
attached hereto, stating that the preconditions specified in Section
6.1 (a) through (d), inclusive, have been satisfied;
(2) copies of all necessary third party and governmental
consents, approvals, releases and filings required in order to effect
the transactions contemplated by this Agreement;
(3) such bills of sale, instruments of sale, transfer,
assignment, conveyance and delivery (including all vehicle titles), as
are required in order to transfer to Purchaser good and marketable
title to the Purchased Assets, free and clear of all liens, charges,
security interests and other encumbrances, except for Permitted
Encumbrances;
(4) such assignments of Leases as Purchaser may reasonably
request;
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(5) certified copies of the resolutions duly adopted by the
Board of Directors and stockholders of Seller and the Board of
Directors of Parent authorizing and any other consents required
pursuant to the Certificate of Incorporation or the By-laws of Seller
to authorize, the execution, delivery and performance of this Agreement
and each of the other agreements contemplated hereby, and the
consummation of all other transactions contemplated by this Agreement;
(6) all of Seller's contracts and commitments, files, books,
records and other data relating to the Business and the Purchased
Assets;
(7) copies of good standing certificates in all jurisdictions
where the Seller is qualified to do business;
(8) the Seller's Opinion;
(9) the Transition Agreement;
(10) a certificate of the Secretary of the Seller certifying as
to the correctness and completeness of the Certificate of Incorporation
and Bylaws of the Seller and all amendments thereto; and
(11) such other documents or instruments as Purchaser or the
Title Insurer may request to effect the transactions contemplated
hereby.
All of the foregoing documents in this Section 8.3(a) shall be
reasonably satisfactory in form and substance to Purchaser and shall be dated
the Closing Date.
(2) Purchaser shall deliver to Seller at the Closing the following
items, duly executed by Purchaser where necessary to make them effective:
(1) the amount of the Purchase Price payable at Closing, as
provided in Section 2.1;
(2) an assumption agreement providing for the assumption by
Purchaser of the Assumed Liabilities;
(3) an officer's certificate in the form set forth as Exhibit H
attached hereto, stating that the preconditions specified in Section
7.1 (a) and (b) hereof have been satisfied;
(4) the Purchaser's Opinion;
(5) copies of all necessary third party and governmental
consents, approvals, releases and filings required in order for
Purchaser to effect the transactions contemplated by this Agreement
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(6) such other documents or instruments as Seller reasonably
may request to effect the transactions contemplated hereby;
(7) certified copies of the resolutions duly adopted by the
Board of Directors of Purchaser and Lawson authorizing the execution,
delivery and performance of this Agreement and each of the other
agreements contemplated hereby and the consummation of all other
transactions contemplated by this Agreement;
(8) copies of good standing certificates in all jurisdictions
where the Purchaser is qualified to do business;
(9) the Transition Agreement; and
(10) a certificate of the Secretary of Purchaser, certifying as
to the correctness and completeness of the Certificate of Incorporation
and Bylaws of the Purchaser and all amendments thereto.
All of the foregoing documents in this Section 8.3(b) shall be
reasonably satisfactory in form and substance to Seller and shall be dated as of
the Closing Date.
(3) The Employment Agreement shall have been executed and delivered
by the parties thereto.
(4) Purchaser, Seller and the Escrow Agent shall execute and
deliver to one another at the Closing the Escrow Agreement.
1.52 Possession. Simultaneously with the Closing, Seller shall take
such steps as may be requisite to put Purchaser in actual possession and
operating control of the Business and the Purchased Assets.
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1.53 Nonassignable Contracts. To the extent that the assignment
hereunder by Seller to Purchaser of the Contracts is not permitted or is not
permitted without the consent of any other party to the Contract, this Agreement
shall not be deemed to constitute an assignment of any such Contract if such
consent is not given or if such assignment otherwise would constitute a breach
of, or cause a loss of contractual benefits under, any such Contract, and
Purchaser shall assume no obligations or liabilities thereunder. Seller shall
advise Purchaser promptly in writing with respect to any Contract which it knows
or has reason to know that it will not receive any required consent. Without in
any way limiting Seller's obligation to use commercially reasonable efforts to
obtain all consents necessary for the sale, transfer, assignment and delivery of
the Contracts and the Purchased Assets to Purchaser hereunder, if any such
consent is not obtained or if such assignment is not permitted irrespective of
consent and, at Purchaser's election, the Closing hereunder is consummated,
Seller shall cooperate with Purchaser in any reasonable arrangement designed by
Purchaser to provide Purchaser with the rights and benefits, subject to the
obligations, under the Contract, including enforcement for the benefit of
Purchaser of any and all rights of Seller against any other person arising out
of breach or cancellation by such other person and, if requested by Purchaser,
Seller shall act as an agent on behalf of Purchaser or as Purchaser shall
otherwise reasonably require; provided, however, that Seller shall not be
required to pay any amount or undertake any obligation not referred to in the
particular document or agreement for which consent is being obtained.
ARTICLE 9.
INDEMNIFICATION
1.54 Indemnification by Seller.
(1) Seller and Parent, jointly and severally, agree to and shall
indemnify in full Purchasers and defend and hold Purchasers harmless against any
loss, liability, deficiency, damage, expense or cost (including reasonable legal
fees and expenses) (collectively, "Losses"), that the Purchasers may suffer,
sustain or become subject to as a result of (i) any misrepresentation in any of
the representations or breach of any of the warranties of Seller or Parent
contained in this Agreement or in any exhibits, schedules or certificates or
other agreements or documents specifically identified in this Agreement for
delivery pursuant to the terms of this Agreement or otherwise mutually agreed
upon and executed by the parties (collectively, the "Related Documents"), (ii)
any breach of, or failure to perform, any agreement or covenant of Seller or
Parent contained in this Agreement or any of the Related Documents, (iii) except
as otherwise reserved for on the Latest Balance Sheet, any claim of liability
for breach of warranty or contract arising out of the operation of the Business
prior to the Closing Date, or (iv) any claim of liability for injury or damage
to person or property caused or alleged to have been caused by the use or
operation of products sold, installed, monitored or serviced by or on behalf of
Seller prior to the Closing Date, or (v) any claim of non-compliance with
Environmental Laws by Seller or Parent or any of the properties owned or leased
by Seller or Parent or for damages as a result thereof, or (vi) any claim for
refund or reimbursement of any payment made to Seller, Parent or Purchaser by
any customer of Seller's Business based on preference or priority as asserted by
any receiver or trustee in bankruptcy or bankruptcy court (collectively,
"Purchaser Losses").
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(2) Seller shall also indemnify Purchasers and hold Purchasers
harmless against and in respect of any Purchaser Losses resulting or arising
from the rights of any creditors of Seller pursuant to any bulk sales laws which
may apply under the laws of the States of Kansas and Ohio, except to the extent
that such rights may result from the failure of Purchaser to perform its
obligations hereunder.
(3) Any Losses shall be determined after taking into account any
recoveries that an Indemnified Party (defined below) actually receives from
insurance policies or other third parties or other resources specifically
identified or referenced in this Agreement; it being the intention of the
parties to avoid double recovery. The determination of Losses shall also exclude
the effect of any multiplier that may be alleged to have been used by Purchaser
in its determination of the Purchase Price. Any Losses shall include punitive
damages, if available, and shall exclude consequential damages except those paid
or payable by the Indemnified Party to a third party.
1.55 Indemnification by Purchaser. Purchasers, jointly and severally,
agree to indemnify in full Seller and Parent (collectively, the "Seller
Indemnified Parties") and hold them harmless against any Losses which any of the
Seller Indemnified Parties may suffer, sustain or become subject to as a result
of (i) any misrepresentation in any of the representations or breaches of any of
the warranties of any of the Purchasers contained in this Agreement or in any of
the Related Documents, (ii) any breach of, or failure to perform, any agreement
or covenant of any of the Purchasers contained in this Agreement or any of the
Related Documents, (iii) any claim for liability for injury or damage to person
or property caused or alleged to have been caused by the use or operation of
products sold, installed, monitored or served by or on behalf of Purchaser on or
after the Closing Date and (iv) any claim of non-compliance with Environmental
Laws by Purchaser or Lawson on any of the properties owned or leased by
Purchaser or Lawson or for damages as a result thereof (collectively, "Seller
Losses").
1.56 Method of Asserting Claims. As used herein, an "Indemnified Party"
shall refer to a "Purchaser Indemnified Party" or "Seller Indemnified Party," as
applicable; the "Notifying Party" shall refer to the party hereto whose
Indemnified Parties are entitled to indemnification hereunder, and the
"Indemnifying Party" shall refer to the party hereto obligated to indemnify such
Notifying Party's Indemnified Parties.
(1) In the event that any of the Indemnified Parties is made a
defendant in or party to any action or proceeding, judicial or administrative,
instituted by any third party for the liability or the costs or expenses of
which are Seller Losses or Purchaser Losses, as the case may be (any such third
party action or proceeding being referred to as a "Claim"), the Notifying Party
shall give the Indemnifying Party prompt notice thereof. The failure to give
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such notice shall not affect any Indemnified Party's ability to seek
reimbursement unless such failure has materially and adversely affected the
Indemnifying Party's ability to defend successfully a Claim. The Indemnifying
Party shall be entitled to contest and defend such Claim; provided, that the
Indemnifying Party (i) has a reasonable basis for concluding that such defense
may be successful and (ii) diligently contests and defends such Claim. Notice of
the intention so to contest and defend shall be given by the Indemnifying Party
to the Notifying Party within twenty (20) business days after the Notifying
Party's notice of such Claim (but, in all events, at least five (5) business
days prior to the date that an answer to such Claim is due to be filed). Such
contest and defense shall be conducted by reputable attorneys employed by the
Indemnifying Party. The Notifying Party shall be entitled at any time, at its
own cost and expense (which expense shall not constitute a Loss unless the
Notifying Party reasonably determines that the Indemnifying Party is not
adequately representing or, because of a conflict of interest, may not
adequately represent, any interests of the Indemnified Parties), to participate
in such contest and defense and to be represented by attorneys of its or their
own choosing. If the Notifying Party elects to participate in such defense, the
Notifying Party shall cooperate with the Indemnifying Party in the conduct of
such defense. Neither the Notifying Party nor the Indemnifying Party may
concede, settle or compromise any Claim without the consent of the other party,
which consent shall not be unreasonably withheld or delayed. Notwithstanding the
foregoing, in the event the Indemnifying Party fails or is not entitled to
contest and defend a claim, the Notifying Party shall be entitled to contest,
defend and settle such Claim.
(2) In the event any Indemnified Party should have a claim against
any Indemnifying Party that does not involve a Claim, the Notifying Party shall
deliver a notice of such claim with reasonable promptness to the Indemnifying
Party. If the Indemnifying Party notifies the Notifying Party that it does not
dispute the claim described in such notice or fails to notify the Notifying
Party within forty-five (45) days after delivery of such notice by the Notifying
Party whether the Indemnifying Party disputes the claim described in such
notice, the Loss in the amount specified in the Notifying Party's notice shall
be conclusively deemed a liability of the Indemnifying Party and the
Indemnifying Party shall pay the amount of such Loss to the Indemnified Party on
demand in accordance with the terms hereof. If the Indemnifying Party gives
notice to the Notifying Party that it disputes the claim, the Notifying Party
may pursue whatever legal remedies may be available to enforce its rights under
this Article 9.
1.57 Limitations. The rights to indemnification in this Article 9 shall
be subject to the following limitations:
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(1) Any claim for indemnification under this Article 9 shall be
made by giving notice under Section 9.3 to the party or parties against whom
indemnification is sought. Any such notice must be given on or before May 1,
2001, except for any claims for indemnification arising out of a
misrepresentation or breach of the representations and warranties in Sections
3.11 or 3.22 which may be given at any time up to and including the third
anniversary of the Closing Date. Any claim for indemnification given after such
dates will have no effect.
(2) Except for claims for non-payment of the Purchase Price
Adjustment (if due to Purchaser) and for payments or damages related to any of
the Excluded Liabilities, Seller and Parent shall not be required to indemnify
Purchasers under Section 9.1 until the Purchaser Losses, individually or in the
aggregate, as to which Purchasers would otherwise be entitled to indemnification
exceed $75,000 (the "Deductible"), at which point Seller and Parent shall be
jointly and severally liable to reimburse Purchasers for all Purchaser Losses
that may arise in excess of the Deductible. Neither the Deductible nor any part
of this Section 9 shall apply to any Purchaser Losses arising out of Seller's or
Parent's breach of Section 2.3, 2.6 or 2.7 to the extent Purchaser has already
received payment therefor.
(3) The aggregate amount of the Purchaser Losses for which Seller
and Parent, in the aggregate, shall be liable with respect to this Agreement and
the Related Document shall not exceed the Purchase Price.
(4) Except for any injunctive relief to which a party may be
entitled, the indemnification remedy provided in this Article 9 shall constitute
the sole remedy of any party hereto with respect to this Agreement and the
Related Documents.
(5) Seller and Parent agree that, in addition to any other rights
or remedies available to Purchaser, Purchaser may make a claim against the
Escrow Account pursuant to the Escrow Agreement to satisfy, among other
obligations of Seller and Parent, (i) any of the obligations of Seller and
Parent under Section 9.1 of this Agreement and (ii) any amount due from Seller
in connection with the final determination of the Closing Tangible Net Worth,
the Receivables Deficiency or the Warranty Deficiency.
1.58 Pre-Closing Remedies. Prior to the Closing, the parties hereto may
pursue whatever legal remedies may be available under applicable law for any
breach of this Agreement by another party hereto, except that Purchasers
acknowledge that Seller and Parent shall not have any liability hereunder for
any breach of a representation or warranty that shall have occurred after the
execution of this Agreement (other than as a result of Seller's or Parent's
willful acts or omissions) and shall not have been avoidable through
commercially reasonable efforts of Seller or Parent.
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ARTICLE 10.
TERMINATION
1.59 Termination. This Agreement may be terminated at any time prior to
the Closing:
(1) by mutual written consent of Purchaser and Seller;
(2) by either Purchaser or Seller if there has been a
misrepresentation or breach of warranty or breach of covenant on the part of the
other party in the representations and warranties or covenants set forth in this
Agreement and any such misrepresentation or breach, if capable of cure, is not
cured within fifteen (15) days after written notice thereof to such other party,
or if events have occurred which have made it impossible to satisfy a condition
precedent to the terminating party's obligations to consummate the transactions
contemplated hereby (other than as a result of any willful act or omission by
the terminating party);
(3) by either Purchaser or Seller if the transactions contemplated
hereby have not been consummated by July 15, 1999; provided, however, that
neither Purchaser nor Seller shall be entitled to terminate this Agreement
pursuant to this subsection (c) if such party's or, in the case of Seller,
Parent's, willful breach or obstruction of the consummation of this Agreement,
respectively, has prevented the consummation of the transactions contemplated
hereby; or
(4) by Purchaser in its sole discretion if Seller shall have
supplemented or amended any Schedule after the date hereof in accordance with
Section 5.1(h) and the changes made by such supplement or amendment, together
with any previous supplement or amendment of any Schedules, could reasonably be
expected to have an adverse effect on the Business.
1.60 Effect of Termination. In the event of termination of this
Agreement as provided above, this Agreement shall forthwith become void, and
there shall be no liability on the part of Seller, Parent or Purchaser, except
for willful breaches of this Agreement prior to the time of such termination and
except for the provisions of Section 11.7.
1.61 Effect of Closing. Seller and Purchaser shall be deemed to have
waived their respective rights to terminate this Agreement upon the completion
of the Closing. No such waiver shall constitute a waiver of any other rights
arising from the non-fulfillment of any condition precedent set forth in Article
6 or 7 unless such waiver is made in writing.
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ARTICLE 11.
ADDITIONAL AGREEMENTS
1.62 Survival. Subject to the limitations of Article 10, the
representations, warranties, covenants and agreements set forth in this
Agreement or in any writing specifically required to be delivered to Purchaser
or Seller in connection with this Agreement shall survive the Closing Date and
the consummation of the transactions contemplated hereby and shall not be
affected by any examination made for or on behalf of Purchaser or Seller, the
knowledge of any of Purchaser's, Parent's or Seller's officers, directors,
stockholders, employees or agents, or the acceptance by Purchaser or Seller of
any certificate or opinion.
1.63 Mutual Assistance. Subsequent to the Closing, Seller on the one
hand and Purchaser on the other, at their own cost, shall assist each other
(including making records available) in the preparation of their respective tax
returns and the filing and execution of tax elections, if required, as well as
any audits or litigation that may ensue as a result of the filing thereof, to
the extent that such assistance is reasonably requested.
1.64 Press Release and Announcements. No press release related to this
Agreement or the transactions contemplated hereby or other announcements to the
employees, customers or suppliers of Seller shall be issued without the joint
approval of Purchaser and Seller, which shall not be unreasonably withheld,
delayed or conditioned. No other public announcement related to this Agreement
or the transactions contemplated hereby shall be made by any party, except as
required by law, in which event the parties shall consult as to the form and
substance of any such announcement required by law.
1.65 Expenses. Each party shall pay all of its expenses in connection
with the negotiation of this Agreement, the performance of its obligations
hereunder and the consummation of the transactions contemplated by this
Agreement. Seller and Purchaser shall each pay one-half of the cost of recording
any documents necessary to place record title to the Purchased Assets in the
condition warranted by or required of Seller by this Agreement.
1.66 Further Transfers. After the Closing, Seller and Parent shall, and
shall cause their respective affiliates to, execute and deliver such further
instruments of conveyance and transfer and take such additional action as
Purchaser may reasonably request to effect, consummate, confirm or evidence the
transfer to Purchaser of the Purchased Assets. Seller shall execute such
documents as may be necessary to assist Purchaser (or its designees) in
preserving or perfecting its rights in the Purchased Assets.
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1.67 Transition Assistance. Except for those actions permitted by
Section 11.8(a) and (b) hereof, from the date hereof and until five (5) years
after the Closing, neither Seller nor Parent shall in any manner take any action
which is designed, intended or might be reasonably anticipated to have the
effect of discouraging customers, suppliers, lessors, employees, sales agents
and other business associates from maintaining the same business relationships
with Purchaser after the date of this Agreement as were maintained with Seller
prior to the date of this Agreement.
1.68 Confidentiality. During the term of this Agreement and whether or
not the transactions contemplated hereby are consummated, Purchasers shall
maintain the confidentiality of all information and materials received by it
which are reasonably designated by Seller as confidential except for the
approved Press Release referenced in Section 11.3 and any information required
to be disclosed pursuant to applicable laws. If the transactions contemplated by
this Agreement are not consummated, Purchasers shall maintain the
confidentiality of all information and materials received by it which are
reasonably designated by Seller as confidential, and Purchasers shall return to
Seller or destroy any materials (and copies thereof) obtained from Seller in
connection with the transactions contemplated hereby. During the term of this
Agreement and whether or not the transactions contemplated hereby are
consummated, Seller and Parent shall maintain the confidentiality of all
information and materials regarding Seller, the Business, this Agreement and the
transactions contemplated hereby and all information and materials regarding
Purchaser and its affiliates, which are reasonably designated as confidential by
Purchaser. If the transactions contemplated by this Agreement are consummated,
Seller and Parent each shall maintain the confidentiality of all proprietary and
other non-public information regarding the Business and the Purchased Assets and
shall turn over to Purchaser all such materials in their possession.
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1.69 Non-Compete; Non-Solicitation.
(1) It is understood among the parties that Seller and Seller
Parties (defined below) no longer desire to engage in the Business. In
consideration for the acquisition of the Purchased Assets and Assumed
Liabilities by Purchaser and as an additional inducement to Purchaser to enter
into and to perform its obligations under this Agreement, Seller and Parent, on
behalf of themselves and the officers and directors of Seller so long as they
are employed by or under the control of Seller or Parent or their subsidiaries
or affiliates (except officers of Seller employed by Purchaser after the
Closing), and their direct and indirect subsidiaries and other entities
controlled by or under common control with Parent (collectively, the "Seller
Parties"), agree that, for a period of five (5) years after the Closing Date
(the "Non-Competition Period"), the Seller Parties shall not in the United
States, Canada or in any other foreign country in which Seller currently does or
has done business or has customers whose purchases are comprised of products
similar to any portion of the Purchased Assets, either for itself or any other
person or entity, own, manage, control, participate in, permit its name to be
used by, consult with, render services for or otherwise assist, in any manner,
any entity that owns, invests in, manages, controls or engages in any
manufacturing, sales or distribution business, whether directly or through
"in-plant" inventory management or integrated supply services, that is
substantially the same as or similar to the Business on the date of this
Agreement, including, but not limited to, sales to OEM customers of production
fasteners used to manufacture or assemble OEM customer products through in-plant
inventory management or integrated supply services. This Section 11.8, however,
shall not restrict the following: (i) any Seller Parties may manufacture, sell,
distribute and provide to any MRO customer of Seller or Parent MRO products or
products which are similar to the Purchased Assets ("OEM Products"); provided
that sales of OEM production fastener products to such MRO customers shall be
permitted only if such sales are ancillary to sales of MRO products to such MRO
customers and are not sold by Seller's employees or agents dispensing or
delivering such ancillary OEM production fastener products within the MRO
customer's facility; (ii) Parent's currently constituted fluid power/technology
services division or affiliate may dispense ancillary OEM production fastener
products though in-plant inventory management arrangement; and (iii) with
respect to Parent's Kar Products, Inc. and A&H Bolt Company Ltd. subsidiaries
only (collectively, "Kar"), Kar may sell MRO products and OEM Products provided
that the OEM Products are not sold by any of the Seller Parties' employees or
agents dispensing or delivering such OEM Products within the customer's facility
through an in-plant inventory management arrangement. Nothing contained in this
Agreement shall preclude either party from competing with the other with respect
to any products in Mexico. The parties may engage in electronic commerce or
Internet sales provided that such activities do not otherwise violate the terms
of this Section.
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(2) To preserve the value of the Purchased Assets for Purchaser and
the confidential information and goodwill associated therewith, Seller and
Parent agree that, for a period of five (5) years after the Closing Date, the
Seller Parties shall not, directly or indirectly solicit for employment, any
current or future employee or sales agent of Purchaser who worked for Seller,
Parent or any affiliate thereof as of the date of this Agreement, or any other
current or future employee or agent of Purchaser, or any employee "leased" by
Purchaser from Seller, Parent or any affiliate thereof for which Purchaser
reimburses, in whole or in part, the cost of such employee's wages, taxes and
benefits.
(3) To preserve the value of the Excluded Assets for Seller and the
confidential information and goodwill associated therewith, Purchaser agrees
that, for a period of five (5) years after the Closing Date, Purchaser shall not
solicit business from the MRO Accounts listed in Schedule 1.2(b). In the event
any of the MRO Accounts terminates its relationship with Seller during such five
(5) year period, then Purchaser shall have the right to solicit business from
such MRO Account.
(4) If, at the time of enforcement of this Section 11.8, a court
shall hold that the duration, scope or area restrictions stated herein are
unreasonable under circumstances then existing, the parties agree that the
maximum duration, scope or area reasonable under such circumstances shall be
substituted for the stated duration, scope or area.
(5) The parties recognize and affirm that, in the event of a breach
by any of them of any of the provisions of this Section 11.8, money damages
would be inadequate and neither Seller nor Purchaser would have any adequate
remedy at law. Accordingly, the parties agree that each party shall have the
right, in addition to any other rights and remedies existing in its favor, to
enforce its rights and the obligations under this Section 11.8 by an action or
actions for specific performance, injunction and/or other equitable relief
against the other party without posting any bond or security to enforce or
prevent any violations, whether anticipatory, continuing or future, of the
provisions of this Section 11.8, including, without limitation, the extension of
the Non-Competition Period by a period equal to (i) the length of the violation
of this Section 11.8 plus (ii) the length of any court proceedings necessary to
stop such violation. In the event of a breach or violation by any Seller Party
of any of the provisions of this Section 11.8, the running of the
Non-Competition Period, but not of such Seller Party's obligations under this
Section 11.8, shall be tolled during the period during which the occurrence of
any such breach or violation is investigated and during the continuance of any
such breach or violation.
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1.70 Specific Performance. Seller and Parent acknowledge that the
Business and the Purchased Assets are unique and recognize and affirm that, in
the event of a breach of this Agreement by Seller or Parent, money damages would
be inadequate and Purchaser would have no adequate remedy at law. Accordingly,
Seller and Parent agree, jointly and severally, that Purchaser shall have the
right, in addition to any other rights and remedies existing in its favor, to
enforce its rights and Seller's and Parent's obligations hereunder by an action
or actions for specific performance, injunction and/or other equitable relief,
without posting any bond or security.
1.71 Remittances. All remittances, mail and other communications
relating to the Purchased Assets, Assumed Liabilities or the Business received
by Seller, Parent, or the officers and directors of Seller, at any time after
the Closing Date, shall be immediately turned over to Purchaser by such parties.
Seller shall cooperate with Purchaser, and take such actions as Purchaser
reasonably requests, to assure that customers of the Business send their
remittances directly to Purchaser, and to assure that remittances from customers
of the Business which are improperly sent to Seller are not commingled with
Seller's assets and are turned over to Purchaser. All remittances, mail and
other communications relating to the Excluded Assets, Excluded Liabilities or
the MRO Accounts received by Purchaser or the officers and directors of
Purchaser at any time after the Closing Date shall be promptly turned over to
Seller by such parties.
1.72 Efforts To Consummate Closing Transactions. On the terms and
subject to the conditions contained in this Agreement, Seller, Parent and
Purchasers each shall use commercially reasonable efforts to take, or cause to
be taken, all actions, and to do, or cause to be done, all things necessary,
proper or advisable under applicable laws and regulations to consummate, as soon
as reasonably practicable, the Closing, including the satisfaction of all
conditions thereto set forth herein.
1.73 Employees and Agents of Seller. Except as provided in this Section
11.12, Purchaser is under no legal obligation to employ any personnel presently
employed by Seller. Prior to the Closing Date, Purchaser may, but shall not be
required to, offer employment to such persons currently employed by Seller as
Purchaser in its sole discretion shall determine. Purchaser shall have the
absolute right to establish all terms and conditions of employment, including
wages, benefits and benefit plans, for any employees of Seller to whom it
chooses to make an offer of employment to be employed by Purchaser. Further, it
is expressly agreed that Purchaser is not bound to assume, implement or continue
any wages, terms and conditions of employment, benefits or benefit plans which
may currently exist for Seller's employees. All such offers of employment shall
be on the terms and conditions established by Purchaser and shall be contingent
upon employment commencing with Purchaser only following the Closing Date.
Seller agrees not to discourage any individuals who are offered employment or an
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agency relationship with Purchaser from accepting such employment or agency
relationship with Purchaser. Purchaser shall offer employment to a sufficient
number of Seller's employees and take and refrain from taking such other actions
as may be necessary to avoid subjecting Purchaser, Seller or Parent to any
disclosure or announcement obligations or any other liability under the Worker's
Adjustment and Retraining Notification Act, P.L. 100-379, 102 Stat. 890, as
amended (the "WARN Act") with respect to employees of the Business. As of the
date hereof, Purchaser does not contemplate any "plant closing" or "employee
layoff," as such terms are used in the WARN Act, with respect to Purchaser or
any former employees of Seller hired by Purchaser with respect to the Business.
As of the date hereof Purchaser has offered employment to 65 employees of Seller
at the Lenexa, Kansas facility and at least 10 employees of Seller at the
Cincinnati, Ohio facility.
1.74 Implied Representations or Warranties. Purchasers understand that
Seller and Parent and their respective officers, directors, employees,
stockholders, Affiliates and representatives are not making any representation
or warranty whatsoever, express or implied, except those representations and
warranties of Seller and Purchasers explicitly set forth in this Agreement.
Subject to such representations and warranties, Purchasers understand that the
Purchased Assets and Business being acquired at the Closing as a result of this
Agreement and the transactions contemplated hereby shall be deemed to have been
acquired on an "as is, where is" basis and in their then present condition.
Except as otherwise explicitly set forth herein, Purchasers understand that none
of Seller and Parent, their respective officers, directors, employees,
stockholders, Affiliates or representatives has made or is making any
representation, express or implied, as to any warranty of merchantability,
suitability or fitness for a particular purpose, with respect to any of the
tangible assets being so acquired.
ARTICLE 12.
MISCELLANEOUS
1.75 Amendment and Waiver. This Agreement may be amended, and any
provision of this Agreement may be waived; provided, however, that any such
amendment or waiver shall be binding on Seller and Parent only if such amendment
or waiver is set forth in a writing executed by Seller and Parent and that any
such amendment or waiver shall be binding upon Purchaser only if such amendment
or waiver is set forth in a writing executed by Purchaser. No course of dealing
between or among any persons having any interest in this Agreement shall be
deemed effective to modify, amend or discharge any part of this Agreement or any
rights or obligations of any person under or by reason of this Agreement.
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1.76 Notices. All notices, demands and other communications to be given
or delivered under or by reason of the provisions of this Agreement shall be in
writing and shall be deemed to have been given when personally delivered, mailed
by first class mail, return receipt requested or delivered by a nationally
recognized courier service. Notices, demands and communications to Seller or
Purchaser shall, unless another address is specified in writing in accordance
herewith, be sent to the address indicated below:
Notices to Seller and Parent
SunSource Inc.
One Logan Square
Philadelphia, PA
Attention: Joseph M. Corvino
Telephone: (215) 282-1290
Telecopier: (215) 282-1309
with a copy to:
Morgan, Lewis & Bockius, LLP
One Logan Square
Philadelphia, PA
Attention: Thomas Sharbaugh, Esq.
Telephone: (215) 963-5004
Telecopier: (215) 963-5299
Notices to Purchaser
c/o Lawson Products, Inc.
1666 East Touhy Avenue
Des Plaines, Illinois 60018
Attention: Robert J. Washlow
Telephone: (847) 827-9666
Telecopier: (847) 795-9030
and
Assembly Component Systems, Inc.
709 Second Avenue, SE
Decatur, Alabama 35601
Attention: Stanley Belsky
Telephone: (256) 353-1931
Telecopier: (256) 355-0274
with a copy to:
Vedder, Price, Kaufman & Kammholz
222 North LaSalle Street
Chicago, Illinois 60601
Attention: Pearl A. Zager, Esq.
Telephone: (312) 609-7548
Telecopier: (312) 609-5005
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1.77 Assignment. This Agreement and all of the provisions hereof shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, but neither this Agreement nor any
of the rights, interests or obligations hereunder of Seller or Parent shall be
assignable by Seller or Parent without the prior written consent of Purchaser.
Purchaser may assign this Agreement, in whole or in part, without restriction to
any of its affiliates existing as of the date hereof or in the future; provided,
however, that any such assignment shall not affect the obligations of Lawson
hereunder.
1.78 Severability. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of such provisions or the remaining provisions of this Agreement.
1.79 No Third Party Beneficiaries. Nothing in this Agreement, whether
express or implied, is intended to confer any rights or remedies under or by
reason of this Agreement on any other persons other than the parties hereto and
their respective successors and permitted assigns, nor is anything in this
Agreement intended to relieve or discharge the obligation or liability of any
third persons to any party, nor shall any provision give any third parties any
right of subrogation or action over or against any party. This Agreement is not
intended to and does not create any third party beneficiary rights whatsoever.
1.80 No Strict Construction. The language used in this Agreement shall
be deemed to be the language chosen by the parties hereto to express their
mutual intent, and no rule of strict construction shall be applied against any
person.
1.81 Captions. The captions used in this Agreement are for convenience
of reference only and do not constitute a part of this Agreement and shall not
be deemed to limit, characterize or in any way affect any provision of this
Agreement, and all provisions of this Agreement shall be enforced and construed
as if no caption had been used in this Agreement.
1.82 Complete Agreement. This document and the documents referred to
herein contain the complete agreement between the parties and supersede any
prior understandings, agreements or representations by or between the parties,
written or oral, which may have related to the subject matter hereof in any way.
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1.83 Counterparts. This Agreement may be executed in one or more
counterparts, all of which taken together shall constitute one and the same
instrument.
1.84 Governing Law; Consent to Forum. This Agreement has been
negotiated, executed and delivered at and shall be deemed to have been made in
Chicago, Illinois. The internal law, not the law of conflicts, of the State of
Illinois shall govern all questions concerning the construction, validity and
interpretation of this Agreement and the performance of the obligations imposed
by this Agreement. As part of the consideration for the Purchase Price received,
Seller and Parent hereby consent and agree that the Circuit Court of Cook
County, Illinois, or, at Purchaser's option, the United States District Court
for the Northern District of Illinois, Eastern Division, shall have exclusive
jurisdiction to hear and determine any claims or disputes among the parties
pertaining to this Agreement or to any matter arising out of or related to this
Agreement. Seller and Parent expressly submit and consent in advance to such
jurisdiction in any action or suit commenced in any such court, and hereby waive
any objection which either of them may have based upon lack of personal
jurisdiction, improper venue or forum non conveniens and hereby consent to the
granting of such legal or equitable relief as is deemed appropriate by such
court. Seller and Parent hereby waive personal service of the summons, complaint
and other process issued in any such action or suit and agree that service of
such summons, complaint and other process may be made by registered or certified
mail addressed to Seller at the address set forth in this Agreement and that
service so made shall be deemed completed upon the earlier of Seller's actual
receipt thereof or three (3) days after deposit in the U.S. Mail, proper postage
prepaid. Nothing in this Agreement shall be deemed or operate to affect the
right of Purchaser to serve legal process in any other manner permitted by law,
or to preclude the enforcement by Purchaser of any judgment or order obtained in
such forum or the taking of any action under this Agreement to enforce same in
any other appropriate forum or jurisdiction.
1.85 Knowledge. Any reference to the knowledge, best knowledge,
awareness or similar concepts with respect to Seller or Parent or both means the
actual knowledge of any officer, director or supervisory employee of Seller or
any officer or director of Parent.
1.86 Bulk Sales. Subject to the provisions of Section 9.1(b), Purchaser
waives compliance by Seller with the bulk sales or similar laws of any state
relating to the sale of the Purchased Assets contemplated by this Agreement.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
SELLER:
SUNSOURCE INVENTORY MANAGEMENT
COMPANY, INC.
By:_________________________________
Its
PARENT:
SUNSOURCE INC.
By:_________________________________
Its
SUNSOURCE INDUSTRIAL SERVICES
COMPANY, INC.
By:_________________________________
Its
PURCHASER:
ACS/SIMCO, INC.
By:_________________________________
Its President
48
<PAGE>
SCHEDULE 1.2(b)
MRO ACCOUNTS SCHEDULE
MRO ACCOUNTS
Tipper Tie, Inc. (Delaware Corporation)
2000 Lufkin Road
Apex, North Carolina 27502
Alamo Group
1502 E. Walnut St.
Seguin, Texas 78155
Iowa Mold Tooling Co., Inc. (IMT)
500 Hwy 18
Garner, Iowa 50438
Tamrock
__________________
___________________
___________________
<PAGE>
SCHEDULE 3.5
OUTSTANDING LIABILITIES
1. $78,000 product defect claim by Modine Manufacturing Co., Inc.
2. Sexual harassment claim by Geri Mowl, an employee of Hillman Industrial.
<PAGE>
TRANSITIONAL SERVICES AND SUPPLY AGREEMENT
THIS TRANSITIONAL SERVICES AND SUPPLY AGREEMENT dated as of July 1,
1999, is made by and among SunSource Inventory Management Company, Inc.
("Seller"), a Delaware corporation, SunSource, Inc., a Delaware corporation, and
SunSource Industrial Services Company, Inc., a Delaware corporation
(collectively "Parent"), The Hillman Group, Inc., a Delaware corporation
("Hillman"), Lawson Products, Inc., a Delaware corporation ("Lawson"), and
ACS/SIMCO, Inc. ("Purchaser"), an Illinois corporation. Capitalized terms used
in this Agreement and not otherwise defined herein shall have the meanings given
to them in that certain Asset Purchase Agreement among Seller, Purchaser and
certain related parties, dated as of July 1, 1999 (the "Purchase Agreement").
W I T N E S S E T H:
WHEREAS, Purchaser and Seller have entered into the Purchase Agreement
pursuant to which Purchaser will purchase substantially all of the assets owned
by Seller which are used in the conduct of the Business on the terms, conditions
and provisions contained therein; and
WHEREAS, Purchaser desires to obtain the use of certain facilities and
receive certain support and transition services from Seller and Hillman on the
terms and subject to the conditions herein contained, and Seller and Hillman
wish to provide such facilities, support and transition services to Purchaser as
provided herein; and
WHEREAS, Purchaser desires to have the right to purchase certain
inventory from Seller and Parent on the terms and subject to the conditions
herein contained, and Seller and Parent wish to sell such inventory to
Purchaser; and
WHEREAS, Seller desires to have Purchaser act as its agent to sell
certain obsolete inventory and to collect certain doubtful accounts receivable,
and Purchaser is willing to do so on the terms and subject to the conditions set
forth herein; and
WHEREAS, Lawson is willing to guarantee the performance of Purchaser
hereunder subject to the terms and conditions set forth herein; and
WHEREAS, Parent is willing to guarantee the performance of Seller and
Hillman hereunder subject to the terms and conditions set forth herein;
<PAGE>
NOW, THEREFORE, in consideration of the foregoing and of the covenants
and agreements herein contained and the consummation of the Purchase Agreement,
the receipt and sufficiency of which are hereby acknowledged, the parties
hereto, intending to be legally bound hereby, agree as follows:
Section 1. Services Provided by Purchaser. Subject to the terms and
conditions of this Agreement, Purchaser will provide to Seller the following
agency services (the "Purchaser Services"):
(1) Purchaser agrees to undertake the collection of the
existing and future receivables from the accounts owned by Seller and
listed on Schedule 1(a) attached hereto and made a part hereof (the
"Accounts") until the earlier of December 31, 2003 and the date on
which Purchaser's retainage rights under Section 4 have been fully
satisfied. In this regard, Purchaser shall devote not less than the
same efforts as it devotes to its own accounts receivable; provided
that Purchaser shall not be obligated to collect the Accounts and does
not promise or guaranty that the Accounts will be collected. Purchaser
shall credit any payments received from a particular Account against
the oldest invoice outstanding from such Account. No compromise or
settlement of any of the Accounts will be accepted without the prior
written consent of Seller. If, on the date of termination of
Purchaser's obligations hereunder, Purchaser has not collected all of
the Accounts, Purchaser shall so notify Seller and deliver to Seller
all of the information in Purchaser's possession concerning the
uncollected Accounts. Subject to Purchaser's right of retainage
pursuant to Section 4, Purchaser shall pay to Seller all sums collected
with respect to the Accounts. For up to three full calendar months
after the Closing, Purchaser will maintain the Accounts on Purchaser's
FAS PAC computer system, including the Frame Relay Circuits between
Kansas City and the Accounts, and allow Seller's personnel access to
the Business' computer hardware and software to convert the Accounts to
Seller's computer systems. All costs associated with this service will
be charged to Seller.
(2) Purchaser agrees to attempt to sell certain obsolete
inventory not reserved on the Latest Balance Sheet and Closing Balance
Sheet having an aggregate value of $444,445.62, acquired from Seller
pursuant to the Purchase Agreement and described in Schedule 1(b)-I
attached hereto and made a part hereof (the "Obsolete Inventory") until
December 31, 2003 or until such time as Seller directs Purchaser to
scrap any of the Obsolete Inventory. Purchaser shall not sell any item
of Obsolete Inventory for less than the minimum sale price set forth in
Schedule 1(b)-I without Seller's prior written authorization or
approval. Subject to Purchaser's right of retainage under Section 4,
for each item of Obsolete Inventory sold by Purchaser, Purchaser shall
promptly pay to Seller the value of such item of Obsolete Inventory as
shown on Seller's books and records used to determine Closing Tangible
Net Worth ("Purchaser's Cost"). For the first 30 days after the Closing
Date, Hillman, an affiliate of Seller and subsidiary of Parent, shall
have the right to purchase any of the Obsolete Inventory at Purchaser's
Cost plus a mark-up equal to the mark-up that Parent or Hillman would
charge Purchaser under Section 3. Purchaser shall not be obligated to
<PAGE>
sell any of the Obsolete Inventory and does not promise or guaranty
that any of the Obsolete Inventory will be sold. To the extent that
Purchaser does not sell all of such Obsolete Inventory by December 31,
2000, Purchaser shall give Seller notice thereof (the "Obsolete
Inventory Notice") and assign, convey and transfer to Seller any
Obsolete Inventory then remaining unsold for no consideration if the
sum to be retained by Purchaser pursuant to Section 4 has been
satisfied and retained in full. If such sum has not been fully
satisfied and retained, then Seller and Parent shall be jointly and
severally liable to pay to Purchaser the difference between $444,445.62
and the value of any unsold Obsolete Inventory (calculated at
Purchaser's Cost) within two business days after the date of
Purchaser's notice thereof. Purchaser and Seller shall track the sale
of the Obsolete Inventory and the proceeds thereof pursuant to the
procedures set forth in Schedule 1(b)-II attached hereto and made a
part hereof. Any Obsolete Inventory currently located at Hillman's
Cincinnati, Ohio facility shall remain there and be stored there at no
expense to Purchaser throughout the period of Purchaser's obligations
under this Section 1(b). Any Obsolete Inventory not currently located
at Hillman's Cincinnati, Ohio facility shall be stored at Purchaser's
expense until June 30, 2000. At that time, any remaining Obsolete
Inventory shall be shipped to Hillman's Cincinnati, Ohio facility or to
such other place as Seller may direct, in each case, at Seller's
expense.
Section 2. Services Provided by Seller and Hillman. Subject to the
terms and conditions of this Agreement, Seller and Hillman shall provide to
Purchaser the following facilities, support and transition services
(collectively, the "Seller Services"):
(1) For up to six full calendar months after the Closing Date,
Hillman will provide Purchaser with (i) the office and warehouse space
in Hillman's Cincinnati, Ohio facility previously used by Seller and
Hillman for the "Hillman Industrial" division of the Business and (ii)
the ancillary services and personnel previously provided by Hillman to
Seller, including, but not limited to, access to computer terminals and
computer programs serving Seller's Business (such as inventory
monitoring and billing programs) and shipping and support personnel to
the extent desired by Purchaser. Seller will charge Purchaser for the
Seller Services at the rates set forth in Schedule 2(a) attached hereto
and made a part hereof. Purchaser may terminate its use or occupancy of
all or any part of the Seller Services at any time during such six
month period, and any charges shall be prorated as of the day of such
termination. At such time as Purchaser completely terminates the Seller
Services and vacates Hillman's facility, Seller and Hillman shall (x)
deliver to the loading dock thereon the Purchased Assets, and (y) at no
expense to Purchaser, disassemble and remove from Hillman's facility
and deliver to the loading dock thereon the racks and shelving which
comprise part of the Purchased Assets and are described on the Hillman
Equipment Schedule.
(2) For six months after the Closing Date, Seller shall cause
Thorn Frass, its employee, or if Mr. Frass shall cease being an
employee of Seller during such period, another employee reasonably
acceptable to Purchaser, to use commercially reasonable efforts to
train up to two employees of Purchaser on the procedures and contacts
used by Parent and Seller to import products for the Hillman Industrial
Division of the Business. After the Closing Date, such employees and
one other employee or representative of Purchaser shall be permitted,
at Purchaser's expense, to accompany Mr. Frass (or such other
acceptable employee of Seller) on not less than two of his trips to
Asia and the "Far East" to meet with Hillman Industrial vendors. Mr.
Frass (or such other acceptable employee of Seller) shall introduce
Purchaser's employees and representative to all of the key personnel at
each of Parent's and Seller's Asian/"Far East" vendor's offices that
relate to the Hillman Industrial Division of the Business. From and
after the Closing Date, Seller and Parent shall authorize each such
vendor to sell to Purchaser all of the products at any time previously
purchased by Seller or Parent for Seller's Business and release such
vendors from any covenants to the contrary.
3
<PAGE>
(3) Hillman shall use commercially reasonable efforts to
maintain the employment of all employees employed by Hillman to work in
Seller's Hillman Industrial division at the Cincinnati, Ohio, facility
of Parent (the "Hillman Employees") through December 31, 1999, and
Hillman shall provide to Purchaser the services of such employees on a
full-time basis. Purchaser shall reimburse Hillman for the actual cost
of that portion of the wages, taxes and benefits paid by Hillman to or
on behalf of the Hillman Employees, prorated based on the amount of
services rendered to Purchaser during such period. Purchaser shall not
be required to reimburse Hillman for any Hillman Employees after
Purchaser notifies Hillman that it no longer needs the services of such
employees. Notwithstanding anything herein to the contrary, Purchaser
shall only be liable to reimburse Hillman for the actual amount of the
profit-sharing plan contributions made by Hillman to those Hillman
Employees who meet the prerequisites therefor under Hillman's
profit-sharing plan and who are hired by Purchaser on January 1, 2000
after Purchaser terminates its arrangements with Hillman hereunder
("Actual Profit-Sharing Contribution"). If the aggregate amount of the
estimated profit-sharing plan contributions reimbursed by Purchaser to
Seller with respect to the Hillman Employees exceeds the Actual
Profit-Sharing Contribution, the excess shall be refunded to Purchaser
by Hillman on or before January 31, 2000. If said aggregate estimated
contributions are less than the Actual Profit-Sharing Contribution, the
deficiency shall be paid to Hillman by Purchaser on or before January
31, 2000. Purchaser shall not be liable to reimburse Hillman for the
cost of any wages, taxes or benefits accrued or accruing to the Hillman
Employees prior to the Closing Date or after their termination date,
whether paid at or prior to termination. Purchaser may direct Hillman
to terminate Purchaser's use of any of the Hillman Employees at any
time during the period prior to December 31, 1999. At any time after
the Closing Date, Purchaser may elect, in its sole discretion, to offer
employment to any or all of the Hillman Employees. If Purchaser does
not elect to offer employment to any one or more of the Hillman
Employees, the termination of any such personnel shall be Seller's,
Parent's or Hillman's responsibility and shall not be done at any cost
or expense to or liability of Purchaser. The rights and obligations of
Purchaser under this Agreement are subject to Purchaser's superseding
obligations under Section 11.12 of the Purchase Agreement with respect
to the number of employees at each facility to whom Purchaser shall
offer employment and the WARN Act, including Purchaser's obligation to
offer employment to a sufficient number of employees of the Business to
avoid any liability under the WARN Act on the part of Seller, Hillman
or Parent.
4
<PAGE>
Section 3. Inventory Supply. For a period of twelve full calendar
months after the Closing Date, Seller and Parent jointly agree to sell to
Purchaser the line of products previously sold by Parent or one of its
subsidiaries to Seller in connection with the Business (the "Products") in such
quantities as required by the terms of this Agreement. Seller and Parent
represent and warrant that the Products will conform to the specifications
previously used by Seller for the Products ("Specifications"), provided that, if
the Specifications are changed for any Product, Parent shall notify Purchaser at
least 30 days in advance and shall provide to Purchaser the customary technical
assistance to adapt to such change, and further provided that any changes to
such Specifications will not cause the Products to fail to meet quality
standards set by Seller prior to the date hereof. Seller shall have the right to
request Specifications and quantity requirements from Purchaser prior to filling
any order for Products and shall receive written Specifications in advance from
Purchaser for any products not previously supplied by Seller or Parent. In the
event the Products supplied by Seller meet the written Specifications furnished
by Purchaser but do not meet the end customer's specifications, Seller shall
have no other obligation to Purchaser therefor and shall be entitled to payment
in full for the Products supplied. Should any Products not conform to the
Specifications, then Seller and Parent shall, at Purchaser's option, either
promptly exchange such Products for conforming Products or take the Products
back (without restocking charges) and refund the costs paid by Purchaser for the
Products.
Seller and Parent shall sell to Purchaser sufficient quantities of the
Products to supply the customers of the Business in accordance with past
practice, including, but not limited to, the parties to Seller's Customer
Inventory Management Agreements which agreements were assigned to Purchaser at
Closing. The Products shall be sold to Purchaser at Seller's or Parent's then
current inter-company wholesale prices. Purchaser shall have the option, but not
the obligation, to purchase the Products from Seller and Parent hereunder. In
the event Purchaser requires quantities of any Product used by both the
Purchaser and the Seller and such quantity is in excess of pre-Closing purchases
of such Product by 10% or reduces the safety stock of such Product of the Seller
and Parent below a ninety (90) day inventory, Seller shall have first claim on
this inventory, and Seller and Parent shall take reasonable steps to replenish
such Product stock as soon as possible at no cost penalties. Seller and Parent
will deliver the Products to freight carriers designated by Purchaser from time
to time within time frames comparable to those previously met by Seller to
satisfy the requirements of customers of the Business.
Section 4. Purchaser's Right of Retainage. Purchaser shall have the
right to retain from the first payments due from Purchaser to Seller or Hillman
with regard to Products purchased pursuant to Section 3, amounts due to Seller
with respect to Obsolete Inventory sold pursuant to Section 1(b) and Accounts
collected pursuant to Section 1(a) until the aggregate amount retained equals
$1,426,000. If the aggregate amount retained is not equal to such sum by
December 31, 2003, then Seller and Parent shall be jointly and severally liable
to pay to Purchaser the difference between said $1,426,000 and the sum of the
amount so retained.
5
<PAGE>
Section 5. Payments to Seller. For each of the five calendar years
beginning with the calendar year ending December 31, 1999, and ending with the
calendar year ending December 31, 2003, Purchaser shall pay to Seller, within
thirty (30) days after the end of each such calendar year, an amount equal to
fifteen percent (15%) of Existing Customer Sales (defined below) for such
calendar year (including the portion of 1999 prior to the Closing Date) in
excess of Twenty-Six Million and no/100 Dollars ($26,000,000.00). Purchaser's
liability to Seller under this Section 5 shall not exceed One Million and no/100
Dollars ($1,000,000.00) in the aggregate. If, during any of the five calendar
years to which this provision applies, Existing Customer Sales equal or exceed
Thirty Million and no/100 Dollars ($30,000,000.00), then Purchaser shall pay to
Seller the difference between One Million and no/100 Dollars ($1,000,000.00) and
the sum of amounts previously paid or credited to Seller under this Section 5.
If (a) Purchaser sells all or substantially all of the assets constituting the
Business at any time prior to termination of Purchaser's obligations hereunder
and (b) for each calendar year or portion thereof prior to the date of such
sale, the average of the Existing Customer Sales was equal to or greater than
Twenty-Seven Million, Three Hundred Thirty-Three Thousand, Three Hundred
Thirty-Three and 33/100 Dollars ($27,333,333.33) per year, then Purchasers shall
be jointly and severally liable to pay to Seller at the time of closing of the
sale of such assets the difference between One Million and no/100 Dollars
($1,000,000.00) and the sum of the amounts previously paid or credited to Seller
under this Section 5. For purposes of this Section, Existing Customer Sales
shall mean net annual sales to Parent, Seller or any of their affiliates
(excluding Obsolete Inventory) as well as sales to customers who were either
customers of Seller or with whom Seller had an outstanding written proposal for
a systems account at the time of Closing and which result in a contract with
Purchaser within twelve months of the Closing Date, all of which customers and
proposed customers are listed on Schedule 5 attached hereto and made a part
hereof. Seller shall have the right, annually, to have its independent auditors
review the records of Purchaser to verify Existing Customer Sales. To the extent
Purchaser has not retained or been paid $1,426,000 pursuant to Section 4,
Purchaser shall have the right to retain any such balance outstanding under
Section 4 from any amounts due to Seller hereunder, and any amounts so retained
shall be deemed to be amounts paid or credited to Seller hereunder.
Section 6. Books and Records. The parties shall keep accurate and
complete books and records in respect of the Services, as the case may be, for
the applicable tax audit period. Such books and records shall be kept at the
principal place of business of each of Seller, Parent and Purchaser, unless
otherwise agreed to by the parties, and such books and records shall be made
available to each of the parties and their respective representatives at all
reasonable times for examination, audit, inspection, transcription and copying.
Section 7. Term of Agreement and Services. The term of this Agreement
will commence on the Closing Date and shall continue until terminated as
provided in each Section of this Agreement respectively.
Section 8. Independent Contractor; No Partnership. The Services being
performed by Purchaser and Seller under the provisions of this Agreement shall
be performed by Purchaser and Seller as an independent contractor for the other
party. Nothing in the Agreement shall be deemed or construed by the parties
hereto or by any third person to create the relationship of partnership or joint
venture between Seller and Purchaser.
6
<PAGE>
Section 9. Personnel. Except as otherwise specifically provided herein,
(a) Seller or Parent will employ, pay, supervise, direct and discharge all
Seller personnel providing the Seller Services, (b) Seller and Parent will be
solely responsible for the payment of benefits and any other direct and indirect
compensation for Seller or Parent personnel assigned to perform the Seller
Services, and (c) Seller and Parent will be responsible for the employees'
worker's compensation insurance, employment taxes and other employer liabilities
relating to such personnel.
Section 10. Dispute Resolution. If a dispute, controversy or claim
(collectively, a "Dispute") between Seller and Purchaser arises out of or
relates to this Agreement, Seller and Purchaser shall have all rights and
remedies available at law or equity.
Section 11. Notices. All notices, demands and other communications to
be given or delivered under or by reason of the provisions of this Agreement
shall be in writing and shall be deemed to have been given when personally
delivered, mailed by first class mail, return receipt requested or delivered by
a nationally recognized courier service. Notices, demands and communications to
Seller or Purchaser shall, unless another address is specified in writing in
accordance herewith, be sent to the address indicated below:
Notices to Seller, Parent and Hillman
SunSource Inc.
One Logan Square
Philadelphia, PA
Attention: Joseph M. Corvino
Telephone: (215) 282-1290
Telecopier: (215) 282-1309
with a copy to:
Morgan, Lewis & Bockius, LLP
One Logan Square
Philadelphia, PA
Attention: Thomas Sharbaugh, Esq.
Telephone: (215) 963-5004
Telecopier: (215) 936-5299
Notices to Purchaser
c/o Lawson Products, Inc.
1666 East Touhy Avenue
Des Plaines, Illinois 60018
Attention: Robert J. Washlow
Telephone: (847) 827-9666
Telecopier: (847) 795-9030
7
<PAGE>
and
Assembly Component Systems, Inc.
709 Second Avenue, S.E.
Decatur, Alabama 35601
Attention: Stanley Belsky
Telephone: (256) 353-1931
Telecopier: (256) 355-0274
with a copy to:
Vedder, Price, Kaufman & Kammholz
222 North LaSalle Street
Chicago, Illinois 60601
Attention: Pearl A. Zager, Esq.
Telephone: (312) 609-7548
Telecopier: (312) 609-5005
Section 12. Entire Agreement. This Agreement constitutes the entire
Agreement between the parties hereto in respect to the subject matter hereof and
supersedes all prior and contemporaneous agreements between the parties hereto
in connection with the subject matter hereof.
Section 13. Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the respective successors and permitted assigns
of the parties hereto; provided, however, that neither party hereto may assign
or in any way voluntarily transfer this Agreement, or its respective obligations
hereunder, without the prior written consent of the other party, which may be
withheld for any reason.
Section 14. Captions. The captions contained in this Agreement are
included only for convenience of reference and do not define, limit, explain or
modify this Agreement or its interpretation, construction or meaning and are in
no way to be construed as a part of this Agreement.
Section 15. Pronouns. The number and gender of each pronoun used in
this Agreement, if any, shall be construed to mean such number and gender as the
context, circumstances or its antecedent may require.
Section 16. Governing Law. This Agreement shall be governed by, and
construed and enforced in accordance with, the laws of the State of Illinois
(regardless of the laws that might otherwise govern under applicable principles
of conflict of laws) as to all matters, including, without limitation, matters
of validity, construction, effect, performance and remedies.
8
<PAGE>
Section 17. Jurisdiction and Venue. Each party consents to the personal
jurisdiction of the state and federal courts located in the State of Illinois
and hereby waives any argument that venue in any such forum is not convenient or
proper.
Section 18. Amendments, Changes and Modifications. This Agreement may
be amended, changed and modified only in a writing executed by both of the
parties.
Section 19. Severability. If any clause, provision or section of this
Agreement, or any covenant, stipulation, obligations, agreement, act or action,
or part thereof made, assumed, entered into or taken under this Agreement is for
any reason held to be illegal, invalid or inoperable, such illegality,
invalidity or inoperability shall not affect the remainder thereof or any other
clause, provision or section or any covenant, stipulation, obligation,
agreement, act or action, or part thereof, made, assumed, entered into or taken
thereunder or hereunder.
Section 20. Lawson Guaranty. Lawson shall cause Purchaser to comply
with all of its obligations in this Agreement. Lawson hereby guarantees the
prompt and complete performance by Purchaser of all of its obligations in this
Agreement.
Section 21. Parent Guaranty. Parent shall cause Seller and Hillman to
comply with all of their respective obligations in this Agreement. Parent hereby
guarantees the prompt and complete performance by Seller and Hillman of all of
their respective obligations in this Agreement.
[SIGNATURE PAGE FOLLOWS]
9
<PAGE>
IN WITNESS WHEREOF, each party hereto has caused this Agreement to be
executed in its name by its duly authorized representative, all as of the day
and year first above written.
SUNSOURCE INVENTORY MANAGEMENT
COMPANY, INC.
By:__________________________________
Name:________________________________
Title:_______________________________
SUNSOURCE INC.
By:__________________________________
Name:________________________________
Title:_______________________________
SUNSOURCE INDUSTRIAL SERVICES
COMPANY, INC.
By:__________________________________
Name:________________________________
Title:_______________________________
THE HILLMAN GROUP, INC.
By:__________________________________
Name:________________________________
Title:_______________________________
ACS/SIMCO, INC.
By:__________________________________
Name:________________________________
Title:_______________________________
10
<PAGE>
INDEX OF SCHEDULES
------------------
Schedule 1(a) -- Accounts (Owned by Seller)
Schedule 1(b) - I -- Obsolete Inventory
Schedule 1(b) - II -- Tracking Procedure for Obsolete Inventory
Schedule 1(a) -- Rates for Seller Services
Schedule 5 -- Seller's Existing Customers or Those With Whom
Seller Had Outstanding Written Proposal
11
<PAGE>
SCHEDULE 1(a)
ACCOUNTS
(Owned by Seller)
MRO ACCOUNTS
- ------------
Tipper Tie, Inc. (Delaware Corporation)
2000 Lufkin Road
Apex, North Carolina 27502
Alamo Group
1502 E. Walnut St.
Seguin, Texas 78155
Iowa Mold Tooling Co., Inc. (IMT)
500 Hwy 18
Garner, Iowa 50438
[TAMROCK]
- ---------
12
<PAGE>
Schedule 1(b) - I
-----------------
OBSOLETE INVENTORY
Description Minimum Sales Price
----------- -------------------
13
<PAGE>
Schedule 1(b) - II
------------------
TRACKING PROCEDURE FOR OBSOLETE INVENTORY
14
<PAGE>
Schedule 2(a)
-------------
RATES FOR SELLER SERVICES
15
<PAGE>
Schedule 5
----------
SELLER'S EXISTING CUSTOMERS
OR THOSE WITH WHOM SELLER HAD
OUTSTANDING WRITTEN PROPOSAL
16
<PAGE>
SUNSOURCE INC.
1998 EQUITY COMPENSATION PLAN
AMENDMENT TO
NONQUALIFIED STOCK OPTION GRANT
This amendment, dated as of January 26, 2000, which amends a
NONQUALIFIED STOCK OPTION GRANT dated as of April 27, 1999, is delivered by
SunSource, Inc. (the "Company") to Maurice P. Andrien (the "Grantee").
RECITALS
A. The SunSource Inc. 1998 Equity Compensation Plan (the "Plan")
provides for the grant of options to purchase shares of common stock of the
Company. The committee established under the terms of the Plan (the "Committee")
made a stock option grant covering 150,000 shares as of April 27, 1999 (the
"Original Grant") as an inducement for the Grantee to enter into an employment
agreement between the Company and the Grantee.
B. On January 26, 2000 the Committee approved a restructuring of the
Original Grant whereby the number of shares covered by the Original Grant shall
be reduced to 50,000 and the Grantee shall receive a new grant 100,000
restricted shares under the terms of a Restricted Stock Grant pursuant to the
Plan.
C. The Plan is administered and interpreted by the Committee.
NOW, THEREFORE, the parties to this Agreement, intending to be legally
bound hereby, agree as follows:
1. The following sentence is added to the end of Section 1 of the
Original Grant:
"Effective January 26, 2000, the number of Shares that may be purchased
upon the exercise of the Option shall be reduced to 50,000."
2. Except as specifically set forth above, each of the provisions of
the Original Grant shall continue in full force and effect.
-1-
<PAGE>
IN WITNESS WHEREOF, the Company has caused its duly authorized officer
to execute this Amendment and the Grantee has executed same to evidence
acceptance of this Amendment.
SUNSOURCE INC.
By:____________________________
Accepted:______________________
Grantee
-2-
<PAGE>
SUNSOURCE INC.
1998 EQUITY COMPENSATION PLAN
RESTRICTED STOCK GRANT
This RESTRICTED STOCK GRANT, dated as of January 26, 2000, is delivered by
SunSource Inc. (the "Company"), to Maurice P. Andrien (the "Grantee").
RECITALS
A. The SunSource Inc. Equity Compensation Plan (the "Plan") provides
for the grant of restricted stock in accordance with the terms and conditions of
the Plan.
B. On January 26, 2000 the committee established under the terms of the
Plan (the "Committee") approved a restructuring of Grantee's equity compensation
grants whereby the number of shares covered by a previous option grant shall be
reduced to 50,000 and the Grantee shall receive a new grant of 100,000
restricted shares under the Plan.
C. The Plan is administered and interpreted by the Committee.
NOW, THEREFORE, the parties to this agreement, intending to be legally
bound hereby, agree as follows:
1. Restricted Stock Grant. The Company hereby grants the Grantee
100,000 shares of common stock of the Company effective January 26, 2000 (the
"Date of Grant"), subject to the restrictions set forth below and in the Plan
("Restricted Stock"). Shares of Restricted Stock may not be transferred by the
Grantee or subjected to any security interest until the shares have become
vested pursuant to this Agreement and the Plan. This grant is contingent upon
the Grantee executing the Amendment to Nonqualified Stock Option Grant of even
date.
2. Vesting of Restricted Stock.
(a) The restrictions described in Section 2(b) and Section 3 shall
lapse with respect to the Restricted Stock as follows, provided, that the
Grantee has a Company Relationship from the Date of Grant until the respective
date set forth below:
(i) 33,333 shares of Restricted Stock shall become vested on July
26, 2000 (six months from the date of grant);
(ii) 33,333 shares of Restricted Stock shall become vested on the
earlier of either: (A) the last day of the continuous thirty calendar day period
during which the closing price for the Company's stock is at least $9.00 per
share, or (B) January 26, 2003 (three years from the date of grant); and
-1-
<PAGE>
(iii) 33,334 shares of Restricted Stock shall become vested on the
earlier of either (A) the last day of the continuous thirty calendar day period
during which the closing price for the Company's stock is at least $15.00 per
share, or (B) January 26, 2003 (three years from the date of grant).
The vesting of the Restricted Stock shall be cumulative.
(b) If the Grantee voluntarily terminates employment or is
involuntarily terminated for "Cause," as defined in the Plan, before the
Restricted Stock is fully vested, the shares of Restricted Stock that are not
then vested shall be forfeited and must be immediately returned to the Company.
The Committee shall accelerate vesting of the Restricted Shares if the Grantee
terminates employment on account of death, disability (as defined under the
Company's long-term disability plan then in effect), approved retirement, or
involuntary termination without Cause.
(c) For purposes of this Agreement, "Company Relationship" means
employment as an employee of, or the provision of services to, the Company or a
subsidiary.
3. Nonassignability of Rights. During the period before the shares of
Restricted Stock vest (the "Restriction Period"), the non-vested Restricted
Stock may not be assigned, transferred, pledged or otherwise disposed of by the
Grantee. Any attempt to assign, transfer, pledge or otherwise dispose of the
shares contrary to the provisions hereof, and the levy of any execution,
attachment or similar process upon the shares, shall be null and void and
without effect.
4. Issuance of Certificates.
(a) Stock certificates representing the Restricted Stock may be issued
by the Company and held in escrow by the Company until the Restricted Stock
vests, or the Company may hold non-certificated shares until the Restricted
Stock vests. During the Restriction Period, the Grantee shall receive any cash
dividends with respect to the shares of Restricted Stock, may vote the shares of
Restricted Stock and may participate in any distribution pursuant to a plan of
dissolution or complete liquidation of the Company. In the event of a dividend
or distribution payable in stock or other property or a reclassification, split
up or similar event during the Restriction Period, the shares or other property
issued or declared with respect to the non-vested shares of Restricted Stock
shall be subject to the same terms and conditions relating to vesting as the
shares to which they relate.
-2-
<PAGE>
(b) When the Grantee obtains a vested right to shares of Restricted
Stock, a certificate representing the vested shares shall be issued to the
Grantee, free of the restrictions under Sections 2 and 3 of this Agreement.
5. Change of Control. In the event of a Change of Control, all
restrictions relating to the Restricted Stock shall lapse unless the Committee
determines that lapse of the restrictions may result in the loss of pooling of
interests accounting treatment or may result in triggering "excess parachute
payments" pursuant to Section 13(e) of the Plan.
6. Grant Subject to Plan Provisions. This grant is made pursuant to the
Plan, the terms of which are incorporated herein by reference, and in all
respects shall be interpreted in accordance with the Plan. The grant is subject
to the provisions of the Plan and to interpretations, regulations and
determinations concerning the Plan established from time to time by the
Committee in accordance with the provisions of the Plan, including, but not
limited to, provisions pertaining to (i) rights and obligations with respect to
withholding taxes, (ii) the registration, qualification or listing of the
Shares, (iii) capital or other changes of the Company and (iv) other
requirements of applicable law. The Committee shall have the authority to
interpret and construe the grant pursuant to the terms of the Plan, and its
decisions shall be conclusive as to any questions arising hereunder.
Notwithstanding the foregoing, to the extent the Committee has discretion under
the Plan, such discretion shall not be exercised in a manner that is
inconsistent with the terms of an employment agreement between the Company and
the Grantee ("Employment Agreement").
7. Withholding. The Grantee shall be required to pay to the Company, or
make other arrangements satisfactory to the Company to provide for the payment
of, any income and other payroll withholding taxes that the Company is required
to withhold with respect to the grant or vesting of the Restricted Stock.
8. No Employment or Other Rights. This grant shall not confer upon the
Grantee any right to be retained by or in the employ or service of the Company
and shall not interfere in any way with the right of the Company to terminate
the Grantee?s employment or service pursuant to the Employment Agreement.
9. Assignment by Company. The rights and protections of the Company
hereunder shall extend to any successors or assigns of the Company and to the
Company's parents, subsidiaries, and affiliates. This Agreement may be assigned
by the Company without the Grantee?s consent.
10. Applicable Law. The validity, construction, interpretation and
effect of this instrument shall be governed by and determined in accordance with
the laws of the State of Delaware, without giving effect to the conflicts of
laws provisions thereof.
11. Notice. Any notice to the Company provided for in this instrument
shall be addressed to the Company in care of the Vice President - Finance at
SunSource Inc., 3000 One Logan Square, Philadelphia, PA 19103, and any notice to
the Grantee shall be addressed to such Grantee at the current address shown on
the payroll of the Company, or to such other address as the Grantee may
designate to the Company in writing. Any notice shall be delivered by hand, sent
by telecopy or enclosed in a properly sealed envelope addressed as stated above,
registered and deposited, postage prepaid, in a post office regularly maintained
by the United States Postal Service.
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<PAGE>
IN WITNESS WHEREOF, the Company has caused its duly authorized officer
to execute this Grant Instrument as evidence of the Restricted Stock Grant
referenced herein, and the Grantee has executed this grant instrument to
evidence acceptance of such Restricted Stock grant on the terms and conditions
specified herein, all effective as of the Date of Grant.
SUNSOURCE INC.
By:____________________________
Accepted:______________________
Grantee
-4-
<PAGE>
NOTE AND PLEDGE AGREEMENT
NOTE AND PLEDGE AGREEMENT (the "Note and Pledge Agreement"), dated as
of February 24, 2000, between Maurice P. Andrien (the "Maker" and SUNSOURCE
INC. (the "Payee").
PRELIMINARY STATEMENT
The Maker has received a restricted stock grant from the Payee
effective January 26, 2000 pursuant to a Restricted Stock Grant effective
January 26, 2000 (the "Grant Letter"), under the SunSource Inc. 1998 Equity
Compensation Plan, whereby the Maker will receive a grant of 100,000 shares (the
"Shares") of common stock of the Payee. Concurrently therewith, the Maker is
making an election under Section 83(b) of the Internal Revenue Code to be taxed
on the date of grant ("83(b) Election" of the Shares, the Payee is making a loan
(the "Loan") to the Maker of the amount of taxes resulting to the Maker as a
result of the 83(b) Election, and the Maker is delivering this Note and Pledge
Agreement to the Payee, whereby the Maker promises, among other things, to pay
the principal amount of $206,350.20 (the "Note") in repayment of the Loan and to
pledge to the Payee the Shares to secure the payment of the Loan (the "Pledge").
Under the terms of the Pledge, the Payee shall continue to hold the Pledged
Securities (as defined below) hereunder until released in accordance with
Section B.8 hereof or the termination of this Note and Pledge Agreement.
WITNESSETH:
NOW, THEREFORE, to induce the Payee to make a loan under this Note and
Pledge Agreement and in consideration of the mutual covenants contained herein,
the parties hereto, each intending to be legally bound hereby, covenant and
agree as follows:
A. Promissory Note.
1. Terms. FOR VALUE RECEIVED, and intending to be legally bound, the
Maker hereby promises to pay, in lawful money of the United States of America,
without demand, defalcation, set off or deduction, to the order of Payee, at the
address of the Payee's executive offices, or at such other place as the holder
hereof shall from time to time designate in writing, the principal amount of
$206,350.20, in three equal annual installments commencing upon February 24,
2001 with interest on the unpaid principal balance until paid at the annual rate
of 6.11%, calculated on the basis of a 360-day year consisting of twelve 30-day
months. If not sooner paid, the outstanding principal amount, together with
accrued interest thereon, shall be immediately due and payable on the first to
occur of (i) the date on which the Maker's employment with the Payee terminates
for any reason, (ii) a Change of Control of the Payee (as defined in the
SunSource Inc. 1998 Equity Compensation Plan), (iii) the date on which the Maker
sells or otherwise disposes of any of the Shares, or agrees to sell or otherwise
dispose of any of the Shares or (iv) February 24, 2003.
<PAGE>
2. Prepayment. The Maker may prepay at any time all or part of the
outstanding principal balance hereof without penalty, provided that when making
such prepayment the Maker shall pay all interest then accrued and all other sums
then due hereunder. Partial prepayments shall be applied to reduce the remaining
payments in the inverse order of maturity.
3. Default.
(a) The Maker shall be in default hereunder upon the occurrence of
any of the following events (each an "Event of Default"): (i) if the Maker fails
to pay the principal or interest or any other sum due hereunder on the
applicable due date therefor and such failure continues for at least 30 days
after notice of the failure; (ii) if the Maker shall (A) apply for or consent to
the appointment of a receiver, custodian, trustee or liquidator of himself or of
all or a substantial part of his property, (B) make a general assignment for the
benefit of his creditors, (C) file a petition seeking to take advantage of any
law providing for the relief of debtors, or (D) take any action for the purpose
of effecting any of the foregoing; (iii) if a proceeding or case shall be
commenced against the Maker in any court of competent jurisdiction for (A) the
winding up, or composition or readjustment of debts, of the Maker, (B) the
appointment of a trustee, receiver, custodian, liquidator or the like of the
Maker or of all or any substantial part of his property, or (C) similar relief
in respect of the Maker under any law providing for the relief of debtors, and
such proceeding or case shall continue undismissed, or unstayed and in effect,
for a period of 60 days, or an order for relief against the Maker shall be
entered in an involuntary case under such Bankruptcy Code; or (iv) if there
shall be a default under the Pledge.
(b) Upon the occurrence of an Event of Default, which shall be
continuing, the balance of principal of and all accrued interest upon this Note
shall become immediately due and payable (i) without any action or notice of any
kind on the part of any holder of this Note in the case of the occurrence of an
Event of Default described in subparagraph (ii) or (iii) of paragraph (a) above;
or (ii) in the case of other Events of Default, only upon declaration of such
default delivered to the Maker by the holder.
(c) The Maker shall pay on demand all costs of collection, including
without limitation reasonable attorneys' fees, incurred by the holder hereof
with respect to any default by the Maker hereunder. Such amounts, until paid by
the Maker, shall be added to the principal hereof, bear interest at the rate set
forth in Section A.1. above and be secured by the Pledge.
4. Forgiveness. This Note shall be forgiven and the Payee shall release
to the Maker all of the Pledged Securities upon the Maker's involuntary
termination from the Payee without "Cause" (as defined in the SunSource Inc.
1998 Equity Compensation Plan).
<PAGE>
B. Pledge Agreement.
1. Pledge of Stock. As collateral security for the punctual payment and
performance of all existing and future indebtedness, obligations and other
liabilities, absolute or contingent, direct or indirect, primary or secondary,
of the Maker to the Payee of any nature whatsoever under this Note and Pledge
Agreement (all of such indebtedness, obligations and liabilities of the Maker
being hereinafter sometimes referred to collectively as the "Obligations"), the
Maker hereby deposits with and pledges and hypothecates to the Payee for its
benefit and grants to the Payee for its benefit, and agrees that the Payee shall
have a first security interest in and pledge of, the number of shares of Shares
(the "Pledged Securities") of the Payee set forth below:
Class of Security Certificate Number Number of Shares Pledged
----------------- ------------------ ------------------------
Common Stock __________ 100,000
2. Representations and Warranties of the Maker. The Maker represents
and warrants to and agrees with Payee as follows:
(a) The Pledged Securities have been duly and validly pledged
hereunder in accordance with all applicable laws, and the Maker warrants and
covenants to defend the Payee's right, security interest and special property in
and to the Pledged Securities against the claims and demands of all persons
whomsoever. Except for the security interest created hereby in favor of the
Payee and certain contractual restrictions on the transfer thereof, as set forth
in the Grant Letter, the Maker is the exclusive legal and equitable owner of,
and has good title to, all of the Pledged Securities identified in Section B.1
as being owned by the Maker, free and clear of all claims, liens, security
interests and other encumbrances, and the Maker has the unqualified legal right
to pledge the same hereunder.
(b) The Maker and his representatives, successors and assigns hereby
irrevocably waive and release all preemptive, first-refusal and other similar
rights of the Maker to purchase any or all of the Pledged Securities upon any
sale thereof by the Payee hereunder, whether such right to purchase arises under
the articles of incorporation or any bylaw of the Payee, by agreement, by
operation of law or otherwise.
(c) All of the foregoing representations, warranties and agreements
shall survive the execution and delivery of this Note and Pledge Agreement and
the making of the loan hereunder.
3. Representations and Warranties of the Payee. The Payee represents
and warrants to the Maker that the Payee is issuing to the Maker good title to
all of the Pledged Securities identified in Section B.1, free and clear of all
claims, liens, security interests and other encumbrances except for certain
contractual restrictions on the transfer thereof, as set forth in the Grant
Letter, and that the Payee has the unqualified legal right to issue the same to
the Maker.
<PAGE>
4. Reservation of Voting Rights. Upon the occurrence of an Event of
Default that shall be continuing, the Payee shall be entitled to exercise any
and all voting power with respect to the Pledged Securities. At all other times,
the Maker shall be entitled to exercise as he deems appropriate, but in a manner
consistent with the provisions of this Note and Pledge Agreement, all voting
power with respect to the Pledged Securities.
5. Additional Collateral Security. If any stock dividend shall be
declared on any of the Pledged Securities, or any shares of stock or fractions
thereof shall be issued pursuant to any stock split involving any of the Pledged
Securities, or any distribution of capital shall be made on any of the Pledged
Securities, or any property shall be distributed upon or with respect to the
Pledged Securities pursuant to any recapitalization or reclassification of the
capital of the Payee or pursuant to a reorganization thereof, the shares or
other property so distributed shall be delivered to the Payee to be held by it
in pledge as additional collateral security for the Obligations.
6. Remedies. Upon the occurrence of an Event of Default that shall be
continuing, the Payee shall have the right at any time and from time to time to
take such actions as it deems appropriate with respect to the Pledged
Securities. Without limiting the foregoing, the parties acknowledge that the
Pledged Securities are subject to the restrictions of the Grant Letter.
7. Right to Execute Endorsements. Upon the occurrence of any Event of
Default, the Payee shall have the right, for and in the name, place and stead of
the Maker and acting as its attorney-in-fact if necessary, to execute
endorsements, assignments and other instruments of conveyance or transfer with
respect to all or any of the Pledged Securities whenever any such execution is
required or permitted hereunder.
8. Release of Pledged Securities. Upon payment of any portion of the
principal amount of the Note, plus all accrued interest thereon, the Payee may
release to the Maker a proportionate number of the Pledged Securities, provided
that no Event of Default shall exist at that time. Upon payment of the full
amount due under the Note, the Payee shall release the remainder of the Pledged
Securities to the Maker. The Payee shall release to the Maker all of the Pledged
Securities upon the Maker's involuntary termination from the Payee without
"Cause" (as defined in the SunSource Inc. 1998 Equity Compensation Plan).
C. Remedies, Termination, Waiver and Miscellaneous.
1. Remedies Cumulative; Indemnities, etc. The rights, powers and
remedies provided herein in favor of the Payee shall not be deemed exclusive,
but shall be cumulative, and shall be in addition to all other rights and
remedies in favor of the Payee existing at law or in equity, including without
limitation all of the rights, powers and remedies available to a secured
creditor under the Uniform Commercial Code as in effect in the State of Delaware
or any other appropriate jurisdiction, and may be exercised concurrently,
independently or successively by the holder hereof in such holder"s discretion.
The Maker shall indemnify and hold harmless the Payee from and against any and
all liabilities, losses and damages that the Payee may incur in the exercise or
performance of any of its or their rights, powers or remedies set forth herein,
provided, however, that the Maker shall have no obligation to indemnify any such
indemnitee against any liability, loss or damage resulting from such
indemnitee's own gross negligence or bad faith.
<PAGE>
2. Waivers; Amendments. No delay on the part of the Payee in exercising
any of its options, powers or rights, and no partial or single exercise thereof,
shall constitute a waiver thereof or of any other option, power or right. The
Payee shall not be deemed by any act or omission to have waived any such right
or remedy or any default by the Maker hereunder or under the Pledge unless such
waiver is in writing and signed by the holder, and then only to the extent
specifically set forth in the writing. Any such waiver shall not be construed as
a continuing waiver or as a bar to or waiver of any right or remedy with respect
to any other default by the Maker. None of the terms and conditions of this Note
and Pledge Agreement may be amended, modified or waived orally but only in a
writing signed by the Payee and the Maker.
3. Return of Collateral. Upon the full payment and performance of all
of the Obligations, this Note and Pledge Agreement shall expire and the Maker
(except to the extent otherwise contemplated hereby) shall be entitled to the
return of all of the Pledged Securities and other property and cash held in
pledge hereunder that have not been used or applied to the payment of the
Obligations.
4. Transfers of Interest. Upon any assignment or other transfer by the
Payee of any of the Obligations, the Payee may transfer its interest in the
Pledged Securities, or any part thereof, to the assignee or transferee, who
shall thereupon become vested with all the rights, remedies, powers, security
interests and liens herein granted to the Payee in respect of the Pledged
Securities or the transferred part thereof, subject, however, to the
restrictions contained herein.
5. Expenses. The Pledged Securities secure, and the Maker shall pay on
demand, all reasonable expenses (including but not limited to reasonable
attorneys' fees and costs for legal services, costs of insurance and payments of
taxes or other charges) of, or incidental to, the custody, care, sale or
realization on any of the Pledged Securities or in any way relating to the
enforcement or protection of the rights of the Payee hereunder.
6. Notices. All notices, requests, demands, directions, declarations
and other communications provided for herein shall be in writing and shall be
deemed effectively given (a) upon personal delivery to the party to be notified,
(b) three days after notice shall be deposited with the United States Post
Office, by registered or certified mail, postage prepaid and addressed to the
party to be notified (i) if to the Maker, at the address set forth below, and
(ii) if to the Payee, at the address designated for payments hereunder from time
to time, or (c) upon confirmation that notice shall have been received by fax at
the fax number specified for such party with its address. Any party may change
its address or fax number for notice purposes by giving advance notice hereunder
to the other party in accordance with this Section C.6.
<PAGE>
7. Governing Law. This Agreement and the rights and obligations of the
parties hereunder shall be governed by and construed and enforced in accordance
with the laws of the State of Delaware.
8. Certain Waivers; Integration, etc.
(a) The Maker waives presentment for payment, demand, notice of
nonpayment, notice of protest, protest and notice of dishonor of this Note, and
all other notices in connection with the delivery, acceptance, performance,
default or enforcement of the payment of this Note and Pledge Agreement.
(b) The Maker hereby waives any and all present and future laws and
rules of court exempting any of the Pledged Securities or any other property,
real or personal, or any of the proceeds arising from any sale of such property,
from attachment, levy, sale or execution, or providing for any stay of
execution, appraisement, exemption from civil process or extension of time for
payment.
(c) This instrument states the entire agreement of the parties
concerning the subject matter hereof, and it is acknowledged that there are no
customs, usages, representations, or assurances referring to the subject matter,
and no inducements leading to the execution or delivery hereof, other than those
expressed herein.
9. Miscellaneous. This Note and Pledge Agreement shall bind and inure
to the benefit of the Maker and the Payee and their respective heirs, executors,
administrators, personal representatives, successors and assigns, except that
the Maker shall not have the right to assign any of the Maker's rights hereunder
or interests herein without the written consent of the Payee. No persons other
than the Maker and the Payee and the respective assignees of the Payee
(including any creditors of Payee to which the Payee may assign its rights
hereunder) are intended to be benefitted hereby or shall have any rights
hereunder, as third-party beneficiaries or otherwise. The Maker acknowledges
that this Note and Pledge Agreement and the obligations of the Maker hereunder
and the security interest created or intended to be created hereby have
constituted, and were intended by the Maker to constitute, a material inducement
to the Payee to enter into this Note and Pledge Agreement and make the loan
contemplated hereby, knowing that the Payee will rely upon this Agreement. This
Agreement may be executed in any number of counterparts, each of which shall be
deemed an original, and all such counterparts shall together constitute but one
and the same instrument. Any provision of this Note and Pledge Agreement which
is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without affecting the validity or enforceability of the
remainder of this Agreement or the validity or enforceability of such provision
in any other jurisdiction. Words of any gender herein shall include any other
genders, and the singular shall include the plural and vice versa, whenever the
same is necessary to produce a fair and meaningful construction. The term
"Payee" shall apply equally to the initial Payee specified above and to any
holder to which this Note may be assigned.
<PAGE>
IN WITNESS WHEREOF, the Maker has executed this Note and Pledge
Agreement and intending to be legally bound as of the day and year first written
above.
MAKER
___________________________
Address:
___________________________
___________________________
___________________________
PAYEE
SUNSOURCE INC.
By:________________________
<PAGE>
REVOLVING CREDIT, TERM LOAN, GUARANTY
AND
SECURITY AGREEMENT
PNC BANK, NATIONAL ASSOCIATION
(AS LENDER AND AS AGENT)
AND
THE OTHER LENDERS A PARTY HERETO
WITH
HARDING GLASS, INC.
KAR PRODUCTS INC.
SUNSOURCE INC.
SUNSOURCE TECHNOLOGY SERVICES INC.
THE HILLMAN GROUP, INC.
AND
A. & H. BOLT & NUT COMPANY LIMITED
A & H HOLDING COMPANY, INC.
J.N. FAUVER (CANADA) LIMITED
SUNSOURCE CANADA INVESTMENT COMPANY
SUNSOURCE CORPORATE GROUP, INC.
SUNSOURCE INDUSTRIAL SERVICES COMPANY, INC.
SUNSOURCE INVENTORY MANAGEMENT COMPANY, INC.
SUNSOURCE INVESTMENT COMPANY, INC.
SUNSUB A INC.
(CREDIT PARTIES AND GUARANTORS)
December 15, 1999
<PAGE>
REVOLVING CREDIT, TERM LOAN, GUARANTY
AND
SECURITY AGREEMENT
Revolving Credit, Term Loan, Guaranty and Security Agreement dated
December 15, 1999 among SUNSOURCE INC., a Delaware corporation ("SunSource"),
SUNSOURCE TECHNOLOGY SERVICES INC., a Delaware corporation ("SunSource
Technology"), KAR PRODUCTS INC., a Delaware corporation ("Kar"), THE HILLMAN
GROUP, INC., a Delaware corporation ("Hillman"), HARDING GLASS, INC., a Delaware
corporation ("Harding") (SunSource, SunSource Technology, Kar, Hillman and
Harding, each a "Borrower" and collectively "Borrowers"), the other Credit
Parties (as defined herein) which are now or which hereafter become a party
hereto, the financial institutions which are now or which hereafter become a
party hereto (collectively, the "Lenders" and individually a "Lender") and PNC
BANK, NATIONAL ASSOCIATION ("PNC"), as agent for Lenders (PNC, in such capacity,
the "Agent").
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<PAGE>
IN CONSIDERATION of the mutual covenants and undertakings herein
contained, Credit Parties, Lenders and Agent hereby agree as follows:
I. DEFINITIONS.
1.1. Accounting Terms. As used in this Agreement, the Note, or any
certificate, report or other document made or delivered pursuant to this
Agreement, accounting terms not defined in Section 1.2 or elsewhere in this
Agreement and accounting terms partly defined in Section 1.2 to the extent not
defined, shall have the respective meanings given to them under GAAP; provided,
however, whenever such accounting terms are used for the purposes of determining
compliance with financial covenants in this Agreement, such accounting terms
shall be defined in accordance with GAAP as applied in preparation of the
audited financial statements of Borrowers for the fiscal year ended December 31,
1998.
1.2. General Terms. For purposes of this Agreement the following terms
shall have the following meanings:
"Accountants" shall have the meaning set forth in Section 9.7
hereof.
"Advances" shall mean and include the Revolving Advances,
Letters of Credit, as well as the Term Loan.
"Advance Rates" shall have the meaning set forth in Section
2.1(a) hereof.
"Affiliate" of any Person shall mean (a) any Person which,
directly or indirectly, is in control of, is controlled by, or is under common
control with such Person, or (b) any Person who is a director or officer (i) of
such Person, (ii) of any Subsidiary of such Person or (iii) of any Person
described in clause (a) above. For purposes of this definition, control of a
Person shall mean the power, direct or indirect, (x) to vote 10% or more of the
securities having ordinary voting power for the election of directors of such
Person, or (y) to direct or cause the direction of the management and policies
of such Person whether by contract or otherwise.
"Agent" shall have the meaning set forth in the preamble to
this Agreement and shall include its successors and assigns.
"A. & H. Bolt" shall mean A. & H. Bolt & Nut Company Limited,
a corporation subsisting under the laws of the Province of Ontario.
"A & H Holding" shall mean A & H Holding Company, Inc., a
Michigan corporation.
3
<PAGE>
"Alternate Base Rate" shall mean, for any day, a rate per
annum equal to the higher of (i) the Base Rate in effect on such day and (ii)
the Federal Funds Rate in effect on such day plus 1/2 of 1%.
"Authority" shall have the meaning set forth in Section
4.19(d).
"Base Rate" shall mean the base commercial lending rate of PNC
as publicly announced to be in effect from time to time, such rate to be
adjusted automatically, without notice, on the effective date of any change in
such rate. This rate of interest is determined from time to time by PNC as a
means of pricing some loans to its customers and is neither tied to any external
rate of interest or index nor does it necessarily reflect the lowest rate of
interest actually charged by PNC to any particular class or category of
customers of PNC.
"Blocked Accounts" shall have the meaning set forth in Section
4.15(h).
"Borrower" or "Borrowers" shall have the meaning set forth in
the preamble to this Agreement and shall extend to all permitted successors and
assigns of such Persons.
"Borrowing Base Certificate" shall mean a certificate duly
executed by an officer of Borrowing Agent appropriately completed and in
substantially the form of Exhibit A hereto.
"Borrowers on a consolidated basis" shall mean the
consolidation in accordance with GAAP of the accounts or other items of
SunSource and its Subsidiaries.
"Borrowers' Account" shall have the meaning set forth in
Section 2.8.
"Borrowing Agent" shall mean SunSource.
"Business Day" shall mean any day other than Saturday or
Sunday or a legal holiday on which commercial banks are authorized or required
by law to be closed for business in East Brunswick, New Jersey and, if the
applicable Business Day relates to any Eurodollar Rate Loans, such day must also
be a day on which dealings are carried on in the London interbank market.
"CERCLA" shall mean the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, 42 U.S.C. ss.ss.9601 et seq.
4
<PAGE>
"Change of Control" shall mean with respect to all Credit
Parties (other than SunSource) (a) the occurrence of any event (whether in one
or more transactions) which results in a transfer of control of such Credit
Party to a Person who is not an Original Owner or (b) any merger or
consolidation of or with any Credit Party or sale of all or substantially all of
the property or assets of such Credit Party. For purposes of this definition,
"control of Credit Party" shall mean the power, direct or indirect (x) to vote
50% or more of the securities having ordinary voting power for the election of
directors of such Credit Party or (y) to direct or cause the direction of the
management and policies of such Credit Party by contract or otherwise, but shall
not include a merger, consolidation or sale of all or substantially all assets
or properties involving only one or more Credit Parties; provided, that, with
respect to any such merger, consolidation or sale, to the extent such
transaction involves a Borrower, Borrower shall be the surviving entity or shall
be the purchaser of the assets or properties.
"Change of Ownership" shall mean the occurrence of one or more
of the following events:
(a) with respect to all Credit Parties (other than SunSource):
(i) 50% or more of the common stock of such Credit
Party is no longer owned or controlled by (including for the purposes of the
calculation of percentage ownership, any shares of common stock into which any
capital stock of such Credit Party held by any of the Original Owners is
convertible or for which any such shares of the capital stock of such Credit
Party or of any other Person may be exchanged and any shares of common stock
issuable to such Original Owners upon exercise of any warrants, options or
similar rights which may at the time of calculation be held by such Original
Owners) a Person who is an Original Owner or
(ii) any merger, consolidation or sale of substantially all of the property or
assets of such Credit Party except for any such transaction only involving
another Credit Party; provided, that, with respect to any such merger,
consolidation or sale, to the extent such transaction involves a Borrower,
Borrower shall be the surviving entity or shall be the purchaser of the assets
or properties.
(b) with respect to SunSource the direct or indirect sale,
lease, exchange or other transfer of all or substantially all of the assets of
SunSource to any Person or entity or group of Persons or entities acting in
concert as a partnership or other group, other than any Borrower (a "Group of
Persons");
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(c) the consummation of any consolidation or merger of
SunSource with or into another Person (other than another Borrower) with the
effect that the stockholders of SunSource immediately prior to the date of the
consolidation or merger hold immediately after such merger or consolidation less
than 51% of the combined voting power of the outstanding voting securities of
the surviving entity of such merger, or the corporation resulting from such
consolidation, ordinarily having the right to vote in the election of directors
(apart from rights accruing under special circumstances) immediately after such
merger or consolidation;
(d) the stockholders of SunSource shall approve any plan or
proposal for the liquidation or dissolution of SunSource;
(e) a Person or Group of Persons acting in concert as a
partnership, limited partnership, syndicate or other group shall, as a result of
a tender or exchange offer, open market purchases, privately negotiated
purchases or otherwise, have become the direct or indirect beneficial owner
(within the meaning of Rule 13d-3 under the Exchange Act of 1934, as amended) of
securities of Sunsource representing 30% or more of the combined voting power of
the then outstanding securities of SunSource ordinarily (and apart from rights
accruing under special circumstances) having the right to vote in the election
of the directors; and
(f) a Person or Group of Persons, together with any Affiliates
thereof, shall succeed in having a sufficient number of its nominees elected to
the Board of Directors of SunSource such that such nominees, when added to any
existing directors remaining on the Board of Directors of SunSource after such
election who are Affiliates of such Person or Group of Persons, will constitute
a majority of the Board of Directors of Sunsource.
"Charges" shall mean all taxes, charges, fees, imposts, levies
or other assessments, including, without limitation, all net income, gross
income, gross receipts, sales, use, ad valorem, value added, transfer,
franchise, profits, inventory, capital stock, license, withholding, payroll,
employment, social security, unemployment, excise, severance, stamp, occupation
and property taxes, custom duties, fees, assessments, liens, claims and charges
of any kind whatsoever, together with any interest and any penalties, additions
to tax or additional amounts, imposed by any taxing or other authority, domestic
or foreign (including, without limitation, the Pension Benefit Guaranty
Corporation or any environmental agency or superfund), upon the Collateral, any
Credit Party or any of its Affiliates.
"Closing Date" shall mean December 15, 1999 or such other date
as may be agreed to by the parties hereto.
"Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time and the regulations promulgated thereunder.
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"Collateral" shall mean and include:
(a) all Receivables;
(b) all Equipment;
(c) all General Intangibles;
(d) all Inventory;
(e) all Investment Property;
(f) all Real Property;
(g) all Subsidiary Stock;
(h) all of each Credit Party's right, title and
interest in and to (i) its respective goods and other property including, but
not limited to, all merchandise returned or rejected by Customers, relating to
or securing any of the Receivables; (ii) all of each Credit Party's rights as a
consignor, a consignee, an unpaid vendor, mechanic, artisan, or other lienor,
including stoppage in transit, setoff, detinue, replevin, reclamation and
repurchase; (iii) all additional amounts due to any Credit Party from any
Customer relating to the Receivables; (iv) other property, including warranty
claims, relating to any goods securing this Agreement; (v) all of each Credit
Party's contract rights, rights of payment which have been earned under a
contract right, instruments, documents, chattel paper, warehouse receipts,
deposit accounts and money; (vi) if and when obtained by any Credit Party, all
real and personal property of third parties in which such Credit Party has been
granted a lien or security interest as security for the payment or enforcement
of Receivables; and (vii) any other goods, personal property or real property
now owned or hereafter acquired in which any Credit Party has expressly granted
a security interest or may in the future grant a security interest to Agent
hereunder, or in any amendment or supplement hereto or thereto, or under any
other agreement between Agent and any Credit Party;
(i) all of each Credit Party's ledger sheets, ledger
cards, files, correspondence, records, books of account, business papers,
computers, computer software (owned by any Credit Party or in which it has an
interest), computer programs, tapes, disks and documents relating to (a), (b),
(c), (d), (e), (f), (g) or (h) of this Paragraph; and
(j) all proceeds and products of (a), (b), (c), (d),
(e), (f), (g), (h) and (i) in whatever form, including, but not limited to:
cash, deposit accounts (whether or not comprised solely of proceeds),
certificates of deposit, insurance proceeds (including hazard, flood and credit
insurance), negotiable instruments and other instruments for the payment of
money, chattel paper, security agreements, documents, eminent domain proceeds,
condemnation proceeds and tort claim proceeds.
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"Commitment Percentage" of any Lender shall mean the
percentage set forth below such Lender's name on the signature page hereof as
same may be adjusted upon any assignment by a Lender pursuant to Section 17.3(b)
hereof.
"Commitment Transfer Supplement" shall mean a document in the
form of Exhibit 17.3 hereto, properly completed and otherwise in form and
substance satisfactory to Agent by which the Purchasing Lender purchases and
assumes a portion of the obligation of Lenders to make Advances under this
Agreement.
"Consents" shall mean all filings and all licenses, permits,
consents, approvals, authorizations, qualifications and orders of governmental
authorities and other third parties, domestic or foreign, necessary to carry on
any Credit Party's business, including, without limitation, any Consents
required under all applicable federal, provincial, state or other applicable
law.
"Contract Rate" shall mean, as applicable, the Revolving
Interest Rate or the Term Loan Rate.
"Controlled Group" shall mean all members of a controlled
group of corporations and all trades or businesses (whether or not incorporated)
under common control which, together with any Credit Party, are treated as a
single employer under Section 414 of the Code.
"Credit Party" shall mean each Borrower and each Guarantor and
"Credit Parties" shall mean, collectively, Borrowers and Guarantors.
"Customer" shall mean and include the account debtor with
respect to any Receivable and/or the prospective purchaser of goods, services or
both with respect to any contract or contract right, and/or any party who enters
into or proposes to enter into any contract or other arrangement with any Credit
Party, pursuant to which such Credit Party is to deliver any personal property
or perform any services.
"Default" shall mean an event which, with the giving of notice
or passage of time or both, would constitute an Event of Default.
"Default Rate" shall have the meaning set forth in Section 3.1
hereof.
"Defaulting Lender" shall have the meaning set forth in
Section 2.16(a) hereof.
"Depository Accounts" shall have the meaning set forth in
Section 4.15(h) hereof.
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"Documents" shall have the meaning set forth in Section 8.1(c)
hereof.
"Dollar" and the sign "$" shall mean lawful money of the
United States of America.
"Domestic Rate Loan" shall mean any Advance that bears
interest based upon the Alternate Base Rate.
"Early Termination Date" shall have the meaning set forth in
Section 13.1 hereof.
"Earnings Before Interest and Taxes" shall mean for any period
the sum of (i) net income (or loss) of Borrowers on a consolidated basis for
such period (excluding extraordinary gains, plus (ii) all interest expense of
Borrowers on a consolidated basis for such period, plus (iii) all charges
against income of Borrowers on a consolidated basis for such period for federal,
provincial, state and local taxes actually paid.
"EBITDA" shall mean for any period the sum of (i) Earnings
Before Interest and Taxes for such period plus (ii) depreciation expenses for
such period, plus (iii) amortization expenses for such period.
"Eligible Inventory" shall mean and include Inventory
(excluding work in process), with respect to each Borrower valued at the lower
of cost or market value, determined on a first-in-first-out basis, which is not,
in Agent's reasonable opinion, obsolete, slow moving or unmerchantable and which
Agent, in its reasonable discretion, shall not deem ineligible Inventory, based
on such considerations as Agent may from time to time deem appropriate
including, without limitation, whether the Inventory is subject to a perfected,
first priority security interest in favor of Agent and no other Lien (other than
Permitted Encumbrances) as confirmed by Uniform Commercial Code, tax lien and
pending suit and judgment searches reasonably satisfactory to Agent, whether
Agent has received an executed landlord or warehouse agreement in favor of
Agent, in form and substance satisfactory to Agent, with respect to such
Inventory and whether the Inventory conforms to all standards imposed by any
governmental agency, division or department thereof which has regulatory
authority over such goods or the use or sale thereof. Inventory (excluding work
in process and unpaid finished goods and raw materials received from suppliers
within the immediately preceding thirty (30) day period) of A. & H. Bolt and
J.N. Fauver shall be deemed to constitute Eligible Inventory to the extent it
would constitute Eligible Inventory based upon the criteria set forth above. The
value of Inventory of A. & H. Bolt and J.N. Fauver shall be converted to Dollars
by Credit Parties (subject to review and revision by Agent in its reasonable
discretion) based upon the exchange rate on the date of computation.
"Eligible Receivables" shall mean and include with respect to
each Borrower, each Receivable of such Borrower arising in the ordinary course
of such Borrower's business and which Agent, in its reasonable credit judgment,
shall deem to be an Eligible Receivable, based on such considerations as Agent
may from time to time deem appropriate. A Receivable shall not be deemed
eligible unless such Receivable is subject to Agent's first priority perfected
security interest and no other Lien (other than Permitted Encumbrances) as
confirmed by Uniform Commercial Code, tax lien and pending suit and judgment
searches reasonably satisfactory to Agent, and is evidenced by an invoice or
other documentary evidence satisfactory to Agent. In addition, no Receivable
shall be an Eligible Receivable if:
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<PAGE>
(a) it arises out of a sale made by any Borrower to an
Affiliate of any Borrower or to a Person controlled by an Affiliate of any
Borrower;
(b) it is due or unpaid more than (i) ninety (90) days after
the original invoice date with respect to Receivables due to any Borrower other
than SunSource Technology and Hillman, and (ii) sixty (60) days after the
original due date but not more than one hundred fifty (150) days after the
original invoice date with respect to Receivables due to SunSource Technology
and Hillman;
(c) fifty percent (50%) or more of the Receivables from such
Customer are not deemed Eligible Receivables hereunder. Such percentage may, in
Agent's sole discretion, be increased or decreased from time to time;
(d) any covenant, representation or warranty contained in this
Agreement with respect to such Receivable has been breached;
(e) the Customer shall (i) apply for, suffer, or consent to
the appointment of, or the taking of possession by, a receiver, custodian,
trustee or liquidator of itself or of all or a substantial part of its property
or call a meeting of its creditors, (ii) admit in writing its inability, or be
generally unable, to pay its debts as they become due or cease operations of its
present business, (iii) make a general assignment for the benefit of creditors,
(iv) commence a voluntary case under any state, provincial or federal bankruptcy
laws (as now or hereafter in effect), (v) be adjudicated a bankrupt or
insolvent, (vi) file a petition seeking to take advantage of any other law
providing for the relief of debtors, (vii) acquiesce to, or fail to have
dismissed, any petition which is filed against it in any involuntary case under
such bankruptcy laws, or (viii) take any action for the purpose of effecting any
of the foregoing;
(f) the sale is to a Customer outside the continental United
States of America or Canada, unless the sale is on letter of credit, guaranty or
acceptance terms, in each case acceptable to Agent in its reasonable discretion;
(g) the sale to the Customer is on a bill-and-hold, guaranteed
sale, sale-and-return, sale on approval, consignment or any other repurchase or
return basis or is evidenced by chattel paper;
(h) Agent believes, in its reasonable judgment, that
collection of such Receivable is insecure or that such Receivable may not be
paid by reason of the Customer's financial inability to pay;
(i) the Customer is the United States of America, Canada, any
province, any state or any department, agency or instrumentality of any of them,
unless the applicable Borrower assigns its right to payment of such Receivable
to Agent pursuant to the Assignment of Claims Act of 1940, as amended (31 U.S.C.
Sub-Section 3727 et seq. and 41 U.S.C. Sub-Section 15 et seq.) or has otherwise
complied with other applicable statutes or ordinances;
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<PAGE>
(j) the goods giving rise to such Receivable have not been
shipped to the Customer or the services giving rise to such Receivable have not
been performed by the applicable Borrower or the Receivable otherwise does not
represent a final sale (other than with respect to a Harding Progress Billing);
(k) the Receivables of the Customer exceed a credit limit
determined by Agent, in its reasonable discretion, to the extent such Receivable
exceeds such limit;
(l) the Receivable is subject to any offset, deduction,
defense, dispute, or counterclaim, the Customer is also a creditor or supplier
of a Borrower or the Receivable is contingent in any respect or for any reason
but only the portion of such Receivable subject to such offset, deduction,
defense, dispute or counterclaim shall be deemed ineligible;
(m) the applicable Borrower has made any agreement with any
Customer for any deduction therefrom, except for discounts or allowances made in
the ordinary course of business for prompt payment, all of which discounts or
allowances are reflected in the calculation of the face value of each respective
invoice related thereto;
(n) any return, rejection or repossession of the merchandise
has occurred or the rendition of services has been disputed;
(o) such Receivable is not payable to a Borrower; or
(p) such Receivable is not otherwise satisfactory to Agent as
determined in good faith by Agent in the exercise of its discretion in a
reasonable manner.
Receivables of A. & H. Bolt and J.N. Fauver shall be deemed to
constitute Eligible Receivables to the extent they would constitute Eligible
Receivables based upon the criteria set forth above. The value of Receivables of
A. & H. Bolt and J.N. Fauver shall be converted by Credit Parties (subject to
review and revision by Agent in its reasonable discretion) to Dollars based upon
the exchange rate on the date of computation.
"Environmental Complaint" shall have the meaning set forth in
Section 4.19(d) hereof.
"Environmental Laws" shall mean all federal, provincial, state
and local environmental, land use, zoning, health, chemical use, safety and
sanitation laws, statutes, ordinances and codes relating to the protection of
the environment and/or governing the use, storage, treatment, generation,
transportation, processing, handling, production or disposal of Hazardous
Substances and the rules, regulations, policies, guidelines, interpretations,
decisions, orders and directives of federal, provincial, state and local
governmental agencies and authorities with respect thereto.
"Equipment" shall mean and include as to each Credit Party all
of such Credit Party's goods (other than Inventory) whether now owned or
hereafter acquired and wherever located including, without limitation, all
equipment, machinery, apparatus, motor vehicles, fittings, furniture,
furnishings, fixtures, parts, accessories and all replacements and substitutions
therefor or accessions thereto.
"ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended from time to time and the rules and regulations promulgated
thereunder.
"Eurodollar Rate" shall mean for any Eurodollar Rate Loan for
the then current Interest Period relating thereto the interest rate per annum
determined by PNC by dividing (the resulting quotient rounded upwards, if
necessary, to the nearest 1/100th of 1% per annum) (i) the rate of interest
determined by PNC in accordance with its usual procedures (which determination
shall be conclusive absent manifest error) to be the average of the London
interbank offered rates for U.S. Dollars quoted by the British Bankers'
Association as set forth on Dow Jones Markets Service (formerly known as
Telerate) (or appropriate successor or, if British Banker's Association or its
successor ceases to provide such quotes, a comparable replacement determined by
PNC) display page 3750 (or such other display page on the Dow Jones Markets
Service system as may replace display page 3750) two (2) Business Days prior to
the first day of such Interest Period for an amount comparable to such
Eurodollar Rate Loan and having a borrowing date and a maturity comparable to
such Interest Period by (ii) a number equal to 1.00 minus the Reserve
Percentage. The Eurodollar Rate may also be expressed by the following formula:
Average of London interbank offered rates quoted by
BBA as shown on Eurodollar Rate =Dow Jones Markets Service display page
3750 or appropriate successor
1.00 - Reserve Percentage
"Eurodollar Rate Loan" shall mean an Advance at any time that
bears interest based on the Eurodollar Rate.
"Event of Default" shall mean the occurrence of any of the
events set forth in Article X hereof.
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"Excess Cash Flow" for any fiscal period shall mean (i) EBITDA
of Borrowers on a consolidated basis for such fiscal period minus (ii)
non-financed capital expenditures made by Borrowers on a consolidated basis
during such fiscal period minus (iii) taxes paid in cash by Borrowers on a
consolidated basis during such fiscal period minus (iv) interest paid in cash by
Borrowers on a consolidated basis during such fiscal period minus (v) Senior
Debt Payments (excluding payments of Revolving Advances) paid by Borrowers on a
consolidated basis during such fiscal period.
"Federal Funds Rate" shall mean, for any day, the weighted
average of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers, as published for such
day (or if such day is not a Business Day, for the next preceding Business Day)
by the Federal Reserve Bank of New York, or if such rate is not so published for
any day which is a Business Day, the average of quotations for such day on such
transactions received by PNC from three Federal funds brokers of recognized
standing selected by PNC.
"Fee Letter" shall mean the fee letter dated as of the Closing
Date among Borrowers and PNC.
"First Union Loan Agreement" shall mean the Second Amended and
Restated Credit Agreement among SunSource Inc., its Subsidiaries as set forth on
Schedule 1 as Borrowers and its Subsidiaries as set forth on Schedule 2 as
Guarantors, First Union National Bank, The Bank of Nova Scotia and the other
Banks dated December 31, 1998, as amended.
"Fixed Charge Coverage Ratio" shall mean and include, with
respect to any fiscal period, the ratio of (a) EBITDA minus non-financed
capitalized expenditures made by Borrowers on a consolidated basis during such
period minus taxes paid in cash by Borrowers on a consolidated basis during such
period to (b) all Senior Debt Payments plus, solely for purposes of Section 6.8
hereof, all Subordinated Debt Payments during such period.
"Formula Amount" shall have the meaning set forth in Section
2.1(a).
"GAAP" shall mean generally accepted accounting principles in
the United States of America in effect from time to time.
"General Intangibles" shall mean and include as to each Credit
Party all of such Credit Party's general intangibles, whether now owned or
hereafter acquired including, without limitation, all choses in action, causes
of action, corporate or other business records, inventions, designs, patents,
patent applications, equipment formulations, manufacturing procedures, quality
control procedures, trademarks, service marks, trade secrets, goodwill,
copyrights, design rights, registrations, licenses, franchises, customer lists,
tax refunds, tax refund claims, computer programs, all claims under guaranties,
security interests or other security held by or granted to such Credit Party to
secure payment of any of the Receivables by a Customer all rights of
indemnification and all other intangible property of every kind and nature
(other than Receivables).
"Governmental Body" shall mean any nation or government, any
state or other political subdivision thereof or any entity exercising the
legislative, judicial, regulatory or administrative functions of or pertaining
to a government.
"Guarantor" shall mean A. & H. Bolt, A & H Holding, J.N.
Fauver, SunSource Canada, SunSource Corporate, SunSource Industrial, SunSource
Inventory, SunSource Investment, SunSub A and any other Person who may hereafter
guarantee payment or performance of the whole or any part of the Obligations and
"Guarantors" means collectively all such Persons.
"Guaranty" shall mean any guaranty of the obligations of
Borrowers executed by a Guarantor in favor of Agent for its benefit and for the
ratable benefit of Lenders including, without limitation, pursuant to Section 16
of this Agreement.
"Harding" shall have the meaning set forth in the preamble to
this Agreement and shall extend to all permitted successors and assigns of such
Person.
"Harding Divestiture" shall mean the sale by SunSource of all
or substantially all of the stock and/or assets of Harding and its Subsidiaries
for a purchase price of at least $30,000,000.
"Harding Division" shall mean Harding.
"Harding Progress Billings" shall mean a Receivable of Harding
arising under an installment contract with a general contractor which is due and
payable within sixty (60) days from the date of the initial invoice sent under
such contract.
"Hazardous Discharge" shall have the meaning set forth in
Section 4.19(d) hereof.
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"Hazardous Substance" shall mean, without limitation, any
flammable explosives, radon, radioactive materials, asbestos, urea formaldehyde
foam insulation, polychlorinated biphenyls, petroleum and petroleum products,
methane, hazardous materials, Hazardous Wastes, hazardous or Toxic Substances or
related materials as defined in CERCLA, the Hazardous Materials Transportation
Act, as amended (49 U.S.C. Sections 1801, et seq.), RCRA, Articles 15 and 27 of
the New York State Environmental Conservation Law or any other applicable
Environmental Law and in the regulations adopted pursuant thereto.
"Hazardous Wastes" shall mean all waste materials subject to
regulation under CERCLA, RCRA or applicable state law, and any other applicable
federal, provincial and state laws now in force or hereafter enacted relating to
hazardous waste disposal.
"Hillman" shall have the meaning set forth in the preamble to
this Agreement and shall extend to all permitted successors and assigns of such
Person.
"Hillman Division" shall mean Hillman.
"Indebtedness" of a Person at a particular date shall mean all
obligations of such Person which in accordance with GAAP would be classified
upon a balance sheet as liabilities (except capital stock and surplus earned or
otherwise) and in any event, without limitation by reason of enumeration, shall
include all indebtedness, debt and other similar monetary obligations of such
Person whether direct or guaranteed, and all premiums, if any, due at the
required prepayment dates of such indebtedness, and all indebtedness secured by
a Lien on assets owned by such Person, whether or not such indebtedness actually
shall have been created, assumed or incurred by such Person. Any indebtedness of
such Person resulting from the acquisition by such Person of any assets subject
to any Lien shall be deemed, for the purposes hereof, to be the equivalent of
the creation, assumption and incurring of the indebtedness secured thereby,
whether or not actually so created, assumed or incurred.
"Individual Formula Amount" shall mean at the date of
determination thereof, with respect to each Operating Division an amount equal
to: (a) up to the Receivables Advance Rate of Eligible Receivables of such
Operating Division, plus (b) up to the Inventory Advance Rate of the value of
Eligible Inventory of such Operating Division, minus (c) such reserves as Agent
may reasonably deem proper and necessary from time to time.
"Individual Maximum Revolving Advance Amount" shall mean
$20,000,000 with respect to the Harding Division, $45,000,000 with respect to
the Hillman Division, $30,000,000 with respect to the Kar Division (it being
understood and agreed that no Advances shall be made by Agent or Lenders to A. &
H. Bolt or J.N. Fauver; rather A. & H. Bolt is part of the Kar Division for
purposes of calculating the Advances which can be made solely to Kar) and
$50,000,000 and with respect to the SunSource Division, it being understood and
agreed that no Advances shall be made by Agent or Lenders to J. N. Fauver;
rather J. N. Fauver is part of the SunSource Division for purposes of
calculating Advances which can be made solely to SunSource Technology.
"Ineligible Security" shall mean any security which may not be
underwritten or dealt in by member banks of the Federal Reserve System under
Section 16 of the Banking Act of 1933 (12 U.S.C. Section 24, Seventh), as
amended.
"Interest Period" shall mean the period provided for any
Eurodollar Rate Loan pursuant to Section 2.2(b).
"Inventory" shall mean and include as to each Credit Party all
of such Credit Party's now owned or hereafter acquired goods, merchandise and
other personal property, wherever located, to be furnished under any contract of
service or held for sale or lease, all raw materials, work in process, finished
goods and materials and supplies of any kind, nature or description which are or
might be used or consumed in such Credit Party's business or used in selling or
furnishing such goods, merchandise and other personal property, and all
documents of title or other documents representing them.
"Inventory Advance Rate" shall have the meaning set forth in
Section 2.1(a)(y)(ii) hereof.
"Investment Property" shall mean and include as to each Credit
Party, all of such Credit Party's now owned or hereafter acquired securities
(whether certificated or uncertificated), securities entitlements, securities
accounts, commodities contracts and commodities accounts.
"Issuer" shall mean any Person who issues a Letter of Credit
and/or accepts a draft pursuant to the terms hereof.
"J.N. Fauver" shall mean J.N. Fauver (Canada) Limited, a
corporation subsisting under the laws of the Province of Ontario.
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"Junior Subordinated Debentures" shall mean, collectively, (a)
Amended and Restated Declaration of Trust of SunSource Capital Trust dated and
effective as of September 5, 1997 by the trustees a party thereto ("SunSource
Capital Declaration of Trust"), as amended by the First Amendment to the
SunSource Capital Declaration of Trust dated and effective as of October 16,
1997, (b) Indenture dated as of September 5, 1997 between SunSource Inc. and The
Bank of New York, as Trustee, as amended by the First Supplemental Indenture
dated as of October 16, 1997, (c) the Guarantee Agreement dated as of September
5, 1997 by SunSource Inc. for the benefit of the holders of the Preferred
Securities of SunSource Capital Trust, (d) Contribution Agreement dated as of
July 31, 1997 between SunSource. and Lehman Brothers Holdings Inc., (e) No. 1
SunSource 11.6% Junior Subordinated Debenture due 2027, (f) No. 2 SunSource
11.6% Junior Subordinated Debenture due 2027, (g) 130,449 common securities of
SunSource Capital Trust representing common individual beneficial interests in
the assets of the SunSource Capital Trust designated the 11.6% Trust Common
Securities and (h) 4,217,837 preferred securities of SunSource Capital Trust
representing preferred undivided beneficial interests in the assets of the
SunSource Capital Trust designated the 11.6% Trust Preferred Securities, each as
in effect on the Closing Date.
"Kar" shall have the meaning set forth in the preamble to this
Agreement and shall extend to all permitted successors and assigns of such
Person.
"Kar Division" shall mean, collectively, Kar and A. & H. Bolt.
"Lender" and "Lenders" shall have the meaning ascribed to such
term in the preamble to this Agreement and shall include each Person which
becomes a transferee, successor or assign of any Lender.
"Letter of Credit Fees" shall have the meaning set forth in
Section 3.2.
"Letters of Credit" shall have the meaning set forth in
Section 2.9.
"LIBOR Margin" shall mean (i) two and one-half percent (2.50%)
at any time after the repayment of the principal balance of the Term Loan in
full in cash and (ii) three percent (3.0%) at all other times.
"Lien" shall mean any mortgage, deed of trust, pledge,
hypothecation, assignment, security interest, lien (whether statutory or
otherwise), Charge, claim or encumbrance, or preference, priority or other
security agreement or preferential arrangement held or asserted in respect of
any asset of any kind or nature whatsoever including, without limitation, any
conditional sale or other title retention agreement, any lease having
substantially the same economic effect as any of the foregoing, and the filing
of, or agreement to give, any financing statement under the Uniform Commercial
Code or comparable law of any jurisdiction.
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"Material Adverse Effect" shall mean, as determined in Agent's
reasonable discretion, a material adverse effect on (a) the condition,
operations, assets, business or prospects of the applicable Person or Persons,
(b) any Credit Party's ability to pay the Obligations in accordance with the
terms hereof, or (c) the value of the Collateral, or Agent's Liens on the
Collateral or the priority of any such Lien.
"Maximum Loan Amount" shall mean $155,000,000 (subject to
adjustment pursuant to Section 2.14(c)) less repayments of the Term Loan.
"Maximum Revolving Advance Amount" shall mean $130,000,000
(subject to adjustment pursuant to Section 2.14(c)).
"Mortgage" shall mean collectively: (i) the Mortgage,
Assignment of Rents and Security Agreement dated as of even date herewith, with
Kar as mortgagor and Agent as mortgagee, encumbering a property located in Des
Plains, Illinois; (ii) the Deed of Trust, Assignment of Rents and Security
Agreement dated as of even date herewith, with SunSource Technology as grantor
and Agent as beneficiary, encumbering a property located in Arlington, Texas;
and (iii) the Mortgage, Assignment of Rents and Security Agreement dated as of
even date herewith with A. & H. Bolt as mortgagor and Agent as mortgagee,
encumbering a property located in Windsor, Ontario, Canada.
"Multiemployer Plan" shall mean a "multiemployer plan" as
defined in Sections 3(37) and 4001(a)(3) of ERISA.
"Net Worth" at a particular date, shall mean all amounts which
would be included under shareholders' equity on a balance sheet of the Borrowers
on a consolidated basis determined in accordance with GAAP as at such date.
"Note" shall mean collectively, the Term Note and the
Revolving Credit Note.
"Obligations" " shall mean and include any and all loans,
advances, debts, liabilities, obligations, covenants and duties owing by Credit
Parties under this Agreement and the Other Documents to Lenders or Agent or to
any other direct or indirect subsidiary or affiliate of Agent or any Lender of
any kind or nature, present or future (including, without limitation, any
interest accruing thereon after maturity, or after the filing of any petition in
bankruptcy, or the commencement of any insolvency, reorganization or like
proceeding relating to any Credit Party, whether or not a claim for post-filing
or post-petition interest is allowed in such proceeding), whether or not
evidenced by any note, guaranty or other instrument, whether arising under any
agreement, instrument or document, (including, without limitation, this
Agreement and the Other Documents) whether or not for the payment of money,
whether arising by reason of an extension of credit, opening of a letter of
credit, loan, equipment lease or guarantee, under any interest or currency swap,
future, option or other similar agreement, or in any other manner, whether
arising out of overdrafts or deposit or other accounts or electronic funds
transfers (whether through automated clearing houses or otherwise) or out of the
Agent's or any Lenders non-receipt of or inability to collect funds or otherwise
not being made whole in connection with depository transfer check or other
similar arrangements, whether direct or indirect (including those acquired by
assignment or participation), absolute or contingent, joint or several, due or
to become due, now existing or hereafter arising, contractual or tortious,
liquidated or unliquidated arising under this Agreement, the Other Documents and
any amendments, extensions, renewals or increases and all costs and expenses of
Agent and any Lender incurred in the documentation, negotiation, modification,
enforcement, collection or otherwise in connection with any of the foregoing,
including but not limited to reasonable attorneys' fees and expenses and all
obligations of any Credit Party to Agent or Lenders to perform acts or refrain
from taking any action.
"Operating Division " shall mean as applicable, the Harding
Division, Hillman Division, Kar Division or SunSource Division.
"Original Owners" shall mean, with respect to each Credit
Party, the Person(s) set forth on Schedule 1.2B hereto, and shall also be deemed
to include each other Credit Party.
"Other Documents" shall mean the Note, the Pledge Agreement,
the Questionnaire, any Guaranty, and any and all other agreements, instruments
and documents, including, without limitation, guaranties, pledges, powers of
attorney, consents, and all other writings heretofore, now or hereafter executed
by any Credit Party and/or delivered to Agent or any Lender in respect of the
transactions contemplated by this Agreement.
"Parent" of any Person shall mean a corporation or other
entity owning, directly or indirectly at least 50% of the shares of stock or
other ownership interests having ordinary voting power to elect a majority of
the directors of the Person, or other Persons performing similar functions for
any such Person.
"Participant" shall mean each Person who shall be granted the
right by any Lender to participate in any of the Advances and who shall have
entered into a participation agreement in form and substance satisfactory to
such Lender.
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"Payment Office" shall mean initially Two Tower Center
Boulevard, East Brunswick, New Jersey 08816; thereafter, such other office of
Agent, if any, which it may designate by notice to Borrowing Agent and to each
Lender to be the Payment Office.
"PBGC" shall mean the Pension Benefit Guaranty Corporation.
"Pension Plan" shall mean any Plan subject to Title IV of
ERISA (other than a Multiemployer Plan), the funding requirements of which under
ERISA Section 302 or Code Section 412 are the responsibility of any Credit Party
or any member of the Controlled Group.
"Permitted Encumbrances" shall mean (a) Liens in favor of
Agent for the benefit of Agent and Lenders; (b) Liens for taxes, assessments or
other governmental charges not delinquent or being contested in good faith and
by appropriate proceedings and with respect to which proper reserves have been
taken by Credit Parties; provided, that, the Lien shall have no effect on the
priority of the Liens in favor of Agent or the value of the assets in which
Agent has such a Lien and a stay of enforcement of any such Lien shall be in
effect; (c) Liens securing Indebtedness disclosed in the financial statements
referred to in Section 5.5, the existence of which Agent has consented to in
writing; (d) deposits or pledges to secure obligations under worker's
compensation, social security or similar laws, or under unemployment insurance;
(e) deposits or pledges to secure bids, tenders, contracts (other than contracts
for the payment of money), leases, statutory obligations, surety and appeal
bonds and other obligations of like nature arising in the ordinary course of any
Credit Party's business; (f) judgment Liens that have been stayed or bonded and
mechanics', workers', materialmen's or other like Liens arising in the ordinary
course of any Credit Party's business with respect to obligations which are not
due or which are being contested in good faith by the applicable Credit Party;
(g) Liens placed upon fixed assets hereafter acquired to secure a portion of the
purchase price thereof, provided that (x) any such lien shall not encumber any
other property of the Credit Parties and (y) the aggregate amount of
Indebtedness secured by such Liens incurred as a result of such purchases during
any fiscal year shall not exceed the amount provided for in Section 7.6; and (h)
Liens disclosed on Schedule 1.2.
"Person" shall mean any individual, sole proprietorship,
partnership, corporation, business trust, joint stock company, trust,
unincorporated organization, association, limited liability company,
institution, public benefit corporation, joint venture, entity or government
(whether federal, provincial, state, county, city, municipal or otherwise,
including any instrumentality, division, agency, body or department thereof).
"Plan" shall mean any employee benefit plan within the meaning
of Section 3(3) of ERISA, maintained for employees of Credit Parties or any
member of the Controlled Group or any such Plan to which any Credit Party or any
member of the Controlled Group is required to contribute on behalf of any of its
employees.
"Pledge Agreement" shall mean, collectively, the Pledge
Agreements each dated as of the Closing Date made by each of SunSource,
SunSource Investment, SunSub A, SunSource Industrial, Kar and SunSource Canada
in favor of Agent.
"Pro Forma Balance Sheet" shall have the meaning set forth in
Section 5.5(a) hereof.
"Pro Forma Financial Statements" shall have the meaning set
forth in Section 5.5(b) hereof.
"Projections" shall have the meaning set forth in Section
5.5(b) hereof.
"Purchasing Lender" shall have the meaning set forth in
Section 16.3 hereof.
"Questionnaire" shall mean the Documentation Information
Questionnaire and the responses thereto provided by Credit Parties and delivered
to Agent.
"RCRA" shall mean the Resource Conservation and Recovery Act,
42 U.S.C.ss.ss.6901 et seq., as same may be amended from time to time.
"Real Property" shall mean all of each Credit Party's right,
title and interest in and to the owned and leased premises identified on
Schedule 4.19 hereto.
"Receivables" shall mean and include, as to each Credit Party,
all of such Credit Party's accounts, contract rights, instruments (including
those evidencing indebtedness owed to Credit Parties by their Affiliates),
documents, chattel paper, general intangibles relating to accounts, drafts and
acceptances, and all other forms of obligations owing to such Credit Party
arising out of or in connection with the sale or lease of Inventory or the
rendition of services, all guarantees and other security therefor, whether
secured or unsecured, now existing or hereafter created, and whether or not
specifically sold or assigned to Agent hereunder.
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"Receivables Advance Rate" shall have the meaning set forth in
Section 2.1(a)(y)(i) hereof.
"Release" shall have the meaning set forth in Section
5.7(c)(i) hereof.
"Reportable Event" shall mean a reportable event described in
Section 4043(b) of ERISA or the regulations promulgated thereunder, other than a
reportable event as to which the provision of 30 days' notice to the PBGC is
waived under applicable regulations.
"Required Lenders" shall mean Lenders holding at least
sixty-six and two-thirds percent (66 2/3%) of the Advances and, if no Advances
are outstanding, shall mean Lenders holding sixty-six and two-thirds percent (66
2/3%) of the Commitment Percentages.
"Reserve Percentage" shall mean the maximum effective
percentage in effect on any day as prescribed by the Board of Governors of the
Federal Reserve System (or any successor) for determining the reserve
requirements (including, without limitation, supplemental, marginal and
emergency reserve requirements) with respect to eurocurrency funding.
"Revolving Advances" shall mean Advances made other than
Letters of Credit and the Term Loan.
"Revolving Credit Note" shall mean, collectively, the
promissory notes referred to in Section 2.1(a) hereof.
"Revolving Interest Rate" shall mean an interest rate per
annum equal to (a) the Alternate Base Rate with respect to Domestic Rate Loans,
and (b) the sum of the Eurodollar Rate plus the LIBOR Margin with respect to
Eurodollar Rate Loans.
"Section 20 Subsidiary" shall mean the Subsidiary of the bank
holding company controlling PNC, which Subsidiary has been granted authority by
the Federal Reserve Board to underwrite and deal in certain Ineligible
Securities.
"Senior Debt Payments" shall mean and include all cash
actually expended by Borrowers on a consolidated basis to make (a) interest
payments on any Advances hereunder, plus, (b) scheduled principal payments on
the Term Loan, plus (c) payments for all fees, commissions and charges set forth
herein and with respect to any Advances, plus (d) capitalized lease payments,
plus (e) payments with respect to any other Indebtedness for borrowed money
including, without limitation, the Indebtedness under the Junior Subordinated
Debentures.
"Senior Notes" shall mean, collectively, (a) the Amended and
Restated Note Purchase Agreement dated as of December 31, 1998 by and among
SunSource and its Subsidiaries set forth on schedule 1 thereto, as obligors, and
its Subsidiaries set forth on schedule 2 thereto, as Guarantors and (b) all
notes, agreements, documents and instruments executed in connection therewith,
each as in effect on the Closing Date.
"Settlement Date" shall mean the Closing Date and thereafter
Wednesday of each week unless such day is not a Business Day in which case it
shall be the next succeeding Business Day.
"Subordinated Debt Payments" shall mean and include all cash
actually expended to make payments of principal and interest on the Junior
Subordinated Note.
"Subsidiary" shall mean a corporation or other entity of whose
shares of stock or other ownership interests having ordinary voting power (other
than stock or other ownership interests having such power only by reason of the
happening of a contingency) to elect a majority of the directors of such
corporation, or other Persons performing similar functions for such entity, are
owned, directly or indirectly, by such Person.
"Subsidiary Stock" shall mean all of the issued and
outstanding shares of stock owned by any Borrower or Guarantor of any Subsidiary
of such Borrower or Guarantor, as set forth on Schedule 1.2A hereto.
"SunSource" shall have the meaning set forth in the preamble
to this Agreement and shall extend to all permitted successors and assigns of
such Person.
"SunSource Canada" shall mean SunSource Canada Investment
Company, an unlimited liability company subsisting under the laws of the
Province of Nova Scotia.
"SunSource Capital Trust" shall mean SunSource Capital Trust,
a Delaware statutory business trust.
"SunSource Corporate" shall mean SunSource Corporate Group,
Inc.
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"SunSource Division" shall mean, collectively, SunSource, J.N.
Fauver and SunSource Technology.
"SunSource Industrial" shall mean SunSource Industrial
Services Company, Inc., a Delaware
corporation.
"SunSource Inventory" shall mean SunSource Inventory
Management Company, Inc. a Delaware corporation.
"SunSource Investment" shall mean SunSource Investment
Company, Inc., a Delaware corporation.
"SunSource Technology" shall have the meaning set forth in the
preamble to this Agreement and shall extend to all permitted successors and
assigns of such Person.
"SunSub A" shall mean SunSub A Inc., a Delaware corporation.
"Tangible Net Worth" shall mean, at a particular date, (a) the
aggregate amount of all assets of Borrowers on a consolidated basis as may be
properly classified as such in accordance with GAAP consistently applied
excluding such other assets as are properly classified as intangible assets
under GAAP, less (b) the aggregate amount of all liabilities of the Borrowers on
a consolidated basis.
"Term" shall have the meaning set forth in Section 13.1
hereof.
"Term Loan" shall mean the Advances made pursuant to Section
2.4 hereof.
"Term Loan Rate" shall mean an interest rate per annum equal
to (a) the Alternate Base Rate with respect to Domestic Rate Loans, (b) the sum
of the Eurodollar Rate plus the LIBOR Margin with respect to Eurodollar Rate
Loans.
"Term Note" shall mean, collectively, the promissory notes
described in Section 2.4 hereof.
"Termination Event" shall mean (i) a Reportable Event with
respect to any Pension Plan or Multiemployer Plan; (ii) the withdrawal of any
Credit Party or any member of the Controlled Group from a Pension Plan or
Multiemployer Plan during a plan year in which such entity was a "substantial
employer" as defined in Section 4001(a)(2) of ERISA; (iii) the providing of
notice of intent to terminate a Pension Plan in a distress termination described
in Section 4041(c) of ERISA; (iv) the institution by the PBGC of proceedings to
terminate a Plan or notice of same regarding a Multiemployer Plan; (v) any event
or condition (a) which constitutes grounds under Section 4042 of ERISA for the
termination of, or the appointment of a trustee to administer, any Pension Plan
or Multiemployer Plan, or (b) that may reasonably be expected to result in
termination of a Multiemployer Plan pursuant to Section 4041A of ERISA; or (vi)
the partial or complete withdrawal within the meaning of Sections 4203 and 4205
of ERISA, of any Credit Party or any member of the Controlled Group from a
Multiemployer Plan.
"Toxic Substance" shall mean and include any material present
on the Real Property which has been shown to have significant adverse effect on
human health or which is subject to regulation under the Toxic Substances
Control Act (TSCA), 15 U.S.C. ss.ss. 2601 et seq., applicable state law, or any
other applicable federal, provincial or state laws now in force or hereafter
enacted relating to toxic substances. "Toxic Substance" includes but is not
limited to asbestos, polychlorinated biphenyls (PCBs) and lead-based paints.
"Transactions" shall have the meaning set forth in Section 5.5
hereof.
"Transferee" shall have the meaning set forth in Section
16.3(b) hereof.
"Undrawn Availability" at a particular date shall mean an
amount equal to (a) the lesser of (i) the Formula Amount or (ii) the Maximum
Revolving Advance Amount, minus (b) the sum of (i) the outstanding amount of
Advances (other than the Term Loan) plus (ii) all amounts due and owing to
Borrowers' trade creditors which are outstanding beyond normal trade terms, plus
(iii) fees and expenses for which Borrowers are liable but which have not been
paid or charged to Borrowers' Account.
"Week" shall mean the time period commencing with the opening
of business on a Wednesday and ending on the end of business the following
Tuesday.
1.3. Uniform Commercial Code Terms. All terms used herein and defined
in the Uniform Commercial Code as adopted in the State of New York shall have
the meaning given therein unless otherwise defined herein.
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1.4. Certain Matters of Construction. The terms "herein", "hereof" and
"hereunder" and other words of similar import refer to this Agreement as a whole
and not to any particular section, paragraph or subdivision. Any pronoun used
shall be deemed to cover all genders. Wherever appropriate in the context, terms
used herein in the singular also include the plural and vice versa. All
references to statutes and related regulations shall include any amendments of
same and any successor statutes and regulations. Unless otherwise provided, all
references to any instruments or agreements to which Agent is a party,
including, without limitation, references to any of the Other Documents, shall
include any and all modifications or amendments thereto and any and all
extensions or renewals thereof.
II. ADVANCES, PAYMENTS.
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2.1. (a) Revolving Advances. Subject to the terms and conditions set
forth in this Agreement including, without limitation, Section 2.1(b), each
Lender, severally and not jointly, will make Revolving Advances to Borrowers in
aggregate amounts outstanding at any time equal to such Lender's Commitment
Percentage of the lesser of (x) the Maximum Revolving Advance Amount less the
aggregate amount of outstanding Letters of Credit or (y) an amount equal to the
sum of:
(i) up to 85%, subject to the provisions of
Section 2.1(c) hereof ("Receivables Advance Rate"),
of Eligible Receivables (the amount to be advanced
against Eligible Receivables consisting of Harding
Progress Billings shall not exceed $5,000,000 at any
time and from time to time), plus
(ii) up to the lesser of (A) 60%, subject to
the provisions of Section 2.1(c) hereof ("Inventory
Advance Rate"), of the value of the Eligible
Inventory (the Receivables Advance Rate and the
Inventory Advance Rate shall be referred to
collectively, as the "Advance Rates") or (B)
$65,000,000 in the aggregate at any one time, minus
(iii) an amount equal to the sum of (x) the
aggregate amount of outstanding standby Letters of
Credit plus, (y) the product of (I) the aggregate
amount of outstanding documentary Letters of Credit
multiplied by (II) 1 minus the Inventory Advance
Rate, minus
(iv) such reserves as Agent may reasonably
deem proper and necessary from time to time.
The amount derived from the sum of (x) Sections 2.1(a)(y)(i) and (ii)
minus (y) Section 2.1 (a)(y)(iv) at any time and from time to time shall be
referred to as the "Formula Amount". The Revolving Advances shall be evidenced
by one or more secured promissory notes (collectively, the "Revolving Credit
Note") substantially in the form attached hereto as Exhibit 2.1(a).
(b) Individual Revolving Advances. Each Lender, severally and
not jointly, will make Revolving Advances to each Operating Division in
aggregate amounts outstanding at any time not greater than such Lender's
Commitment Percentage of the lesser of (x) such Operating Division's Individual
Maximum Revolving Advance Amount less the aggregate amount of outstanding
Letters of Credit applicable to such Operating Division or (y) such Operating
Division's Individual Formula Amount less the aggregate amount of outstanding
Letters of Credit applicable to such Operating Division.
(c) Discretionary Rights. The Advance Rates may be increased
or decreased by Agent at any time and from time to time in the exercise of its
reasonable discretion. Each Borrower consents to any such increases or decreases
and acknowledges that decreasing the Advance Rates or increasing the reserves
may limit or restrict Advances requested by Borrowing Agent.
2.2. Procedure for Borrowing Advances.
(a) Borrowing Agent on behalf of any Borrower may notify Agent
prior to 11:00 a.m. on a Business Day of a Borrower's request to incur, on that
day, a Revolving Advance hereunder. Should any amount required to be paid as
interest hereunder, or as fees or other charges under this Agreement or any
other agreement with Agent or Lenders, or with respect to any other Obligation,
become due, same shall be deemed a request for a Revolving Advance as of the
date such payment is due, in the amount required to pay in full such interest,
fee, charge or Obligation under this Agreement or any other agreement with Agent
or Lenders, and such request shall be irrevocable.
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(b) Notwithstanding the provisions of (a) above, in the event
any Borrower desires to obtain a Eurodollar Rate Loan, Borrowing Agent shall
give Agent at least three (3) Business Days' prior written notice, specifying
(i) the date of the proposed borrowing (which shall be a Business Day), (ii) the
type of borrowing and the amount on the date of such Advance to be borrowed,
which amount shall be in a minimum amount of $1,000,000 and in integral
multiples of $1,000,000 thereafter, and (iii) the duration of the first Interest
Period therefor. Interest Periods for Eurodollar Rate Loans shall be for one,
two, three or six months; provided, if an Interest Period would end on a day
that is not a Business Day, it shall end on the next succeeding Business Day
unless such day falls in the next succeeding calendar month in which case the
Interest Period shall end on the next preceding Business Day. No Eurodollar Rate
Loan shall be made available to Borrower during the continuance of a Default or
an Event of Default.
(c) Each Interest Period of a Eurodollar Rate Loan shall
commence on the date such Eurodollar Rate Loan is made and shall end on such
date as Borrowing Agent may elect as set forth in subsection (b)(iii) above
provided that the exact length of each Interest Period shall be determined in
accordance with the practice of the interbank market for offshore Dollar
deposits and no Interest Period shall end after the last day of the Term.
Borrowing Agent shall elect the initial Interest Period applicable to a
Eurodollar Rate Loan by its notice of borrowing given to Agent pursuant to
Section 2.2(b) or by its notice of conversion given to Agent pursuant to Section
2.2(d), as the case may be. Borrowing Agent shall elect the duration of each
succeeding Interest Period by giving irrevocable written notice to Agent of such
duration not less than three (3) Business Days prior to the last day of the then
current Interest Period applicable to such Eurodollar Rate Loan. If Agent does
not receive timely notice of the Interest Period elected by Borrowing Agent,
Borrowers shall be deemed to have elected to convert to a Domestic Rate Loan
subject to Section 2.2(d) hereinbelow.
(d) Provided that no Event of Default shall have occurred and
be continuing, any Borrower may, on the last Business Day of the then current
Interest Period applicable to any outstanding Eurodollar Rate Loan, or on any
Business Day with respect to Domestic Rate Loans, convert any such loan into a
loan of another type in the same aggregate principal amount provided that any
conversion of a Eurodollar Rate Loan shall be made only on the last Business Day
of the then current Interest Period applicable to such Eurodollar Rate Loan. If
a Borrower desires to convert a loan, Borrowing Agent shall give Agent not less
than three (3) Business Days' prior written notice to convert from a Domestic
Rate Loan to a Eurodollar Rate Loan or one (1) Business Day's prior written
notice to convert from a Eurodollar Rate Loan to a Domestic Rate Loan,
specifying the date of such conversion, the loans to be converted and if the
conversion is from a Domestic Rate Loan to any other type of loan, the duration
of the first Interest Period therefor. After giving effect to each such
conversion, there shall not be outstanding more than eight (8) Eurodollar Rate
Loans, in the aggregate.
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(e) At its option and upon three (3) Business Days' prior
written notice, any Borrower may prepay the Eurodollar Rate Loans in whole at
any time or in part from time to time, without premium or penalty, but with
accrued interest on the principal being prepaid to the date of such repayment.
Such Borrower shall specify the date of prepayment of Advances which are
Eurodollar Rate Loans and the amount of such prepayment. In the event that any
prepayment of a Eurodollar Rate Loan is required or permitted on a date other
than the last Business Day of the then current Interest Period with respect
thereto, such Borrower shall indemnify Agent and Lenders therefor in accordance
with Section 2.2(f) hereof.
(f) Each Borrower shall indemnify Agent and Lenders and hold
Agent and Lenders harmless from and against any and all losses or expenses that
Agent and Lenders may sustain or incur as a consequence of any prepayment,
conversion of or any default by any Borrower in the payment of the principal of
or interest on any Eurodollar Rate Loan or failure by any Borrower to complete a
borrowing of, a prepayment of or conversion of or to a Eurodollar Rate Loan
after notice thereof has been given, including, but not limited to, any interest
payable by Agent or Lenders to lenders of funds obtained by it in order to make
or maintain its Eurodollar Rate Loans hereunder. A certificate as to any
additional amounts payable pursuant to the foregoing sentence submitted by Agent
or any Lender to Borrowing Agent shall be conclusive absent manifest error.
(g) Notwithstanding any other provision hereof, if any
applicable law, treaty, regulation or directive, or any change therein or in the
interpretation or application thereof, shall make it unlawful for any Lender
(for purposes of this subsection (g), the term "Lender" shall include any Lender
and the office or branch where any Lender or any corporation or bank controlling
such Lender makes or maintains any Eurodollar Rate Loans) to make or maintain
its Eurodollar Rate Loans, the obligation of Lenders to make Eurodollar Rate
Loans hereunder shall forthwith be cancelled and Borrowers shall, if any
affected Eurodollar Rate Loans are then outstanding, promptly upon request from
Agent, either pay all such affected Eurodollar Rate Loans or convert such
affected Eurodollar Rate Loans into loans of another type. If any such payment
or conversion of any Eurodollar Rate Loan is made on a day that is not the last
day of the Interest Period applicable to such Eurodollar Rate Loan, Borrowers
shall pay Agent, upon Agent's request, such amount or amounts as may be
necessary to compensate Lenders for any loss or expense sustained or incurred by
Lenders in respect of such Eurodollar Rate Loan as a result of such payment or
conversion, including (but not limited to) any interest or other amounts payable
by Lenders to lenders of funds obtained by Lenders in order to make or maintain
such Eurodollar Rate Loan. A certificate as to any additional amounts payable
pursuant to the foregoing sentence submitted by Lenders to Borrowing Agent shall
be conclusive absent manifest error.
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2.3. Disbursement of Advance Proceeds. All Advances shall be disbursed
from whichever office or other place Agent may designate from time to time and,
together with any and all other Obligations of Borrowers to Agent or Lenders,
shall be charged to Borrowers' Account on Agent's books. During the Term,
Borrowers may use the Revolving Advances by borrowing, prepaying and
reborrowing, all in accordance with the terms and conditions hereof. The
proceeds of each Revolving Advance requested by Borrowers or deemed to have been
requested by Borrowers under Section 2.2(a) hereof shall, with respect to
requested Revolving Advances to the extent Lenders make such Revolving Advances,
be made available to the applicable Borrower on the day so requested by way of
credit to such Borrower's operating account at PNC, or such other bank as
Borrowing Agent may designate following notification to Agent, in immediately
available federal funds or other immediately available funds or, with respect to
Revolving Advances deemed to have been requested by any Borrower, be disbursed
to Agent to be applied to the outstanding Obligations giving rise to such deemed
request.
2.4. Term Loan. Subject to the terms and conditions of this Agreement,
each Lender, severally and not jointly, will make a Term Loan to Borrowers in
the sum equal to such Lender's Commitment Percentage of $25,000,000. The Term
Loan shall be advanced on the Closing Date and shall be, with respect to
principal, payable as follows, subject to acceleration upon the occurrence of an
Event of Default under this Agreement or termination of this Agreement: equal
quarterly installments of $1,250,000 each commencing on April 1, 2000 and on the
first day of each July, October, January and April thereafter until December 14,
2004 when the entire unpaid principal balance of the Term Loan shall be due and
payable. The Term Loan shall be evidenced by one or more secured promissory
notes (collectively, the "Term Note") in substantially the form attached hereto
as Exhibit 2.4.
2.5. Maximum Advances. The aggregate balance of Revolving Advances
outstanding at any time shall not exceed the lesser of (a) Maximum Revolving
Advance Amount or (b) the Formula Amount.
2.6. Repayment of Advances.
(a) The Revolving Advances shall be due and payable in full on
the last day of the Term subject to earlier prepayment as herein provided. The
Term Loan shall be due and payable as provided in Section 2.4 hereof and in the
Term Note.
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(b) Each Borrower recognizes that the amounts evidenced by
checks, notes, drafts or any other items of payment relating to and/or proceeds
of Collateral may not be collectible by Agent on the date received. In
consideration of Agent's agreement to conditionally credit Borrowers' Account as
of the Business Day on which Agent receives those items of payment, each
Borrower agrees that, in computing the charges under this Agreement, all items
of payment shall be deemed applied by Agent on account of the Obligations one
(1) Business Day after the Business Day Agent receives such payments via wire
transfer or electronic depository check. Agent is not, however, required to
credit Borrowers' Account for the amount of any item of payment which is not a
wire transfer or electric depository check and unsatisfactory to Agent until
such item of payment has cleared and become good funds. Agent may charge
Borrowers' Account for the amount of any item of payment which is returned to
Agent unpaid.
(c) All payments of principal, interest and other amounts
payable hereunder, or under any of the Other Documents shall be made to Agent at
the Payment Office not later than 1:00 P.M. (New York Time) on the due date
therefor in lawful money of the United States of America in federal funds or
other funds immediately available to Agent. Agent shall have the right to
effectuate payment on any and all Obligations due and owing hereunder by
charging Borrowers' Account or by making Advances as provided in Section 2.2
hereof.
(d) Credit Parties shall pay principal, interest, and all
other amounts payable hereunder, or under any related agreement, without any
deduction whatsoever, including, but not limited to, any deduction for any
setoff or counterclaim.
2.7. Repayment of Excess Advances. The aggregate balance of Advances
outstanding at any time in excess of the maximum amount of Advances permitted
hereunder shall be immediately due and payable without the necessity of any
demand, at the Payment Office, whether or not a Default or Event of Default has
occurred.
2.8. Statement of Account. Agent shall maintain, in accordance with its
customary procedures, a loan account ("Borrowers' Account") in the name of
Borrowers on a collective basis in which shall be recorded the date and amount
of each Advance made by Agent and the date and amount of each payment in respect
thereof; provided, however, the failure by Agent to record the date and amount
of any Advance shall not adversely affect Agent or any Lender. Each month, Agent
shall send to Borrowing Agent a statement showing the accounting for the
Advances made, payments made or credited in respect thereof, and other
transactions between Agent and Borrowers, during such month. The monthly
statements shall be deemed correct and binding upon Borrowers in the absence of
manifest error and shall constitute an account stated between Lenders and
Borrowers unless Agent receives a written statement of Borrowers' specific
exceptions thereto within thirty (30) days after such statement is received by
Borrowing Agent. The records of Agent with respect to the loan account shall be
conclusive evidence absent manifest error of the amounts of Advances and other
charges thereto and of payments applicable thereto.
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2.9. Letters of Credit. Subject to the terms and conditions hereof,
Agent shall issue or cause the issuance of Letters of Credit ("Letters of
Credit") on behalf of any Borrower; provided, however, that Agent will not be
required to issue or cause to be issued any Letters of Credit to the extent that
the face amount of such Letters of Credit would then cause the sum of (i) the
outstanding Revolving Advances plus (ii) outstanding Letters of Credit to exceed
the lesser of (x) the Maximum Revolving Advance Amount or (y) the Formula
Amount; provided, further, however, that Agent will not be required to issue or
cause to be issued any Letters of Credit to the extent that the face amount of
such Letters of Credit issued for an Operating Division of such Borrower would
then cause the sum of (i) the outstanding Revolving Advances to the Operating
Division of such Borrower plus (ii) the outstanding Letters of Credit issued or
caused to be issued on behalf of the Operating Division of such Borrower to
exceed the lesser of (x) such Borrower's Operating Division's Individual Maximum
Revolving Advance Amount or (y) such Borrower's Operating Division's Individual
Formula Amount. The maximum undrawn amount of outstanding Letters of Credit
shall not exceed $15,000,000 in the aggregate at any time. All disbursements or
payments related to Letters of Credit shall be deemed to be Domestic Rate Loans
consisting of Revolving Advances and shall bear interest at the Revolving
Interest Rate for Domestic Rate Loans; Letters of Credit that have not been
drawn upon shall not bear interest.
2.10. Issuance of Letters of Credit.
(a) Borrowing Agent, on behalf of Borrowers, may request Agent
to issue or cause the issuance of a Letter of Credit by delivering to Agent at
the Payment Office, Agent's form of Letter of Credit Application (the "Letter of
Credit Application") completed to the satisfaction of Agent; and, such other
certificates, documents and other papers and information as Agent may reasonably
request. Borrowing Agent, on behalf of Borrowers, also has the right to give
instructions and make agreements with respect to any application, any applicable
letter of credit and security agreement, any applicable letter of credit
reimbursement agreement and/or any other applicable agreement, any letter of
credit and the disposition of documents, disposition of any unutilized funds,
and to agree with Agent upon any amendment, extension or renewal of any Letter
of Credit.
(b) Each Letter of Credit shall, among other things, (i)
provide for the payment of sight drafts or acceptances of usance drafts when
presented for honor thereunder in accordance with the terms thereof and when
accompanied by the documents described therein and (ii) have an expiry date not
later than six (6) months after such Letter of Credit's date of issuance and in
no event later than the last day of the Term. Each Letter of Credit shall be
subject to the Uniform Customs and Practice for Documentary Credits (1993
Revision), International Chamber of Commerce Publication No. 500, and any
amendments or revision thereof adhered to by the Issuer and, to the extent not
inconsistent therewith, the laws of the State of New York.
(c) Agent shall use its reasonable efforts to notify Lenders
of the request by Borrowing Agent for a Letter of Credit hereunder.
2.11. Requirements For Issuance of Letters of Credit.
(a) In connection with the issuance of any Letter of Credit
Borrowers shall indemnify, save and hold Agent, each Lender and each Issuer
harmless from any loss, cost, expense or liability, including, without
limitation, payments made by Agent, any Lender or any Issuer and expenses and
reasonable attorneys' fees incurred by Agent, any Lender or Issuer arising out
of, or in connection with, any Letter of Credit to be issued or created for any
Borrower. Borrowers shall be bound by Agent's or any Issuer's regulations and
good faith interpretations of any Letter of Credit issued or created for
Borrowers' Account, although this interpretation may be different from its own;
and, neither Agent, nor any Lender, nor any Issuer nor any of their
correspondents shall be liable for any error, negligence, or mistakes, whether
of omission or commission, in following Borrowing Agent's or any Borrower's
instructions or those contained in any Letter of Credit or of any modifications,
amendments or supplements thereto or in issuing or paying any Letter of Credit,
except for Agent's, any Lender's, any Issuer's or such correspondents' willful
misconduct or gross (not mere) negligence.
(b) Borrowing Agent shall authorize and direct any Issuer to
name the applicable Borrower as the "Applicant" or "Account Party" of each
Letter of Credit. If Agent is not the Issuer of any Letter of Credit, Borrowing
Agent shall authorize and direct the Issuer to deliver to Agent all instruments,
documents, and other writings and property received by the Issuer pursuant to
the Letter of Credit and to accept and rely upon Agent's instructions and
agreements with respect to all matters arising in connection with the Letter of
Credit, the application therefor or any acceptance therefor.
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(c) In connection with all Letters of Credit issued or caused
to be issued by Agent under this Agreement, each Borrower hereby appoints Agent,
or its designee, as its attorney, with full power and authority following an
Event of Default and while such Event of Default is continuing, (i) to sign
and/or endorse such Borrower's name upon any warehouse or other receipts, letter
of credit applications and acceptances; (ii) to sign such Borrower's name on
bills of lading; (iii) to clear Inventory through the United States of America
Customs Department ("Customs") in the name of such Borrower or Agent or Agent's
designee, and to sign and deliver to Customs officials powers of attorney in the
name of such Borrower for such purpose; and (iv) to complete in such Borrower's
name or Agent's, or in the name of Agent's designee, any order, sale or
transaction, obtain the necessary documents in connection therewith, and collect
the proceeds thereof. Neither Agent nor its attorneys will be liable for any
acts or omissions nor for any error of judgment or mistakes of fact or law,
except for Agent's or its attorney's willful misconduct. This power, being
coupled with an interest, is irrevocable as long as any Letters of Credit remain
outstanding.
(d) Each Lender shall to the extent of the percentage amount
equal to the product of such Lender's Commitment Percentage times the aggregate
amount of all unreimbursed reimbursement obligations arising from disbursements
made or obligations incurred with respect to the Letters of Credit be deemed to
have irrevocably purchased an undivided participation in each such unreimbursed
reimbursement obligation. In the event that at the time a disbursement is made
the unpaid balance of Revolving Advances exceeds or would exceed, with the
making of such disbursement, the lesser of the Maximum Revolving Advance Amount
or the Formula Amount, and such disbursement is not reimbursed by Borrowers
within two (2) Business Days, Agent shall promptly notify each Lender and upon
Agent's demand each Lender shall pay to Agent such Lender's proportionate share
of such unreimbursed disbursement together with such Lender's proportionate
share of Agent's unreimbursed costs and expenses relating to such unreimbursed
disbursement. Upon receipt by Agent of a repayment from any Borrower of any
amount disbursed by Agent for which Agent had already been reimbursed by
Lenders, Agent shall deliver to each Lender that Lender's pro rata share of such
repayment. Each Lender's participation commitment shall continue until the last
to occur of any of the following events: (A) Agent ceases to be obligated to
issue or cause to be issued Letters of Credit hereunder; (B) no Letter of Credit
issued hereunder remains outstanding and uncancelled or (C) all Persons (other
than the applicable Borrower) have been fully reimbursed for all payments made
under or relating to Letters of Credit.
2.12. Additional Payments. Any sums expended by Agent or any Lender due
to any Borrower's failure to perform or comply with its obligations under this
Agreement or any Other Document including, without limitation, any Borrower's
obligations under Sections 4.2, 4.4, 4.12, 4.13, 4.14 and 6.1 hereof, may be
charged to Borrowers' Account as a Revolving Advance and added to the
Obligations.
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2.13. Manner of Borrowing and Payment.
(a) Each borrowing of Revolving Advances shall be advanced
according to the applicable Commitment Percentages of Lenders. The Term Loan
shall be advanced according to the Commitment Percentages of Lenders.
(b) Each payment (including each prepayment) by Borrowers on
account of the principal of and interest on the Revolving Advances, shall be
applied to the Revolving Advances pro rata according to the applicable
Commitment Percentages of Lenders. Each payment (including each prepayment) by
Borrowers on account of the principal of and interest on the Term Note, shall be
made from or to, or applied to that portion of the Term Loan evidenced by the
Term Note pro rata according to the Commitment Percentages of Lenders. Except as
expressly provided herein, all payments (including prepayments) to be made by
any Borrower on account of principal, interest and fees shall be made without
set off or counterclaim and shall be made to Agent on behalf of the Lenders to
the Payment Office, in each case on or prior to 1:00 P.M., New York time, in
Dollars and in immediately available funds.
(c) (i) Notwithstanding anything to the contrary contained in
Sections 2.13(a) and (b) hereof, commencing with the first Business Day
following the Closing Date, each borrowing of Revolving Advances shall be
advanced by Agent and each payment by any Borrower on account of Revolving
Advances shall be applied first to those Revolving Advances advanced by Agent.
On or before 1:00 P.M., New York time, on each Settlement Date commencing with
the first Settlement Date following the Closing Date, Agent and Lenders shall
make certain payments as follows: (I) if the aggregate amount of new Revolving
Advances made by Agent during the preceding Week (if any) exceeds the aggregate
amount of repayments applied to outstanding Revolving Advances during such
preceding Week, then each Lender shall provide Agent with funds in an amount
equal to its applicable Commitment Percentage of the difference between (w) such
Revolving Advances and (x) such repayments and (II) if the aggregate amount of
repayments applied to outstanding Revolving Advances during such Week exceeds
the aggregate amount of new Revolving Advances made during such Week, then Agent
shall provide each Lender with funds in an amount equal to its applicable
Commitment Percentage of the difference between (y) such repayments and (z) such
Revolving Advances.
(ii) Each Lender shall be entitled to earn interest
at the applicable Contract Rate on outstanding Advances which it has funded.
(iii) Promptly following each Settlement Date, Agent
shall submit to each Lender a certificate with respect to payments received and
Advances made during the Week immediately preceding such Settlement Date. Such
certificate of Agent shall be conclusive in the absence of manifest error.
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(d) If any Lender or Participant (a "benefited Lender") shall
at any time receive any payment of all or part of its Advances, or interest
thereon, or receive any Collateral in respect thereof (whether voluntarily or
involuntarily or by set-off) in a greater proportion than any such payment to
and Collateral received by any other Lender, if any, in respect of such other
Lender's Advances, or interest thereon, and such greater proportionate payment
or receipt of Collateral is not expressly permitted hereunder, such benefited
Lender shall purchase for cash from the other Lenders a participation in such
portion of each such other Lender's Advances, or shall provide such other Lender
with the benefits of any such Collateral, or the proceeds thereof, as shall be
necessary to cause such benefited Lender to share the excess payment or benefits
of such Collateral or proceeds ratably with each of the other Lenders; provided,
however, that if all or any portion of such excess payment or benefits is
thereafter recovered from such benefited Lender, such purchase shall be
rescinded, and the purchase price and benefits returned, to the extent of such
recovery, but without interest. Each Lender so purchasing a portion of another
Lender's Advances may exercise all rights of payment (including, without
limitation, rights of set-off) with respect to such portion as fully as if such
Lender were the direct holder of such portion.
(e) Unless Agent shall have been notified by telephone,
confirmed in writing, by any Lender that such Lender will not make the amount
which would constitute its applicable Commitment Percentage of the Advances
available to Agent, Agent may (but shall not be obligated to) assume that such
Lender shall make such amount available to Agent on the next Settlement Date
and, in reliance upon such assumption, make available to Borrowers a
corresponding amount. Agent will promptly notify Borrowers of its receipt of any
such notice from a Lender. If such amount is made available to Agent on a date
after such next Settlement Date, such Lender shall pay to Agent on demand an
amount equal to the product of (i) the daily average Federal Funds Rate
(computed on the basis of a year of 360 days) during such period as quoted by
Agent, times (ii) such amount, times (iii) the number of days from and including
such Settlement Date to the date on which such amount becomes immediately
available to Agent. A certificate of Agent submitted to any Lender with respect
to any amounts owing under this paragraph (e) shall be conclusive, in the
absence of manifest error. If such amount is not in fact made available to Agent
by such Lender within three (3) Business Days after such Settlement Date, Agent
shall be entitled to recover such an amount, with interest thereon at the rate
per annum then applicable to such Revolving Advances hereunder, on demand from
Borrowers; provided, however, that Agent's right to such recovery shall not
prejudice or otherwise adversely affect Borrowers' rights (if any) against such
Lender.
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2.14. Mandatory Prepayments.
(a) Subject to Section 4.3 hereof, when any Borrower sells or
otherwise disposes of any Collateral other than Inventory in the ordinary course
of business, Borrowers shall repay the Advances in an amount equal to the net
proceeds of such sale (i.e., gross proceeds less the reasonable costs of such
sales or other dispositions), such repayments to be made promptly but in no
event more than two (2) Business Day following receipt of such net proceeds, and
until the date of payment, such proceeds shall be held in trust for Agent. The
foregoing shall not be deemed to be implied consent to any such sale otherwise
prohibited by the terms and conditions hereof. Such repayments shall be applied
first to the outstanding principal installments of the Term Loan in the inverse
order of the maturities thereof and second, to the remaining Advances in such
order as Agent may determine, subject to Borrowers' ability to reborrow
Revolving Advances in accordance with the terms hereof.
(b) Borrowers shall prepay the outstanding amount of the
Advances in an amount equal to 75% of Excess Cash Flow for each fiscal year
commencing on or after January 1, 2000, payable upon delivery of the financial
statements to Agent referred to in and required by Section 9.7 for such fiscal
year but in any event not later than ninety (90) days after the end of each such
fiscal year, which amount shall be applied first, to the outstanding principal
installments of the Term Loan in the inverse order of the maturities thereof
and, second, to the remaining Advances in such order as Agent may determine
subject to Borrowers' ability to reborrow Revolving Advances in accordance with
the terms hereof. In the event that the financial statement is not so delivered,
then a calculation based upon estimated amounts shall be made by Agent upon
which calculation Borrowers shall make the prepayment required by this Section
2.14(b), subject to adjustment when the financial statement is delivered to
Agent as required hereby. The calculation made by Agent shall not be deemed a
waiver of any rights Agent or Lenders may have as a result of the failure by
Borrowers to deliver such financial statement.
(c) Upon the consummation of the Harding Divestiture, the
Borrowers shall repay the Revolving Advances in an amount (the "Harding
Divestiture Revolving Amount") equal to the applicable Advance Rate multiplied
by the amount of Eligible Receivables and Eligible Inventory at Harding, such
repayments to be made concurrently with the consummation of the Harding
Divestiture. In addition, Borrowers shall repay the Advances in an amount equal
to net proceeds (i.e., gross proceeds less reasonable transaction costs) from
the Harding Divestiture in excess of the Harding Divestiture Revolving Amount,
such repayments to be made within one (1) Business Day of receipt of such net
proceeds, and until paid, such proceeds shall be held in trust for Agent. Such
repayments shall be applied first, to the outstanding principal installments of
the Term Loan in the inverse order of the maturities thereof and, second, to the
remaining Advances in such order as Agent may determine, subject to Borrowers'
ability to reborrow Revolving Advances in accordance with the terms hereof.
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2.15. Use of Proceeds. Borrowers shall apply the proceeds of Advances
to (i) repay existing indebtedness owed to (x) First Union and the other lenders
pursuant to the First Union Loan Agreement and (y) the holders of the Senior
Notes pursuant to the Senior Notes, (ii) pay fees and expenses relating to this
transaction, and (iii) to provide for their working capital needs.
2.16. Defaulting Lender.
(a) Notwithstanding anything to the contrary contained herein,
in the event any Lender (x) has refused (which refusal constitutes a breach by
such Lender of its obligations under this Agreement) to make available its
portion of any Advance or (y) notifies either Agent or Borrowing Agent that it
does not intend to make available its portion of any Advance (if the actual
refusal would constitute a breach by such Lender of its obligations under this
Agreement) (each, a "Lender Default"), all rights and obligations hereunder of
such Lender (a "Defaulting Lender") as to which a Lender Default is in effect
and of the other parties hereto shall be modified to the extent of the express
provisions of this Section 2.16 while such Lender Default remains in effect.
(b) Advances shall be incurred pro rata from Lenders (the
"Non-Defaulting Lenders") which are not Defaulting Lenders based on their
respective Commitment Percentages, and no Commitment Percentage of any Lender or
any pro rata share of any Advances required to be advanced by any Lender shall
be increased as a result of such Lender Default. Amounts received in respect of
principal of any type of Advances shall be applied to reduce the applicable
Advances of each Lender pro rata based on the aggregate of the outstanding
Advances of that type of all Lenders at the time of such application; provided,
that, such amount shall not be applied to any Advances of a Defaulting Lender at
any time when, and to the extent that, the aggregate amount of Advances of any
Non-Defaulting Lender exceeds such Non-Defaulting Lender's Commitment Percentage
of all Advances then outstanding.
(c) A Defaulting Lender shall not be entitled to give
instructions to Agent or to approve, disapprove, consent to or vote on any
matters relating to this Agreement and the Other Documents. All amendments,
waivers and other modifications of this Agreement and the Other Documents may be
made without regard to a Defaulting Lender and, for purposes of the definition
of "Required Lenders", a Defaulting Lender shall be deemed not to be a Lender
and not to have Advances outstanding.
(d) Other than as expressly set forth in this Section 2.16,
the rights and obligations of a Defaulting Lender (including the obligation to
indemnify Agent) and the other parties hereto shall remain unchanged. Nothing in
this Section 2.16 shall be deemed to release any Defaulting Lender from its
obligations under this Agreement and the Other Documents, shall alter such
obligations, shall operate as a waiver of any default by such Defaulting Lender
hereunder, or shall prejudice any rights which any Borrower, Agent or any Lender
may have against any Defaulting Lender as a result of any default by such
Defaulting Lender hereunder.
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(e) In the event a Defaulting Lender retroactively cures to
the satisfaction of Agent the breach which caused a Lender to become a
Defaulting Lender, such Defaulting Lender shall no longer be a Defaulting Lender
and shall be treated as a Lender under this Agreement.
III. INTEREST AND FEES.
3.1. Interest. Interest on Advances shall be payable in arrears on the
first day of each month with respect to Domestic Rate Loans and, with respect to
Eurodollar Rate Loans, at the end of each Interest Period or, for Eurodollar
Rate Loans with an Interest Period in excess of three months, (a) three months
from the commencement of such Eurodollar Rate Loan and (b) the end of the
Interest Period. Interest charges shall be computed on the actual principal
amount of Advances outstanding during the month at a rate per annum equal to (i)
with respect to Revolving Advances, the applicable Revolving Interest Rate and
(ii) with respect to the Term Loan, the applicable Term Loan Rate. Whenever,
subsequent to the date of this Agreement, the Alternate Base Rate is increased
or decreased, the applicable Contract Rate shall be similarly changed without
notice or demand of any kind by an amount equal to the amount of such change in
the Alternate Base Rate during the time such change or changes remain in effect.
The Eurodollar Rate shall be adjusted with respect to Eurodollar Rate Loans
without notice or demand of any kind on the effective date of any change in the
Reserve Percentage as of such effective date. Upon and after the occurrence of
an Event of Default, and during the continuation thereof, at the option of Agent
or at the direction of Required Lenders, the Obligations shall bear interest at
the applicable Contract Rate plus two percent (2%) per annum (as applicable, the
"Default Rate").
3.2. Letter of Credit Fees.
(a) Borrowers shall pay (x) to Agent, for the benefit of
Lenders, fees for each Letter of Credit for the period from and excluding the
date of issuance of same to and including the date of expiration or termination,
equal to the average daily face amount of each outstanding Letter of Credit
multiplied by one and one-half percent (1.50%) per annum, such fees to be
calculated on the basis of a 360-day year for the actual number of days elapsed
and to be payable monthly in arrears on the first day of each month and on the
last day of the Term and (y) to the Issuer, any and all fees and expenses as
agreed upon by the Issuer and the Borrowing Agent in connection with any Letter
of Credit, including, without limitation, in connection with the opening,
amendment or renewal of any such Letter of Credit and any acceptances created
thereunder and shall reimburse Agent for any and all fees and expenses, if any,
paid by Agent to the Issuer (all of the foregoing fees, the "Letter of Credit
Fees"). All such charges shall be deemed earned in full on the date when the
same are due and payable hereunder and shall not be subject to rebate or
proration upon the termination of this Agreement for any reason. Any such charge
in effect at the time of a particular transaction shall be the charge for that
transaction, notwithstanding any subsequent change in the Issuer's prevailing
charges for that type of transaction. All Letter of Credit Fees payable
hereunder shall be deemed earned in full on the date when the same are due and
payable hereunder and shall not be subject to rebate or proration upon the
termination of this Agreement for any reason.
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Following the occurrence and during the continuance of an
Event of Default, on demand, Borrowers will cause cash to be deposited and
maintained in an account with Agent, as cash collateral, in an amount equal to
one hundred and five percent (105%) of the outstanding Letters of Credit, and
each Borrower hereby irrevocably authorizes Agent, in its discretion, on such
Borrower's behalf and in such Borrower's name, to open such an account and to
make and maintain deposits therein, or in an account opened by such Borrower, in
the amounts required to be made by such Borrower, out of the proceeds of
Receivables or other Collateral or out of any other funds of such Borrower
coming into any Lender's possession at any time. Agent will invest such cash
collateral (less applicable reserves) in such short-term money-market items as
to which Agent and such Borrower mutually agree and the net return on such
investments shall be credited to such account and constitute additional cash
collateral. No Borrower may withdraw amounts credited to any such account except
upon payment and performance in full of all Obligations and termination of this
Agreement.
3.3. Facility Fee. If, for any quarter during the Term, the average
daily unpaid balance of the Revolving Advances for each day of such quarter does
not equal the Maximum Revolving Advance Amount, then Borrowers shall pay to
Agent for the ratable benefit of Lenders a fee at a rate equal to one-half of
one percent (.50%) per annum on the amount by which the Maximum Revolving
Advance Amount exceeds such average daily unpaid balance. Such fee shall be
payable to Agent in arrears on the first day of each quarter.
3.4. Fee Letter. Borrowers shall pay Agent the amounts set forth in the
Fee Letter at the times set forth therein.
3.5. Computation of Interest and Fees. Interest and fees
hereunder shall be computed on the basis of a year of 360 days and for the
actual number of days elapsed. If any payment to be made hereunder becomes due
and payable on a day other than a Business Day, the due date thereof shall be
extended to the next succeeding Business Day and interest thereon shall be
payable at the applicable Contract Rate during such extension. For the purposes
of the Interest Act (Canada), whenever interest is calculated on the basis of a
year of 360 days, each rate of interest determined pursuant to such calculation
expressed as an annual rate is equivalent to such rate as so determined
multiplied by the actual number of days in the calendar year in which the same
is to be ascertained and divided by 360.
3.6. Maximum Charges. In no event whatsoever shall interest and other
charges charged hereunder exceed the highest rate permissible under law. In the
event interest and other charges as computed hereunder would otherwise exceed
the highest rate permitted under law, such excess amount shall be first applied
to any unpaid principal balance owed by Borrowers, and if the then remaining
excess amount is greater than the previously unpaid principal balance, Lenders
shall promptly refund such excess amount to Borrowers and the provisions hereof
shall be deemed amended to provide for such permissible rate.
3.7. Increased Costs. In the event that any applicable law, treaty or
governmental regulation, or any change therein or in the interpretation or
application thereof, or compliance by any Lender (for purposes of this Section
3.7, the term "Lender" shall include Agent or any Lender and any corporation or
bank controlling Agent or any Lender) and the office or branch where Agent or
any Lender (as so defined) makes or maintains any Eurodollar Rate Loans with any
request or directive (whether or not having the force of law) from any central
bank or other financial, monetary or other authority, shall:
(a) subject Agent or any Lender to any tax of any kind
whatsoever with respect to this Agreement or any Other Document or change the
basis of taxation of payments to Agent or any Lender of principal, fees,
interest or any other amount payable hereunder or under any Other Documents
(except for changes in the rate of tax on the overall net income of Agent or any
Lender by the jurisdiction in which it maintains its principal office);
(b) impose, modify or hold applicable any reserve, special
deposit, assessment or similar requirement against assets held by, or deposits
in or for the account of, advances or loans by, or other credit extended by, any
office of Agent or any Lender, including (without limitation) pursuant to
Regulation D of the Board of Governors of the Federal Reserve System; or
(c) impose on Agent or any Lender or the London interbank
Eurodollar market any other condition with respect to this Agreement or any
Other Document;
and the result of any of the foregoing is to increase the cost to Agent or any
Lender of making, renewing or maintaining its Advances hereunder by an amount
that Agent or such Lender deems to be material or to reduce the amount of any
payment (whether of principal, interest or otherwise) in respect of any of the
Advances by an amount that Agent or such Lender deems to be material, then, in
any case Borrowers shall promptly pay Agent or such Lender, upon its demand,
such additional amount as will compensate Agent or such Lender for such
additional cost or such reduction, as the case may be, provided that the
foregoing shall not apply to increased costs which are reflected in the
Eurodollar Rate. Agent or such Lender shall certify the amount of such
additional cost or reduced amount to Borrowers, and such certification shall be
conclusive absent manifest error.
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3.8. Basis For Determining Interest Rate Inadequate or Unfair. In the
event that Agent or any Lender shall have determined that:
(a) reasonable means do not exist for ascertaining the
Eurodollar Rate applicable pursuant to Section 2.2 hereof for any Interest
Period; or
(b) Dollar deposits in the relevant amount and for the
relevant maturity are not available in the London interbank Eurodollar market,
with respect to an outstanding Eurodollar Rate Loan, a proposed Eurodollar Rate
Loan, or a proposed conversion of a Domestic Rate Loan into a Eurodollar Rate
Loan,
then Agent shall give Borrowing Agent prompt written, telephonic or telegraphic
notice of such determination. If such notice is given, (i) any such requested
Eurodollar Rate Loan shall be made as a Domestic Rate Loan, unless Borrowing
Agent shall notify Agent no later than 10:00 a.m. (New York City time) two (2)
Business Days prior to the date of such proposed borrowing, that its request for
such borrowing shall be cancelled or made as an unaffected type of Eurodollar
Rate Loan, (ii) any Domestic Rate Loan or Eurodollar Rate Loan which was to have
been converted to an affected type of Eurodollar Rate Loan shall be continued as
or converted into a Domestic Rate Loan, or, if Borrowing Agent shall notify
Agent, no later than 10:00 a.m. (New York City time) two (2) Business Days prior
to the proposed conversion, shall be maintained as an unaffected type of
Eurodollar Rate Loan, and (iii) any outstanding affected Eurodollar Rate Loans
shall be converted into a Domestic Rate Loan, or, if Borrowing Agent shall
notify Agent, no later than 10:00 a.m. (New York City time) two (2) Business
Days prior to the last Business Day of the then current Interest Period
applicable to such affected Eurodollar Rate Loan, shall be converted into an
unaffected type of Eurodollar Rate Loan, on the last Business Day of the then
current Interest Period for such affected Eurodollar Rate Loans. Until such
notice has been withdrawn, Lenders shall have no obligation to make an affected
type of Eurodollar Rate Loan or maintain outstanding affected Eurodollar Rate
Loans and no Borrower shall have the right to convert a Domestic Rate Loan or an
unaffected type of Eurodollar Rate Loan into an affected type of Eurodollar Rate
Loan.
3.9. Capital Adequacy.
(a) In the event that Agent or any Lender shall have
determined that any applicable law, rule, regulation or guideline regarding
capital adequacy, or any change therein, or any change in the interpretation or
administration thereof by any governmental authority, central bank or comparable
agency charged with the interpretation or administration thereof, or compliance
by Agent or any Lender (for purposes of this Section 3.9, the term "Lender"
shall include Agent or any Lender and any corporation or bank controlling Agent
or any Lender) and the office or branch where Agent or any Lender (as so
defined) makes or maintains any Eurodollar Rate Loans 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 Agent or any Lender's capital as a
consequence of its obligations hereunder to a level below that which Agent or
such Lender could have achieved but for such adoption, change or compliance
(taking into consideration Agent's and each Lender's policies with respect to
capital adequacy) by an amount deemed by Agent or any Lender to be material,
then, from time to time, Borrowers shall pay upon demand to Agent or such Lender
such additional amount or amounts as will compensate Agent or such Lender for
such reduction. In determining such amount or amounts, Agent or such Lender may
use any reasonable averaging or attribution methods. The protection of this
Section 3.9 shall be available to Agent and each Lender regardless of any
possible contention of invalidity or inapplicability with respect to the
applicable law, regulation or condition.
(b) A certificate of Agent or such Lender setting forth such
amount or amounts as shall be necessary to compensate Agent or such Lender with
respect to Section 3.9(a) hereof when delivered to Borrowers shall be conclusive
absent manifest error.
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IV. COLLATERAL: GENERAL TERMS
4.1. Security Interest in the Collateral. To secure the prompt payment
and performance to Agent and each Lender of the Obligations, each Credit Party
hereby assigns, pledges and grants to Agent for its benefit and for the ratable
benefit of each Lender a continuing security interest in and to all of its
Collateral, whether now owned or existing or hereafter acquired or arising and
wheresoever located. Each Credit Party shall mark its books and records as may
be necessary or appropriate to evidence, protect and perfect Agent's security
interest and shall cause its financial statements to reflect such security
interest.
4.2. Perfection of Security Interest. Each Credit Party shall take all
action that may be necessary or desirable, or that Agent may request, so as at
all times to maintain the validity, perfection, enforceability and priority of
Agent's security interest in the Collateral or to enable Agent to protect,
exercise or enforce its rights hereunder and in the Collateral, including, but
not limited to, (i) immediately discharging all Liens other than Permitted
Encumbrances, (ii) obtaining landlords' or mortgagees' lien waivers, (iii)
delivering to Agent, endorsed or accompanied by such instruments of assignment
as Agent may specify, and stamping or marking, in such manner as Agent may
specify, any and all chattel paper, instruments, letters of credits and advices
thereof and documents evidencing or forming a part of the Collateral, (iv)
entering into warehousing, lockbox and other custodial arrangements satisfactory
to Agent, and (v) executing and delivering financing statements, instruments of
pledge, mortgages, notices and assignments, in each case in form and substance
satisfactory to Agent, relating to the creation, validity, perfection,
maintenance or continuation of Agent's security interest under the Uniform
Commercial Code or other applicable law. Agent is hereby authorized to file
financing statements signed by Agent instead of Credit Party in accordance with
Section 9-402(2) of Uniform Commercial Code as adopted in the State of New York.
All charges, expenses and fees Agent may incur in doing any of the foregoing,
and any local taxes relating thereto, shall be charged to Borrowers' Account as
a Revolving Advance of a Domestic Rate Loan and added to the Obligations, or, at
Agent's option, shall be paid to Agent for the ratable benefit of Lenders
immediately upon demand.
4.3. Disposition of Collateral. Each Credit Party will safeguard and
protect all Collateral for Agent's general account and make no disposition
thereof whether by sale, lease or otherwise except (a) the sale of Inventory in
the ordinary course of business and (b) the disposition or transfer of obsolete
and worn-out Equipment in the ordinary course of business during any fiscal year
having an aggregate fair market value for all Credit Parties of not more than
$250,000 and only to the extent that (i) the proceeds of any such disposition
are used to acquire replacement Equipment which is subject to Agent's first
priority security interest or (ii) the proceeds of which are remitted to Agent
to be applied pursuant to Section 2.14.
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4.4. Preservation of Collateral. Following the demand by Agent for
payment of all Obligations due and owing in accordance with Section 11.1 hereof,
in addition to the rights and remedies set forth in Section 11.1 hereof, Agent:
(a) may at any time take such steps as Agent deems necessary to protect Agent's
interest in and to preserve the Collateral, including the hiring of such
security guards or the placing of other security protection measures as Agent
may deem appropriate; (b) may employ and maintain at any of any Credit Party's
premises a custodian who shall have full authority to do all acts necessary to
protect Agent's interests in the Collateral; (c) may lease warehouse facilities
to which Agent may move all or part of the Collateral; (d) may use any Credit
Party's owned or leased lifts, hoists, trucks and other facilities or equipment
for handling or removing the Collateral; and (e) shall have, and is hereby
granted, a right of ingress and egress to the places where the Collateral is
located, and may proceed over and through any of Credit Party's owned or leased
property. Each Credit Party shall cooperate fully with all of Agent's efforts to
preserve the Collateral and will take such actions to preserve the Collateral as
Agent may direct. All of Agent's expenses of preserving the Collateral,
including any expenses relating to the bonding of a custodian, shall be charged
to Borrowers' Account as a Revolving Advance of a Domestic Rate Loan and added
to the Obligations.
4.5. Ownership of Collateral. With respect to the Collateral, at the
time the Collateral becomes subject to Agent's security interest: (a) each
Credit Party shall be the sole owner of and fully authorized and able to sell,
transfer, pledge and/or grant a first priority security interest in each and
every item of the its respective Collateral to Agent; and, except for Permitted
Encumbrances the Collateral shall be free and clear of all Liens and
encumbrances whatsoever; (b) each document and agreement executed by each Credit
Party or delivered to Agent or any Lender in connection with this Agreement
shall be true and correct in all material respects; (c) all signatures and
endorsements of each Credit Party that appear on such documents and agreements
shall be genuine and each Credit Party shall have full capacity to execute same;
and (d) each Credit Party's Equipment and Inventory shall be located as set
forth on Schedule 4.5 and shall not be removed from such location(s) without the
prior written consent of Agent except with respect to the sale of Inventory in
the ordinary course of business and Equipment to the extent permitted in Section
4.3 hereof.
4.6. Defense of Agent's and Lenders' Interests. Until (a) payment and
performance in full of all of the Obligations and (b) termination of this
Agreement, Agent's interests in the Collateral shall continue in full force and
effect. During such period no Credit Party shall, without Agent's prior written
consent, pledge, sell (except Inventory in the ordinary course of business and
Equipment to the extent permitted in Section 4.3 hereof), assign, transfer,
create or suffer to exist a Lien upon or encumber or allow or suffer to be
encumbered in any way except for Permitted Encumbrances, any part of the
Collateral. Each Credit Party shall defend Agent's interests in the Collateral
against any and all Persons whatsoever. At any time following demand by Agent
for payment of all Obligations, Agent shall have the right to take possession of
the indicia of the Collateral and the Collateral in whatever physical form
contained, including without limitation: labels, stationery, documents,
instruments and advertising materials. If Agent exercises this right to take
possession of the Collateral, Credit Parties shall, upon demand, assemble it in
the best manner possible and make it available to Agent at a place reasonably
convenient to Agent. In addition, with respect to all Collateral, Agent and
Lenders shall be entitled to all of the rights and remedies set forth herein and
further provided by the Uniform Commercial Code or other applicable law. Each
Credit Party shall, and Agent may, at its option, instruct all suppliers,
carriers, forwarders, warehousers or others receiving or holding cash, checks,
Inventory, documents or instruments in which Agent holds a security interest to
deliver same to Agent and/or subject to Agent's order and if they shall come
into any Credit Party's possession, they, and each of them, shall be held by
such Credit Party in trust as Agent's trustee, and such Credit Party will
immediately deliver them to Agent in their original form together with any
necessary endorsement.
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4.7. Books and Records. Each Credit Party shall (a) keep proper books
of record and account in which full, true and correct entries will be made of
all dealings or transactions of or in relation to its business and affairs; (b)
set up on its books accruals with respect to all taxes, assessments, charges,
levies and claims; and (c) on a reasonably current basis set up on its books,
from its earnings, allowances against doubtful Receivables, advances and
investments and all other proper accruals (including without limitation by
reason of enumeration, accruals for premiums, if any, due on required payments
and accruals for depreciation, obsolescence, or amortization of properties),
which should be set aside from such earnings in connection with its business.
All determinations pursuant to this subsection shall be made in accordance with,
or as required by, GAAP consistently applied in the opinion of such independent
public accountant as shall then be regularly engaged by Credit Parties.
4.8. Financial Disclosure. Each Credit Party hereby irrevocably
authorizes and directs all accountants and auditors employed by such Credit
Party at any time during the Term to exhibit and deliver to Agent and each
Lender copies of any of any Credit Party's financial statements, trial balances
or other accounting records of any sort in the accountant's or auditor's
possession, and to disclose to Agent and each Lender any information such
accountants may have concerning such Credit Party's financial status and
business operations. Each Credit Party hereby authorizes all federal,
provincial, state and municipal authorities to furnish to Agent and each Lender
copies of reports or examinations relating to such Credit Party, whether made by
such Credit Party or otherwise; however, Agent and each Lender will attempt to
obtain such information or materials directly from such Credit Party prior to
obtaining such information or materials from such accountants or such
authorities.
4.9. Compliance with Laws. Each Credit Party shall comply in all
material respects with all acts, rules, regulations and orders of any
legislative, administrative or judicial body or official applicable to its
respective Collateral or any part thereof or to the operation of such Credit
Party's business the non-compliance with which could reasonably be expected to
have a Material Adverse Effect on such Credit Party. Each Credit Party may,
however, contest or dispute any acts, rules, regulations, orders and directions
of those bodies or officials in any reasonable manner, provided that any related
Lien is inchoate or stayed and sufficient reserves are established to the
reasonable satisfaction of Agent to protect Agent's Lien on or security interest
in the Collateral. The Collateral at all times shall be maintained in accordance
with the requirements of all insurance carriers which provide insurance with
respect to the Collateral so that such insurance shall remain in full force and
effect.
4.10. Inspection of Premises. At all reasonable times and so long as
(a) no Event of Default has occurred and is then continuing and (b) Agent, in
its reasonable discretion, does not believe that any Credit Party has or is
committing fraud, upon reasonable prior notice, Agent and each Lender shall have
full access to and the right to audit, check, inspect and make abstracts and
copies from each Credit Party's books, records, audits, correspondence and all
other papers relating to the Collateral and the operation of each Credit Party's
business. Agent, any Lender and their agents may enter upon any of each Credit
Party's premises at any time during business hours and at any other reasonable
time, and from time to time, for the purpose of inspecting the Collateral and
any and all records pertaining thereto and the operation of such Credit Party's
business. So long as no Event of Default has occurred and is then continuing,
Credit Parties shall only be liable to pay Agent's and each Lender's costs and
expenses in connection with four (4) inspections during any twelve (12) month
period of each Credit Party's premises.
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4.11. Insurance. Each Credit Party shall bear the full risk of any loss
of any nature whatsoever with respect to the Collateral. At each Credit Party's
own cost and expense in amounts and with carriers acceptable to Agent, each
Credit Party shall (a) keep all its insurable properties and properties in which
each Credit Party has an interest insured against the hazards of fire, flood,
sprinkler leakage, those hazards covered by extended coverage insurance and such
other hazards, and for such amounts, as is customary in the case of companies
engaged in businesses similar to such Credit Party's including, without
limitation, business interruption insurance; (b) maintain a bond in such amounts
as is customary in the case of companies engaged in businesses similar to such
Borrower insuring against larceny, embezzlement or other criminal
misappropriation of insured's officers and employees who may either singly or
jointly with others at any time have access to the assets or funds of such
Credit Party either directly or through authority to draw upon such funds or to
direct generally the disposition of such assets; (c) maintain public and product
liability insurance against claims for personal injury, death or property damage
suffered by others; (d) maintain all such worker's compensation or similar
insurance as may be required under the laws of any state or jurisdiction in
which such Credit Party is engaged in business; (e) furnish Agent with (i)
copies of all policies and evidence of the maintenance of such policies by the
renewal thereof at least thirty (30) days before any expiration date, and (ii)
appropriate loss payable endorsements in form and substance satisfactory to
Agent, naming Agent as a co-insured and loss payee as its interests may appear
with respect to all insurance coverage referred to in clauses (a) and (c) above,
and providing (A) that all proceeds thereunder shall be payable to Agent, (B) no
such insurance shall be affected by any act or neglect of the insured or owner
of the property described in such policy, and (C) that such policy and loss
payable clauses may not be cancelled, amended or terminated unless at least
thirty (30) days' prior written notice is given to Agent. In the event of any
loss thereunder, the carriers named therein hereby are directed by Agent and the
applicable Credit Party to make payment for such loss to Agent and not to such
Credit Party and Agent jointly. If any insurance losses are paid by check, draft
or other instrument payable to any Credit Party and Agent jointly, Agent may
endorse such Credit Party's name thereon and do such other things as Agent may
deem advisable to reduce the same to cash. Agent is hereby authorized to adjust
and compromise claims under insurance coverage referred to in clauses (a) and
(b) above. All loss recoveries received by Agent upon any such insurance may be
applied to the Obligations, in such order as Agent in its sole discretion shall
determine. Any surplus shall be paid by Agent to Credit Parties or applied as
may be otherwise required by law. Any deficiency thereon shall be paid by Credit
Parties to Agent, on demand. Anything hereinabove to the contrary
notwithstanding, and subject to the fulfillment of the conditions set forth
below, Agent shall remit to Credit Parties insurance proceeds received by Agent
during any calendar year under insurance policies procured and maintained by
Credit Parties which insure Credit Parties insurable properties to the extent
such insurance proceeds do not exceed $500,000 in the aggregate during such
calendar year or $500,000 per occurrence. In the event the amount of insurance
proceeds received by Agent for any occurrence exceeds $500,000 then Agent shall
not be obligated to remit the insurance proceeds to Credit Parties unless Credit
Parties shall provide Agent with evidence reasonably satisfactory to Agent that
the insurance proceeds will be used by Credit Parties to repair, replace or
restore the insured property which was the subject of the insurable loss subject
to Borrowers' ability to reborrow such amounts as Revolving Advances to be used
for such purpose. In the event Credit Parties have previously received (or,
after giving effect to any proposed remittance by Agent to Credit Parties would
receive) insurance proceeds which equal or exceed $500,000 in the aggregate
during any calendar year, then Agent may, in its sole discretion, either remit
the insurance proceeds to Credit Parties upon Credit Parties providing Agent
with evidence reasonably satisfactory to Agent that the insurance proceeds will
be used by Credit Parties to repair, replace or restore the insured property
which was the subject of the insurable loss, or apply the proceeds to the
Obligations, as aforesaid. The agreement of Agent to remit insurance proceeds in
the manner above provided shall be subject in each instance to satisfaction of
each of the following conditions: (x) No Event of Default shall then have
occurred and be continuing, and (y) Credit Parties shall use such insurance
proceeds to repair, replace or restore the insurable property which was the
subject of the insurable loss and for no other purpose.
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4.12. Failure to Pay Insurance. If any Credit Party fails to obtain
insurance as hereinabove provided, or to keep the same in force, Agent, if Agent
so elects, may obtain such insurance and pay the premium therefor on behalf of
such Credit Party, and charge Borrowers' Account therefor as a Revolving Advance
of a Domestic Rate Loan and such expenses so paid shall be part of the
Obligations.
4.13. Payment of Taxes. Each Credit Party will pay, when due, all
taxes, assessments and other Charges lawfully levied or assessed upon such
Credit Party or any of the Collateral including, without limitation, real and
personal property taxes, assessments and charges and all franchise, income,
employment, social security benefits, withholding, and sales taxes. If any tax
by any governmental authority is or may be imposed on or as a result of any
transaction between any Credit Party and Agent or any Lender which Agent or any
Lender may be required to withhold or pay or if any taxes, assessments, or other
Charges remain unpaid after the date fixed for their payment, or if any claim
shall be made which, in Agent's or any Lender's opinion, may possibly create a
valid Lien on the Collateral, Agent may without notice to Credit Parties pay the
taxes, assessments or other Charges and each Credit Party hereby indemnifies and
holds Agent and each Lender harmless in respect thereof. Agent will not pay any
taxes, assessments or Charges to the extent that any Credit Party has contested
or disputed those taxes, assessments or Charges in good faith, by expeditious
protest, administrative or judicial appeal or similar proceeding provided that
any related tax lien is stayed and sufficient reserves are established to the
reasonable satisfaction of Agent to protect Agent's security interest in or Lien
on the Collateral. The amount of any payment by Agent under this Section 4.13
shall be charged to Borrowers' Account as a Revolving Advance of a Domestic Rate
Loan and added to the Obligations and, until Credit Parties shall furnish Agent
with an indemnity therefor (or supply Agent with evidence satisfactory to Agent
that due provision for the payment thereof has been made), Agent may hold
without interest any balance standing to Credit Parties' credit and Agent shall
retain its security interest in any and all Collateral held by Agent.
4.14. Payment of Leasehold Obligations. Each Credit Party shall at all
times pay, when and as due, its rental obligations under all leases under which
it is a tenant, and shall otherwise comply, in all material respects, with all
other terms of such leases and keep them in full force and effect and, at
Agent's request will provide evidence of having done so.
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4.15. Receivables.
(a) Nature of Receivables. Each of the Receivables which
constitute "accounts" under the Uniform Commercial Code shall be a bona fide and
valid account representing a bona fide indebtedness incurred by the Customer
therein named, for a fixed sum as set forth in the invoice relating thereto
(provided immaterial or unintentional invoice errors shall not be deemed to be a
breach hereof) with respect to an absolute sale or lease and delivery of goods
upon stated terms of a Credit Party, or work, labor or services theretofore
rendered by a Credit Party as of the date each Receivable is created. Same shall
be due and owing in accordance with the applicable Credit Party's standard terms
of sale without dispute, setoff or counterclaim except as may be stated on the
accounts receivable schedules delivered by Credit Parties to Agent.
(b) Solvency of Customers. Each Customer, to the best of each
Credit Party's knowledge, as of the date each Receivable is created, is and will
be solvent and able to pay all Receivables on which the Customer is obligated in
full when due or with respect to such Customers of any Credit Party who are not
solvent such Credit Party has set up on its books and in its financial records
bad debt reserves adequate to cover such Receivables.
(c) Locations of Credit Party . Each Credit Party's chief
executive office is located at the addresses set forth on Schedule 4.15(c)
hereto. Until written notice is given to Agent by Borrowing Agent of any other
office at which any Credit Party keeps its records pertaining to Receivables,
all such records shall be kept at such executive office.
(d) Collection of Receivables. Until any Credit Party's
authority to do so is terminated by Agent (which notice Agent may give at any
time following the occurrence of an Event of Default or a Default or when Agent
in its sole discretion deems it to be in Lenders' best interest to do so), each
Credit Party will, at such Credit Party's sole cost and expense, but on Agent's
behalf and for Agent's account, collect as Agent's property and in trust for
Agent all amounts received on Receivables, and shall not commingle such
collections with any Credit Party's funds or use the same except to pay
Obligations. Each Credit Party shall, upon request, deliver to Agent, or deposit
in the Blocked Account, in original form and on the date of receipt thereof, all
checks, drafts, notes, money orders, acceptances, cash and other evidences of
Indebtedness.
(e) Notification of Assignment of Receivables. At any time
following the occurrence of an Event of Default and while such Event of Default
is continuing, Agent shall have the right to send notice of the assignment of,
and Agent's security interest in, the Receivables to any and all Customers or
any third party holding or otherwise concerned with any of the Collateral.
Thereafter, Agent shall have the sole right to collect the Receivables, take
possession of the Collateral, or both. Agent's actual collection expenses,
including, but not limited to, stationery and postage, telephone and telegraph,
secretarial and clerical expenses and the salaries of any collection personnel
used for collection, may be charged to Borrowers' Account and added to the
Obligations.
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(f) Power of Agent to Act on Credit Parties Behalf. Agent
shall have the right to receive, endorse, assign and/or deliver in the name of
Agent or any Credit Party any and all checks, drafts and other instruments for
the payment of money relating to the Receivables, and each Credit Party hereby
waives notice of presentment, protest and non-payment of any instrument so
endorsed. Each Credit Party hereby constitutes Agent or Agent's designee as such
Credit Party's attorney with power (i) to endorse such Credit Party's name upon
any notes, acceptances, checks, drafts, money orders or other evidences of
payment or Collateral; (ii) to sign such Credit Party's name on any invoice or
bill of lading relating to any of the Receivables, drafts against Customers,
assignments and verifications of Receivables; (iii) to send verifications of
Receivables to any Customer; (iv) to sign such Credit Party's name on all
financing statements or any other documents or instruments deemed necessary or
appropriate by Agent to preserve, protect, or perfect Agent's interest in the
Collateral and to file same; (v) to demand payment of the Receivables; (vi) to
enforce payment of the Receivables by legal proceedings or otherwise; (vii) to
exercise all of Credit Party s' rights and remedies with respect to the
collection of the Receivables and any other Collateral; (viii) to settle,
adjust, compromise, extend or renew the Receivables; (ix) to settle, adjust or
compromise any legal proceedings brought to collect Receivables; (x) to prepare,
file and sign such Credit Party's name on a proof of claim in bankruptcy or
similar document against any Customer; (xi) to prepare, file and sign such
Credit Party's name on any notice of Lien, assignment or satisfaction of Lien or
similar document in connection with the Receivables; and (xii) to do all other
acts and things necessary to carry out this Agreement. Agent shall only exercise
such power of attorney with respect to (v), (vi), (vii), (viii), (ix), (x) and
(xi) following the occurrence and during the continuation of an Event of
Default. All acts of said attorney or designee are hereby ratified and approved,
and said attorney or designee shall not be liable for any acts of omission or
commission nor for any error of judgment or mistake of fact or of law, unless
done maliciously or with gross (not mere) negligence; this power being coupled
with an interest is irrevocable while any of the Obligations remain unpaid.
Agent shall have the right at any time following the occurrence and during the
continuation of an Event of Default, to change the address for delivery of mail
addressed to any Credit Party to such address as Agent may designate and to
receive, open and dispose of all mail addressed to any Credit Party.
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(g) No Liability. Neither Agent nor any Lender shall, under
any circumstances or in any event whatsoever, have any liability for any error
or omission or delay of any kind occurring in the settlement, collection or
payment of any of the Receivables or any instrument received in payment thereof,
or for any damage resulting therefrom. Following the occurrence of an Event of
Default and while such Event of Default is continuing Agent may, without notice
or consent from any Credit Party, sue upon or otherwise collect, extend the time
of payment of, compromise or settle for cash, credit or upon any terms any of
the Receivables or any other securities, instruments or insurance applicable
thereto and/or release any obligor thereof. Agent is authorized and empowered to
accept following the occurrence of an Event of Default and during the
continuation thereof the return of the goods represented by any of the
Receivables, without notice to or consent by any Credit Party, all without
discharging or in any way affecting any Credit Party's liability hereunder.
(h) Establishment of a Lockbox Account, Dominion Account. All
proceeds of Collateral shall, at the direction of Agent, be deposited by Credit
Parties into a lockbox account, dominion account or such other "blocked account"
("Blocked Accounts") as Agent may require pursuant to an arrangement with such
bank as may be selected by Credit Parties and be acceptable to Agent. Credit
Parties shall issue to any such bank, an irrevocable letter of instruction
directing said bank to transfer such funds so deposited to Agent, either to any
account maintained by Agent at said bank or by wire transfer to appropriate
account(s) of Agent. All funds deposited in such Blocked Account shall
immediately become the property of Agent and Credit Parties shall obtain the
agreement by such bank to waive any offset rights against the funds so
deposited. Neither Agent nor any Lender assumes any responsibility for such
blocked account arrangement, including without limitation, any claim of accord
and satisfaction or release with respect to deposits accepted by any bank
thereunder. Alternatively, Agent may establish depository accounts ("Depository
Accounts") in the name of Agent at a bank or banks for the deposit of such funds
and Credit Parties shall deposit all proceeds of Collateral or cause same to be
deposited, in kind, in such Depository Accounts of Agent in lieu of depositing
same to the Blocked Accounts.
(i) Adjustments. No Credit Party will, without Agent's
consent, compromise or adjust any material amount of the Receivables (or extend
the time for payment thereof) or accept any material returns of merchandise or
grant any additional discounts, allowances or credits thereon except for those
compromises, adjustments, returns, discounts, credits and allowances as have
been heretofore customary in the business of such Credit Party.
4.16. Inventory. To the extent Inventory held for sale or lease has
been produced by any Credit Party, it has been and will be produced by such
Credit Party in accordance with the Federal Fair Labor Standards Act of 1938, as
amended, and all rules, regulations and orders thereunder.
4.17. Maintenance of Equipment. The Equipment shall be maintained in
good operating condition and repair (reasonable wear and tear excepted) and all
necessary replacements of and repairs thereto shall be made so that the value
and operating efficiency of the Equipment shall be maintained and preserved. No
Credit Party shall use or operate the Equipment in violation of any law,
statute, ordinance, code, rule or regulation. Each Credit Party shall have the
right to sell Equipment to the extent set forth in Section 4.3 hereof.
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4.18. Exculpation of Liability. Nothing herein contained shall be
construed to constitute Agent or any Lender as any Credit Party's agent for any
purpose whatsoever, nor shall Agent or any Lender be responsible or liable for
any shortage, discrepancy, damage, loss or destruction of any part of the
Collateral wherever the same may be located and regardless of the cause thereof.
Neither Agent nor any Lender, whether by anything herein or in any assignment or
otherwise, assume any of any Credit Party's obligations under any contract or
agreement assigned to Agent or such Lender, and neither Agent nor any Lender
shall be responsible in any way for the performance by any Credit Party of any
of the terms and conditions thereof.
4.19. Environmental Matters. (a) Credit Parties shall ensure that the
Real Property remains in compliance with all Environmental Laws and they shall
not place or permit to be placed any Hazardous Substances on any Real Property
except as permitted by applicable law or appropriate governmental authorities.
(b) Credit Parties shall establish and maintain a system to
assure and monitor continued compliance with all applicable Environmental Laws
which system shall include periodic reviews of such compliance.
(c) Credit Parties shall (i) employ in connection with the use
of the Real Property appropriate technology necessary to maintain compliance
with any applicable Environmental Laws and (ii) dispose of any and all Hazardous
Waste generated at the Real Property only at facilities and with carriers that
maintain valid permits under RCRA and any other applicable Environmental Laws.
Credit Parties shall use their best efforts to obtain certificates of disposal,
such as hazardous waste manifest receipts, from all treatment, transport,
storage or disposal facilities or operators employed by Credit Parties in
connection with the transport or disposal of any Hazardous Waste generated at
the Real Property.
(d) In the event any Credit Party obtains, gives or receives
notice of any Release or threat of Release of a reportable quantity of any
Hazardous Substances at the Real Property (any such event being hereinafter
referred to as a "Hazardous Discharge") or receives any notice of violation,
request for information or notification that it is potentially responsible for
investigation or cleanup of environmental conditions at the Real Property,
demand letter or complaint, order, citation, or other written notice with regard
to any Hazardous Discharge or violation of Environmental Laws affecting the Real
Property or any Credit Party's interest therein (any of the foregoing is
referred to herein as an "Environmental Complaint") from any Person, including
any state agency responsible in whole or in part for environmental matters in
the state in which the Real Property is located or the United States
Environmental Protection Agency (any such person or entity hereinafter the
"Authority"), then Borrowing Agent shall, within five (5) Business Days, give
written notice of same to Agent detailing facts and circumstances of which any
Credit Party is aware giving rise to the Hazardous Discharge or Environmental
Complaint. Such information is to be provided to allow Agent to protect its
security interest in the Real Property and the Collateral and is not intended to
create nor shall it create any obligation upon Agent or any Lender with respect
thereto.
(e) Credit Parties shall promptly forward to Agent copies of
any request for information, notification of potential liability, demand letter
relating to potential responsibility with respect to the investigation or
cleanup of Hazardous Substances at any other site owned, operated or used by any
Credit Party to dispose of Hazardous Substances and shall continue to forward
copies of material correspondence between any Credit Party and the Authority
regarding such claims to Agent until the claim is settled. Credit Parties shall
promptly forward to Agent copies of all documents and reports concerning a
Hazardous Discharge at the Real Property that any Credit Party is required to
file under any Environmental Laws. Such information is to be provided solely to
allow Agent to protect Agent's security interest in the Real Property and the
Collateral.
(f) Credit Parties shall respond promptly to any Hazardous
Discharge or Environmental Complaint and take all necessary action in order to
safeguard the health of any Person and to avoid subjecting the Collateral or
Real Property to any Lien. If any Credit Party shall fail to respond promptly to
any Hazardous Discharge or Environmental Complaint or any Credit Party shall
fail to comply with any of the requirements of any Environmental Laws, Agent on
behalf of Lenders may, but without the obligation to do so, for the sole purpose
of protecting Agent's interest in Collateral: (A) give such notices or (B) enter
onto the Real Property (or authorize third parties to enter onto the Real
Property) and take such actions as Agent (or such third parties as directed by
Agent) deem reasonably necessary or advisable, to clean up, remove, mitigate or
otherwise deal with any such Hazardous Discharge or Environmental Complaint. All
reasonable costs and expenses incurred by Agent and Lenders (or such third
parties) in the exercise of any such rights, including any sums paid in
connection with any judicial or administrative investigation or proceedings,
fines and penalties, together with interest thereon from the date expended at
the Default Rate for Domestic Rate Loans constituting Revolving Advances shall
be paid upon demand by Borrowers, and until paid shall be added to and become a
part of the Obligations secured by the Liens created by the terms of this
Agreement or any other agreement between Agent, any Lender and any Credit Party.
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(g) Promptly upon the written request of Agent from time to
time which request shall only be made if Agent, in its reasonable discretion,
believes that Hazardous Substances may be found on, under, at or within the
applicable Real Property, Credit Parties shall provide Agent, at Credit Parties'
expense, with an environmental site assessment or environmental audit report
prepared by an environmental engineering firm acceptable in the reasonable
opinion of Agent, to assess with a reasonable degree of certainty the existence
of a Hazardous Discharge and the potential costs in connection with abatement,
cleanup and removal of any Hazardous Substances found on, under, at or within
the Real Property. Any report or investigation of such Hazardous Discharge
proposed and acceptable to an appropriate Authority that is charged to oversee
the clean-up of such Hazardous Discharge shall be acceptable to Agent. If such
estimates, individually or in the aggregate, exceed $100,000, Agent shall have
the right to require Credit Parties to post a bond, letter of credit or other
security reasonably satisfactory to Agent to secure payment of these costs and
expenses.
(h) Credit Parties shall defend and indemnify Agent and
Lenders and hold Agent, Lenders and their respective employees, agents,
directors and officers harmless from and against all loss, liability, damage and
expense, claims, costs, fines and penalties, including attorney's fees, suffered
or incurred by Agent or Lenders under or on account of any Environmental Laws,
including, without limitation, the assertion of any Lien thereunder, with
respect to any Hazardous Discharge, the presence of any Hazardous Substances
affecting the Real Property, whether or not the same originates or emerges from
the Real Property or any contiguous real estate, including any loss of value of
the Real Property as a result of the foregoing except to the extent such loss,
liability, damage and expense is attributable to any Hazardous Discharge
resulting from actions on the part of Agent or any Lender. Credit Parties'
obligations under this Section 4.19 shall arise upon the discovery of the
presence of any Hazardous Substances at the Real Property, whether or not any
federal, provincial, state, or local environmental agency has taken or
threatened any action in connection with the presence of any Hazardous
Substances. Credit Parties' obligation and the indemnifications hereunder shall
survive the termination of this Agreement.
(i) For purposes of Section 4.19 and 5.7, all references to
Real Property shall be deemed to include all of Credit Parties' right, title and
interest in and to its owned and leased premises.
4.20. Financing Statements. Except as respects the financing statements
filed by Agent and the financing statements described on Schedule 1.2, no
financing statement covering any of the Collateral or any proceeds thereof is on
file in any public office.
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4.21. Amalgamation. Each Credit Party acknowledges that if it
amalgamates with any other corporation, then (i) the Agent's security interest
attaches to the Collateral which will extend to and include all of the personal
property of each of the amalgamating corporations and all of the personal
property of the amalgamated corporation owned on the amalgamation becoming
effective and thereafter owned or acquired, (ii) the term "Credit Party", where
used in this Agreement, will extend to and include the amalgamating corporations
and the amalgamated corporation, and (iii) the term "Obligations" where used in
this Agreement will extend to and included "Obligations" of the amalgamating
corporations and the Obligations of the amalgamated corporation.
V. REPRESENTATIONS AND WARRANTIES.
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Each Credit Party represents and warrants as follows:
5.1. Authority. Each Credit Party has full power, authority and legal
right to enter into this Agreement and the Other Documents and to perform all
its respective Obligations hereunder and thereunder. This Agreement and the
Other Documents constitute the legal, valid and binding obligation of such
Credit Party enforceable in accordance with their terms, except as such
enforceability may be limited by any applicable bankruptcy, insolvency,
moratorium or similar laws affecting creditors' rights generally. The execution,
delivery and performance of this Agreement and of the Other Documents (a) are
within such Credit Party's corporate powers, have been duly authorized, are not
in contravention of law or the terms of such Credit Party's by-laws, certificate
of incorporation or other applicable documents relating to such Credit Party's
formation or to the conduct of such Credit Party's business or of any material
agreement or undertaking to which such Credit Party is a party or by which such
Credit Party is bound, and (b) will not conflict with nor result in any breach
in any of the provisions of or constitute a default under or result in the
creation of any Lien except Permitted Encumbrances upon any asset of such Credit
Party under the provisions of any agreement, charter document, instrument,
by-law, or other instrument to which such Credit Party is a party or by which it
or its property may be bound.
5.2. Formation and Qualification. (a) Each Credit Party is duly
incorporated and in good standing under the laws of the jurisdictions listed on
Schedule 5.2(a) and is qualified to do business and is in good standing in the
jurisdictions listed on Schedule 5.2(a) which constitute all jurisdictions in
which qualification and good standing are necessary for such Credit Party to
conduct its business and own its property and where the failure to so qualify
could reasonably be expected to have a Material Adverse Effect on such Credit
Party. Each Credit Party has delivered to Agent true and complete copies of its
organizational documents and will promptly notify Agent of any amendment or
changes thereto.
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(b) The only Subsidiaries of each Credit Party are listed on
Schedule 5.2(b).
5.3. Survival of Representations and Warranties. All representations
and warranties of such Credit Party contained in this Agreement and the Other
Documents shall be true at the time of such Credit Party's execution of this
Agreement and the Other Documents, and shall survive the execution, delivery and
acceptance thereof by the parties thereto and the closing of the transactions
described therein or related thereto.
5.4. Tax Returns. Each Credit Party's federal tax identification number
is set forth on Schedule 5.4. Each Credit Party has filed all federal,
provincial, state and local tax returns and other reports each is required by
law to file and has paid all taxes, assessments, fees and other governmental
charges that are due and payable. Federal, provincial, state and local income
tax returns of each Credit Party have been examined and reported upon by the
appropriate taxing authority or closed by applicable statute and satisfied for
all fiscal years prior to and including the fiscal year ending December 31,
1998. The provision for taxes on the books of each Credit Party are adequate for
all years not closed by applicable statutes, and for its current fiscal year,
and no Credit Party has any knowledge of any deficiency or additional assessment
in connection therewith not provided for on its books.
5.5. Financial Statements.
(a) The pro forma balance sheet of Borrowers on a consolidated
basis (the "Pro Forma Balance Sheet") furnished to Agent on the Closing Date
reflects the consummation of the transactions contemplated under this Agreement
(the "Transactions") and is accurate, complete and correct and fairly reflects
the financial condition of Borrowers in all material respects on a consolidated
basis as of the Closing Date after giving effect to the Transactions, and has
been prepared in accordance with GAAP, consistently applied. The Pro Forma
Balance Sheet has been certified as accurate, complete and correct in all
material respects by the President and Chief Financial Officer of SunSource. All
financial statements referred to in this subsection 5.5(a), including the
related schedules and notes thereto, have been prepared, in accordance with
GAAP, except as may be disclosed in such financial statements.
(b) The twelve-month cash flow projections of the Borrowers on
a consolidated basis and their projected balance sheets as of the Closing Date,
copies of which are annexed hereto as Exhibit 5.5(b) (the "Projections") were
prepared by the Chief Financial Officer of SunSource, are based on underlying
assumptions which provide a reasonable basis for the projections contained
therein and reflect Borrowers' judgment based on present circumstances of the
most likely set of conditions and course of action for the projected period. The
cash flow Projections together with the Pro Forma Balance Sheet, are referred to
as the "Pro Forma Financial Statements".
(c) The consolidated and consolidating balance sheets of the
Borrowers, their Subsidiaries and such other Persons described therein
(including the accounts of all Subsidiaries for the respective periods during
which a subsidiary relationship existed) as of September 30, 1999 and the
related statements of income, changes in stockholder's equity, and changes in
cash flow for the period ended on such date, all accompanied by reports thereon
containing opinions without qualification by independent certified public
accountants, copies of which have been delivered to Agent, have been prepared in
accordance with GAAP, consistently applied (except for changes in application in
which such accountants concur and present fairly the financial position of the
Borrowers and their Subsidiaries at such date and the results of their
operations for such period. Since September 30, 1999 there has been no change in
the condition, financial or otherwise, of Borrowers or their Subsidiaries as
shown on the consolidated balance sheet as of such date and no change in the
aggregate value of machinery, equipment and Real Property owned by Borrowers and
their respective Subsidiaries, except changes in the ordinary course of
business, none of which individually or in the aggregate has been materially
adverse.
5.6. Corporate Name. No Credit Party has been known by any other
corporate name or any French version of its name in the past five years and does
not sell Inventory under any other name except as set forth on Schedule 5.6, nor
has any Credit Party been the surviving corporation of a merger or consolidation
or acquired all or substantially all of the assets of any Person during the
preceding five (5) years.
5.7. O.S.H.A. and Environmental Compliance.
(a) Each Credit Party has duly complied with, and its
facilities, business, assets, property, leaseholds and Equipment are in
compliance in all material respects with, the provisions of the Federal
Occupational Safety and Health Act, the Environmental Protection Act, RCRA and
all other Environmental Laws; there have been no outstanding citations, notices
or orders of non-compliance issued to any Credit Party or relating to its
business, assets, property, leaseholds or Equipment under any such laws, rules
or regulations.
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(b) Each Credit Party has been issued all required federal,
provincial, state and local licenses, certificates or permits relating to all
applicable Environmental Laws.
(c) (i) There are no visible signs of releases, spills,
discharges, leaks or disposal (collectively referred to as "Releases") of
Hazardous Substances at, upon, under or within any Real Property; (ii) there are
no underground storage tanks or polychlorinated biphenyls on the Real Property;
(iii) none of the Real Property has ever been used as a treatment, storage or
disposal facility of Hazardous Waste; and (iv) no Hazardous Substances are
present on the Real Property, excepting such quantities as are handled in
accordance with all applicable manufacturer's instructions and governmental
regulations and in proper storage containers and as are necessary for the
operation of the commercial business of any Credit Party or of its tenants.
5.8. Solvency; No Litigation, Violation, Indebtedness or Default.
(a) After giving effect to the Transactions, Credit Parties
will be solvent, able to pay their debts as they mature, have capital sufficient
to carry on their business and all businesses in which they are about to engage,
and (i) as of the Closing Date, the fair present saleable value of their assets,
calculated on a going concern basis, is in excess of the amount of their
liabilities and (ii) subsequent to the Closing Date, the fair saleable value of
their assets (calculated on a going concern basis) will be in excess of the
amount of their liabilities.
(b) Except as disclosed in Schedule 5.8(b), no Credit Party
has (i) any pending or threatened litigation, arbitration, actions or
proceedings which involve the possibility of having a Material Adverse Effect on
such Credit Party, and (ii) any liabilities nor indebtedness for borrowed money
other than the Obligations.
(c) No Credit Party is in violation of any applicable statute,
regulation or ordinance in any respect which could reasonably be expected to
have a Material Adverse Effect on such Credit Party, nor is any Credit Party in
material violation of any order of any court, governmental authority or
arbitration board or tribunal.
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(d) As of the Closing Date and on the last day of each fiscal
quarter, no Credit Party nor any member of the Controlled Group maintains or
contributes to any Plan other than those listed on Schedule 5.8(d) hereto.
Credit Parties shall be required to add any new Plans not listed on Schedule
5.8(d) on the last day of each fiscal quarter to reflect Plans entered into
during such fiscal quarter. Except where the failure to be true would not
reasonably be expected to have a Material Adverse Effect on any Credit Party or
any member of the Controlled Group, or except as set forth in Schedule 5.8(d),
(i) no Pension Plan has incurred any "accumulated funding deficiency," as
defined in Section 302(a)(2) of ERISA and Section 412(a) of the Code, whether or
not waived, and each Credit Party and each member of the Controlled Group has
met all applicable minimum funding requirements under Section 302 of ERISA in
respect of each Pension Plan, (ii) each Plan which is intended to be a qualified
plan under Section 401(a) of the Code as currently in effect has been determined
by the Internal Revenue Service to be qualified under Section 401(a) of the Code
and the trust related thereto is exempt from federal income tax under Section
501(a) of the Code, (iii) with respect to each Pension Plan, no Credit Party nor
any member of the Controlled Group has incurred any material liability to the
PBGC other than for the payment of premiums, and there are no premium payments
which have become due which are unpaid, (iv) no Pension Plan has been terminated
by the plan administrator thereof nor by the PBGC, and to the knowledge of the
Credit Parties there is no occurrence which would cause the PBGC to institute
proceedings under Title IV of ERISA to terminate any Pension Plan, (v) at this
time, the current value of the assets of each Pension Plan equals or exceeds the
present value of the accrued benefits and other liabilities of such Pension Plan
and no Credit Party nor any member of the Controlled Group knows of any facts or
circumstances which would materially change the value of such assets and accrued
benefits and other liabilities, (vi) no Credit Party nor any member of the
Controlled Group has breached any of the responsibilities, obligations or duties
imposed on it by ERISA with respect to any Plan, (vii) no Credit Party nor any
member of a Controlled Group has incurred any material liability for any excise
tax arising under Section 4972 or 4980B of the Code, and to the knowledge of the
Credit Party no fact exists which could give rise to any such liability, (viii)
no Credit Party nor any member of the Controlled Group nor any fiduciary of, nor
any trustee to, any Plan, has engaged in a non-exempt "prohibited transaction"
described in Section 406 of the ERISA or Section 4975 of the Code nor taken any
action which would constitute or result in a Termination Event with respect to
any such Plan which is subject to ERISA, (ix) each Credit Party and each member
of the Controlled Group has made all contributions due and payable with respect
to each Plan, (x) there exists no event described in Section 4043(b) of ERISA,
for which the thirty (30) day notice period contained in 29 CFR ss.2615.3 has
not been waived, (xi) no Credit Party nor any member of the Controlled Group has
any fiduciary responsibility for investments with respect to any plan existing
for the benefit of persons other than employees or former employees of any
Credit Party and any member of the Controlled Group, and (xii) no Credit Party
nor any member of the Controlled Group has withdrawn, completely or partially,
from any Multiemployer Plan so as to incur liability under the Multiemployer
Pension Plan Amendments Act of 1980.
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5.9. Patents, Trademarks, Copyrights and Licenses. All patents, patent
applications, trademarks, trademark applications, service marks, service mark
applications, copyrights, copyright applications, design rights, tradenames,
assumed names, trade secrets and licenses owned or utilized by any Credit Party
are set forth on Schedule 5.9, are valid and have been duly registered or filed
with all appropriate governmental authorities and constitute all of the
intellectual property rights which are necessary for the operation of its
business; there is no objection to or pending challenge to the validity of any
such patent, trademark, copyright, design right, tradename, trade secret or
license and no Credit Party is aware of any grounds for any challenge, except as
set forth in Schedule 5.9 hereto. Each patent, patent application, patent
license, trademark, trademark application, trademark license, service mark,
service mark application, service mark license, design right, copyright,
copyright application and copyright license owned or held by any Credit Party
and all trade secrets used by any Credit Party consist of original material or
property developed by such Credit Party or was lawfully acquired by such Credit
Party from the proper and lawful owner thereof. Each of such items has been
maintained so as to preserve the value thereof from the date of creation or
acquisition thereof. With respect to all software used by any Credit Party, such
Credit Party is in possession of all source and object codes related to each
piece of software.
5.10. Licenses and Permits. Except as set forth in Schedule 5.10, each
Credit Party (a) is in compliance with and (b) has procured and is now in
possession of, all material licenses or permits required by any applicable
federal, provincial, state, or local law or regulation for the operation of its
business in each jurisdiction wherein it is now conducting or proposes to
conduct business and where the failure to be in such compliance or to procure
such licenses or permits could have a Material Adverse Effect on such Credit
Party.
5.11. Default of Indebtedness. No Credit Party is in default in the
payment of the principal of or interest on any Indebtedness in excess of $50,000
or under any instrument or agreement under or subject to which any Indebtedness
in excess of $50,000 has been issued and no event has occurred under the
provisions of any such instrument or agreement which with or without the lapse
of time or the giving of notice, or both, constitutes or would constitute an
event of default thereunder.
5.12. No Default. No Credit Party is in default in the payment or
performance of any of its contractual obligations and no Default has occurred.
5.13. No Burdensome Restrictions. No Credit Party is party to any
contract or agreement the performance of which could have a Material Adverse
Effect on such Credit Party. No Credit Party has agreed or consented to cause or
permit in the future (upon the happening of a contingency or otherwise) any of
its property, whether now owned or hereafter acquired, to be subject to a Lien
which is not a Permitted Encumbrance.
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5.14. No Labor Disputes. No Credit Party is involved in any labor
dispute; there are no strikes or walkouts or union organization of any Credit
Party's employees threatened or in existence and no labor contract is scheduled
to expire during the Term other than as set forth on Schedule 5.14 hereto.
5.15. Margin Regulations. No Credit Party is engaged, nor will it
engage, principally or as one of its important activities, in the business of
extending credit for the purpose of "purchasing" or "carrying" any "margin
stock" within the respective meanings of each of the quoted terms under
Regulation U of the Board of Governors of the Federal Reserve System as now and
from time to time hereafter in effect. No part of the proceeds of any Advance
will be used for "purchasing" or "carrying" "margin stock" as defined in
Regulation U of such Board of Governors.
5.16. Investment Company Act. No Credit Party is an "investment
company" registered or required to be registered under the Investment Company
Act of 1940, as amended, nor is it controlled by such a company.
5.17. Disclosure. No representation or warranty made by any Credit
Party in this Agreement or in any financial statement, report, certificate or
any other document furnished in connection herewith contains any untrue
statement of a material fact or omits to state any material fact necessary to
make the statements herein or therein not misleading. There is no fact known to
Credit Parties or which reasonably should be known to Borrowers which Credit
Parties have not disclosed to Agent in writing with respect to the transactions
contemplated by this Agreement which could reasonably be expected to have a
Material Adverse Effect on any Credit Party.
5.18. Delivery of Junior Subordinated Debentures. Agent has received
complete copies of the Junior Subordinated Debentures (including all exhibits,
schedules and disclosure letters referred to therein or delivered pursuant
thereto, if any) and all amendments thereto, waivers relating thereto and other
side letters or agreements affecting the terms thereof. None of such documents
and agreements has been amended or supplemented, nor have any of the provisions
thereof been waived, except pursuant to a written agreement or instrument which
has heretofore been delivered to Agent.
5.19. Swaps. No Credit Party is a party to, nor will it be a party to,
any swap agreement whereby such Credit Party has agreed or will agree to swap
interest rates or currencies unless same provides that damages upon termination
following an event of default thereunder are payable on an unlimited "two-way
basis" without regard to fault on the part of either party.
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5.20. Conflicting Agreements. No provision of any mortgage, indenture,
contract, agreement, judgment, decree or order binding on any Credit Party or
affecting the Collateral conflicts with, or requires any Consent which has not
already been obtained to, or would in any way prevent the execution, delivery or
performance of, the terms of this Agreement or the Other Documents.
5.21. Application of Certain Laws and Regulations. No Credit Party nor
any Affiliate of any Credit Party is subject to any statute, rule or regulation
which regulates the incurrence of any Indebtedness, including without
limitation, statutes or regulations relative to common or interstate carriers or
to the sale of electricity, gas, steam, water, telephone, telegraph or other
public utility services.
5.22. Business and Property of Credit Parties . Upon and after the
Closing Date, Credit Parties do not propose to engage in any business other than
as set forth on Schedule 5.22 hereto and activities necessary to conduct the
foregoing. On the Closing Date, each Credit Party will own all the property and
possess all of the rights and Consents necessary for the conduct of the business
of such Credit Party.
5.23. Year 2000. Credit Parties and their respective Subsidiaries have
reviewed the areas within their business and operations which could reasonably
be expected to be adversely affected by, and have developed a program to address
on a timely basis, the risk that certain computer applications used by Credit
Parties or their respective Subsidiaries (or any of their respective material
suppliers, customers or vendors) may be unable to recognize and perform properly
date-sensitive functions involving dates prior to and after December 31, 1999
(the "Year 2000 Problem"). The Year 2000 Problem is not expected to have a
Material Adverse Effect on Credit Parties.
5.24. Section 20 Subsidiaries. Credit Parties do not intend to use and
shall not use any portion of the proceeds of the Advances, directly or
indirectly, to purchase during the underwriting period, or for 30 days
thereafter, Ineligible Securities being underwritten by a Section 20 Subsidiary.
VI. AFFIRMATIVE COVENANTS.
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Each Credit Party shall, until payment in full of the Obligations and
termination of this Agreement:
6.1. Payment of Fees. Pay to Agent on demand all usual and customary
fees and expenses which Agent incurs in connection with (a) the forwarding of
Advance proceeds and (b) the establishment and maintenance of any Blocked
Accounts or Depository Accounts as provided for in Section 4.15(h). Agent may,
without making demand, charge Borrowers' Account for all such fees and expenses.
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6.2. Conduct of Business and Maintenance of Existence and Assets. (a)
Conduct continuously and operate actively its business according to good
business practices and maintain all of its properties useful or necessary in its
business in good working order and condition (reasonable wear and tear excepted
and except as may be disposed of in accordance with the terms of this
Agreement), including, without limitation, all licenses, patents, copyrights,
design rights, tradenames, trade secrets and trademarks and take all actions
necessary to enforce and protect the validity of any intellectual property right
or other right included in the Collateral; (b) keep in full force and effect its
existence and comply in all material respects with the laws and regulations
governing the conduct of its business where the failure to do so could
reasonably be expected to have a Material Adverse Effect on such Credit Party;
and (c) make all such reports and pay all such franchise and other taxes and
license fees and do all such other acts and things as may be lawfully required
to maintain its rights, licenses, leases, powers and franchises under the laws
of the United States, Canada or any political subdivision thereof where the
failure to do so could reasonably be expected to have a Material Adverse Effect
on such Credit Party.
6.3. Violations. Promptly notify Agent in writing of any violation of
any law, statute, regulation or ordinance of any Governmental Body, or of any
agency thereof, applicable to any Credit Party which could reasonably be
expected to have a Material Adverse Effect on any Credit Party.
6.4. Government Receivables. At the Agent's request, take all steps
necessary to protect Agent's interest in the Collateral under the Federal
Assignment of Claims Act or other applicable federal, provincial, state or local
statutes or ordinances and deliver to Agent appropriately endorsed, any
instrument or chattel paper connected with any Receivable arising out of
contracts between any Credit Party and the United States, Canada, any province,
any state or any department, agency or instrumentality of any of them.
6.5. Minimum EBITDA. Maintain, with respect to Borrowers on a
consolidated basis, EBITDA of not less than $6,000,000 for the three months
ending March 31, 2000.
6.6. Fixed Charge Coverage Ratio. Maintain, with respect to Borrowers
on a consolidated basis, a Fixed Charge Coverage Ratio of not less than 1.35 to
1 for the three months ending June 30, 2000, the six months ending September 30,
2000, the nine months ending December 31, 2000 and thereafter on the last day of
each March, June, September and December for the twelve months period ending on
such last day.
6.7. Undrawn Availability. Maintain, with respect to Borrowers on a
consolidated basis, at all times at least $5,000,000 of Undrawn Availability (as
calculated under Section 2.1(a)(y)) including, without limitation, after giving
effect to any payments made under the Junior Subordinated Debentures.
6.8. Deferred Interest. In the event (a) at December 31, 1999, January
31, 2000 and February 29, 2000, Undrawn Availability with respect to Borrowers
on a consolidated basis, is less than $8,000,000, (b) at March 31, 2000, April
30, 2000, May 31, 2000 and June 30, 2000, Undrawn Availability with respect to
Borrowers on a consolidated basis is less than $10,000,000 or (c) commencing on
June 30, 2000, the Fixed Charge Coverage Ratio for the most recently completed
fiscal quarter (for the three month, six month, nine month or rolling twelve
month period described in Section 6.6 hereof) is less than 1.25 to 1, Credit
Parties shall exercise their right to defer interest due under the Junior
Subordinated Debentures and prior to paying any such deferred interest under the
Junior Subordinated Debentures prior to the end of such deferral period, Credit
Parties shall obtain the written consent of Required Lenders to make such
payment.
6.9. Execution of Supplemental Instruments. Execute and deliver to
Agent from time to time, upon demand, such supplemental agreements, statements,
assignments and transfers, or instructions or documents relating to the
Collateral, and such other instruments as Agent may request, in order that the
full intent of this Agreement may be carried into effect.
6.10. Payment of Indebtedness. Pay, discharge or otherwise satisfy at
or before maturity (subject, where applicable, to specified grace periods and,
in the case of the trade payables, to normal payment practices) all its
obligations and liabilities of whatever nature, except when the failure to do so
could not reasonably be expected to have a Material Adverse Effect or when the
amount or validity thereof is currently being contested in good faith by
appropriate proceedings and each Credit Party shall have provided for such
reserves as Agent may reasonably deem proper and necessary, subject at all times
to any applicable subordination arrangement in favor of Lenders.
6.11. Standards of Financial Statements. Cause all financial statements
referred to in Sections 9.7, 9.8, 9.9, 9.10, 9.11, 9.12, 9.13 and 9.14 as to
which GAAP is applicable to be complete and correct in all material respects
(subject, in the case of interim financial statements, to normal year-end audit
adjustments) and to be prepared in reasonable detail and in accordance with GAAP
applied consistently throughout the periods reflected therein (except as
concurred in by such reporting accountants or officer, as the case may be, and
disclosed therein).
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6.12. Harding Mortgages. If the Harding Divestiture is not consummated
on or before March 31, 2000, Harding shall, at the request of Agent, execute and
deliver to Agent a Mortgage, in form and substance satisfactory to Agent, on
each of its owned Real Property having a fair market value of $100,000 or more
along with such other instruments, agreements or documents reasonably requested
by Agent in connection therewith including, without limitation, title
commitments, surveys and environmental reports, all of which shall be in form
and substance satisfactory to Agent.
6.13. Net Worth. On or before March 31, 2000, Borrowers and Required
Lenders shall in good faith negotiate the establishment of minimum Net Worth
requirements to be tested at the end of each fiscal quarter commencing with the
fiscal quarter ending March 31, 2000.
VII. NEGATIVE COVENANTS.
No Credit Party shall, until satisfaction in full of the Obligations
and termination of this Agreement:
7.1. Merger, Consolidation, Acquisition and Sale of Assets.
(a) Enter into any merger, amalgamation, consolidation or
other reorganization with or into any other Person or acquire all or a
substantial portion of the assets or stock of any Person or permit any other
Person to consolidate with or merge with it.
(b) Sell, lease, transfer or otherwise dispose of any of its
properties or assets, except in the ordinary course of its business and except
(i) as provided in Section 4.3 or (ii) the Harding Divestiture.
7.2. Creation of Liens. Create or suffer to exist or permit any of its
Subsidiaries to create or suffer to exist any Lien or transfer upon or against
any of its property or assets (including, without limitation, any life insurance
policies) now owned or hereafter acquired, except Permitted Encumbrances.
7.3. Guarantees. Become liable upon the obligations of any Person by
assumption, endorsement or guaranty thereof or otherwise (other than to Lenders)
except (a) as disclosed on Schedule 7.3, (b) the endorsement of checks in the
ordinary course of business and (c) SunSource may guaranty, in the ordinary
course of business, obligations of any other Credit Party under such Credit
Party's real property leases.
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7.4. Investments. Purchase or acquire obligations or stock of, or any
other interest in, any Person, except (a) obligations issued or guaranteed by
the United States of America or any agency thereof, (b) commercial paper with
maturities of not more than 180 days and a published rating of not less than A-1
or P-1 (or the equivalent rating), (c) certificates of time deposit and bankers'
acceptances having maturities of not more than 180 days and repurchase
agreements backed by United States government securities of a commercial bank if
(i) such bank has a combined capital and surplus of at least $500,000,000, or
(ii) its debt obligations, or those of a holding company of which it is a
Subsidiary, are rated not less than A (or the equivalent rating) by a nationally
recognized investment rating agency, and (d) U.S. money market funds that invest
solely in obligations issued or guaranteed by the United States of America or an
agency thereof.
7.5. Loans. Make advances, loans or extensions of credit to any Person,
including without limitation, any Parent, Subsidiary or Affiliate except with
respect to the extension of commercial trade credit in connection with the sale
of Inventory in the ordinary course of its business except loans to employees
which shall not exceed $500,000 in the aggregate at any time.
7.6. Capital Expenditures. Contract for, purchase or make any
expenditure or commitments for fixed or capital assets (including capitalized
leases) in any fiscal year in an aggregate amount for all Credit Parties in
excess of $8,000,000.
7.7. Dividends. Declare, pay or make any dividend or distribution on
any shares of the common stock or preferred stock of any Credit Party (other
than dividends or distributions payable in its stock, or split-ups or
reclassifications of its stock) or apply any of its funds, property or assets to
the purchase, redemption or other retirement of any common or preferred stock,
or of any options to purchase or acquire any such shares of common or preferred
stock of any Credit Party except that so long as (a) a notice of termination
with regard to this Agreement shall not be outstanding, (b) no Event of Default
shall have occurred and then be continuing, and (c) the purpose for such
purchase, redemption or dividend shall be as set forth in writing to Agent at
least ten (10) days prior to such purchase, redemption or dividend and such
purchase, redemption or dividend shall in fact be used for such purpose, Credit
Parties shall be permitted to pay dividends to any other Credit Party, to pay
professional fees, franchise taxes and other ordinary course of business
operating expenses (excluding salaries and other employee compensation) incurred
by such Credit Party.
7.8. Indebtedness. Create, incur, assume or suffer to exist any
Indebtedness (exclusive of trade debt) except in respect of (i) Indebtedness to
Agent or to Lenders; (ii) Indebtedness incurred for capital expenditures
permitted under Section 7.6 hereof; (iii) Indebtedness due under the Junior
Subordinated Debentures as in effect on the date hereof, and (iv) Indebtedness
set forth in the financial statements delivered pursuant to Section 5.5 hereof.
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7.9. Nature of Business. Substantially change the nature of the
business in which it is presently engaged, nor except as specifically permitted
hereby purchase or invest, directly or indirectly, in any assets or property
other than in the ordinary course of business for assets or property which are
useful in, necessary for and are to be used in its business as presently
conducted.
7.10. Transactions with Affiliates. Directly or indirectly, purchase,
acquire or lease any property from, or sell, transfer or lease any property to,
or otherwise deal with, any Affiliate, except transactions in the ordinary
course of business, on an arm's-length basis on terms no less favorable than
terms which would have been obtainable from a Person other than an Affiliate.
7.11. Leases. Enter as lessee into any lease arrangement for real or
personal property (unless capitalized and permitted under Section 7.6 hereof) if
after giving effect thereto, aggregate annual rental payments for all leased
property would exceed $15,000,000 in any one fiscal year in the aggregate for
all Credit Parties.
7.12. Subsidiaries.
(a) Form any Subsidiary.
(b) Enter into any partnership, joint venture or similar
arrangement.
7.13. Fiscal Year and Accounting Changes. Change its fiscal year from
December 31 or make any significant change (i) in accounting treatment and
reporting practices except as required by GAAP or (ii) in tax reporting
treatment except as required by law.
7.14. Pledge of Credit. Now or hereafter pledge Agent's or any Lender's
credit on any purchases or for any purpose whatsoever or use any portion of any
Advance in or for any business other than such Credit Party's business as
conducted on the date of this Agreement.
7.15. Amendment of Articles of Incorporation, By-Laws. Amend, modify or
waive any term or material provision of its Articles of Incorporation, By-Laws,
or any of its organizational documents unless required by law.
7.16. Compliance with ERISA. Except where the failure to comply would
reasonably be expected to have a Material Adverse Effect on any Credit Party or
member of the Controlled Group (i) (x) without prior notice to Agent, maintain,
or permit any member of the Controlled Group to maintain, or (y) become
obligated to contribute, or permit any member of the Controlled Group to become
obligated to contribute, to any Plan, other than those Plans disclosed on
Schedule 5.8(d), (ii) engage, or permit any member of the Controlled Group to
engage, in any non-exempt "prohibited transaction", as that term is defined in
section 406 of ERISA and Section 4975 of the Code, (iii) incur, or permit any
member of the Controlled Group to incur, any material "accumulated funding
deficiency", as that term is defined in Section 302 of ERISA or Section 412 of
the Code, (iv) terminate, or permit any member of the Controlled Group to
terminate, any Plan where such event could result in any material liability of
any Credit Party or any member of the Controlled Group or the imposition of a
lien on the property of any Credit Party or any member of the Controlled Group
pursuant to Section 4068 of ERISA, (v) assume, or permit any member of the
Controlled Group to assume, any obligation to contribute to any Multiemployer
Plan not disclosed on Schedule 5.8(d), without prior written consent of Agent
(vi) incur, or permit any member of the Controlled Group to incur, any
withdrawal liability to any Multiemployer Plan; (vii) fail promptly to notify
Agent of the occurrence of any Termination Event, (viii) fail to materially
comply, or permit a member of the Controlled Group to fail to materially comply,
with the requirements of ERISA or the Code or other applicable laws in respect
of any Plan, (ix) fail to meet, or permit any member of the Controlled Group to
fail to meet, all minimum funding requirements under ERISA or the Code or
postpone or delay or allow any member of the Controlled Group to postpone or
delay any funding requirement with respect of any Plan.
7.17. Prepayment of Indebtedness. At any time, directly or indirectly,
prepay any Indebtedness (other than to Lenders), or repurchase, redeem, retire
or otherwise acquire any Indebtedness of any Credit Party.
7.18. Junior Subordinated Debentures. At any time, directly or
indirectly, pay, prepay, repurchase, redeem, retire or otherwise acquire, or
make any payment on account of any principal of, interest on or premium payable
in connection with the repayment or redemption of the Junior Subordinated
Debentures, except for payments of interest (subject to Section 6.8 hereof)
required by the terms of the Junior Subordinated Debentures as in effect on the
Closing Date.
7.19. Other Agreements. Enter into any material amendment, waiver or
modification of the Junior Subordinated Debentures, or any related agreements.
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VIII. CONDITIONS PRECEDENT.
8.1. Conditions to Initial Advances. The agreement of Lenders to make
the initial Advances requested to be made on the Closing Date is subject to the
satisfaction, or waiver by Lenders, immediately prior to or concurrently with
the making of such Advances, of the following conditions precedent:
(a) Note. Agent shall have received the Notes duly executed
and delivered by an authorized officer of each Borrower;
(b) Filings, Registrations and Recordings. Each document
(including, without limitation, any Uniform Commercial Code financing statement)
required by this Agreement, any related agreement or under law or reasonably
requested by the Agent to be filed, registered or recorded in order to create,
in favor of Agent, a perfected security interest in or lien upon the Collateral
shall have been properly filed, registered or recorded in each jurisdiction in
which the filing, registration or recordation thereof is so required or
requested, and Agent shall have received an acknowledgment copy, or other
evidence satisfactory to it, of each such filing, registration or recordation
and satisfactory evidence of the payment of any necessary fee, tax or expense
relating thereto;
(c) Corporate Proceedings of Credit Parties . Agent shall have
received a copy of the resolutions in form and substance reasonably satisfactory
to Agent, of the Board of Directors of each Credit Party authorizing (i) the
execution, delivery and performance of this Agreement, the Notes, the Mortgage
and any related agreements, (collectively the "Documents") and (ii) the granting
by each Credit Party of the security interests in and liens upon the Collateral
in each case certified by the Secretary or an Assistant Secretary of each Credit
Party as of the Closing Date; and, such certificate shall state that the
resolutions thereby certified have not been amended, modified, revoked or
rescinded as of the date of such certificate;
(d) Incumbency Certificates of Credit Parties . Agent shall
have received a certificate of the Secretary or an Assistant Secretary of each
Credit Party, dated the Closing Date, as to the incumbency and signature of the
officers of each Credit Party executing this Agreement, any certificate or other
documents to be delivered by it pursuant hereto, together with evidence of the
incumbency of such Secretary or Assistant Secretary;
(e) Certificates. Agent shall have received a copy of the
Articles or Certificate of Incorporation of each Borrower and each Guarantor,
and all amendments thereto, certified by the Secretary of State or other
appropriate official of its jurisdiction of incorporation together with copies
of the By-Laws of each Borrower and each Guarantor and all agreements of each
Borrower's and each Guarantor's shareholders certified as accurate and complete
by the Secretary of each Borrower and such Guarantor;
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(f) Good Standing Certificates. Agent shall have received good
standing certificates for each Borrower and each Guarantor dated not more than
thirty (30) days prior to the Closing Date, issued by the Secretary of State or
other appropriate official of each Borrower's and each Guarantor's jurisdiction
of incorporation and each jurisdiction where the conduct of each Borrower's and
each Guarantor's business activities or the ownership of its properties
necessitates qualification;
(g) Legal Opinion. Agent shall have received the executed
legal opinion of Morgan, Lewis & Bockius, LLP, Cowles Thompson, a Professional
Corporation, Katz Randall Weinberg Richmond, Wilson Walker Hochberg Slopen and
supporting opinions issued in connection with the foregoing, in form and
substance satisfactory to Agent which shall cover such matters incident to the
transactions contemplated by this Agreement, the Notes, and related agreements
as Agent may reasonably require and each Borrower and each Guarantor hereby
authorizes and directs such counsel to deliver such opinions to Agent and
Lenders;
(h) No Litigation. (i) No litigation, investigation or
proceeding before or by any arbitrator or Governmental Body shall be continuing
or threatened against any Borrower or any Guarantor or against the officers or
directors of any Borrower or any Guarantor (A) in connection with the Other
Documents or any of the transactions contemplated thereby and which, in the
reasonable opinion of Agent, is deemed material or (B) which could, in the
reasonable opinion of Agent, have a Material Adverse Effect on any Borrower or
any Guarantor; and (ii) no injunction, writ, restraining order or other order of
any nature materially adverse to any Borrower or any Guarantor or the conduct of
its business or inconsistent with the due consummation of the Transactions shall
have been issued by any Governmental Body;
(i) Financial Condition Certificates. Agent shall have
received an executed Financial Condition Certificate in the form of Exhibit
8.1(k). \
(j) Collateral Examination. Agent shall have completed
Collateral examinations and received appraisals, the results of which shall be
satisfactory in form and substance to Lenders, of the Receivables, Inventory,
General Intangibles and Equipment of each Borrower and Guarantor and all books
and records in connection therewith;
(k) Fees. Agent shall have received all fees payable to Agent
and Lenders on or prior to the Closing Date pursuant to Article III hereof;
(l) Pro Forma Financial Statements. Agent shall have received
a copy of the Pro Forma Financial Statements which shall be satisfactory in all
respects to Agent;
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(m) Junior Subordinated Debentures. Agent shall have received
final executed copies of the Junior Subordinated Debentures, and all related
agreements, documents and instruments as in effect on the Closing Date which
shall be satisfactory in all respects to Agent;
(n) Insurance. Agent shall have received in form and substance
satisfactory to Agent, certified copies of Borrower s' and Guarantor's casualty
insurance policies, together with loss payable endorsements on Agent's standard
form of loss payee endorsement naming Agent as loss payee, and certified copies
of Credit Parties' and Guarantor's liability insurance policies, together with
endorsements naming Agent as a co-insured;
(o) Title Insurance. Agent shall have received fully paid
mortgagee title insurance policies (or binding commitments to issue title
insurance policies, marked to Agent's satisfaction to evidence the form of such
policies to be delivered with respect to the Mortgage), in standard ALTA form,
issued by a title insurance company satisfactory to Agent, each in an amount
equal to not less than the fair market value of the Real Property subject to the
Mortgage, insuring the Mortgage to create a valid Lien on the Real Property with
no exceptions which Agent shall not have approved in writing and no survey
exceptions;
(p) Environmental Reports. Agent shall have received all
environmental studies and reports prepared by independent environmental
engineering firms with respect to all Real Property owned or leased by Credit
Parties or any Guarantor;
(q) Payment Instructions. Agent shall have received written
instructions from SunSource directing the application of proceeds of the initial
Advances made pursuant to this Agreement;
(r) Blocked Accounts. Agent shall have received duly executed
agreements establishing the Blocked Accounts or Depository Accounts with
financial institutions acceptable to Agent for the collection or servicing of
the Receivables and proceeds of the Collateral;
(s) Consents. Agent shall have received any and all Consents
necessary to permit the effectuation of the transactions contemplated by this
Agreement and the Other Documents; and, Agent shall have received such Consents
and waivers of such third parties as might assert claims with respect to the
Collateral, as Agent and its counsel shall deem necessary;
(t) No Adverse Material Change. (i) since September 30, 1999,
there shall not have occurred any event, condition or state of facts which could
reasonably be expected to have a Material Adverse Effect on any Borrower or any
Guarantor and (ii) no representations made or information supplied to Agent
shall have been proven to be inaccurate or misleading in any material respect;
(u) Leasehold Agreements. Agent shall have received landlord,
mortgagee or warehouseman agreements satisfactory to Agent with respect to all
premises leased by Borrowers or any Guarantor at which Inventory is located;
(v) October Financial Statements. Agent shall have received
the financial statements of Borrowers on a consolidated basis for the month of
October, 1999 which shall be satisfactory in all respects to Agent;
(w) Pledge Agreement and Other Documents. Agent shall have
received (i) the Pledge Agreement and (ii) the executed Other Documents, all in
form and substance satisfactory to Agent;
(x) Net Worth. Agent shall have received the Pro Forma Balance
Sheet reflecting a Net Worth after giving effect to the Indebtedness under the
Junior Subordinated Debentures and after giving effect to the Transactions of at
least $123,800,000;
(y) Contract Review. Agent shall have reviewed all material
contracts of Credit Parties and Guarantors including, without limitation,
leases, union contracts, labor contracts, vendor supply contracts, license
agreements and distributorship agreements and such contracts and agreements
shall be satisfactory in all respects to Agent;
(z) Closing Certificate. Agent shall have received a closing
certificate signed by the Chief Financial Officer of SunSource dated as of the
date hereof, stating that (i) all representations and warranties set forth in
this Agreement and the Other Documents are true and correct on and as of such
date, (ii) Credit Parties and Guarantors are on such date in compliance with all
the terms and provisions set forth in this Agreement and the Other Documents and
(iii) on such date no Default or Event of Default has occurred or is continuing;
(aa) Borrowing Base. Agent shall have received evidence from
SunSource that the aggregate amount of Eligible Receivables and Eligible
Inventory is sufficient in value and amount to support Advances in the amount
requested by Credit Parties on the Closing Date;
(bb) Undrawn Availability. After giving effect to the initial
Advances hereunder, Credit Parties shall have Undrawn Availability of at least
$15,000,000;
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(cc) Mortgage. Agent shall have received in form and substance
satisfactory to Lenders (i) an executed Mortgage and (ii) surveys; and
(dd) Other. All corporate and other proceedings, and all
documents, instruments and other legal matters in connection with the
Transactions shall be satisfactory in form and substance to Agent and its
counsel.
8.2. Conditions to Each Advance. The agreement of Lenders to make any
Advance requested to be made on any date (including, without limitation, the
initial Advance), is subject to the satisfaction of the following conditions
precedent as of the date such Advance is made:
(a) Representations and Warranties. Each of the
representations and warranties made by any Credit Party in or pursuant to this
Agreement and any related agreements to which it is a party, and each of the
representations and warranties contained in any certificate, document or
financial or other statement furnished at any time under or in connection with
this Agreement or any related agreement shall be true and correct in all
material respects on and as of such date as if made on and as of such date;
(b) No Default. No Event of Default or Default shall have
occurred and be continuing on such date, or would exist after giving effect to
the Advances requested to be made, on such date; provided, however that Lenders,
in their sole discretion, may continue to make Advances notwithstanding the
existence of an Event of Default or Default and that any Advances so made shall
not be deemed a waiver of any such Event of Default or Default; and
(c) Maximum Advances. In the case of any Advances requested to
be made, after giving effect thereto, the aggregate Advances shall not exceed
the maximum amount of Advances permitted under Section 2.1 hereof.
Each request for an Advance by any Borrower hereunder shall constitute a
representation and warranty by each Credit Party as of the date of such Advance
that the conditions contained in this subsection shall have been satisfied.
IX. INFORMATION AS TO CREDIT PARTIES.
Each Credit Party shall, until satisfaction in full of the Obligations
and the termination of this Agreement:
9.1. Disclosure of Material Matters. Immediately upon learning thereof,
report to Agent all matters materially affecting the value, enforceability or
collectibility of any portion of the Collateral including, without limitation,
any Credit Party's reclamation or repossession of, or the return to any Credit
Party of, a material amount of goods or claims or disputes asserted by any
Customer or other obligor.
9.2. Schedules. Deliver to Agent on or before the twentieth (20th) day
of each month as and for the prior month (a) accounts receivable agings, (b)
accounts payable schedules and (c) Inventory reports and (d) a Borrowing Base
Certificate (which shall be calculated as of the last day of the prior month and
which shall not be binding upon Agent or restrictive of Agent's rights under
this Agreement). In addition, each Borrower will deliver to Agent at such
intervals as Agent may require: (i) confirmatory assignment schedules, (ii)
copies of Customer's invoices, (iii) evidence of shipment or delivery, (iv)
monthly reconciliations of the above reports, and (v) such further schedules,
documents and/or information regarding the Collateral as Agent may require
including, without limitation, trial balances and test verifications. Agent
shall have the right to confirm and verify all Receivables by any manner and
through any medium it considers advisable and do whatever it may deem reasonably
necessary to protect its interests hereunder. The items to be provided under
this Section are to be in form satisfactory to Agent and executed by each
Borrower and delivered to Agent from time to time solely for Agent's convenience
in maintaining records of the Collateral, and any Borrower's failure to deliver
any of such items to Agent shall not affect, terminate, modify or otherwise
limit Agent's Lien with respect to the Collateral.
9.3. Environmental Reports. Furnish Agent, concurrently with the
delivery of the financial statements referred to in Sections 9.7 and 9.8, with a
certificate signed by the Chief Financial Officer of SunSource, on behalf of
each Borrower stating, to the best of his knowledge, that each Borrower is in
compliance in all material respects with all federal, provincial, state and
local laws relating to environmental protection and control and occupational
safety and health. To the extent any Credit Party is not in compliance with the
foregoing laws, the certificate shall set forth with specificity all areas of
non-compliance and the proposed action such Credit Party will implement in order
to achieve full compliance.
9.4. Litigation. Promptly notify Agent in writing of any litigation,
suit or administrative proceeding affecting any Credit Party, whether or not the
claim is covered by insurance, and of any suit or administrative proceeding,
which in any such case could reasonably be expected to have a Material Adverse
Effect on any Credit Party.
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9.5. Material Occurrences. Promptly notify Agent in writing upon the
occurrence of (a) any Event of Default or Default; (b) any event of default
under the Junior Subordinated Debentures; (c) any event which with the giving of
notice or lapse of time, or both, would constitute an event of default under the
Junior Subordinated Debentures; (d) any event, development or circumstance
whereby any financial statements or other reports furnished to Agent fail in any
material respect to present fairly, in accordance with GAAP consistently
applied, the financial condition or operating results of any Credit Party as of
the date of such statements; (e) any accumulated retirement plan funding
deficiency which, if such deficiency continued for two plan years and was not
corrected as provided in Section 4971 of the Code, could subject any Credit
Party to a tax imposed by Section 4971 of the Code; (f) each and every default
by any Credit Party which might result in the acceleration of the maturity of
any Indebtedness in excess of $50,000, including the names and addresses of the
holders of such Indebtedness with respect to which there is a default existing
or with respect to which the maturity has been or could be accelerated, and the
amount of such Indebtedness; and (g) any other development in the business or
affairs of any Credit Party which could reasonably be expected to have a
Material Adverse Effect on such Credit Party; in each case describing the nature
thereof and the action Credit Parties propose to take with respect thereto.
9.6. Government Receivables. Notify Agent immediately if any of its
Receivables arise out of contracts between any Credit Party and the United
States, Canada, any province, any state, or any department, agency or
instrumentality of any of them.
9.7. Annual Financial Statements. Furnish Agent and Lenders within
ninety (90) days after the end of each fiscal year of Borrowers, financial
statements of Borrowers on a consolidating and consolidated basis including, but
not limited to, statements of income and stockholders' equity and cash flow from
the beginning of the current fiscal year to the end of such fiscal year and the
balance sheet as at the end of such fiscal year, all prepared in accordance with
GAAP applied on a basis consistent with prior practices, and in reasonable
detail and reported upon without qualification by an independent certified
public accounting firm selected by Borrowers and satisfactory to Agent (the
"Accountants"). The report of the Accountants shall be accompanied by a
statement of the Accountants certifying that (i) they have caused the Loan
Agreement to be reviewed, (ii) in making the examination upon which such report
was based either no information came to their attention which to their knowledge
constituted an Event of Default or a Default under this Agreement or any related
agreement or, if such information came to their attention, specifying any such
Default or Event of Default, its nature, when it occurred and whether it is
continuing, and such report shall contain or have appended thereto calculations
which set forth Credit Parties' compliance with the requirements or restrictions
imposed by Sections 6.5, 6.6, 6.7, 7.6 and 7.11 hereof. In addition, the reports
shall be accompanied by a certificate of the Chief Financial Officer of
SunSource, on behalf of each Credit Party, which shall state that, based on an
examination sufficient to permit him to make an informed statement, no Default
or Event of Default exists, or, if such is not the case, specifying such Default
or Event of Default, its nature, when it occurred, whether it is continuing and
the steps being taken by the affected Credit Party with respect to such event,
and such certificate shall have appended thereto calculations which set forth
Credit Party's compliance with the requirements or restrictions imposed by
Sections 6.5, 6.6, 6.7, 7.6 and 7.11 hereof.
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9.8. Quarterly Financial Statements. Furnish Agent and Lenders within
forty-five (45) days after the end of each fiscal quarter, an unaudited balance
sheet of Borrowers on a consolidated and consolidating basis and unaudited
statements of income on a consolidated and consolidating basis and stockholders'
equity and cash flow of Borrowers on a consolidated basis reflecting results of
operations from the beginning of the fiscal year to the end of such quarter and
for such quarter, prepared on a basis consistent with prior practices and
complete and correct in all material respects, subject to normal and recurring
year end adjustments that individually and in the aggregate are not material to
the business of Credit Parties. The reports shall be accompanied by a
certificate signed by the Chief Financial Officer of SunSource, on behalf of
each Credit Party, which shall state that, based on an examination sufficient to
permit him to make an informed statement, no Default or Event of Default exists,
or, if such is not the case, specifying such Default or Event of Default, its
nature, when it occurred, whether it is continuing and the steps being taken by
the affected Credit Parties with respect to such default and, such certificate
shall have appended thereto calculations which set forth the affected Credit
Parties' compliance with the requirements or restrictions imposed by Sections
6.5, 6.6, 6.7, 7.6 and 7.11 hereof.
9.9. Monthly Financial Statements. Furnish Agent and Lenders within
forty (40) days after the end of each month, an unaudited balance sheet of
Borrowers on a consolidated and consolidating basis and unaudited statements of
income of Borrowers on a consolidated and consolidating basis reflecting results
of operations from the beginning of the fiscal year to the end of such month and
for such month, prepared on a basis consistent with prior practices and complete
and correct in all material respects, subject to normal and recurring year end
adjustments that individually and in the aggregate are not material to the
business of Credit Parties. The reports shall be accompanied by a certificate of
the Chief Financial Officer of SunSource, on behalf of each Credit Party, which
shall state that, based on an examination sufficient to permit him to make an
informed statement, no Default or Event of Default exists, or, if such is not
the case, specifying such Default or Event of Default, its nature, when it
occurred, whether it is continuing and the steps being taken by Credit Parties
with respect to such event and, such certificate shall have appended thereto
calculations which set forth Credit Parties' compliance with the requirements or
restrictions imposed by Sections 6.5, 6.6, 6.7, 7.6 and 7.11 hereof.
9.10. Other Reports. Furnish Agent as soon as available, but in any
event within ten (10) days after the issuance thereof, (i) with copies of such
financial statements, reports and returns as each Borrower shall send to its
stockholders and (ii) copies of all notices sent pursuant to the Junior
Subordinated Debentures.
9.11. Additional Information. Furnish Agent with such additional
information as Agent shall reasonably request in order to enable Agent to
determine whether the terms, covenants, provisions and conditions of this
Agreement and the Notes have been complied with by Borrowers including, without
limitation and without the necessity of any request by Agent, (a) copies of all
environmental audits and reviews, (b) at least thirty (30) days prior thereto,
notice of any Borrower's opening of any new office or place of business or any
Borrower's closing of any existing office or place of business, and (c) promptly
upon any Borrower's learning thereof, notice of any labor dispute to which any
Borrower may become a party, any strikes or walkouts relating to any of its
plants or other facilities, and the expiration of any labor contract to which
any Borrower is a party or by which any Borrower is bound.
9.12. Projected Operating Budget. Furnish Agent, no later than fifteen
(15) days prior to the beginning of each of SunSource's fiscal years commencing
with fiscal year 2001, a month by month projected operating budget and cash flow
of Borrowers on a consolidated and consolidating basis for such fiscal year
(including an income statement for each month and a balance sheet as at the end
of the last month in each fiscal quarter), such projections to be accompanied by
a certificate signed by the President or Chief Financial Officer of SunSource to
the effect that such projections have been prepared on the basis of sound
financial planning practice consistent with past budgets and financial
statements and that such officer has no reason to question the reasonableness of
any material assumptions on which such projections were prepared.
9.13. Variances From Operating Budget. Furnish Agent, concurrently with
the delivery of the financial statements referred to in Section 9.7 and each
quarterly and monthly report, a written report summarizing all material
variances from budgets submitted by Borrowers pursuant to Section 9.12 and a
discussion and analysis by management with respect to such variances.
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9.14. Notice of Suits, Adverse Events. Furnish Agent with prompt notice
of (i) any lapse or other termination of any Consent issued to any Borrower by
any Governmental Body or any other Person that is material to the operation of
any Borrower's business, (ii) any refusal by any Governmental Body or any other
Person to renew or extend any such Consent; and (iii) copies of any periodic or
special reports filed by any Borrower with any Governmental Body or Person, if
such reports indicate any material change in the business, operations, affairs
or condition of any Borrower, or if copies thereof are requested by Lender, and
(iv) copies of any material notices and other communications from any
Governmental Body or Person which specifically relate to any Borrower.
9.15. ERISA Notices and Requests. Furnish Agent with prompt written
notice in the event that (i) any Borrower or any member of the Controlled Group
knows or has reason to know that a Termination Event has occurred, together with
a written statement describing such Termination Event and the action, if any,
which such Borrower or any member of the Controlled Group has taken, is taking,
or proposes to take with respect thereto and, when known, any action taken or
threatened by the Internal Revenue Service, Department of Labor or PBGC with
respect thereto, (ii) any Borrower or any member of the Controlled Group knows
or has reason to know that a non-exempt prohibited transaction (as defined in
Sections 406 of ERISA and 4975 of the Code) has occurred together with a written
statement describing such transaction and the action which such Borrower or any
member of the Controlled Group has taken, is taking or proposes to take with
respect thereto, (iii) a funding waiver request has been filed with respect to
any Pension Plan together with all communications received by any Borrower or
any member of the Controlled Group with respect to such request, (iv) any
material increase in the benefits of any existing Plan or the establishment of
any new Plan or the commencement of contributions to any Plan to which any
Borrower or any member of the Controlled Group was not previously contributing
shall occur, (v) any Borrower or any member of the Controlled Group shall
receive from the PBGC a notice of intention to terminate a Pension Plan or to
have a trustee appointed to administer a Pension Plan, together with copies of
each such notice, (vi) any Borrower or any member of the Controlled Group shall
receive any unfavorable determination letter from the Internal Revenue Service
regarding the qualification of a Plan under Section 401(a) of the Code, together
with copies of each such letter; (vii) any Borrower or any member of the
Controlled Group shall receive a notice regarding the imposition of withdrawal
liability, together with copies of each such notice; (viii) any Borrower or any
member of the Controlled Group shall fail to make a required installment or any
other required payment under Section 412 of the Code on or before the due date
for such installment or payment; (ix) any Borrower or any member of the
Controlled Group knows that (a) a Multiemployer Plan has been terminated, (b)
the administrator or plan sponsor of a Multiemployer Plan intends to terminate a
Multiemployer Plan, or (c) the PBGC has instituted or will institute proceedings
under Section 4042 of ERISA to terminate a Multiemployer Plan.
9.16. Additional Documents. Execute and deliver to Agent, upon request,
such documents and agreements as Agent may, from time to time, reasonably
request to carry out the purposes, terms or conditions of this Agreement.
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X. EVENTS OF DEFAULT.
The occurrence of any one or more of the following events shall
constitute an "Event of Default":
10.1. failure by any Credit Party to pay any principal or interest on
the Obligations when due, whether at maturity or by reason of acceleration
pursuant to the terms of this Agreement or by notice of intention to prepay, or
by required prepayment or failure to pay any other liabilities or make any other
payment, fee or charge provided for herein when due or in any Other Document;
10.2. any representation or warranty made or deemed made by any Credit
Party in this Agreement or any related agreement or in any certificate, document
or financial or other statement furnished at any time in connection herewith or
therewith shall prove to have been misleading in any material respect on the
date when made or deemed to have been made;
10.3. failure by any Credit Party to (i) furnish financial information
when due or when requested, or (ii) permit the inspection of its books or
records in accordance with Section 4.10 hereof;
10.4. issuance of a notice of Lien, levy, assessment, injunction or
attachment against a material portion of any Credit Party's property which is
not stayed or lifted within thirty (30) days;
10.5. except as otherwise provided for in Sections 10.1 and 10.3,
failure or neglect of any Credit Party to perform, keep or observe any term,
provision, condition, covenant herein contained, or contained in any other
agreement or arrangement, now or hereafter entered into between any Credit Party
and Agent or any Lender except for a failure or neglect of any Credit Party to
perform, keep or observe any term, provision, condition or covenant, contained
in Sections 4.7, 4.9, 4.11, 6.1, 6.3, 6.4, 9.4, 9.6 or 9.15 hereof which is
cured within thirty (30) days from the occurrence of such failure or neglect;
10.6. any judgment or judgments are rendered or judgment liens filed
against any Credit Party or any execution, sequestration or other process of any
court becomes enforceable against a Credit Party or if a distress or an
analogous process is levied on all or part of its assets which, when aggregated
with judgements and other process of any court for all Credit Parties are in
aggregate amount in excess of $500,000 which within forty (40) days of such
rendering or filing is not either satisfied, stayed or discharged of record;
10.7. any Credit Party shall (i) apply for, consent to or suffer the
appointment of, or the taking of possession by, a receiver, custodian, trustee,
liquidator or similar fiduciary of itself or of all or a substantial part of its
property, (ii) make a general assignment for the benefit of creditors, (iii)
commence a voluntary case under any state, provincial or federal bankruptcy laws
(as now or hereafter in effect), (iv) be adjudicated a bankrupt or insolvent,
(v) file a petition seeking to take advantage of any other law providing for the
relief of debtors, (vi) acquiesce to, or fail to have dismissed, within
forty-five (45) days, any petition filed against it in any involuntary case
under such bankruptcy laws, or (vii) take any action for the purpose of
effecting any of the foregoing;
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10.8. any Credit Party shall admit in writing its inability, or be
generally unable, to pay its debts as they become due or cease operations of its
present business or institute or be subject to any formal or informal proceeding
for its dissolution, liquidation or winding up, or agree to make a bulk sale of
assets without the consent of Agent or Lenders;
10.9. any Affiliate or any Subsidiary of any Credit Party, or any
Guarantor, shall (i) apply for, consent to or suffer the appointment of, or the
taking of possession by, a receiver, custodian, trustee, liquidator or similar
fiduciary of itself or of all or a substantial part of its property, (ii) admit
in writing its inability, or be generally unable, to pay its debts as they
become due or cease operations of its present business, (iii) make a general
assignment for the benefit of creditors, (iv) commence a voluntary case under
any state, provincial or federal bankruptcy laws (as now or hereafter in
effect), (v) be adjudicated a bankrupt or insolvent, (vi) file a petition
seeking to take advantage of any other law providing for the relief of debtors,
(vii) acquiesce to, or fail to have dismissed, within forty-five (45) days, any
petition filed against it in any involuntary case under such bankruptcy laws, or
(viii) take any action for the purpose of effecting any of the foregoing;
10.10. any change in any Credit Party's condition or affairs (financial
or otherwise) which in Agent's reasonable opinion has a Material Adverse Effect
on such Credit Party including, without limitation, as a result of the Year 2000
Problem;
10.11. any Lien created hereunder or provided for hereby or under any
related agreement for any reason ceases to be or is not a valid and perfected
Lien having a first priority interest;
10.12. an event of default has occurred and been declared under the
Junior Subordinated Debentures which default shall not have been cured or waived
within any applicable grace period;
10.13. a default of the obligations of any Credit Party under any other
agreement to which it is a party shall occur which adversely affects its
condition, affairs or prospects (financial or otherwise) which default is not
cured within any applicable grace period;
10.14. termination or breach of any Guaranty or similar agreement
executed and delivered to Agent in connection with the Obligations of any
Borrower, or if any Guarantor attempts to terminate, challenges the validity of,
or its liability under, any such Guaranty or similar agreement;
10.15. any Change of Ownership or Change of Control shall occur;
10.16. any material provision of this Agreement shall, for any reason,
cease to be valid and binding on any Credit Party, or any Credit Party shall so
claim in writing to Agent;
10.17. (i) any Governmental Body shall (A) revoke, terminate, suspend
or adversely modify any license, permit, patent trademark or tradename of any
Credit Party, the continuation of which is material to the continuation of any
Credit Party's business, or (B) commence proceedings to suspend, revoke,
terminate or adversely modify any such license, permit, trademark, tradename or
patent and such proceedings shall not be dismissed or discharged within sixty
(60) days, or (c) schedule or conduct a hearing on the renewal of any license,
permit, trademark, tradename or patent necessary for the continuation of any
Credit Party's business and the staff of such Governmental Body issues a report
recommending the termination, revocation, suspension or material, adverse
modification of such license, permit, trademark, tradename or patent; (ii) any
agreement which is necessary or material to the operation of any Credit Party's
business shall be revoked or terminated and not replaced by a substitute
acceptable to Agent within thirty (30) days after the date of such revocation or
termination, and such revocation or termination and non-replacement would
reasonably be expected to have a Material Adverse Effect on any Credit Party;
10.18. any portion of the Collateral shall be seized or taken by a
Governmental Body, or any Credit Party or the title and rights of any Credit
Party or any Original Owner which is the owner of any material portion of the
Collateral shall have become the subject matter of litigation which might, in
the opinion of Agent, upon final determination, result in impairment or loss of
the security provided by this Agreement or the Other Documents; or
10.19. an event or condition specified in Sections 7.16 or 9.15 hereof
shall occur or exist with respect to any Plan and, as a result of such event or
condition, together with all other such events or conditions, any Credit Party
or any member of the Controlled Group shall incur, or in the opinion of Agent be
reasonably likely to incur, a liability to a Plan or the PBGC (or both) which,
in the reasonable judgment of Agent, would have a Material Adverse Effect on any
Credit Party.
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XI. LENDERS' RIGHTS AND REMEDIES AFTER DEFAULT.
11.1. Rights and Remedies. Upon the occurrence of (i) an Event of
Default pursuant to Section 10.7 all Obligations shall be immediately due and
payable and this Agreement and the obligation of Lenders to make Advances shall
be deemed terminated, and (ii) any of the other Events of Default and at any
time thereafter (such default not having previously been cured), at the option
of Agent or at the direction of Required Lenders all Obligations shall be
immediately due and payable and Lenders shall have the right to terminate this
Agreement and to terminate the obligation of Lenders to make Advances and (iii)
a filing of a petition against Credit Party in any involuntary case under any
state, provincial or federal bankruptcy laws, the obligation of Lenders to make
Advances hereunder shall be terminated other than as may be required by an
appropriate order of the bankruptcy court having jurisdiction over any Credit
Party. Upon the occurrence of any Event of Default and while such Event of
Default is continuing, Agent shall have the right to exercise any and all other
rights and remedies provided for herein, under the Uniform Commercial Code or
under any other applicable law and at law or equity generally, including,
without limitation, the right to foreclose the security interests granted herein
and to realize upon any Collateral by any available judicial procedure and/or to
take possession of and sell any or all of the Collateral with or without
judicial process. Agent may enter any of any Credit Party's premises or other
premises without legal process and without incurring liability to any Credit
Party therefor, and Agent may thereupon, or at any time thereafter, in its
discretion without notice or demand, take the Collateral and remove the same to
such place as Agent may deem advisable and Agent may require Credit Parties to
make the Collateral available to Agent at a convenient place. With or without
having the Collateral at the time or place of sale, Agent may sell the
Collateral, or any part thereof, at public or private sale, at any time or
place, in one or more sales, at such price or prices, and upon such terms,
either for cash, credit or future delivery, as Agent may elect. Except as to
that part of the Collateral which is perishable or threatens to decline speedily
in value or is of a type customarily sold on a recognized market, Agent shall
give Credit Parties reasonable notification of such sale or sales, it being
agreed that in all events written notice mailed to Credit Parties at least five
(5) days or such other period that may be required by any law of Canada or any
province thereof prior to such sale or sales is reasonable notification. At any
public sale Agent or any Lender may bid for and become the purchaser, and Agent,
any Lender or any other purchaser at any such sale thereafter shall hold the
Collateral sold absolutely free from any claim or right of whatsoever kind,
including any equity of redemption and such right and equity are hereby
expressly waived and released by each Credit Party. In connection with the
exercise of the foregoing remedies, Agent is granted permission to use all of
each Credit Party's trademarks, trade styles, trade names, patents, patent
applications, licenses, franchises and other proprietary rights which are used
in connection with (a) Inventory for the purpose of disposing of such Inventory
and (b) Equipment for the purpose of completing the manufacture of unfinished
goods. The proceeds realized from the sale of any Collateral shall be applied in
accordance with Section 11.5 hereof. If any deficiency shall arise, Credit
Parties shall remain liable to Agent and Lenders therefor.
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11.2. Agent's Discretion. Agent shall have the right in its sole
discretion to determine which rights, Liens, security interests or remedies
Agent may at any time pursue, relinquish, subordinate, or modify or to take any
other action with respect thereto and such determination will not in any way
modify or affect any of Agent's or Lenders' rights hereunder.
11.3. Setoff. In addition to any other rights which Agent or any Lender
may have under applicable law, upon the occurrence of an Event of Default and
while such Event of Default is continuing hereunder, Agent and such Lender shall
have a right to apply any Credit Party's property held by Agent and such Lender
to reduce the Obligations.
11.4. Rights and Remedies not Exclusive. The enumeration of the
foregoing rights and remedies is not intended to be exhaustive and the exercise
of any right or remedy shall not preclude the exercise of any other right or
remedies provided for herein or otherwise provided by law, all of which shall be
cumulative and not alternative.
11.5. Allocation of Payments After Event of Default. Notwithstanding
any other provisions of this Agreement to the contrary, after the occurrence and
during the continuance of an Event of Default, all amounts collected or received
by the Agent on account of the Obligations or any other amounts outstanding
under any of the Other Documents or in respect of the Collateral may, at Agent's
discretion, be paid over or delivered as follows:
FIRST, to the payment of all reasonable out-of-pocket costs and
expenses (including without limitation, reasonable attorneys' fees) of the Agent
in connection with enforcing the rights of the Lenders under this Agreement and
the Other Documents and any protective advances made by the Agent with respect
to the Collateral under or pursuant to the terms of this Document;
SECOND, to payment of any fees owed to the Agent;
THIRD, to the payment of all reasonable out-of-pocket costs and
expenses (including without limitation, reasonable attorneys' fees) of each of
the Lenders in connection with enforcing its rights under this Agreement and the
Other Documents or otherwise with respect to the Obligations owing to such
Lender;
FOURTH, to the payment of all of the Obligations consisting of accrued
fees and interest;
FIFTH, to the payment of the outstanding principal amount of the
Obligations (including the payment or cash collateralization of the outstanding
Letters of Credit);
SIXTH, to all other Obligations and other obligations which shall have
become due and payable under the Other Documents or otherwise and not repaid
pursuant to clauses "FIRST" through "FIFTH" above;
SEVENTH, to the payment of the surplus, if any, to whoever may be
lawfully entitled to receive such surplus.
In carrying out the foregoing, (i) amounts received shall be applied in the
numerical order provided until exhausted prior to application to the next
succeeding category; (ii) each of the Lenders shall receive (so long as it is
not a Defaulting Lender) an amount equal to its pro rata share (based on the
proportion that the then outstanding Advances held by such Lender bears to the
aggregate then outstanding Advances) of amounts available to be applied pursuant
to clauses "THIRD", "FOURTH", "FIFTH" and "SIXTH" above; and (iii) to the extent
that any amounts available for distribution pursuant to clause "FIFTH" above are
attributable to the issued but undrawn amount of outstanding Letters of Credit,
such amounts shall be held by the Agent in a cash collateral account and applied
(A) first, to reimburse the Issuer from time to time for any drawings under such
Letters of Credit and (B) then, following the expiration of all Letters of
Credit, to all other obligations of the types described in clauses "FIFTH" and
"SIXTH" above in the manner provided in this Section 11.5.
11.6. Canadian Remedies. Upon the occurrence of an Event of Default and
during the continuation thereof, solely with respect to Credit Parties organized
under the laws of Canada or any province thereof,
(a) Agent may, by instrument in writing, appoint a receiver
("Receiver" which term shall include a receiver and a manager) of all or any
part of Collateral and remove any Receiver appointed and appoint another
Receiver in its stead or may institute proceedings in any court of competent
jurisdiction for the appointment of a Receiver in respect of any Credit Party or
the Collateral;
(b) subject to the provisions of the document appointing it,
any Receiver appointed shall have all the powers of Agent pursuant to this
Agreement;
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(c) Agent shall have the power to carry on the business of any
Credit Party in whole or in part, the power to purchase on credit, the power to
borrow in any Credit Party's name or in Agent's name with or without security
and to advance its own money to any Credit Party at such rates of interest as it
may deem reasonable, the power to take possession of Collateral and to preserve
Collateral or its value and to sell, lease or otherwise dispose of Collateral,
the power to enter upon, use and occupy all premises owned or occupied by any
Credit Party where Collateral is situated and maintain Collateral on such
premises and generally to deal with Collateral in the same manner and to the
same extent as any Credit Party. A Receiver appointed under this Agreement shall
only borrow money with the prior consent of Agent;
(d) to facilitate the realization of Collateral, Agent may
carry on or concur in the carrying on of all or any part of the business of any
Credit Party and may to the exclusion of all others, including any Credit Party,
enter upon, occupy and use all or any of the premises of any Credit Party and
use free of charge all or any of the tools, machinery and equipment of any
Credit Party for such time as Agent sees fit to manufacture or complete the
manufacture of any Inventory and to pack and ship the finished products and
Agent shall not be liable to any Credit Party for any act, omission or neglect
in so doing or liable to any Credit Party for any rent, charges, depreciation or
damages in connection with such actions;
(e) Agent may seize, collect, realize, borrow money on the
security of, release to third parties or otherwise deal with Collateral in such
manner, upon such terms and conditions and at such times as Agent may deem
advisable and without notice to any Credit Party (except as required by any
applicable law), and may charge on its own behalf and pay to others reasonable
amounts of costs and expenses incurred and for services rendered (including
without limitation the fees of any Receiver and fees and disbursements of
Agent's and Receiver's legal and accounting advisors) in connection with the
enforcement of its security interest or the exercise of any rights of Agent
under this Agreement, including, without limitation, the operations of Debtor's
accounts and business, retaking, holding, repairing, processing, preparing for
disposition, collecting, realizing, borrowing on the security of, disposing of
or obtaining payment for Collateral or advice or direction with respect to any
of the above. When in possession of Collateral, Agent shall not have any
obligation to keep Collateral identifiable;
Each Credit Party agrees with Agent that:
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(a) the Receiver shall be the agent of the respective Credit
Party for the purpose of:
(i) carrying on and managing the business and
affairs of Credit Party, and,
(ii) establishing liability for all of the acts,
omissions or neglect of the Receiver and
those for whom it is in law responsible and
Agent shall not be liable for such acts,
omissions or neglect; and,
(b) Agent is hereby irrevocably authorized to give
instructions to the Receiver relating to the performance of its duties.
XII. WAIVERS AND JUDICIAL PROCEEDINGS.
12.1. Waiver of Notice. Each Credit Party hereby waives notice of
non-payment of any of the Receivables, demand, presentment, protest and notice
thereof with respect to any and all instruments, notice of acceptance hereof,
notice of loans or advances made, credit extended, Collateral received or
delivered, or any other action taken in reliance hereon, and all other demands
and notices of any description, except such as are expressly provided for
herein.
12.2. Delay. No delay or omission on Agent's or any Lender's part in
exercising any right, remedy or option shall operate as a waiver of such or any
other right, remedy or option or of any default.
12.3. Jury Waiver. EACH PARTY TO THIS AGREEMENT HEREBY EXPRESSLY WAIVES
ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (A)
ARISING UNDER THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT
EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR (B) IN ANY WAY CONNECTED WITH
OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR ANY OF THEM
WITH RESPECT TO THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT
EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR THE TRANSACTIONS RELATED HERETO
OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER
SOUNDING IN CONTRACT OR TORT OR OTHERWISE AND EACH PARTY HEREBY CONSENTS THAT
ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT
TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS AGREEMENT MAY FILE AN ORIGINAL
COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE
CONSENTS OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
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XIII. EFFECTIVE DATE AND TERMINATION.
13.1. Term. This Agreement, which shall inure to the benefit of and
shall be binding upon the respective successors and permitted assigns of each
Credit Party, Agent and each Lender, shall become effective on the date hereof
and shall continue in full force and effect until December 14, 2004 (the "Term")
unless sooner terminated as herein provided. Borrowers may terminate this
Agreement at any time upon ninety (90) days' prior written notice upon payment
in full of the Obligations.
13.2. Termination. The termination of the Agreement shall not affect
any Credit Party's, Agent's or any Lender's rights, or any of the Obligations
having their inception prior to the effective date of such termination, and the
provisions hereof shall continue to be fully operative until all transactions
entered into, rights or interests created or Obligations have been fully
disposed of, concluded or liquidated. The security interests, Liens and rights
granted to Agent and Lenders hereunder and the financing statements filed
hereunder shall continue in full force and effect, notwithstanding the
termination of this Agreement or the fact that Borrowers' Account may from time
to time be temporarily in a zero or credit position, until all of the
Obligations of each Credit Party have been paid or performed in full after the
termination of this Agreement or each Credit Party has furnished Agent and
Lenders with an indemnification satisfactory to Agent and Lenders with respect
thereto. Accordingly, each Credit Party waives any rights which it may have
under Section 9-404(1) of the Uniform Commercial Code or any similar right under
any other statute to demand the filing of termination statements with respect to
the Collateral, and Agent shall not be required to send such termination
statements to each Credit Party, or to file them with any filing office, unless
and until this Agreement shall have been terminated in accordance with its terms
and all Obligations paid in full in immediately available funds. All
representations, warranties, covenants, waivers and agreements contained herein
shall survive termination hereof until all Obligations are paid or performed in
full.
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XIV. REGARDING AGENT.
14.1. Appointment. Each Lender hereby designates PNC to act as Agent
for such Lender under this Agreement and the Other Documents. Each Lender hereby
irrevocably authorizes Agent to take such action on its behalf under the
provisions of this Agreement and the Other Documents and to exercise such powers
and to perform such duties hereunder and thereunder as are specifically
delegated to or required of Agent by the terms hereof and thereof and such other
powers as are reasonably incidental thereto and Agent shall hold all Collateral,
payments of principal and interest, fees (except the fees set forth in the Fee
Letter), charges and collections (without giving effect to any collection days)
received pursuant to this Agreement, for the ratable benefit of Lenders. Agent
may perform any of its duties hereunder by or through its agents or employees.
As to any matters not expressly provided for by this Agreement (including
without limitation, collection of the Note) Agent shall not be required to
exercise any discretion or take any action, but shall be required to act or to
refrain from acting (and shall be fully protected in so acting or refraining
from acting) upon the instructions of the Required Lenders, and such
instructions shall be binding; provided, however, that Agent shall not be
required to take any action which exposes Agent to liability or which is
contrary to this Agreement or the Other Documents or applicable law unless Agent
is furnished with an indemnification reasonably satisfactory to Agent with
respect thereto.
14.2. Nature of Duties. Agent shall have no duties or responsibilities
except those expressly set forth in this Agreement and the Other Documents.
Neither Agent nor any of its officers, directors, employees or agents shall be
(i) liable for any action taken or omitted by them as such hereunder or in
connection herewith, unless caused by their gross (not mere) negligence or
willful misconduct, or (ii) responsible in any manner for any recitals,
statements, representations or warranties made by any Credit Party or any
officer thereof contained in this Agreement, or in any of the Other Documents or
in any certificate, report, statement or other document referred to or provided
for in, or received by Agent under or in connection with, this Agreement or any
of the Other Documents or for the value, validity, effectiveness, genuineness,
due execution, enforceability or sufficiency of this Agreement, or any of the
Other Documents or for any failure of any Credit Party to perform its
obligations hereunder. Agent shall not be under any obligation to any Lender to
ascertain or to inquire as to the observance or performance of any of the
agreements contained in, or conditions of, this Agreement or any of the Other
Documents, or to inspect the properties, books or records of any Credit Party.
The duties of Agent as respects the Advances to Borrowers shall be mechanical
and administrative in nature; Agent shall not have by reason of this Agreement a
fiduciary relationship in respect of any Lender; and nothing in this Agreement,
expressed or implied, is intended to or shall be so construed as to impose upon
Agent any obligations in respect of this Agreement except as expressly set forth
herein.
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14.3. Lack of Reliance on Agent and Resignation. Independently and
without reliance upon Agent or any other Lender, each Lender has made and shall
continue to make (i) its own independent investigation of the financial
condition and affairs of each Credit Party in connection with the making and the
continuance of the Advances hereunder and the taking or not taking of any action
in connection herewith, and (ii) its own appraisal of the creditworthiness of
each Credit Party. Agent shall have no duty or responsibility, either initially
or on a continuing basis, to provide any Lender with any credit or other
information with respect thereto, whether coming into its possession before
making of the Advances or at any time or times thereafter except as shall be
provided by any Credit Party pursuant to the terms hereof. Agent shall not be
responsible to any Lender for any recitals, statements, information,
representations or warranties herein or in any agreement, document, certificate
or a statement delivered in connection with or for the execution, effectiveness,
genuineness, validity, enforceability, collectibility or sufficiency of this
Agreement or any Other Document, or of the financial condition of any Credit
Party, or be required to make any inquiry concerning either the performance or
observance of any of the terms, provisions or conditions of this Agreement, the
Note, the Other Documents or the financial condition of any Credit Party, or the
existence of any Event of Default or any Default.
Agent may resign on sixty (60) days' written notice to each of Lenders
and Borrowing Agent and upon such resignation, the Required Lenders will
promptly designate a successor Agent reasonably satisfactory to Borrowers.
Any such successor Agent shall succeed to the rights, powers and duties
of Agent, and the term "Agent" shall mean such successor agent effective upon
its appointment, and the former Agent's rights, powers and duties as Agent shall
be terminated, without any other or further act or deed on the part of such
former Agent. After any Agent's resignation as Agent, the provisions of this
Article XIV shall inure to its benefit as to any actions taken or omitted to be
taken by it while it was Agent under this Agreement.
14.4. Certain Rights of Agent. If Agent shall request instructions from
Lenders with respect to any act or action (including failure to act) in
connection with this Agreement or any Other Document, Agent shall be entitled to
refrain from such act or taking such action unless and until Agent shall have
received instructions from the Required Lenders; and Agent shall not incur
liability to any Person by reason of so refraining. Without limiting the
foregoing, Lenders shall not have any right of action whatsoever against Agent
as a result of its acting or refraining from acting hereunder in accordance with
the instructions of the Required Lenders.
14.5. Reliance. Agent shall be entitled to rely, and shall be fully
protected in relying, upon any note, writing, resolution, notice, statement,
certificate, telex, teletype or telecopier message, cablegram, order or other
document or telephone message believed by it to be genuine and correct and to
have been signed, sent or made by the proper person or entity, and, with respect
to all legal matters pertaining to this Agreement and the Other Documents and
its duties hereunder, upon advice of counsel selected by it. Agent may employ
agents and attorneys-in-fact and shall not be liable for the default or
misconduct of any such agents or attorneys-in-fact selected by Agent with
reasonable care.
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14.6. Notice of Default. Agent shall not be deemed to have knowledge or
notice of the occurrence of any Default or Event of Default hereunder or under
the Other Documents, unless Agent has received notice from a Lender or a Credit
Party referring to this Agreement or the Other Documents, describing such
Default or Event of Default and stating that such notice is a "notice of
default". In the event that Agent receives such a notice, Agent shall give
notice thereof to Lenders. Agent shall take such action with respect to such
Default or Event of Default as shall be reasonably directed by the Required
Lenders; provided, that, unless and until Agent shall have received such
directions, Agent may (but shall not be obligated to) take such action, or
refrain from taking such action, with respect to such Default or Event of
Default as it shall deem advisable in the best interests of Lenders.
14.7. Indemnification. To the extent Agent is not reimbursed and
indemnified by Credit Parties, each Lender will reimburse and indemnify Agent in
proportion to its respective portion of the Advances (or, if no Advances are
outstanding, according to its Commitment Percentage), from and against any and
all liabilities, obligations, losses, damages, penalties, actions, judgments,
suits, costs, expenses or disbursements of any kind or nature whatsoever which
may be imposed on, incurred by or asserted against Agent in performing its
duties hereunder, or in any way relating to or arising out of this Agreement or
any Other Document; provided that, Lenders shall not be liable for any portion
of such liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements resulting from Agent's gross
(not mere) negligence or willful misconduct.
14.8. Agent in its Individual Capacity. With respect to the obligation
of Agent to lend under this Agreement, the Advances made by it shall have the
same rights and powers hereunder as any other Lender and as if it were not
performing the duties as Agent specified herein; and the term "Lender" or any
similar term shall, unless the context clearly otherwise indicates, include
Agent in its individual capacity as a Lender. Agent may engage in business with
any Credit Party as if it were not performing the duties specified herein, and
may accept fees and other consideration from any Credit Party for services in
connection with this Agreement or otherwise without having to account for the
same to Lenders.
14.9. Credit Parties' Undertaking to Agent. Without prejudice to their
respective obligations to Lenders under the other provisions of this Agreement,
each Credit Party hereby undertakes with Agent to pay to Agent from time to time
on demand all amounts from time to time due and payable by it for the account of
Agent or Lenders or any of them pursuant to this Agreement to the extent not
already paid. Any payment made pursuant to any such demand shall pro tanto
satisfy the relevant Credit Party's obligations to make payments for the account
of Lenders or the relevant one or more of them pursuant to this Agreement.
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XV. BORROWING AGENCY.
15.1. Borrowing Agency Provisions.
(a) Each Borrower hereby irrevocably designates Borrowing
Agent to be its attorney and agent and in such capacity to borrow, sign and
endorse notes, and execute and deliver all instruments, documents, writings and
further assurances now or hereafter required hereunder, on behalf of such
Borrower or Borrowers, and hereby authorizes Agent to pay over or credit all
loan proceeds hereunder in accordance with the request of Borrowing Agent.
(b) The handling of this credit facility as a co-borrowing
facility with a borrowing agent in the manner set forth in this Agreement is
solely as an accommodation to Borrowers and at their request. Neither Agent nor
any Lender shall incur liability to Borrowers as a result thereof. To induce
Agent and Lenders to do so and in consideration thereof, each Borrower hereby
indemnifies Agent and each Lender and holds Agent and each Lender harmless from
and against any and all liabilities, expenses, losses, damages and claims of
damage or injury asserted against Agent or any Lender by any Person arising from
or incurred by reason of the handling of the financing arrangements of Borrowers
as provided herein, reliance by Agent or any Lender on any request or
instruction from Borrowing Agent or any other action taken by Agent or any
Lender with respect to this Section 15.1 except due to willful misconduct or
gross (not mere) negligence by the indemnified party.
(c) All Obligations shall be joint and several, and each
Borrower shall make payment upon the maturity of the Obligations by acceleration
or otherwise, and such obligation and liability on the part of each Borrower
shall in no way be affected by any extensions, renewals and forbearance granted
to Agent or any Lender to any Borrower, failure of Agent or any Lender to give
any Borrower notice of borrowing or any other notice, any failure of Agent or
any Lender to pursue or preserve its rights against any Borrower, the release by
Agent or any Lender of any Collateral now or thereafter acquired from any
Borrower, and such agreement by each Borrower to pay upon any notice issued
pursuant thereto is unconditional and unaffected by prior recourse by Agent or
any Lender to the other Borrowers or any Collateral for such Borrower's
Obligations or the lack thereof.
15.2. Waiver of Subrogation. Each Credit Party expressly waives any and
all rights of subrogation, reimbursement, indemnity, exoneration, contribution
of any other claim which such Credit Party may now or hereafter have against the
other Credit Parties or other Person directly or contingently liable for the
Obligations hereunder, or against or with respect to the other Credit Parties'
property (including, without limitation, any property which is Collateral for
the Obligations), arising from the existence or performance of this Agreement,
until termination of this Agreement and repayment in full of the Obligations.
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XVI. GUARANTEE.
16.1. Each Guarantor unconditionally guarantees, as a primary obligor
and not merely as a surety, jointly and severally with each other Guarantor when
and as due, whether at maturity, by acceleration, by notice of prepayment or
otherwise, the due and punctual performance of all Obligations, including,
without limitation, the due and punctual payment of the principal of and all
interest on each Revolving Credit Note and each Term Note. Each payment made by
any Guarantor pursuant to this Guarantee shall be made in lawful money of the
United States in immediately available funds.
16.2. Each Guarantor hereby absolutely, unconditionally and irrevocably
waives (i) promptness, diligence, notice of acceptance, notice of presentment
for payment and any other notice with respect to this Guarantee, (ii) demand of
payment, protest, notice of protest, notice of dishonor or nonpayment, notice of
the present and future amount of the Obligations and any other notice with
respect to the Obligations, (iii) any requirement that the Agent or any other
Lender protect, secure, perfect or insure any security interest or Lien or any
property subject thereto or exhaust any right or take any action against any
other Credit Party, or any Person or any Collateral, (iv) any other action,
event or precondition to the enforcement of this Guarantee or the performance by
each such Guarantor of the Obligations and (v) any defense arising by any lack
of capacity or authority or any other defense of any Borrower or any notice,
demand or defense by reason of the cessation from any cause of Obligations other
than payment and performance in full by the Obligations by the Borrowers and any
defense that any other guarantee or security was or was to be obtained by Agent.
16.3. No invalidity, irregularity, voidableness, voidness or
unenforceability of this Agreement, any Revolving Credit Note, any Term Note, or
any other Document or any other agreement or instrument relating thereto, or of
all or any part of the Obligations or of any collateral security therefor shall
affect, impair or be a defense to this Guarantee.
16.4. This Guarantee is one of payment and performance, not collection,
and the obligations of each Guarantor under this Guarantee are independent of
the Obligations of the other Loan Parties, and a separate action or actions may
be brought and prosecuted against any Guarantor to enforce this Guarantee,
irrespective of whether any action is brought against any other Credit Party or
other Persons or whether any other Credit Party or other Persons are joined in
any such action or actions. Each Guarantor waives any right to require that any
resort be had by Agent or any Lender to any security held for payment of the
Obligations or to any balance of any deposit account or credit on the books of
any Agent or any Lender in favor of any Credit Party or any other Person. No
election to proceed in one form of action or proceedings, or against any Person,
or on any Obligations, shall constitute a waiver of Agent's right to proceed in
any other form of action or proceeding or against any other Person unless Agent
has expressed any such waiver in writing. Without limiting the generality of the
foregoing, no action or proceeding by Agent against any Borrower under any
document evidencing or securing indebtedness of such Borrowers to Agent shall
diminish the liability of any Guarantor under this Guarantee, except to the
extent Agent receives actual payment on account of Obligations by such action or
proceeding, notwithstanding the effect of any such election, action or
proceeding upon the right of subrogation of any Guarantor in respect of
Borrowers.
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16.5. The liability of each Guarantor under this Guarantee shall be
absolute, unlimited and unconditional irrespective and shall not be subject to
any reduction, limitation, impairment, discharge or termination for any reason,
including, without limitation, any claim of waiver, release, surrender
alteration or compromise, and shall not be subject to any defense or setoff,
counterclaim, recoupment or termination whatsoever by reason of the invalidity,
illegality or unenforceability of any other Obligations or otherwise. Without
limiting the generality of the foregoing, the obligations of each Guarantor
shall not be discharged or impaired or released or limited or otherwise affected
by:
(i) any change in the manner, place or terms of
payment or performance, and/or any change or extension of the
time of payment or performance of, release, renewal or
alteration of, or any new agreements relating to any
Obligation, any security therefor, or any liability incurred
directly or indirectly in respect thereof, or any rescission
of, or amendment, waiver or other modification of, or any
consent to departure from, this Agreement, the Revolving
Credit Notes, the Term Notes or any Other Document, including
any increase in the Obligations resulting from the extension
of additional credit to Borrower or otherwise;
(ii) any sale, exchange, release, surrender, loss,
abandonment, realization upon any property by whomsoever at
any time pledged or mortgaged to secure, or howsoever
securing, all or any of the Obligations, and/or any offset
there against, or failure to register, to perfect, or continue
the perfection of, any Lien in any such property, or delay in
the perfection or the registration of any such Lien, or any
amendment or waiver of or consent to departure from any other
guaranty for all or any of the Obligations;
(iii) the failure of the Agent or any Lender to
assert any claim or demand or to enforce any right or remedy
against any Borrower or any other Credit Party or any other
Person under the provisions of this Agreement, the Revolving
Credit Notes, the Term Notes, any Letter of Credit or any
other document or instrument executed and delivered in
connection herewith or therewith;
(iv) any settlement or compromise of any Obligation,
any security therefor or any liability (including any of those
hereunder) incurred directly or indirectly in respect thereof
or hereof, and any subordination of the payment of all or any
part thereof to the payment of any obligation (whether due or
not) of any Credit Party to creditors of any Credit Party
other than any other Credit Party;
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(v) any manner of application of Collateral, or
proceeds thereof, to all or any of the Obligations, or any
manner of sale or other disposition of any Collateral for all
or any of the Obligations or any other assets of any Credit
Party;
(vi) any other agreements or circumstance of any
nature whatsoever that may or might in any manner or to any
extent vary the risk of any Guarantor, or that might otherwise
at law or in equity constitute a defense available to, or a
discharge of, this Guarantee and/or the obligations of
Guarantor, or a defense to, or discharge of, any Credit Party
or any other Person or party relating to this Guarantee or the
Obligations or otherwise with respect to the Advances, Letters
of Credit or other financial accommodations to Borrower
pursuant to the Other Documents;
(vii) the loss or diminution of authority,
liquidation, dissolution, winding-up, winding-down,
amalgamation, any arrangement under corporate legislation, any
change in the name, business, membership, directorate, powers,
objects, or organization or management, or other change in the
corporate form, winding up proceedings, proceedings under the
Bankruptcy and Insolvency Act R.S.C. 1985 c. B-3 as amended
from time to time or any successor legislation thereto,
proceedings in the Companies' Creditors Arrangement Act R.S.C.
1985 c. C-36 as amended from time to time or any successor
legislation thereto, liquidation, receivership proceedings,
appointment of a receiver, manager or receiver and manager or
other insolvency proceedings occurring in respect of any
Borrower, or any other Credit Party or the assumption by any
Person of the obligation to pay or perform Obligations;
(viii) the Agent shall have the right to do any of
the above without notice to or the consent of any Guarantor
and each Guarantor expressly waives any right to notice of,
consent to, knowledge of and participation in any agreements
relating to any of the above or any other present or future
event relating to Obligations whether under this Agreement or
otherwise or any right to challenge or question any of the
above and waives any defenses of such Guarantor which might
arise as a result of such dealings.
16.6. Agent may at any time and from time to time (whether or not after
revocation or termination of this Guarantee) without the consent of, or notice
(except as shall be required by applicable statute and cannot be waived) to, any
Guarantor, and without incurring responsibility to any Guarantor or impairing or
releasing the Obligations, apply any sums by whomsoever paid or howsoever
realized to any Obligations regardless of what Obligations remain unpaid.
16.7. (a) This Guarantee shall continue to be effective or be
reinstated, as the case may be, if claim is ever made upon the Agent or any
Lender for repayment or recovery of any amount or amounts received by such
Person in payment or on account of any of the Obligations and such Person repays
all or part of said amount for any reason whatsoever, including, without
limitation, by reason of any judgment, decree or order of any court or
administrative body having jurisdiction over such Person or the respective
property of each, or any settlement or compromise of any claim effected by such
Person with any such claimant (including any Borrower); and in such event each
Guarantor agrees that any such judgment, decree, order, settlement or compromise
or other circumstances shall be binding upon such Guarantor, notwithstanding any
revocation hereof or the cancellation of any note (including the Term Notes
and/or the Revolving Credit Notes) or other instrument evidencing any
Obligation, and each Guarantor shall be and remain liable to the Agent and/or
Lenders for the amount so repaid or recovered to the same extent as if such
amount had never originally been received by such Person(s).
(b) Agent shall not be required to marshal any assets in favor of any
Guarantor, or against or in payment of Obligations.
(c) No Guarantor shall have the right to be reimbursed, indemnified or
subrogated to any of Agent's rights until Agent has received payment and
performance in full of all Obligations (whether or not guaranteed hereby) and
all reasonable costs and expenses incurred by Agent in obtaining payment and
performance of Obligations and this Agreement has been irrevocably terminated.
No Guarantor shall be entitled to claim against any present or future security
held by Agent from any person for Obligations in priority to or equally with any
claim of Agent, or assert any claim for any liability of any Borrower to any
Guarantor in priority to or equally with claims of Agent for Obligations, and no
Guarantor shall be entitled to compete with Agent with respect to, or to advance
any equal or prior claim to any security held by Agent for Obligations.
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(d) If any Borrower makes any payment to Agent, which payment is wholly
or partly subsequently invalidated, declared to be fraudulent or preferential,
set aside or required to be repaid to any person under any federal, state or
provincial statute or at common law or under equitable principles, then to the
extent of such payment the Obligation intended to be paid shall be revived and
continued in full force and effect as if the payment had not been made, and the
resulting revived Obligation shall continue to be guaranteed, uninterrupted, by
each Guarantor under this Guarantee.
(e) All present and future monies payable by any Borrower to each
Guarantor are assigned to Agent as security for such Guarantor's liability to
Agent under this Guarantee and are postponed and subordinated to Agent's prior
right to payment in full of Obligations. All monies received by any Guarantor
from any Borrower shall be held by such Guarantor as agent and trustee for
Agent. This provision shall remain in effect notwithstanding any termination by
any Guarantor of this Guarantee. This assignment, postponement and subordination
shall only terminate when Obligations are paid in full and the Agreement is
irrevocably terminated.
(f) Each Borrower acknowledges this assignment, postponement and
subordination and, except as permitted hereunder, agrees to make no payments to
any Guarantor without the prior written consent of Agent. Each Borrower agrees
to give full effect to the provisions of this Guarantee.
16.8. Upon the occurrence and during the continuance of any Event of
Default, the Agent may and upon written request of the Lenders shall, without
notice to or demand upon any Credit Party or any other Person, declare any
obligations of each Guarantor hereunder immediately due and payable, and shall
be entitled to enforce the obligations of each Guarantor. Upon such declaration
by the Agent, the Agent and Lenders are hereby authorized at any time and from
time to time to set off and apply any and all deposits (general or special, time
or demand, provisions or final) at any time held and other indebtedness at any
time owing by the Agent or Lenders to or for the credit or the account of any
Guarantor against any and all of the obligations of each Guarantor now or
hereafter existing under this Guarantee, whether or not the Agent or Lenders
shall have made any demand under this Guarantee and although such obligations
may be contingent and unmatured. The rights of the Agent and Lenders hereunder
are in addition to other rights and remedies (including other rights of set-off)
which the Agent and Lenders may have. Upon such declaration by the Agent, with
respect to any claims (other than those claims referred to in the immediately
preceding paragraph) of any Guarantor against any Credit Party (the "Claims"),
the Agent shall have the full right on the part of the Agent in its own name or
in the name of such Guarantor to collect and enforce such Claims by legal
action, proof of debt or claim in bankruptcy or liquidation or other similar
proceedings, vote in any proceeding for the arrangement or reorganization of
debts at any time proposed, or otherwise, the Agent and each of its officers
being hereby irrevocably constituted attorneys-in-fact for each Guarantor for
the purpose of such enforcement and for the purpose of endorsing in the name of
each Guarantor any instrument for the payment of money. Each Guarantor will
receive as trustee for the Agent and will pay to the Agent forthwith upon
receipt thereof any amounts which such Guarantor may receive from any Credit
Party on account of the Claims. Each Guarantor agrees that at no time hereafter
will any of the Claims be represented by any notes, other negotiable instruments
or writings, except and in such event they shall either be made payable to the
Agent, or if payable to any Guarantor, shall forthwith be endorsed by such
Guarantor to the Agent. Each Guarantor agrees that no payment on account of the
Claims or any security interest therein shall be created, received, accepted or
retained during the continuance of an Event of Default nor shall any financing
statement be filed with respect thereto by any Guarantor.
16.9. Any acknowledgment or new promise, whether by payment of
principal or interest or otherwise and whether by any Credit Party or others
(including any Lenders) with respect to any of the Obligations shall, if the
statute of limitations in favor of any Guarantor against the Agent or Lenders
shall have commenced to run, toll the running of such statute of limitations
and, if the period of such statute of limitations shall have expired, prevent
the operation of such statute of limitations.
16.10. (a) All amounts payable from time to time by any Guarantor
hereunder shall bear interest at the interest rate per annum then chargeable
with respect to Revolving Credit Advances.
(b) If, with respect to any payment under this Guarantee, the
application, introduction or adoption of any law, regulation, treaty,
convention, guideline, request or directive of any governmental authority or
similar agency or any change therein, to Guarantor, or to Agent, or
interpretation, or administration thereof, or any compliance by Agent therewith,
shall impose or require any reserve, or tax (excluding taxes measured with
reference to the net income of Agent), or shall impose any other requirement or
condition which results in an increased cost to Agent or reduces the amount
received or receivable by Agent with respect with any amount due under this
Guarantee or causes Agent to make or to forego any payment, then upon
notification to Guarantor by Agent, Guarantor shall immediately pay to Agent
such amounts as shall fully compensate Agent and Lenders for all such increased
costs, reductions, payments or foregone payments which accrue up to and
including the date of receipt by Guarantor of such notice and thereafter, upon
demand from time to time, Guarantor shall pay such additional amounts as shall
fully compensate Agent for any increased cost, imposed costs, reductions,
payments or foregone payments.
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16.11. Each Guarantor acknowledges receipt of a copy of each of the
Other Documents. Each Guarantor has made an independent investigation of the
Loan Parties and of the financial condition of the Loan Parties. Neither Agent
nor any Lender has made and neither Agent nor any Lender does make any
representations or warranties as to the income, expense, operation, finances or
any other matter or thing affecting any Credit Party nor has Agent or any Lender
made any representations or warranties as to the amount or nature of the
Obligations of any Credit Party to which this Guarantee applies as specifically
herein set forth, nor has Agent or any Lender or any officer, agent or employee
of Agent or any Lender or any representative thereof, made any other oral
representations, agreements or commitments of any kind or nature, and each
Guarantor hereby expressly acknowledges that no such representations or
warranties have been made and such Guarantor expressly disclaims reliance on any
such representations or warranties.
16.12. The provisions of this Section 16 shall remain in effect until
indefeasible payment in full in cash of all Obligations and the irrevocable
termination of this Agreement.
16.13. If any Obligations remain outstanding following the exercise of
any of Agent's rights and/or remedies pursuant to any Mortgage, each Guarantor
hereby agrees that the Guaranty made by such Guarantor under this Section 16
shall continue in full force and effect with respect to such Obligations and any
future Obligations not withstanding any applicable law, statute or regulation.
Further, each Guarantor hereby agrees to execute any instruments, agreements
and/or documents reasonably requested by Agent to reflect any of the foregoing.
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XVII. MISCELLANEOUS.
17.1. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York applied to contracts to be
performed wholly within the State of New York. Any judicial proceeding brought
by or against any Credit Party with respect to any of the Obligations, this
Agreement or any related agreement may be brought in any court of competent
jurisdiction in the State of New York, United States of America, and, by
execution and delivery of this Agreement, each Credit Party accepts for itself
and in connection with its properties, generally and unconditionally, the
non-exclusive jurisdiction of the aforesaid courts, and irrevocably agrees to be
bound by any judgment rendered thereby in connection with this Agreement. Each
Credit Party hereby waives personal service of any and all process upon it and
consents that all such service of process may be made by registered mail (return
receipt requested) directed to Borrowing Agent at its address set forth in
Section 17.6 and service so made shall be deemed completed five (5) days after
the same shall have been so deposited in the mails of the United States of
America, or, at the Agent's and/or any Lender's option, by service upon
Borrowing Agent which each Credit Party irrevocably appoints as such Credit
Party's Agent for the purpose of accepting service within the State of New York.
Nothing herein shall affect the right to serve process in any manner permitted
by law or shall limit the right of Agent or any Lender to bring proceedings
against any Credit Party in the courts of any other jurisdiction. Each Credit
Party waives any objection to jurisdiction and venue of any action instituted
hereunder and shall not assert any defense based on lack of jurisdiction or
venue or based upon forum non conveniens. Any judicial proceeding by any Credit
Party against Agent or any Lender involving, directly or indirectly, any matter
or claim in any way arising out of, related to or connected with this Agreement
or any related agreement, shall be brought only in a federal or state court
located in the County of New York, State of New York.
17.2. Entire Understanding. (a) This Agreement and the documents
executed concurrently herewith contain the entire understanding among each
Credit Party, Agent and each Lender and supersedes all prior agreements and
understandings, if any, relating to the subject matter hereof. Any promises,
representations, warranties or guarantees not herein contained and hereinafter
made shall have no force and effect unless in writing, signed by each Credit
Party's, Agent's and each Lender's respective officers. Neither this Agreement
nor any portion or provisions hereof may be changed, modified, amended, waived,
supplemented, discharged, cancelled or terminated orally or by any course of
dealing, or in any manner other than by an agreement in writing, signed by the
party to be charged. Each Credit Party acknowledges that it has been advised by
counsel in connection with the execution of this Agreement and Other Documents
and is not relying upon oral representations or statements inconsistent with the
terms and provisions of this Agreement.
(b) The Required Lenders, Agent with the consent in writing of
the Required Lenders, and Credit Parties may, subject to the provisions of this
Section 17.2 (b), from time to time enter into written supplemental agreements
to this Agreement or the Other Documents executed by Credit Parties, for the
purpose of adding or deleting any provisions or otherwise changing, varying or
waiving in any manner the rights of Lenders, Agent or Credit Parties thereunder
or the conditions, provisions or terms thereof of waiving any Event of Default
thereunder, but only to the extent specified in such written agreements;
provided, however, that no such supplemental agreement shall, without the
consent of all Lenders:
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(i) increase the Commitment Percentage or maximum
dollar commitment of any Lender.
(ii) extend the maturity of any Note or the due date
for any amount payable hereunder, or decrease the rate of interest or reduce any
fee payable by Borrowers to Lenders pursuant to this Agreement.
(iii) alter the definition of the term Required
Lenders or alter, amend or modify this Section 17.2(b).
(iv) release any Collateral during any calendar year
(other than in accordance with the provisions of this Agreement) having an
aggregate value in excess of $1,000,000.
(v) change the rights and duties of Agent.
(vi) permit any Revolving Advance to be made if after
giving effect thereto the total of Revolving Advances outstanding hereunder
would exceed the Formula Amount for more than thirty (30) consecutive Business
Days or exceed one hundred and ten percent (110%) of the Formula Amount.
(vii) increase the Advance Rates above the Advance
Rates in effect on the Closing Date.
Any such supplemental agreement shall apply equally to each Lender and shall be
binding upon Credit Parties, Lenders and Agent and all future holders of the
Obligations. In the case of any waiver, Credit Parties, Agent and Lenders shall
be restored to their former positions and rights, and any Event of Default
waived shall be deemed to be cured and not continuing, but no waiver of a
specific Event of Default shall extend to any subsequent Event of Default
(whether or not the subsequent Event of Default is the same as the Event of
Default which was waived), or impair any right consequent thereon.
In the event that Agent requests the consent of a Lender pursuant to
this Section 17.2 and such Lender shall not respond or reply to Agent in writing
within ten (10) days of delivery of such request, such Lender shall be deemed to
have consented to matter that was the subject of the request. In the event that
Agent requests the consent of a Lender pursuant to this Section 17.2 and such
consent is denied, then PNC may, at its option, require such Lender to assign
its interest in the Advances to PNC or to another Lender or to any other Person
designated by the Agent (the "Designated Lender"), for a price equal to the then
outstanding principal amount thereof plus accrued and unpaid interest and fees
due such Lender, which interest and fees shall be paid when collected from
Borrowers. In the event PNC elects to require any Lender to assign its interest
to PNC or to the Designated Lender, PNC will so notify such Lender in writing
within forty five (45) days following such Lender's denial, and such Lender will
assign its interest to PNC or the Designated Lender no later than five (5) days
following receipt of such notice pursuant to a Commitment Transfer Supplement
executed by such Lender, PNC or the Designated Lender, as appropriate, and
Agent.
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Notwithstanding the foregoing, Agent may at its discretion and without
the consent of the Required Lenders, voluntarily permit the outstanding
Revolving Advances at any time to exceed the Formula Amount by up to one hundred
and ten percent (110%) of the Formula Amount for up to thirty (30) consecutive
Business Days. For purposes of the preceding sentence, the discretion granted to
Agent hereunder shall not preclude involuntary overadvances that may result from
time to time due to the fact that the Formula Amount was unintentionally
exceeded for any reason, including, but not limited to, Collateral previously
deemed to be either "Eligible Receivables" or "Eligible Inventory", as
applicable, becomes ineligible, collections of Receivables applied to reduce
outstanding Revolving Advances are thereafter returned for insufficient funds or
overadvances are made to protect or preserve the Collateral. In the event Agent
involuntarily permits the outstanding Revolving Advances to exceed the Formula
Amount by more than ten percent (10%), Agent shall use its efforts to have the
Borrowers decrease such excess in as expeditious a manner as is practicable
under the circumstances and not inconsistent with the reason for such excess.
Revolving Advances made after Agent has determined the existence of involuntary
overadvances shall be deemed to be involuntary overadvances and shall be
decreased in accordance with the preceding sentence.
17.3. Successors and Assigns; Participations; New Lenders.
(a) This Agreement shall be binding upon and inure to the
benefit of Credit Parties, Agent, each Lender, all future holders of the
Obligations and their respective successors and assigns, except that no Credit
Party may assign or transfer any of its rights or obligations under this
Agreement without the prior written consent of Agent and each Lender.
(b) Each Credit Party acknowledges that in the regular course
of commercial banking business one or more Lenders may at any time and from time
to time sell participating interests in the Advances to other financial
institutions (each such transferee or purchaser of a participating interest, a
"Transferee"). Each Transferee may exercise all rights of payment (including
without limitation rights of set-off) with respect to the portion of such
Advances held by it or other Obligations payable hereunder as fully as if such
Transferee were the direct holder thereof provided that Credit Parties shall not
be required to pay to any Transferee more than the amount which it would have
been required to pay to Lender which granted an interest in its Advances or
other Obligations payable hereunder to such Transferee had such Lender retained
such interest in the Advances hereunder or other Obligations payable hereunder
and in no event shall Credit Parties be required to pay any such amount arising
from the same circumstances and with respect to the same Advances or other
Obligations payable hereunder to both such Lender and such Transferee. Each
Credit Party hereby grants to any Transferee a continuing security interest in
any deposits, moneys or other property actually or constructively held by such
Transferee as security for the Transferee's interest in the Advances.
79
<PAGE>
(c) Any Lender may with the consent of Agent which shall not
be unreasonably withheld or delayed sell, assign or transfer all or any part of
its rights under this Agreement and the Other Documents to one or more
additional banks or financial institutions and one or more additional banks or
financial institutions may commit to make Advances hereunder (each a "Purchasing
Lender"), in minimum amounts of not less than $5,000,000 pursuant to a
Commitment Transfer Supplement, executed by a Purchasing Lender, the transferor
Lender, and Agent and delivered to Agent for recording. Upon such execution,
delivery, acceptance and recording, from and after the transfer effective date
determined pursuant to such Commitment Transfer Supplement, (i) Purchasing
Lender thereunder shall be a party hereto and, to the extent provided in such
Commitment Transfer Supplement, have the rights and obligations of a Lender
thereunder with a Commitment Percentage as set forth therein, and (ii) the
transferor Lender thereunder shall, to the extent provided in such Commitment
Transfer Supplement, be released from its obligations under this Agreement, the
Commitment Transfer Supplement creating a novation for that purpose. Such
Commitment Transfer Supplement shall be deemed to amend this Agreement to the
extent, and only to the extent, necessary to reflect the addition of such
Purchasing Lender and the resulting adjustment of the Commitment Percentages
arising from the purchase by such Purchasing Lender of all or a portion of the
rights and obligations of such transferor Lender under this Agreement and the
Other Documents. Credit Parties hereby consent to the addition of such
Purchasing Lender and the resulting adjustment of the Commitment Percentages
arising from the purchase by such Purchasing Lender of all or a portion of the
rights and obligations of such transferor Lender under this Agreement and the
Other Documents. Credit Parties shall execute and deliver such further documents
and do such further acts and things in order to effectuate the foregoing.
(d) Agent shall maintain at its address a copy of each
Commitment Transfer Supplement delivered to it and a register (the "Register")
for the recordation of the names and addresses of the Advances owing to each
Lender from time to time. The entries in the Register shall be conclusive, in
the absence of manifest error, and Credit Parties, Agent and Lenders may treat
each Person whose name is recorded in the Register as the owner of the Advance
recorded therein for the purposes of this Agreement. The Register shall be
available for inspection by Credit Parties or any Lender at any reasonable time
and from time to time upon reasonable prior notice. Agent shall receive a fee in
the amount of $3,500 payable by the applicable Purchasing Lender upon the
effective date of each transfer or assignment to such Purchasing Lender
provided, that, if PNC makes such transfer or assignment within sixty (60) days
of the Closing Date to such Purchasing Lender, such Purchasing Lender shall not
be obligated to pay such fee to Agent.
(e) Each Credit Party authorizes each Lender to disclose to
any Transferee or Purchasing Lender and any prospective Transferee or Purchasing
Lender any and all financial information in such Lender's possession concerning
such Credit Party which has been delivered to such Lender by or on behalf of
such Credit Party pursuant to this Agreement or in connection with such Lender's
credit evaluation of such Credit Party.
80
<PAGE>
17.4. Application of Payments. Agent shall have the continuing and
exclusive right to apply or reverse and re-apply any payment and any and all
proceeds of Collateral to any portion of the Obligations. To the extent that any
Credit Party makes a payment or Agent or any Lender receives any payment or
proceeds of the Collateral for any Credit Party's benefit, which are
subsequently invalidated, declared to be fraudulent or preferential, set aside
or required to be repaid to a trustee, debtor in possession, receiver, custodian
or any other party under any bankruptcy law, common law or equitable cause,
then, to such extent, the Obligations or part thereof intended to be satisfied
shall be revived and continue as if such payment or proceeds had not been
received by Agent or such Lender.
17.5. Indemnity. Each Credit Party shall indemnify Agent, each Lender
and each of their respective officers, directors, Affiliates, employees and
agents from and against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses and disbursements of any
kind or nature whatsoever (including, without limitation, fees and disbursements
of counsel) which may be imposed on, incurred by, or asserted against Agent or
any Lender in any litigation, proceeding or investigation instituted or
conducted by any governmental agency or instrumentality or any other Person with
respect to any aspect of, or any transaction contemplated by, or referred to in,
or any matter related to, this Agreement or the Other Documents, whether or not
Agent or any Lender is a party thereto, except to the extent that any of the
foregoing arises out of the gross (not mere) negligence or willful misconduct of
the party being indemnified.
17.6. Notice. Any notice or request hereunder may be given to Borrowing
Agent or any Credit Party or to Agent or any Lender at their respective
addresses set forth below or at such other address as may hereafter be specified
in a notice designated as a notice of change of address under this Section. Any
notice or request hereunder shall be given by (a) hand delivery, (b) overnight
courier, (c) registered or certified mail, return receipt requested, (d) telex
or telegram, subsequently confirmed by registered or certified mail, or (e)
telecopy to the number set out below (or such other number as may hereafter be
specified in a notice designated as a notice of change of address) with
electronic confirmation of its receipt. Any notice or other communication
required or permitted pursuant to this Agreement shall be deemed given (a) when
personally delivered to any officer of the party to whom it is addressed, (b) on
the earlier of actual receipt thereof or three (3) days following posting
thereof by certified or registered mail, postage prepaid, or (c) upon actual
receipt thereof when sent by a recognized overnight delivery service or (d) upon
actual receipt thereof when sent by telecopier to the number set forth below
with electronic confirmation of its receipt, in each case addressed to each
party at its address set forth below or at such other address as has been
furnished in writing by a party to the other by like notice:
81
<PAGE>
(A) If to Agent or PNC Bank, National Association
PNC at: Two Tower Center
East Brunswick, New Jersey 08816
Attention: Ryan Peak
Telephone: (732) 220-4315
Telecopier: (732) 220-4393
with a copy to: PNC Bank, National Association
PNC Agency Services
One PNC Plaza
249 Fifth Avenue
Pittsburgh, Pennsylvania 15222
Attention: Arlene Ohler
Telephone: (412) 762-3627
Telecopier: (412) 762-8672
and a copy to: Hahn & Hessen LLP
350 Fifth Avenue
New York, New York 10118-0075
Attention: Steven J. Seif, Esq.
Telephone: (212) 946-0294
Telecopier: (212) 594-7167
(B) If to a Lender other than Agent, as specified on the signature
pages hereof
(C) If to Borrowing Agent
or any Credit Party,
at: SunSource Inc.
3000 One Logan Square, 30th Floor
Philadelphia, Pennsylvania 19103
Attention: Joseph M. Corvino
Telephone: (215) 282-1290
Telecopier: (215) 282-1309
with a copy to: Morgan, Lewis & Bockius, LLP
1701 Market Street
Philadelphia, Pennsylvania
Attention: Andrew Hamilton, Esq.
Telephone: (215) 963-4837
Telecopier: (215) 963-5299
17.7. Survival. The obligations of Credit Parties under Sections
2.2(f), 3.7, 3.8, 3.9, 4.19(h), 14.7 and 17.5 shall survive termination of this
Agreement and the Other Documents and payment in full of the Obligations.
17.8. Severability. If any part of this Agreement is contrary to,
prohibited by, or deemed invalid under applicable laws or regulations, such
provision shall be inapplicable and deemed omitted to the extent so contrary,
prohibited or invalid, but the remainder hereof shall not be invalidated thereby
and shall be given effect so far as possible.
17.9. Expenses. All costs and expenses including, without limitation,
reasonable attorneys' fees (including the allocated costs of in house counsel)
and disbursements incurred by Agent, Agent on behalf of Lenders and Lenders (a)
in all efforts made to enforce payment of any Obligation or effect collection of
any Collateral, or (b) in connection with the entering into, modification,
amendment, administration and enforcement of this Agreement or any consents or
waivers hereunder and all related agreements, documents and instruments, or (c)
in instituting, maintaining, preserving, enforcing and foreclosing on Agent's
security interest in or Lien on any of the Collateral, whether through judicial
proceedings or otherwise, or (d) in defending or prosecuting any actions or
proceedings arising out of or relating to Agent's or any Lender's transactions
with any Credit Party, or (e) in connection with any advice given to Agent or
any Lender with respect to its rights and obligations under this Agreement and
all related agreements, may be charged to Borrowers' Account and shall be part
of the Obligations.
82
<PAGE>
17.10. Injunctive Relief. Each Credit Party recognizes that, in the
event any Credit Party fails to perform, observe or discharge any of its
obligations or liabilities under this Agreement, any remedy at law may prove to
be inadequate relief to Lenders; therefore, Agent, if Agent so requests, shall
be entitled to temporary and permanent injunctive relief in any such case
without the necessity of proving that actual damages are not an adequate remedy.
17.11. Consequential Damages. Neither Agent nor any Lender, nor any
agent or attorney for any of them, shall be liable to any Credit Party for
consequential damages arising from any breach of contract, tort or other wrong
relating to the establishment, administration or collection of the Obligations.
17.12. Captions. The captions at various places in this Agreement are
intended for convenience only and do not constitute and shall not be interpreted
as part of this Agreement.
17.13. Counterparts; Telecopied Signatures. This Agreement may be
executed in any number of and by different parties hereto on separate
counterparts, all of which, when so executed, shall be deemed an original, but
all such counterparts shall constitute one and the same agreement. Any signature
delivered by a party by facsimile transmission shall be deemed to be an original
signature hereto.
17.14. Construction. The parties acknowledge that each party and its
counsel have reviewed this Agreement and that the normal rule of construction to
the effect that any ambiguities are to be resolved against the drafting party
shall not be employed in the interpretation of this Agreement or any amendments,
schedules or exhibits thereto.
17.15. Confidentiality; Sharing Information. (a) Agent, each Lender and
each Transferee shall hold all non-public information obtained by Agent, such
Lender or such Transferee pursuant to the requirements of this Agreement in
accordance with Agent's, such Lender's and such Transferee's customary
procedures for handling confidential information of this nature; provided,
however, Agent, each Lender and each Transferee may disclose such confidential
information (a) to its examiners, affiliates, outside auditors, counsel and
other professional advisors, (b) to Agent, any Lender or to any prospective
Transferees and Purchasing Lenders, and (c) as required or requested by any
Governmental Body or representative thereof or pursuant to legal process;
provided, further that (i) unless specifically prohibited by applicable law or
court order, Agent, each Lender and each Transferee shall use its best efforts
prior to disclosure thereof, to notify the applicable Credit Party of the
applicable request for disclosure of such non-public information (A) by a
Governmental Body or representative thereof (other than any such request in
connection with an examination of the financial condition of a Lender or a
Transferee by such Governmental Body) or (B) pursuant to legal process and (ii)
in no event shall Agent, any Lender or any Transferee be obligated to return any
materials furnished by any Credit Party other than those documents and
instruments in possession of Agent or any Lender in order to perfect its Lien on
the Collateral once the Obligations have been paid in full and this Agreement
has been terminated.
83
<PAGE>
(b) Each Credit Party acknowledges that from time to time
financial advisory, investment banking and other services may be offered or
provided to such Credit Party or one or more of its Affiliates (in connection
with this Agreement or otherwise) by any Lender or by one or more Subsidiaries
or Affiliates of such Lender and each Credit Party hereby authorizes each Lender
to share any information delivered to such Lender by such Credit Party and its
Subsidiaries pursuant to this Agreement, or in connection with the decision of
such Lender to enter into this Agreement, to any such Subsidiary or Affiliate of
such Lender, it being understood that any such Subsidiary or Affiliate of any
Lender receiving such information shall be bound by the provision of Section
17.15 as if it were a Lender hereunder. Such authorization shall survive the
repayment of the other Obligations and the termination of the Loan Agreement.
17.16. Publicity. Each Credit Party and each Lender hereby authorizes
Agent to make appropriate announcements of the financial arrangement entered
into among Credit Parties, Agent and Lenders, including, without limitation,
announcements which are commonly known as tombstones, in such publications and
to such selected parties as Agent shall in its sole and absolute discretion deem
appropriate.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
Each of the parties has signed this Agreement as of the day and year
first above written.
<TABLE>
<CAPTION>
<S> <C>
HARDING GLASS, INC., as a Borrower
KAR PRODUCTS INC., as a Borrower
SUNSOURCE INC., as a Borrower
SUNSOURCE TECHNOLOGY SERVICES INC., as a Borrower
THE HILLMAN GROUP, INC., as a Borrower
A & H HOLDING COMPANY, INC., as a Guarantor
SUNSOURCE CORPORATE GROUP, INC., as a Guarantor
SUNSOURCE INDUSTRIAL SERVICES, COMPANY, INC., as a Guarantor
SUNSOURCE INVENTORY MANAGEMENT COMPANY, INC., as a Guarantor
SUNSOURCE INVESTMENT COMPANY, INC., as a Guarantor
SUNSUB A INC., as a Guarantor
By:_______________________________
Name: Joseph M. Corvino
Title: Vice President of each of the foregoing corporations
A. & H. BOLT & NUT COMPANY LIMITED, as a Guarantor
By:_______________________________
Name: Joseph M. Corvino
Title:____________________________
J.N. FAUVER (CANADA) LIMITED, as a Guarantor
By:_______________________________
Name: Joseph M. Corvino
Title:____________________________
</TABLE>
[SIGNATURES CONTINUED ON FOLLOWING PAGE]
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
SUNSOURCE CANADA INVESTMENT COMPANY as a Guarantor
By:_______________________________
Name: Joseph M. Corvino
Title:____________________________
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
PNC BANK, NATIONAL ASSOCIATION, as Lender and as Agent
By:_______________________________
Name:_____________________________
Title:____________________________
Address: Two Tower Center Boulevard
East Brunswick, New Jersey 08816
Commitment Percentage: 100%
</TABLE>
<PAGE>
STATE OF ______________)
) ss.
COUNTY OF ____________)
On this _____ day of December, 1999, before me personally came Joseph
M. Corvino, to me known, who, being by me duly sworn, did depose and say that he
is the Vice President of each of Harding Glass, Inc., Kar Products Inc.,
SunSource Inc., SunSource Technology Services Inc., The Hillman Group, Inc., A &
H Holding Company, Inc., SunSource Corporate Group, Inc., SunSource Industrial
Services Company, Inc., SunSource Inventory Management Company, Inc., SunSource
Investment Company, Inc. and SunSub A Inc. the corporations described in and
which executed the foregoing instrument; and that he signed his name thereto by
order of the board of directors of each of the said corporations.
-------------------------
Notary Public
<PAGE>
STATE OF ______________)
) ss.
COUNTY OF ____________)
On this _____ day of December, 1999, before me personally came Joseph
M. Corvino, to me known, who, being by me duly sworn, did depose and say that he
is the __________________ of A. & H. Bolt & Nut Company Limited, the corporation
described in and which executed the foregoing instrument; and that he signed his
name thereto by order of the board of directors of said corporation.
-------------------------
Notary Public
STATE OF ______________)
) ss.
COUNTY OF ____________)
On this _____ day of December, 1999, before me personally came Joseph
M. Corvino, to me known, who, being by me duly sworn, did depose and say that he
is the __________________ of J.N. Fauver (Canada) Limited, the corporation
described in and which executed the foregoing instrument; and that he signed his
name thereto by order of the board of directors of said corporation.
-------------------------
Notary Public
STATE OF ______________)
) ss.
COUNTY OF ____________)
On this _____ day of December, 1999, before me personally came Joseph
M. Corvino, to me known, who, being by me duly sworn, did depose and say that he
is the __________________ of SunSource Canada Investment Company, the unlimited
liability company described in and which executed the foregoing instrument; and
that he signed his name thereto by order of said company.
-------------------------
Notary Public
<PAGE>
STATE OF ______________)
) ss.
COUNTY OF ____________)
On this _____ day of December, 1999, before me personally came
______________, to me known, who, being by me duly sworn, did depose and say
that he is the __________________ of PNC Bank, National Association, the
association described in and which executed the foregoing instrument; and that
he signed his name thereto by order of said association.
-------------------------
Notary Public
<PAGE>
List of Exhibits and Schedules
Exhibits
Exhibit 2.1(a) Revolving Credit Note
Exhibit 2.4 Term Note
Exhibit 5.5(b) Financial Projections
Exhibit 8.1(k) Financial Condition Certificate
Exhibit 17.3 Commitment Transfer Supplement
Exhibit A Borrowing Base Certificate
Schedules
Schedule 1.2 Permitted Encumbrances
Schedule 1.2A Subsidiary Stock
Schedule 1.2B Original Owners
Schedule 4.5 Equipment and Inventory Locations
Schedule 4.15(c) Location of Executive Offices
Schedule 4.19 Real Property
Schedule 5.2(a) Jurisdictions of Qualification and Good Standing
Schedule 5.2(b) Subsidiaries
Schedule 5.4 Federal Tax Identification Number
Schedule 5.6 Prior Names
Schedule 5.8(b) Litigation
Schedule 5.8(d) Plans
Schedule 5.9 Intellectual Property, Source Code Escrow Agreements
Schedule 5.10 Licenses and Permits
Schedule 5.14 Labor Disputes
Schedule 5.22 Business of Credit Parties
Schedule 7.3 Guarantees
<PAGE>
TABLE OF CONTENTS
I. DEFINITIONS 2
1.1. Accounting Terms.........................................2
1.2. General Terms............................................2
1.3. Uniform Commercial Code Terms...........................21
1.4. Certain Matters of Construction.........................22
II. ADVANCES, PAYMENTS 22
2.1. (a) Revolving Advances..................................22
(b) Individual Revolving Advances................23
-
(c) Discretionary Rights.........................23
2.2. Procedure for Borrowing Advances........................23
2.3. Disbursement of Advance Proceeds........................25
2.4. Term Loan 25
2.5. Maximum Advances........................................25
2.6. Repayment of Advances...................................25
2.7. Repayment of Excess Advances............................26
2.8. Statement of Account....................................26
2.9. Letters of Credit.......................................27
2.10. Issuance of Letters of Credit...........................27
2.11. Requirements For Issuance of Letters of Credit..........28
2.12. Additional Payments.....................................29
2.13. Manner of Borrowing and Payment.........................29
2.14. Mandatory Prepayments...................................31
2.15. Use of Proceeds.........................................32
2.16. Defaulting Lender.......................................32
III. INTEREST AND FEES 33
3.1. Interest .............................................33
3.2. Letter of Credit Fees...................................33
3.3. Facility Fee............................................34
3.4. Fee Letter 34
3.5. Computation of Interest and Fees........................34
3.6. Maximum Charges.........................................34
3.7. Increased Costs.........................................34
3.8. Basis For Determining Interest Rate Inadequate or
Unfair.............................................35
3.9. Capital Adequacy........................................35
<PAGE>
IV. COLLATERAL: GENERAL TERMS 35
4.1. Security Interest in the Collateral.....................35
4.2. Perfection of Security Interest.........................35
4.3. Disposition of Collateral...............................35
4.4. Preservation of Collateral..............................35
4.5. Ownership of Collateral.................................35
4.6. Defense of Agent's and Lenders' Interests...............35
4.7. Books and Records.......................................35
4.8. Financial Disclosure....................................35
4.9. Compliance with Laws....................................35
4.10. Inspection of Premises..................................35
4.11. Insurance 35
4.12. Failure to Pay Insurance................................35
4.13. Payment of Taxes........................................35
4.14. Payment of Leasehold Obligations........................35
4.15. Receivables.............................................35
(a) Nature of Receivables.............................35
(b) Solvency of Customers.............................35
(c) Locations of Credit Party.........................35
(d) Collection of Receivables.........................35
(e) Notification of Assignment of Receivables.........35
(f) Power of Agent to Act on Credit Parties Behalf....35
(g) No Liability......................................35
(h) Establishment of a Lockbox Account, Dominion
Account........................................35
(i) Adjustments.......................................35
4.16. Inventory.............................................. 35
4.17. Maintenance of Equipment................................35
4.18. Exculpation of Liability................................35
4.19. Environmental Matters...................................35
4.20. Financing Statements....................................35
4.21. Amalgamation............................................35
V. REPRESENTATIONS AND WARRANTIES 35
5.1. Authority 35
5.2. Formation and Qualification.............................35
5.3. Survival of Representations and Warranties..............35
5.4. Tax Returns.............................................35
5.5. Financial Statements....................................35
5.6. Corporate Name..........................................35
5.7. O.S.H.A. and Environmental Compliance...................35
5.8. Solvency; No Litigation, Violation, Indebtedness or
Default.............................................35
5.9. Patents, Trademarks, Copyrights and Licenses............35
5.10. Licenses and Permits....................................35
5.11. Default of Indebtedness.................................35
5.12. No Default 35
5.13. No Burdensome Restrictions..............................35
5.14. No Labor Disputes.......................................35
5.15. Margin Regulations......................................35
5.16. Investment Company Act..................................35
5.17. Disclosure 35
5.18. Delivery of Junior Subordinated Debentures..............35
5.19. Swaps .............................................35
5.20. Conflicting Agreements..................................35
5.21. Application of Certain Laws and Regulations.............35
5.22. Business and Property of Credit Parties.................35
5.23. Year 2000 35
5.24. Section 20 Subsidiaries.................................35
<PAGE>
VI. AFFIRMATIVE COVENANTS 35
6.1. Payment of Fees.........................................35
6.2. Conduct of Business and Maintenance of Existence
and Assets.........................................35
6.3. Violations 35
6.4. Government Receivables..................................35
6.5. Minimum EBITDA..........................................35
6.6. Fixed Charge Coverage Ratio.............................35
6.7. Undrawn Availability....................................35
6.8. Deferred Interest.......................................35
6.9. Execution of Supplemental Instruments...................35
6.10. Payment of Indebtedness.................................35
6.11. Standards of Financial Statements.......................35
6.12. Harding Mortgages.......................................35
6.13. Net Worth 35
VII. NEGATIVE COVENANTS. 35
7.1. Merger, Consolidation, Acquisition and Sale of Assets...35
7.2. Creation of Liens.......................................35
7.3. Guarantees 35
7.4. Investments.............................................35
7.5. Loans .............................................35
7.6. Capital Expenditures....................................35
7.7. Dividends 35
7.8. Indebtedness............................................35
7.9. Nature of Business......................................35
7.10. Transactions with Affiliates............................35
7.11. Leases .............................................35
7.12. Subsidiaries............................................35
7.13. Fiscal Year and Accounting Changes......................35
-
7.14. Pledge of Credit........................................35
7.15. Amendment of Articles of Incorporation, By-Laws.........35
7.16. Compliance with ERISA...................................35
7.17. Prepayment of Indebtedness..............................35
7.18. Junior Subordinated Debentures..........................35
7.19. Other Agreements........................................35
<PAGE>
VIII. CONDITIONS PRECEDENT. 35
8.1. Conditions to Initial Advances..........................35
(a) Note.........................................35
(b) Filings, Registrations and Recordings........35
(c) Corporate Proceedings of Credit Parties......35
(d) Incumbency Certificates of Credit Parties....35
(e) Certificates.................................35
(f) Good Standing Certificates...................35
(g) Legal Opinion................................35
(h) No Litigation................................35
(i) Financial Condition Certificates.............35
(j) Collateral Examination.......................35
(k) Fees.........................................35
(l) Pro Forma Financial Statements...............35
(m) Junior Subordinated Debentures...............35
(n) Insurance....................................35
(o) Title Insurance..............................35
(p) Environmental Reports........................35
(q) Payment Instructions.........................35
(r) Blocked Accounts35
(s) Consents.....................................35
(t) No Adverse Material Change...................35
(u) Leasehold Agreements.........................35
(v) October Financial Statements.................35
(w) Pledge Agreements and Other Documents........35
(x) Net Worth....................................35
(y) Contract Review35
(z) Closing Certificate..........................35
(aa) Borrowing Base.35
(bb) Undrawn Availability.........................35
(cc) Mortgage.....................................35
(dd) Other........................................35
8.2. Conditions to Each Advance..........................35
(a) Representations and Warranties...........35
(b) No Default...............................35
(c) Maximum Advances35
IX. INFORMATION AS TO CREDIT PARTIES 35
9.1. Disclosure of Material Matters......................35
9.2. Schedules 35
9.3. Environmental Reports...............................35
9.4. Litigation 35
9.5. Material Occurrences................................35
9.6. Government Receivables..............................35
9.7. Annual Financial Statements.........................35
9.8. Quarterly Financial Statements......................35
9.9. Monthly Financial Statements........................35
9.10. Other Reports.......................................35
9.11. Additional Information..............................35
9.12. Projected Operating Budget..........................35
9.13. Variances From Operating Budget.....................35
9.14. Notice of Suits, Adverse Events.....................35
9.15. ERISA Notices and Requests..........................35
9.16. Additional Documents................................35
<PAGE>
X. EVENTS OF DEFAULT 35
XI. LENDERS' RIGHTS AND REMEDIES AFTER DEFAULT 35
11.1. Rights and Remedies.................................35
11.2. Agent's Discretion..................................35
11.3. Setoff .........................................35
11.4. Rights and Remedies not Exclusive...................35
11.5. Allocation of Payments After Event of Default.......35
11.6. Canadian Remedies...................................35
XII. WAIVERS AND JUDICIAL PROCEEDINGS 35
12.1. Waiver of Notice....................................35
12.2. Delay .........................................35
12.3. Jury Waiver.........................................35
XIII. EFFECTIVE DATE AND TERMINATION 35
13.1. Term .........................................35
13.2. Termination.........................................35
XIV. REGARDING AGENT 35
14.1. Appointment.........................................35
14.2. Nature of Duties....................................35
14.3. Lack of Reliance on Agent and Resignation...........35
14.4. Certain Rights of Agent.............................35
14.5. Reliance .........................................35
14.6. Notice of Default...................................35
14.7. Indemnification.....................................35
14.8. Agent in its Individual Capacity....................35
14.10. Credit Parties' Undertaking to Agent................35
XV. BORROWING AGENCY 35
15.1. Borrowing Agency Provisions.........................35
15.2. Waiver of Subrogation...............................35
XVI. GUARANTEE 35
<PAGE>
XVII. MISCELLANEOUS 35
17.1. Governing Law.......................................35
17.2. Entire Understanding................................35
17.3. Successors and Assigns; Participations;
New Lenders...................................35
17.4. Application of Payments.............................35
17.5. Indemnity 35
17.6. Notice .........................................35
17.7. Survival .........................................35
17.8. Severability........................................35
17.9. Expenses 35
17.10. Injunctive Relief...................................35
17.11. Consequential Damages...............................35
17.12. Captions .........................................35
17.13. Counterparts; Telecopied Signatures.................35
17.14. Construction........................................35
17.15. Confidentiality; Sharing Information................35
17.16. Publicity .........................................35
<PAGE>
[LOGO] June 3, 1999
Mr. Donald T. Marshall
SunSource Inc.
3000 One Logan Square
Philadelphia, Pennsylvania 19103
Dear Don:
As you know the Board of Directors (the "Board") of SunSource, Inc. (the
"Company") has been discussing with you the terms of your continued employment
by the Company following the recent appointment of a new President and Chief
Executive Officer of the Company (the "CEO"). The Company and you desire to
facilitate a prompt and smooth transition to the CEO. This letter sets forth the
terms on which you and the Company have agreed for the continuation of your
employment starting April 28, 1999 (the "Commencement Date").
1. Term.
The term of your employment under this Agreement begins on the Commencement
Date and will continue until the third anniversary thereof (the "Term") unless
terminated at an earlier date as provided herein.
2. Position.
During the Term, you will continue in your role as Chairman of the Board,
which will be an executive officer of the Company, and the Company will nominate
you for election to the Board during the Term.
3. Duties.
In your role as Chairman of the Board, you will serve as the chairman of the
meetings of the board of directors of the Company (the "Board") and of the
stockholders of the Company, and you will retain all corporate governance
authority and responsibility applicable to your role as Chairman of the Board.
You will also perform in your role as Chairman such executive-level duties as
the Board or the CEO may assign to you from time to time. For so long as and to
the extent that the CEO requests these services, your services as Chairman will
include the following: advising the CEO regarding the strengths and weaknesses
of key personnel;
One Logan Square, Philadelphia, PA 19103 o Telephone: 215-282-1290
o Facsimile: 215-282-1309
<PAGE>
familiarizing the CEO with the strategies of the Company and its operating
subsidiaries; advising the CEO of formal and informal reporting systems; acting
as a sound board for the CEO; giving support and guidance to the CEO in order to
optimize the chances for the success of the CEO; and visiting the operating
companies to obtain such information and make such assessments as the Board
deems desirable. It is the intention of the parties that your duties will be
largely advisory in nature and will require significantly less than your
full-time efforts which time commitment will continue to decrease during the
Term, thereby enabling you to pursue your non-work related interests on an
expanded basis.
4. Compensation.
(a) During the Term, the Company will pay you an annual base salary (the
"Base Salary") of $525,000 in the first year, $425,000 in the second year and
$325,000 in the third year. The Company shall pay the Base Salary to you in
accordance with its customary payroll policies for executive employees.
(b) The Company is also granting to you on the date hereof by a separate
document (the "Grant Letter") non-qualified options to purchase 150,000 shares
of Common Stock of the Company at a price per share of $15.00 (the "Options")
under the 1998 Equity Compensation Plan (the "Plan"). The Options shall vest and
become exercisable by you at the rate of 50,000 shares on each of the first
three anniversaries of the Commencement Date and shall be subject to the other
terms and restrictions set forth in the Grant Letter and Plan. Except as
otherwise provided in the Grant Letter, the Options will be exercisable by you
until the tenth (10th) anniversary of the Date of the Grant (as defined in the
Grant).
(c) The Compensation Committee of the Board will determine from time to time
whether you will receive any options in addition to those provided for herein.
(d) During the Term, the Company will provide you access to an office and
secretarial assistance at its corporate headquarters in Philadelphia. The
Company will give the office that you currently occupy to the CEO.
(e) During the Term, the Company will provide you with an automobile
allowance and country club memberships consistent with such benefits that are
provided to you on the date hereof plus such other fringe benefits (other than
stock options) that are generally made available to other senior executives of
the Company.
5. Termination Without Compensation,
(a) If you become Disabled (as defined below), the Company may terminate the
Term, and thereafter the Company would have no further liability or obligation
to you except that you would receive from the Company: (i) any unpaid Base
Salary and fringe benefits that have accrued through the date of termination;
and (ii) whatever benefits that you may be entitled to receive under any then
existing disability benefit plans of the Company that apply to you. The term
"Disabled" means your becoming permanently and totally disabled within the
meaning of Section 22(e)(3) of the Internal Revenue Code of 1986, as amended.
<PAGE>
(b) If you die during the Term, the Term will terminate, and thereafter the
Company would not have any further liability or obligation to you, your
executors, administrators, heirs, assigns or any other person claiming under or
through you except that your estate would receive from the Company (i) any
unpaid Base Salary and fringe benefits that have accrued through the date of
termination and (ii) whatever benefits that you may be entitled to receive under
any then existing life insurance plans of the Company that apply to you.
(c) The Company may terminate the Term for "cause" by giving you notice of
the termination, and thereafter the Company would not have any further liability
or obligation to you, except that you would be entitled to receive from the
Company any unpaid Base Salary and Fringe Benefits that have accrued through the
date of termination. For purposes of this Agreement, "cause" shall mean that you
have (i) breached Section 7 of this Agreement and not remedied such breach
within 30 days after receiving written notice specifying the details thereof;
(ii) been engaged in proven disloyalty to the Company, including fraud,
embezzlement, theft, commission of a felony or proven dishonesty, affecting the
Company adversely in a material way in the course of your employment or
services; or (iii) disclosed Company Information (defined in Section 8(a)) in
violation of Section 8, affecting the Company adversely in a material way,
provided that good faith disclosures in the performance of your duties shall not
constitute cause.
6. Relief of Duties With Compensation and Benefits.
(a) The Board shall have the right to relieve you of all of your duties
during the Term without cause (as defined above) at any time by giving you 30
days' notice. Under such circumstances, the Company will pay to you the Base
Salary and provide you with fringe benefits (including your car allowance and
country club memberships) that would have been paid or provided to you if you
had continued to perform your duties for the remainder of the Tenn. The Base
Salary shall be paid in accordance with the Company's customary payroll policies
maintained by the Company.
(b) In the event that the Company shall relieve you of all of your duties
under this provision during the Term without cause as defined above, or you and
the Company shall mutually agree that you shall cease performing all of your
duties, you shall remain an employee of the Company for all purposes and shall
retain your right to exercise the Options under the Grant Letter and under the
Company's 1998 Equity Compensation Plan ("Plan"), notwithstanding your having
been relieved of all of your duties.
<PAGE>
7. Agreement Not to Compete.
During the Restricted Period (defined below), you shall not, at any time
within the Territory (defined below), directly or indirectly, engage in, or have
any interest on behalf of itself or others in, any person, firm, corporation or
business (whether as an employee, officer, director, agent, security holder,
creditor, partner, joint venturer, beneficiary under a trust, investor,
consultant or otherwise) that engages within the Territory in any of the
business activities in which the Company at any time has been engaged, or at any
time during the Term will have been engaged (the "Restricted Business");
provided, however, that nothing contained herein shall prevent or prohibit you
from owning of record or beneficially up to 1% of the stock or equity of any
corporation or other business entity engaged in the Restricted Business if such
corporation or other entity is traded on the New York Stock Exchange, the
American Stock Exchange or the NASDAQ National Market. In addition, during the
Restricted Period, you shall not directly or indirectly solicit or otherwise
encourage any of the Company's employees to terminate their employment with the
Company. The "Restricted Period" means the period during which the Company shall
be paying you the Base Salary hereunder, whether under Section 4 or Section 6,
plus an additional one year after the end of such payments. The "Territory"
means any part of North America in which the Company engages in the Restricted
Business during the Restricted Period.
If a court determines that the foregoing restrictions are too broad or
otherwise unreasonable under applicable law, including with respect to time or
space, the court is hereby requested and authorized by the parties hereto to
revise the foregoing restriction to include the maximum restrictions allowable
under applicable law. You acknowledge, however, that this Section 7 has been
negotiated by the parties hereto and that the geographical and time limitations,
as well as the limitation on activities, are reasonable in light of the
circumstances pertaining to the business of the Company.
8. Confidential Information.
(a) You have had and will have possession of or access to confidential
information relating to the business of the Company, including manuals,
financial information, business plans, customer lists, the identity of or other
facts relating to prospective customers, inventory lists, arrangements with
suppliers and customers, computer programs, or other material embodying trade
secrets, customer or product information or technical or business information of
the Company. All such information, other than any information that (i) is in the
public domain through no act or omission of you, (ii) is made available to you
after the Term by an independent third party or (iii) is required by law to be
disclosed, is referred to collectively as the "Company Information." During and
after the Employment Term, you shall not (i) use or exploit in any manner the
Company Information for yourself or any person, partnership, association,
corporation or other entity other than the Company, (ii) remove any Company
Information, or any reproduction thereof, from the possession or control of the
Company or (iii) treat Company Information otherwise than in a confidential
manner. It is understood that your possession and/or control of Company
Information during your employment (and thereafter to the extent necessary to
enable you to perform your duties in the event that you serve as a non-employee
member of the Board of Directors of the Company) shall not constitute removal of
any Company Information, or reproduction thereof, from the possession or control
of the Company in violation of this Section 8.
<PAGE>
(b) All Company Information developed, created or maintained by you, alone
or with others, while employed by the Company and all Company Information
maintained by you thereafter, shall remain at all times the exclusive property
of the Company. You shall return to the Company all Company Information, and
reproductions thereof, whether prepared by you or others, that are in your
possession immediately upon request and in any event upon the completion of the
Term.
9. Remedies.
You expressly acknowledge that the remedy at law for any breach of Sections
7 or 8 will be inadequate and that, upon any such breach or threatened breach,
the Company shall be entitled as a matter of right to injunctive relief in any
court of competent jurisdiction, in equity or otherwise and to enforce the
specific performance of your obligations under these provisions without the
necessity of proving the actual damage to the Company or the inadequacy of a
legal remedy. Subject to the remainder of this Section 9, the rights conferred
upon the Company by the preceding sentence shall not be exclusive of, but shall
be in addition to, any other rights or remedies which the Company may have at
law, in equity or otherwise.
10. General.
(a) For purposes of Sections 7, 8, 9 and 10, the term "Company" shall be
deemed to include any incorporate or unincorporated subsidiaries or Affiliates
(as hereinafter defined) of the Company and any majority-owned subsidiaries
thereof. The term "Affiliate" shall mean persons or entities controlling,
controlled by or under common control with the applicable person or entity, as
well as any officers, directors and majority-owned entities of such person or
entity and of its other Affiliates. For the purposes of the foregoing,
ownership, directly or indirectly, of 20% or more of the voting stock or other
equity interest shall be deemed to constitute control.
(b) The terms of this Agreement shall be governed by the laws of the
Commonwealth of Pennsylvania.
(c) All of the terms and provisions of this Agreement shall be binding upon
and inure to the benefit and be enforceable by the respective heirs,
representatives, successors (including any successor as a result of a merger or
similar reorganization) and assigns of the parties hereto, except that your
duties and responsibilities are of a personal nature and shall not be assignable
in whole or in part by you.
(d) All notices required to be given under this Agreement shall be in
writing and shall be deemed to have been given when personally delivered or when
mailed by registered or certified mail, postage prepaid, return receipt
requested, or when sent by Federal Express or other overnight delivery service,
addressed as follows: if to the Company, to the Company's corporate
headquarters, attention the Chief Executive Officer, and if to you, to you at
the most residential address on file with the Company for you.
<PAGE>
(e) This Agreement constitutes the entire agreement of the parties hereto
with respect to the subject matter hereof and may not be modified or amended in
any way except in writing by the parties hereto. As of the date hereof, all
prior agreements and understandings, including all employment agreements and any
other employment arrangements, between you and the Company are hereby terminated
and shall be of no further force and effect from and after the date hereof,
except that this Agreement shall not affect your right to receive any unpaid
salary or fringe benefits that has accrued as of the date hereof nor shall this
Agreement affect you or the Company's rights and obligations under the Company's
Deferred Compensation Plan for Key Employees or your Nonqualified Stock Option
Grants, dated July 30, 1998 and March 5, 1999.
(f) No waiver of any breach of this Agreement shall be construed to be a
waiver as to succeeding breaches.
(g) If any provision of this Agreement or application thereof to anyone
under any circumstances is adjudicated to be invalid or unenforceable in any
jurisdiction, such invalidity or unenforceability shall not affect any other
provisions or applications of this Agreement which can be given effect without
the invalid or unenforceable provision or application and shall not invalidate
or render unenforceable such provision in any other jurisdiction.
(h) Unless the context of this Agreement clearly requires otherwise, (i)
references to the plural include the singular, the singular the plural, the part
the whole, (ii) references to one gender include all genders, (iii) "including"
has the inclusive meaning frequently identified with the phrase "but not limited
to" and (iv) references to "hereunder" or "herein" relate to this Agreement. The
section and other headings contained in this Agreement are for reference
purposes only and shall not control or affect the construction of this Agreement
or the interpretation thereof in any respect. Section, subsection, schedule and
exhibit references are to this Agreement unless otherwise specified.
(i) This Agreement may be executed in any number of counterparts, each of
which shall be binding as of the date first written above. Each such copy shall
be deemed an original, and it shall not be necessary in making proof of this
Agreement to produce or account for more than one such counterpart.
<PAGE>
(j) Notwithstanding the termination of the Term and your employment by the
Company, this Agreement shall continue to bind the parties hereto for so long as
any obligations remain under the terms of this Agreement.
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound, have
hereunto duly executed this Agreement as of the day and year first written
above.
SUNSOURCE, INC.
By: /s/ Joseph M. Corvino
---------------------------
Name: Joseph M. Corvino
-------------------------
Title: Vice President - Finance
------------------------
/s/ Donald T. Marshall
-------------------------------
DONALD T. MARSHALL
APPROVED AND RATIFIED BY THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS.
/s/ XXXXXXXXXXXXXXXXXXXXX
-------------------------------
-------------------------------
<PAGE>
EMPLOYMENT AGREEMENT
This Agreement is made as of the 27 day of April, 1999 between SunSource,
Inc., a Delaware corporation (the "Company"), SunSource Corporate Group, Inc., a
Delaware corporation (the "Management Company" and together with the Company,
the "Companies"), and Maurice Andrien (the "Employee").
BACKGROUND
The Management Company desires to employ the Employee, and the Employee
desires to be employed by the Management Company, upon the terms and conditions
hereinafter set forth. Contemporaneously with this Agreement, the Company, which
is the parent company of the Management Company, is granting to the Employee
under a separate document that is attached hereto (the "1999 Option Grant") an
option to purchase 150,000 shares of Common Stock under the Company's 1998
Equity Compensation Plan (the "1998 Plan").
WITNESSETH:
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, each intending
to be legally bound hereby, agree as follows:
1. Definitions.
For all purposes of this Agreement, the following terms shall have the
meanings specified in this Section unless the context clearly otherwise requires
(other terms are defined elsewhere in this Agreement):
(a) "Beneficial Owner" and the correlative term "Beneficially Own" are used
herein within the meaning of Rule 13d-3 under the Exchange Act.
(b) "Board" means the Board of Directors of the Company.
(c) "Change of Control" means the occurrence of any one of the following
events:
(i) Any Person other than the management group of Harold J. Cornelius,
Joseph M. Corvino, Norman V. Edmonson, Max W. Hillman, Donald T. Marshall,
and John P. McDonnell, becomes a Beneficial Owner, directly or indirectly, of
securities of the Company representing 20% or more of the voting power of the
then outstanding securities of the Company.
<PAGE>
(ii) (A) A transaction is approved in which the stockholders of the
Company immediately before the transaction will not Beneficially Own in the
same relative percentages, immediately after the transaction, shares
entitling such stockholders to 75% or more of all votes to which all
stockholders of the surviving entity would be entitled in the election of
directors or other governing persons (excluding any election of directors by
a separate class vote), or where the members of the Board, immediately prior
to the transaction, would not, immediately after the transaction, constitute
a majority of the board of directors of the surviving entity, (B) the sale or
other disposition of all or substantially all of the assets of the Company,
SunSource Investments, Inc., or SunSub A Inc., or their respective successors
in interest or (C) a liquidation or dissolution of the Company, SunSource
Investments, Inc., or SunSub A Inc., or their respective successors in
interest; provided, however, that any such action with respect to SunSource
Investments, Inc. or SunSub A Inc. shall not constitute a change of control
so long as the Company continues to own, directly or indirectly,
substantially all of the assets thereof.
(iii) A majority of the Board shall cease for any reason to consist of
(A) individuals who on the effective date hereof are serving as directors of
the Company, or (B) individuals who subsequently become members of the Board
and whose nomination for election or election to the Board is recommended or
approved by a majority of the Board.
(d) "Cause" means, except to the extent specified otherwise by the Board,
that the Employee has: (i) breached any material provision of this Agreement and
does not remedy such breach within 30 days after receiving written notice
specifying the details thereof; (ii) been engaged in fraud, embezzlement, theft,
commission of a felony, proven dishonesty in the course of his employment or
service or deliberate injury to any SunSource Company; or (iii) disclosed any
material Company Information (defined in Section 9(a)) in violation of
Section 9.
(e) "Common Stock" means the common stock of the Company.
(f) "Compensation Committee" means the Compensation Committee of the Board.
(g) "Constructive Termination Without Cause" means a termination of the
Employee's employment by the Employee following the occurrence, without his
prior written consent, of one or more of the following events: (1) a reduction
in the Salary, or a significant diminution in the Fringe Benefits; (2) a
significant diminution in the Employee's duties, responsibilities, titles or
position, including the failure to maintain his status as a member of the Board,
or the assignment to Employee of duties and responsibilities inconsistent with
the title or positions held by the Employee on the date of this Agreement; (3)
the failure of the Company to obtain the unconditional assumption, in writing or
by operation of law, of the Company's obligation to the Employee under this
Agreement by any successor prior to or at the time of a reorganization, merger,
consolidation, disposition of all or substantially all of the assets of the
Company or similar transaction; provided, however, that a Constructive
Termination Without Cause will not take effect unless: (x) the Employee has
delivered written notice to the Board within 60 days after acquiring knowledge
of one
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<PAGE>
of the events described in this paragraph (g) that provide a basis for
Constructive Termination Without Cause, stating which one of these events has
occurred; (y) within 30 days after receipt of such notice the Company has not
remedied such event and provided the Employee with written notice of such
remedy; and (z) if the Company has not remedied such event within such period
and provided such notice, the Employee has notified the Company in writing that
he is terminating the Employment Term as of a certain date; and provided further
that the failure of the Employee to effect a Constructive Termination Without
Cause as to any one event described in this paragraph (g) will not affect the
Employee's entitlement to effect a Constructive Termination Without Cause as to
any other such event.
(h) "Disabled" means the Employee's becoming permanently and totally disabled
within the meaning of Section 22(e)(3) of the Internal Revenue Code of 1986, as
amended.
(i) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(j) "Person" is used as defined in Sections 3(a)(9) and 13(d)(3) of the
Exchange Act.
(k) "SunSource Company" means any one or more of the Company, the Management
Company and any Subsidiary.
(l) "Subsidiary" shall mean any corporation in which the Company, directly or
indirectly, owns at least 50% of the then outstanding voting securities of such
company entitled to vote generally in an election of such company's directors,
or an unincorporated entity of which the Company, directly or indirectly, owns
at least 50% of the profits or capital interests.
2. Employment.
The Management Company hereby employs the Employee, and the Employee hereby
accepts employment by the Management Company, upon the terms and conditions set
forth in this Agreement. During the term of employment under this Agreement (the
"Employment Term"), the Employee shall be the President and Chief Executive
Officer of each of the Management Company and the Company and, with respect to
each such SunSource Company, perform such duties as are customarily performed by
the most senior executive officer of a corporation, subject to the supervision
and control of the respective boards of directors thereof. The Employee shall
also be a member of the Board during the Employment Term.
3. Performance.
The Employee shall devote his entire working time and attention to the
performance of his duties hereunder; provided, however, that the Employee may
serve as a director of (subject to increase by the Board) up to two other
for-profit corporations and one not-for-profit corporation, and the Employee may
make, and assist in, personal investments to the extent that doing so does not
conflict with his duties hereunder.
3
<PAGE>
4. Term.
Unless otherwise terminated in accordance with Sections 6 or 7, the
Employment Term shall be an initial term of three years from the date of this
Agreement (the "Initial Term") and shall automatically continue thereafter for
successive one-year renewal terms (each a "Renewal Term") unless the Management
Company or the Employee gives the other party at least 45 days' prior written
notice that the then current term shall not be extended.
5. Compensation for Employment.
(a) The basic annual rate of compensation of the Employee for his employment
services to the Company, the Management Company and the other Subsidiaries
during the Employment Term shall be at least $450,000 or such higher amount as
may be approved by the Board at any time during the Employment Term (the
"Salary"), which the Management Company shall pay to the Employee in accordance
with the Management Company's payroll payment schedule in effect from time to
time. The Board shall not decrease the salary at any time during the Employment
Term.
(b) In addition to the Salary, during the Employment Term, the Company shall
pay to the Employee a bonus (the "Bonus") for the fiscal year that will end
December 31, 1999 and for each fiscal year thereafter ending December 31 during
the Employment Term (each such year is referred to herein as a "Bonus Year").
The Bonus for 1999 will be $180,000 and will be payable irrespective of the
performance of the Company so long as the Employee does not resign voluntarily
or is not terminated for Cause prior to December 31, 1999. The Bonus for each
year after 1999 (the "Post 1999 Bonus") will be equal to 40% of the Salary in
effect for the Bonus Year as to which the Post 1999 Bonus is paid, and will be
payable upon achievement of the results specified below in this paragraph (b).
Seventy percent of the Post 1999 Bonus will be payable if the Company shall have
earnings before interest, taxes, depreciation and amortization ("EBITDA") for
the related Bonus Year that is at least equal to the EBITDA specified in the
plan for that Bonus Year as approved by the Board. Thirty percent of the Post
1999 Bonus will be payable if the Employee shall have satisfied, in the judgment
of the Compensation Committee, the specific goals that the Compensation
Committee shall have specified for the Employee with respect to the particular
Bonus Year. The Board or the Compensation Committee may award the Employee such
additional bonus amounts as it from time to time may deem appropriate.
(c) The Company is issuing the 1999 Option Grant to the Employee in
connection with his employment hereunder. In addition, provided the Employee is
employed at that time, starting with the year 2000, the Company shall grant to
the Employee as part of its annual program of option grants to senior executives
in each year of the Employment Term an option to purchase 70,000 shares of
Common Stock under the 1998 Plan (or under any similar plan that may be adopted)
at a price per share equal to the fair market value on the date of grant,
subject to the respective terms generally applicable to options granted to
senior executive officers of the Company in the respective years and otherwise
subject to the terms and conditions of the 1998 Plan (or any such other plan).
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<PAGE>
(d) The Company shall pay the Employee $1,000,000 in a single payment within
30 days after a (but not more than one) Change of Control that occurs on or
before the later of (i) the second anniversary of the date hereof or (ii) the
first date as of which the Employee shall have options that are exercisable to
purchase at least 290,000 shares of Common Stock.
(e) The Management Company shall pay all reasonable out-of-pocket expenses
incurred by the Employee in connection with his move from Montreal to the
Philadelphia area, including (i) expenses of up to $3,000 per month incurred by
the Employee in connection with renting a residence in the Philadelphia area for
up to one year and (ii) any brokerage commissions, transfer taxes and other
costs of the sale (but not including income taxes or recovery of any loss on the
sale), and customary legal and accounting costs relating to his move or this
Agreement. The Company shall also pay the Employee a tax-offset bonus in order
to neutralize the tax impact of any such reimbursements.
(f) The Management Company shall provide the Employee with the following
benefits (the "Fringe Benefits") during the Employment Term.
(i) $1,000 per month automobile allowance;
(ii) four weeks of paid vacation;
(iii) initiation fee and customary membership dues at a country club of
the Employee's choice in the Philadelphia area;
(iv) such other benefits (other than those related to automobiles and
club memberships) that any Company may provide generally to other senior
executives of that Company; and
(v) reimbursement of legitimate business expenses incurred on or prior to
the date of termination.
6. Termination Without Compensation.
(a) If the Employee becomes Disabled, the Management Company may terminate
the Employment Term, and the Companies thereafter shall have no further
liability or obligation to the Employee hereunder except as follows: the
Employee shall receive (i) any unpaid Salary and Fringe Benefits that have
accrued through the date of termination; (ii) whatever benefits that he may be
entitled to receive under any then existing disability benefit plans of any
Company that may be included in the Fringe Benefits applicable to the Employee;
(iii) a proportionate amount of any Bonus that would have been due to the
Employee if he were employed for the full Bonus Year during which the Employment
Term was terminated (a "Proportionate Bonus"); (iv) reimbursement of legitimate
and reasonable business expenses incurred on or prior to the date of termination
("Pre-Termination Expenses") and (v) continuation of health care coverage for
the Employee and his
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<PAGE>
family for the 12-month period following the date of termination. The Management
Company shall pay any Proportionate Bonus in the year immediately following the
related Bonus Year at the time when it generally pays other bonus payments based
on that Bonus Year. In the event of any dispute as to whether the Employee is
Disabled, the Employee shall submit to a physical examination by a licensed
physician mutually satisfactory to the Management Company and the Employee, the
cost of such examination to be paid by the Management Company, and the
determination of such physician shall be determinative.
(b) If the Employee dies, the Employment Term shall terminate, and thereafter
the Companies shall not have any further liability or obligation to the
Employee, his executors, administrators, heirs, assigns or any other person
claiming under or through him except that the Employee's estate shall receive
any unpaid Salary and Fringe Benefits that have accrued through the date of
termination, plus a Proportionate Bonus, and reimbursement of any
Pre-Termination Expenses.
(c) The Management Company may terminate the Employment Term for Cause by
giving the Employee notice of the termination, and thereafter the Companies
shall not have any further liability or obligation to the Employee, except that
the Employee shall receive any unpaid Salary and Fringe Benefits that have
accrued through the date of termination, net of any liabilities that the
Employee may have to any Company, and reimbursement of any Pre-Termination
Expenses.
7. Termination With Compensation.
(a) The Management Company shall have the right to terminate the Employment
Term without Cause at any time by giving the Employee 45 days' notice of the
termination date. Upon any such termination by the Management Company and also
upon any termination due to the Management Company's decision not to renew the
Initial Term or any Renewal Term under Section 4, for a period of one year
following the termination date, the Management Company shall (i) continue to pay
the Employee the Salary, provide the Employee with Fringe Benefits and provide
the Employee with the customary services of an outplacement firm, (ii) pay the
Employee a Proportionate Bonus, and (iii) have no further liability or
obligation to the Employee hereunder except that the Employee shall receive any
unpaid Salary and Fringe Benefits that have accrued through the date of
termination and reimbursement of any Pre-Termination Expenses.
(b) The Employee may terminate the Employment Term if there is a Constructive
Termination without Cause, in which case the Management Company and the Employee
shall have the same obligations and rights as are specified in paragraph (a)
above for a termination by the Management Company.
(c) The Employee shall not be entitled to any compensation under any part of
this Section 7 unless the Employee executes and delivers to the Management
Company after a notice of termination a release in the form of Exhibit "A"
hereto. The parties hereto acknowledge that the payments and Fringe Benefits to
be provided under this Section 7 are to be provided in consideration for the
above-specified release.
6
<PAGE>
8. Inventions, Designs and Product Developments.
All inventions, innovations, designs, ideas and product developments
(collectively, the "Developments"), developed or conceived by the Employee,
solely or jointly with others, whether or not patentable or copyrightable, at
any time during the Employment Term and that relate to the actual or planned
business activities of the Company and all of the Employee's right, title and
interest therein, shall be the exclusive property of the Company. The Employee
hereby assigns, transfers and conveys to the Company all of his right, title and
interest in and to any and all such Developments. At any time and from time to
time, upon the request of the Company, the Employee shall execute and deliver to
the Company any and all instruments, documents and papers, give evidence and do
any and all other acts that, in the opinion of counsel for the Company, are or
may be necessary or desirable to document such transfer or to enable the Company
to file and prosecute applications for and to acquire, maintain and enforce any
and all patents, trademark registrations or copyrights under United States or
foreign law with respect to any such Developments or to obtain any extension,
validation, re-issue, continuance or renewal of any such patent, trademark or
copyright. The Company will be responsible for the preparation of any such
instruments, documents and papers and for the prosecution of any such
proceedings and will reimburse the Employee for all reasonable expenses incurred
by him in compliance with the provisions of this Section.
9. Confidential Information.
(a) The Employee will have possession of or access to confidential
information relating to the business of the Company, including writings,
equipment, processes, drawings, reports, manuals, invention records, financial
information, business plans, customer lists, the identity of or other facts
relating to prospective customers, inventory lists, arrangements with suppliers
and customers, computer programs, or other material embodying trade secrets,
customer or product information or technical or business information of the
Company. All such information, other than any information that is in the public
domain through no act or omission of the Employee or which he is authorized to
disclose or required to disclose in connection with legal or administrative
proceedings, is referred to collectively as the "Company Information." During
and after the Employment Term, except in connection with the performance of his
duties under this Agreement, the Employee shall not (i) use or exploit in any
manner the Company Information for himself or any person, partnership,
association, corporation or other entity other than the Company, (ii) remove any
Company Information, or any reproduction thereof, from the possession or control
of the Company or (iii) treat Company Information otherwise than in a
confidential manner.
(b) All Company Information developed, created or maintained by the Employee,
alone or with others while employed by the Management Company, and all Company
Information maintained by the Employee thereafter, shall remain at all times the
exclusive property of the Company. The Employee shall return to the Company all
Company Information, and reproductions thereof, whether prepared by him or
others, that are in his possession immediately upon request and in any event
upon the completion of his employment by the Company.
7
<PAGE>
10. Agreement Not to Compete
During the Restricted Period (defined below), the Employee shall not, at any
time within the Territory (defined below), directly or indirectly, engage in, or
have any interest on behalf of itself or others in, any person, firm,
corporation or business (whether as an employee, officer, director, agent,
security holder, creditor, partner, joint venturer, beneficiary under a trust,
investor, consultant or otherwise) that engages within the Territory in any of
the business activities in which the Company's shall have been engaged at any
time during the one year prior to the termination of the Employment Term (the
"Restricted Business"); provided, however, that nothing contained herein shall
prevent or prohibit the Employee from owning of record or beneficially up to 1%
of the stock or equity of any corporation or other business entity engaged in
the Restricted Business if such corporation or other entity is traded on the New
York Stock Exchange, the American Stock Exchange or the NASDAQ National Market.
In addition, during the Restricted Period, the Employee shall not directly or
indirectly solicit or otherwise encourage any of the Company's employees to
terminate their employment with the Company. The "Restricted Period" means the
period during which the Company shall be required to pay the Salary to the
Employee, whether under Section 5 or Section 7, plus an additional one year
after the end of such payments, except that the Restricted Period shall only
include such additional one year if the Employment Term shall have been
terminated by the Management Company for Cause or by the Employee's resignation
under circumstances that do not constitute a Constructive Termination without
Cause. The "Territory" means any part of North America in which the Company
engages in the Restricted Business during the Restricted Period. If a court
determines that the foregoing restrictions are too broad or otherwise
unreasonable under applicable law, including with respect to time or space, the
court is hereby requested and authorized by the parties hereto to revise the
foregoing restriction to include the maximum restrictions allowable under
applicable law. The Employee acknowledges, however, that this Section 10 has
been negotiated by the parties hereto and that the geographical and time
limitations, as well as the limitation on activities, are reasonable in light of
the circumstances pertaining to the business of the Company.
11. Remedies.
The Employee expressly acknowledges that the remedy at law for any breach of
Sections 8, 9 or 10 will be inadequate and that upon any such breach or
threatened breach, the Company shall be entitled as a matter of right to
injunctive relief in any court of competent jurisdiction, in equity or
otherwise, and to enforce the specific performance of the Employee's obligations
under these provisions without the necessity of proving the actual damage to the
Company or the inadequacy of a legal remedy. The rights conferred upon the
Company by the preceding sentence shall not be exclusive of, but shall be in
addition to, any other rights or remedies which the Company may have at law, in
equity or otherwise.
8
<PAGE>
12. Guaranty.
The Company hereby guarantees the Management Company's performance of this
Agreement.
13. General.
(a) Governing Law. The terms of this Agreement shall be governed by the laws
of the State of Pennsylvania.
(b) Company. For purposes of Sections 8, 9, 10 and 11, the term "Company"
shall be deemed to include any Subsidiaries, and to the extent that any of the
provisions thereof impose any obligations on a Subsidiary that is not a party
hereto, the Company shall cause such Subsidiary to comply with such obligations.
(c) Binding Effect. All of the terms and provisions of this Agreement shall
be binding upon and inure to the benefit and be enforceable by the respective
heirs, representatives, successors (including any successor as a result of a
merger or similar reorganization) and assigns of the parties hereto, except that
the duties and responsibilities of the Employee hereunder are of a personal
nature and shall not be assignable in whole or in part by the Employee.
(d) Notices. All notices required to be given under this Agreement shall be
in writing and shall be deemed to have been given when personally delivered or
when mailed by registered or certified mail, postage prepaid, return receipt
requested, or when sent by Federal Express or other overnight delivery service,
addressed as follows:
TO EMPLOYEE:
At the Employee's residence as provided from time to time by the
Employee to the Management Company for tax reporting purposes.
TO THE COMPANY:
SunSource Corporate Group, Inc.
3000 One Logan Square
Philadelphia, PA 19103
(e) Entire Agreement; Modification. This Agreement and the option agreements
referred to herein constitute the entire agreement of the parties hereto with
respect to the subject matter hereof and supersede all prior agreements or
understandings of the parties regarding these matters, including any prior
agreement between the Employee and the Company or any Subsidiary. Any such prior
agreement is hereby terminated as of the date hereof. This Agreement may not be
modified or amended in any way except in writing by the parties hereto.
9
<PAGE>
(f) Duration. Notwithstanding the termination of the Employment Term and of
the Employee's employment by the Company, this Agreement shall continue to bind
the parties for so long as any obligations remain under the terms of this
Agreement.
(g) Waiver. No waiver of any breach of this Agreement shall be construed to
be a waiver as to succeeding breaches. Any waiver must be in writing and signed
by the party granting the waiver.
(h) Severability. If any provision of this Agreement or application thereof
to anyone under any circumstances is adjudicated to be invalid or unenforceable
in any jurisdiction, such invalidity or unenforceability shall not affect any
other provisions or applications of this Agreement which can be given effect
without the invalid or unenforceable provision or application and shall not
invalidate or render unenforceable such provision in any other jurisdiction.
(i) Interpretation. Unless the context of this Agreement clearly requires
otherwise, (a) references to the plural include the singular, the singular the
plural, the part the whole, (b) references to any gender include all genders,
(c) "including" has the inclusive meaning frequently identified with the phrase
"but not limited to" and (d) references to "hereunder" or "herein" relate to
this Agreement. The section and other headings contained in this Agreement are
for reference purposes only and shall not control or affect the construction of
this Agreement or the interpretation thereof in any respect.
(j) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be binding as of the date first written above,
and all of which shall constitute one and the same instrument. Each such copy
shall be deemed an original, and it shall not be necessary in making proof of
this Agreement to produce or account for more than one such counterpart.
(k) The Employee shall have no duty to mitigate damages by seeking other
employment or other compensation in the event of the termination of the
Employment Term, and any payments due the Employee hereunder will not be offset
in respect of any amount except as expressly provided in this Agreement.
10
<PAGE>
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound, have
hereunto duly executed this Agreement as of the day and year first written
above.
SUNSOURCE, INC.
By:___________________________
Name:
Title:
SUNSOURCE CORPORATE GROUP, INC.
By:____________________________
Name:
Title:
_______________________________
MAURICE ANDRIEN
11
<PAGE>
EXHIBIT A
FORM OF RELEASE
NOTE: YOU SHOULD CONSULT WITH AN ATTORNEY PRIOR TO
SIGNING THIS DOCUMENT.
FULL WAIVER AND RELEASE OF CLAIMS
1. I, Maurice Andrien, in exchange for the compensation
provided under Section 7 of the employment agreement among SunSource, Inc.,
SunSource Corporate Group, Inc. (collectively, the "Companies") and myself dated
[INSERT DATE], to which I would not otherwise be entitled in the amount of
[INSERT AMOUNT OF CONSIDERATION], less applicable federal, state and local tax
deductions, hereby waive any and all Claims (as defined below) which I may have
against the Companies, their parents, subsidiaries, affiliated businesses and
divisions, or their directors, officers, employees, or agents (hereinafter
collectively referred to as "Releasees").
2. This Full Waiver and Release of Claims (hereinafter the
"Waiver") applies to any and all past and present claims, suits, damages,
liabilities, demands and causes of action, whether known or unknown, existing or
contingent, or whether at law or equity, arising out of my employment with the
Companies or the termination of that employment but only to the extent that any
of such items relates to any of the following:
o age discrimination under the federal Age Discrimination in
Employment Act;
o age discrimination under similar state or local laws; and
o discrimination Claims under federal, state or local laws
based on race, color, creed, marital status, veteran status,
sex, sexual preference, national origin, citizenship,
disability, handicap or religion.
Such released claims, suits, damages, liabilities, demands and causes of action
that are specified above in this Section 2 are referred to herein as "Claims."
This Waiver shall not apply to claims for workers' compensation benefits or
unemployment compensation benefits.
3. This Waiver also precludes me from bringing a lawsuit, or
obtaining relief as a result of any charge, lawsuit, or proceeding brought by me
or on my behalf, asserting any Claims against Releasees (or any one of them). In
the event I violate this paragraph, I agree that the affected Releasee(s) shall
be entitled to dismissal of any such lawsuit and that I will be responsible for
the payment of the reasonable attorney's fees and expenses incurred in the
Releasee(s)' defense.
<PAGE>
EXHIBIT A
4. My last day of work will be _________________, and the
Companies have no obligation to re-employ me in the future.
5. I may revoke this Waiver for a period of seven (7) days
following the day I sign it by submitting written notice of my revocation to
[INSERT EMPLOYER REPRESENTATIVE'S NAME AND TITLE] at [INSERT ADDRESS]. This
Waiver shall become effective and enforceable upon expiration of this revocation
period.
6. I acknowledge that I have been advised in writing to
consult with an attorney prior to signing this Waiver and that I have been given
twenty-one (21) days to consider this Waiver.
7. This Waiver shall be binding upon me and my heirs,
administrators, representatives, executors, and assigns.
I HAVE CAREFULLY READ THIS ENTIRE DOCUMENT. I UNDERSTAND THAT
BY SIGNING THIS DOCUMENT, I AM WAIVING ALL CLAIMS RELATING TO MY EMPLOYMENT WITH
THE COMPANIES AND THE TERMINATION OF THAT EMPLOYMENT. I HAVE SIGNED THIS WAIVER
VOLUNTARILY, INTENDING TO BE LEGALLY BOUND.
In witness whereof, I have signed this Waiver this
_____ day of __________________________.
Employee Signature:________________________________
2
<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
* 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
* SunSource Integrated Services de Mexico S. A. DE C. V.
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 February 9, 2000, on our audits of the consolidated financial
statements and financial statement schedules of SunSource Inc. as of December
31, 1999 and 1998, and for the three years in the period ending December
31,1999, which report is included in this Annual Report on Form 10-K.
Philadelphia, Pennsylvania
March 28, 2000
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF DECEMBER 31, 1999 AND THE RELATED STATEMENT OF INCOME FOR THE YEAR
TO DATE ENDED DECEMBER 31, 1999.
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
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115,200
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<TOTAL-LIABILITY-AND-EQUITY> 323,017
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