-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R0EZuKLHijSvcWhInI6fk02wYTj0n/OcY0PP2a1zOWvAMc6DRlrDh6SYrD1vvL1h dbJ3cm9EJxRB5LSHmZ1nWg== 0000950116-97-001341.txt : 19970725 0000950116-97-001341.hdr.sgml : 19970725 ACCESSION NUMBER: 0000950116-97-001341 CONFORMED SUBMISSION TYPE: S-4/A PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19970724 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUNSOURCE INC CENTRAL INDEX KEY: 0001029831 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MACHINERY, EQUIPMENT & SUPPLIES [5080] IRS NUMBER: 232874736 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-19077 FILM NUMBER: 97644958 BUSINESS ADDRESS: STREET 1: 2600 ONE LOAN SQUARE CITY: PHILADELPHIA STATE: PA ZIP: 19103 BUSINESS PHONE: 2156653650 MAIL ADDRESS: STREET 1: 2600 ONE LOAN SQUARE CITY: PHILADELPHIA STATE: PA ZIP: 19103 S-4/A 1 As filed with the Securities and Exchange Commission on July 24, 1997 Registration No. 333-19077 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ----------------------- Amendment No. 4 to Form S-4 REGISTRATION STATEMENT Under THE SECURITIES ACT OF 1933 ----------------------- SunSource Inc. (Exact name of registrant as specified in its charter) Delaware 6719 23-2874736 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.) incorporation or organization) Classification No.)
2600 One Logan Square Philadelphia, Pennsylvania 19103 (215) 665-3650 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ----------------------- DONALD T. MARSHALL President and Chief Executive Officer 2600 One Logan Square Philadelphia, Pennsylvania 19103 (215) 665-3650 (Name, address, including zip code, and telephone number, including area code, of agent for service) ----------------------- SunSource Capital Trust (Exact name of registrant as specified in its charter) Delaware 6719 23-2874735 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.) incorporation or organization) Classification No.)
501 Silverside Road Suite 17 Wilmington, Delaware 19809 (302) 798-6665 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ----------------------- DONALD T. MARSHALL 2600 One Logan Square Philadelphia, Pennsylvania 19103 (215) 665-3650 (Name, address, including zip code, and telephone number, including area code, of agent for service) ----------------------- Copies to: DONALD A. SCOTT GEORGE R. KROUSE WILLIAM G. LAWLOR Morgan, Lewis & Bockius LLP Simpson Thacher & Bartlett Dechert Price & Rhoads 2000 One Logan Square 425 Lexington Avenue 1717 Arch Street Philadelphia, PA 19103 New York, NY 10017 Philadelphia, PA 19103 (215) 963-5000 (212) 455-2000 (215) 994-4000
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effectiveness of this Registration Statement and the satisfaction or waiver of all other conditions to the merger of SunSource L.P. (the "Partnership") and a wholly owned subsidiary of the Partnership with and into the Registrant pursuant to the Agreement and Plan of Conversion dated July __, 1997 among the Registrant, the Partnership, LPSub Inc., a Delaware corporation, Lehman/SDI, Inc., a Delaware corporation and the limited partners of SDI Partners I, L.P., described in the enclosed Proxy Statement/Prospectus. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [ ] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box [ ]. ----------------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to such Section 8(a), may determine. Philadelphia, Pennsylvania August __, 1997 NOTICEOF SPECIAL MEETING OF LIMITED PARTNERS To Be Held On September 18, 1997 To the Limited Partners of SunSource L.P.: NOTICE IS HEREBY GIVEN that a Special Meeting of the limited partners of SunSource L.P., a Delaware limited partnership (the "Partnership"), will be held at 3000 One Logan Square, 18th and Cherry Streets, Philadelphia, Pennsylvania on Thursday, September 18, 1997 at 10:00 a.m., local time. At the Special Meeting, the limited partners will vote upon a proposal (the "Conversion Proposal") to convert the Partnership to corporate form (the "Conversion") through a merger with and into SunSource Inc., a newly formed Delaware corporation (the "Corporation"). If the limited partners approve the Conversion Proposal: o Each Class A limited partnership interest ("A Interest") will be exchanged for $1.30 in cash and 0.38 of an 11.6% Trust Preferred Security of SunSource Capital Trust, a business trust holding 11.6% Junior Subordinated Debentures of the Corporation. The Trust Preferred Securities will have a liquidation preference of $25, will be entitled to cumulative distributions of $2.90 per year payable monthly and will mature in 30 years, subject to optional redemption after five years or earlier upon the occurrence of a Tax Event. o Each Class B limited partnership interest ("B Interest") will be exchanged for 0.25 share of Common Stock of the Corporation (the "Common Stock"). The Conversion will be accomplished by the following: o The contribution by the Partnership of its limited partnership interest in SDI Operating Partners, L.P. (the "Operating Partnership") and by Lehman/SDI, Inc. ("Lehman/SDI") of its general partnership interest in SDI Partners I, L.P., the general partner of the Partnership and the Operating Partnership (the "General Partner"), to a subsidiary of the Partnership ("LPSub") in exchange for common stock of LPSub. o The contribution by certain current and former members of management of their limited partnership interests in the General Partner to the Corporation, in exchange for 462,000 shares of Common Stock, of which 75,000 shares will be held in escrow to be distributed after two years if all distributions then due on the Trust Preferred Securities have then been paid, and the contribution by the Corporation of those limited partnership interests to a wholly owned subsidiary of the Corporation. o A merger (the "Merger") of the Partnership and LPSub with and into the Corporation, in which (i) the A Interests will be converted into 4,217,837 Trust Preferred Securities and cash; (ii) the B Interests will be converted into 5,418,936 shares of Common Stock and (iii) the common stock of LPSub held by Lehman/SDI will be converted into 538,000 shares of Common Stock. As a result of the Conversion, the Partnership will cease to exist and subsidiaries of the Corporation will own all of the partnership interests in the Operating Partnership and the General Partner. Unaffiliated holders of A Interests will hold 4,187,543 Trust Preferred Securities and affiliated holders of A Interests will hold 30,294 Trust Preferred Securities (in each case, less the number of fractional shares for which holders will receive cash in the Conversion). Unaffiliated holders of B Interests will hold 2,954,601 (less the number of fractional shares for which holders will receive cash in the Conversion) shares of Common Stock (46.0% of the total outstanding). The partners of the General Partner and other affiliates of the General Partner who presently hold B Interests will hold 3,464,335 shares of Common Stock (54.0% of the total outstanding). The Conversion Proposal and related matters are more fully described in the attached Proxy Statement/Prospectus, which (together with the exhibits thereto and the documents incorporated by reference therein) forms a part of this Notice and is incorporated herein by reference. Frequently used capitalized terms are defined in Exhibit A thereto and a chart illustrating the relative relationships of the entities before and after the Conversion is set forth before the Summary to the Proxy Statement/Prospectus. The Conversion will require (i) the approval of limited partners holding a majority of the outstanding A Interests and B Interests, each voting separately as a class, and (ii) the approval of unaffiliated limited partners (limited partners other than affiliates of the General Partner) holding a majority of the A Interests and B Interests held by unaffiliated limited partners, each voting separately as a class. Only limited partners of the Partnership of record at the close of business on August 4, 1997 are entitled to notice of and to vote at the Special Meeting. You are cordially invited to attend the Special Meeting. If you cannot attend, please sign and date the accompanying form of proxy and return it promptly in the enclosed envelope. If you attend the meeting, you may vote in person regardless of whether you have given your proxy. Any proxy may be revoked at any time before it is exercised, as indicated herein. By Order of the General Partner Joseph M. Corvino, Secretary SDI Partners I, L.P. Your vote is important. Accordingly, you are asked to complete, sign and return the accompanying proxy card in the envelope provided, which requires no postage if mailed in the United States. Proxy Statement/Prospectus SUNSOURCE INC. 6,418,936 Shares of Common Stock SUNSOURCE CAPITAL TRUST 4,217,837 11.6% Trust Preferred Securities (Liquidation Amount $25 per Trust Preferred Security) Fully and unconditionally guaranteed by SUNSOURCE INC. This Proxy Statement (which is also a Prospectus) relates to the issuance of (i) Common Stock, par value $0.01 per share ("Common Stock"), of SunSource Inc., a Delaware corporation which has been newly formed by SunSource L.P., a Delaware limited partnership, and (ii) 11.6% Trust Preferred Securities (the "Trust Preferred Securities") of SunSource Capital Trust, a Delaware statutory business trust (the "Trust"), representing preferred undivided beneficial interests in the assets of the Trust, which will consist of 11.6% Junior Subordinated Debentures ("Junior Subordinated Debentures") of SunSource Inc. In this Proxy Statement/Prospectus, SunSource Inc. is referred to as the "Corporation" and SunSource L.P. as the "Partnership." Other frequently used capitalized terms are defined in Exhibit A hereto (located inside the back cover). This Proxy Statement is being sent by the Partnership to the holders of Class A limited partnership interests ("A Interests") and Class B limited partnership interests ("B Interests," and together with A Interests, "Interests") in connection with the solicitation by SDI Partners I, L.P., a Delaware limited partnership which is the general partner of the Partnership (the "General Partner"), of proxies to be voted at a Special Meeting of the Partnership's limited partners in Philadelphia on September 18, 1997. At the Special Meeting, the limited partners will vote on a proposal (the "Conversion Proposal") that, if approved, will result in the conversion of the Partnership to corporate form (the "Conversion"). The Conversion will be accomplished through a merger (the "Merger") of the Partnership and a subsidiary of the Partnership ("LPSub") with and into the Corporation. Upon consummation of the Merger, each A Interest will be exchanged for 0.38 of a Trust Preferred Security and $1.30 in cash. The Trust Preferred Securities will have a liquidation preference of $25, will be entitled to cumulative distributions of $2.90 per year payable monthly and will mature in 30 years, subject to optional redemption after five years or earlier upon the occurrence of a Tax Event (as defined herein). Each B Interest will be exchanged for 0.25 share of Common Stock of the Corporation. The general partnership interest in the General Partner held by Lehman/SDI, Inc. ("Lehman/SDI") will be exchanged for common stock of LPSub, which will be converted into 538,000 shares of Common Stock in the Merger. The limited partnership interests in the General Partner held by current and former members of management will be exchanged with the Corporation for 462,000 shares of Common Stock, of which 75,000 shares will be held in escrow to be distributed after two years if all distributions on the Trust Preferred Securities have then been paid. As a result of the Conversion, (i) the Partnership will cease to exist and subsidiaries of the Corporation will own all of the partnership interests in the Operating Partnership and the General Partner; (ii) the unaffiliated holders of A Interests will hold 4,187,543 and affiliated holders of A Interests will hold 30,294 Trust Preferred Securities (in each case, less the number of fractional shares for which holders will receive cash in the Conversion); (iii) unaffiliated holders of B Interests will hold 2,954,601 (less the number of fractional shares for which holders will receive cash in the Conversion) shares of Common Stock (46.0% of the total outstanding); and (iv) the partners of the General Partner and affiliates of the General Partner who presently hold B Interests will hold 3,464,335 shares of Common Stock (54.0% of the total outstanding). (cover page continued) --------------- NEITHER THIS TRANSACTION NOR THESE SECURITIES HAVE BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF THIS TRANSACTION OR THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ---------------- The date of this Proxy Statement/Prospectus is August__, 1997. Considerations for Holders of A Interests (references are to page numbers in this Proxy Statement/Prospectus) o You will receive in exchange for each of your A Interests: - $1.30 in cash and - 0.38 of a $25 Trust Preferred Security o 0.38 of a $25 Trust Preferred Security will entitle you to: - $1.10 distribution each year, payable monthly, the same amount and timing as the Priority Return on your A Interests - a liquidation preference of $9.50 compared to a liquidation preference for your A Interest of $10. o The Trust Preferred Security will be redeemable at $9.50 after five years (or earlier at $9.595 if certain conditions are met and there is a change in the applicable tax law affecting the deductibility of interest on the Junior Subordinated Debentures) whereas the A Interest may only be cashed out in a liquidation. See page 19. o Distributions on the Trust Preferred Securities may be deferred for up to five years. The unpaid distributions will accrue interest at 11.6%, but you will be required to pay tax on the distributions as they are due. See page 22. o The debentures underlying the Trust Preferred Securities are subordinate to the senior indebtedness of the Corporation and its subsidiaries, which is substantially the case now with the A Interests. See page 23. o Your receipt of cash and the Trust Preferred Security will be a taxable event. This effect is described on page 24. o You presently have the right to vote on mergers, dissolution, the sale of substantially all of the assets of the Partnership and the removal of the General Partner. The Trust Preferred Securities will not have those voting rights. See page 26. (continued on next page) Considerations for Holders of B Interests (references are to page numbers in this Proxy Statement/Prospectus) o You will receive in exchange for each of your B Interests 0.25 share of Common Stock (effectively a one-for-four reverse split). o The partners of the General Partner (which has a 1% interest in the Partnership, a 1% interest in the Operating Partnership and the right to receive an annual management fee of $3,300,000 (the "Management Fee")) will receive 1,000,000 shares of Common Stock. This will increase the interests currently held by the partners and their affiliates from 46% of the B Interests to 54% of the Common Stock. o After the Conversion you will not be entitled to receive the B Tax Distribution. However, you will not have any taxable income allocated to you as has been done in the past. o We will consider the possibility of paying dividends on the Common Stock after the Effective Time of the Conversion. The payment of dividends will be at the discretion of the Corporation's Board of Directors and will depend, among other things, on earnings, financial condition, capital requirements, availability of acquisition candidates, level of indebtedness, contractual restrictions with respect to the payment of dividends and other factors that the Corporation's Board of Directors deems relevant. o You should be aware that: - - there are conflicts of interest between the General Partner and the A Interests and you. You were not independently represented in the negotiations. See page 19. - - you have no right to dissent and demand appraisal in connection with the Conversion. See page 20. - - there is no assurance as to the price at which the Common Stock will trade. The price could be adversely affected if a large number of stockholders sell their shares immediately after the Conversion. In this regard the Corporation has agreed to file registration statements for the sale by Lehman Brothers and management of their shares. See page 21. (continued on next page) ii Considerations for Holders of A Interests (references are to page numbers in this Proxy Statement/Prospectus) o You should be aware that: - - there are conflicts of interest between the General Partner and the B Interests and you. You were not independently represented in the negotiations. See page 21. - - you have no right to dissent and demand appraisal in connection with the Conversion. See page 26. - - there is no assurance as to the price at which the Trust Preferred Securities will trade although, in view of the cash you will receive, it is likely that the price will be below the price of the A Interests before the Conversion. See page 26. o Other important considerations are set forth on pages 5 to 7 and 19 to 27. The reasons for the Conversion are set forth on pages 7 and 33. Before you make your decision on how to vote, we urge you to read the Proxy Statement/Prospectus carefully. Considerations for Holders of B Interests (references are to page numbers in this Proxy Statement/Prospectus) - - the fiduciary duties of the directors of the Corporation may be less than those owed by the General Partner. See page 23. - - the Corporation will have a stockholders' deficit which could affect the ability to pay dividends if that action is ultimately decided upon. See page 19. - - there will be certain provisions in place which may reduce the likelihood of a takeover that, if successful, would permit stockholders to receive a premium over market. See page 22. o Other important considerations are set forth on pages 5 to 7 and 19 to 24. The reasons for the conversion are set forth on pages 7 and 33. Before you make your decision on how to vote, we urge you to read the Proxy Statement/Prospectus carefully. The Conversion will require (i) the approval of limited partners holding a majority of the outstanding A Interests and B Interests, each voting separately as a class, and (ii) the approval of unaffiliated limited partners (limited partners other than affiliates of the General Partner) holding a majority of the A Interests and B Interests held by unaffiliated limited partners, each voting separately as a class. Such majority approvals will bind all limited partners regardless of whether they vote against the Conversion. The affiliates of the General Partner, who own approximately 46% of the B Interests, have advised the Partnership that they will vote in favor of the Conversion Proposal. Failure to forward a proxy or to vote in person at the Special Meeting will have the same effect as if a limited partner had voted against the Conversion Proposal. This Proxy Statement/Prospectus and the related form of proxy are first being sent to limited partners on or about August ___, 1997. Application has been made to list the Trust Preferred Securities and Common Stock on the New York Stock Exchange. No person is authorized to give any information or to make any representation not contained in this Proxy Statement/Prospectus, and any information or representation not contained herein must not be relied upon as having been authorized by the Partnership, the General Partner, the Corporation or the Trust. This Proxy Statement/Prospectus does not constitute an offer of any securities other than the registered securities to which it relates or an offer to any person in any jurisdiction where such offer would be unlawful. Neither the delivery of this Proxy Statement/Prospectus nor any sales made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Partnership or the Corporation since the date hereof. Until 25 days after the date of this Proxy Statement/Prospectus, all dealers effecting transactions in the Trust Preferred Securities and the Common Stock, whether or not participating in this distribution, may be required to deliver a Proxy Statement/Prospectus. iii TABLE OF CONTENTS SUMMARY ................................................................2 The Partnership, the Corporation and the Trust.......................2 Overview of the Conversion...........................................3 Existing Economic Interests of the Partners..........................4 Risk Factors .......................................................5 Reasons to Convert to Corporate Form.................................8 Alternatives to the Conversion.......................................9 Structure of the Conversion.........................................10 Control of SunSource................................................10 Special Committee...................................................10 Recommendation of General Partner and Fairness Determination..........................................11 Summary Description of Trust Preferred Securities......................................................11 Comparative Rights of the Interests and the Securities to be Issued.........................................13 Summary of Certain Federal Income Tax Consequences................................................13 Conditions to the Conversion........................................13 No Appraisal Rights.................................................14 Consequences if Conversion Is Not Approved..........................14 Limited Partner Litigation..........................................14 Voting at the Special Meeting.......................................14 List of Partners....................................................15 Delivery of Depositary Receipts.....................................15 Reverse Stock Split.................................................15 Summary Financial Information.......................................16 RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS..................................19 RISKS TO HOLDERS OF A INTERESTS.........................................19 Conflicts of Interest...............................................19 No Independent Representation.......................................19 Optional Redemption.................................................19 Reduction in Liquidation Preference.................................19 Special Event Redemption or Distribution; Shortening of Stated Maturity...................................19 Loss of Contractual Right to Distributions..........................22 Option to Extend Interest Payment Period; Tax Impact of Extension.............................................22 Ranking of Subordinated Obligations Under Preferred Securities Guarantee and Junior Subordinated Debentures; Dependence on the Corporation...................................24 Adverse Tax Implications............................................25 Enforcement of Certain Rights by Holders of Trust Preferred Securities...................................25 Limited Voting Rights...............................................26 No Dissenters', Appraisal or Similar Rights for Nonconsenting Limited Partners..............................26 Uncertainty Regarding Market Price for Trust Preferred Securities......................................27 Elimination of General Partner Liability for Corporation Obligations.........................................27 Payments Under Deferred Compensation Plans..........................28 Transaction Costs...................................................28 Change in Ownership Rights..........................................28 Other Considerations................................................28 RISKS TO HOLDERS OF B INTERESTS Conflicts of Interest...............................................19 No Independent Representation.......................................19 Loss of Contractual Right to Distributions..........................19 Certain Delaware Law Considerations.................................19 No Dissenters', Appraisal or Similar Rights for Nonconsenting Limited Partners..............................20 Adverse Tax Implications............................................20 Uncertainty Regarding Market Price of Common Stock; Possible Reduction Due to Sales by Lehman Brothers or Management..........................21 Future Dilution of Common Stock.....................................21 Addition of Provisions that May Discourage Changes of Control..............................................22 Possible Reduction in Fiduciary Standards...........................23 Elimination of General Partner Liability for Corporation Obligations.........................................23 Payments Under Deferred Compensation Plans..........................23 Transaction Costs...................................................23 Change in Ownership Rights..........................................23 Other Considerations................................................24 VOTING AND PROXY INFORMATION............................................28 Voting Procedures...................................................28 Revocation of Proxies...............................................28 Vote Required; Quorum...............................................29 Solicitation of Proxies.............................................29 Independent Auditors................................................29 No Appraisal Rights.................................................29 Other Matters.......................................................29 SPECIAL FACTORS.........................................................29 Background of the Conversion........................................29 Existing Partnership Structure......................................31 Existing Economic Interests of the Partners.........................31 Alternatives to the Conversion......................................32 Reasons to Convert to Corporate Form................................37 Terms of the Conversion.............................................38 Consequences if Conversion is Not Approved..........................39 Allocation of Interests in the Conversion...........................41 Distributions and Compensation......................................43 Limited Partner Litigation..........................................44 Determinations of the Special Committee.............................45 Opinion of Smith Barney.............................................58 Recommendation of the General Partner and Fairness Determination..........................................63 iv Source and Amount of Funds..........................................64 Accounting Treatment................................................65 Fees and Expenses...................................................65 Exchange of Depositary Receipts.....................................65 Treatment of Fractional Shares......................................66 COMPARISON OF INTERESTS AND SECURITIES TO BE ISSUED........................................................66 Fiduciary Duties....................................................74 CERTAIN FEDERAL INCOME TAX CONSEQUENCES........................................................74 Partnership Status and Taxation of the Partnership....................................................75 General Tax Treatment of the Conversion.............................75 Certain Tax Consequences of the Conversion to Holders of B Interests.......................................76 Certain Tax Consequences of the Conversion to Holders of A Interests.......................................78 Other Tax Issues Affecting Limited Partners.........................80 Tax Consequences to the Corporation and the Partnership.................................................81 Unrelated Business Taxable Income...................................81 Other Tax Aspects...................................................81 MARKET PRICES AND DISTRIBUTIONS.........................................82 CAPITALIZATION..........................................................84 SELECTED HISTORICAL FINANCIAL INFORMATION .............................................85 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..............................................87 BUSINESS...............................................................100 General............................................................100 Acquisition Strategy...............................................101 Products and Services..............................................102 Marketing..........................................................103 Competition........................................................103 Insurance Arrangements.............................................103 Investment and Borrowing Policies..................................104 Employees..........................................................104 Backlog............................................................104 Federal Income Tax Considerations..................................104 Properties.........................................................105 Legal Proceedings..................................................105 MANAGEMENT.............................................................107 Directors and Executive Officers...................................107 Directors and Executive Officers after the Conversion...........................................108 Compensation.......................................................108 Deferred Compensation Plans........................................109 Change in Control Arrangements.....................................110 Management Fee.....................................................110 Certain Business Relations.........................................110 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.....................................................111 Security Ownership of Certain Beneficial Owners.........................................................111 Security Ownership of Certain Beneficial Owners and Management..........................................111 SUNSOURCE CAPITAL TRUST................................................112 DESCRIPTION OF TRUST PREFERRED SECURITIES.........................................................114 General............................................................115 Distributions......................................................115 Mandatory Redemption...............................................116 Special Event Redemption or Distribution; Shortening of Stated Maturity..................................116 Redemption Procedures..............................................118 Subordination of Trust Common Securities...........................119 Liquidation Distribution Upon Dissolution..........................119 No Merger, Consolidation or Amalgamation of the Trust......................................................119 Declaration Events of Default......................................120 Voting Rights......................................................12- Modification and Amendment of the Declaration....................................................122 Book-Entry; Delivery and Form......................................123 Expenses and Taxes.................................................124 Registrar, Transfer Agent and Paying Agent.........................124 Information Concerning the Property Trustee........................124 Governing Law......................................................125 Miscellaneous......................................................125 DESCRIPTION OF PREFERRED SECURITIES GUARANTEE...........................................125 General............................................................125 Certain Covenants of the Corporation...............................126 Amendments and Assignment..........................................126 Termination of the Preferred Securities Guarantee......................................................126 Status of the Preferred Securities Guarantee.......................126 Governing Law......................................................127 DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES.........................................................127 General............................................................127 Optional Redemption................................................127 Proposed Tax Legislation...........................................128 Interest...........................................................128 Option to Extend Interest Payment Period...........................129 Compounded Interest................................................129 Certain Covenants of the Corporation Applicable to the Junior Subordinated Debentures..........................129 v Subordination......................................................130 Indenture Events of Default........................................130 Modification of the Indenture......................................131 Book-Entry and Settlement..........................................131 Consolidation, Merger and Sale.....................................132 Defeasance and Discharge...........................................132 Governing Law......................................................132 Information Concerning the Indenture Trustee.......................132 Miscellaneous......................................................132 RELATIONSHIP AMONG THE TRUST PREFERRED SECURITIES, THE JUNIOR SUBORDINATED DEBENTURES AND THE PREFERRED SECURITIES GUARANTEE..........................................................133 DESCRIPTION OF CAPITAL STOCK...........................................134 Preferred Stock....................................................134 Common Stock.......................................................134 Stockholders Agreement.............................................134 Anti-takeover Provisions...........................................135 Limitation of Liability............................................136 Transfer Agent and Registrar.......................................136 RESALE OF SECURITIES...................................................136 Securities Act Restrictions........................................136 Resales by Lehman Brothers and Management..........................136 LEGAL MATTERS..........................................................136 EXPERTS................................................................137 AVAILABLE INFORMATION..................................................137 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.......................................................137 INDEX TO FINANCIAL STATEMENTS..........................................F-1 EXHIBIT A GLOSSARY OF DEFINED TERMS A-1 EXHIBIT B CONVERSION AGREEMENT B-1 EXHIBIT C SMITH BARNEY FAIRNESS OPINION C-1 EXHIBIT D MANAGEMENT PROJECTIONS D-1 ORGANIZATION CHART
Lehman/SDI, Management Inc. (including Norman V. Edmonson, Donald T. Marshall and John P. McDonnell) 53.8% 46.2% A Holders Public B Lehman Management GP LP Holders Affiliates (including Norman V. (including Lehman Edmonson, Donald T. Brothers Capital Marshall and John Partners I, L.P., P. McDonnell) LBI Group Inc. and Lehman Ltd. I Inc. 100% 53.7% 27.2% 19.1% SDI Partners I, L.P. A B B B (The General Partner) 1% Interests Interests Interests Interests GP SunSource L.P. (The Partnership) 99% LP GP SDI Operating 1% and Fee Partners, L.P. (The Operating Partnership) AFTER CONVERSION Former Public Former Lehman and Management A Holders B Holders Affiliates (including Norman V. (including Lehman Edmonson, Donald T. Brothers Capital Marshall and John Partners I, L.P., P. McDonnell) LBI Group Inc. and Lehman Ltd. I Inc. | | | | | | | | 100% 46.0% 31.4% 22.6% Preferred Common Common Common Securities Stock Stock Stock | | - -------------- Junior ---------------------------------------------- SunSource Subordinated Capital Trust Debentures SunSource Inc. (The Trust) | (The Corporation) - -------------- Common Securities ---------------------------------------------- | | 100% 100% | | SunSub A SunSub B 99% 46.2% 53.8% LP LP GP (interest formerly (interest formerly held by Management) held by Lehman/SDI, Inc.) | | | | |----------------- SDI Partners I, L.P. | (The General Partner) | SDI Operating Partners, L.P. (The Operating Partnership) ------- GP 1% and Fee
2 SUMMARY The following is not intended to be complete and is qualified in all respects by the more detailed information set forth elsewhere in this Proxy Statement/Prospectus and the documents incorporated by reference herein. Unless otherwise indicated, all information in this Proxy Statement/Prospectus assumes a 1-for-4 reverse stock split that will be effected by the exchange ratio of 0.25 share of Common Stock for each B Interest in the Conversion. A glossary of frequently used capitalized and other specialized terms is attached as Exhibit A and a chart describing the SunSource structure before and after the Conversion is set forth immediately preceding this Summary. Limited partners are urged to review carefully the entire Proxy Statement/Prospectus and to request such documents incorporated by reference herein as they desire. This Proxy Statement/Prospectus contains forward-looking statements that address, among other things, source and amount of funds, amount of sales, projected capital expenditures, projected revenue and profit growth, and acquisition strategy. These statements may be found under "SPECIAL FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," and "BUSINESS," and Exhibit D as well as in the Proxy Statement/Prospectus generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including without limitation, those discussed in "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS" and matters set forth in the Proxy Statement/Prospectus generally. The Partnership, the Corporation and the Trust SunSource L.P.(the "Partnership") was organized as a Delaware limited partnership in 1986 under the name Sun Distributors L.P. to conduct the business formerly conducted by Sun Distributors, Inc. when it was a subsidiary of Sun Company, Inc. The Partnership assumed its present name in April 1996. The general partner of the Partnership is SDI Partners I, L.P. (the "General Partner"), a Delaware limited partnership, whose general partner is Lehman/SDI, Inc. ("Lehman/SDI"), a Delaware corporation, and whose limited partners are current or former members of management of the Partnership and the Operating Partnership. Lehman/SDI is an indirect wholly owned subsidiary of Lehman Brothers Holdings Inc. The business of the Partnership is conducted through SDI Operating Partners, L.P. (the "Operating Partnership"), a Delaware limited partnership. The General Partner is the general partner of the Operating Partnership and the limited partner of the Operating Partnership is the Partnership. The Operating Partnership is one of the largest wholesale distributors of industrial products and services in the United States, organized in three segments: industrial services, hardware merchandising and glass merchandising. See "BUSINESS." The principal executive offices of the Partnership and the Operating Partnership are located at 2600 One Logan Square, Philadelphia, PA 19103 and their telephone number is (215) 665-3650. SunSource Inc. (the "Corporation") is a Delaware corporation which has been newly formed to accomplish the conversion of the Partnership to corporate form (the "Conversion"). The outstanding shares of the Corporation are presently owned by the Partnership. The Corporation's address and telephone number are the same as the Partnership. In this Proxy Statement/Prospectus, the term SunSource means the Partnership prior to the Conversion and/or the Corporation after the Conversion, in each case including subsidiaries. SunSource Capital Trust (the "Trust") is a newly formed Delaware statutory business trust which has been organized to issue the Trust Preferred Securities (the "Trust Preferred Securities"), representing preferred undivided beneficial interests in the assets of the Trust, which will be exchanged for A Interests in the Merger. All of the Trust Common Securities, representing common undivided beneficial interests in the assets of the Trust, are owned by the Corporation. The Trust's address is 501 Silverside Road, Suite 17, Wilmington, DE 19809 and its telephone number is (302) 798-6665. Overview of the Conversion In the Conversion: o The Partnership and a subsidiary of the Partnership will merge with and into the Corporation (the "Merger"). o In the Merger each A Interest will be exchanged for 0.38 (with a liquidation preference of $9.50) of a $25 Trust Preferred Security and $1.30 in cash. Each B Interest will be exchanged for 0.25 share of Common Stock. Through the Merger and other contributions, the interests of the general and limited partners of the General Partner will be exchanged for 1,000,000 shares of 3 Common Stock, of which 75,000 shares will be held in escrow to be distributed after two years if all distributions then due on the Trust Preferred Securities have then been paid. o As a result of the Conversion, subsidiaries of the Corporation (SunSub A and SunSub B) will own all of the partnership interests in the Operating Partnership and the General Partner. o At the time of the Conversion, the existing bank credit agreement will be canceled and the Partnership's long-term debt will be repaid and replaced with new credit facilities at interest rates expected to be lower than financing rates currently incurred by the Partnership. The existing credit agreements (existing senior notes and bank credit revolver) provide available financing of $113.9 million, of which $84.9 million is outstanding as of June 30, 1997. The new credit facilities provide for $150 million of available financing, of which approximately $97.0 million is expected to be outstanding upon consummation of the Conversion. Prepayment of the Partnership's long-term debt will result in the payment of a make-whole penalty of approximately $4 million. The chart on page 1 describes the ownership structure of SunSource before and after the Conversion. As a result of the Conversion, the Partnership will cease to exist, the holders of A Interests will own 100% of the outstanding Trust Preferred Securities, the holders of B Interests who are not affiliated with the General Partner will own 46.0% of the Common Stock and affiliates of the General Partner will own 54.0% of the Common Stock. The directors and certain officers of Lehman/SDI will become directors and officers of the Corporation. The Corporation will own, through its wholly owned subsidiaries, 100% of the equity in the business and operations owned by the Operating Partnership which will remain in partnership form after the Conversion. The employees of the Operating Partnership will continue as employees after the Conversion. The following table illustrates the proposed exchange of partnership interests for Common Stock:
Partnership Corporation --------------------- --------------------- B Interests % Common Stock % ----------- ---- ------------ ----- Public Investors B Interests 11,633,603 53.7 2,908,401 45.3 General Partner Interest 46,200 0.7 ----------- ----- 2,954,601 46.0 Lehman/SDI and Affiliates B Interests 5,896,678 27.2 1,474,169 23.0 General Partner Interest 538,000 8.4 ----------- ----- 2,012,169 31.4 Executive Officers and Directors B Interests 4,145,465 19.1 1,036,366 16.1 General Partner Interest 415,800 6.5 ---------- ----- ----------- ------- 1,452,166 22.6 ----------- ------- 21,675,746 100.0 6,418,936 100.0 ========== ===== =========== =======
The General Partner may decide not to pursue the Conversion at any time before it becomes effective, whether before or after approval by the Partnership's limited partners. Existing Economic Interests of the Partners All cash receipts of the Partnership, less cash used to pay or establish a reserve for expenses ("Cash Available for Distribution"), are distributed 99% to the holders of A Interests and 1% to the General Partner until holders of A Interests have received annually a $1.10 simple, cumulative return (the "Priority Return"), which has historically been paid on a monthly basis to holders of record on the first day of the month. 4 After distribution of the Priority Return, Cash Available for Distribution is distributed 1% to the General Partner and 99% to the holders of B Interests until such holders have received an annual distribution (the "B Tax Distribution") equal to the product of (i) 125% of the then applicable maximum Federal income tax rate for individuals and (ii) the taxable income allocable to the B Interests. The B Tax Distribution has historically been partially distributed on a monthly basis to holders of record on the first day of the month with the balance distributed by March 31 of the succeeding year. See Note 3 of Notes to Consolidated Financial Statements. The Partnership suspended the payment of monthly advance B Tax Distributions effective January 1, 1997 through March 31, 1997, pending the Conversion. Due to the delay in completion of the proposed Conversion, the Partnership resumed payment of monthly advance B Tax Distributions in April 1997 in the amount of $.03 per B Interest. The Partnership intends to pay this monthly rate to holders of B Interests until the effective date of the Conversion, since it expects to allocate sufficient taxable income on the B Interests in the shortened tax year from January 1, 1997 through the effective date to require the B Tax Distribution payment. The balance of the required 1997 B Tax Distribution, if any, will be paid on or before March 31, 1998. Upon liquidation of the Partnership, after provision for all liabilities, the holders of A Interests would receive a preferential distribution equal to $10 per A Interest plus any unpaid Priority Return and the balance would be distributed to the General Partner and the holders of B Interests in accordance with their respective capital accounts. The Operating Partnership distributes its Cash Available for Distribution 99% to the Partnership and 1% to the General Partner until the amount distributed to the Partnership is sufficient to pay the Priority Return and the B Tax Distribution. The General Partner also receives a Management Fee from the Operating Partnership of $3,330,000 annually. To the extent that the Priority Return and the B Tax Distribution have not been paid on a cumulative basis, the Management Fee will not be paid, but will be deferred and be paid, together with any Management Fees then owed with respect to any other year, after the Priority Return and B Tax Distribution have been paid. In addition, the Management Fee can be paid only if the Operating Partnership complies with the covenants required by the Operating Partnership's credit agreements. See Notes 8 and 9 of Notes to Consolidated Financial Statements of the Partnership as of and for the three years ended December 31, 1996. Risk Factors 5 - -------------------------------------------------------------------------------- RISKS TO HOLDERS OF A INTERESTS - -------------------------------------------------------------------------------- The proposed Conversion necessitates the allocation of the total value of the Partnership among the holders of the A Interests, the holders of the B Interests and the General Partner. It would be in the General Partner's interest to have its partners receive maximum consideration, undertake the least possible responsibilities and assume minimum risk, all at the limited partners' expense. Also, it would be in the interest of the holders of A Interests to receive the maximum consideration for their A Interests, at the expense of the General Partner and the holders of the B Interests. o Holders of A Interests were not separately represented in establishing the terms of the Conversion. Such representation might have caused the terms of the Conversion to be different in some material respects from those described herein. o Unlike A Interests, which are not subject to mandatory or optional redemption by the Partnership, the Junior Subordinated Debentures held by the Trust may be redeemed by the Corporation at 100% of the principal amount plus accrued and unpaid interest at any time after September 30, 2002 or, if certain conditions are met, earlier at 101% of the principal amount plus accrued - ------------------------------------------------------------------------------- RISKS TO HOLDERS OF B INTERESTS - ------------------------------------------------------------------------------- The proposed Conversion necessitates the allocation of the total value of the Partnership among the holders of the B Interests, the holders of the A Interests and the General Partner. It would be in the General Partner's interest to have its partners receive maximum consideration, undertake the least possible responsibilities and assume minimum risk, all at the limited partners' expense. Also, it would be in the interest of the holders of B Interests to receive the maximum consideration for their B Interests, at the expense of the General Partner and the holders of the A Interests. o Holders of B Interests were not separately represented in establishing the terms of the Conversion. Such representation might have caused the terms of the Conversion to be different in some material respects from those described herein. o If the Conversion is approved, holders of B Interests will no longer have the right to receive tax distributions with respect to their allocable share of the Partnership's taxable income since they will no longer be taxed with respect to income of the corporation. 6 - -------------------------------------------------------------------------------- RISKS TO HOLDERS OF A INTERESTS - -------------------------------------------------------------------------------- and unpaid interest upon the occurrence of a Tax Event. See "DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES -- Optional Redemption." This redemption will result in the redemption of the Trust Preferred Securities. o Upon the occurrence of a Tax Event, if certain conditions are met, the Corporation shall have the right under certain circumstances to shorten the maturity of the Junior Subordinated Debentures to a date not earlier than September 30, 2002. See "DESCRIPTION OF TRUST PREFERRED SECURITIES -- Special Event Redemption or Distribution; Shortening of Stated Maturity." If the Corporation exercises such right, there can be no assurance that the shortening of the maturity of the Junior Subordinated Debentures will not have an effect on the market price of the Trust Preferred Securities or Junior Subordinated Debentures that may be distributed in exchange for Trust Preferred Securities. o In view of the cash payment of $1.30 to the holders of A Interests, the liquidation preference for 0.38 of a Trust Preferred Security will be $9.50 compared to a liquidation preference for an A Interest of $10.00. o If the Conversion is approved, holders of A Interests will no longer have their contractual right under the Partnership Agreement to the Priority Return, although they will be entitled to distributions on the Trust Preferred Securities in an amount equal to such Priority Return before dividends, if any, are paid on the Common Stock. The Board of Directors of the Corporation will have discretion to defer payments on the Junior Subordinated Debentures for up to five years. If such payments are deferred, the Trust will be unable to make distributions on the Trust Preferred Securities, and the Corporation will be prohibited from paying dividends on the Common Stock. o Holders of Trust Preferred Securities will be required to accrue original issue discount income with respect to any unpaid distributions on the Trust Preferred Securities. o The obligations of the Corporation under the Junior Subordinated Debentures will be unsecured obligations and will be subordinate and junior in right of payment to senior indebtedness of the Corporation and the Operating Partnership and will be structurally subordinated to all liabilities and obligations of the Operating Partnership and the Corporation's other subsidiaries. As of March 31, 1997 (on a pro forma basis, assuming the Merger had occured on such date), the Corporation and the Operating Partnership would have had approximately - ------------------------------------------------------------------------------- RISKS TO HOLDERS OF B INTERESTS - ------------------------------------------------------------------------------- o The Board of Directors has not yet established a policy regarding the payment of dividends on the Common Stock after the Effective Time of the Conversion. The payment of dividends will be at the discretion of the Corporation's Board of Directors and will depend, among other things, on earnings, financial condition, capital requirements, availability of acquisition candidates, level of indebtedness, contractual restrictions with respect to the payment of dividends and other factors that the Corporation's Board of Directors deems relevant. It should be noted that the Corporation's unaudited pro forma balance sheet at March 31, 1997 reflects a stockholders' deficit of approximately $7.4 million and a negative net book value per common share of $1.16. Counsel has advised the Partnership and the Corporation that under Delaware law, dividends or distributions on the stock of a Delaware corporation may be declared or paid out of surplus, so that the net assets of the corporation after such payment shall at least equal the amount of its capital. However, such a dividend or distribution is permissible under such provision only if the corporation's board of directors concludes that (a) immediately following payment of such dividend or distribution, the fair market value of the corporation's assets will exceed its liabilities and (b) the payment of such dividend or distribution is being made out of the corporation's surplus (net assets minus capital) and not out of capital in contravention of Delaware law. In case there shall be no surplus, dividends may also be paid out of net profits for the fiscal year and/or the preceding fiscal year. In evaluating the fairness of the proposed Conversion, the Special Committee did not consider the pro forma stockholders' deficit and negative book value to be a significant negative factor, because the accounting measures of stockholders' equity and net book value were not viewed but the Special Committee's financial advisor. Smith Barney, as primary determinants of value for ongoing industrial concerns like the Corporation or the Partnership. o If distributions on the Trust Preferred Securities are in arrears, the Board of Directors will not be able to declare and pay dividends on the Common Stock. o Holders of B Interests have no dissenters' or appraisal rights in the Conversion. Therefore, holders of B Interests will not be entitled to receive cash payments from SunSource for the fair value of their Interests if they dissent and the Conversion is approved and consummated. o Prior to the Conversion, there has been no public market for the Common Stock. The Common Stock received by the holders of the B Interests may trade at prices below 7 - -------------------------------------------------------------------------------- RISKS TO HOLDERS OF A INTERESTS - -------------------------------------------------------------------------------- $106.2 million principal amount of senior indebtedness outstanding, and the Operating Partneship and the Corporation's other subsidiaries would have had approximately $92.4 million of indebtedness and other liabilities. o There are no terms in the Trust Preferred Securities or the Junior Subordinated Debentures that limit the Corporation's or its subsidiaries' ability to incur additional indebtedness. o The receipt of Trust Preferred Securities and cash by the holders of A Interests will be a taxable event. The receipt of Trust Preferred Securities, Common Stock and cash by holders who hold both A Interests and B Interests will be a taxable event. o Holders of A Interests currently have the right to vote as a class on mergers and together with the holders of B Interests on the sale of substantially all the assets of the Partnership, amendment of the Partnership Agreement, dissolution and removal of the General Partner. The Trust Preferred Securities will not have these voting rights. o Holders of A Interests have no dissenters' or appraisal rights in the Conversion. Therefore, holders of A Interests will not be entitled to receive cash payments from SunSource for the fair value of their Interests if they dissent and the Conversion is approved and consummated. o Prior to the Conversion, there has been no public market for the Trust Preferred Securities. Because the consideration received by the holders of A Interests includes $1.30 in cash for each A Interest, it is likely that 0.38 of a Trust Preferred Security received in respect of each A Interest will trade at prices below the market price of the A Interest immediately prior to the Conversion. o The Corporation intends to list the Trust Preferred Securities on the New York Stock Exchange ("NYSE"). The Trust Preferred Securities may trade at prices that do not fully reflect the value of accrued but unpaid interest with respect to the underlying Junior Subordinated Debentures. A holder of Trust Preferred Securities that disposes of its Trust Preferred Securities between record dates for payments of distribtuions (and consequently does not receive a distribution from the Trust for the period prior to such disposition) will nevertheless be required to include as ordinary income, accrued but - -------------------------------------------------------------------------------- RISKS TO HOLDERS OF B INTERESTS - -------------------------------------------------------------------------------- the historical trading levels of the B Interests. o If a large number of holders of Common Stock were to offer their securities for sale immediately after consummation of the Conversion, the market could decline. o The Corporation has agreed to file a registration statement for the sale of shares of Common Stock by Lehman Brothers and, subject to certain limitations, by management, after the Conversion. Lehman Brothers and management have agreed to cooperate to execute an underwritten secondary offering of all or some portion of their shares of Common Stock as soon as practicable after the effective date of the Conversion, subject to market conditions. The Corporation has agreed not to sell any additional shares of Common Stock prior to the earlier of such initial secondary offering and the nine-month anniversary of the Conversion, except the issuance of unregistered shares in connection with acquisitions. In addition, Lehman Brothers Capital Partners I, an affiliate of Lehman/SDI holding 5,788,124 B Interests, may distribute to its partners the shares of Common Stock it receives as a result of the Conversion (a majority of which shares would be freely tradeable immediately after such distribution). See "RESALE OF SECURITIES -- Resales by Lehman Brothers and Management." o Certain provisions of Delaware law and the Corporation's organizational documents, as well as provisions of the Stockholders Agreement dated as of July ___, 1997 among the Corporation and certain of its stockholders (the "Stockholders Agreement") and the stockholder rights plan, contain provisions that may reduce the likelihood of a takeover of the Corporation that, if successful, might permit stockholders to receive a premium over the market price for the Common Stock. See "DESCRIPTION OF CAPITAL STOCK." Such provisions could also have a negative effect on the market price of the Common Stock. o A benefit to the partners of the General Partner of the Conversion which is not shared by the limited partners is the elimination of liability, if any, of the partners of the General Partner for obligations and liabilities of SunSource which occur after the Conversion. o The fiduciary duties owed by the directors of the Corporation after the Conversion may be less than those owed by the General Partner of the Partnership before the Conversion, which may result in decreased potential liability of the directors of the Corporation. 8 - -------------------------------------------------------------------------------- RISKS TO HOLDERS OF A INTERESTS - -------------------------------------------------------------------------------- unpaid interest on the Junior Subordinated Debentures through the date of disposition. Such holder will recognize a capital loss to the extent the amount realized with respect to the Trust Preferred Securities is less than its adjusted tax basis. Subject to certain limited exceptions, capital losses cannot be applied to offset ordinary income for United States federal income tax purposes. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES--Certain Tax Consequences of the Conversion to Holders of A Interests." o If a large number of holders of Trust Preferred Securities were to offer their securities for sale immediately after consummation of the Conversion, the market price of the Trust Preferred Securities could decline. o A benefit to the partners of the General Partner of the Conversion which is not shared by the limited partners is the elimination of liability, if any, of the partners of the General Partner for obligations and liabilities of SunSource which occur after the Conversion. o Certain members of management will receive accelerated payments under certain deferred compensation plans of the Operating Partnership as a result of the Conversion. See "MANAGEMENT--Change in Control Arrangements." o In addition to the factors noted above, an investment in SunSource (whether in partnership or corporate form) is subject to risks associated with operating conditions, competitive factors, economic conditions, industry conditions and market conditions. - -------------------------------------------------------------------------------- RISKS TO HOLDERS OF B INTERESTS - -------------------------------------------------------------------------------- o Certain members of management will receive accelerated payments under certain deferred compensation plans of the Operating Partnership as a result of the Conversion. o In addition to the factors noted above, an investment in SunSource (whether in partnership or corporate form) is subject to risks associated with operating conditions, competitive factors, economic conditions, industry conditions and equity market conditions. Reasons to Convert to Corporate Form The Conversion will convert SunSource to corporate form, replacing partnership interests presently held by limited partners with securities of the Corporation and the Trust. The General Partner believes that there are six principal reasons for converting to corporate form at this time, which are discussed at greater length in "SPECIAL FACTORS -- Reasons to Convert to Corporate Form." All of these reasons are for the benefit of the holders of B Interests. Other than as described herein under "SPECIAL FACTORS -- Alternatives to the Conversion," the primary benefit of the Conversion to holders of A Interests is the simplification of tax reporting, although the General Partner believes that several of the benefits listed below will increase the likelihood of timely distributions on the Trust Preferred Securities. o Expansion of Potential Investor Base. The General Partner anticipates that the Conversion will expand SunSource's potential investor base to include institutional and other investors who do not typically invest in limited partnership securities because of various tax and administrative reasons. In addition, the General Partner anticipates that the Common Stock (as compared to Interests) will receive additional investor interest through increased review and evaluation by research analysts. 9 o Conservation of Cash. The Corporation will conserve cash by the retention of the annual Management Fee of $3,330,000 and the retention of distributions on the General Partner's ownership in the Partnership and the Operating Partnership amounting to approximately $400,000 annually. o Tax Consequences. The benefit of being taxed as a partnership will end under current law after December 31, 1997. Although the Corporation will also have to pay tax on its income, the Conversion will allow SunSource to conserve additional cash because the interest payable on the Junior Subordinated Debentures, which will approximately equal the distributions currently paid on the A Interests, is deductible for federal income tax purposes, resulting in a corporate tax benefit of approximately $4,900,000 annually. Four bills are presently pending in Congress to extend or eliminate the December 31, 1997 deadline. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES -- Partnership Status and Taxation of the Partnership." The General Partner believes that even if one of these bills is adopted, the Conversion would still be desirable for the other reasons set forth herein. o Acquisition Currency. The General Partner believes that current industry conditions may provide opportunities for SunSource to grow through the acquisition of businesses and assets which are complementary to its existing businesses. In certain cases, SunSource may want to be able to issue equity interests as payment of the purchase price for such acquisitions. The General Partner believes that an equity interest in a corporation will be a more attractive acquisition currency to sellers than an interest in a partnership. SunSource is not presently party to any agreement or understanding regarding a material acquisition and currently has no plans to make a material acquisition. o Greater Access to Equity Markets. The General Partner expects that the Corporation will have greater access to the public and private equity capital markets than the Partnership, potentially enabling it to raise capital on more favorable terms than are now available to the Partnership. This greater access may be of particular benefit if SunSource proposes to issue equity securities to reduce existing debt or to seek additional funds for capital expenditures or otherwise expand its business. The Corporation's access to equity capital markets will be limited during the period from the date of the Conversion to the earlier of an initial secondary offering of shares held by Lehman Brothers and management and the nine-month anniversary of the Conversion. See "RESALE OF SECURITIES -- Resales by Lehman Brothers and Management." o Tax Reporting. The General Partner believes that the complexities of tax reporting associated with partnership investments are regarded as unduly burdensome for most limited partners under current conditions. The ownership of stock rather than Interests will greatly simplify tax reporting with respect to an investment in SunSource on each limited partner's individual federal and state income tax returns for future years. Alternatives to the Conversion The alternatives to the Conversion which were considered by the General Partner were continuing the existence of the Partnership as a limited partnership and the liquidation of the Partnership. The Board of Directors of Lehman/SDI believes that the Conversion will be more beneficial to the limited partners than either of these alternatives. The General Partner believes that other long-term strategies available to SunSource, such as diversification, disposition of assets and acquisition of assets, are not materially adversely affected and may be enhanced by the decision to convert. o A benefit of continuing the existence of the Partnership as a limited partnership is the possible reduction of aggregate federal income taxes payable by the Partnership and its partners compared to the aggregate federal income taxes payable by the Corporation and its stockholders with respect to the income of SunSource and its stockholders with respect to any dividends received. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES -- Partnership Status and Taxation of Partnership." This federal income tax benefit will end under current law on December 31, 1997, although there are several bills pending in Congress that could change this result. Although holders of A Interests would still be entitled to the Priority Return, the Partnership's ability to pay the Priority Return could be impeded over time by the payment of corporate income tax. In addition, the effect of paying the Priority Return from after-tax income would have a significant adverse effect upon the holders of B Interests. o The benefit of liquidating the Partnership at this time rather than effecting the Conversion would be the possibility that the currently realizable value of the Partnership assets may exceed the value of SunSource as a continuing business. The General Partner believes that a liquidation of the Partnership's assets at this time would not result in a price which would produce an acceptable return to the limited partners, after the repayment of debt and after paying all costs and expenses of liquidating and 10 winding up the Partnership, including taxes on the sale of the assets. The A Interests would receive only $10 upon liquidation. The holders of B Interests would not be able to have a continuing equity interest in the business of the Partnership. See "SPECIAL FACTORS -- Alternatives to the Conversion" and "-- Recommendation of the General Partner and Fairness Determination." The holders of A Interests would be entitled to vote on the advisability of liquidation although the vote required is a majority of the outstanding A Interests and B Interests voting as a single class. As of July 18, 1997, there were 11,099,573 A Interests outstanding (representing approximately 33.9% of the total Interests) and 21,675,746 B Interests outstanding (representing approximately 66.1% of the total Interests). See "SPECIAL FACTORS -- Alternatives to the Conversion," "-- Reasons to Convert to Corporate Form" and "-- Consequences if Conversion is Not Approved." For a more complete description of the impact of the three alternatives on the holders of A Interests, holders of B Interests and the General Partner, see "SPECIAL FACTORS -- Alternatives to the Conversion." Structure of the Conversion If approved by the limited partners, the Conversion will be effected as follows: o The Partnership will contribute its limited partnership interest in the Operating Partnership and Lehman/SDI, Inc. will contribute its general partnership interest in the General Partner to LPSub, a newly formed subsidiary of the Partnership, in exchange for common stock of LPSub. Current and former members of management who hold limited partnership interests in the General Partner will contribute their limited partnership interests in the General Partner to the Corporation, in exchange for 462,000 shares of Common Stock, of which 75,000 shares will be held in escrow to be distributed after two years if all distributions on the Trust Preferred Securities then due have then been paid, and the Corporation will contribute such limited partnership interests to SunSub A, a wholly owned subsidiary. The Partnership and LPSub will then merge with and into the Corporation and (i) the A Interests will be converted into 4,217,837 Trust Preferred Securities and cash; (ii) the B Interests will be converted into 5,418,936 shares of Common Stock and (iii) the common stock of LPSub held by Lehman/SDI will be converted into 538,000 shares of Common Stock. The Corporation will contribute the limited partnership interest in the Operating Partnership to SunSub A and the general partnership interest in the General Partner to SunSub B, also a wholly owned subsidiary. o As a result of the Conversion, the former holders of the A Interests will be holders of Trust Preferred Securities and the former holders of B Interests and the partners of the General Partner will be holders of shares of Common Stock of the Corporation. o The Corporation, through its subsidiaries, will then be the holder of the partnership interests in the Operating Partnership and the General Partner. See page 1 above for a diagram of the corporate structure after the Conversion. Control of SunSource The directors and certain officers of Lehman/SDI will become the directors and officers of the Corporation at the time of the Conversion. For a list of the directors and executive officers of the Corporation after the Conversion, see "MANAGEMENT--Directors and Executive Officers After the Conversion." Special Committee Because of its concern regarding the conflicts of interest between the General Partner and the limited partners with respect to the determination of the exchange ratios for the exchange of partnership interests, in June 1996 the Board of Directors of Lehman/SDI appointed a special committee consisting of two members of the Board of Directors, O. Gordon Brewer, Jr. and Ernest L. Ransome, III (the "Special Committee"), to consider and advise the Board with respect to the terms of the Conversion as to the fairness of the terms of the Conversion to the limited partners, and to make a recommendation to the Board of Directors with respect to the Conversion. The members of the Special Committee were not otherwise affiliated with the Partnership. Smith Barney Inc. ("Smith Barney") was retained to advise the Special Committee as to the fairness from a financial point of view to the limited partners of the exchange ratios. The Special Committee retained Dechert Price & Rhoads as its counsel. The limited partners were not independently represented in the evaluation or negotiation of the Conversion. 11 For a more detailed description of the deliberations of the Special Committee and its determinations regarding certain matters related to the Conversion, see "SPECIAL FACTORS -- Determinations of the Special Committee," and "-- Opinion of Smith Barney," and the opinion of Smith Barney attached as Exhibit C to this Proxy Statement/Prospectus. For its services, Smith Barney has been paid a fee of $1,250,000, plus reimbursement of expenses. The fee was not contingent upon the consummation of the Conversion or any other occurrence. Smith Barney will also be indemnified against certain liabilities, including liabilities under the Securities Act and the Exchange Act. SunSource and its affiliates have had no relationship in the past two years with Smith Barney other than that described above. Recommendation of General Partner and Fairness Determination The Board of Directors of Lehman/SDI has determined that the Conversion is fair in all respects, including with regard to procedural matters, to the limited partners. See "SPECIAL FACTORS -- Recommendation of the General Partner and Fairness Determination." This belief is principally based on the fairness opinion of Smith Barney, the deliberations concerning the exchange ratios of the Special Committee consisting of disinterested directors and the requirement that the Conversion be approved by a majority of the unaffiliated holders of the A Interests and the B Interests, each voting separately as a class. The Board of Directors of Lehman/SDI took into account the benefits of the Conversion to SunSource, the alternatives of continuing in existence as a partnership and liquidation, and other considerations, including the fact that the General Partner will no longer have a fiduciary duty to the Partnership and its partners, and the fact that its partners will no longer have any liability for the liabilities of SunSource after the Conversion. See "SPECIAL FACTORS -- Determinations of the Special Committee." The General Partner believes that the Conversion is in the best interests of the Partnership and the limited partners and recommends that the limited partners approve the Conversion. There are conflicts of interest between the General Partner and the limited partners with respect to certain matters relating to the Conversion. See "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS," "SPECIAL FACTORS -- Determinations of the Special Committee," "-- Opinion of Smith Barney," and "-- Recommendation of the General Partner and Fairness Determination." Summary Description of Trust Preferred Securities The Trust is a statutory business trust that was formed under the Delaware Business Trust Act (the "Business Trust Act") pursuant to a declaration of trust (as amended and restated, the "Declaration") and the filing of a certificate of trust with the Secretary of State of Delaware. The Declaration has been filed as an exhibit to the Registration Statement of which this Prospectus forms a part. The Trust exists, among other things, for the purpose of issuing (i) its Trust Preferred Securities to the Corporation in consideration for the deposit by the Corporation of Junior Subordinated Debentures in the Trust as trust assets, and (ii) the Trust Common Securities to the Corporation in exchange for cash and investing the proceeds thereof in an equivalent amount of Junior Subordinated Debentures. The rights of the holders of the Trust Securities, including economic rights, rights to information and voting rights, are as set forth in the Declaration, the Business Trust Act and the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). See "SUNSOURCE CAPITAL TRUST" and "DESCRIPTION OF TRUST PREFERRED SECURITIES." The Corporation has agreed to pay for all debts and obligations (other than with respect to the Trust Securities) and all costs and expenses of the Trust, including the fees and expenses of the Trustees and any income taxes, duties and other governmental charges, and all costs and expenses with respect thereto, to which the Trust may become subject, except for United States withholding taxes. See "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Risks to Holders of A Interests," "SUNSOURCE CAPITAL TRUST" and "DESCRIPTION OF TRUST PREFERRED SECURITIES." The Trust Preferred Securities evidence preferred undivided beneficial interests in the assets of the Trust and will rank pari passu with, and have terms equivalent to, the Trust Common Securities; provided that (i) if an Event of Default under the Declaration occurs and is continuing, the holders of Trust Preferred Securities will have a priority over holders of the Trust Common Securities with respect to payments in respect of distributions and payments upon liquidation, redemption or otherwise and (ii) holders of Trust Common Securities have the exclusive right (subject to the terms of the Declaration) to appoint, remove and replace Trustees and to increase or decrease the number of Trustees, subject to the right of holders of Trust Preferred Securities to appoint a Special Regular Trustee upon the occurrence of an Appointment Event (as defined herein). The Declaration does not permit the issuance by the Trust of any securities or beneficial interests in the assets of the Trust other than the Trust Preferred Securities and the Trust Common Securities, the incurrence of any indebtedness for borrowed money by the Trust or the making of any investments other than in the Junior Subordinated Debentures. The Declaration defines an event of default with respect to the Trust Securities (an "Event of Default") as the occurrence 12 and continuance of an "event of default" under the Indenture with respect to the Junior Subordinated Debentures (an "Indenture Event of Default"). Periodic cash distributions on each Trust Preferred Security will be fixed at a rate per annum of $2.90 (11.6% of the stated liquidation amount of $25 per Trust Preferred Security). Distributions in arrears will compound monthly at the rate per annum of 11.6% of the amount in arrears. Distributions on the Trust Preferred Securities will be cumulative, will accrue from the first day following the Effective Time (the "Accrual Date") and, except as otherwise described herein, will be made monthly in arrears, on the last day of each calendar month of each year, commencing on October 31, 1997, but only if and to the extent that interest payments are made in respect of the Junior Subordinated Debentures. The distribution rate and the distribution and other payment dates for the Trust Preferred Securities will correspond to the interest rate and the interest and other payment dates on the Junior Subordinated Debentures deposited in the Trust as trust assets. As a result, if principal or interest is not paid on the Junior Subordinated Debentures, including as a result of the Corporation's election to extend the interest payment period on the Junior Subordinated Debentures as described below, the Trust will not make payments on the Trust Securities. The Junior Subordinated Debentures provide that, so long as the Corporation shall not be in default in the payment of interest on the Junior Subordinated Debentures, the Corporation has the right under the Indenture to defer payments of interest on the Junior Subordinated Debentures by extending the interest payment period from time to time for a period not exceeding 60 consecutive months (each, an "Extension Period") and, as a consequence, monthly distributions on the Trust Preferred Securities would not be made (but would continue to accrue with interest thereon at the rate of 11.6% per annum, compounded monthly by the Trust during any such Extension Period). During an Extension Period, the Corporation may not declare or pay dividends on, or redeem, purchase, acquire or make a distribution or liquidation payment with respect to, any of its Common Stock or Preferred Stock or make any guarantee payments with respect thereto during such Extension Period. See "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Risks to Holders of A Interests"; "DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES -- Interest" and "-- Option to Extend Interest Payment Period." The payment of distributions on the Trust Preferred Securities and payments on liquidation of the Trust and the redemption of Trust Preferred Securities, as set forth below, are guaranteed by the Corporation on a subordinated basis as and to the extent set forth under "DESCRIPTION OF PREFERRED SECURITIES GUARANTEE." The Preferred Securities Guarantee is a full and unconditional guarantee from the time of issuance of the Trust Preferred Securities, but the Preferred Securities Guarantee covers distributions and other payments on the Trust Preferred Securities only if and to the extent that the Corporation has made a payment to the Property Trustee of interest or principal on the Junior Subordinated Debentures deposited in the Trust as trust assets. The Trust Preferred Securities and Trust Common Securities are redeemable on a Pro Rata Basis (as defined herein) from time to time, in whole or in part, to the same extent as the Junior Subordinated Debentures are redeemable by the Corporation, on or after September 30, 2002, upon not less than 30 nor more than 60 days notice, at $25 per Trust Preferred Security plus accrued and unpaid distributions thereon to the date of redemption, including distributions accrued as a result of the Corporation's election to defer payments of interest on the Junior Subordinated Debentures (the "Redemption Price"), payable in cash. The Trust Preferred Securities will be redeemed upon the maturity or earlier redemption of the Junior Subordinated Debentures. See "DESCRIPTION OF TRUST PREFERRED SECURITIES -- Mandatory Redemption." As used in this Proxy Statement/Prospectus, the term "Pro Rata Basis" shall mean pro rata to each holder of Trust Securities according to the aggregate liquidation amount of the Trust Securities held by the relevant holder in relation to the aggregate liquidation amount of all Trust Securities outstanding unless, in relation to a payment, an Event of Default under the Declaration has occurred and is continuing, in which case any funds available to make such payment shall be paid first to each holder of the Trust Preferred Securities pro rata according to the aggregate liquidation amount of the Trust Preferred Securities held by the relevant holder in relation to the aggregate liquidation amount of all Trust Preferred Securities outstanding, and only after satisfaction of all amounts owed to the holders of the Trust Preferred Securities, to each holder of Trust Common Securities pro rata according to the aggregate liquidation amount of the Trust Common Securities held by the relevant holder in relation to the aggregate liquidation amount of all the Trust Common Securities outstanding. In addition, upon the occurrence and during the continuation of a Tax Event or an Investment Company Event (each as defined herein) arising from a change in law or a change in legal interpretation or other specified circumstances, the Trust shall, unless the Junior Subordinated Debentures are redeemed in the limited circumstances described below, be dissolved with the result that, after satisfaction of creditors of the Trust, the Junior Subordinated Debentures will be distributed to the holders of the Trust Preferred Securities and the Trust Common Securities on a Pro Rata Basis, in lieu of any cash distribution. If the Junior Subordinated Debentures are distributed to the holders of the Trust Preferred Securities, the Corporation will use its best efforts to have the Junior Subordinated Debentures listed on the NYSE or on such other exchange as Trust Preferred Securities are then listed. In the case of a Tax Event, the Corporation 13 will have the right in certain circumstances to redeem the Junior Subordinated Debentures at any time with the result that the Trust will redeem the Trust Securities on a Pro Rata Basis to the same extent as the Junior Subordinated Debentures are redeemed. Any redemption for a Tax Event will be at a Redemption Price of $25.25 per Trust Preferred Security if the redemption occurs within five years after the Effective Time of the Conversion and at $25 thereafter plus, in each case, accrued and unpaid distributions to the date of redemption. If such redemption occurs while the 75,000 shares of Common Stock are held in escrow on behalf of management employees, Lehman Brothers has agreed that, to the extent it has disposed of any shares of Common Stock it received in the Conversion, it will pay to the Corporation a portion of the 1% premium paid by the Corporation on such redemption proportionate to the percentage interest in the Corporation that it so disposed of. See "DESCRIPTION OF TRUST PREFERRED SECURITIES -- Special Event Redemption or Distribution; Shortening of Stated Maturity." The Junior Subordinated Debentures will be issued pursuant to an indenture, dated as of _______, 1997 (the "Indenture") between the Corporation and The Bank of New York, as trustee (the "Indenture Trustee"). See "DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES." The Junior Subordinated Debentures will mature on September 30, 2027; provided, that in the case of a Tax Event, the Corporation will have the right in certain circumstances to shorten the stated maturity of the Junior Subordinated Debentures to a date not earlier than September 30, 2002 (and thereby cause the Trust Preferred Securities to be redeemed on such earlier date). See "DESCRIPTION OF TRUST PREFERRED SECURITIES - -- Special Event Redemption or Distribution; Shortening of Stated Maturity." The Junior Subordinated Debentures will bear interest at an annual rate of 11.6% from the Accrual Date. Interest will be payable monthly in arrears on the last day of each calendar month of each year, commencing on October 31, 1997; provided that, as described above, so long as the Corporation shall not be in default in the payment of interest on the Junior Subordinated Debentures, the Corporation shall have the right to extend the interest payment period from time to time for a period not exceeding 60 consecutive months. The Corporation has no current intention of exercising its right to extend an interest payment period. However, should the Corporation determine to exercise such right in the future, the market price of the Trust Preferred Securities is likely to be adversely affected. See "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Risks to Holders of A Interests" and "DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES -- Option to Extend Interest Payment Period." The Corporation shall have the right to redeem the Junior Subordinated Debentures, in whole or in part, from time to time, on or after September 30, 2002, upon not less than 30 nor more than 60 days notice, at a redemption price equal to 100% of the principal amount to be redeemed, plus any accrued and unpaid interest to the redemption date, including interest accrued as a result of the Corporation's election to defer payments of interest on the Junior Subordinated Debentures, payable in cash. In addition, upon the occurrence of a Tax Event, the Corporation will also have the right if certain conditions are met to redeem the Junior Subordinated Debentures in whole (but not in part), upon not less than 30 nor more than 60 days notice, at a redemption price equal to 101% of the principal amount to be redeemed if the redemption occurs within five years after the Effective Time and 100% thereafter, plus, in each case, any accrued and unpaid interest, to the redemption date. Comparative Rights of the Interests and the Securities to be Issued If the Conversion is approved, the rights and limitations to which holders of Trust Preferred Securities and Common Stock will be subject will be similar in some respects and will differ in other respects from those to which they are subject as holders of Interests. These rights and limitations are discussed below under "COMPARISON OF INTERESTS AND SECURITIES TO BE ISSUED." Summary of Certain Federal Income Tax Consequences See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES" for a general description of the tax consequences of the Merger and the Conversion to holders of A Interests and B Interests and tax consequences generally. Conditions to the Conversion The principal conditions to the Conversion are (i) the affirmative vote of limited partners holding an aggregate of more than 50% of the outstanding A Interests and B Interests, each voting separately as a class; (ii) the affirmative vote of unaffiliated limited partners (limited partners other than affiliates of the General Partner) holding an aggregate of more than 50% of the A Interests and B Interests held by unaffiliated limited partners, each voting separately as a class; (iii) approval of the Trust Preferred Securities and Common Stock for listing on the NYSE; (iv) no withdrawal of the Special Committee's determination that the Conversion is fair to the holders of A Interests and the holders of B Interests or of the fairness opinion of Smith Barney; (v) receipt of a satisfactory tax opinion; (vi) the availability of financing to refinance existing senior debt on terms acceptable to the Corporation; and (vii) no material change in 14 applicable law, including with respect to the taxation of the Conversion, the Partnership, the Corporation or the Trust Preferred Securities. No Appraisal Rights Limited partners who object to the Conversion will have no appraisal, dissenters' or similar rights. Therefore, limited partners will not be entitled to receive cash payments from SunSource for the fair value of their Interests if they dissent and the Conversion is approved and consummated. See "VOTING AND PROXY INFORMATION -- No Appraisal Rights." Consequences if Conversion Is Not Approved If the Conversion is not approved by the limited partners, or if the Conversion is not consummated for any other reason, the Partnership presently intends to continue to operate as an ongoing business in its current form. No other transaction is currently being considered by the Partnership as an alternative to the Conversion, although the Partnership may from time to time explore other alternatives. See "SPECIAL FACTORS -- Consequences if Conversion is Not Approved." Limited Partner Litigation On January 16, 1997, a holder of B Interests filed a purported class action in the Delaware Court of Chancery seeking to enjoin the Conversion on the terms proposed as well as an order requiring the defendants to account to the plaintiff and the class for damages and requiring the General Partner or its affiliates to hold the consideration received in trust pending a determination of the amounts properly attributable to the General Partner's interest. Defendants named in the complaint are the Partnership, the Corporation, the General Partner, Lehman/SDI, Lehman Brothers Holdings Inc. and all of the directors of Lehman/SDI. The complaint alleged that the terms of the Conversion unfairly transfer substantial equity to the General Partner to the detriment of the B Interests and constitute a breach of fiduciary duty. A second complaint containing substantially identical allegations was filed by a limited partner in the Delaware Court of Chancery on February 11, 1997. The cases have been consolidated and an amended complaint was filed on April 16, 1997 which added claims for breach of contract and breach of a covenant of good faith and fair dealing. For a fuller description of the allegations of the amended complaint see "SPECIAL FACTORS -- Limited Partner Litigation." The defendants believe the complaints are without merit and intend to vigorously defend the action. Voting at the Special Meeting
The Special Meeting......................... The Special Meeting will be held at 3000 One Logan Square, Philadelphia, Pennsylvania on Thursday, September 18, 1997 at 10:00 a.m., local time. Voting...................................... Each Interest entitles the holder thereof on the record date to one vote. Only limited partners of the Partnership on the record date are entitled to vote at the Special Meeting. August 4, 1997 is the record date for the determination of limited partners entitled to vote at the Special Meeting. Interests Outstanding....................... On the record date, 11,099,573 A Interests and 21,675,746 B Interests were outstanding. Vote Required............................... Approval of the Conversion will require (i) the favorable vote of limited partners holding a majority of the outstanding A Interests and B Interests, each voting separately as a class and (ii) the favorable vote of unaffiliated limited partners (limited partners other than affiliates of the General Partner) holding a majority of the A Interests and B Interests held by unaffiliated limited partners, each voting separately as a class. Directors, executive officers and other affiliates of the General Partner own less than 1% of the outstanding A Interests and 46.3% of the outstanding B Interests and have advised the Partnership that they each intend to vote their Interests in favor of the Conversion in the first vote described above.
15 List of Partners Each limited partner has the right for a proper purpose reasonably related to the limited partner's interest in the Partnership, upon reasonable demand and at the limited partner's own expense, to have furnished to the limited partner, upon notification to the General Partner at 2600 One Logan Square, Philadelphia, PA 19103, Attention: Joseph M. Corvino, Secretary and Vice President - Finance, a current list of the name and last known business, residence or mailing address of each partner. Delivery of Depositary Receipts Promptly after the Effective Time, the Corporation will cause to be mailed to all limited partners of record a letter of transmittal containing instructions with respect to the surrender of Depositary Receipts for A and B Interests in exchange for certificates representing Trust Preferred Securities and shares of Common Stock and cash in the case of A Interests. Upon surrender to the Corporation of one or more Depositary Receipts, together with a properly completed letter of transmittal, there will be issued and mailed to former limited partners a certificate or certificates representing the number of Trust Preferred Securities and shares of Common Stock (and related Rights) to which such holder is entitled and a check for cash in the case of A Interests. From and after the Effective Time, each such Depositary Receipt will evidence only the right to receive Trust Preferred Securities and cash or shares of Common Stock. No fractional shares will be issued. Instead, (i) each holder of A Interests will be entitled to receive cash in an amount equal to the fraction of a Trust Preferred Security to which the holder is otherwise entitled multiplied by the average closing price of the Trust Preferred Securities for the five trading days following the Effective Time; and (ii) each holder of B Interests shall be entitled to receive cash in an amount equal to the fraction of a share of Common Stock to which the holder is otherwise entitled multiplied by the average closing price of the Common Stock for the five trading days following the Effective Time. Limited partners should not send any Depositary Receipts with the enclosed proxy. They should retain such Depositary Receipts until their receipt of the letter of transmittal after the Effective Time. Reverse Stock Split As a result of the one-for-four reverse stock split, each holder of B Interests will receive one post-split share of Common Stock for every four B Interests held by such holder prior to the Conversion. The General Partner believes that current trading prices for the B Interests reduce the attractiveness of the Corporation's equity securities to the financial community and the investing public. The reverse stock split will not affect a holder's percentage ownership in the Corporation or of the outstanding Common Stock (except for minor differences resulting from the elimination of fractional shares as described herein). It is impossible to predict the market's reaction to any reverse stock split or, in this case, to separate that reaction from the market's reaction to the Conversion as a whole. However, the Corporation expects that immediately after the reverse stock split each share of Common Stock would be valued at a price approximately four times greater than without the split. 16 Summary Financial Information of the Partnership and Summary Unaudited Pro Forma Financial Information of the Corporation (dollars in thousands, except for per unit and per share data) The following tables set forth summary consolidated historical and unaudited pro forma financial and operating data of the Partnership and the Corporation as of the dates and for the periods indicated. The historical financial information set forth below for the Partnership as of and for the three months ended March 31, 1997 and 1996 is derived from unaudited financial statements included elsewhere herein. The historical financial information set forth below for the Partnership as of December 31, 1996 and 1995 and for each of the three years in the period ended December 31, 1996 are derived from the audited financial statements included elsewhere herein. The historical financial information set forth below for the Partnership as of December 31, 1994, 1993 and 1992 and for each of the two years in the period ended December 31, 1993 are derived from the financial statements not included elsewhere herein. The summary unaudited pro forma financial information gives effect to the Conversion as if it occurred at the beginning of the period presented for the data on pro forma statements of income and cash flow and as of the date presented with respect to the balance sheet data. The pro forma financial information is also presented excluding non-recurring income tax benefits. The summary financial information should be read in conjunction with the Consolidated Financial Statements and Notes thereto of the Partnership and the unaudited Pro Forma Financial Statements and Notes thereto of the Corporation included elsewhere herein. See "INDEX TO FINANCIAL STATEMENTS." See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" for acquisitions and divestitures that affect comparability, and for a discussion of the Corporation's recently announced restructuring plans.
P A R T N E R S H I P - H I S T O R I C A L ------------------------------------------------------------------------------------------ Three Months Ended March 31, Years Ended December 31, ----------------------- ------------------------------------------------------------- 1997 1996 1996 1995 1994 1993 1992 ---------- ----------- ---------- ---------- ---------- -------- ------- INCOME STATEMENT DATA: Net sales $169,016 $154,892 $649,254 $628,935 $735,861 $655,707 $612,052 Income from operations 6,266 5,557 24,452 31,302 37,759 28,975 29,712 Gain on sale of divisions -- -- -- 20,644 3,523 -- -- Provision (benefit) for income taxes (28) (76) (1,140) 537 100 869 493 Income before extraordinary loss and cumulative effect of change in accounting principle 4,576 4,010 19,267 44,745 29,544 18,506 17,691 Extraordinary loss -- -- -- (629) -- -- (3,434) Cumulative effect on prior years of change in accounting principle -- -- -- -- -- -- 822 Net income $ 4,576 $ 4,010 $19,267 $44,116 $29,544 $18,506 $15,079 Earnings per limited partnership interest: Income before extraordinary loss and cumulative effect of change in accounting principle - Class A $ 0.27 $ 0.27 $ 1.10 $ 1.10 $ 1.10 $ 1.10 $ 1.10 - Class B $ 0.07 $ 0.04 $ 0.32 $ 1.48 $ 0.79 $ 0.28 $ 0.25 Extraordinary loss - Class A -- -- -- -- -- -- -- - Class B -- -- -- $ (0.03) -- -- $ (0.16) Cumulative effect on prior years of change in accounting principle - Class A -- -- -- -- -- -- -- - Class B -- -- -- -- -- -- $ 0.04
17
Three Months Ended March 31, Years Ended December 31, ----------------------- ------------------------------------------------------------- 1997 1996 1996 1995 1994 1993 1992 ---------- ----------- ---------- ---------- ---------- -------- ------- Net income per limited partner interest: - Class A $ 0.27 $ 0.27 $ 1.10 $ 1.10 $ 1.10 $ 1.10 $ 1.10 - Class B $ 0.07 $ 0.04 $ 0.32 $ 1.45 $ 0.79 $ 0.28 $ 0.13 Cash distributions declared per limited partnership interest: - Class A $ 0.27 $ 0.27 $ 1.10 $ 1.10 $ 1.10 $ 1.10 $ 1.10 - Class B $ 0.03 $ 0.06 $ 0.33 $ 0.67 $ 0.49 $ 0.27 $ 0.13 Weighted average number of outstanding limited partner interests - Class A 11,099,573 11,099,573 11,099,573 11,099,573 11,099,573 11,099,573 11,099,573 - Class B 21,675,746 21,675,746 21,675,746 21,675,746 21,675,746 21,675,746 21,675,746 BALANCE SHEET DATA (AT MARCH 31 AND DECEMBER 31): Cash and cash equivalents $ 3,096 $ 633 $ 1,666 $ 5,900 $ 4,903 $ 1,327 $ 745 Total assets 276,039 253,950 262,555 254,591 266,186 273,493 261,588 Short-term debt financing $26,395 6,395 6,395 6,395 19,357 6,319 6,319 Long-term debt and capitalized lease obligations 58,186 67,934 69,043 63,934 74,781 104,185 115,503 Total liabilities 180,924 159,287 167,936 159,648 186,967 200,611 189,013 General partner capital 969 959 960 963 791 729 726 Limited partners' capital: Class A 67,642 67,642 67,642 67,642 67,642 67,642 67,642 Class B 29,868 28,869 29,040 29,252 12,300 6,025 5,721 Class B held in treasury (1,514) (1,514) (1,514) (1,514) (1,514) (1,514) (1,514) Cumulative foreign translation adjustment (1,850) (1,293) (1,509) (1,400) (1,338) (694) (254) Total partners' capital 95,115 94,633 94,619 94,913 79,219 72,882 72,575 OTHER DATA: Ratio of earnings to fixed charges 1.13(i) .85 .91(i) 1.13 1.25 1.17 1.11 Cash distributions, excluding distributions on capital gains $ 3,690 $ 4,886 $19,982 $20,745 $20,357 $14,940 $15,384 Cash provided by (used for) operating activities (2,081) 2,088 23,298 17,050 17,704 23,571 27,056 Net increase (decrease) in cash and cash equivalents 1,430 (5,267) (4,234) 997 3,576 582 69 Net book value per Class A interest 6.09 6.09 6.09 6.09 6.09 6.09 6.09 Net book value per Class B interest 1.22 1.20 1.20 1.22 .50 .21 .19 (i) Excluding non-recurring items recorded in 1997 and 1996, the ratio is 1.20 and 1.21, respectively.
18 C O R P O R A T I O N - P R O F O R M A -----------------------------------------------------------
Three Months Ended Year Ended March 31, 1997 December 31, 1996 ------------------ ----------------- INCOME STATEMENT DATA: Net sales $169,016 $649,254 Income from operations 7,344 29,562 Distribution on guaranteed preferred beneficial interest in the Corporation's junior subordinated debentures (3,057) (12,232) Income before income taxes 2,297 9,928 Provision for income taxes 1,173 4,701 Net income 1,124 5,227 Net income (loss) after transaction expenses of the conversion (2,298) 1,805 Net income per common share $ .18 $ .81(ii) Net income (loss) after transaction expenses per common share $ (.36) $ .28(ii) Weighted average number of outstanding common shares 6,418,936 6,418,936 (ii) Including non-recurring restructuring charges of $5,950 or $0.56 per common share on an after-tax basis. As of BALANCE SHEET DATA: March 31, 1997 -------------- Cash and cash equivalents $ -- Total assets 295,835 Senior Notes 60,000 Bank revolving credit 45,415 Total liabilities 197,588 Trust preferred securities 105,446 Stockholders' deficit (7,399) OTHER DATA: Three Months Ended Year Ended March 31, 1997 December 31, 1996 ------------------ ----------------- Ratio of earnings to fixed charges 1.41 1.45 (iii) Cash provided by (used for) operations $ (5,409) $ 8,365 Net increase (decrease) in cash and cash equivalents $ -- $ -- Book value per common share (1.16) (iii) Excluding non-recurring items recorded in 1996, the ratio is 1.75.
19 RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS Before completing the enclosed form of proxy, each limited partner should carefully read this entire Proxy Statement/Prospectus, including the Exhibits and the Partnership's Form 10-K for the year ended December 31, 1996 and the other documents incorporated herein by reference, and should give particular attention to the following considerations. 20 - -------------------------------------------------------------------------------- RISKS OF HOLDERS OF A INTERESTS - -------------------------------------------------------------------------------- Conflicts of Interest The proposed Conversion necessitates the allocation of the total value of the Partnership among the holders of the A Interests, the holders of the B Interests and the General Partner. It would be in the General Partner's interest to have its partners receive maximum consideration, undertake the least possible responsibilities and assume minimum risk, all at the limited partners' expense. Also, it would be in the interest of the holders of A Interests to receive the maximum consideration for their A Interests, at the expense of the General Partner and the holders of the B Interests. No Independent Representation Holders of A Interests were not separately represented in establishing the terms of the Conversion. Such representation might have caused the terms of the Conversion to be different in some respects from those described herein. Optional Redemption Unlike the A Interests, which are not subject to mandatory or optional redemption by the Partnership, the Junior Subordinated Debentures held by the Trust may be redeemed by the Corporation at 100% of the liquidation amount plus accrued and unpaid distributions at any time after September 30, 2002. In that case, the Trust Preferred Securities will be redeemed in the same amount. Special Event Redemption or Distribution; Shortening of Stated Maturity Upon the occurrence and during the continuation of a Tax Event or Investment Company Event (each as defined herein), which may occur at any time, the Trust shall, unless the Junior Subordinated Debentures are redeemed in the circumstances described below, be dissolved with the result that, in the manner described in "DESCRIPTION OF TRUST PREFERRED SECURITIES -- Liquidation Distribution Upon Dissolution," Junior Subordinated Debentures having an aggregate principal amount equal to the aggregate stated liquidation amount of, and bearing accrued and unpaid interest equal to accrued and unpaid distributions on, the Trust Preferred Securities and Trust Common Securities would be distributed on a Pro Rata Basis to the holders of the Trust Preferred Securities and Trust Common Securities in liquidation of the Trust. - -------------------------------------------------------------------------------- RISKS TO HOLDERS OF B INTERESTS - -------------------------------------------------------------------------------- Conflicts of Interest The proposed Conversion necessitates the allocation of the total value of the Partnership among the holders of the B Interests, the holders of the A Interests and the General Partner. It would be in the General Partner's interest to have its partners receive maximum consideration, undertake the least possible responsibilities and assume minimum risk, all the limited partners' expense. Also, it would be in the interest of the holders of B Interests to receive the maximum consideration for their B Interests, at the expense of the General Partner and the holders of the A Interests. No Independent Representation Holders of B Interests were not separately represented in establishing the terms of the Conversion. Such representation might have caused the terms of the Conversion to be different in some respects from those described herein. Loss of Contractual Right to Distributions The Partnership Agreement requires the Partnership to distribute Cash Available for Distribution to the B Interests to the extent of the B Tax Distribution. However, Cash Available for Distribution is determined after deducting such reserves as the General Partner, in its sole discretion, determines to be necessary for capital expenditures and other business purposes. After converting into corporate form, holders of B Interests will lose this contractual right. The Board of Directors of the Corporation will have complete discretion as to the distribution of dividends on the Common Stock. The payment of dividends will be at the discretion of the Corporation's Board of Directors and will depend, among other things, on earnings, financial condition, capital requirements, availability of acquisiton candidates, level of indebtedness, contractual restrictions with respect to the payment of dividends and other factors that the Corporation's Board of Directors deems relevant. If distributions on the Trust Preferred Securities are in arrears, the Board of Directors will not be able to declare and pay dividends on the Common Stock. Certain Delaware Corporate Law Considerations The Corporation's unaudited pro forma balance sheet at March 31, 1997 reflects a stockholders' deficit of approximately $7.4 million and a negative net book value per common share of $1.16. Counsel has advised the Partnership and the Corporation that under Delaware law, dividends or 21 - -------------------------------------------------------------------------------- RISKS TO HOLDERS OF A INTERESTS - -------------------------------------------------------------------------------- In the case of a Tax Event, the Corporation will have the right in certain circumstances to shorten the stated maturity of the Junior Subordinated Debentures to a date not earlier than September 30, 2002 (and thereby cause the Trust Preferred Securities to be redeemed on such earlier date) if such Tax Event would continue even after terminating the Trust and distributing the Junior Subordinated Debentures in exchange for the Trust Preferred Securities. See "DESCRIPTION OF TRUST PREFERRED SECURITIES -- Special Event Redemption or Distribution; Shortening of Stated Maturity." If the Corporation exercises such right, there can be no assurance that the shortening of the maturity of the Junior Subordinated Debentures will not have an effect on the market price of the Trust Preferred Securities or the Junior Subordinated Debentures that may be distributed in exchange for the Trust Preferred Securities. In addition, in the case of a Tax Event, in certain circumstances, the Corporation shall have the right to redeem at any time the Junior Subordinated Debentures, in whole or in part, in which event the Trust will redeem Trust Preferred Securities and Trust Common Securities on a Pro Rata Basis to the same extent as the Junior Subordinated Debentures are redeemed. The price paid on such redemption will be $25.25 in respect of each Trust Preferred Security if the redemption in the case of a Tax Event occurs within five years of the Conversion and $25 thereafter plus, in each case, accrued and unpaid distributions to the date of redemption. There can be no assurance as to the market prices for the Junior Subordinated Debentures which may be distributed in exchange for Trust Preferred Securities if a dissolution and liquidation of the Trust were to occur. Accordingly, the Junior Subordinated Debentures which the investor may receive on dissolution and liquidation of the Trust, may trade at a discount. See "DESCRIPTION OF TRUST PREFERRED SECURITIES - -- Special Event Redemption or Distribution; Shortening of Stated Maturity" and "DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES -- General." Under current United States federal income tax law and interpretations thereof and assuming, as expected, the Trust is treated as a grantor trust for United States federal income tax purposes, a distribution by the trust of the Junior Subordinated Debentures pursuant to a liquidation of the trust will not be a taxable event to the Trust or to holders of the Trust Preferred Securities and will result in a holder of the Trust Preferred Securities receiving directly such holder's pro rata share of the - -------------------------------------------------------------------------------- RISKS TO HOLDERS OF B INTERESTS - -------------------------------------------------------------------------------- distributions on the stock of a Delaware corporation may be declared or paid out of surplus, so that the net assets of the corporation after such payment shall at least equal the amount of its capital. However, such a dividend or distribution is permissible under such provision only if the corporation's board of directors concludes that (a) immediately following payment of such dividend or distribution, the fair market value of the corporation's assets will exceed its liabilities and (b) the payment of such dividend or distribution is being made out of the corporation's surplus (net assets minus capital) and not out of capital in contravention of Delaware law. In case there shall be no surplus, dividends may also be paid out of net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. No Dissenters', Appraisal or Similar Rights for Nonconsenting Limited Partners If the limited partners approve the Conversion, all holders of Interests will be bound by such approval even though they, individually, may have voted against the Conversion. Under applicable state law and the terms of the Partnership Agreement, limited partners will have no dissenters', appraisal or similar rights in connection with the Conversion, nor will such rights be voluntarily accorded to limited partners by the Partnership or the Corporation. Therefore, limited partners will not be entitled to receive cash payment from SunSource for the fair value of their Interests if they dissent and the Conversion is approved and consummated. See "VOTING AND PROXY INFORMATION -- No Appraisal Rights ." Adverse Tax Implications A primary disadvantage of converting to corporate form is tax related. The principal tax disadvantage is that a corporation pays taxes on its taxable income, and its stockholders generally pay taxes on any dividends from the corporation out of current or accumulated earnings and profits; whereas a partnership pays no tax and its partners pay tax on their distributive share (whether or not actually distributed) of the Partnership's taxable income, gain, loss, deductions and credits. Under current law, the Partnership will be taxed as a corporation after December 31, 1997; however, efforts have been made to extend this date and there can be no assurance that further efforts in this regard will not be successful. As a result of a conversion of the Partnership to corporate form, limited partners will forego the potential future tax benefits associated with operating in partnership form, including primarily the right, through December 31, 1997, to have the Partnership income subject to only one level of federal income taxation. In addition, the Conversion will be a taxable transaction to holders of B Interests also holding A Interests, who will 22 - -------------------------------------------------------------------------------- RISKS TO HOLDERS OF A INTERESTS - -------------------------------------------------------------------------------- Junior Subordinated Debentures (previously held indirectly through the Trust). If, however, the liquidation of the Trust were to occur because the Trust is subject to United States Federal income tax with respect to income accrued or received on the Junior Subordinated Debentures as a result of the occurrence of a Tax Event or otherwise, the distribution of Junior Subordinated Debentures to holders of the Trust Preferred Securities by the Trust would be a taxable event to the Trust and each holder, and holders of the Trust Preferred Securities would recognize gain or loss as if they had exchanged their Trust Preferred Securities for the Junior Subordinated Debentures they received upon the liquidation of the Trust. See "Certain FEDERAL INCOME TAX CONSEQUENCES -- Certain Tax Consequences of the Conversion to Holders of A Interests -- Distribution of Junior Subordinated Debentures to Holders of Trust Preferred Securities." On March 19, 1996, the Revenue Reconciliation Bill of 1996 (the "Bill") was introduced in the 104th Congress which would have, among other things, generally denied interest deductions on an instrument, issued by a corporation, that has a maximum term of more than 20 years and that is not shown as indebtedness on the separate balance sheet of the issuer or, where the instrument is issued to a related party (other than a corporation), where the holder or some other related party issues a related instrument that is not shown as indebtedness on the issuer's consolidated balance sheet. The above-described provisions of the Bill were proposed to be effective generally for instruments issued on or after December 7, 1995. If this provision were to apply to the Junior Subordinated Debentures, the Company would not be able to deduct interest on the Junior Subordinated Debentures. However, on March 29, 1996, the Chairmen of the Senate Finance and House Ways and Means Committees issued a joint statement (the "Joint Statement") to the effect that it was their intention that the effective date of the Bill, if enacted, would be no earlier than the date of appropriate Congressional action. In addition, subsequent to the publication of the Joint Statement, Senator Daniel Patrick Moynihan and Representatives Sam M. Gibbons and Charles B. Rangel wrote letters to Treasury Department officials concurring with the view expressed in the Joint Statement. The 104th Congress adjourned without enacting the Bill. Similar legislation was reproposed by the Treasury Department on February 6, 1997, as part of President Clinton's Fiscal 1998 Budget Proposal (the "Proposed Legislation"). The Proposed Legislation would, however, generally deny an interest deduction with respect to an instrument not shown as indebtedness on the separate or consolidated balance sheet of the issuer (as described above) and with a maximum term of more than 15 years (as contrasted to a maximum term of more than 20 years under the provision of the Bill). Such provision is proposed to be effective generally for instruments issued on or after the date of the first committee action. If such a provision were - -------------------------------------------------------------------------------- RISKS TO HOLDERS OF B INTERESTS - -------------------------------------------------------------------------------- recognize gain equal to the difference between the cash and the fair market value of the Trust Preferred Securities and Common Stock received in the Conversion and their aggregate tax basis in the A Interests and B Interests, which gain will likely be recognized only to the extent of the fair market value of the Trust Preferred Securities and the cash received in the Conversion. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES." Uncertainty Regarding Market Price of Common Stock; Possible Reduction Due to Sales by Lehman Brothers or Management At present there is no trading market for the Common Stock. Application has been made to list the Common Stock on the NYSE under the trading symbol SDPB. There can be no assurance that holders will be able to sell their securities at favorable prices or that the trading prices for the securities will be comparable to the trading prices for the B Interests prior to consummation of the Conversion. A large number of securities may be traded by former limited partners immediately following completion of the Conversion for various reasons, including the perceived increased liquidity that the securities may afford to limited partners. This might tend to depress the market price of the securities. The Corporation has agreed to file registration statements for the sale of shares of Common Stock by Lehman Brothers and, subject to certain limitations, by management after the Conversion. Lehman Brothers and management have agreed to cooperate to execute an underwritten secondary offering of all or some portion of their shares of Common Stock as soon as practicable after the effective date of the Conversion, subject to market conditions. Lehman Brothers Capital Partners I, an affiliate of Lehman/SDI holding 5,788,124 B Interests, may distribute to its partners the shares of Common Stock it receives in the Merger (a majority of which shares would be freely tradeable immediately after such distribution). This might tend to depress the market price of the securities. "RESALES OF SECURITIES -- Resales by Lehman Brothers and Management." The Corporation has agreed not to sell any additional shares of Common Stock prior to the earlier of such initial secondary offering and the nine-month anniversary of the Conversion, except the issuance of unregistered shares in connection with acquisition. Future Dilution of Common Stock The Corporation will be permitted to issue additional equity or debt securities, including shares of Preferred Stock. Issuances of additional shares of Common Stock or shares of Preferred Stock could adversely affect stockholders' equity interest in the Corporation and the market price of the Common Stock, and the interests in the assets, liabilities, cash flow and results of operations of the Corporation represented by the shares of Common Stock issued pursuant to the Conversion may be 23 - -------------------------------------------------------------------------------- RISKS TO HOLDERS OF A INTERESTS - -------------------------------------------------------------------------------- enacted and were applicable to the Junior Subordinated Debentures, the Indenture governing the Junior Subordinated Debentures provides that the maturity of the Junior Subordinated Debentures will be reduced to the maximum period permissible (but not earlier than September 30, 2002) without affecting the deductibility of interest payable on the Junior Subordinated Debentures. There can be no assurance that current or future legislative or administrative proposals or final legislation will not adversely affect the ability of the Company to deduct interest on the Junior Subordinated Debentures or otherwise affect the tax treatment described herein. Such a change, therefore, could give rise to a Tax Event, which would permit the Company to cause a redemption of the Trust Preferred Securities or to dissolve the Trust and distribute the Junior Subordinated Debentures to the holders of Trust Securities in liquidation of the Trust upon receiving an opinion of counsel as described more fully under "DESCRIPTION OF TRUST PREFERRED SECURITIES - -- Special Event Redemption or Distribution; Shortening of Stated Maturity." Loss of Contractual Right to Distributions The Partnership Agreement requires the Partnership to distribute Cash Available for Distribution to the A Interests to the extent of the Priority Return. However, Cash Available for Distribution is determined after deducting such reserves as the General Partner, in its sole discretion, determines to be necessary for capital expenditures and other business purposes. After converting into corporate form, limited partners will lose this contractual right. Payment of distributions on the Trust Preferred Securities by the Trust will depend on payments by the Corporation on the Junior Subordinated Debentures which can be deferred for as long as five years. Option to Extend Interest Payment Period; Tax Impact of Extension So long as the Corporation shall not be in default in the payment of interest on the Junior Subordinated Debentures, the Corporation has the right under the Indenture to defer payments of interest on the Junior Subordinated Debentures by extending the interest payment period from time to time for an Extension Period not exceeding 60 consecutive months, during which no interest shall be due and payable. In such an event, monthly distributions on the Trust Preferred Securities would not be made (but would continue to compound monthly at the rate of 11.6% per annum) by the Trust during any such Extension Period. If the Corporation exercises the right to extend an interest payment period, the Corporation may not during such Extension Period declare or pay dividends on, or redeem, purchase, acquire or make a distribution or liquidation payment with respect to, any of its Common Stock or Preferred - -------------------------------------------------------------------------------- RISKS TO HOLDERS OF B INTERESTS - -------------------------------------------------------------------------------- diluted. Issuances of additional shares may be more likely after the Conversion if the corporate form expands the potential investor base, provides greater access to equity markets and permits the use of capital stock as acquisition currency. Holders of Common Stock will not be entitled to preemptive rights. Addition of Provisions that May Discourage Changes of Control The Partnership Agreement of the Partnership contains many provisions which are designed to vest in the General Partner the right to manage the business of the Partnership and to restrict the right of the limited partners to change management and to approve transactions of a type which are generally subject to stockholder approval in the case of a corporation. The Partnership does not hold annual meetings of limited partners and does not permit limited partners to vote on many of the matters upon which stockholders of the Corporation will be permitted to vote. Upon effectiveness of the Conversion, the Partnership will terminate and the stockholders will have the rights described under the captions "DESCRIPTION OF TRUST PREFERRED SECURITIES," "DESCRIPTION OF CAPITAL STOCK" and "COMPARISON OF INTERESTS AND SECURITIES TO BE ISSUED." The Corporation's Certificate of Incorporation and By-laws, the Stockholders Agreement and the stockholder rights plan contain certain provisions that may have the effect of encouraging persons considering an acquisition or takeover of the Corporation to negotiate with the Board of Directors rather than to pursue non-negotiated acquisitions or takeover attempts that a stockholder might consider to be in the stockholders' best interests, including offers that might result in a premium over market price for the Common Stock. These provisions include authorization for the Board of Directors to issue classes or series of Preferred Stock and a requirement that stockholders notify the Corporation in advance of any director nominees or items of business to be proposed at any meeting of stockholders. See "DESCRIPTION OF CAPITAL STOCK -- Anti-takeover Provisions." In addition, the deferred compensation plans of the Operating Partnership will continue to provide that, upon the occurrence of a change in control as defined in the plans, the vesting provisions of awards under the plans will be accelerated. See "MANAGEMENT -- Deferred Compensation Plans." These provisions may reduce interest in the Corporation as a potential acquisition target or reduce the likelihood of a change in the management or voting control of the Corporation without the consent of the then incumbent Board of Directors. 24 - -------------------------------------------------------------------------------- RISKS TO HOLDERS OF A INTERESTS - -------------------------------------------------------------------------------- Stock. Prior to the termination of any Extension Period, the Corporation may further extend such Extension Period; provided that such Extension Period together with all such previous and further extensions thereof may not exceed 60 consecutive months. Upon the termination of any Extension Period and the payment of all amounts then due, the Corporation may commence a new Extension Period, subject to the above requirements. The Corporation may also prepay at any time all or any portion of the interest accrued during an Extension Period. Consequently, there could be multiple Extension Periods of varying lengths throughout the term of the Junior Subordinated Debentures. See "DESCRIPTION OF TRUST PREFERRED SECURITIES -- Distributions" and "DESCRIPTION OF THE JUNIOR SUBORDINATED DEBENTURES -- Option to Extend Interest Payment Period." Because the Corporation has the right to extend the interest payment period up to 60 consecutive months on various occasions, the Junior Subordinated Debentures will be treated as issued with "original issue discount" for United States federal income tax purposes. As a result, holders of Trust Preferred Securities will be required to include their pro rata share of original issue discount in gross income as it accrues for United States federal income tax purposes in advance of the receipt of cash. Generally, all of a securityholder's taxable interest income with respect to the Junior Subordinated Debentures will be accounted for as "original issue discount" and actual distributions of stated interest will not be separately reported as taxable income. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES -- Certain Tax Consequences of the Conversion to Holders of A Interests -- Accrual of Original Issue Discount and Premium" and "-- Potential Extension of Payment Period on the Junior Subordinated Debentures." As described above, the Corporation has the right to extend an interest payment period on the Junior Subordinated Debentures from time to time for a period not exceeding 60 consecutive monthly interest periods. If the Corporation determines to extend an interest payment period, or if the Corporation thereafter extends an Extension Period or prepays interest accrued during an Extension Period as described above, the market price of the Trust Preferred Securities is likely to be adversely affected. In addition, as a result of such rights, the market price of the Trust Preferred Securities (which represent an undivided beneficial interest in Junior Subordinated Debentures) may be more volatile than other securities on which original issue discount accrues that do not have such rights. - -------------------------------------------------------------------------------- RISKS TO HOLDERS OF B INTERESTS - -------------------------------------------------------------------------------- Possible Reduction in Fiduciary Standards At least one Delaware court has stated that the fiduciary duties of a general partner to limited partners are comparable to those of a director to stockholders. Other courts, however, have indicated that the fiduciary duties of a general partner are greater than those of a director to stockholders. Therefore, although it is unclear whether or to what extent there are any differences in such fiduciary duties, it is possible that the fiduciary duties of directors of the Corporation to its stockholders could be less than those of the General Partner to the limited partners, which may result in decreased potential liability of the directors of the Corporation. The Certificate of Incorporation of the Corporation expressly limits the potential liabilities of the directors for certain breaches of their fiduciary duties. See "COMPARISON OF INTERESTS AND SECURITIES TO BE ISSUED -- Fiduciary Duties." Elimination of General Partner Liability for Corporation Obligations The partners of the General Partner will receive a benefit from the Conversion which is not shared by all limited partners generally in the elimination of their liability, if any, for obligations and liabilities of SunSource which may occur after the Conversion. Under Delaware law, as a general partner of the Partnership, the General Partner is liable to the extent of its assets for the debts and obligations of the Partnership. If the Conversion is consummated, the partners of the General Partner would be stockholders of the Corporation and would not have liability for the debts and obligations of the Corporation. Payments Under Deferred Compensation Plans Certain members of management will receive accelerated payments under certain deferred compensation plans of the Operating Partnership. See "MANAGEMENT -- Change in Control Arrangements." Transaction Costs Transaction costs of approximately $4,500,000 will be incurred by the Partnership, of which $3,900,000 will be paid by the Partnership whether or not the Conversion is completed. Change in Ownership Rights As a result of the Conversion, holders of B Interests will lose certain rights associated with their ownership of B Interests and will acquire certain rights associated with their ownership of shares of Common Stock. A comparison of these factors, which may relate to investment objectives of limited partners, is set forth in "COMPARISON OF INTERESTS AND SECURITIES TO BE ISSUED." 25 - -------------------------------------------------------------------------------- RISKS TO HOLDERS OF A INTERESTS - -------------------------------------------------------------------------------- A holder that disposes of Trust Preferred Securities during an Extension Period, therefore, may not receive the same return on investment as a holder that continues to hold its Trust Preferred Securities. See "DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES -- Option to Extend Interest Payment Period." Ranking of Subordinated Obligations under Preferred Securities Guarantee and Junior Subordinated Debentures; Dependence on the Corporation The obligations of the Corporation under the Junior Subordinated Debentures are unsecured obligations of the Corporation and will be subordinate and junior in right of payment to Senior Indebtedness of the Corporation but senior to its capital stock. The Corporation's obligations under the Preferred Securities Guarantee are unsecured and will rank (i) subordinate and junior in right of payment to all other liabilities of the Corporation, including the Junior Subordinated Debentures, except those made pari passu or subordinate by their terms, and (ii) senior to all capital stock now or hereafter issued by the Corporation and to any guarantee now or hereafter entered into by the Corporation in respect of its capital stock. Because the Corporation is a holding company, the Junior Subordinated Debentures (and the Corporation's obligations under the Preferred Securities Guarantee) are also effectively subordinated to all existing and future liabilities, including trade payables, of the Operating Partnership and other subsidiaries of the Corporation, except to the extent that the Corporation is a creditor of the subsidiaries recognized as such. There are no terms in the Trust Preferred Securities, the Junior Subordinated Debentures or the Preferred Securities Guarantee that limit the Corporation's ability to incur additional indebtedness, including indebtedness that ranks senior to or pari passu with the Junior Subordinated Debentures and the Preferred Securities Guarantee, or the ability of its subsidiaries to incur additional indebtedness. See "DESCRIPTION OF PREFERRED SECURITIES GUARANTEE -- Status of the Preferred Securities Guarantee" and "DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES -- Subordination." The Indenture and the Declaration provide that the Corporation shall pay all debts and obligations (other than with respect to the Trust Securities) and all costs and expenses of the Trust, including any taxes and all costs and expenses with respect thereto, to which the Trust may become subject, except for United States withholding taxes. No assurance can be given that the Corporation will have sufficient resources to enable it to pay such debts, obligations, costs and expenses on behalf of the Trust. - -------------------------------------------------------------------------------- RISKS TO HOLDERS OF B INTERESTS - -------------------------------------------------------------------------------- Other Considerations In addition to the factors noted above, an investment in SunSource (whether in partnership or corporate form) is subject to risks associated with operating conditions, competitive factors, economic conditions, industry conditions and equity market conditions. 26 - -------------------------------------------------------------------------------- RISKS TO HOLDERS OF A INTERESTS - -------------------------------------------------------------------------------- Adverse Tax Implications The Conversion will be taxable transaction to holders of A Interests, who will recognize gain or loss equal to the difference between the cash and the fair market value of the Trust Preferred Securities received in the Conversion and their tax basis in their A Interests, and to holders of both A and B Interests who will recognize gain equal to the difference between the cash and the fair market value of the Trust Preferred Securities and Common Stock received in the Conversion and their aggregate tax basis in the A Interests and B Interests, which gain will likely be recognized only to the extent of the fair market value of the Trust Preferred Securities and the cash received in the Conversion. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES." Enforcement of Certain Rights by Holders of Trust Preferred Securities If an Event of Default (as defined herein) under the Declaration occurs and is continuing, then the holders of Trust Preferred Securities would rely on the enforcement by the Property Trustee (as defined herein) of its rights as a holder of the Junior Subordinated Debentures against the Corporation. The holders of a majority in liquidation amount of the Trust Preferred Securities will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Property Trustee or to direct the exercise of any trust or power conferred upon the Property Trustee under the Declaration, including the right to direct the Property Trustee to exercise the remedies available to it as a holder of the Junior Subordinated Debentures. If the Property Trustee fails to enforce its rights with respect to the Junior Subordinated Debentures held by the Trust, any record holder of Trust Preferred Securities may, to the fullest extent permitted by law, institute legal proceedings directly against the Corporation (a "Direct Action") to enforce the Property Trustee's rights under such Junior Subordinated Debentures without first instituting any legal proceedings against such Property Trustee or any other person or entity. In connection with such Direct Action, the Corporation will be subrogated to the rights of such holder of Trust Preferred Securities to the rights of such holder of Trust Preferred Securities under the Declaration to the extent of any payment made by the Corporation to such holder of Trust Preferred Securities in such Direct Action. Except as set forth herein, holders of Trust Preferred Securities will not be able to exercise directly any other remedy available to the holders of Junior Subordinated Debentures or assert directly any other rights in respect of the Junior Subordinated Debentures. See "DESCRIPTION OF PREFERRED SECURITIES GUARANTEE," and "DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES -- Indenture Events of Default." If the Trust's failure to make distributions on the - -------------------------------------------------------------------------------- RISKS TO HOLDERS OF B INTERESTS - -------------------------------------------------------------------------------- 27 - -------------------------------------------------------------------------------- RISKS TO HOLDERS OF A INTERESTS - -------------------------------------------------------------------------------- Trust Preferred Securities is a consequence of the Corporation's exercise of its right to extend the interest payment period for the Junior Subordinated Debentures, the Property Trustee will have no right to enforce the payment of distributions on the Trust Preferred Securities until an Event of Default under the Declaration shall have occurred. The Trust's ability to make distributions and other payments on the Trust Preferred Securities is solely dependent upon the Corporation making interest and other payments on the Junior Subordinated Debentures deposited as trust assets as and when required. If the Corporation were not to make distributions or other payments on the Junior Subordinated Debentures for any reason, including as a result of the Corporation's election to defer the payment of interest on the Junior Subordinated Debentures by extending the interest period on the Junior Subordinated Debentures, the Trust will not make payments on the Trust Securities. In such an event, holders of the Trust Preferred Securities would not be able to rely on the Preferred Securities Guarantee since distributions and other payments on the Trust Preferred Securities are subject to such Guarantee only if and to the extent that the Corporation has made a payment to the Property Trustee of interest or principal on the Junior Subordinated Debentures deposited in the Trust as trust assets. Instead, holders of Trust Preferred Securities would rely on the enforcement by the Property Trustee of its rights as registered holder of the Junior Subordinated Debentures against the Corporation pursuant to the terms of the Indenture and may vote to appoint a Special Regular Trustee. Limited Voting Rights Holders of Trust Preferred Securities will have limited voting rights and, subject to the rights of holders of Trust Preferred Securities to appoint a Special Regular Trustee upon the occurrence of an Appointment Event, will not be able to appoint, remove or replace, or to increase or decrease the number of, Trustees, which rights are vested exclusively in the holders of Trust Common Securities. No Dissenters', Appraisal or Similar Rights for Nonconsenting Limited Partners If the limited partners approve the Conversion, all holders of Interests will be bound by such approval even though they, individually, may have voted against the Conversion. Under applicable state law and the terms of the Partnership Agreement, limited partners will have no dissenters', appraisal or similar rights in connection with the Conversion, nor will such rights be voluntarily accorded to limited partners by the Partnership or the Corporation. Therefore, limited partners will not be entitled to receive cash payment from SunSource - -------------------------------------------------------------------------------- RISKS TO HOLDERS OF B INTERESTS - -------------------------------------------------------------------------------- 28 - -------------------------------------------------------------------------------- RISKS TO HOLDERS OF A INTERESTS - -------------------------------------------------------------------------------- for the fair value of their Interests if they dissent and the Conversion is approved and consummated. See "VOTING AND PROXY INFORMATION -- No Appraisal Rights." Uncertainty Regarding Market Price for Trust Preferred Securities At present there is no trading market for the Trust Preferred Securities. Application has been made to list these securities on the NYSE under the trading symbol SDP. There can be no assurance that holders will be able to sell their securities at favorable prices or that the trading prices for the securities will be comparable to the trading prices for the Interests prior to consummation of the Conversion. A large number of securities may be traded by former limited partners immediately following completion of the Conversion for various reasons, including the perceived increased liquidity that the securities may afford to limited partners. This might tend to depress the market price of the securities. The Trust Preferred Securities may trade at prices that do not fully reflect the value of accrued but unpaid interest with respect to the underlying Junior Subordinated Debentures. A holder of Trust Preferred Securities that disposes of its Trust Preferred Securities between record dates for payments of distributions (and consequently does not receive a distribution from the Trust for the period prior to such disposition) will nevertheless be required to include as ordinary income, accrued but unpaid interest on the Junior Subordinated Debentures through the date of disposition. Such holder will recognize a capital loss to the extent the amount realized with respect to the Trust Preferred Securities is less than its adjusted tax basis. Subject to certain limited exceptions, capital losses cannot be applied to offset ordinary income for United States federal income tax purposes. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES." The closing price on the NYSE on June 30, 1997 for A Interests was $11 7/16. Elimination of General Partner Liability for Corporation Obligations The partners of the General Partner will receive a benefit from the Conversion which is not shared by all limited partners generally in the elimination of their liability, if any, for obligations and liabilities of SunSource which may occur after the Conversion. Under Delaware law, as a general partner of the Partnership, the General Partner is liable to the extent of its assets for the debts and obligations of the Partnership. If the Conversion is consummated, the partners of the General Partner would be stockholders of the Corporation and would not have liability for the debts and obligations of the Corporation. - -------------------------------------------------------------------------------- RISKS TO HOLDERS OF B INTERESTS - -------------------------------------------------------------------------------- 29 - -------------------------------------------------------------------------------- RISKS TO HOLDERS OF A INTERESTS - -------------------------------------------------------------------------------- Payments Under Deferred Compensation Plans Certain members of management will receive accelerated payments under certain deferred compensation plans of the Operating Partnership. See "MANAGEMENT -- Change in Control Arrangements." Transaction Costs Transaction costs of approximately $4,500,000 will be incurred by the Partnership, of which $3,900,000 will be paid by the Partnership whether or not the Conversion is completed. Change in Ownership Rights As a result of the Conversion, holders of A Interests will lose certain rights associated with their ownership of A Interests and will acquire certain rights associated with their ownership of Trust Preferred Securities. A comparison of these factors, which may relate to investment objectives of limited partners, is set forth in "COMPARISON OF INTERESTS AND SECURITIES TO BE ISSUED." Other Considerations In addition to the factors noted above, an investment in SunSource (whether in partnership or corporate form) is subject to risks associated with operating conditions, competitive factors, economic conditions, industry conditions and market conditions. - -------------------------------------------------------------------------------- VOTING AND PROXY INFORMATION Voting Procedures Under the Partnership Agreement, a holder of an Interest may vote only if the holder has been admitted as a limited partner of the Partnership on or before the record date for the Special Meeting. Each Interest entitles the holder thereof to one vote with respect to matters to be voted on at the Special Meeting. The General Partner has set the close of business on August 4, 1997 as the record date (the "Record Date") for the determination of limited partners entitled to vote at the Special Meeting. The Partnership will accept proxies at any time before the Conversion is voted on at the Special Meeting. The enclosed form of proxy, when properly completed and returned, will constitute a limited partner's vote for or against, or abstention on, the Conversion. If a limited partner returns a form of proxy duly signed without voting, the limited partner will be deemed to have voted for the Conversion. Revocation of Proxies A limited partner may revoke a proxy any time during the solicitation period before its exercise by (i) delivering written notice of revocation to the Partnership, (ii) executing and delivering to the Partnership a later dated form of proxy or (iii) 30 voting in person at the Special Meeting. Any such written notice or later dated proxy should be sent to SunSource L.P., 2600 One Logan Square, Philadelphia, Pennsylvania 19103, Attention: Joseph M. Corvino, Secretary. Vote Required; Quorum Approval of the Conversion will require (i) the affirmative vote of limited partners holding an aggregate of more than 50% of the outstanding A Interests and B Interests, each voting separately as a class, and (ii) the affirmative vote of unaffiliated limited partners (limited partners other than affiliates of the General Partner) holding an aggregate of more than 50% of the A Interests and B Interests held by unaffiliated limited partners, each voting separately as a class. As of the Record Date, there were 11,099,573 A Interests outstanding, of which 11,019,850 were held by unaffiliated holders, and 21,675,746 B Interests outstanding, of which 11,633,603 were held by unaffiliated holders. The presence, in person or by proxy, of limited partners holding an aggregate of more than 50% of each class will constitute a quorum at the Special Meeting. Abstentions and broker non-votes will be treated as present for the purpose of determining a quorum but will have the effect of votes against the Conversion Proposal. The executive officers, directors and other affiliates of the General Partner own less than 1% of the outstanding A Interests and 46.3% of the outstanding B Interests. They have advised the Partnership that they each intend to vote their Interests in favor of the Conversion, although they will not participate in the votes by the unaffiliated holders of A Interests and B Interests. For further information concerning the ownership of Interests by the General Partner's affiliates, executive officers and directors, see "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT." Solicitation of Proxies This solicitation is being made by the General Partner on behalf of the Partnership. The Partnership will pay the cost of soliciting proxies. The Partnership will reimburse brokerage houses and other nominees for their reasonable expenses of forwarding proxy materials to beneficial owners of Interests. The Partnership has retained D.F. King & Co., Inc. to aid in the solicitation of proxies and to verify certain records related to the solicitation of proxies for a fee of $10,000, plus an additional fee of $3.00 for each incoming or outgoing limited partner contact, plus line charges and other out-of-pocket expenses. In addition, representatives of SunSource may meet with brokers, research analysts and other members of the investment community to discuss the Conversion. Representatives of SunSource may also contact limited partners in person or by telephone, or arrange meetings with limited partners to discuss the Conversion. Independent Auditors Representatives of Coopers & Lybrand L.L.P., the Partnership's independent accountants, are expected to be present at the Special Meeting. No Appraisal Rights Limited partners who object to the Conversion will have no appraisal, dissenters' or similar rights (i.e., the right, instead of receiving securities of the Corporation, to seek a judicial determination of the "fair value" of their Interests and to compel SunSource to purchase their Interests for cash in that amount) under state law or the Partnership Agreement, nor will such rights be voluntarily accorded to limited partners by SunSource. Thus, approval of the Conversion by the requisite vote of limited partners will bind all limited partners, and objecting limited partners will have no alternative to receipt of securities of the Corporation other than selling their Interests (or securities of the Corporation) in the open market. Other Matters The enclosed form of proxy grants discretionary authority to the persons named to vote on any other matters that may properly come before the Special Meeting. The Partnership is not aware of any other proposals planned to be made at the Special Meeting and has no current intention of making any additional proposals. 31 SPECIAL FACTORS Background of the Conversion In October 1986, the predecessor to Lehman Brothers acquired all of the capital stock of Sun Distributors, Inc. ("SDI") from Sun Company, Inc. In December 1986, the Partnership and the Operating Partnership were organized as Delaware limited partnerships, and in January 1987 the assets and liabilities of SDI were transferred to the Operating Partnership in exchange for a note and a 99% limited partnership interest in the Operating Partnership. Lehman Brothers' predecessor then contributed the limited partnership interest to the Partnership in exchange for 11,099,573 A Interests and 22,199,146 B Interests. In February 1987, 10,653,990 units (each consisting of one A Interest and one B Interest) were sold in an underwritten public offering. At the time of organization, the limited partnership form offered important tax advantages since there was no federal income tax at the partnership level. However, in December 1987 Congress passed the Revenue Act of 1987, one of the provisions of which provided that publicly held limited partnerships ("MLPs"), with certain exceptions not applicable to the Partnership, would be taxed for federal income tax purposes as corporations. MLP's existing on December 17, 1987 were "grandfathered" for ten years until December 31, 1997. In addition to the limited time period for the tax benefits, management found that the structure of the Partnership impeded the strategic direction of its business. Prior to 1987, the business had grown principally through acquisitions made either with cash or Sun Company stock. With a limited partnership, acquisitions with Interests became impracticable. Available cash is limited by the required payment of the B Tax Distribution which has to be made at 125% of the maximum individual federal income tax rate. This meant that, at the outset, 38.75% (125% x 31%, the then maximum tax rate) of federal taxable income allocable to the B Interests had to be distributed. In 1993, the maximum tax rate was increased to 39.6% meaning that the B Tax Distribution increased to 49.5% of federal taxable income allocable to the B Interests. During the early 1990s the question whether to convert to a corporation was examined from time to time. One of the advantages of conversion was that, if the A Interests could be replaced with debt, the interest on the debt would be deductible which would offset to some degree the tax disadvantages of being taxed as a corporation. However, the amount of this much debt on the balance sheet would have impaired SunSource's ability to borrow money. It therefore became impracticable to convert without the sale of some assets to provide additional net worth. In the spring and summer of 1992, Lehman Brothers and Legg Mason Wood Walker, Incorporated ("Legg Mason") were engaged to seek out buyers for the entire Partnership. Lehman Brothers and Legg Mason prepared descriptive memoranda for the operations of the divisions, solicited confidentiality agreements from prospective buyers, assisted in the due diligence efforts of the prospective buyers and received various offers. Approximately 60 companies were contacted but the effort produced no proposals attractive to pursue, due in part to the financial and economic climate at that time and its effect on the Partnership's business. On September 13, 1993, the Partnership publicly announced that the Board of Directors of Lehman/SDI had begun to explore the possible sale of assets or becoming a publicly traded corporation and had authorized the engagement of financial advisors to assist in the process. Lehman Brothers and Legg Mason (the "Advisors") were again engaged and conducted an extensive search for buyers of the entire Partnership or of divisions of the Partnership. Again, the Advisors prepared memoranda for the operations of the divisions, solicited confidentiality agreements from and assisted in the due diligence efforts of, the prospective buyers and received various offers. The Advisors contacted 77 strategic and 44 financial buyers. They received no interest in the Partnership as a whole from acquirors at an acceptable level. They received a number of bids for divisions, some of which were attractive. However, the Board of Directors of Lehman/SDI determined that the realizable sale value of all of the Partnership's assets was not adequate, and also decided that conversion to a corporation at that time would be unattractive. Finally the Board of Directors of Lehman/SDI determined that the bids for the Electrical Group and for the Dorman Products division should be pursued further and instructed the Advisors to obtain final bids for these businesses. The Operating Partnership sold its Electrical Group on December 5, 1994 and the Dorman Products division on January 3, 1995. In addition, although not the result of the study of strategic alternatives in 1993-1994, the Downey Glass division was sold on October 27, 1995. The Operating Partnership received an aggregate cash consideration, net of expenses, of approximately $70 million, of which $14.2 million was used for a mandatory prepayment on its senior debt. 32 With the regularly scheduled principal payment on the senior debt in December 1995, the Partnership's total debt as a percentage of its consolidated capitalization was reduced to 43.5% at December 31, 1995 compared with 55% at December 31, 1994. The sales not only strengthened the financial position of the Partnership but enabled it to remove the restriction on acquisitions which had been imposed by the lenders for 1993 and 1994. The strengthened balance sheet therefore removed one of the negative considerations for conversion to a corporation and, with the deadline of December 31, 1997 approaching, management and Lehman Brothers began to develop a concept for conversion to a corporation. This concept was presented to the Board of Lehman/SDI at its June 12, 1996 meeting. The Board of Directors of Lehman/SDI authorized further work on the conversion and appointed the Special Committee to review the terms of the conversion proposal to be prepared by the General Partner. See "-- Determinations of the Special Committee" below. At the same meeting, the Board of Directors of Lehman/SDI reviewed a presentation prepared by management which outlined a range of values which might be realized if the Partnership were to be liquidated. Because the valuations presented did not suggest an attractive potential sale value for the Partnership and because of the other difficulties in a liquidation described below, the Board of Directors of Lehman/SDI decided that pursuit of the conversion alternative offered a higher expected value for Interest holders than the liquidation plan. For more information on the liquidation alternative, see "-- Alternatives to the Conversion." Existing Partnership Structure The Partnership is a Delaware limited partnership. Unless earlier terminated pursuant to the Conversion or the Partnership Agreement, the Partnership will continue in existence until December 31, 2086. The General Partner holds a 1% general partnership interest. The limited partnership interests in the Partnership, representing a 99% limited partnership interest, are represented by 11,099,573 A Interests and 21,675,746 B Interests, both of which are traded on the NYSE. The Partnership holds a 99% limited partnership interest in the Operating Partnership and the General Partner holds a 1% general partnership interest. The Partnership conducts all of its business activities through the Operating Partnership. Lehman/SDI is the general partner of the General Partner and makes all the decisions relating to the management of the Partnership and the Operating Partnership and manages and controls their activities. Lehman Brothers Holdings Inc., as the sole stockholder of Lehman/SDI, elects the members of the Board of Directors of Lehman/SDI. See the chart on page 1 of this Proxy Statement/Prospectus. The General Partner receives, as part of its general partnership interest in the Operating Partnership, a Management Fee of $3,330,000 per year from the Operating Partnership as well as distributions attributable to its general partnership interests. See "-- Existing Economic Interests of the Partners." All expenses incurred by the General Partner are paid or reimbursed by the Operating Partnership, except for the compensation of the non-management directors of Lehman/SDI. Existing Economic Interests of the Partners Cash Available for Distribution of the Partnership (i.e., all cash receipts of the Partnership, less cash used to pay or establish a reserve for expenses) is distributed 99% to the holders of A Interests and 1% to the General Partner until holders of A Interests have received annually a $1.10 simple, cumulative return. The Priority Return has been paid on a monthly basis to holders of record on the first day of the month. After distribution of the Priority Return, Cash Available for Distribution is distributed 1% to the General Partner and 99% to the holders of B Interests until such holders have received an annual distribution equal to the product of (i) 125% of the then applicable maximum Federal income tax rate for individuals and (ii) the taxable income allocable to the B Interests. The B Tax Distribution has been partially distributed on a monthly basis to holders of record on the first day of the month with the balance distributed by March 31 of the succeeding year. See Note 3 of Notes to Consolidated Financial Statements. The Partnership suspended the payment of monthly advance B Tax Distributions effective January 1, 1997, but resumed the payments in April because it did not expect to effect the Conversion until the summer of 1997. Upon liquidation of the Partnership, after provision for all liabilities, the holders of A Interests will receive a preferential distribution equal to $10 per A Interest plus any unpaid Priority Return and the balance will be distributed to the General Partner and the holders of B Interests in accordance with their respective capital accounts. 33 The Operating Partnership distributes its available cash 99% to the Partnership and 1% to the General Partner until the amount distributed to the Partnership is sufficient to pay the Priority Return and the B Tax Distribution. The General Partner also receives a Management Fee from the Operating Partnership of $3,330,000 annually. To the extent that the Priority Return and the B Tax Distribution have not been paid on a cumulative basis, the Management Fee will not be paid, but will be deferred and be paid, together with any Management Fees then owed with respect to any other year, after the Priority Return and B Tax Distribution have been paid. In addition, the Management Fee can be paid only if the Operating Partnership complies with the covenants required by the Operating Partnership's credit agreements. See Notes 8 and 9 of Notes to Consolidated Financial Statements of the Partnership as of and for the three years ended December 31, 1996. Alternatives to the Conversion The alternatives to the Conversion which were considered by the General Partner were continuing the existence of the Partnership as a limited partnership and the liquidation of the Partnership, either immediately or over an extended period of time. A benefit of continuing the existence of the Partnership as a limited partnership is the possible reduction of aggregate federal income taxes payable by the Partnership and its partners compared to the aggregate federal income taxes payable by the Corporation with respect to the income of SunSource and its stockholders with respect to any dividends received. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES." This federal income tax benefit will end under current law on December 31, 1997, although there are several bills pending in Congress that could change this result. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES -- Partnership Status and Taxation of Partnership." Under current tax law, the Partnership will be taxed as a corporation after December 31, 1997 so that the Partnership will be subject to tax at the Partnership level and the partners will also be subject to tax on any distributions received. In addition, payments of the Priority Return would not be deductible for tax purposes. In view of the potential double taxation at both the Partnership and the partner levels, the General Partner no longer believes it would be in the best interests of the Partnership and the limited partners to remain in partnership form. The Corporation will be subject to taxation at the corporate level and individual stockholders will be subject to tax on any dividends received, but payments in respect of the Junior Subordinated Debentures will be deductible by the Corporation for income tax purposes. See "-- Consequences if Conversion is Not Approved." Another alternative to the Conversion considered by the General Partner was liquidation. One benefit of liquidating the Partnership at this time rather than effecting the Conversion would be the possibility that the currently realizable value of the Partnership assets may exceed the value of SunSource as a continuing business. Another benefit of liquidating while in partnership form prior to December 31, 1997 is that under current law a liquidation of the Partnership would likely result in less federal income taxes payable on any gains recognized by the Partnership than if the Partnership were converted to a corporation and subsequently liquidated because the partners of the Partnership would only pay federal income tax at the partner level on liquidation gains, while a corporation would pay federal income tax on gains derived from liquidating its assets and the corporation's stockholders would also pay federal income tax on the amount by which the liquidation proceeds received by the stockholders exceeded their basis in the shares. As set forth above under " -- Background of the Conversion," management made a presentation to the Board of Directors of Lehman/SDI on June 12, 1996 concerning alternatives to the Conversion. The Board of Directors of Lehman/SDI again examined the alternatives on June 18, 1997 during a special meeting, using as the basis for its analysis the management projections furnished to Smith Barney. See Management Projections included as Exhibit D to this Proxy Statement/Prospectus, noting particularly the "Qualifications with Respect to Projections." The Board of Directors of Lehman/SDI considered the estimated impact upon the limited partners and the General Partner of three alternatives: 1) conversion to corporate form; 2) continuation as a master limited partnership taxable as a corporation; and 3) liquidation. The following tables set forth management's estimates with respect to values that would be received under the three alternatives. These estimates should not be relied on as indicators of the actual values of the Interests or the consideration to be received in respect of Interests in the Conversion. The estimates are based on the following assumptions. 34 Assumptions Relating to Alternatives to the Conversion A Interests The reference price for the conversion to corporate form alternative was determined by discounting the expected monthly cash flows of the Trust Preferred Securities by a rate that was based on current Treasury Strip Yields for the same maturities plus an appropriate credit spread as adjusted for the substantial probability of a call at par five years from the date of the Conversion. The reference price for the continuation as a master limited partnership alternative was determined by discounting the expected A Interest cash flows in perpetuity by a rate that was based upon current Treasury Forward rates plus the mean of the historical A Interests credit spread. B Interests The reference prices for both the conversion to corporate form and the continuation as a master limited partnership alternatives were determined by applying a price/earnings ("P/E") ratio to the appropriate projected net income figure in each case. The projected P/E ratio was determined by analyzing the Partnership's historical last twelve months' P/E ratio on a pro forma tax-adjusted basis, and comparing the results to the similar ratios of the Partnership's comparable industrial distribution corporations (over five-year and two-and-a-half-year periods). The results were compared to comparable industrial distribution corporations because there are no industrial distribution master limited partnerships comparable to the Partnership. It was determined that the Partnership historically traded at a P/E ratio discount of 18% to 25% to the comparables. The discount was then applied to the mean of the comparables resulting in a P/E ratio for the Partnership of 11x to 12x. For the 17 months between January 1, 1996 and June 1, 1997, the P/E ratio averaged 12.0x. The mean of the P/E ratio for comparable industrial distribution corporations as described herein was 14.6x, which was utilized to determine the reference price in the conversion to corporate form alternative. While the General Partner believes that the Conversion will lead to a reduction in the market discount, there can be no assurance that this will occur. The estimated effect of the three alternatives upon the A Interests is shown in the following table. The table assumes for purposes of comparison that the $1.10 distributions start in 1998. 35
PER A INTEREST Conversion to Corporate Form 1997 1998 1999 2000 2001 2002 - ---------------------------- ---- ---- ---- ---- ---- ---- Reference Price $10.78 $10.65 $10.47 $10.29 $10.09 $ 9.86 Proceeds at First Call Date -- -- -- -- -- $ 9.50 Anticipated Cumulative Cash Receipts(1) $ 1.30 $ 2.40 $ 3.50 $ 4.60 $ 5.70 $ 6.80 Continuation as Master Limited Partnership Taxable as a Corporation Reference Price $11.00 $11.00 $10.98 $10.96 $10.92 $10.90 Anticipated Cumulative Cash Receipts Starting in 1998 -- $ 1.10 $ 2.20 $ 3.30 $ 4.40 $ 5.50 Liquidation Liquidation Value $10.00 $10.00 $10.00 $10.00 $10.00 $10.00 Anticipated Cumulative Cash Receipts Starting in 1998 -- $ 1.10 $ 2.20 $ 3.30 $ 4.40 $ 5.50
- -------------------- (1) Includes $1.30 in cash received at the time of Conversion. The above table shows three estimated outcomes for a current holder of an A Interest. For example, if a current A Interest holder were to sell the investment at the end of 1998: o If the Conversion takes place, an A Interest holder is estimated to receive $10.65 from the sale of 0.38 of a Trust Preferred Security, plus $1.30 in cash at the time of Conversion, plus $1.10 in distributions for 1998. Total cash received is estimated to be $13.05. o If the Conversion does not take place, an A interest holder is estimated to receive $11.00 from the sale of the A Interest, plus $1.10 of Priority Return for 1998. Total cash received is estimated to be $12.10. o If the Partnership were to be liquidated at the end of 1998, the A Interest holder would receive $10.00 in liquidation preference plus $1.10 of Priority Return for 1998. Total cash is estimated to be $11.10. The General Partner believes the estimated values shown in the above table support the conclusion that the proposed Conversion is advantageous to the holders of A Interests. The estimated effect upon the holders of B Interests is shown in the following table: 36
PER B INTEREST Conversion to Corporate Form 1997 1998 1999 2000 2001 2002 - ---------------------------- ---- ---- ---- ---- ---- ---- Reference Price(1)(2) $6.28 $7.59 $9.49 $11.68 $14.02 $16.35 Continuation as Master Limited Partnership Taxable as a Corporation Reference Price(3) $2.40 $3.87 $6.07 $7.85 $ 9.84 $12.18 Liquidation Liquidation Value at 5.0x EBITA $2.73 $3.22 $4.09 $5.08 $ 6.19 $ 7.47 Liquidation Value at 6.0x EBITA $4.15 $4.76 $5.79 $6.95 $ 8.24 $ 9.72 Liquidation Value at 7.0x EBITA $5.58 $6.30 $7.50 $8.82 $10.30 $11.98
- -------------------- (1) Assumes a P/E multiple of 14.6x net income after tax. See "-- Assumptions Relating to Alternatives to the Conversion." (2) Before the 1-for-4 reverse stock split. (3) Assumes a P/E multiple of 12.0x net income after tax. See "-- Assumptions Relating to Alternatives to the Conversion." The above table shows, subject to the assumptions and caveats set forth above under " -- Assumptions Relating to Alternatives to the Conversion" and in Exhibit D, the derived outcomes for a current holder of B Interests under the three alternatives. The derived values shown under the conversion to corporate form alternative are significantly better than those shown under the alternative of continuing as a master limited partnership in all years. With respect to liquidation, the 5.0x EBITA case is inferior to remaining as a master limited partnership in all years except 1997. Liquidation at 6.0x EBITA is also inferior to remaining as a master limited partnership in all years except 1997 and 1998. However, the 1997 and 1998 liquidation values of $4.15 and $4.76, respectively, at 6.0x EBITA are below the market price of $5.00 at the time of the meeting of the Board of Directors of Lehman/SDI on June 18, 1997. Liquidation at 7.0x EBITA is superior in all years shown relative to the alternative of continuing as a master limited partnership except 2002, but inferior to the alternative of converting to corporate form for all years. The liquidation values derived above were based upon the Management Projections set forth in Exhibit D, and are subject to all of the assumptions and caveats described therein. The EBITA figures used to calculate liquidation values for each year are approximately $13 million higher than the EBITA figures shown in Exhibit D due to the elimination of the Management Fee and the administrative expenses of SunSource's home office organization. The liquidation values shown above also reflect the payment of income taxes by the Partnership on the gain from sale of assets upon liquidation as required by present tax law. The combined effective income tax rate for federal, state and local income taxes is approximately 40%. If the current law taxing MLPs as corporations in 1998 and thereafter were to be changed, the Partnership might no longer be required to pay on such gains. In that event, the proceeds to holders of B interests would increase by the amount of income taxes not paid at the Partnership level. The increase (decrease) in proceeds due to potential elimination of Partnership income taxes upon liquidation are shown below: 37
Taxes Paid per B Interest on Liquidation at End of 1997 Liquidation Value At Taxable as Partnership Taxable as Corporation (1) -------------------- ---------------------- -------------------------- 5.0x EBITA 0 $ (0.36) 6.0x EBITA 0 $ 0.59 7.0x EBITA 0 $ 1.53
- -------------------- (1) The incremental proceeds would be taxable to holders of B Interests. It should be noted that numerous legislative proposals to change the tax treatment of master limited partnerships have been introduced in Congress in the years since the current law was enacted in 1987. The General Partner cannot predict if any of the four proposals currently before Congress will be enacted. The General Partner believes the principal advantage afforded by the various legislative proposals is the possible elimination of Partnership level income tax upon liquidation. The General Partner believes there is considerable uncertainty that such legislation will be approved. The General Partner further believes that, even if one of the pending proposals is enacted, it would still be desirable to convert to corporate form for the reasons set forth under " -- Reasons to Convert to Corporate Form." See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES -- Partnership Status and Taxation of the Partnership." In discussing the liquidation alternative, the Board of Directors of Lehman/SDI noted that previous efforts by the Partnership's investment bankers in 1994 and 1995 had resulted neither in a bid for the entire partnership nor bids as high as 6.0x EBITA for two of the Partnership's larger business units. In addition, the most aggressive previous bidder for the Partnership's largest business group had sharply curtailed its acquisition activity in the United States. In summary, the Board concluded that there was substantial doubt that the Partnership could realize as much as 6.0x EBITA for all of its business units within a reasonable time frame. Liquidation requires approval of a majority of all the A Interests and all the B Interests outstanding, voting together as a single class. Because there are 11.1 million A Interests and 21.7 million B Interests outstanding, the holders of B Interests would be entitled to cast votes equal to approximately 66.1% of the total votes entitled to be cast on a vote on liquidation if a liquidation value superior to the alternative of continuing as a master limited partnership were to become available. In any vote on liquidation, affiliates of the General Partner, as substantial holders of B Interests, would be entitled to cast approximately 46.3% of the total votes entitled to be cast. For an analysis of the impact of liquidation on the General Partner, see the "General Partner Interest" table below. Based on the foregoing, the General Partner believes that conversion to corporate form is advantageous to the holders of B Interests. The estimated effect upon the General Partner's Interest is shown in the following table. 38
GENERAL PARTNER INTEREST Conversion to Corporate Form 1997 1998 1999 2000 2001 2002 - ---------------------------- ---- ---- ---- ---- ---- ---- Reference Price per Common Share(1)(2) $6.28 $7.59 $9.49 $11.68 $14.02 $16.35 Derived Value of Common $25,120 $30,360 $37,960 $46,720 $56,080 $65,400 Stock Owned(3)(000) Continuation as Master Limited Partnership Taxable as a Corporation (000) - ------------------------------------------ Derived Value of GP's Effective 1.99% $3,535 $4,183 $5,147 $5,927 $6,790 $7,817 Equity Interest(4) Value of Management Fee (5) $26,640 $26,640 $26,640 $26,640 $26,640 $26,640 Total Derived Value of GP Interest $30,175 $30,823 $31,787 $32,567 $33,430 $34,457 Anticipated Cumulative Cash Receipts Starting in 1998(6) -- $3,578 $7,156 $10,734 $14,312 $17,890 Liquidation (000) - ----------------- Liquidation Value at 5.0x EBITA(7) $3,296 $36,57 $4,296 $5,016 $5,832 $6,768 Liquidation Value at 6.0x EBITA(7) $4,340 $4,784 $5,541 $6,384 $7,335 $8,417 Liquidation Value at 7.0x EBITA(7) $5,385 $5,910 $6,786 $7,753 $8,837 $10,066 Anticipated Cumulative Cash Receipts -- $3,578 $7,156 $10,734 $14,312 $17,890 Starting in 1998(6)(000)
- -------------------- (1) Assumes a P/E multiple of 14.6x net income after tax. See "-- Assumptions Relating to Alternatives to the Conversion." (2) Before 1-for-4 reverse stock split. (3) Equals the pre-split reference price per share of Common Stock multiplied by the 4,000,000 shares of Common Stock (before the 1-for-4 reverse stock split) to be received by the partners of the General Partner in the Conversion. (4) Based on business enterprise value derived from the reference prices of the A and B Interests shown above. (5) Represents the low end of the estimated value range for the Management Fee proposed by the General Partner to the Special Committee at the commencement of negotiations. (6) Includes Management Fee of $3,330 per year plus the General Partner's 1.99% share of the Priority Return paid to holders of A Interests. (7) Represents liquidation value of General Partner's 1.99% effective percentage equity interest as of the end of each year shown. The above table shows, subject to the caveats and assumptions set forth above under " -- Assumptions Relating to Alternatives to the Conversion" and in Exhibit D, the derived values for the GP Interest under the three alternatives. For 2000 and thereafter, the derived values shown for the alternative of converting to corporate form are more attractive than those shown under the alternative of continuing as a master limited partnership, including the anticipated cumulative cash receipts. Liquidation is the least attractive of the three alternatives for the General Partner in all years. However, in view of the substantial ownership of B Interests by affiliates of the General Partner, it might become in the General Partner's economic interest to reassess its alternatives if a liquidation alternative of more than 7.0x EBITA were to become available. In 1994 and 1995, the Partnership sold its electrical business for 6.32x EBITA, its Dorman division for 13.42x EBITA, and its Downey division for 12.23x EBITA. For all three units, the combined sales price was 9.49x EBITA. As noted above however, the Board of Directors of Lehman/SDI believes that there is substantial doubt at this time that it could realize as much as 6.0x EBITA for all of its remaining business units within a reasonable time frame. 39 In addition, there are a number of serious risks in pursuing a strategy of complete liquidation. A risk in the liquidation proposal is the amount of time it could take to dispose of multiple businesses on satisfactory terms. Management is concerned that morale could become a problem at those units not sold quickly, and diminished performance and increased employee defections could rapidly impair the value of the affected units. The failure to sell all units would prevent the Partnership from liquidating. In that event, the requirement to pay the A Interest Priority Return would place an onerous cash burden upon the remaining operating units. The Board of Directors of Lehman/SDI determined that the administrative burdens that would result from an attempt to sell simultaneously all business units in separate transactions made liquidation an unattractive alternative. The Board of Directors of Lehman/SDI also considered that liquidation would create an immediate large taxable gain for the Partnership's investors while the Conversion would result in a substantially smaller taxable gain. Based on the considerations described above, the Board of Directors of Lehman/SDI believes that a liquidation of the Partnership's assets (either through individual or bulk asset sales or the sale of the Partnership in its entirety) at this time would not result in the limited partners receiving acceptable value. The Board did not obtain an appraisal or other valuation of the assets because, in light of the previous efforts to sell the Partnership's business units and the Board's conclusions regarding the logistical and financial risks of liquidation, the Board believed that a liquidation of assets would not result in sufficient value to the limited partners. The Board of Directors of Lehman/SDI also rejected the liquidation alternative because liquidation would not provide the holders of B Interests and the General Partner with any continuing equity interest in the Partnership and would be unlikely to be accomplished on a tax-advantaged basis. The General Partner believes that in the long term the value of the Partnership, whether or not the Conversion is effected, to the General Partner and the holders of B Interests would exceed the value of the proceeds of a liquidation at this time. The General Partner believes that other long-term strategies available to SunSource such as diversification, disposition of assets and acquisition of assets are not materially adversely affected by the decision to convert and may be enhanced by the decision to convert as set forth above. From time to time in the past, the General Partner has considered, and in some cases effected, the possibility of disposing of surplus assets, acquiring assets, diversifying its operations geographically and engaging in new lines of business. For example in 1994 and 1995, the Partnership sold its Electrical Group, Dorman Products division, and Downey Glass division. Similarly, the Partnership has acquired a number of companies which complement its operations. See "BUSINESS -- General." The General Partner believes that SunSource will continue to consider, and in some cases effect, similar transactions in the future, regardless of whether SunSource is organized in partnership or corporate form. However, the General Partner believes that the Conversion will enhance SunSource's ability to pursue its long-term strategies by conserving cash and creating the possibility of using Common Stock in future acquisitions. If the December 31, 1997 deadline is changed by the adoption of one of the bills pending in Congress, the disposal of appreciated assets would be preferable in partnership form where there is no tax at the partnership level whereas in corporate form there would be a tax at the corporate as well as the stockholder level. The General Partner currently is not considering any significant transaction involving the Partnership or SunSource's business which is outside the ordinary course of business of the Partnership. Reasons to Convert to Corporate Form The General Partner believes that there are six principal reasons to convert to corporate form at this time: (i) the potential for the Corporation's and the Trust's equity securities to attain greater acceptance within the investment community; (ii) the conservation of cash by the retention of the Management Fee and reduction in tax payments; (iii) the ability to deduct interest payments on the Junior Subordinated Debentures for federal income tax purposes; (iv) the potential for the Corporation to issue equity in payment of the purchase price for complementary acquisitions; (v) the potential for the Corporation to have greater access to equity capital markets; and (vi) the simplification and reduction in cost of tax reporting for investors in SunSource. All of these reasons are for the benefit of the holders of B Interests. Other than as described above under " -- Alternatives to the Conversion," the primary benefit of the Conversion to holders of A Interests is the simplification of tax reporting, although the General Partner believes that several of the benefits listed below will increase the likelihood of timely distributions on the Trust Preferred Securities. o Expansion of Potential Investor Base. The General Partner anticipates that the Conversion will expand SunSource's potential investor base to include institutional and other investors who do not typically invest in limited partnership securities because of various tax and administrative reasons. In 40 addition, the General Partner anticipates that the Common Stock (as compared to Interests) will receive additional investor interest through increased review and evaluation by research analysts. o Conservation of Cash. The Corporation will conserve cash by the retention of the annual Management Fee of $3,330,000 and the retention of distributions on the General Partner's ownership in the Partnership and the Operating Partnership amounting to approximately $400,000 annually. o Tax Consequences. The benefit of being taxed as a partnership will end under current law after December 31, 1997. Although the Corporation will also have to pay tax on its income, the Conversion will allow SunSource to conserve additional cash because the interest payable on the Junior Subordinated Debentures, which will approximately equal the distributions currently paid on the A Interests, is deductible for federal income tax purposes, resulting in a corporate tax benefit of approximately $4,900,000 annually. Four bills are presently pending in Congress which would change the December 31, 1997 deadline. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES -- Partnership Status and Taxation of Partnership." The General Partner believes that even if one of these bills is adopted, the Conversion would still be desirable for the other reasons set forth herein. o Acquisition Currency. The General Partner believes that current industry conditions may provide opportunities for SunSource to grow through the acquisition of businesses and assets which are complementary to its existing businesses. In certain cases, SunSource may want to be able to issue equity interests as payment of the purchase price for such acquisitions. The General Partner believes that an equity interest in a corporation will be a more attractive acquisition currency to sellers than an interest in a partnership. SunSource is not presently party to any agreement or understanding regarding a material acquisition and currently has no plans to make a material acquisition. o Greater Access to Equity Markets. The General Partner expects that the Corporation will have greater access, after the expiration of the nine-month lock-up period, to the public and private equity capital markets than the Partnership, potentially enabling it to raise capital on more favorable terms than are now available to the Partnership. This greater access may be of particular benefit if SunSource proposes to issue equity securities to reduce existing debt, or to raise additional funds for capital expenditures or otherwise to expand its business. The Corporation's access to equity capital markets will be limited during the period from the date of the Conversion to the earlier of an initial secondary offering of shares held by Lehman Brothers and management and the nine-month anniversary of the Conversion. See "RESALE OF SECURITIES -- Resales by Lehman Brothers and Management." o Tax Reporting. In addition, the General Partner believes that the complexities of tax reporting associated with partnership investments are regarded as unduly burdensome for most limited partners under current conditions. The ownership of stock rather than Interests will greatly simplify tax reporting with respect to an investment in SunSource on each limited partner's individual federal and state income tax returns for future years. Terms of the Conversion Structure of the Conversion. If approved by the limited partners, the Conversion will be effected as follows: The Partnership will contribute its limited partnership interest in the Operating Partnership and Lehman/SDI will contribute its general partnership interest in the General Partner to LPSub in exchange for common stock of LPSub. Certain current and former members of management of the General Partner will contribute their limited partnership interests in the General Partner to the Corporation, in exchange for 462,000 shares of Common Stock, of which 75,000 shares will be held in escrow to distributed after two years if all distributions on the Trust Preferred Securities have then been paid, and the Corporation will contribute such limited partnership interests to SunSub A, a wholly owned subsidiary. The Partnership and LPSub will then merge with and into the Corporation and (i) the A Interests will be converted into 4,217,837 Trust Preferred Securities and cash; (ii) the B Interests will be converted into 5,418,936 shares of Common Stock and (iii) the common stock of LPSub held by Lehman /SDI will be converted into 538,000 shares of Common Stock. The Corporation will contribute the limited partnership interests in the Operating Partnership to SunSub A and the general partnership interest in the General Partner to SunSub B, also a wholly owned subsidiary. 41 o As a result of the Conversion, the former holders of A Interests will be holders of Trust Preferred Securities and the former holders of B Interests and the partners of the General Partner will be holders of shares of Common Stock of the Corporation. o The Corporation, through its subsidiaries, will then be the holder of the general and limited partnership interests in the Operating Partnership and the General Partner. The Operating Partnership will be managed by the General Partner, whose general partner will be Sun Sub B, which will act under the direction of its parent, the Corporation. By reason of the Merger, the Corporation will be responsible for all liabilities and obligations of the Partnership. The Conversion is proposed to be effected pursuant to an Agreement and Plan of Conversion, attached as Exhibit B and incorporated by reference herein, among the Corporation, the Partnership, LPSub, Lehman/SDI and the limited partners of the General Partner (the "Conversion Agreement"). As set forth under "SPECIAL FACTORS --Limited Partner Litigation," the amended complaint filed in the Delaware Chancery Court alleges that the Conversion is in breach of the provisions of the partnership agreements governing the Partnership and the Operating Partnership. While the General Partner disagrees strongly with these allegations, the Conversion Agreement provides that, to the extent any of the terms of the Conversion Agreement violate any of the provisions of the partnership agreements, the adoption of the Conversion Proposal by the limited partners and the General Partner shall be deemed to be an amendment and waiver of any such provisions in order to effectuate the Conversion. Amendments to the partnership agreements are permitted with the approval of a majority of the unaffiliated holders of A Interests and B Interests voting as a single class so that approval by the unaffiliated holders of the Conversion Proposal as set forth in this Proxy Statement/Prospectus will satisfy that requirement. Diagrams illustrating the structure of SunSource and its subsidiaries, both before and after the Conversion, are set forth immediately preceding the Summary. Effective Time. If approved at the Special Meeting, the Conversion is expected to become effective on September 30, 1997 (the "Effective Time"). Conditions to the Conversion. The principal conditions to the Conversion are (i) the affirmative vote of limited partners holding an aggregate of more than 50% of the outstanding A Interests and B Interests, each voting separately as a class; (ii) the affirmative vote of unaffiliated limited partners (limited partners other than affiliates of the General Partner) holding an aggregate of more than 50% of the A Interests and B Interests held by unaffiliated limited partners, each voting separately as a class; (iii) approval of the Trust Preferred Securities and Common Stock for listing on the NYSE; (iv) no withdrawal of the Special Committee's determination that the Conversion is fair to the holders of A Interests and the holders of B Interests or of the fairness opinion of Smith Barney; (v) receipt of a satisfactory tax opinion; (vi) the availability of financing to refinance existing senior debt on terms acceptable to the Corporation; and (vii) no material change in applicable law, including with respect to the taxation of the Conversion, the Partnership, the Corporation or the Trust Preferred Securities. Indemnification. Pursuant to the terms of the Conversion Agreement, the Partnership prior to the Effective Time, and the Corporation after the Effective Time, agree to indemnify officers, directors, partners, stockholders, agents or fiduciaries of the Partnership, the Operating Partnership, the General Partner, Lehman/SDI or the Corporation and their respective affiliates (collectively, "Indemnified Parties") for damages paid pursuant to claims based on the fact that such person was an officer, director, partner or shareholder of one or more of such entities. The Partnership and the Corporation also agree to reimburse the Indemnified Parties for expenses (including attorneys' fees) incurred in defending such claims. Termination; Amendment. The General Partner may terminate the Conversion Agreement and abandon the Conversion at any time before it becomes effective, whether before or after approval by the limited partners. Any provision of the Conversion Agreement may be waived at any time by the party that is entitled to the benefits thereof, and the Conversion Agreement may be amended at any time before or after approval thereof by the limited partners by agreement of the Board of Directors of Lehman/SDI and the other parties to the Conversion Agreement. After any such approval, however, no amendment or waiver may be made that decreases the amount or changes the type of the consideration or that in any way materially and adversely affects the rights of the holders of Interests without the approval of a majority of such holders. 42 Consequences if Conversion is Not Approved If the Conversion is not approved by the limited partners, or if the Conversion is not consummated for any other reason, the Partnership presently intends to continue to operate as an ongoing business in its current form. No other transaction is currently being considered by the Partnership as an alternative to the Conversion, although the Partnership may from time to time explore other alternatives. Failure to consummate the conversion could result in a substantial reduction in income available to B Interests after December 31, 1997, since it is likely that payment of the A Interest Priority Return would be distributed from net income after payment of corporate income taxes. This result could also impede the Partnership's ability to pay the Priority Return after December 31, 1997. For a discussion of proposed revisions to current tax law that may affect the taxation of the Partnership if the Conversion is not approved, see "CERTAIN FEDERAL INCOME TAX CONSEQUENCES -- Partnership Status and Taxation of the Partnership." The following table shows the pro forma results for the three months ended March 31, 1997 and for the year ended December 31, 1996 if the Conversion were not approved and the Partnership were to be taxed as a Corporation (as it will be after December 31, 1997 under current tax law) compared to the Partnership being converted to corporate form in accordance with the terms of the proposed Conversion. For the three months ended March 31, 1997, the Partnership's operations would result in a net loss of $0.031 per existing B Interest if the Partnership were taxed as a corporation compared to net income of $0.044 per existing B Interest if the Partnership were to have converted to corporate form. Of the $0.075 increase in earnings per B Interest in the pro forma results for the Conversion, $0.063 is attributable to the exchange of A Interests for Trust Preferred Securities and cash (and the tax benefits of the deduction of the interest payments on the related Junior Subordinated Debentures) and $0.012 is attributable to retention of the General Partner's Management Fee and respective 1% ownership interests in the Partnership and the Operating Partnership in exchange for the issuance of 4,000,000 shares of Common Stock (before reverse stock split). For the year ended December 31, 1996, the Partnership's operations would result in a net loss of $0.076 per existing B Interest if the Partnership were taxed as a corporation compared with net income of $0.204 per existing B Interest if the Partnership were to have converted to corporate form. Of the $0.28 increase in earnings per B Interest in the pro forma results for the Conversion, $0.232 is attributable to exchange of A Interests for Trust Preferred Securities and cash (and related tax benefits as previously discussed) and $0.048 is attributable to the retention of the General Partner's Management Fee and the exchange of General Partner ownership interests as discussed above. 43
Pro Forma Results (dollars in thousands) Pro Forma Partnership Taxable as a Corporation Pro Forma Corporation ------------------------- ---------------------- Three Months Twelve Months Three Months Twelve Months Ended 3/31/97 Ended 12/31/96 Ended 3/31/97 Ended 12/31/96 Income from Operations $7,437(2) $29,932(1)(2) $ 7,344 $29,562(1) Management Fee 821 3,330 -- -- Interest Expense, Net 1,831 6,875 2,149 8,147 Other Income, Net 159 745 159 745 Distributions on Trust Preferred Securities -- -- (3,057) (12,232) ------ ------- ------- ------- Income Before Taxes 4,944 20,472 2,297 9,928 Income Tax Provision 2,525 9,693 1,173 4,701 ------ ------- ------- ------- Net Income 2,419 10,779 1,124 5,227 General Partner Income Allocations 48 215 -- -- A Interest Priority Return Payments 3,052 12,210 -- -- ------ ------- ------- ------- Net Income (Loss) to Holders of B Interests $ (681) $ (1,646) $ 1,124 $ 5,227 ------ ------- ------- ------- Number of B Interests Outstanding (Before reverse stock split) 21,675,746 21,675,746 25,675,746 25,675,746 Earnings (loss) per B Interest (Before reverse stock split) $ (0.031) $ (0.076) $ 0.044 $ 0.204 ------ ------- ------- -------
- --------------------- (1) Includes non-recurring charges of $5,950 related to restructuring. (2) Excludes amortization costs directly related to purchase accounting on exchange of the minority interest in the Operating Partnership in the amount of $93 for the three months ended March 31, 1997 and $370 for the twelve months ended December 31, 1996. Under current law, tax distributions to B Interest holders would be discontinued after December 31, 1997 even if the Conversion is not approved, because income taxes on the Partnership's income will be paid by the Partnership (rather than the partners) after that date. Failure to consummate the Conversion will result in reduced cash flow, which may inhibit the Partnership's ability to finance adequately future growth by internal expansion or acquisition. The above table shows pro forma net income in corporate form of $1.1 million and $5.2 million to holders of corporate B Interests for the three months ended March 31, 1997 and for the year ended December 31, 1996, respectively, versus a loss of $.7 million and $1.6 million, respectively, to holders of B Interests if the Partnership were taxed as a corporation. If the Conversion is not approved, the General Partner might reconsider other alternatives, including liquidation of the Partnership. In the event of a liquidation, the A Interests would be entitled to a liquidation preference of $10 per Interest. 44 Allocation of Interests in the Conversion As set forth under " -- Determinations of the Special Committee -- Negotiations with the General Partner," the terms of the Trust Preferred Securities and the exchange ratio for the A Interests of 0.38 of a Trust Preferred Security and $1.30 in cash and the number of shares to be allocated to the partners of the General Partner were the product of negotiations between the General Partner and the Special Committee and their respective advisors. These negotiations between the General Partner and the Special Committee took into account the existing economic interests of the General Partner and the limited partners, as well as their respective rights under various provisions of the Partnership Agreement and the Operating Partnership Agreement, including the General Partner's right to receive the Management Fee under the terms of the Operating Partnership Agreement. See "-- Existing Economic Interests of the Partners;" " -- Determinations of the Special Committee." In its deliberations during these negotiations, the Special Committee considered a number of factors affecting the terms of the Trust Preferred Securities, the exchange ratio and amount of cash to be exchanged for the A Interests, and the number of shares of Common Stock to be allocated to the partners of the General Partner, and the Special Committee obtained a fairness opinion from its financial advisor with respect to the terms of the Conversion. For a discussion of the factors considered by the Special Committee during its deliberations, see "-- Determinations of the Special Committee -- Factors Considered by the Special Committee." For a discussion of the fairness opinion of Smith Barney, see "-- Opinion of Smith Barney." The values set forth in the tables below do not fully reflect the negotiating process by which the allocation of interests was determined nor should limited partners rely on them as indicators of the actual values of the Interests or the consideration to be received in respect of Interests in the Conversion. The information has been prepared by the General Partner based on preannouncement market prices, the General Partner's estimated value of the Management Fee and the reference prices determined in the conversion to corporate form alternative. See "-- Alternatives to the Conversion." CALCULATION OF VALUE OF PARTNERSHIP INTERESTS BEFORE CONVERSION
# Interests Investment Type Outstanding Value Per Interest Total Value ($000) % of Total Value --------------- ------------- ------------------ ------------------ ---------------- A Interests 11,099,573 $10.50(1) $116,546 48.2 B Interests 21,675,746 $ 4.35(1) 94,289 39.0 GP Interests 30,921(2) 12.8 -------- ----- TOTAL $241,756 100.0 ======== =====
- --------------------- (1) Average closing market price on the five trading days immediately preceding the public announcement of the terms of the Conversion on December 11, 1996. (2) Estimated value of GP's 1.99% effective equity ownership interest of $4,281,000 based on business enterprise value derived from the pre-announcement market prices of the A and B Interests shown herein, plus the estimated value of the GP's Management Fee of $26,640,000, representing the low end of the estimated value range for the Management Fee proposed by the General Partner to the Special Committee at the commencement of negotiations. The table below shows the value of the total consideration for each type of partnership interest based on the 1997 reference price for each of the A and B Interests as derived in the Conversion alternative. See " -- Alternatives to the Conversion." 45 CALCULATION OF AGGREGATE VALUE OF POST-CONVERSION CONSIDERATION
# Interests Value Per Interest Exchanged Outstanding Former Interest Total Value ($000) % of Total Value ------------------ ------------- --------------- ------------------ ---------------- A Interests 11,099,573(1) $12.08(2) $134,083 45.4 B Interests 21,675,746(3) $ 6.28(4) 136,124 46.1 GP Interests 4,000,000(5) $ 6.28(4) 25,120 8.5 ------- ---- TOTAL $295,327 100.0 ======== =====
- --------------------- (1) The 11,099,573 A Interests will be exchanged for $14,429,445 of cash and 4,217,837 11.6% Trust Preferred Securities having a liquidation preference of $25.00. (2) Based on the 1997 reference price per A Interest derived in the Conversion alternative, plus $1.30 per A Interest in cash to be received in the Conversion. See "-- Alternatives to the Conversion -- Per A Interest." (3) Each B Interest will be exchanged for 0.25 shares of Common Stock. B Interests shown are before 1-for-4 reverse stock split. (4) Based on the 1997 reference price per Class B Interest derived in the Conversion alternative. See "-- Alternatives to the Conversion -- Per B Interest." (5) The general partnership interests will be exchanged for 4,000,000 shares of Common Stock (before giving effect to the 1-for- 4 reverse stock split). The table set forth below compares the percentages of total value allocated to each of the A Interests, B Interests and the general partnership interests pre- and post-Conversion, using the methodologies described above.
% of Total % of Total Interest Exchanged Value Pre-Conversion Value Post-Conversion - ------------------ -------------------- --------------------- A Interests 48.2 45.4 B Interests 39.0 46.1 General Partner Interests 12.8 8.5 ----- ----- 100.0 100.0 ===== =====
Although the percentage of total Partnership value for the A Interests declines in this table, the total value for the A Interests increases from $116,546,000 to $134,083,000. The principal reason for the increase in value for the B Interests is the elimination of the market discount applicable to the B Interests. See "-- Alternatives to the Conversion." The terms of the Conversion were the product of negotiations between the General Partner and the Special Committee and their respective advisors. The negotiations between the General Partner and the Special Committee and the deliberations of the Special Committee are described in more detail in "-- Determinations of the Special Committee." Limited partners are strongly urged to read carefully "-- Factors Considered by the Special Committee" for a discussion of the material factors considered by the Special Committee during its deliberations and "-- Opinion of Smith Barney" for a discussion of Smith Barney's fairness opinion. The consideration paid in 1987 by the General Partner for its interest in the Partnership and the Operating Partnership was a capital contribution of assets of Sun Distributors, Inc. having a stated value of $1,226,364. 46 Distributions and Compensation The following table sets forth the actual amounts of distributions and compensation paid by the Partnership to the General Partner, affiliates of Lehman Brothers and senior management for the Partnership's last three fiscal years and the amounts of distributions and compensation that would have been paid if the Conversion had been in effect during such period.
Amounts that would have been paid if Actual Distributions and Actual Compensation Conversion had been Year Management Fee Paid(1) Paid(2) Total Paid in effect(1)(3) ---- ---------------------- --------- ----------------------- --------------- 1996 $ 9,826,054(4) $1,309,206(3) $11,135,260 $1,360,918 1995 $10,608,167(5) $1,330,719(3) $11,938,886 $1,388,730 1994 $ 7,376,257(6) $1,474,071(3) $ 8,850,328 $1,532,082
- -------------------- (1) Actual amounts include distributions on A Interests and B Interests held by senior management. Amounts that would have been paid are distributions on Trust Preferred Securities to be held by senior management and compensation to senior management. (2) Represents amounts paid to Donald T. Marshall, John P. McDonnell and Norman V. Edmonson as set forth in "MANAGEMENT -- Compensation." (3) The affiliates of Lehman Brothers and senior management will receive Common Stock for their B Interests. The partners of the General Partner will receive Common Stock in place of distributions on the general partnership interests and the Management Fee. No policy has been established with respect to dividends on the Common Stock and therefore no amount for such dividends is included in this column. (4) Represents $511,752 distributed to the General Partner, $3,535,058 distributed to affiliates of Lehman Brothers, $2,449,244 distributed to senior management and $3,330,000 for the Management Fee. (5) Represents $544,780 distributed to the General Partner, $3,977,663 distributed to affiliates of Lehman Brothers, $2,755,724 distributed to senior management and $3,330,000 for the Management Fee. (6) Represents $407,983 distributed to the General Partner, $2,144,209 distributed to affiliates of Lehman Brothers and $1,494,065 distributed to senior management. Limited Partner Litigation On January 16, 1997, a holder of B Interests filed a purported class action in the Delaware Court of Chancery seeking to enjoin the Conversion on the terms proposed as well as an order requiring the defendants to account to the plaintiff and the class for damages and requiring the General Partner or its affiliates to hold the consideration received in trust pending a determination of the amounts properly attributable to the General Partner's interest. Defendants named in the complaint are the Partnership, the Corporation, the General Partner, Lehman/SDI, Lehman Brothers Holdings Inc. and all of the directors of Lehman/SDI. A second complaint containing substantially identical allegations was filed by a limited partner in the Delaware Court of Chancery on February 11, 1997. The cases have been consolidated and an amended complaint was filed on April 16, 1997. Count I of the amended complaint alleges that the transfer of substantial equity to the General Partner to the detriment of the B Interests constitutes a breach of fiduciary duty because (i) the amount of the transfer is an overpayment to gain the General Partner's cooperation in the implementation of the Conversion although the General Partner already deemed the Conversion to be in the best interests of the Partnership and its limited partners; (ii) the approximate aggregate value of the General Partner's percentage interests in the Partnership and the Operating Partnership is estimated to be no greater than between $4.1 million and $5.6 million and the General Partner is not entitled to any additional amount for the Management Fee because it will terminate upon the Conversion and the payment would be in violation of the partnership agreements; (iii) the limited partners had no independent representation in the negotiations and the proposed terms were not the result of arms-length negotiations and were not based on a valid or independent appraisal of the value of the General Partner's interests; (iv) the proxy material (as then on file with the SEC) was misleading because (a) the members of the Special Committee, Messrs. Brewer and Ransome, were not disinterested because, as directors of Lehman/SDI, they owed 47 fiduciary duties to it and its parent, Lehman Brothers; (b) the presentation of the methodology employed by Smith Barney was misleading and confusing; (c) the statement that the Conversion constituted a "change of control" within the meaning of the Officers' Deferred Compensation Plan is false; and (d) the statement that SunSource has had no relationship with Smith Barney is a misrepresentation because Smith Barney acquired a portion of the business of Shearson Lehman Brothers, Lehman Brothers' predecessor, and had sold 175,000 shares as part of the selling group in the underwritten public offering of the Partnership in February 1987. Count II of the amended complaint alleges that the proposed terms constitute a breach of the partnership agreements governing the Partnership and the Operating Partnership because (i) the agreements provide only for the payment of an annual management fee and do not authorize any payments to the General Partner after the management fee is terminated; (ii) the agreements do not provide for payment to the General Partner for the present value of future management services; (iii) the agreements prohibit the payment of additional consideration to the General Partner for its services and cooperation in managing the partnerships except with respect to the management fee; (iv) the distribution of 1,000,000 shares of Common Stock for the General Partner Interest constitutes a material modification of the order and/or method of allocation set forth in the Partnership Agreement without the consent of the public holders of Class B Interests; and (v) the distribution of 1,000,000 shares is in breach of the section which provides that any services rendered to the Partnership shall be on terms that are fair and reasonable to the Partnership because the value of the General Partner's future management fees is zero. Count III alleges that the conduct described in the amended complaint constitutes a breach of the covenant of good faith and fair dealing implied in the SunSource partnership agreement. The amended complaint requests a preliminary and permanent injunction against the solicitation of proxies and other steps in consummating the Conversion or rescission if it is completed, an order that any compensation received by the General Partner or its affiliates be held in constructive trust pending an independent valuation; and compensatory damages. The defendants believe the amended complaint is without merit and intend to vigorously defend the action. Determinations of the Special Committee Appointment of the Special Committee and its Independent Advisors. On June 12, 1996, the Board of Directors of Lehman/SDI appointed the Special Committee to review, evaluate and reach a determination with respect to the fairness of the terms of the Conversion to the limited partners, and to make a recommendation to the Board of Directors with respect to the Conversion. In connection with these instructions, the Special Committee was authorized to take such action it deemed necessary or appropriate, including retaining, at the expense of Lehman/SDI (which expenses are payable by the Partnership and Operating Partnership pursuant to the terms of the Partnership Agreement and the Operating Partnership Agreement), legal counsel and a financial advisor. The Special Committee was also authorized to negotiate and document any agreement with respect to the Conversion or any revisions thereto. The resolution establishing the Special Committee provided that the Special Committee is only advisory in nature and is not authorized or empowered to take any action on behalf of, or binding upon, Lehman/SDI or its Board of Directors regarding the Conversion or otherwise. When it created the Special Committee, the Board of Directors of Lehman/SDI undertook the responsibility of considering the relative merits of the Conversion as compared to any alternative business strategies that might exist for the Partnership or the effect of any alternative transaction in which the Partnership might engage, including the acquisition by one or more third parties of all or any part of the Partnership or its securities. For a discussion of the review of certain alternatives to the Conversion considered by the Board of Directors of Lehman/SDI, see "--Alternatives to the Conversion." Accordingly, the Special Committee was instructed not to consider the effects of any such alternatives and, consistent with the resolution establishing the Special Committee, the Special Committee did not consider the effects of such alternatives in its deliberations. O. Gordon Brewer, Jr. and Ernest L. Ransome, III were appointed to serve on the Special Committee and Mr. Brewer was elected to be the Special Committee's Chairman. Except for their directorship in Lehman/SDI and the Corporation and membership on the Special Committee, the members of the Special Committee are not otherwise affiliated with the Partnership, Operating Partnership, General Partner, Corporation or Lehman/SDI. Between June 12, 1996 and the date hereof, Mr. Brewer beneficially owned 3,000 A Interests and 1,000 B Interests and Mr. Ransome beneficially owned 5,000 A Interests and 5,000 B Interests. As compensation for serving on the Special Committee, Lehman/SDI agreed to pay to each member of the Special Committee a retainer of $10,000 (subsequently increased to $20,000 in January 1997 at the request of the Special Committee) in recognition of the substantial effort and time commitment invested in the Conversion process by the Special Committee, plus a meeting fee of $1,000 per meeting. Lehman/SDI also provided the Special Committee with a letter acknowledging that the members of the Special Committee would be indemnified, and have expenses advanced, under Lehman/SDI's bylaws to the fullest extent permitted under law for any losses or claims arising out of the performance of the Special Committee. 48 On June 24, 1996, the Special Committee selected Dechert Price & Rhoads as its independent legal counsel to advise the Special Committee regarding its fiduciary duties and the legal aspects of the Conversion and any other matters related to fulfilling the purpose of the Special Committee. On July 16, 1996, the Special Committee formally engaged Smith Barney to act as independent financial advisor to the Special Committee and in that capacity, among other things, to (i) assist the Special Committee in its review of the business and operations of the Partnership and the Operating Partnership and their historical and projected financial condition, (ii) assist the Special Committee in its review, evaluation and negotiation of the financial terms and structure of the Conversion and (iii) render an opinion to the Special Committee and to the Board of Directors as to whether (x) the consideration to be received in the Conversion by the holders of A Interests is fair from a financial point of view to such holders, (y) the consideration to be received in the Conversion by the holders of B Interests is fair from a financial point of view to such holders, and (z) the consideration (the "General Partner Consideration") to be received by the General Partner in exchange for the General Partnership Interests (as defined below) is fair from a financial point of view to the holders of A Interests and to the holders of the B Interests, respectively. Due Diligence, Evaluation and Preliminary Analysis of Initial Conversion Proposal. Beginning in July 1996, at the instruction of the Special Committee, Smith Barney and Dechert Price & Rhoads reviewed certain financial and legal information relating to the Partnership and its operations to assist the Special Committee. In addition, representatives of Smith Barney met with the senior management team to discuss the Partnership's business, operations and prospects. On August 8, 1996, the Special Committee received the General Partner's proposal (the "Initial Conversion Proposal"), to convert the Partnership into a corporation. The Initial Conversion Proposal provided for (i) each A Interest to be exchanged for a package of preferred stock and subordinated debt of the Corporation with an aggregate liquidation preference and face value of $10.00 per A Interest and aggregate annual cash distributions of $1.10 per year, (ii) each B Interest to be exchanged for 0.25 share of Common Stock1, and (iii) the General Partner's general partnership interests in and rights under the Partnership and the Operating Partnership (the "General Partnership Interests"), to be exchanged for 2,285,750 shares of Common Stock. The General Partner informed the Special Committee that the number of shares of Common Stock proposed to be exchanged for the General Partnership Interests represented the General Partner's determination of the value of the General Partnership Interests, including the General Partner's percentage interest in each of the Partnership and the Operating Partnership, the value attributable to the General Partner's right to receive the Management Fee pursuant to the terms of the Operating Partnership Agreement, and a "control premium" in addition to the value attributable to the percentage interests and Management Fee. The Initial Conversion Proposal was supplemented on August 16 with a description of the terms of the preferred stock and subordinated debt to be exchanged for the A Interests. On August 26, 1996, the Special Committee met with its financial and legal advisors to preliminarily discuss the Initial Conversion Proposal. Smith Barney discussed with the Special Committee its preliminary views of the financial aspects of the Initial Conversion Proposal. The Special Committee's advisors reported on the status of their review of the Partnership and its operations. After extensive discussion of the terms of the Initial Conversion Proposal, the Special Committee instructed its advisors to arrange for a meeting with representatives of the General Partner and its advisors to express a number of areas of concern to the General Partner, including the likely effect on market liquidity for holders of A Interests resulting from the proposed issuance of multiple classes of securities in exchange for the A Interests. On September 4, 1996, the General Partner modified the Initial Conversion Proposal and provided the Special Committee and its advisors with draft terms for trust preferred securities which were proposed to be exchanged for the A Interests. Each A Interest would be exchanged for 0.40 trust preferred securities, with a liquidation preference of $25.00 (or $10.00 for each A Interest) and cumulative cash distributions of 11% per annum ($1.10 per year for each A Interest). Negotiations with the General Partner. On September 9, 1996, representatives of Smith Barney and Dechert Price & Rhoads met with representatives of the General Partner (including Lehman Brothers and the Partnership's management) and legal counsel to Lehman Brothers. The Special Committee's advisors informed the General Partner that in evaluating the fairness of any exchange of securities for A Interests in the Conversion, the Special Committee would attribute significant weight to the current market price of the A Interests as opposed to their $10 liquidation preference, and that the terms of the Conversion should reflect the taxable nature of the exchange of A - -------- (1) All references to shares of Common Stock reflect the one-for-four reverse stock split implied by the exchange ratio for B Interests in the Conversion. 49 Interests and any elimination of existing economic and other rights currently available to the A Interests. With respect to the proposed consideration for the General Partnership Interests, the General Partner was informed that the Special Committee believed the number of shares of Common Stock proposed to be exchanged for General Partnership Interests substantially overstated the value of the General Partnership Interests. The Special Committee had taken note of certain limitations on the value of the Management Fee, including the limited partners' right under the Partnership Agreement to remove the General Partner by a vote of 80% of the outstanding unaffiliated Interests and the termination of the General Partner's right to receive the Management Fee upon the liquidation of the Partnership. The General Partner was also advised that the Special Committee did not believe that the General Partner was entitled to a "control premium" for the General Partnership Interests (i.e., any value over and above the value attributable to the General Partner's percentage interest in each of the Partnership and the Operating Partnership and the Management Fee), especially in view of the significant Common Stock ownership which Lehman Brothers, its affiliates and management would have in the Corporation after the Conversion and their representation on the Corporation's Board of Directors. Moreover, the Special Committee's legal counsel conveyed the Special Committee's concern with a number of issues relating to the governance of the Corporation after the Conversion, including (i) the potential shift in voting power from the current unaffiliated holders of A Interests and B Interests to Lehman Brothers, its affiliates and management as a result of both the issuance of a significant number of shares of Common Stock in exchange for the General Partnership Interests and the loss of voting rights previously belonging to the A Interests, (ii) the potential for a post-Conversion sale by Lehman Brothers of a control block of Common Stock at a premium not available to all holders of Common Stock generally or otherwise in a manner not in the best interests of all holders, and (iii) the need for a meaningful independent check on any decision by Lehman Brothers or management with respect to any major transaction by the Corporation with change of control implications occurring shortly after the Conversion, particularly given the substantial equity to be received by the General Partner in exchange for the General Partnership Interests, and Lehman Brothers' expression of interest in possibly liquidating some or all of its Common Stock holdings after the Conversion. For a discussion of the Special Committee's consideration of these corporate governance issues and the provisions negotiated by the Special Committee, see "-- Certain Corporate Governance Matters" below. From September 10-17, 1996, representatives of Lehman Brothers and Smith Barney had a number of discussions regarding the value and terms of the proposed trust preferred securities. Lehman Brothers indicated that, in response to the Special Committee's concerns, the General Partner was prepared to increase the annual yield on the proposed securities to 11.8%, resulting in the holders of A Interests receiving cash distributions of $1.18 per annum with respect to the trust preferred securities received in exchange for each A Interest. During the same period, counsel to the Special Committee and Lehman Brothers discussed the corporate governance issues raised by the Special Committee. On September 17 and 18, 1996, the Special Committee met telephonically and in person with its legal counsel and financial advisors to consider the revisions to the Conversion proposal. The Special Committee received a report from its advisors regarding the September 9 meeting and reviewed with them the revised Conversion proposal. The Special Committee identified as its major areas of concern (i) the value of the trust preferred securities, (ii) the taxable nature of the Conversion to holders of the A Interests, (iii) the differences between the trust preferred securities and the A Interests, including the Corporation's right to call the trust preferred securities at par after five years or at any time upon the occurrence of a Tax Event, and the Corporation's ability to defer payments on the trust preferred securities at any time or from time to time for up to 60 consecutive months, (iv) the number of shares of Common Stock proposed to be issued with respect to the General Partnership Interests, and (v) the need for certain corporate governance provisions for the benefit of unaffiliated holders of Common Stock given the Special Committee's concerns in this area noted above. On October 22, 1996, the General Partner presented the Special Committee with a new set of proposed terms for the Conversion (the "Second Conversion Proposal"). The Second Conversion Proposal provided for (i) each A Interest to be exchanged for (a) 0.38 of an 11.6% Trust Preferred Security with a liquidation amount of $25.00 (or $9.50 per A Interest), callable at par in five years, and (b) $1.00 in cash, (ii) each B Interest to be exchanged for 0.25 share of Common Stock, and (iii) the General Partnership Interests to be exchanged for an aggregate of 1,375,000 shares of Common Stock, 1,000,000 shares of which would be received by the General Partner upon consummation of the Conversion, and the remaining 375,000 shares of which would be received by the General Partner in 125,000 share installments on the first three anniversaries of the Conversion, provided that if there were accrued and unpaid distributions on the Trust Preferred Securities on such dates, such shares would not be received by the General Partner until such distributions had been paid. The Second Conversion Proposal also contained a restriction on the ability of Lehman Brothers and management to vote or transfer the shares of Common Stock which they received in exchange for the General Partnership Interests, although such restrictions did not apply to Common Stock received by them with respect to their B Interests. In response to the Special Committee's concerns regarding the dominant influence of certain stockholders after the Conversion, the Second Conversion Proposal also provided for the Corporation's Board of Directors to consist of nine directors, up to two designated by Lehman Brothers and its affiliates, three from management and four independent directors (the "Independent Directors"). 50 On October 23 and 24, 1996, the Special Committee met telephonically and in person with its financial and legal advisors to discuss the Second Conversion Proposal. At these meetings the Special Committee determined to advise the General Partner that the Second Conversion Proposal did not adequately compensate holders of the A Interests and that the 1,375,000 shares of Common Stock proposed to be exchanged for the General Partnership Interests was not acceptable to the Special Committee. The Special Committee discussed with its advisors various alternative structures regarding the timing of the issuance of Common Stock for the General Partnership Interests, including the possibility of issuing a smaller number of shares without any vesting requirements, or linking a portion of the shares to a contingent vesting schedule based on the financial performance of the Corporation after the Conversion. As to the corporate governance aspects of the Second Conversion Proposal, the Special Committee determined to continue negotiating for additional provisions protecting minority, unaffiliated stockholders, including as to voting and resale restrictions on Lehman Brothers' and management's Common Stock, and a provision requiring approval of a majority of the Independent Directors for some period of time following the Conversion with respect to certain types of transactions. Later on October 24, the Special Committee and its advisors met with Lehman Brothers, management, and counsel to Lehman Brothers and the Partnership to further negotiate the terms of the Second Conversion Proposal. The parties were unable to reach an agreement with respect to the number of shares comprising the General Partner Consideration, although they did reach agreement on the $1.30 cash payment to be included as part of the consideration for the A Interests and the nature of the restrictions on the voting power of Lehman Brothers and management after the Conversion. See "--Factors Considered by the Special Committee -- Certain Corporate Governance Matters" and "DESCRIPTION OF CAPITAL STOCK -- Stockholders Agreement." During the next three weeks, the Special Committee's advisors continued to discuss the General Partner Consideration, the terms of any vesting of contingent shares and further refinements to the corporate governance provisions with the General Partner and its counsel, including the prohibition on certain resales of Common Stock by Lehman Brothers and certain senior members of management, and the requirement of Independent Director approval of certain types of transactions after the Conversion. See "--Factors Considered by the Special Committee -- Certain Corporate Governance Matters" and "DESCRIPTION OF CAPITAL STOCK -- Stockholders Agreement." On November 15, 1996, the Special Committee met with Mr. Donald T. Marshall, the Partnership's Chairman and Chief Executive Officer. Mr. Marshall proposed various vesting alternatives and performance targets which resulted in a maximum of 1,125,000 shares being paid out for the General Partnership Interests if all such performance targets were met. The parties were unable to reach agreement on the number of shares or performance targets. During telephonic meetings on November 7, 14, 15, 18 and 25 and December 3, the Special Committee continued to examine with its advisors the terms of the Conversion. The Special Committee concluded that it was unlikely that the Special Committee and the General Partner would be able to reach agreement on the appropriate performance vesting targets and determined to drop its request for vesting based on performance targets in exchange for a reduction in the aggregate number of shares to be paid for the General Partnership Interests. During November and the first week of December 1996, the Special Committee and its advisors had a series of discussions with Lehman Brothers, management, counsel to Lehman Brothers and counsel to the Partnership regarding the resolution of the remaining issues on the proposal, including the agreement that 1,000,000 shares of Common Stock be exchanged for the General Partnership Interests. On December 4, 1996, during a telephone conference among the members of the Special Committee, Lehman Brothers, Mr. Marshall and Mr. Edmonson, the parties agreed upon a premium of 101% of liquidation value upon a Tax Event redemption of the Trust Preferred Securities and a two year vesting requirement for 75,000 shares of the Common Stock to be exchanged for the General Partnership Interests. At the Special Committee's request, the General Partner clarified that the three most senior members of management (Messrs. Marshall, Edmonson and McDonnell) would agree to waive any right to receive accelerated payments under the change in control provisions of the Partnership's deferred compensation plans. See "MANAGEMENT -- Change in Control Arrangements." On December 9, 1996, the Special Committee received the final draft of the summary terms of the Conversion proposal (the "Term Sheet") from the General Partner reflecting the terms agreed upon. 51 Initial Determination to Recommend the Conversion, Fairness Opinion. On December 2, 1996, and again on December 10, 1996, the Special Committee met with Smith Barney and Dechert Price & Rhoads for a comprehensive review of the terms of the Conversion proposal. At both meetings, Smith Barney made a presentation to the Special Committee regarding the fairness of the consideration to be received in the Conversion from a financial point of view to the holders of the A Interests and the B Interests, respectively, and the fairness from a financial point of view of the General Partner Consideration to the holders of the A Interests and the B Interests, respectively. At the December 10 meeting, Smith Barney, upon the Special Committee's request, rendered a written fairness opinion, dated December 10, 1996. Upon receipt of Smith Barney's written fairness opinion, the Special Committee unanimously determined to recommend to the Board of Directors of Lehman/SDI that, as of such date, (i) the terms of the Conversion set forth on the Term Sheet were (x) fair to the holders of the A Interests and (y) fair to the holders of the B Interests, and (ii) the consideration to be received in the Conversion by the holders of the general and limited partnership interests in the General Partner (the "General Partner Consideration") in exchange for their general and limited partnership interests in the General Partner was fair to the holders of the A Interests and the holders of the B Interests, respectively. The Special Committee's recommendation was subject to its review of, and satisfaction with, the definitive documentation effecting the Conversion and to its receipt of an updated written fairness opinion of Smith Barney, in form and substance satisfactory to the Special Committee, after such definitive documentation had been completed. On December 11, 1996, the Special Committee and its financial and legal advisors met with the Board of Directors of Lehman/SDI and advised the Board of Directors of Lehman/SDI that the Special Committee had reviewed the proposed terms of the Conversion set forth on the Term Sheet submitted to it by the General Partner and that at the Special Committee meeting held the previous afternoon, the Special Committee had received a written fairness opinion dated December 10, 1996 from Smith Barney and the Special Committee delivered to the Board of Directors of Lehman/SDI a letter of recommendation as described above with respect to the proposed terms of the Conversion. The Special Committee and Smith Barney advised the Board of Directors of Lehman/SDI that their analyses did not include any effects of the restructuring charge related to the Partnership's Technology Services divisions and Glass Merchandising business, which was finalized and announced later that day. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Results of Operations -- Restructuring Charges." The Special Committee informed the Board of Directors of Lehman/SDI that, when it convened to review the final documentation of the Conversion prior to the mailing of the Proxy Statement/Prospectus, it and Smith Barney would include the effects, if any, of such restructuring charge in any updated recommendations by the Special Committee or fairness opinions rendered by Smith Barney. The Board of Directors then considered the recommendation of the Special Committee and unanimously approved the proposed terms of the Conversion. On December 11, 1996, the Partnership issued press releases announcing the Conversion and the restructuring. On June 19, 1997, the Special Committee met with its financial and legal advisors to review the terms of the Conversion as described herein. At this meeting, Smith Barney reviewed with the Special Committee the effects of the previously announced restructuring charge, the Partnership's recent operating results, the Partnership's most recent financial projections and forecasts, and the terms of the Conversion. Smith Barney made a presentation to the Special Committee updating its analysis of the fairness from a financial point of view of the consideration to be received in the Conversion by the holders of the A Interests and the B Interests, respectively, and the fairness from a financial point of view of the General Partner Consideration to the holders of the A Interests and the B Interests, respectively. Smith Barney rendered a written fairness opinion, dated June 19, 1997, to the effect that, as of such date based upon and subject to certain matters stated therein, (i) the consideration to be received in the Conversion by the holders of A Interests is fair, from a financial point of view to such holders, (ii) the consideration to be received in the Conversion by the holders of B Interests is fair, from a financial point of view to such holders, and (iii) the General Partner Consideration to be received in the Conversion is fair from a financial point of view to the holders of A Interests and to the holders of B Interests, respectively. See "SPECIAL FACTORS -- Opinion of Smith Barney." Upon receipt of Smith Barney's written fairness opinion, the Special Committee unanimously determined to reaffirm its recommendation to the Board of Directors of Lehman/SDI that, as of such date, (i) the terms of the Conversion were (x) fair to the holders of A Interests and (y) fair to the holders of B Interests, and (ii) the General Partner Consideration was fair to the holders of the A Interests and the holders of the B Interests, respectively. Consistent with its instructions from the Board of Directors of Lehman/SDI (which undertook the responsibility of considering alternatives to the Conversion), the Special 52 Committee noted that it had not considered the relative merits of the Conversion as compared to any alternative business strategies that might exist for the Partnership or the effect of any alternative transaction in which the Partnership might engage, including the acquisition by one or more third parties of all or any part of the Partnership or its securities or the liquidation of the Partnership. For a discussion of the review of certain alternatives to the Conversion considered by the Board of Directors of Lehman/SDI, see "-- Alternatives to the Conversion." For a discussion of the scope of the Special Committee's authority, see "Determinations of the Special Committee-- Appointment of the Special Committee and its Independent Advisors." The Special Committee then delivered to the Board of Directors of Lehman/SDI a letter of recommendation as described above with respect to the Conversion. The Special Committee was aware of recent legislative attempts to amend existing federal income tax law affecting securities such as the Trust Preferred Securities and publicly traded limited partnerships such as the Partnership and advised the Board of Directors of Lehman/SDI that its recommendation was based upon existing tax laws. For a discussion of possible tax law changes that may affect the Trust Preferred Securities or the taxation of the Partnership, see "CERTAIN FEDERAL INCOME TAX CONSEQUENCES -- Partnership Status and Taxation of the Partnership." Management Projections A description of the projections provided by management to the Special Committee and its advisors and to prospective lenders is included as Exhibit D to this Proxy Statement/Prospectus. The projections provided to the Special Committee and its advisors are filed as exhibits to the Schedule 13E-3 filed with the SEC in connection with the Conversion. Factors Considered by Special Committee In reaching its recommendations, the Special Committee considered a number of factors. The Special Committee's recommendations were made after considering all of the factors as a whole with respect to each such recommendation, and were not based on any single factor. In making its recommendations, the members of the Special Committee exercised their independent business judgment assisted by their independent financial and legal advisors. The material factors considered by the Special Committee included the following: o Fairness Opinion and Related Presentations. The Special Committee reviewed, considered and analyzed information provided by the Partnership and its advisors during various meetings and telephone conferences, including the information as to the historical and forecasted financial performance of the Partnership and the Corporation (including the restructuring charge announced by the Partnership in December 1996) and the pro forma effects of the Conversion, the information and analyses relating to the Partnership and the Corporation (including their respective values as going concerns), the A Interests, the B Interests, the General Partnership Interests (including the Management Fee), the Trust Preferred Securities and the Common Stock, and the terms and conditions of the Trust Preferred Securities and the corporate governance arrangements. In reaching its determination as to the fairness of the Conversion to each of the A Interests and the B Interests, the Special Committee placed particular weight on the fairness opinion rendered by Smith Barney. In reviewing Smith Barney's fairness opinion, the Special Committee was aware that Smith Barney was relying, among other things, on operating projections prepared by management which are described in Exhibit D to the Proxy Statement/Prospectus. As described in Exhibit D, the Partnership instructed the Special Committee and its advisors not to use in their analyses certain refinancing projections prepared by the Partnership for prospective lenders in connection with the Conversion. See Exhibit D and "SPECIAL FACTORS -- Opinion of Smith Barney." o Trading Volumes and Market Prices. The Special Committee considered (i) the relatively low trading volumes of the A Interests and the B Interests, (ii) the relatively narrow trading ranges of $10 1/4 to $11 3/4 for the A Interests and $4 to $5 1/8 for the B Interests between January 1, 1995 and December 9, 1996, (iii) the absence of a trading market for the Trust Preferred Securities and Common Stock at the time of the Special Committee's recommendation, and (iv) the reverse stock split implied by the exchange ratio of B Interests for Common Stock. The closing sales prices of the A Interests and B Interests on December 9, 1996, were $10 1/2 and $4 3/8, respectively. For more information regarding the trading ranges and market prices of the A Interests and the B Interests, see "MARKET PRICES AND DISTRIBUTIONS." As to the matters noted in (i) and (ii) above, the Special Committee recognized that the Conversion will benefit the holders of Trust Preferred Securities and Common Stock to the extent the Conversion expands the potential investor base for the Corporation's securities. See "-- Reasons to Convert to 53 Corporate Form." As to the matter noted in (ii) above, the Special Committee considered the presentations and analyses of Smith Barney and its fairness opinion. See "- - Opinion of Smith Barney." In assessing the fairness of the consideration to be received by the holders of the A Interests in the Conversion, the Special Committee attributed significant weight to the market price of the A Interests prior to the public announcement of the proposed terms of the Conversion (which was $10 1/2 at December 9, 1996; see "MARKET PRICES AND DISTRIBUTIONS") as opposed to their liquidation value of $10.00 per Interest. As to the matter noted in (iii) above, the Special Committee recognized, and discussed with its financial advisor, the possibility of short-term selling pressure on the Trust Preferred Securities and Common Stock as a result of the change in the form of investment for holders of the A Interests and B Interests. The Special Committee was also aware that there could be downward pressure on the market price of the Common Stock after the Conversion to the extent Lehman Brothers or management take steps to sell any of their Common Stock holdings. See "RESALE OF SECURITIES -- Resales by Lehman Brothers and Management." As to the matters noted in (iii) and (iv) above, the Special Committee consulted with Smith Barney with respect to the level of market acceptance of the Trust Preferred Securities and Common Stock. However, Smith Barney's fairness opinion did not express any opinion as to what the value of the Trust Preferred Securities or the Common Stock actually will be when issued to holders of A Interests and B Interests, or the prices at which the Trust Preferred Securities or Common Stock will trade subsequent to the Conversion. See "-- Opinion of Smith Barney." The Special Committee noted that the Trust Preferred Securities and Common Stock will be new securities. See "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Risks to Holders of A Interests -- Uncertainty Regarding Market Price for Trust Preferred Securities" and " -- Risks to Holders of B Interests -- Uncertainty Regarding Market Price of Common Stock; Possible Reduction Due to Sales by Lehman Brothers." In addition, Smith Barney advised the Special Committee that the valuation of the Trust Preferred Securities was further complicated by the limited number of Trust Preferred Securities of issuers of generally comparable credit quality. As to the matter noted in (iv) above, the Special Committee noted that the General Partner had structured the reverse stock split implied by the exchange ratio in the Conversion with respect to the B Interests because it believes the current trading prices for the B Interests ($4 3/8 at December 9, 1996; see also "MARKET PRICES AND DISTRIBUTIONS") reduce the attractiveness of the Corporation's equity securities to the financial community and the investing public. After consultation with Smith Barney, the Special Committee determined this stated reason was reasonable and credible. See "SUMMARY -- Reverse Stock Split." o General Partner's Reasons to Convert to Corporate Form. The Special Committee considered the reasons expressed by the General Partner in support of the Conversion. See "-- Reasons to Convert to Corporate Form." The Special Committee consulted with its financial and legal advisors to assess the validity of these reasons and determined that they were reasonable and credible. o Maintain Current Annual Distributions to Holders of A Interests. The Special Committee recognized that holders of the Trust Preferred Securities would receive distributions of $2.90 per annum for each Trust Preferred Security, which equates to the Priority Return paid of $1.10 per annum on each A Interest after giving effect to the exchange ratio of Trust Preferred Securities for A Interests. The Special Committee believed that maintaining the aggregate annual amount of distributions payable was a benefit to the holders of the A Interests. o Differences Between A Interests and Trust Preferred Securities. In evaluating the Trust Preferred Securities, the Special Committee, considered the various differences between the A Interests and the Trust Preferred Securities. These differences included, among others: (i) the Corporation's ability to defer interest payments on the Junior Subordinated Debentures with respect to the Trust Preferred Securities at any time or from time to time for a period up to 60 consecutive months, in which case no distributions will be paid on the Trust Preferred Securities although holders of Trust Preferred Securities will still be required to accrue original issue discount income with respect to the unpaid distributions on the Trust Preferred Securities (see "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER CONSIDERATIONS -- Risks to Holders of A Interests -- Option to Extend Interest Payment Period; Tax Impact of Extension"); (ii) the subordination of the Management Fee to the Priority Return on A Interests; (iii) the Corporation's ability to redeem at par the Junior Subordinated Debentures on or after September 30, 2002; (iv) the Corporation's ability to cause the Trust Preferred Securities to be redeemed at 101% of their liquidation preference during the first five years upon the occurrence of a Tax Event if certain conditions are met (see "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER CONSIDERATIONS -- Risks to Holders of A Interests -- Special Event Redemption or Distribution; Shortening of Stated Maturity;" (v) that holders of A Interests are entitled under the terms of the Partnership Agreement to receive in liquidation, after the satisfaction of all liabilities of the Partnership, an amount equal to their capital account ($10.00), whereas holders of Trust Preferred Securities will receive in liquidation, after satisfaction of all liabilities of the Trust, the equivalent of $9.50 for each A Interest previously held; and (vi) the loss of certain rights associated with the ownership of A Interests, such as voting rights, rights to remove the General Partner, rights to compel dissolution and duration of the holder's investment (see "COMPARISON OF INTERESTS AND SECURITIES TO BE ISSUED"). 54 As to the matters noted in (i) and (ii) above, the Special Committee discussed with its advisors the credit quality of the Junior Subordinated Debentures and Trust Preferred Securities and the prospective terms of the refinancing, including the circumstances under which the lenders could block payment of the Junior Subordinated Debentures (see "-- Source and Amount of Funds"). The Special Committee viewed as a negative factor the Corporation's right, for any reason or no reason, to defer payments on the Junior Subordinated Debentures. Also, the Special Committee considered that the monetization of the General Partner's interest in the Management Fee is a negative factor for the holders of the Trust Preferred Securities to the extent it would eliminate to some degree the discipline afforded by the subordination feature of the Management Fee to keep current any due payments on the Trust Preferred Securities. However, the unfettered deferral right and the absence of an effective Management Fee subordination feature were viewed as counterbalanced to some extent by (a) the adverse consequences any unpaid distributions on the Trust Preferred Securities would have on the Corporation and the market value of the Common Stock and the Trust Preferred Securities, (b) the fact that interest would accrue on such unpaid distributions at a rate of 11.6% per annum compounded monthly, and (c) the two-year escrow for some of the shares of Common Stock to be issued to senior management of the Corporation in exchange for the General Partnership Interests, with payment of such shares being contingent on prior payment of all distributions due on the Trust Preferred Securities. See "SUMMARY -- Overview of the Conversion." As to the matters noted in (iii) above, the Special Committee discussed with Smith Barney its view of the effect of the optional redemption feature of the Junior Subordinated Debentures including its effect on the trading yield of the Trust Preferred Securities. See "-- Opinion of Smith Barney -- Valuation of the A Consideration." As to the matters noted in (iv) above, the Special Committee discussed with its advisors the possibility of changes in federal tax law which might give rise to a Tax Event redemption. The Special Committee believed that any risk of a Tax Event redemption was mitigated by the redemption price of $25.25 per Trust Preferred Security (101% of liquidation value) negotiated by the Special Committee and the provisions of the Indenture restricting such Tax Event redemptions to circumstances where shortening the maturity of the Junior Subordinated Debentures does not preserve the tax deductibility of interest payments on the Junior Subordinated Debentures, as well as the other benefits of the Conversion to the holders of the A Interests, including the maintenance of a level of income distributions on the Trust Preferred Securities equivalent to the Priority Return, the $1.30 cash consideration, the conservation of the Corporation's cash resulting from the retention of the Management Fee and the tax deductibility of the interest on Junior Subordinated Debentures, and the simplified tax reporting for investors in the Corporation. The Special Committee considered and discussed with its advisors the possibility of a change in federal tax law affecting securities similar to the Junior Subordinated Debentures or the Trust Preferred Securities. See "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Risks to Holders of A Interests -- Special Event Redemption or Distribution; Shortening of Stated Maturity." The Special Committee's recommendation as to the fairness of the Conversion was based upon existing tax laws. For a discussion of possible tax law changes that may affect the taxation of the Trust Preferred Securities, see "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Risks to Holders of A Interests -- Special Event Redemption or Distribution; Shortening of Stated Maturity." It is a condition to the effectiveness of the Conversion that no tax legislation be pending or in effect which would adversely affect the tax consequences of the Trust Preferred Securities, although there can be no assurance that a Tax Event will not occur after the Conversion is completed. As to the matters noted in (v) above, the Special Committee believed that the difference in liquidation value between the A Interests and the Trust Preferred Securities was adequately compensated for by the 11.6% distribution rate of the Trust Preferred Securities (as opposed to the 11.0% annual distribution rate on the A Interests), which higher rate equates to the $1.10 per annum distribution currently received by holders of A Interests, and the $1.30 in cash to be received with respect to each A Interest in the Conversion. As to the matters noted in (vi) above, the Special Committee viewed the loss of such voting and other rights as negative factors. However, the Special Committee noted that both the A Interests and Trust Preferred Securities are principally yield-oriented preferred securities (with fixed rates of distribution and the right to participate in liquidating distributions to the extent of their liquidation preference) with attributes similar to preferred stock, as opposed to common stock or similar equity securities and, after consultation with its financial and legal advisors, the Special Committee concluded that, on balance, the loss of such voting and other rights was outweighed by the benefits of the Conversion to the holders of the A Interests discussed herein (including the 11.6% distribution rate and $1.30 in cash referred to above). 55 o Certain Federal Income Tax Consequences of the Conversion. The Special Committee considered the applicable federal income tax consequences of the Conversion to the Partnership and to the Corporation and the holders of A Interests and B Interests, including the tax consequences noted below: o Tax Advantages to Corporation of Trust Preferred Securities. The Special Committee considered the tax benefits to the Corporation of the issuance of the Trust Preferred Securities and the deductibility of interest on the Junior Subordinated Debentures. See "-- Reasons to Convert to Corporate Form -- Tax Consequences." The Special Committee's recommendation as to the fairness of the Conversion was based upon existing tax laws. For a discussion of possible tax law changes that may affect the taxation of the Trust Preferred Securities, see "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Risks to Holders of A Interests -- Special Event Redemption or Distribution; Shortening of Stated Maturity." o Corporate Level Tax. The Special Committee considered as a negative factor the loss of the potential future tax benefits associated with operating in partnership form, including primarily the right to have Partnership income subject to only one level of federal income taxation. See "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Risks to Holders of B Interests -- Adverse Tax Implications." In addition, the Special Committee considered the loss of the Partnership's favorable tax status for the period from the date of consummation of the Conversion until December 31, 1997. The Special Committee was aware of recent attempts to amend existing federal income tax laws to permit certain publicly traded partnerships, such as the Partnership, to continue to be taxed as partnerships after December 31, 1997 under certain circumstances. The Special Committee's recommendation as to the fairness of the Conversion was based upon existing tax laws. There can be no assurance that future changes in tax law would not materially affect the Partnership, the Corporation or their securities or security holders. For a discussion of possible tax law changes that may affect the Partnership, see "CERTAIN FEDERAL INCOME TAX CONSEQUENCES -- Partnership Status and Taxation of the Partnership." o Exchange of A Interests for Trust Preferred Securities and Cash is Taxable. The Special Committee considered the potential tax consequences of the Conversion to holders of A Interests. The Special Committee negotiated the cash portion of the consideration to be exchanged for the A Interests in the Conversion in part to provide that the holders of the A Interests would be compensated for, and have the liquidity to pay, income tax which may be incurred by them as a result of the Conversion. In connection with its consideration of the tax position of holders of A Interests, the Special Committee discussed with its advisors and the General Partner the historical trading prices and volumes of the A Interests, as well as certain tax basis estimates prepared by management. However, the Special Committee realized that it could not determine precisely the financial impact of those federal income tax consequences of the Conversion because the tax basis of each holder of A Interests in his or her A Interests may be different and tax rates vary depending on the circumstances and tax status of each holder. Furthermore, in assessing the tax consequences the Special Committee recognized that the taxes imposed on any gain recognized as a result of the Conversion essentially represent an acceleration of the tax gain which a holder of an A Interest would incur when such holder sold his or her A Interests in the future. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES -- Certain Tax Consequences of the Conversion to Holders of A Interests." The Special Committee also considered the likely income tax consequences of the Conversion to holders of A Interests and B Interests together. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES -- General Tax Treatment of the Conversion." o Termination of Tax Distributions on B Interests. The Special Committee considered the termination of the B Tax Distribution as a consequence of the Conversion, and the Corporation's current intention regarding the payment of cash dividends on the Common Stock. The Special Committee noted that the purpose of the B Tax Distribution was to provide holders of the B Interests with the cash required to pay income taxes on the Partnership's taxable income which is allocable and taxable to holders of the B Interests. The Special Committee believed that termination of the B Tax Distribution is mitigated by the fact that holders of Common Stock generally will be taxed only on distributions of money or other property received from the Corporation and not on their allocable share of the Corporation's taxable income. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES -- Certain Tax Consequences of the Conversion to Holders of the B Interests." The Special Committee also compared the B Tax Distribution, which is made at the rate of 49.5% of the taxable income allocated to the B Interests, with the 56 Corporation's estimate of federal, state and local income taxes payable on its taxable income at the effective rate of approximately 40%. The Special Committee was aware that applicable tax rates vary depending upon the individual circumstances and tax status of each holder. The Special Committee viewed as a negative factor the possibility that the B Tax Distribution was a cash resource to B Interest holders to the extent of its monthly payout feature, particularly for certain holders of B Interests with respect to the portion of the B Tax Distribution which exceeded the holders' federal, state and local income taxes on their allocable portion of the taxable income of the Partnership. However, the Special Committee considered that this factor was mitigated by the increased cash flow to the Corporation from this aspect of the Conversion, which in the Special Committee's view benefits both the A Interests and the B Interests, and that, on balance, the loss of the B Tax Distribution was outweighed by the benefits of the Conversion to the holders of the B Interests, including the expansion of the potential investor base for the Common Stock, the conservation of the Corporation's cash resulting from the retention of the Management Fee and the tax deductibility of interest on the Junior Subordinated Debentures, the Corporation's potential for better access to equity markets and the potential use of the Common Stock as an acquisition currency, the simplified tax reporting for investors in the Corporation, and the restrictions on Lehman Brothers' and management's voting power and ability to resell shares under the Stockholders' Agreement. o Possible Reduction in Fiduciary Duties. The Special Committee considered the elimination of the fiduciary duties owed to the limited partners by the General Partner, the nature of the fiduciary duties owed to the holders of Common Stock and Trust Preferred Securities, and the absence generally of fiduciary duties of the directors of the Corporation to the Trust holding the Junior Subordinated Debentures or the holders of the Trust Preferred Securities. See "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Risks to Holders of B Interests -- Possible Reduction in Fiduciary Standards." The Special Committee believed the change in the scope of the fiduciary duties owed to the former limited partners, especially with respect to the A Interests exchanged for Trust Preferred Securities, to be a negative factor, mitigated to some extent because the Special Committee viewed the A Interests as principally yield-oriented securities. o Certain Effects of the Conversion. The Special Committee also considered the pro forma effects of the Conversion (including the transaction costs associated with the Conversion and the Corporation's pro forma negative stockholders' equity). See "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Risks to Holders of A Interests -- Transaction Costs" and "-- Risks to Holders of B Interests -- Transaction Costs" For a discussion of the pro forma effects of the Conversion, see the pro forma financial statements included in "INDEX TO FINANCIAL STATEMENTS." The Special Committee noted that after giving effect to the Conversion, the Corporation would have pro forma negative stockholders' equity and the Common Stock would have a pro forma negative book value per share, resulting primarily from the exchange of Trust Preferred Securities for the A Interests. The Special Committee did not consider this to be a significant negative factor, because the accounting measures of stockholders' equity and net book value per share of Common Stock (in the case of the Corporation) or per partnership interest (in the case of the Partnership) were not viewed by Smith Barney as primary determinants of value for ongoing industrial concerns like the Corporation or the Partnership. The Special Committee also considered the effects of the foregoing pro forma computations with respect to the Corporation's ability to legally pay dividends or other distributions on the Trust Preferred Securities and the Common Stock. For a discussion of these restrictions, see "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Risk Factors Applicable to Holders of B Interests -- Certain Delaware Corporate Law Considerations." The Special Committee was aware that, as a result of the Conversion, holders of the A Interests and the B Interests would no longer have a contractual right to receive the Priority Return and the B Tax Distribution. See "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Risks Applicable to Holders of A Interests and B Interests -- Loss of Contractual Right to Distributions." The Special Committee was also aware that the shares of Common Stock issued in the Conversion may be diluted by additional issuances, which may be more likely as a result of the Conversion. See "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Risks to Holders of B Interests -- Future Dilution of Common Stock." o Benefits to General Partner of Conversion. In evaluating the fairness to the holders of the A Interests and the B Interests of the allocation of the number of shares of Common Stock to be issued with respect to the General Partnership Interests and the effects of the Conversion, the Special Committee considered and discussed with its financial and legal advisors a number of factors benefiting the partners of the General Partner, including: (i) the elimination 57 of the partners of the General Partner's liability for obligations of the Partnership and Operating Partnership (see "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Risks to Holders of A Interests -- Elimination of General Partner Liability for Corporation Obligations" and " -- Risks to Holders of B Interests -- Elimination of General Partner Liability for Corporation Obligations"); (ii) the ability of the partners of the General Partner to convert their illiquid General Partnership Interests into a liquid security, thereby facilitating the possible sale by the former general and limited partners of some or all of their Common Stock in the Corporation, and the value to Lehman Brothers and management of the registration rights they will receive pursuant to the Registration Rights Agreement; (iii) the value to the partners of the General Partner of monetizing the Management Fee and receiving most of their shares of Common Stock immediately upon consummation of the Conversion; (iv) the potential for the General Partner to treat as capital gain income some or all of the income realized by them as a result of the exchange of the General Partnership Interests for shares of Common Stock; and (v) the acceleration of benefits under the Operating Partnership's deferred compensation plans due to certain limited partners of the General Partner (although the Special Committee viewed as a mitigating factor the waiver of such acceleration by the three most senior members of the Partnership's management.) See "MANAGEMENT -- Change in Control Arrangements." o Valuation of General Partnership Interest. In evaluating the fairness to the holders of the A Interests and the B Interests of the number of shares of Common Stock to be issued with respect to the General Partnership Interests, the Special Committee considered and discussed with its financial and legal advisors a number of factors, including: (i) the value of the General Partner's 1% percentage interest in the capital and income of the Partnership; (ii) the value of the General Partner's 1% percentage interest in the capital and income of the Operating Partnership; (iii) the present value of the General Partner's right to receive the Management Fee pursuant to the terms of the Operating Partnership Agreement; (iv) the value to the Partnership of the services provided by the General Partner with respect to the Management Fee; (v) the subordination of the Management Fee to the liabilities and obligations of the Operating Partnership and Partnership and to the Priority Return on the A Interests and the B Tax Distribution on the B Interests; (vi) the potential termination of the Management Fee upon the liquidation of the Partnership; (vii) the potential removal of the General Partner by a vote of 80% of the Interests owned by unaffiliated limited partners, voting as a single class, which would result in the payment to the General Partner of 1.01% of the aggregate fair market value of the A Interests and the B Interests (with no additional payment with respect to the Management Fee); (viii) the potential for all or a portion of the Management Fee to be deductible to the Corporation for income tax purposes after the Conversion if the Corporation and the General Partner entered into a management agreement providing for the continuation of the Management Fee on the same terms and conditions presently applicable; and (ix) the value of the A Interests and B Interests prior to the Conversion, including the going concern value of the Partnership, and the value of the shares of Common Stock after the Conversion, including the going concern value of the Corporation. In addition, the Special Committee considered certain benefits to the General Partner arising out of the Conversion discussed under "--Benefits to General Partner of Conversion" above. As to the matters noted above generally, the Special Committee considered, and placed particular weight on, the presentations and analyses of Smith Barney and its fairness opinion. See "-- Opinion of Smith Barney." As to the matters noted in (vi) and (vii) above, the Special Committee observed that, although the Partnership Agreement and the Operating Partnership Agreement essentially provided for no payment to the General Partner attributable to the General Partner's right to receive the Management Fee upon liquidation or removal of the General Partner, the Conversion was neither a liquidation nor a removal of the General Partner. The Special Committee recognized that the Board of Directors of Lehman/SDI had considered and rejected the alternative of liquidation at this time, and liquidation would likely be an unattractive option in corporate form because of the two levels of income taxation applicable to corporate liquidations. See "-- Alternatives to the Conversion" and "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Risks to Holders of A Interests -- Adverse Tax Implications" and "-- Risks to Holders of B Interests -- Adverse Tax Implications" In addition, the Special Committee recognized that the right of the unaffiliated limited partners to remove the General Partner required a supermajority vote of the outstanding Interests of the unaffiliated limited partners, which made it difficult for the unaffiliated limited partners to successfully remove the General Partner. The Special Committee also recognized that the ongoing participation of the General Partner was required for the Conversion. In this regard, the Special Committee had been advised by the General Partner that it is the General Partner's belief that it has no duty to advocate and pursue a transaction that does not provide the General Partner fair value for all of the economic components of its General Partnership Interest, including the fair value for its otherwise continuing right to receive the Management Fee. As to the matter noted in (viii) above, the Special Committee considered this tax aspect of the Management Fee and during negotiations raised the possibility of continuation of the Management Fee after the Conversion. The Special Committee ultimately 58 concluded that continuation of the Management Fee in corporate form would be unduly burdensome to the Corporation and that the retention of the Management Fee and the substitution of Common Stock for its value, as provided for in the Conversion, more closely aligns the interests of the beneficial owners of the General Partner with the interests of holders of Common Stock. The Special Committee also believed that the resulting incremental cash flow to the Corporation was a benefit to the holders of the A Interests and the B Interests. As to the matters noted in (ix) above, the Special Committee placed particular weight on the presentations and analyses of Smith Barney and its fairness opinion. See "-- Opinion of Smith Barney." During its deliberations, the Special Committee did not attach any weight to the General Partner's request for a "control premium" for the General Partnership Interests (i.e., any value over and above the value attributable to the General Partner's percentage interest in each of the Partnership and the Operating Partnership and the Management Fee), especially in view of the significant Common Stock ownership which Lehman Brothers, its affiliates and management would have in the Corporation after the Conversion and their representation on the Corporation's Board of Directors. o No Appraisal Rights; Separate Class Vote. The Special Committee noted the absence of appraisal or dissenters' rights for the benefit of holders of Interests. The Special Committee believed this factor was mitigated by the requirement that the Conversion be approved by the affirmative vote of unaffiliated limited partners holding an aggregate of more than 50% of the A Interests and B Interests, respectively, each voting separately as a class. See "VOTING AND PROXY INFORMATION -- Vote Required; Quorum" and "-- No Appraisal Rights." o Certain Corporate Governance Matters. The Special Committee recognized that the Conversion altered, or could potentially alter, a number of the existing corporate governance relationships among the General Partner, Lehman Brothers, management, and the unaffiliated limited partners. These included in particular (i) the increased voting power that could accrue to Lehman Brothers or senior management, (ii) potential sales of control blocks of stock, and (iii) the potential effect of Conversion on major strategic decisions, in each case as discussed in "-- Negotiations with the General Partner" above. As to the matters noted in (i) above, the Special Committee was aware that as a result of the loss of voting rights of the A Interests and the issuance of Common Stock for the General Partnership Interests, Lehman Brothers' and management's pro forma voting power would have increased from 18.0% and 12.6%, respectively, to 31.4% and 22.6%, respectively. Accordingly, the Special Committee negotiated a provision in the Stockholders Agreement with Lehman Brothers and certain members of senior management that restricts the respective voting power of such persons to the voting power held by each of them with respect to a vote of the limited partners prior to the Conversion. See "DESCRIPTION OF CAPITAL STOCK -- Stockholders Agreement." Under the terms of such restriction, such persons will agree to vote, in the same proportion as the shares not owned by them (the "Unaffiliated Shares") that are voted on any such matter, that percentage of Excess Voting Shares held by them at such time that equals the percentage of outstanding Unaffiliated Shares that are voted on such matter. The Special Committee was aware of the significant ownership of Interests by Lehman Brothers and management in partnership form and the absence of any voting restrictions on such Interests in the Partnership Agreement. The Special Committee believed the voting restrictions obtained in the Stockholders Agreement (which effectively provides that, as to matters requiring a majority vote of stockholders of the Corporation, the holders of approximately 77% of the Common Stock held by persons other than Lehman Brothers and its affiliates and certain members of senior management have the ability to control the outcome of any such vote) were of benefit to the other holders of Common Stock, particularly in view of the fact that the provision in the Partnership Agreement providing for the removal of the General Partner upon the affirmative vote of 80% of the Interests of the unaffiliated limited partners would not be carried forward in the Corporation's Certificate of Incorporation or Bylaws. See "COMPARISON OF INTERESTS AND SECURITIES TO BE ISSUED." As to the matter noted in (ii) above, the Special Committee viewed the Conversion as significantly enhancing the possibility of change of control transactions involving major stockholders of the Corporation given its more simplified corporate structure and the likelihood of broader market liquidity for its Common Stock. After extensive negotiations with the General Partner, the Special Committee concluded that the general prohibition on sales to third persons which would beneficially own more than 10% (or in certain cases involving institutional stockholders, 15%) of the Common Stock substantially diminished the likelihood of Lehman Brothers or management selling shares of Common Stock for a premium not available to all stockholders, or effecting a change of control transaction without the consent of the Independent Directors. The Special Committee was not aware of any plans or proposals on the part of the General Partner, Lehman Brothers, management or their respective affiliates to engage in any block sales of Common Stock, whether or not prohibited by the terms of the Stockholders Agreement. See "DESCRIPTION OF CAPITAL STOCK -- Stockholders Agreement." 59 As to the matter noted in (iii) above, the Special Committee believed it important that there be some meaningful independent check on any decision by Lehman Brothers or management with respect to any major transaction by the Corporation with change of control implications occurring shortly after the Conversion, particularly in light of the substantial equity to be received by the partners of the General Partner in exchange for their General Partnership Interests and Lehman Brothers' expression of interest in possibly liquidating some or all of its Common Stock holdings after the Conversion. Accordingly, the Special Committee negotiated provisions in the Stockholders Agreement requiring that at least four of the nine members of the Corporation's Board of Directors be Independent Directors, and that, for three years after the Conversion, certain specified transactions, including mergers, asset sales, liquidations and tender and exchange offers for the Corporation, be approved by a majority of the Independent Directors on the Corporation's Board of Directors. Also, the Stockholders Agreement provides for the approval by the Independent Directors of certain transactions between management and Lehman Brothers, on the one hand, and the Corporation, on the other. See "DESCRIPTION OF CAPITAL STOCK -- Stockholders Agreement." As to the matters noted in (i), (ii) and (iii) above, the Special Committee was also aware that certain provisions in the Corporation's Certificate of Incorporation and Bylaws and the Corporation's stockholder rights plan could have certain anti-takeover effects. See "DESCRIPTION OF CAPITAL STOCK -- Anti-takeover Provisions." However, the Special Committee believed such provisions and the stockholder rights plan could also facilitate the Special Committee's objectives in preventing sale of control transactions that were not in the best interests of all holders of Common Stock as discussed above. The Special Committee was aware that the Corporation's Certificate of Incorporation provides that it shall not be subject to Section 203 of the Delaware General Corporation Law and considered this a negative factor mitigated to some extent by the other corporate governance provisions discussed above. o Conflicts of Interest. In considering the proposed Conversion, the Special Committee was aware of certain conflicts of interest with respect to the Committee's deliberations (in addition to those conflicts of interest noted under "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Risks to Holders of A Interests -- Conflicts of Interest" and " -- Risks to Holders of B Interests -- Conflicts of Interest" applicable to the proposed Conversion generally). These conflicts included the following: (i) the Special Committee considered the fairness of the proposed Conversion with respect to both the A Interests and the B Interests (as opposed to having separate committees consider the terms of the proposed Conversion with respect to the A Interests and B Interests, respectively); (ii) Smith Barney's fairness opinion, upon which the Special Committee relied in recommending the proposed Conversion to the Board of Directors, dealt with fairness from a financial point of view for both the A Interests and the B Interests (as opposed to having separate investment banks render fairness opinions with respect to the A Interests and B Interests, respectively); (iii) the Special Committee members' beneficial ownership of A Interests and B Interests; (iv) the Special Committee members' compensation for serving on the Special Committee and indemnification rights with respect to their service on the Committee, as described in "--Appointment of the Special Committee and its Independent Advisors" above; (v) the Special Committee members' status as directors of Lehman/SDI with fiduciary duties to the stockholder of Lehman/SDI; and (vi) the designation of the Special Committee as a committee of the Board of Directors of Lehman/SDI (as opposed to formally and directly representing the holders of the A Interests and B Interests, respectively--see "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Risks to Holders of A Interests -- No Independent Representation" and "-- Risks to Holders of B Interests -- No Independent Representation" above), as well as the general expectation of the Special Committee members' continuing to serve on the Board of Directors of the Corporation after the consummation of the proposed Conversion. As to the matters noted in (i) and (ii) above, the Special Committee believed that the conflicts of interest were mitigated by the different terms of the A Interests and the B Interests. The Special Committee viewed the A Interests as securities with attributes generally like preferred stock, and therefore principally as yield-oriented securities. On the other hand, the Special Committee viewed the B Interests as securities with attributes generally like common stock, and therefore principally as growth-oriented securities. Consequently, the Special Committee considered the two instruments as sufficiently different vis-a-vis their competing claims on the Partnership's resources to accommodate a single committee review and engagement of one financial advisor to render fairness opinions for both classes of securities. In addition, the Special Committee noted the requirement that the Conversion be approved by a majority of the outstanding unaffiliated A Interests and B Interests, voting as separate classes. See "VOTING AND PROXY INFORMATION -- Vote Required; Quorum." As to the matter noted in (iii) above, the members of the Special Committee did not consider their ownership of A and B Interests to be meaningful in light of the relatively small number of Interests involved. See "-- Determinations of the Special Committee -- Appointment of the Special Committee and its Independent Advisors" above. As to the matter noted in (iv) above, the Special Committee viewed as mitigating factors the Committee's belief that the compensation and indemnification provisions are generally 60 customary for transactions of this nature and beneficial to the overall process in light of its complex and time-consuming nature. As to the matters noted in (v) and (vi) above, the Special Committee considered that its designation as a committee of the Board of Directors of Lehman/SDI and its members' prospective continued service on the Corporation's Board of Directors were mitigated by the Special Committee's retention of independent advisors, as well as the Special Committee's charge to negotiate any modifications to the General Partner's proposal if necessary. o Extent of Negotiations. The Special Committee and its independent financial and legal advisors were involved in extensive negotiations regarding the terms of the Conversion with the General Partner, Lehman/SDI, management and counsel to Lehman/SDI and the Partnership. The Special Committee believed that it had significant leverage in these negotiations, because it understood that the Conversion was not likely to proceed without approval from the Special Committee. The Special Committee considered whether further negotiations would have resulted in more favorable results for the A Interests or the B Interests, especially in relation to the amount of consideration exchanged for the General Partnership Interests. In addition, the Special Committee considered that additional delays in the negotiation process could adversely affect the timing of the Conversion or jeopardize the Corporation's ability to realize the benefits of the Trust Preferred Securities in view of possible changes in tax laws. See "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Risks to Holders of A Interests -- Special Event Redemption or Distribution; Shortening of Stated Maturity." o Limitation of Scope of Special Committee's Review. Consistent with its instructions from the Board of Directors of Lehman/SDI, the Special Committee did not specifically consider the relative merits of the Conversion as compared to any alternative strategies or transactions, including liquidation or sale of the Partnership. See "-- Determinations of the Special Committee." For a discussion of the review of certain alternatives to the Conversion considered by the Board of Directors of Lehman/SDI, see "-- Alternatives to the Conversion." For a discussion of the scope of the Special Committee's authority, see "-- Determinations of the Special Committee -- Appointment of the Special Committee and its Independent Advisors." Accordingly, the Special Committee did not specifically consider the potential liquidation values of the A Interests and B Interests, although the Special Committee was aware of the $10.00 liquidation preference of the A Interests and the liquidation analyses previously undertaken by the Board of Directors of Lehman/SDI and the Board's determination that liquidation was not an acceptable alternative to the Partnership. In addition, the Special Committee did not consider, and was not aware of, any firm offers during the preceding 18 months for the Partnership or all or any substantial part of its assets. The foregoing is a summary of the information and factors considered by the Special Committee and is not intended to be exhaustive but is believed to include all material factors considered by the Special Committee. In reaching its recommendation that the Conversion is fair to the holders of the A Interests and fair to the holders of the B Interests, and that the General Partner Consideration is fair to the holders of the A Interests and the holders of the B Interests, respectively, the Special Committee did not assign specific or relative weights to the foregoing factors, except that each member placed significant weight on the fairness opinion of Smith Barney. For additional information regarding certain risks relating to the Conversion, limited partners should read carefully "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS" herein. Opinion of Smith Barney The Special Committee, Lehman/SDI, the Partnership, the Operating Partnership and the General Partner have retained Smith Barney to act as financial advisor to the Special Committee in connection with the Conversion. In connection with its engagement, Smith Barney has delivered to the Special Committee its written opinions, dated December 10, 1996 and June 19, 1997, to the effect that, as of such dates based upon and subject to certain matters as stated therein, (i) the consideration to be received in the Conversion by the holders of A Interests is fair, from a financial point of view to such holders, (ii) the consideration to be received in the Conversion by the holders of B Interests is fair, from a financial point of view to such holders, and (iii) the General Partner Consideration to be received in the Conversion is fair from a financial point of view to the holders of the A Interests and to the holders of the B Interests, respectively. The description set forth below pertains to Smith Barney's June 19, 1997 opinion. In rendering its opinion Smith Barney reviewed the Registration Statement on Form S-4 of SunSource Inc. and SunSource Capital Trust filed with the Securities and Exchange Commission, as amended on May 12, 1997 (the "Registration Statement") and the partnership agreements of the Partnership, the Operating Partnership, and the General Partner and held discussions with certain of the senior operating management of the Partnership and the Operating Partnership ("Management") and representatives and advisors of the Partnership, 61 the Operating Partnership and the General Partner to discuss the business, operations and prospects of the Partnership. Smith Barney also examined certain publicly available business and financial information relating to the Partnership as well as internal financial statements, forecasts and other financial and operating data concerning the Partnership prepared by Management. Smith Barney reviewed the financial terms of the Conversion as set forth in the Registration Statement in relation to current and historical market prices and trading volumes of the A Interests and B Interests, historical and projected earnings and operating data of the Partnership and projected earnings and operating data of the Corporation, and the capitalization and financial condition of the Partnership. Smith Barney analyzed certain financial, capital market and other publicly available information relating to the businesses of other companies whose operations Smith Barney considered comparable to those of the Partnership. In addition to the foregoing, Smith Barney conducted such other analyses and examinations and considered such other financial, economic and market criteria as it deemed necessary to arrive at its opinion. In rendering its opinion, Smith Barney assumed and relied, without independent verification, upon the accuracy and completeness of all financial and other information publicly available or furnished to or otherwise reviewed by or discussed with Smith Barney. With respect to financial forecasts and other information furnished to or otherwise reviewed by or discussed with Smith Barney, Smith Barney was informed by Management that such forecasts and other information were reasonably prepared on bases reflecting the best currently available estimates and judgments of Management as to the expected future financial performance of the Partnership or the Corporation, as the case may be. Smith Barney further relied on the assurances of Management that it was unaware of any facts that would make the information or forecasts provided to Smith Barney incomplete or misleading. Smith Barney did not express any opinion as to what the value of the Common Stock or the Trust Preferred Securities actually will be when issued to holders of A Interests and B Interests, respectively, or the prices at which the Common Stock or the Trust Preferred Securities will trade subsequent to the Conversion. In addition, Smith Barney did not make and was not provided with an independent evaluation or appraisal of the assets or liabilities (contingent or otherwise) of the Partnership. Smith Barney was not asked to and did not express an opinion as to the relative merits of the Conversion as compared to any alternative business strategies that might exist for the Partnership or the effect of any other transaction in which the Partnership might engage. Smith Barney was not asked to solicit third-party indications of interest in acquiring all or any part of the Partnership. Smith Barney's opinion is necessarily based upon financial, capital market and other conditions and circumstances, including current tax laws, existing and disclosed to Smith Barney as of the date of its opinion. No limitation was imposed by the Special Committee, Lehman/SDI, the Partnership, the Operating Partnership or the General Partner on the scope of the investigation by Smith Barney in connection with its fairness opinion. The full text of the written opinion of Smith Barney, which sets forth the assumptions made, matters considered and limitation on the review undertaken, is attached as Exhibit C to this Proxy Statement/Prospectus and is incorporated herein by reference. Holders of A Interests and B Interests are urged to read this opinion carefully in its entirety. Smith Barney's opinion is directed only to the fairness of the consideration to be received by holders of A Interests and B Interests and of the General Partner Consideration from a financial point of view to holders of A Interests and B Interests, respectively, and has been provided for the use of the Special Committee and the Board of Directors of Lehman/SDI in their evaluation of the Conversion, does not address any other aspect of the Conversion or any related transaction and does not constitute a recommendation to any holder of A Interests or B Interests as to how such holder should vote at the Special Meeting. The summary of the opinion of Smith Barney set forth in this Proxy Statement/Prospectus is qualified in its entirety by reference to the full text of such opinion. In preparing its opinion to the Special Committee, Smith Barney performed a variety of financial and comparative analyses, including those described below. The summary of such analyses contains the material analyses, but does not purport to be a complete description of the analyses underlying Smith Barney's opinion. The preparation of a fairness opinion is a complex analytic process involving various determinations as to the most appropriate and relevant methods of financial analyses and the application of those methods to the particular circumstances and, therefore, such an opinion is not necessarily susceptible to summary description. In arriving at its opinion, Smith Barney did not attribute any particular weight to any analysis or factor considered by it, but rather made qualitative judgments as to the significance and relevance of such analyses and factors. Accordingly, Smith Barney believes that its analyses must be considered as a whole and that selecting portions of its analyses and factors, without considering all analyses and factors, could create a misleading or incomplete view of the processes underlying such analyses and its opinion. In its analyses, Smith Barney made numerous assumptions with respect to the Partnership, industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of the Partnership. The estimates contained in such analyses are not necessarily indicative of actual values or predictive of actual future results or values, which may be significantly more or less favorable than suggested by such analyses. In addition, analyses relating to the value of the businesses or securities do not purport to be appraisals or to reflect the prices at which the business or securities may actually be sold. Accordingly, such analyses and estimates are inherently subject to substantial uncertainty. 62 A Interests Valuation of A Interests. In order to value the A Interests, Smith Barney performed discounted cash flow analyses of the distributions payable to the holders of A Interests taking into account the preferential distribution of $10 per A Interest that holders of A Interests are entitled to receive upon retirement of the A Interests. Due to the fact that holders of A Interests do not have a right to immediately receive $10 per A Interest, Smith Barney performed discounted cash flow analyses assuming the A Interests are retired at June 30, 2037, which approximates valuing it in perpetuity. In this analysis, discount rates of 9.5%, 10.5% and 11.5% were used. These discount rates were based on the trading yield of the A Interests immediately prior to the public announcement of the terms of the Conversion. The implied valuation range for the A Interests resulting from this analysis was $106.2 million ($9.57 per A Interest) to $128.1 million ($11.54 per A Interest). The mid-point of the implied valuation range was then calculated to be $117.2 million ($10.56 per A Interest). Valuation of the A Consideration. Upon consummation of the Merger, each A Interest will be exchanged for 0.38 share of Trust Preferred Securities and $1.30 in cash (collectively, the "A Consideration"). Smith Barney analyzed the value of the Trust Preferred Securities in relation to the trading value of the A Interests. Unlike the A Interests which are not redeemable (other than in a liquidation of the Partnership), the Trust Preferred Securities are callable by the Corporation at liquidation value five years after the date of issuance. Based on the treasury yield curve on December 6, 1996, assumed interest rate volatility of 9% and a 40 year maturity, Smith Barney estimated that an additional yield of 93 basis points (0.93%) would be required to compensate holders of A Interests for this change in call protection. In addition to the changes in the distribution rate and call protection in the Trust Preferred Securities, in analyzing the differences between the A Interests and the Trust Preferred Securities, Smith Barney also considered (i) the market risk associated with the Trust Preferred Securities, (ii) the potential for the deferment for up to 60 months of the monthly distributions on the Trust Preferred Securities, and (iii) the differences in voting and other rights. In comparing the value of the A Consideration with the value of the A Interests, Smith Barney also considered the potential payment of taxes by holders of A Interests in the Conversion and the fact that the amount of monthly distributions to be received by holders of A Interests in the Conversion would be the same as the monthly distributions payable on the A Interests prior to the Conversion. Smith Barney analyzed the value of the A Consideration assuming a range of trading yields on the Trust Preferred Securities of 9.5% to 12.5% on a yield to first call basis. The range of implied values for the A Consideration based on such yields on the Trust Preferred Securities was calculated to be $10.48 to $11.59. The range of implied values of the A Consideration was compared to $10.50, the average of the closing market prices of an A Interest on the five trading days preceding December 12, 1996, the day the Partnership announced the terms of the Conversion (the "Announcement Date"). The range of (discounts) / premiums of such implied values over such average market price for an A Interest was (0.2%) to 10.4%. The range of implied values of the A Consideration was also compared to the mid-point of the discounted cash flow valuation range of the A Interests and the range of (discounts) / premiums over such valuation was (0.7%) to 9.8%. The conclusion that the value of the consideration to be received for an A Interest is likely to be greater than the value of an A Interest supports Smith Barney's fairness conclusion. B Interests Valuation of B Interests. In order to value the B Interests, Smith Barney performed discounted cash flow analyses of the projected free cash flows of the Partnership for the five fiscal years ended December 31, 2001 assuming the Partnership begins paying corporate income taxes in 1998. Smith Barney was unable to value the B Interests based on trading values of comparable companies as was done in valuing the B Consideration (as defined below), since there are no publicly traded limited partnership interests for companies comparable to the Partnership. See: "Valuation of the B Consideration -- Comparable Company Analysis." In its discounted cash flow analyses, Smith Barney also assumed discount rates of 11.5%,12.5% and 13.5% and terminal multiples of earnings before interest, taxes, depreciation and amortization ("EBITDA") of 5.5x to 7.0x. The discount rates used were based on the cost of capital of the Partnership, adjusted to take into account that beginning in 1998, distributions on the A Interests would not be tax deductible. The terminal multiples used were based on the trading multiples of the Comparable Companies (as defined below). 63 Smith Barney performed the discounted cash flow analyses on the operating projections prepared by Management. These analyses resulted in an implied valuation range for the B Interests of $88.9 million ($4.10 per B Interest) to $166.4 million ($7.68 per B Interest). The mid-point of the implied valuation range was then calculated to be $127.7 million ($5.89 per B Interest). Valuation of the B Consideration. Upon consummation of the Merger, each B Interest will be exchanged for 0.25 shares of Common Stock (the "B Consideration"). Smith Barney analyzed the value of the Common Stock by examining trading multiples of comparable companies and performing discounted cash flow analyses of the Corporation's projected free cash flows. Comparable Company Analysis. Using publicly available information, Smith Barney analyzed the market values and trading multiples of a group of eight selected comparable wholesale distributors of industrial products and services comprised of Barnes Group, Inc., BMC West Corp., Applied Industrial Technologies, Inc. (formerly Bearings, Inc.), Cameron Ashley Building Products, Inc., Hughes Supply, Inc., Lawson Products, Inc., NCH Corporation and Rexel Inc. (collectively the "Comparable Companies"). Smith Barney compared market values as multiples of historical net income and projected 1997 and projected 1998 net income. The multiples of the latest twelve months ended March 31, 1997 ("LTM") net income and projected 1997 and projected 1998 net income of the Comparable Companies were between the following ranges: (i) LTM net income: 10.9x to 17.3x (with a mean of 14.3x and a median of 14.3x); (ii) projected 1997 net income: 9.3x to 16.9x (with a mean of 13.2x and a median of 13.9x); and (iii) projected 1998 net income: 8.1x to 13.6x (with a mean of 11.7x and a median of 12.5x). Smith Barney also compared market values as multiples of historical EBITDA and projected 1997 and projected 1998 EBITDA. The multiples of LTM EBITDA and projected 1997 and projected 1998 EBITDA of the Comparable Companies were between the following ranges: (i) LTM EBITDA: 5.5x to 9.2x (with a mean of 7.4x and a median of 7.1x); (ii) projected 1997 EBITDA: 5.4x to 8.1x (with a mean of 6.8x and a median of 6.8x); and (iii) projected 1998 EBITDA: 5.1x to 7.4x (with a mean of 6.2x and a median of 6.3x). Smith Barney also compared the debt to capitalization ratios, interest coverage ratios, historical profit margins, historical EBITDA and net income growth, returns of average assets, equity and invested capital (total debt plus book value of common equity plus book value of preferred equity plus book value of minority interests plus deferred income tax liabilities), dividend yield and projected earnings per share ("EPS") growth of the Comparable Companies. All projected EPS figures for the Comparable Companies were based on the consensus net income estimates of selected investment banking firms and all projections for the Corporation were based on operating projections prepared by Management. All multiples were based on closing stock prices as of June 16, 1997. Smith Barney applied a range of trading multiples representative of the Comparable Companies to pro forma historical and projected operating data of the Corporation (derived by adjusting the operating data of the Partnership to reflect consummation of the Conversion and application of a 40% corporate tax rate) to arrive at a range of implied equity values for the shares of Common Stock. Smith Barney applied the Comparable Companies' mean and median multiples of 14.3x and 14.3x to LTM net income, and 13.2x and 13.9x to projected 1997 net income, and 11.7x and 12.5x to projected 1998 net income. Based on these multiples, Smith Barney arrived at an implied valuation range of $23.28 to $27.89 per share of Common Stock or $5.82 to $6.97 for the B Consideration. Smith Barney also applied the Comparable Companies' mean and median multiples of 7.4x and 7.1x to LTM EBITDA, 6.8x and 6.8x to projected 1997 EBITDA, and 6.2x and 6.3x to projected 1998 EBITDA. Based on these multiples of EBITDA, Smith Barney arrived at an implied valuation range of $13.08 to $16.42 per share of Common Stock or $3.27 to $4.11 for the B Consideration. In valuing the Common Stock, Smith Barney relied more heavily on the implied valuation range derived from the multiples of net income rather than the multiples of EBITDA since they believe that net income multiples are a better indicator of the trading value of the Common Stock. Smith Barney compared the implied equity valuation range for the B Consideration based on multiples of net income to $4.35, the average closing market price of a B Interest on the five trading days immediately preceding the Announcement Date, and derived a range of premiums of 33.8% to 60.2%. The above-described range of implied values for the B Consideration was also compared to the mid-point of the implied valuation range of a B Interest using the discounted cash flow analysis methodology ($5.89 per B Interest) and the range of (discounts)/ premiums over such valuation was (1.2%) to 18.3%. 64 None of the Comparable Companies is identical to the Corporation. Accordingly, an analysis of the results of the foregoing is not entirely mathematical; rather, it involves complex considerations and judgments concerning differences in financial and operating characteristics that could affect the public trading value of the Comparable Companies or the company to which they are being compared. Discounted Cash Flow Analyses. Smith Barney also performed discounted cash flow analyses of the projected free cash flows of the Corporation for the five fiscal years ended December 31, 2001. Smith Barney assumed discount rates of 9.0%, 10.0% and 11.0% and terminal multiples of EBITDA of 6.0x to 7.5x. The discount rates used were based on the cost of capital of the Partnership, adjusted to take into account the capital structure of the Corporation and the fact that distributions on the Trust Preferred Securities will be tax deductible. The terminal multiples used were based on the trading multiples of the Comparable Companies. The discounted cash flow analyses were performed on the operating projections prepared by Management and resulted in an implied equity valuation range per share of Common Stock of $18.36 to $33.19 or $4.59 to $8.30 for the B Consideration. Smith Barney compared the implied equity valuation range for the B Consideration based on the discounted cash flow analyses to $4.35, the average closing market price of a B Interest on the five trading days immediately preceding the Announcement Date, and derived a range of premiums of 5.5% to 90.8%. The above-described range of implied values for the B Consideration was also compared to $5.89, the mid-point of the implied valuation range of a B Interest, and the range of (discounts)/premiums over such valuation was (22.1%) to 40.9%. The conclusion that the range of values of B Consideration is greater than (i) the average closing market price of a B Interest on the five trading days immediately preceding the Announcement Date and (ii) the implied valuation range of a B Interest based on the discounted cash flow analyses supports Smith Barney's fairness conclusion. General Partnership Interests Valuation of the General Partnership Interests. Smith Barney analyzed the value of the General Partnership Interests consisting of (i) the Management Fee and (ii) an effective percentage equity interest of 1.99% in the Operating Partnership (the "1.99% Interest"). In order to determine the potential value attributable to the General Partnership Interests, Smith Barney performed a net present value calculation of the Management Fee in perpetuity assuming discount rates of 9.5%, 10.5% and 11.5%. Based on these net present value calculations, Smith Barney estimated the range of the total potential value of the Management Fee to be $29.0 million to $35.1 million. Since the Management Fee does not have a fixed redemption value, Smith Barney also estimated the range of values by capitalizing the Management Fee based on the Comparable Companies' mean and median LTM EBITDA multiples (7.4x and 7.1x) and capitalizing the after-tax equivalent of the Management Fee based on the Comparable Companies' mean and median LTM net income multiples (14.3x and 14.3x). This method of valuation was used to show the impact of the Management Fee on the LTM net income and the LTM EBITDA available to the Partnership. On the basis of this analysis, a range of values for the Management Fee was calculated. The capitalization of the Management Fee resulted in a range of total potential value of $23.6 million to $28.6 million. The two methodologies produced a composite total potential valuation range for the Management Fee of $23.6 million to $35.1 million. In addition to looking at the valuation methodologies described in the preceding paragraph, Smith Barney took into consideration the following factors which detract from the value of the Management Fee in analyzing the value of the Management Fee: (i) the accelerated timing of the receipt by the General Partner of value for the Management Fee in the Conversion; (ii) the illiquidity of the right to receive the Management Fee; (iii) the potential for the Management Fee to be terminated in the event of (a) liquidation or sale of the Partnership, or (b) removal of the General Partner upon the vote of 80% of the unaffiliated limited partners; (iv) the subordination of the Management Fee to the payment of distributions on the A Interests; and (v) the termination of the services provided by the General Partner following the consummation of the Conversion. Smith Barney estimated the value for the 1.99% Interest by taking 1.99% of the enterprise value for the Partnership less net debt. Enterprise value for the Partnership was calculated using discounted cash flow analyses of the projected free cash flows of the Partnership assuming the Partnership begins paying corporate income taxes in 1998. Smith Barney also assumed discount rates of 11.5%, 12.5% and 13.5% and terminal multiples of EBITDA of 5.5x to 7.0x. Smith Barney performed these analyses on the operating projections prepared by Management. These analyses resulted in an implied valuation range for the 1.99% Interest of $4.1 million to $5.6 million. Smith Barney then added the range of total potential values derived from the analysis of the Management Fee and the range of implied values of the 1.99% Interest and derived a total potential value range for the General Partnership Interests of $27.7 million to $40.7 million with a resulting mid-point of $34.2 million. The total potential value did not take into account the factors listed in the preceding paragraph that detract from the value of the Management Fee. 65 Valuation of the General Partner Consideration. Upon consummation of the Merger, the General Partnership Interests will be exchanged for 1,000,000 shares of Common Stock (the "General Partner Consideration"). Smith Barney analyzed the value of the Common Stock using the equity values implied by the comparable company trading multiples and discounted cash flow analyses described above. See " -- B Interests -- Valuation of the B Consideration." Smith Barney derived an implied equity valuation range per share of Common Stock of $20.82 to $30.54 by averaging the composite values derived through the comparable company analysis based on net income multiples and the discounted cash flow analysis. The valuation range for the General Partner Consideration was then calculated to be $20.8 million to $30.5 million. Since the value to be paid for the General Partner Consideration is less than the total potential value of the General Partnership Interests, it supports Smith Barney's fairness conclusion. Other Factors and Comparative Analyses In rendering its opinion, Smith Barney considered certain other factors and conducted certain other comparative analyses, including a review of (i) the projected financial results of the Partnership, (ii) the history of trading prices for the A and B Interests, (iii) certain pro forma effects on the Partnership resulting from the Conversion and (iv) the pro forma ownership of the Corporation. The Special Committee, Lehman/SDI, the Partnership, the Operating Partnership and the General Partner entered into an engagement letter with Smith Barney on July 16, 1996 pursuant to which the Partnership agreed to pay Smith Barney fees of $1.25 million, comprised of a retainer fee of $250,000, which was paid upon execution of the engagement letter and an opinion fee of $1.0 million, which was paid shortly after delivery of Smith Barney's opinion, dated December 10, 1996. The Partnership has agreed to reimburse Smith Barney for its out-of-pocket expenses, including reasonable fees and disbursements of counsel provided that such fees and expenses of counsel shall not be in excess of $25,000 in the aggregate without the prior written consent of the Special Committee, which consent shall not be unreasonably withheld. Lehman/SDI, the General Partner, the Partnership and the Operating Partnership have also agreed, in a separate letter agreement, to indemnify Smith Barney and its affiliates, their respective directors, officers, agents and employees and each person, if any, controlling Smith Barney or any of its affiliates against certain liabilities, including liabilities under the federal securities laws and expenses related to Smith Barney's engagement. In light of Smith Barney's familiarity with, and understanding of, the operations of the Partnership as well as their experience in advising on matters relating to the conversion of partnerships to corporate form generally, the Special Committee believed that it was advisable to engage Smith Barney in connection with the proposed Conversion. Smith Barney is a nationally recognized investment banking firm and is regularly engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive bids, secondary distributions of listed and unlisted securities, private placements and valuations for estate, corporate and other purposes. Other than acting as financial advisor in connection with the Conversion (and delivery of its fairness opinion), Smith Barney has not previously rendered investment banking services to the Partnership, Lehman/SDI, the Operating Partnership or the General Partner in the past two years. In the ordinary course of its business, Smith Barney may, from time to time, buy and sell securities of the Partnership. The reports of Smith Barney on December 10, 1996 and June 19, 1997 are filed as exhibits to the Rule 13e-3 Transaction Statement on Schedule 13E-3, as amended, filed with the Commission by the Partnership, the General Partner, Lehman Brothers Capital Partners I, L.P., LB I Group, Inc., Lehman Ltd. I, Inc., Norman V. Edmonson, Donald T. Marshall, John P. McDonnell and Lehman/SDI relating to the Conversion and may be obtained in the manner described in "AVAILABLE INFORMATION." Recommendation of the General Partner and Fairness Determination The General Partner believes the Conversion is fair to and in the best interests of the Partnership and the limited partners. The General Partner recommends that the limited partners approve the Conversion. There are conflicts of interest between the General Partner and the limited partners with respect to certain matters relating to the Conversion. 66 As described under "-- Alternatives to the Conversion," the General Partner does not believe that liquidation is a viable alternative for the Partnership because, among other things, there was substantial doubt that acceptable prices could be found for all of the business units within an acceptable time period. The General Partner's determination to recommend that SunSource convert to corporate form is based on its belief that the Conversion will result in the benefits to the limited partners and to the Corporation described above under "-- Reasons to Convert to Corporate Form." On the other hand, the General Partner considered the potential disadvantages of the Conversion, see "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS" and, given the alternatives to the Conversion, believes that the advantages of the Conversion outweigh any potential disadvantages. In determining the fairness of the Conversion to the A Interests, the General Partner considered the factors considered by the Special Committee discussed above under "--Factors Considered by Special Committee." It considered the current and historical market prices of the A Interests, noting particularly the fact that the market price of the A Interests has fluctuated in accordance with market changes in interest yields. In this respect, fairness is provided by the establishment of a distribution rate on the Trust Preferred Securities (11.6%) greater than the Priority Return on the A Interests (11%). The General Partner also considered liquidation value as it applied to the A Interests and the fact that the holders would only be entitled to $10 on liquidation. The liquidation preference on the Trust Preferred Securities is being reduced to $9.50 but this is offset by the cash payment of $1.30 in the Conversion. Although the A Interests are not callable and the Trust Preferred Securities will be callable at liquidation value after five years, the General Partner believes that the cash received is adequate to compensate holders of A Interests for this change in call protection. The General Partner also considered, as discussed below, the opinion of Smith Barney in determining the fairness of the Conversion to the A Interests. The comparative effects upon the A Interests of the three alternatives of Conversion, remaining a master limited partnership taxable as a corporation, or liquidation are shown in the "Per A Interest" table under "-- Alternatives to the Conversion." The General Partner believes that the reference prices shown in the "Per A Interest" table under "-- Alternatives to the Conversion" and allocation of values information support its conclusion that the Conversion is fair to the holders of A Interests. See "-- Allocation of Interests in the Conversion." The General Partner did not consider net book value or going concern value because it believed that the fixed return on the A Interests made these factors not significant. The General Partner also did not consider purchases of A Interests in the preceding two years or offers during the preceding 18 months for a merger, acquisition, tender offer or change of control because no purchases or offers occurred during those periods. In determining the fairness of the Conversion to the B Interests, the General Partner again considered the factors discussed under "-- Factors Considered by Special Committee." It took into account the current and historical market prices of the B Interests and its belief that conversion to corporate form would provide substantially greater coverage of the Company by financial analysts and expand the potential investor base to include mutual funds and other entities that currently do not invest in limited partnerships. It also took into account its belief that the Common Stock will constitute a more attractive acquisition currency. The General Partner also believes that the elimination of the relatively burdensome tax reporting requirements of the partnership form would remove a current impediment to investing in the Partnership. As noted under "-- Alternatives to the Conversion," the B Interests have traded at a price/earnings discount of 18% to 25% to comparable industrial distribution companies. The General Partner believes that expansion of the potential investor base and the other benefits of the Conversion would enhance the market price of the Common Stock to be issued for the B Interests. Liquidation value was considered based upon the previous experience of the Partnership as discussed under "-- Alternatives to the Conversion." The General Partner also considered the going concern value of the business and concluded that the elimination of the Management Fee and the General Partner distribution would enhance that value. The General Partner, as discussed below, considered the opinion of Smith Barney in determining the fairness of the conversion to the B Interests. The comparative effects upon the B Interests of the three alternatives of Conversion, remaining a master limited partnership taxable as a corporation, or liquidation are shown in the "Per B Interest" table under "-- Alternatives to the Conversion." The General Partner believes that the reference prices shown in the "Per B Interest" table under "-- Alternatives to the Conversion" and allocation of values information support its conclusion that the Conversion is fair to the holders of B Interests. See "-- Allocation of Interests in the Conversion." The General Partner did not consider net book value because it believed this was not a true determinant of value. As noted above, there were no purchases of B Interests during the preceding two years or offers for a merger, acquisition, tender offer or change of control during the preceding 18 months. 67 In reaching a recommendation with respect to the Conversion, the General Partner also considered (i) the fact that the consideration to be received and the other terms of the Conversion resulted from arms-length negotiation with the Special Committee and were determined by the Special Committee to be fair to the limited partners and (ii) the fact that Smith Barney has delivered its opinion (and the basis for such opinion) to the Special Committee to the effect that, (a) the consideration to be received in the Conversion by the holders of A Interests is fair, from a financial point of view to such holders, (b) the consideration to be received in the Conversion by the holders of B Interests is fair, from a financial point of view to such holders, and (c) the General Partner Consideration to be received in the Conversion is fair from a financial point of view to the holders of the A Interests and to the holders of the B Interests, respectively. The General Partner also considered the consequences to the Partnership and its partners if the Conversion is not consummated, as discussed under "-- Consequences if Conversion is Not Approved" and other information about the Conversion and the Corporation included in this Proxy Statement/Prospectus, and concluded that the Conversion was in the best interests of the Partnership and the limited partners. No particular weight was assigned to any one factor in arriving at its decision. The General Partner sought to provide procedural fairness to the limited partners in connection with the consideration of the Conversion by (i) creating a Special Committee composed of disinterested directors to advise the Board of Directors with respect to the terms of the Conversion as to its fairness to the limited partners, and to make a recommendation to the Board of Directors with respect to the Conversion, (ii) authorizing the Special Committee to select a financial advisor and legal counsel to assist it in its deliberations, and (iii) implementing the Conversion only if approved by the affirmative vote of a majority of the unaffiliated A Interests and B Interests, each voting separately as a class. Through these arrangements the General Partner believes it has provided procedural fairness to the limited partners and minimized the extent to which the consideration of the Conversion was subject to conflicts of interest of management and affiliates of the General Partner. Source and Amount of Funds It is estimated that the funds required to make the $1.30 cash payment to the A Interests and to pay for fractional shares and for the fees and expenses described below will be less than $19,500,000. Payments to be made prior to the Conversion will be made from funds borrowed under the Partnership's existing bank credit agreement which is described in Note 8 of Notes to Consolidated Financial Statements. Upon consummation of the Conversion, the existing bank credit agreement and the Partnership's long-term debt will be repaid and replaced with new credit facilities at interest rates expected to be lower than financing rates currently incurred by the Partnership. See "BUSINESS -- Investment and Borrowing Policies." Prepayment of the Partnership's long-term debt will result in the payment of a make-whole penalty of approximately $4 million. Accounting Treatment For financial accounting purposes, the Conversion will be treated as a recapitalization except for the exchange of the General Partner's 1% minority interest (the "Minority Interest") in the Operating Partnership for Common Stock of the Corporation which is subject to purchase accounting in accordance with Accounting Principles Bulletin ("APB") No. 16, "Business Combinations". Accordingly, the assets and liabilities of the Partnership will be recorded by the Corporation at their historical cost basis, except for the excess of fair value of the consideration received for the Minority Interest over the book value of the General Partner's 1% interest in the Operating Partnership which will be recorded as goodwill of the Corporation. The Corporation will also record incremental deferred tax assets in accordance with Statement of Financial Accounting Standards No. 109 ("SFAS 109"), relating to the temporary differences for certain assets and liabilities of the Partnership at the date of conversion to corporate form. The existing values of the tax basis in assets and liabilities of the Partnership at the date of conversion will carry over to the Corporation, which will also record a provision for U.S. federal and state income taxes on its taxable earnings. For financial reporting purposes, the Trust will be treated as a subsidiary of the Corporation and, accordingly, the accounts of the Trust will be included in the consolidated financial statements of the Corporation. The Trust Preferred Securities will be presented in the consolidated balance sheet of the Corporation as a separate line item directly above stockholders' equity under the caption "Guaranteed Preferred Beneficial Interest in the Corporation's Junior Subordinated Debentures" and appropriate disclosures about the Trust Preferred Securities, the Guarantee and the Junior Subordinated Debentures will be included in the Notes to the Consolidated Financial Statements. For financial reporting purposes, the Corporation will record distributions payable on the Trust Preferred Securities as an expense in its consolidated statements of income. 68 Fees and Expenses All legal and other costs and expenses incurred by the Corporation or the Partnership in connection with the Conversion will be paid by the Partnership, whether or not the Conversion is consummated. The following is a statement of certain estimated fees and expenses incurred by the Corporation in connection with the Conversion: SEC registration fee........................................ $ 67,000 New York Stock Exchange listing fee......................... 60,000 Legal fees and expenses..................................... 1,300,000 Financial advisory fees and expenses........................ 1,525,000 Accounting fees and expenses................................ 1,100,000 Solicitation fees and expenses.............................. 200,000 Printing and engraving expenses............................. 225,000 Miscellaneous .............................................. 23,000 ---------- Total ............................................ $4,500,000 ========== Exchange of Depositary Receipts Limited partners should not send any depositary receipts with the enclosed proxy. They should retain the depositary receipts until they receive further instructions if the Conversion is consummated. Promptly after the Effective Time, the Corporation will mail to all limited partners of record a letter of transmittal containing instructions with respect to the surrender of depositary receipts for Interests in exchange for certificates representing Trust Preferred Securities or shares of Common Stock and cash in the case of A Interests. Upon surrender to the Corporation of one or more depositary receipts, together with a properly completed letter of transmittal, there will be issued and mailed to former limited partners of record at the Effective Time a certificate or certificates representing the number of Trust Preferred Securities or shares of Common Stock to which such holder is entitled and a check for cash in the case of A Interests. From and after the Effective Time, each depositary receipt will evidence only the right to receive Trust Preferred Securities and shares of Common Stock and cash in the case of A interests. No distributions or dividends with respect to the Trust Preferred Securities or Common Stock payable to the holders of record thereof after the Effective Time will be paid to the holder of any unsurrendered depositary receipts until such depositary receipts are surrendered for exchange, at which time accumulated interest or dividends will be paid, without interest, subject to any applicable escheat laws. If any certificate representing Trust Preferred Securities or Common Stock is to be issued in a name other than that in which the depositary receipt surrendered in exchange therefor is registered on the books of the Partnership as of the Effective Time, it will be a condition of such issuance that (i) the depositary receipt so surrendered be properly endorsed and otherwise in proper form for transfer, and (ii) the person requesting such exchange pay to the Corporation any transfer or other taxes required by reason of the issuance of a certificate representing Trust Preferred Securities or Common Stock in any name other than that of the registered owner of the depositary receipt surrendered, or the person requesting such exchange establish to the satisfaction of the Corporation that such tax has been paid or is not applicable. After the Effective Time, there will be no further registration of transfers of Interests that were issued and outstanding immediately before such time. If, after the Effective Time, depositary receipts representing Interests are presented for transfer, they will be canceled and exchanged for one or more certificates representing Trust Preferred Securities or shares of Common Stock and cash in the case of A Interests. Treatment of Fractional Shares No fractional shares will be issued. Instead, (i) each holder of A Interests will be entitled to receive cash in an amount equal to the fraction of a Trust Preferred Security to which the holder is otherwise entitled multiplied by the average closing price of the Trust Preferred Securities for the five trading days following the Effective Time; and (ii) each holder of B Interests shall be entitled to receive cash in an amount equal to the fraction of a share of Common Stock to which the holder is otherwise entitled multiplied by the average closing price of the Common Stock for the five trading days following the Effective Time. 69 COMPARISON OF INTERESTS AND SECURITIES TO BE ISSUED The following summary compares a number of differences between ownership of Interests and ownership of Trust Preferred Securities and Common Stock and the effects relating thereto.
Interests Common Stock Trust Preferred Securities ------------ -------------- ---------------------------- Issuer The Partnership The Corporation The Trust. Payment of distributions and on liquidation or redemption is guaranteed on a subordinated basis as and to the extent described herein by the Corporation. Taxation Under current law, the The Corporation is a taxable Each holder of Trust Partnership is not a taxpaying entity with respect to its Preferred Securities entity. Rather, each holder of income after allowable will be considered to Interests includes the deductions and credits. own a pro rata portion holder's share of the income Stockholders will have of the Junior and gain and, subject to taxable income from the Subordinated certain limitations, the losses, Corporation's operations Debentures held by the deductions and credits of the only to the extent that trust and will be Partnership in computing taxable dividends and other required to include in taxable income without distributions are declared and gross income the pro regard to the cash distributed paid on the Common Stock. rata share of income to the limited partner. See "CERTAIN FEDERAL accrued on the Junior Generally, cash distributions INCOME TAX Subordinated to holders of Interests are CONSEQUENCES." Debentures and any not taxable, unless original issue discount distributions exceed the attributable to the limited partner's basis in the Junior Subordinated Interests. See "CERTAIN Debentures. See FEDERAL INCOME TAX "CERTAIN FEDERAL CONSEQUENCES." INCOME TAX CONSEQUENCES."
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Interests Common Stock Trust Preferred Securities ------------ -------------- ---------------------------- A tax-exempt limited No portion of the earnings No portion of the partner's share of the of, or any dividends received income accrued or Partnership's taxable income from, the Corporation will distributions received constitutes unrelated constitute unrelated business on the Trust Preferred business taxable income to taxable income to tax-exempt Securities will the tax-exempt unitholder. stockholders, except to the constitute unrelated See "CERTAIN FEDERAL extent their investment in business taxable income INCOME TAX stock of the Corporation is to tax-exempt CONSEQUENCES." considered debt-financed. stockholders, except to See "CERTAIN FEDERAL the extent their INCOME TAX investment in the Trust CONSEQUENCES." Preferred Securities is considered debt- financed. See CERTAIN FEDERAL INCOME TAX CONSEQUENCES."
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Interests Common Stock Trust Preferred Securities ------------ -------------- ---------------------------- Distributions and Dividends The Partnership is required The Board of Directors of The holders of Trust under the Partnership the Corporation has the Preferred Securities Agreement to make discretion to determine will be entitled to distributions of the whether or not and when to monthly distributions at Partnership's Cash Available declare and pay dividends the rate of $2.90 per for Distribution, less certain and the amount of any annum (11.6% of the permitted retentions to the A dividend. Holders of $25 liquidation Interests for the Priority Common Stock will have no amount) to the extent Return of $1.10 per annum contractual right to receive interest is paid by the and to the B Interests for the dividends. Corporation on the Tax Distribution. Cash Junior Subordinated Available for Distribution Debentures. The generally means the Corporation has the Partnership's cash receipts right to defer payment less (i) cash operating of interest on the Junior expenses and other Subordinated expenditures, and (ii) Debentures for a period reserves, established by the up to 60 consecutive General Partner in its sole months in which case discretion for working no distributions will be capital, capital expenditures, paid on the Trust debt service and other Preferred Securities. purposes and contingencies. Any unpaid distributions will cumulate and must be paid prior to any dividends on the Common Stock.
Management The business and affairs of The business and affairs of The Trust is managed the Partnership are managed the Corporation are managed by five trustees by the General Partner. by or under the direction of appointed by the the Board of Directors of the Corporation. Corporation. The members of the Board of Directors of Lehman/SDI will become the members of the Board of Directors of the Corporation after the Conversion. Therefore, the personnel in control of the Corporation will be identical to that of the Partnership. The General Partner may be The holders of Common The holders of Trust removed only by vote of Stock of the Corporation will Preferred Securities 80% of the Interests held by have the ability to elect will have no rights to unaffiliated limited partners. members of the Board of elect or remove See "DESCRIPTION OF Directors with a plurality of management of the CAPITAL STOCK -- the votes cast for such Corporation. The Stockholders Agreement." election and to remove the holders will be entitled Board of Directors with a to elect a Special majority vote of the Regular Trustee if the Common Stock outstanding Trust fails to make and entitled to vote. distributions for 18 consecutive months or there is an Event of Default. [ ]
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Interests Common Stock Trust Preferred Securities ------------ -------------- ---------------------------- Voting Rights Under Delaware law and the Holders of Common Stock The holders of Trust Partnership Agreement, will have the right to vote on Preferred Securities limited partners have voting matters specified by will have no voting rights with respect to (i) the Delaware law affecting the rights except to elect a removal and replacement of corporate structure of the Special Regular the General Partner, (ii) the Corporation, including Trustee as described merger of the Partnership, election of the Board of above and with respect (iii) the sale of all or Directors. Stockholders of to certain modifications substantially all of the assets the Corporation will have the and amendments. owned, directly or indirectly, right to vote on all matters by the Partnership, (iv) the on which stockholders must dissolution of the Partnership be permitted to vote or the Operating Partnership, including, as a general and (v) material amendments matter, election of directors, to the Partnership Agreement fundamental changes in the and the Operating Corporation, sale of all or Partnership Agreement, substantially all of the assets subject to certain limitations. of the Corporation and amendments to the Certificate of Incorporation. Each Interest entitles each Each share of Common Each of the Trust holder thereof who is Stock entitles its holder to Preferred Securities admitted as a limited partner cast one vote on each matter entitles its holder to to the Partnership to cast one presented to stockholders. cast one vote on each vote on all matters presented matter presented to the to limited partners. holders of Trust Preferred Securities. Approval of any matter Approval of any matter Approval on any matter submitted to limited partners submitted to stockholders on which holders of generally requires the generally requires the Trust Preferred affirmative vote of limited affirmative vote of holders of Securities are entitled partners holding more than more than 50% of the to vote requires the 50% of the Interests then Common Stock outstanding affirmative vote of a outstanding. The removal of and entitled to vote. majority of the the General Partner requires outstanding Trust the affirmative vote of 80% Preferred Securities of the unaffiliated limited except that certain partners. modifications and amendments of the Declaration require a 66 2/3% vote.
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Interests Common Stock Trust Preferred Securities ------------ -------------- ---------------------------- Holders of 25% of the Amendment of the certificate The holders of the Interests held by limited of incorporation or bylaws Trust Preferred partners may propose requires approval of a Securities may [ ] approve amendments to the majority of the members of certain amendments partnership agreement. the Board of Directors and, of the Declaration with in certain cases, approval by the approval of at least the stockholders. The 66 2/3% in liquidation Stockholders Agreement has amount of Trust certain requirements with Preferred Securities. regard to approval of amendments by the Independent Directors. In addition, the Stockholders Agreement contains provisions under which Lehman Brothers and certain members of management will agree to vote, in the same proportion as the "Unaffiliated Shares" that are voted on any such matter, that percentage of Excess Voting Shares (as defined herein) held by them at such time that equals the percentage of outstanding Unaffiliated Shares that are voted on such matter. See "DESCRIPTION OF CAPITAL STOCK -- Stockholders Agreement." Any action that may be taken Stockholders may act by Holders of Trust at a meeting of limited written consent in lieu of a Preferred Securities partners may be taken by meeting with a number of may act by written written consent in lieu of a votes sufficient for such consent in lieu of a meeting executed by limited action. meeting with a number partners sufficient to of votes sufficient for authorize such action at a such action. meeting of limited partners.
Special Meetings Special meetings of Limited Stockholders are permitted Holders of Trust Partners may be called by the to call a special meeting or Preferred Securities General Partner or by require that the board of may call a special Limited Partners holding at directors call a special meeting of the Trust least 25% of the outstanding meeting of stockholders if only to elect a Special Interests. such meeting is called by Regular Trustee. holders of at least 25% of outstanding Common Stock.
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Interests Common Stock Trust Preferred Securities ------------ -------------- ---------------------------- Conversion Rights The Interests are not The Common Stock is not The Trust Preferred convertible into any other convertible into any other Securities are not securities. securities. convertible into any other securities.
Redemption Interests are not subject to The Common Stock is not The Trust Preferred mandatory or optional subject to mandatory or Securities will be redemption. optional redemption. redeemed upon maturity or earlier redemption of the Junior Subordinated Debentures at 100% of the liquidation amount plus accrued and unpaid distributions, provided that any redemption by reason of a Tax Event within the first five years will be at 101%. The Junior Subordinated Debentures may be redeemed by the Corporation at any time after April 30, 2002. Liquidation Rights In the event of the liquidation In the event of a liquidation In the event of a of the Partnership the assets of the Corporation, the liquidation of the Trust, of the Partnership remaining holders of Common Stock the holders of Trust after the satisfaction of all would be entitled to share Preferred Securities debts and liabilities of the ratably in any assets would be entitled to Partnership are distributed to remaining after satisfaction receive a preferential holders of A Interests in an of obligations to creditors distribution of $25 per amount equal to their capital and any liquidation Trust Preferred account ($10) plus any preferences on any series of Security plus accrued unpaid Priority Return and preferred stock of the and unpaid distributions the remainder is distributed Corporation that may then be except that, upon the to the General Partner and outstanding. occurrence of a Special the B Interests in accordance Event, the Trust will be with their capital accounts. liquidated and, after satisfaction of creditors of the Trust, the holders will receive Junior Subordinated Debentures.
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Interests Common Stock Trust Preferred Securities ------------ -------------- ---------------------------- Right to Compel Dissolution Under the Partnership Under Delaware law, holders Under the Declaration, Agreement, limited partners of Common Stock may holders of Trust may compel dissolution of compel dissolution of the Preferred Securities the Partnership by the Corporation, absent prior may not compel affirmative vote of the action by the board of dissolution of the holders of a majority of directors, only if all holders Trust. outstanding Interests. consent in writing. A plan of dissolution adopted by the board of directors must be approved by a majority of the Common Stock outstanding and entitled to vote. Limited Liability In general, holders of Shares of Common Stock Holders of Trust Interests are limited partners will be fully paid and Preferred Securities in a Delaware limited nonassessable. Stockholders will be entitled to the partnership, and do not have generally will not have same limitation of personal liability for personal liability for personal liability obligations of the obligations of the extended to Partnership. Corporation. stockholders of private corporations for profit organized under the general corporation law of the State of Delaware. Liquidity and Marketability The Interests are freely The Common Stock will be The Trust Preferred transferable and are currently freely transferable and Securities will be freely listed and traded on the NYSE. application has been made transferable and After the Effective Time, the for listing the Common application has been Interests will cease to be Stock on the NYSE. made for listing the traded. Trust Preferred Securities on the NYSE.
Continuity of Existence [ ]The Partnership Agreement The Corporation's The Trust will dissolve provides for the Partnership Certificate of Incorporation on , 2027 or to continue in existence until provides for perpetual upon the earlier December 31, 2086, unless existence, subject to redemption of the Trust earlier terminated in Delaware law. Preferred Securities or accordance with the the distribution to the Partnership Agreement. holders of the Junior Subordinated Debentures. Financial Reporting The Partnership is subject to The Corporation will be The Corporation will the reporting requirements of subject to the reporting provide annual and the Exchange Act and files requirements of the quarterly reports of the annual and quarterly reports Exchange Act and will file Corporation to the thereunder. The Partnership annual and quarterly reports holders of the Trust also provides annual and thereunder. The Corporation Preferred Securities. quarterly reports to its also will provide annual and For the reasons set limited partners. quarterly reports to its forth under "Available stockholders. Information," the Trust will not issue any separate reports.
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Interests Common Stock Trust Preferred Securities ------------ -------------- ---------------------------- Certain Legal Rights Delaware law allows a Delaware law affords Delaware law allows a limited partner to institute stockholders of a corporation beneficial owner of the legal action on behalf of the rights to bring stockholder Trust to institute legal Partnership (a partnership derivative actions when the action on behalf of the derivative action) to recover board of directors has failed Trust (a trust derivative damages from a third party to institute an action against action) to recover or a general partner where third parties or directors of damages from a third the general partner has failed the corporation, and class party or a trustee where to institute the action. In actions to recover damages the trustees with addition, a limited partner from directors for violations authority to do so have may have rights to institute of their fiduciary duties. failed to institute the legal action on behalf of the Stockholders may also have action. In addition, a limited partner or all other rights to bring actions in beneficial owner of the similarly situated limited federal courts to enforce Trust may have rights partners (a class action) to federal rights. These rights to institute legal action recover damages from a are comparable to the rights on behalf of himself or general partner for violations of the limited partners in the all other similarly of fiduciary duties to the Partnership. situated beneficial limited partners. Limited owners (a class action) partners may also have rights to recover damages to bring actions in federal from a trustee for courts to enforce federal violations of fiduciary rights. duties to the beneficial owners. Beneficial owners of the Trust may also have rights to bring actions in federal courts to enforce federal rights. Right to List of Holders; Inspection of Books and Records Upon reasonable demand, at Under Delaware law, upon Upon reasonable the limited partner's own written request, at reasonable demand and for a expense and for a purpose times and for a proper purpose reasonably reasonably related to his purpose reasonably related to related to his interest as interest in the Partnership, a a stockholder's interest as a a beneficial owner of limited partner may have stockholder, any stockholder the Trust, a Holder of access, at reasonable times, of record shall have the right Trust Preferred to certain information to examine and copy the Securities may have regarding the status of the Corporation's stock ledger, a access, at reasonable business and financial list of its stockholders and its times, to certain condition of the Partnership, other books and records. In information regarding tax returns, governing certain circumstances under the status of the instruments of the Delaware law, stockholders business and financial Partnership and a current list may not have the same right condition of the Trust, of the partners of the to information regarding the governing instruments Partnership, provided that Corporation that they of the Trust and a the General Partner may currently have under the current list of the keep confidential any trade Partnership Agreement with beneficial owners and secrets or any other respect to information trustees of the Trust, information the disclosure of regarding the Partnership. provided that the which could damage the trustees of the Trust Partnership or violate any may keep confidential agreement or applicable law. any trade secrets or other information the disclosure of which could damage the Trust or violate any agreement or applicable law.
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Interests Common Stock Trust Preferred Securities ------------ -------------- ---------------------------- Subordination Subordinated to claims of Subordinated to claims of Subordinated to creditors of the Partnership creditors of the Corporation creditors of the Trust, and Operating Partnership. and the Operating if any. The Preferred Partnership. Securities Guarantee and the Junior Subordinated Debentures of the Corporation will be subordinate to all liabilities of the Corporation and the Operating Partnership except those made pari passu or subordinate by their terms.
Fiduciary Duties As a general partner of a limited partnership, the General Partner owes the limited partners, under Delaware law, the fiduciary duties of good faith and loyalty in handling the affairs of the Partnership, including, in certain instances, a duty to disclose material information concerning the Partnership's affairs. The General Partner believes it has satisfied its fiduciary duties in connection with the Conversion. Following consummation of the Conversion, the directors of Lehman/SDI will become directors of the Corporation. Under Delaware law, a director's fiduciary duties to the stockholders of the Corporation in such capacity will be substantially similar to those currently owed by the General Partner to limited partners under Delaware law. The Partnership Agreement further provides that neither the General Partner nor any of its affiliates will be liable to the Partnership or the limited partners for any act or omission if (i) taken in good faith and in a manner reasonably believed to be in, or not opposed to, the interests of the Partnership, and (ii) the conduct did not constitute gross negligence or willful or wanton misconduct. Thus, the General Partner and its affiliates may have a more limited liability to the limited partners than would otherwise be the case absent such provisions. Similarly, the Corporation's Certificate of Incorporation provides that a director of the Corporation shall not be liable for any act or omission in the director's capacity as director except to the extent the director is found liable for (i) a breach of the duty of loyalty, (ii) an act or omission not in good faith, (iii) a transaction in which the director received an improper benefit or (iv) an act or omission for which the liability of a director is expressly provided for by statute. Under the Partnership Agreement, the Partnership is required to indemnify the General Partner and the officers, directors, employees and agents of the General Partner against liabilities and expenses incurred by the General Partner or such persons if (i) the General Partner or such persons acted in good faith, and in a manner reasonably believed to be in, or not opposed to, the interests of the Partnership and, with respect to any criminal proceeding, had no reason to believe the conduct was unlawful and (ii) the General Partner's or such persons' conduct did not constitute actual fraud, gross negligence or willful misconduct. The Corporation's By-laws provide indemnification to all its directors, officers, employees and agents. After the Conversion, the general partner of the General Partner will be SunSub B, a subsidiary of the Corporation. CERTAIN FEDERAL INCOME TAX CONSEQUENCES The following general discussion summarizes certain federal income tax considerations relating to the Conversion. These summaries are included herein for general information only. They do not discuss all aspects of federal income taxation that may be relevant to a particular taxpayer in light of the taxpayer's personal tax circumstances or to certain types of taxpayers subject to special treatment under the federal income tax laws. No legal opinion regarding such tax considerations is being rendered hereby. Except as otherwise indicated, statements of legal conclusion regarding tax treatments, tax effects or tax consequences reflect the opinions of Morgan, Lewis & Bockius LLP, counsel 78 for the Corporation and the Partnership, which has rendered its opinion regarding the accuracy of the discussion herein to the Partnership. A copy of Morgan, Lewis & Bockius LLP's opinion has been filed as an exhibit to the Registration Statement of which this Proxy Statement/Prospectus forms a part, and a copy of the opinion may be obtained by written request addressed to SunSource L.P., 2600 One Logan Square, Philadelphia, Pennsylvania 19103, Attention: Joseph M. Corvino, Secretary, telephone number (215) 665-3650. The Partnership has not requested, and does not intend to request, a ruling from the Internal Revenue Service ("IRS"). An opinion of counsel is not binding on the IRS or the courts, and no assurance can be given that the IRS will not challenge the tax treatment of certain matters discussed herein, or if it does, that it will be unsuccessful. Accordingly, each limited partner should consult the limited partner's own tax advisor as to the specific tax consequences to the limited partner including the application and effect of state or local income and other tax laws. The following discussion is based on existing provisions of the Internal Revenue Code of 1986, as amended (the "Code"), existing and proposed regulations and existing administrative interpretations and court decisions. Future legislation, regulations, administrative interpretations or court decisions could significantly change such authorities either prospectively or retroactively. Partnership Status and Taxation of the Partnership The Partnership is properly classified for federal income tax purposes as a partnership rather than an association taxable as a corporation. Currently, the Partnership is not itself subject to federal income tax. Rather, each limited partner is subject to income tax based on the limited partner's allocable share of Partnership taxable income, gain, loss, deduction, and credits, whether or not any cash is actually distributed to such limited partner. The Revenue Act of 1987 amended the Code to treat certain publicly-traded partnerships as corporations rather than partnerships for federal income tax purposes. Under a transition rule, however, an existing publicly-traded partnership, such as the Partnership, will not be classified as a corporation until the earlier of (i) the partnership's first taxable year beginning after December 31, 1997 or (ii) the time at which the partnership adds a new line of business that is substantial. Under the above-described transition rule, the Partnership will be taxed as a corporation no later than its taxable year beginning on January 1, 1998. At that time the Partnership will be treated as if it had transferred all of its assets (subject to its liabilities) to a newly formed corporation in exchange for the stock of the corporation, and then distributed such stock to its partners in liquidation of their interests in the Partnership. Upon classification as a corporation for tax purposes, the Partnership would be subject to federal income tax on its earnings at corporate tax rates. There are four bills pending in Congress that would change the treatment of publicly-traded partnerships after December 31, 1997. H.R. 1443, introduced April 24, 1997, and S. 907, introduced June 16, 1997, would eliminate the transition rule so that publicly-traded partnerships would continue to be taxed as partnerships after December 31, 1997. The bill passed by the House Ways and Means Committee in June 1997 provides that a publicly-traded partnership can avoid being taxed as a corporation if it elects to be subject to a 15% tax on gross income. The bill passed by the Senate Finance Committee in June 1997 has a similar provision except the tax on gross income would be 3.5%. The differences between these two bills must be resolved by the conference committee before being submitted to the President for his signature. It is not possible to predict at this time if one of these bills or a compromise bill will ultimately be adopted by Congress and signed by the President. General Tax Treatment of the Conversion The Partnership has been a Delaware limited partnership since it began operations in 1987. In the Conversion, the Partnership and a subsidiary of the Partnership will be merged with and into the Corporation with each A Interest being exchanged for Trust Preferred Securities and cash and each B Interest being exchanged for Common Stock. There is no specific authority dealing with a substantially similar transaction. Accordingly, counsel cannot predict with certainty how the Conversion will be treated for federal income tax purposes. The exchange of A Interests for Trust Preferred Securities and cash pursuant to the Merger will be a taxable transaction. In the case of a holder who exchanges A Interests, gain or loss will be recognized in an amount equal to the difference between the sum of the amount of cash and the fair market value of Trust Preferred Securities received in the exchange and the exchanging holder's tax basis in the A Interests exchanged. Such gain or loss will be long-term capital gain or loss if the A Interests have been held for more than one year as of such date and if such Interests have been held as capital assets. Under current law, the Corporation does not expect that any portion of the gain 79 will be treated as ordinary income pursuant to the rules of section 751 of the Code. Legislation has been passed by the House and Senate, however, that, if enacted prior to the Conversion, would result in a portion of the gain being treated as ordinary income pursuant to Section 751 of the Code. Specifically, any amount received by a holder of A Interests that is attributable to inventory items would be treated as an amount realized from the sale or exchange of property that is not a capital asset and would result in ordinary income to the exchanging holder of A Interests. A holder of A Interests will have a tax basis in the Trust Preferred Securities received in the Merger equal to the fair market value of such Trust Preferred Securities received. A holder's aggregate tax basis in his pro rata share of the underlying Junior Subordinated Debentures will be equal to his pro rata share of their "issue price" at the Effective Time as defined below. As to holders of B Interests, counsel is of the opinion that the limited partners will be treated as exchanging their B Interests for shares of Common Stock in an exchange described in Section 351 of the Code, pursuant to which such holders should not recognize gain or loss, except to the extent of any cash received in lieu of fractional shares. Any such cash should result in capital gain to the recipient, assuming that the B Interests are held as capital assets. Counsel's opinion that holders of B Interests will be treated as exchanging their Partnership interests for stock of the Corporation is based on the federal income tax treatment of analogous transactions. It is well settled, and the Service has issued published rulings to the effect that, if a parent corporation forms a transitory subsidiary corporation and merges it into another corporation to enable the parent to acquire the stock of such other corporation, the merger of the transitory subsidiary corporation into such other corporation will be ignored, and the stockholders of the target corporation will be treated as receiving directly from the parent corporation stock or other property of the parent in exchange for their shares of the target. In addition, the Service has issued private letter rulings addressing the treatment of transactions in which a corporation forms a transitory partnership and merges it into an existing partnership as a means of transforming the partners of the existing partnership into stockholders of the corporation. The conclusions expressed in the private letter rulings are consistent with the treatment of the Conversion expressed above. Holders of B Interests should be aware that, unlike published rulings, private letter rulings cannot be cited as authority, and may be relied upon only by the taxpayer requesting the ruling, although the conclusions expressed therein are indicative of the Service's thinking on a particular matter. As to persons that hold both A Interests and B Interests at the time of the Conversion, while not free from doubt, a likely result is that these investors will recognize gain on an aggregate basis - i.e. the difference between their aggregate tax basis in the A Interests and the B Interests and the aggregate fair market value of the cash, Trust Preferred Securities and Common Stock received in the Conversion will constitute the gain realized, which realized gain will be recognized to the extent of the fair market value of cash or other property ("boot") received in the Conversion - i.e. the sum of the cash and the fair market value of the Trust Preferred Securities received. Such gain should be treated as long-term capital gain, provided that the Interests have been held for more than one year, and provided that such Interests have been held as capital assets. As noted earlier, under current law, the Corporation does not expect that any portion of the gain will be treated as ordinary income pursuant to section 751 of the Code. As further discussed above, however, proposed legislation could result in a portion of the gain being treated as ordinary. Such a holder's basis in the Common Stock received in the Conversion will be equal to sum of such holder's basis in the A Interests and B Interests exchanged therefor, plus the amount of gain recognized, less the amount of cash and the value of the Trust Preferred Securities received. If the aggregate tax basis of the A and B Interests exceeds the aggregate fair market values of the cash, Trust Preferred Securities, and Common Stock received in the Conversion, it is likely that no loss will be recognized. A person that holds both A Interests and B Interests could take the position that a treatment of the Conversion other than the aggregate basis approach described above should apply, and such persons should consult their own tax advisors regarding the tax consequences of the aggregate basis approach. The Partnership and the Corporation intend to treat the Conversion in accordance with the positions reflected in the foregoing description and to prepare reports and tax information accordingly. Except as otherwise noted, the following discussion assumes the correctness of such treatment. Certain Tax Consequences of the Conversion to Holders of B Interests Nonrecognition of Gain or Loss. Section 351 (a) of the Code provides, in general, that no gain or loss is recognized upon the transfer by one or more persons of property (such as partnership interests) to a corporation solely in exchange for stock in such corporation if, immediately after the exchange, such person or persons are in control of the corporation to which the property was transferred. Section 368(c) of the Code defines control as the ownership of stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of all other classes of stock. Section 351 (b) of the Code provides that if boot is received in addition to stock in an otherwise qualifying transaction, taxable income must be recognized in an amount equal to the lesser of (i) any gain realized on the exchange or (ii) the amount of boot received. For this purpose, gain realized is generally equal to the excess, if any, of (x) the amount of cash and the fair market value of stock and other property received from the corporation over (y) the adjusted basis of property transferred to the corporation. In determining realized gain, a limited partner's share of partnership liabilities is treated as cash received upon the transfer. Section 80 357(c) of the Code generally provides that if the sum of the liabilities assumed in the Section 351 exchange exceeds the aggregate tax basis of the assets transferred in the exchange, such excess is treated as gain from the sale or exchange of the assets transferred. Section 752 of the Code generally provides that a partner's tax basis for its partnership interest includes its share of the liabilities of the partnership, as determined under Treasury regulations. A published ruling issued by the Service holds that upon the transfer of a partnership interest to a corporation in a Section 351 transaction, the transferor's share of partnership liabilities is treated as assumed by the corporation for purposes of Section 357(c) of the Code. Assuming the Conversion is treated for federal income tax purposes in the manner described above under "General Tax Treatment of the Conversion," it is counsel's opinion that the exchange by holders of B Interests of their Interests for Common Stock will be treated as part of a transaction described in Code Section 351(a). Accordingly, holders of B Interests should incur no federal income tax liability as a result of the exchange, except to the extent of any cash received in lieu of fractional shares. Any such cash should result in capital gain to the recipient, assuming that such B Interests are held as capital assets. This conclusion is based on the assumption that (i) such holders do not own any A Interests (see the discussion above), (ii) holders of B Interests and the parties exchanging their interests in the General Partner (together, the "Transferors") as steps in the Conversion will own, immediately after such transfers, more than 80 percent of each class of stock of the Corporation and (iii) not more than 20 percent of the shares of stock transferred to the Transferors pursuant to the Conversion will be subsequently disposed of pursuant to contracts or other formal or informal agreements entered into prior to the Conversion (the "Control Assumption"). If the Control Assumption were not correct, each holder of B Interests could recognize gain or loss on the Conversion as if such holder had sold the B Interests in a taxable transaction for an amount equal to the value of stock received in the Conversion. Counsel is not aware of any contracts or other formal or informal agreements entered into by persons receiving shares of stock to dispose of such shares. Notwithstanding the above, any holders of B Interests who are treated as receiving shares of stock in exchange for services will be taxed on the receipt of the stock to the extent of the value thereof. Any portion of the liabilities of the Partnership allocated to a holder of B Interests would increase such holder's tax basis in such B Interest by an amount equal to such allocated liability. As such allocated liability cannot exceed such holder's tax basis in the B Interest, no gain recognition under Section 357(c) of the Code will result from the Conversion for a holder of B Interests. Basis and Holding Period of Common Stock. The aggregate tax basis of the Common Stock that a holder of B Interests receives in the exchange will be equal to the tax basis of their B Interests immediately prior to the Conversion. The holding period for Common Stock received in the Conversion will include the exchanging holder's holding period for the B Interests, provided such holder held such Interests as capital assets at the time of the Conversion. Sale of Stock. In general, any gain or loss from the sale or exchange of the Common Stock received in the Conversion will be characterized as capital gain or loss provided such item was held as a capital asset. Gain or loss will be measured by the difference between the amount realized and the holder's adjusted tax basis in the Common Stock. Ownership of Stock. After the Conversion, a holder of Common Stock generally will be taxed only on distributions of money or other property received from the Corporation, if any, out of current or accumulated earnings and profits. Such income will be characterized as a dividend and as investment or portfolio income for purposes of certain tax rules, e.g., those regarding deductibility of interest expense, under Section 163 of the Code. To the extent that the Corporation has no current or accumulated earnings and profits at the time of a distribution, the amount of the distribution will first reduce a stockholder's adjusted basis in the Common Stock and, thereafter, will be taxed as an amount received from the sale or exchange of the Common Stock. The Corporation will have no accumulated earnings and profits as it begins operations following consummation of the Conversion. Distributions in connection with a complete liquidation of the Corporation will be treated as amounts received from the sale or exchange of the Common Stock. Distributions received in connection with a redemption will be treated as dividends or as amounts received from the sale or exchange of the stock depending upon the redeeming stockholder's actual or constructive ownership of other stock of the Corporation. 81 Certain Tax Consequences of the Conversion to Holders of A Interests Classification of the Trust. In connection with the issuance of the Trust Preferred Securities, Morgan, Lewis & Bockius LLP, counsel to the Corporation and the Trust, will render its opinion generally to the effect that, under then current law and assuming full compliance with the terms of the Declaration, the Trust will be classified for United States federal income tax purposes as a grantor trust and not as an association taxable as a corporation. Accordingly, each holder of Trust Preferred Securities (a "Securityholder") will be considered the owner of a pro rata portion of the Junior Subordinated Debentures held by the Trust. Accordingly, each Securityholder will be required to include in gross income the Securityholder's pro rata share of the income accrued on the Junior Subordinated Debentures. Recognition of Gain or Loss. The exchange of A Interests for Trust Preferred Securities and cash pursuant to the Merger will be a taxable transaction. Gain or loss will be recognized in an amount equal to the difference between the sum of the cash and the fair market value of Trust Preferred Securities received in the exchange and the exchanging holder's tax basis in the A Interests exchanged. Under current law, such gain will be long-term capital gain or loss if the A Interests has been held for more than one year as of such date and if such Interests have been held as capital assets. Legislation has been passed by the House and the Senate, however, that, if enacted prior to the Conversion, would result in a portion of the gain being treated as ordinary income pursuant to Section 751 of the Code. Specifically, any amount received by a holder of A Interests that is attributable to inventory items would be treated as an amount realized from the sale or exchange of property that is not a capital asset and would result in ordinary income to the exchanging holder of A Interests. Basis and Holding Period of Junior Subordinated Debentures. A Securityholder's initial tax basis for the Securityholder's pro rata share of the Junior Subordinated Debentures will be equal to the Securityholder's pro rata share of their "issue price" (for each $25 principal amount of Junior Subordinated Debentures the "issue price" will be equal to the fair market value of a Trust Preferred Security at the Effective Time (reduced by Pre-Issuance Accrued Interest (as defined below)), which may be more or less than $25) and will be increased by original issue discount (as discussed below) accrued with respect thereto, and reduced by the amount of cash distributions (including the amount of any Pre-Issuance Accrued Interest) paid to such Securityholder. Accrual of Original Issue Discount and Premium. The Junior Subordinated Debentures will be considered to have been issued with "original issue discount" and each Securityholder, including a taxpayer who otherwise uses the cash method of accounting, will be required to include the Securityholder's pro rata share of original issue discount on the Junior Subordinated Debentures in income as it accrues, in accordance with a constant yield method based on a compounding of interest, before the receipt of cash distributions on the Trust Preferred Securities. Generally, all of a Securityholder's taxable interest income with respect to the Junior Subordinated Debentures will be accounted for as "original issue discount" and actual distributions of stated interest will not be separately reported as taxable income. So long as the interest payment period is not extended, cash distributions received by an initial holder for any monthly interest period (assuming no disposition prior to the record date for such distribution) will equal or exceed the sum of the daily accruals of income for such monthly interest period, unless the issue price of the Junior Subordinated Debentures is less than $25. The total amount of "original issue discount" on the Junior Subordinated Debentures will equal the difference between the issue price of the Junior Subordinated Debentures and their "stated redemption price at maturity." Because the Corporation has the right to extend the interest payment period of the Junior Subordinated Debentures, all of the stated interest payments on the Junior Subordinated Debentures will be includible in determining their "stated redemption price at maturity." The issue price of each $25 principal amount of the Junior Subordinated Debentures will be equal to the fair market value of a Trust Preferred Security at the Effective Time (reduced by Pre-Issuance Accrued Interest), which may be more or less than $25, with the result that the total amount of original issue discount on the Junior Subordinated Debentures may be more or less than the amount of stated interest payable with respect thereto. No portion of the amounts received on the Trust Preferred Securities will be eligible for the dividends received deduction applicable to holders that are U.S. corporations, unless the Trust Preferred Securities constitute "high yield discount obligations" ("HYDOs") under the Internal Revenue Code. If the Trust Preferred Securities do constitute HYDOs, the original issue discount on the Trust Preferred Securities will not be deductible by the Corporation until actually paid by the Corporation, and depending upon the instrument's yield as computed under the original issue discount rules, a portion of such original issue discount (the "Disqualified Portion") may not be deductible by the Corporation at any time. Such Disqualified Portion, if any, will be eligible for the dividends received deduction for corporate holders of A Interests, however, if the Corporation has sufficient earnings and profits. The question whether the 82 Trust Preferred Securities will constitute HYDOs cannot be determined at the time of this writing, because the issue depends, in part, on factors that will not be determined until the date of issuance of the Trust Preferred Securities (including their "issue price" and the prevailing "applicable federal rate" under the Code). In order to constitute HYDOs, the yield to maturity on the Trust Preferred Securities must equal or exceed five percentage points over the applicable federal rate. For August 1997, the applicable federal rate is 6.39%. Potential Extension of Payment Period on the Junior Subordinated Debentures. Securityholders will continue to accrue original issue discount with respect to their pro rata share of the Junior Subordinated Debentures during an extended interest payment period, and any holders who dispose of Trust Preferred Securities prior to the record date for the payment of interest following such extended interest payment period, will not receive from the Trust any cash related thereto. Distribution of Junior Subordinated Debentures to Holders of Trust Preferred Securities. Under current law, except in the unlikely event that the Trust were determined to be taxable as a corporation for tax purposes, a distribution by the Trust of the Junior Subordinated Debentures as described in the Prospectus detailing the terms of the Trust Preferred Securities under the caption "DESCRIPTION OF THE TRUST PREFERRED SECURITIES -- Special Event Redemption or Distribution; Shortening of Stated Maturity," will be non-taxable and will result in the Securityholder receiving directly his pro rata share of the Junior Subordinated Debentures previously held indirectly through the Trust, with a holding period and tax basis equal to the holding period and adjusted tax basis such Securityholder was considered to have had in his pro rata share of the underlying Junior Subordinated Debentures prior to such distribution. Treatment of the Payment of Pre-issuance Accrued Interest. "Pre-Issuance Accrued Interest" payable on the first interest payment date should be treated as a return of capital with respect to a Securityholder's pro rata interest in the Junior Subordinated Debentures, reducing the Securityholder's tax basis in his pro rata share of the Junior Subordinated Debentures. Market Discount and Bond Premium. Securityholders other than initial holders may be considered to have acquired their pro rata interest in the Junior Subordinated Debentures with market discount, acquisition premium or amortizable bond premium. Such holders are advised to consult their tax advisors as to the income tax consequences of the acquisition, ownership and disposition of the Trust Preferred Securities. Disposition of the Trust Preferred Securities. Upon a sale, exchange or other disposition of the Trust Preferred Securities (including a distribution of cash in redemption of a Securityholder's Trust Preferred Securities upon redemption or repayment of the underlying Junior Subordinated Debentures, but excluding the distribution of Junior Subordinated Debentures), a Securityholder will be considered to have disposed of all or part of the Securityholder's pro rata share of the Junior Subordinated Debentures, and will recognize gain or loss equal to the difference between the amount realized and the Securityholder's adjusted tax basis in the Securityholder's pro rata share of the underlying Junior Subordinated Debentures deemed disposed of. Gain or loss will be capital gain or loss (except to the extent of any accrued market discount with respect to such Securityholder's pro rata share of the Junior Subordinated Debentures not previously included in income) provided the Trust Preferred Securities are a capital asset in a Securityholder's hands. See "-- Market Discount and Bond Premium" above. Such gain or loss will be long-term capital gain or loss if the Trust Preferred Securities have been held for more than one year. The Trust Preferred Securities may trade at a price that does not fully reflect the value of accrued but unpaid interest with respect to the underlying Junior Subordinated Debentures. A Securityholder who disposes of Trust Preferred Securities between record dates for payments of distributions thereon will nevertheless be required to include in income accrued but unpaid interest on the Junior Subordinated Debentures through the date of disposition, and to add such amount to the Securityholder's adjusted tax basis in the Securityholder's pro rata share of the underlying Junior Subordinated Debentures deemed disposed of. Accordingly, such a Securityholder will recognize a capital loss to the extent the selling price (which may not fully reflect the value of accrued but unpaid interest) is less than the Securityholder's adjusted tax basis (which will include accrued but unpaid interest). Subject to certain limited exceptions, capital losses cannot be applied to offset ordinary income for United States federal income tax purposes. United States Alien Holders. For purposes of this discussion, a "United States Alien Holder" is any corporation, individual, partnership, estate or trust that is, as to the United States, a foreign corporation, a non-resident alien individual, a foreign partnership or a non-resident fiduciary of a foreign estate or trust. Under present United States federal income tax law: 83 (i) payments by the Trust or any of its paying agents to any holder of a Trust Preferred Security who or which is a United States Alien Holder will not be subject to United States federal withholding tax, provided that (a) the beneficial owner of the Trust Preferred Security does not actually or constructively own 10 percent or more of the total combined voting power of all classes of stock of the Corporation entitled to vote, (b) the beneficial owner of the Trust Preferred Security is not a controlled foreign corporation that is related to the Corporation through stock ownership, and (c) either (A) the beneficial owner of the Trust Preferred Security certifies to the Trust or its agent, under penalties of perjury, that it is not a United States holder and provides its name and address or (B) a securities clearing organization, bank or other financial institution that holds customers' securities in the ordinary course of its trade or business (a "Financial Institution") and holds the Trust Preferred Security certifies to the Trust or its agent under penalties of perjury that such statement has been received from the beneficial owner by it or by a Financial Institution between it and the beneficial owner and furnishes the Trust or its agent with a copy thereof; (ii) a United States Alien Holder of a Trust Preferred Security will not be subject to United States federal withholding tax on any gain realized upon the sale or other disposition of a Preferred Security; and (iii) any gain realized by a United States Alien Holder upon the exchange of A Interests for Trust Preferred Securities will not be subject to United States federal withholding tax. Information Reporting to Holders. The Trust will report the original issue discount that accrued during the year with respect to the Junior Subordinated Debentures, and any gross proceeds received by the Trust from the retirement or redemption of the Junior Subordinated Debentures, annually to the holders of record of the Trust Preferred Securities and the Internal Revenue Service. The Trust currently intends to deliver such reports to holders of record prior to January 31 following each calendar year. It is anticipated that persons who hold Trust Preferred Securities as nominees for beneficial holders will report the required tax information to beneficial holders. Backup Withholding. Payments made on, and proceeds from the sale of, Trust Preferred Securities may be subject to a "backup" withholding tax of 31 percent unless the holder complies with certain identification requirements. Any withheld amounts will generally be allowed as a credit against the holder's federal income tax, provided the required information is timely filed with the Internal Revenue Service. Other Tax Issues Affecting Limited Partners Pre-Conversion Operations of the Partnership. The income and deductions of the Partnership incurred during 1997 prior to the Conversion will be allocated among the partners, and each partner's basis in its general or limited partnership interest will be adjusted by such allocations, in essentially the same manner they would have been allocated and adjusted apart from the Conversion. Each partner will receive a Schedule K-1 for 1997 reflecting the income and deductions allocated to the partner during the period in 1997 in which the partner owned such Interests, even if the partner sells the Interests prior to the Conversion. Pre-Conversion Sale of Interests. The tax consequences to a limited partner who sells a Partnership Interest prior to the Conversion are not affected by the Conversion. (i) The limited partner may recognize both ordinary income and capital gain or loss. The ordinary income amount will be approximately the amount of ordinary income, including depreciation recapture and other unrealized receivables as defined in Section 751 of the Code, that would have been allocated to the limited partner if the Partnership had sold all its assets. Such amount will vary depending on the amount paid for the Partnership Interests, the date acquired and other factors. The capital gain or loss amount will normally be the difference between the limited partner's adjusted tax basis and the amount realized from the sale of the Interest (reduced by the portion treated as ordinary income). (ii) The deductibility of a noncorporate taxpayer's investment interest expense is generally limited to the amount of such taxpayer's net investment income. Investment interest expense includes (1) interest on indebtedness incurred or continued to purchase or carry property held for investment (such as the Common Stock); (2) a partnership's interest expense attributed to the portfolio income of the Partnership under the passive activity loss rules; and (3) that portion of interest expense incurred or continued to purchase or carry an interest in a passive activity (such as a limited partner's Interest in the Partnership) to the extent attributed to portfolio income (within the meaning of the passive activity loss rules). Investment interest deductions which are disallowed may be carried forward and deducted in subsequent years to the extent of net investment income in such years. 84 Reporting Requirements. Each limited partner who receives Common Stock in the Conversion will be required to file with the limited partners' federal income tax return a statement that provides details relating to the property transferred and the stock received in the Conversion. The Corporation will provide former limited partners with information to assist them in preparing such statement. Tax Consequences to the Corporation and the Partnership The following discussion assumes that the Conversion will be treated for federal income tax purposes in the manner described above under "--Tax Treatment of the Conversion." In counsel's opinion, the acquisition by the Corporation of the various partnership interests and other interests as a result of the Conversion and issuance of cash, the Trust Preferred Securities and Common Stock will not give rise to the recognition of gain or loss by the Corporation or the Partnership, and the basis of the Partnership interests received by the Corporation in exchange for cash, the Trust Preferred Securities and Common Stock will generally be determined by reference to the tax basis of the B Interests in the hands of the exchanging partners immediately prior to the Conversion increased by the fair market value of the cash and Trust Preferred Securities received by the holders of A Interests. The acquisition of Partnership interests by the Corporation will result in a constructive termination of the Partnership for federal income tax purposes under Section 708 of the Code. This section provides that a "sale or exchange" (which includes a transfer in connection with a Section 351 transaction) of 50 percent or more of the total interest in a partnership's capital and profits within a 12-month period terminates a partnership for tax purposes. Upon such termination, there is a hypothetical liquidation and distribution of the partnership's assets to the transferees of the partnership interests and the remaining partners, and a hypothetical contribution of the assets to the partnership, which for tax purposes is considered a new partnership. The constructive termination of the Partnership under Section 708 of the Code results in a constructive termination of the Operating Partnership. The Corporation does not expect that this termination will result in any material adverse tax consequences to the Corporation or the Partnership. As part of the Conversion, the Partnership will be merged with the Corporation. The merger of the Partnership and the transfer of its assets to the Operating Partnership will not result in the recognition of gain or loss to the Partnership or the Operating Partnership. Unrelated Business Taxable Income Certain persons otherwise generally exempt from federal income taxes (such as pension plans and other exempt organizations) are taxed under Section 511 of the Code on unrelated business taxable income. Currently, substantially all taxable income generated by the Partnership is considered unrelated business taxable income for tax-exempt organizations. Dividends distributed by the Corporation will not be taxed under Section 511 of the Code, except to the extent that the Common Stock is debt-financed property as that term is defined in Section 514 of the Code. Other Tax Aspects Apart from federal income taxes, no attempt has been made to determine any tax that may be imposed on limited partners by the country, state or jurisdiction in which such partner resides or is a citizen. In addition to federal income taxes, limited partners may be subject to other taxes, such as state or local income taxes that may be imposed by various jurisdictions, and may be required to file tax returns through the date of consummation of the Conversion in those states in which properties owned by the Partnership (through the Operating Partnership) are located. Limited partners may also be subject to income, intangible property, estate, and inheritance taxes in their state of domicile. Limited partners should consult their own tax advisors with regard to state income, inheritance, and estate taxes. THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INTENDED TO PROVIDE ONLY A GENERAL SUMMARY AND DOES NOT ADDRESS TAX CONSEQUENCES WHICH MAY VARY WITH, OR ARE CONTINGENT ON, INDIVIDUAL CIRCUMSTANCES. MOREOVER, THIS DISCUSSION DOES NOT ADDRESS ANY FOREIGN, STATE OR LOCAL TAX CONSEQUENCES OF DISPOSITION OF INTERESTS IN THE PARTNERSHIP PURSUANT TO THE CONVERSION. ACCORDINGLY, EACH LIMITED PARTNER IS STRONGLY URGED TO CONSULT HIS OWN TAX ADVISOR TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO SUCH LIMITED PARTNER OF THE CONVERSION, INCLUDING THE APPLICABILITY AND EFFECT OF FOREIGN, STATE, LOCAL AND OTHER TAX LAWS. 85 MARKET PRICES AND DISTRIBUTIONS Effective May 1, 1990, the Partnership separated its publicly traded limited partnership unit into one A Interest and one B Interest. The A Interests and B Interests trade separately on the NYSE under the symbols SDP and SDPB, respectively. The following table shows the quarterly range of high and low closing sales prices for the A Interests and B Interests separately for the periods indicated. A Interests B Interests ----------- ----------- High Low High Low ---- --- ---- --- 1995 - ---- First Quarter 10 3/4 10 1/4 4 3/4 4 Second Quarter 11 10 3/8 4 3/8 4 Third Quarter 11 3/8 10 3/4 4 7/8 4 Fourth Quarter 11 3/8 10 7/8 5 1/8 4 1/2 1996 - ---- First Quarter 11 3/4 11 1/4 5 1/8 4 Second Quarter 11 1/2 10 7/8 4 1/2 4 Third Quarter 11 1/8 10 3/8 4 1/2 4 1/4 Fourth Quarter 11 1/4 10 3/8 4 5/8 4 1/8 1997 - ---- First Quarter 11 1/2 10 7/8 4 1/2 4 1/8 Second Quarter 12 11 1/8 5 1/8 4 The closing sales prices on August __, 1997, the date of this Proxy Statement/Prospectus, were ____ per A Interest and ____ per B Interest. The closing sales prices on December 11, 1996, the last trading day before the Partnership publicly announced the planned Conversion, were $10 1/2 per A Interest and $4 1/4 per B Interest. As of July 18, 1997, the Partnership had 11,099,573 A Interests and 21,675,746 B Interests outstanding. The total number of record holders of A Interests and B Interests as of July 18, 1997 was 1,603 and 913, respectively. The holders of the A Interests are entitled to receive annually $1.10 per A Interest (the "Priority Return") to the extent that cash is available for distribution. Priority Return distributions are paid monthly on the last day of the month to holders of record on the first day of that month. When federal taxable income is allocated to the holders of B Interests, such holders are entitled to annual tax distributions (the "B Tax Distribution") equal to the product of (i) 125% of the then applicable maximum federal income tax rate for individuals and (ii) the federal taxable income allocated to the holders of B Interests with respect to the preceding year. The Priority Return and B Tax Distribution will be paid to the extent cash is available for distribution and accumulate until paid. To the extent that the Priority Return and B Tax Distribution have not been paid on a cumulative basis, Management Fees due the General Partner will be deferred, and will be paid, together with any Management Fees then owed with respect to any other year, after the Priority Return and B Tax Distribution have been paid. If cash available for distribution exceeds the amount necessary to pay the Priority Return and B Tax Distribution, the General Partner may make additional discretionary distributions to the holders of B Interests, provided that no distribution, except the B Tax Distribution, may be made to holders of the B Interests if, after such distribution, such holders' capital accounts with respect to their B Interests would be below $.50 on a per Interest basis. 86 The Partnership paid Priority Return distributions of $1.10 per A Interest in 1995 and 1996. For 1994, the B Tax Distribution amounted to $10,895,000 or $.492619 per B Interest which was partially paid in the amount of $.009352 per B Interest per month for the period January through March 1994 and $.02 per B Interest per month during the period April through December 1994. The monthly tax distributions were paid to holders of record on the first day of each month during 1994 and aggregated $.208056 per B Interest for the full year 1994. On March 31, 1995, the Partnership distributed the balance of the tax distribution due of $.284563 per B Interest, as follows: approximately $.01981 per month to holders of record of B Interests on the first day of the month during January through March 1994; $.00916 per month for April through November 1994; and $.15185 for December 1994 which included $.14269 related to the capital gain on the sale of the Electrical Group divisions on December 5, 1994. For 1995, the B Tax Distribution amounted to $14,807,000 or $.669517 per B Interest which was partially paid in the amount of $.02 per B interest per month for the period January through December, 1995, along with a partial distribution of $.15 on April 10, 1995 to holders of record on December 30, 1994, related to the taxable gain on the sale of Dorman Products. The monthly tax distributions were paid to holders of record on the first day of each month during 1995 and aggregated $.24 per B interest for the full year 1995. On March 29, 1996, the Partnership distributed the balance of the tax distribution due of $.279517 per B Interest, as follows: $.174544 to holders of record on December 30, 1994 for the balance due on the taxable gain on the sale of Dorman Products; $.001968 per month to holders of record of B Interests on the first day of the month during January through December 1995 for the balance due on ordinary taxable income; and $.081356 to holders of record on September 29, 1995 related to the taxable gain on the sale of Downey Glass on October 27, 1995. For 1996, the B Tax Distribution amounted to $7.7 million or $.35 per B Interest, which was partially paid in the amount of $.02 per B Interest per month for the period January through April 1996 and in the amount of $.03 per B Interest per month for the period May through December 1996 (including a distribution declared November 18, 1996, payable December 31, 1996, to holders of record November 29, 1996). On March 31, 1997, the Partnership distributed the balance of the tax distribution due of $.0265 per B Interest to the holders of record for the entire year. The Partnership suspended the payment of monthly advance B Tax Distributions effective January 1, 1997 through March 31, 1997, pending the conversion to corporate form. Due to the delay in completion of the proposed corporate conversion, the Partnership resumed payment of monthly advance B Tax Distributions in April 1997 in the amount of $.03 per B Interest. The Partnership intends to pay this monthly rate to holders of B Interests until the effective date of the conversion, since it expects to allocate sufficient taxable income on the B Interests in the shortened tax year from January 1, 1997 through the effective date to require the B Tax Distribution payment. The balance of the required 1997 B Tax Distribution, if any, will be paid on or before March 31, 1998. For the period January 1, 1997 through the Effective Time, the Partnership expects to pay Priority Return distributions of approximately $.091666 per month per A Interest. After the Effective Time, the former holders of A Interests will be entitled to monthly distributions on the Trust Preferred Securities subject to the right of the Corporation to defer payments on the Junior Subordinated Debentures for up to five years in which case the distributions will accumulate, compounding monthly. Dividends on the Common Stock will be payable when and as declared by the Board of Directors of the Corporation. The payment of dividends will be at the discretion of the Corporation's Board of Directors and will depend, among other things, on earnings, financial condition, capital requirements, availability of acquisition candidates, level of indebtedness, contractual restrictions with respect to the payment of dividends and other factors that the Corporation's Board of Directors deems relevant. 87 CAPITALIZATION The following table sets forth the historical capitalization of the Partnership at March 31, 1997, and the pro forma capitalization of the Corporation as if the conversion had occurred on March 31, 1997. The table should be read in conjunction with the historical and pro forma financial statements of the Partnership and related Notes thereto, appearing elsewhere in this Proxy Statement/Prospectus.
(dollars in thousands) March 31, 1997 -------------- Pro Forma Partnership Corporation ----------- ----------- Current portion of senior notes $ 6,395 $ -- ============ ========== Current portion of bank revolving credit facility 20,000 -- ------------ ---------- Total short-term debt $ 26,395 $ -- ============ ========== Long-term portion of senior notes $ 57,539 $ 60,000 ------------ ---------- Long-term portion of bank revolving credit facility -- 45,415 ------------ ---------- Guaranteed preferred beneficial interests in the Corporation's Junior Subordinated Debentures -- 105,446 ------------ ---------- General Partner's minority interest in the operating partnership 979 -- ------------ ---------- Partners' capital: General partner 969 -- Limited partners: A interests 67,642 -- B interests 29,868 -- B interest held in treasury (1,514) -- Cumulative foreign currency translation adjustment (1,850) -- ------------ ---------- Total partners' capital 95,115 -- ------------ ---------- Stockholders' deficit: Preferred stock, $.01 par, 1,000,000 shares authorized, none issued -- -- Common Stock, $0.01 par, 20,000,000 shares authorized; 6,418,936 shares issued and outstanding -- 64 Accumulated deficit -- (5,613) Cumulative foreign currency translation adjustment -- (1,850) ------------ ---------- Total stockholders' deficit -- (7,399) ------------ ---------- Total capitalization $ 153,633 $ 203,462 ============ ==========
88 SELECTED HISTORICAL FINANCIAL INFORMATION (dollars in thousands, except for partnership interest data) The following table sets forth selected consolidated historical financial data of the Partnership as of the dates and for the periods indicated. The selected financial information set forth below for the Partnership as of and for the three months ended March 31, 1997 and 1996 is derived from unaudited financial statements included elsewhere herein. The selected financial information set forth below for the Partnership as of December 31, 1996 and 1995 and for each of the three years in the period ended December 31, 1996 are derived from the audited financial statements included elsewhere herein. The selected financial information set forth below for the Partnership as of December 31, 1994, 1993 and 1992 and for each of the two years in the period ended December 31, 1993 are derived from the financial statements not included elsewhere herein. The selected financial information should be read in conjunction with the Consolidated Financial Statements and the Notes thereto appearing elsewhere herein. See "INDEX TO FINANCIAL STATEMENTS." See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" for acquisitions and divestitures that affect comparability.
Three Months Ended Years Ended December 31, March 31, 1997 1996 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- ---- ---- INCOME STATEMENT DATA Net sales $169,016 $154,892 $649,254 $628,935 $735,861 $655,707 $612,052 Income from operations 6,266 5,557 24,452 31,302 37,759 28,975 29,712 Gain on Sale of Divisions -- -- -- 20,644 3,523 -- -- Provision (benefit) for income taxes (28) (76) (1,140) 537 100 869 493 Income before extraordinary loss and cumulative effect of change in accounting principle 4,576 4,010 19,267 44,745 29,544 18,506 17,691 Extraordinary loss -- -- -- (629) -- -- (3,434) Cumulative effect on prior years of change in accounting principle -- -- -- -- -- -- 822 Net income $ 4,576 $ 4,010 $19,267 $44,116 $29,544 $18,506 $15,079 Earnings per limited partnership interest: Income before extraordinary loss and cumulative effect of change in accounting principle - Class A $ 0.27 $ 0.27 $1.10 $1.10 $1.10 $1.10 $1.10 - Class B $ 0.07 $ 0.04 $0.32 $1.48 $0.79 $0.28 $0.25 Extraordinary loss - Class A -- -- -- -- -- -- -- - Class B -- -- -- $(0.03) -- -- $(0.16) Cumulative effect on prior years of change in accounting principal - Class A -- -- -- -- -- -- -- - Class B -- -- -- -- -- -- $0.04 Net income per limited partnership interest - Class A $ 0.27 $ 0.27 $1.10 $1.10 $1.10 $1.10 $1.10 - Class B $ 0.07 $ 0.04 $0.32 $1.45 $0.79 $0.28 $0.13 Cash distributions declared per limited partnership interest - Class A $ 0.27 0.27 $1.10 $1.10 $1.10 $1.10 $1.10 - Class B $ 0.03 0.06 $0.33 $0.67 $0.49 $0.27 $0.13 Weighted average number of outstanding limited partnership interests - Class A 11,099,573 11,099,573 11,099,573 11,099,573 11,099,573 11,099,573 11,099,573 - Class B 21,675,746 21,675,746 21,675,746 21,675,746 21,675,746 21,675,746 21,675,746
89
Three Months Ended March 31, Years Ended December 31, ------------------- ------------------------ 1997 1996 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- ---- ---- BALANCE SHEET DATA (AT MARCH 31 AND DECEMBER 31): Cash and cash equivalents $ 3,096 $ 633 $ 1,666 $ 5,900 $ 4,903 $ 1,327 $ 745 Total assets 276,039 253,950 262,555 254,591 266,186 273,493 261,588 Short-term debt financing 26,395 6,395 6,395 6,395 19,357 6,319 6,319 Long-term debt and capitalized lease obligations 58,186 67,934 69,043 63,934 74,781 104,185 115,503 Total liabilities 180,924 159,287 167,936 159,648 186,967 200,611 189,013 General partner capital 969 959 960 963 791 729 726 Limited partners' capital: Class A 67,642 67,642 67,642 67,642 67,642 67,642 67,642 Class B 29,868 28,869 29,040 29,252 12,300 6,025 5,721 Class B held in treasury (1,514) (1,514) (1,514) (1,514) (1,514) (1,514) (1,514) Cumulative foreign translation adjustment (1,850) (1,293) (1,509) (1,400) (694) (694) (254) Total partners' capital 95,115 94,633 94,619 94,913 72,882 79,219 72,575 OTHER DATA: Ratio of earnings to fixed charges 1.13(i) .85 .91(i) 1.13 1.25 1.17 1.11 Cash distributions paid, excluding distributions on capital gains $ 3,690 $ 4,886 $19,982 $20,745 $20,357 $14,940 $15,384 Cash provided by (used for) operating activities (2,081) 2,088 23,298 17,050 17,704 23,571 27,056 Net increase (decrease) in cash and cash equivalents 1,430 (5,267) (4,234) 997 3,576 582 69 Net book value per Class A interest 6.09 6.09 6.09 6.09 6.09 6.09 6.09 Net book value per Class B interest 1.22 1.20 1.20 1.22 .50 .21 .19
(i) Excluding non-recurring items recorded in 1997 and 1996, the ratio is 1.20 and 1.21, respectively. 90 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion provides information which management believes is relevant to an assessment and understanding of the Partnership's operations and financial condition. The discussion pertains to the consolidated statements of income of the Partnership and subsidiary for the years ended December 31, 1994, 1995 and 1996 (audited) and for the three months ended March 31, 1997 (unaudited) and the consolidated balance sheets dated December 31, 1995 and 1996 (audited) and March 31, 1997 (unaudited) and should be read in conjunction with these consolidated financial statements and notes thereto appearing elsewhere herein. In connection with the proposed conversion of the partnership to a C corporation, references are also made, where appropriate, to the unaudited pro forma financial statements contained elsewhere herein. General The Partnership is a publicly held master limited partnership operating in the wholesale industrial distribution industry through a subsidiary partnership, SDI Operating Partners, L.P. (the "Operating Partnership"). The Partnership consists of a headquarters operation and three business segments which are Industrial Services, Hardware Merchandising and Glass Merchandising. The Partnership's Industrial Services segment is comprised of the Sun Inventory Management ("SIMCO") divisions and the Sun Technology Services divisions. The SIMCO divisions are Kar Products, A&H Bolt, SIMCO/Special-T-Metals and SIMCO de Mexico. The SIMCO divisions provide maintenance products and inventory management services to both original equipment manufacturers and maintenance and repair facilities, including in-plant systems. Sun Technology Services, formerly the Fluid Power group, is comprised of Activation, Air-Dreco, J.N. Fauver Co., Hydra-Power de Mexico, Walter Norris and Warren Fluid Power. The Technology Services divisions provide fluid power products, engineering design, and equipment repair services to a wide variety of industrial customers. The Partnership's Hardware Merchandising segment consists of the Hillman division. Hillman distributes hardware items and related products and also provides merchandising systems service and support to both large and small hardware retailers. The Partnership's Glass Merchandising segment consists of the Harding Glass division. Harding provides glass products and point-of-sale related services such as the installation and repair of automobile and flat glass. Conversion to Corporate Form The Partnership has recorded $2.5 million of transaction costs related to the proposed conversion as of March 31, 1997 ($2.1 million in the fourth quarter of 1996 and $.4 million in the first quarter of 1997) and anticipates incurring an additional $2.0 million of transaction costs to complete the conversion process. See Note 1 of Notes to Consolidated Financial Statements of the Partnership as of and for the three years ended December 31, 1996, for a discussion of the accounting recognition of these costs. Sale of Certain Divisions The Operating Partnership sold its Downey Glass division on October 27, 1995, its Dorman Products division on January 3, 1995 and its three Electrical Group divisions on December 5, 1994, for an aggregate cash consideration, net of expenses, of approximately $70.6 million (subject to certain post-closing adjustments) and the assumption of certain liabilities. The proceeds from these divestitures were used to reduce debt and for general Partnership purposes, including acquisitions for integration with its remaining businesses. Sales from the divested divisions aggregated $ 29.1 million for the year ended December 31, 1995 and $177.1 million for the year ended December 31, 1994. Income contributions from these divisions aggregated $.3 million or $.01 per Class B interest in 1995 and $8.6 million or $.39 per Class B interest in 1994. 91 Acquisitions On April 11, 1996, the Partnership's Industrial Services segment, through its Warren Fluid Power division, purchased certain assets of Hydraulic Depot, Inc. of Reno, Nevada for an aggregate purchase price of $.7 million. Annual sales of Hydraulic Depot, Inc. are approximately $2.5 million. This acquisition expands Warren's previous geographic markets. On November 13, 1995, the Partnership's Hardware Merchandising segment, through its Hillman division, purchased certain assets of the Retail Division of Curtis Industries of Eastlake, Ohio for an aggregate purchase price of $8.0 million and the assumption of certain liabilities. The Curtis Retail operation was integrated with the Hillman division. Curtis' sales were $1.6 million from the acquisition date through December 31, 1995 and approximately $11.0 million for the twelve months ended December 31, 1996. Results of Operations Market Developments In 1996, the Industrial Services and Hardware Merchandising segments continued to expand as a result of economic strength in most product markets and the addition of new product lines and value-added services. However, the Glass business has experienced a decline in sales volume primarily attributable to the discontinuation of certain product lines and markets served and competitive pressures from major glass manufacturers who have more aggressively pursued the wholesale distribution business in recent years. This decline has been partially offset by real growth in Harding's retail glass business, it's primary strategic focus. Growth in the retail glass business is expected to continue, complemented by internal expansion and acquisition growth opportunities. Operating expense control and liquidity in working capital investment allows the operating divisions to respond quickly to market conditions affected by economic recession or growth. Management will continue to respond to changing market conditions. Restructuring Charges On December 11, 1996, the Board of Directors of Lehman/SDI approved management's plan to restructure its Technology Services divisions and its Glass Merchandising business. During the fourth quarter of 1996, the Partnership recorded a $6.0 million restructuring charge, of which only $.2 million was paid by December 31, 1996, related to the integration and consolidation of its five domestic Technology Services divisions and the write-off of certain non-performing assets in the Glass Merchandising segment. The restructuring plan is expected to result in the elimination of 175 employees in the Technology Services divisions by December 31, 1998, and is expected to produce net annualized cost savings of approximately $5.0 million per year upon its completion. See Note 1 of Notes to Consolidated Financial Statements for the accounting recognition of the restructuring charges. Pro Forma Results As shown in the accompanying Pro Forma Consolidated Financial Statements included herein, net income on a pro forma corporate basis for the three months ended March 31, 1997, is $1.1 million resulting in $0.18 per common share or approximately $0.05 per Class B interest (before the reverse stock split). Net income on a pro forma corporate basis for the year ended December 31, 1996 is $5.2 million resulting in $0.81 per common share or approximately $0.20 per Class B interest (before the reverse stock split). Excluding the aforementioned restructuring charge of $6.0 million, net income on a pro forma corporate basis for the year ended December 31, 1996, would have amounted to $8.8 million resulting in $1.37 per common share or approximately $0.34 per Class B interest (before the reverse stock split). Three Months Ended March 31, 1997 and March 31, 1996 Net income for the quarter ended March 31, 1997, was $4.6 million compared with $4.0 million in 1996. The results for the first quarter of 1997 included a $.4 million charge for transaction costs associated with the proposed conversion to a C corporation. Excluding this non-recurring item, net income increased $.9 million or 22.8% over the first quarter of 1996. 92 Net sales increased $14.1 million or 9.1% over the first quarter of 1996 resulting primarily from an increase in the volume of products sold due to continued strengthening in existing product markets as well as additional market penetration from new product lines and value-added services. Sales recorded in the first quarter of 1997 were $169.0 million compared with the first quarter of 1996 of $154.9 million. Sales increases (decreases) by business segment are as follows: Sales Increase (Decrease) ------------------------- Amount % ------ - Industrial Services Technology Services 5.9 million 8.1 % Inventory Management 5.5 million 14.5 % ----- Total Industrial Services 11.4 million 10.3 % Hardware Merchandising 4.1 million 18.5 % Glass Merchandising (1.4) million (6.6)% ----- Total Partnership $14.1 million 9.1 % ===== The sales increase in the Hardware Merchandising segment is due primarily to an expansion of Hillman's customer base and market penetration from new product lines associated with the Curtis acquisition. The increase in sales in the Inventory Management divisions is comprised of sales growth primarily from new inventory management programs of $4.2 million and in maintenance products of $1.3 million. The decline in sales volume in the Glass Merchandising Segment is attributable to decreases in retail flat glass, wholesale glass and other product line sales aggregating $1.8 million, offset by an increase in retail automotive glass sales of $.4 million. Cost of sales increased $8.4 million or 9.1% from the first quarter of 1996, due primarily to increased sales levels in the comparison period. The 1996 period also reflects a reclassification of $.6 million in costs from selling, warehouse and delivery and general and administrative expense (S,G&A) to cost of sales. Gross margins were 40.0% in the first quarter of 1997 and 1996, comprised by business segment as follows: First Quarter ------------- 1997 1996 ---- ---- Industrial Services Technology Services 25.8% 25.7% Inventory Management 58.5% 63.0% Total Industrial Services 37.3% 38.4% Hardware Merchandising 51.8% 50.6% Glass Merchandising 40.8% 36.9% The erosion in gross margin in the Industrial Services segment is due mainly to competitive pricing pressures and changes in sales mix, primarily in the Inventory Management divisions. Gross margins in the Hardware Merchandising segment increased due to reduced packaging costs from the comparable 1996 period. The increase in gross margins in the Glass Merchandising segment is due primarily to improved purchasing management in retail glass and exiting from low-margin product lines. 93 SG&A expenses increased by $4.5 million or 8.3% over the first quarter of 1996, comprised as follows: increased selling expenses of $2.0 million or 7.5%, supporting increased 1997 sales levels; increased warehouse and delivery expenses of $.9 million or 9.2% due to the addition of five large in-plant accounts in the Industrial Services segment and expansion programs by certain operating units; and increased general and administrative expenses of $1.6 million or 9.2% to support the increased number of system accounts in the Industrial Services segment and the overall increase in 1997 sales levels. S,G&A expenses as a percentage of sales, were as follows: First Quarter 1997 1996 ---- ---- Selling Expenses Warehouse and Delivery Expenses 16.7% 17.0% General and Administrative Expenses 6.2% 6.2% Total S,G&A Expenses 11.8% 11.8% ----- ----- 34.7% 35.0% ===== ===== Overall, as a percentage of sales, total S,G&A expense decreased due mainly to the increase in sales levels in relation to the fixed cost component of S,G&A expenses. As calculated in accordance with the partnership agreement, the Management Fee due the General Partner (the "GP") annually amounts to $3.3 million which is based on 3% of the aggregate initial capital investment ($111 million) of the limited partners. The Management Fee is accrued each quarter in the amount of approximately $.8 million. Interest expense increased $.2 million in the comparison period due primarily to increased borrowing levels under the Partnership's revolving credit facility to support working capital requirements, offset by reduced financing costs from the scheduled principal repayment on senior notes in the amount of $6.4 million on December 1, 1996. Other income increased by $.1 million in the comparison period due primarily to gains from the sale of fixed assets. Currently, the Partnership incurs state and local income taxes on its domestic operations and foreign income taxes on its Canadian and Mexican Operations. Also, the Partnership provides for deferred income taxes as determined in accordance with Statement of Financial Accounting Standard No. 109 ("SFAS #109"). As currently calculated, deferred income taxes represent state and federal income tax benefits expected to be realized after December 31, 1997, when the Partnership will be taxed as a corporation. The allocation of net income to the GP is based on the GP's 1% ownership interest in the profits of the Partnership. The allocation of net income to the limited partners for financial statement purposes represents a 99% interest in the profits of the Partnership. The net income allocation resulted in $.27 of income per Class A limited partnership interest for the quarters ended March 31, 1997 and March 31, 1996; and $.07 of income per Class B limited partnership interest in the first quarter of 1997 compared with $.04 of income per Class B interest for the first quarter of 1996. Income per Class B interest in 1997 includes non-recurring transaction costs related to the proposed conversion to corporate form of $.01. Excluding the transaction costs, income per Class B limited partnership interest amounted to $.08 in the first quarter of 1997 compared with $.04 in the first quarter of 1996. Operating Results Excluding Divisions Sold As previously stated, the Operating Partnership sold certain divisions in 1994 and 1995. In order to provide an analysis of the results of ongoing operations, the sales, gross profit and operating expenses of these divisions have been excluded from the following discussion of results of operations. The table below reflects the results from ongoing operations of the Partnership for each year: 94
(dollars in thousands) 1996 1995 1994 ---- ---- ---- Net sales $649,254 $599,865 $558,754 Cost of sales 386,251 355,004 331,609 -------- -------- -------- Gross profit 263,003 244,861 227,145 -------- -------- -------- Operating expenses: Selling, general and admin. expenses 221,574 205,180 189,252 Management fee to general partner 3,330 3,330 3,330 Depreciation 3,623 3,358 3,249 Amortization 1,924 1,961 2,143 -------- -------- -------- Total operating expenses 230,451 213,829 197,974 -------- -------- -------- Restructuring charges 5,950 -- -- Transaction costs 2,150 -- -- -------- -------- -------- Income from operations $24,452 $31,032 $29,171 ======== ======= =======
Years Ended December 31, 1996 and 1995 -------------------------------------- Net income for the year ended December 31, 1996 was $19.3 million compared with $44.1 million in 1995. As previously mentioned, 1996 results included a $4.9 million charge (net of $1.1 million in deferred tax benefits), related to the restructuring of the Technology Services and Glass Merchandising divisions and a $2.1 million charge for transaction costs associated with the conversion to a C corporation. The 1995 results included a combined gain of $20.6 million from the sale of the Downey Glass division in October 1995 and the Dorman Products division in January 1995. Results for 1995 also included a $.6 million charge related to the early retirement of debt and $.3 million of operating income from Downey Glass. Excluding these non-recurring items, net income for 1996 amounted to $26.3 million or 10.5% above the comparable 1995 earnings of $23.8 million. Net sales increased $49.4 million or 8.2% over 1995 resulting primarily from an increase in the volume of products sold due to continued strengthening in existing product markets as well as additional market penetration from new product lines and value-added services. Sales recorded in 1996 were $649.3 million compared with 1995 sales of $599.9 million, excluding divisions sold. Sales increases (decreases) by business segment are as follows: Sales Increase (Decrease) Amount % ------ - Industrial Services Technology Services 13.6 million 4.8 % Inventory Management 18.2 million 13.1 % ----- Total Industrial Services 31.8 million 7.5 % Hardware Merchandising 18.8 million 22.2 % Glass Merchandising (1.2) million (1.3)% ------ Total Partnership $49.4 million 8.2 % ===== The sales increase in the Hardware Merchandising segment includes approximately $11.0 million which is due to the Curtis acquisition and the balance of $7.8 million in growth from new accounts, expansion of existing product lines and market penetration of new product lines. The increase in sales in the SIMCO divisions is comprised of sales growth from new inventory management programs of $10.5 million or 42.9% and in maintenance products of $7.7 million or 6.7%. 95 The decline in sales volume in the Glass Merchandising segment is attributable to the discontinuation of certain product lines and markets served, accounting for $.2 million of the sales decline and a decrease in wholesale glass, brokerage and other product line sales of $2.8 million, offset by an increase in retail glass sales of $1.8 million, or 4.2%. Cost of sales increased $31.2 million or 8.8% from the twelve months ended December 31, 1995, due primarily to increased sales levels in the comparison period. Gross margins were 40.5% in 1996 compared with 40.8% in 1995, excluding divisions sold, comprised by business segment as follows: Year Ended December 31, ----------------------- 1996 1995 ---- ---- Industrial Services Technology Services 26.7% 27.4% Inventory Management 61.1% 64.5% Total Industrial Services 38.6% 39.5% Hardware Merchandising 50.8% 52.4% Glass Merchandising 38.8% 35.9% The erosion in gross margin in the SIMCO divisions is due mainly to competitive pricing pressures and changes in sales mix. Gross margins in the Hardware Merchandising segment decreased due to reduced packaging productivity levels and costs associated with integration costs for the Curtis acquisition and other business expansion programs. Gross margins in the Glass Merchandising segment increased due primarily to improved purchasing management and better sales in retail glass which carries higher margins than the other product lines in this segment. Selling, warehouse and delivery, and general and administrative ("S,G&A") expenses increased by $16.4 million or 8.0% over 1995, excluding divisions sold, comprised as follows: increased selling expenses of $7.4 million or 7.5%, supporting increased 1996 sales levels; increased warehouse and delivery expenses of $6.3 million or 17.2% due to the integration of the Curtis retail division, expansion programs by certain operating units, and the addition of seven large in-plant accounts in the SIMCO divisions; and increased general and administrative expenses of $2.8 million or 3.9% due primarily to cost containment efforts. Excluding divisions sold, S,G&A expenses as a percentage of sales, were as follows: Year Ended December 31, ----------------------- 1996 1995 ---- ---- Selling Expenses 16.3% 16.4% Warehouse and Delivery Expenses 6.6% 6.1% General and Administrative Expenses 11.2% 11.7% ----- ----- Total S,G&A Expenses 34.1% 34.2% ===== ===== The Management Fee due the General Partner is accrued in the amount of $3.3 million, as previously discussed. Depreciation expense increased $.3 million in the comparison period due primarily to an increase in the depreciable fixed asset base. Interest income decreased $.3 million in 1996 due primarily to the reduced investment of excess cash that was generated during the fourth quarter of 1994 and the first quarter of 1995 from divisions sold. 96 Interest expense decreased $.4 million in 1996 due primarily to reduced financing costs from the prepayment of senior notes on March 14, 1995, offset by higher interest expense from increased borrowing levels under the Partnership's revolving credit facility. Other income increased $.3 million in the comparison period due primarily to lowered minority interest expense. As previously stated, the Partnership incurs state, local and foreign income taxes and provides for deferred income taxes as determined in accordance with SFAS #109. The Partnership's provision for income taxes in 1996 decreased $1.7 million from 1995 due to the recording of the following: $.5 million deferred income tax benefit relating to book/tax differences in the Partnership's casualty loss insurance program, a $1.1 million deferred income tax benefit relating to book/tax differences from restructuring costs and a $.1 million favorable adjustment to prior year's state income tax provisions. See "Income Taxes" below for a discussion of the effect of the proposed conversion to corporate form on deferred income taxes. The allocation of net income, which was previously discussed, resulted in $1.10 of income per Class A limited partnership interest for the years ended December 31, 1996 and December 31, 1995; and $.32 of income per Class B limited partnership interest in 1996 compared with $1.45 of income per B Interest for the year ended December 31, 1995. Income per B Interest in 1996 was reduced by the restructuring charge, net of deferred tax benefits and transaction costs amounting to $.22 and $.10, respectively. Income per B Interest for the twelve months ended December 31, 1995 included a combined gain of $.94 from the sale of the Dorman Products and Downey Glass divisions, an extraordinary loss of $.03 from the early extinguishment of debt and $.01 of income from the divested Downey Glass division. Excluding these non-recurring items, income per B Interest was $.64 compared with $.53 in 1995, an increase of approximately 21%. Years Ended December 31, 1995 and 1994 Net income for the year ended December 31, 1995 was $44.1 million including a combined gain of $20.6 million from the sale of the Dorman Products and Downey Glass divisions, compared with $29.5 million earned in 1994, which included a gain of $3.5 million from the sale of the Electrical Group divisions in December 1994. Results for 1995 also included a $.6 million charge related to the early retirement of debt and a reduction in net financing costs of almost $3.2 million from the prior year. 1994 net income included income from the Electrical Group of $4.1 million, from Dorman Products of $2.8 million, and from Downey Glass of $1.7 million. Excluding income contributions and gains from divisions sold, as well as the extraordinary loss on early extinguishment of debt, net income for 1995 amounted to $23.8 million or 36.7% above the comparable 1994 earnings of $17.4 million. Net sales increased $41.1 million or 7.4% over 1994 resulting primarily from an increase in the volume of products sold due to strengthening in most product markets and significant growth from sales programs and services initiated since 1992. Substantially all of the Partnership's growth in revenues is related to increases in the volume of products sold. Excluding divisions sold, sales recorded in 1995 were $599.9 million compared with 1994 sales of $558.8 million. Sales increases (decreases) by business segment were as follows: Sales Increase (Decrease) Amount % ------ - Industrial Services Technology Services 25.0 million 9.6 % Inventory Management 10.1 million 7.9 % ----- Total Industrial Services 35.1 million 9.1 % Hardware Merchandising 11.9 million 16.3 % Glass Merchandising (5.9) million (6.1) % ------ Total Partnership $41.1 million 7.4 % ===== 97 The decline in sales volume in the Glass Merchandising segment was primarily attributable to the discontinuation of certain product lines and markets served, resulting in a sales reduction of $5.0 million from 1994. On a comparable basis sales decreased $.9 million, or .9%, in the Glass Merchandising segment. Cost of sales increased $23.4 million or 7.1%, due primarily to increased sales levels in the existing businesses in the comparison period. Excluding divisions sold, gross margins were 40.8% in 1995 compared with 40.7% in 1994, comprised by business segment as follows: Year Ended December 31, ----------------------- 1995 1994 ---- ---- Industrial Services Technology Services 27.4% 27.7% Inventory Management 64.5% 65.9% Total Industrial Services 39.5% 40.3% Hardware Merchandising 2.4% 51.0% Glass Merchandising 35.9% 34.4% Sales mix was the principal contributor to the changes in gross margins. S,G&A expenses, excluding divisions sold, increased by $15.9 million or 8.4% over 1994, comprised as follows: increased selling expenses of $8.9 million or 9.9%, increased warehouse and delivery expenses of $3.2 million or 10.0% and increased general and administrative expenses of $3.9 million or 5.7%. The increase in S,G&A expenses supported increased 1995 sales levels and expansion programs by certain operating units. Excluding divisions sold, S,G&A expenses, as a percentage of sales were as follows: Year Ended December 31, ----------------------- 1995 1994 ---- ---- Selling Expenses 16.4% 16.1% Warehouse and Delivery Expenses 6.1% 5.7% General and Administrative Expenses 11.7% 12.1% ----- ----- Total S,G&A Expenses 34.2% 33.9% ===== ===== The increase in S, G&A as a percentage of sales was due mainly to increased support payments, incentive programs and marketing efforts for the sales force. The Management Fee due the General Partner is accrued in the amount of $3.3 million annually, as previously discussed. Depreciation expense increased $.1 million in the comparison period due primarily to an increase in the depreciable fixed asset base at the remaining divisions of the Partnership. Amortization expense decreased $.2 million in the comparison period due primarily to the expiration of non-compete agreements in the Glass Merchandising segment. Interest income increased $.3 million in the comparison period due primarily to the investment of excess cash generated from divisions sold. 98 Interest expense decreased $2.6 million in the comparison period due to reduced financing costs of approximately $1.5 million from the prepayment of senior notes on March 14, 1995, and $1.1 million from reduced borrowing levels under the Partnership's revolving credit facility. Other income was $.3 million for the twelve months ended December 31, 1995, compared to $1.7 million of other expense recorded in the 1994 comparison period. This change was primarily due to the favorable settlement of certain non-recurring insurance and legal matters in the 1995 period. As previously stated, the Partnership incurs state, local and foreign income taxes and provides for deferred income taxes as determined in accordance with SFAS #109. The Partnership's provision for income taxes in 1995 increased $0.4 million from 1994 due primarily to an increase in state taxes as a result of gains on divisions sold. The allocation of net income, which was discussed previously, resulted in $1.10 of income per A Interest for the years ended December 31, 1995 and December 31, 1994; and $1.45 of income per B Interest in 1995 compared with $.79 of income per B Interest for the year ended December 31, 1994. Income per B Interest in 1995 included a combined gain of $.94 from the sale of the Dorman Products and Downey Glass divisions and an extraordinary loss of $.03 from the early extinguishment of debt. Income per B Interest for the twelve months ended December 31, 1994 included a gain of $.16 on the sale of the Electrical Group divisions. Income per B Interest for the twelve months ended December 31, 1995 and 1994 included $.01 and $.39, respectively, of income from divisions sold. Liquidity and Capital Resources Net cash used for operations in the first quarter of 1997 was $2.1 million compared with net cash provided by operations in the first quarter of 1996 of $2.1 million, a change of $4.2 million. This change was due primarily to increased working capital investment in operations in the comparison period of approximately $4.8 million offset by increased net income of $.6 million. The Partnership's net interest coverage ratio (earnings before interest, taxes and gain on sale of divisions over net interest expense) improved to 3.68x in the first quarter of 1997 from 3.42x in the comparable prior year period. Net cash provided by operations for the twelve months ended December 31, 1996 was $23.3 million, an increase of $6.2 million from the prior year level of $17.1 million. The Partnership's net interest coverage ratio (earnings before interest, taxes, gain on sale of divisions, and 1996 restructuring charges and transaction costs over net interest expense) improved to 4.81x in 1996 from the 1995 level of 4.56x. The Partnership's cash position of $3.1 million as of March 31, 1997, decreased $1.4 million from the balance at December 31, 1996. Cash was provided during this period primarily from borrowings under the bank credit agreement of $9.0 million and proceeds from the sale of property and equipment of $.3 million. Cash was used during this period predominantly for operations, distributions to the general and limited partners, capital expenditures, repayments under other credit facilities and other items in the amounts of $2.1 million, $3.7 million, $1.0 million, $1.0 million and $.1 million, respectively. The Partnership's cash position of $1.7 million as of December 31, 1996, decreased $4.2 million from the balance at December 31, 1995. Cash was provided during 1996 primarily from operations of $23.3 and borrowings under the bank credit agreement of $11.0 million. Cash was used during this period predominantly for distributions to the general and limited partners ($25.6 million), repayment of debt obligations ($6.4 million), acquisitions ($.7 million), capital expenditures ($4.3 million), repayments under other credit facilities($.1 million) and the purchase of life insurance ($1.4 million). The Partnership's working capital position of $90.8 million at March 31, 1997, represents a decrease of $10.0 million from the December 31, 1996 level of $100.8 million. The decrease is attributable to an increase in current liabilities of $20.0 million as a result of the classification of bank revolver debt as current at March 31, 1997, an increase in interest payable on senior notes of $1.4 million, and an increase in distributions payable to partners of $.1 million; offset by reinvestment in working capital of $7.6 million, an increase in cash balance of $1.4 million and a decrease in Management Fee payable to the General Partner of $2.5 million. The Partnership's current ratio decreased to 1.82 at March 31, 1997 from the December 31, 1996 level of 2.16, primarily as a result of the classification of bank revolver debt as current at March 31, 1997, compared with long-term at December 31, 1996. 99 The Partnership's working capital position of $100.2 million at December 31, 1996, represents an increase of $4.4 million from the December 31, 1995 level of $95.8 million. The increase is primarily attributable to reinvestment in working capital of $2.7 million, a decrease in distributions payable of $5.4 million and acquired working capital of $.5 million related to the Hydraulic Depot acquisition, offset by a decrease in cash of $4.2 million. The Partnership's current ratio increased to 2.16 at December 31, 1996 from the December 31, 1995 level of 2.11. As of March 31, 1997, the Partnership's total debt as a percentage of its consolidated capitalization is 46.6% compared with 43.7% as of March 31, 1996. On December 1, 1996 and 1995, the Operating Partnership paid scheduled principal repayments on its senior notes aggregating $6.4 million and $4.8 million, respectively. On March 14, 1995, the Partnership prepaid a portion of its senior notes in the amount of $14.2 million, including accrued interest thereon of $.4 million and a make-whole penalty of $.6 million. As of December 31, 1996, the Partnership's total debt as a percentage of its consolidated capitalization is 43.9% compared with 42.3% as of December 31, 1995. The Partnership anticipates spending approximately $4.7 million for capital expenditures in 1997, primarily for machinery and equipment. The Partnership's existing bank credit facility of $50 million expires December 31, 1997. Financing commitments of $150 million are available to the Partnership until September 30, 1997, to fund costs related to its conversion to corporate form, prepay its existing senior notes and provide capital for internal and acquisition growth. The new financing arrangements will provide capital for a five-year term from the date of conversion to corporate form. If the Conversion is not consummated, an extension of the Partnership's existing bank credit facility beyond December 31, 1997, will be requested. See Note 4 of Notes to Consolidated Financial Statements as of and for the three months ended March 31, 1997. As of March 31, 1997, the Operating Partnership had $24.4 million available under its $50.0 million Bank Credit Agreement which provides revolving credit for working capital purposes and acquisitions. The $25.6 million outstanding under the Bank Credit Agreement consisted of bank borrowings totaling $20.0 million and Letter of Credit commitments aggregating $5.6 million. In addition, an indirect, wholly-owned Canadian subsidiary of the Operating Partnership has a $2.5 million Canadian dollar line of credit for working capital purposes, of which no amount was outstanding at March 31, 1997. The Partnership was restricted from making acquisition investments in 1994 under the Senior Note and Bank Credit Agreements. The acquisition restriction in 1994 was a result of an amendment to the credit agreements executed in the first quarter of 1994 that eased certain coverage ratios and other financial requirements of the credit agreements. Acquisition spending amounted to $.7 million and $8.0 million in 1996 and 1995, respectively. Management intends to continue its acquisition strategy in 1997, with authorized spending of up to $15.0 million per year in the aggregate, to complement internal growth. The Operating Partnership was required to reduce permanently the bank revolver commitment under the bank credit agreement by approximately $13.0 million as a result of the sale of certain operating divisions. However, the banks have waived this permanent reduction and maintained the existing bank credit commitment of $50.0 million. For 1995 and future years, the lenders have agreed to revise certain covenant tests to exclude the impact of cash distributions to holders of Class B interests related solely to tax gains on divisions sold. The Partnership suspended the payment of monthly advance B tax distributions effective January 1, 1997 through March 31, 1997, pending the conversion to corporate form. Due to the delay in completion of the proposed corporate conversion, the Partnership resumed payment of monthly advance Class B tax distributions in April 1997 in the amount of $.03 per B Interest. The Partnership intends to pay this monthly rate to Class B holders until the effective date of the conversion since it expects to allocate sufficient Class B taxable income in the shortened tax year from January 1, 1997, through the effective date to require the B tax distribution payment. The balance of the required 1997 Class B tax distribution, if any will be paid on or before March 31, 1998. As a result of the proposed conversion, the Corporation would not be required to make tax-related cash distributions to the holders of B Interests. Accordingly, a decision regarding dividends on common stock received in exchange for B Interests would solely be within the discretion of the Board of Directors of the Corporation. On March 31, 1997, the Partnership distributed the balance of the tax distribution due of $.0265 per Class B Interest to holders of record for the entire year of 1996 which amounted to $.6 million in the aggregate. The 1996 Class B tax distribution amounted to $7.7 million or $.35 per B interest, which was partially paid in the amount of $.02 per B interest per month for the period January through April 1996 and in the amount of $.03 per B interest per month for the period May through December 1996. 100 The taxable gain from the sale of the Dorman Products and Downey Glass divisions in 1995 amounted to $.927 and $.232 per B Interest, respectively. The sale of the Electrical Group divisions in December 1994 resulted in a taxable gain of $.408 per B Interest. With respect to the sale of Dorman Products on January 3, 1995, the Operating Partnership paid a partial tax distribution on April 10, 1995 to holders of B Interests of record as of December 30, 1994, in the amount of $.15 per B Interest. The remaining balance of the tax distribution for the taxable gain on the sale of Dorman Products in the amount of $.175 per B Interest was paid on March 29, 1996, along with a tax distribution in the amount of $.081 per B Interest to holders of record as of September 29, 1995 related to the sale of the Downey Glass division on October 27, 1995. Related to the sale of the Electrical Group divisions, the Partnership made a tax distribution on March 31, 1995 to holders of B Interests of record as of December 30, 1994, equal to approximately $.143 per B Interest. See "SPECIAL FACTORS -- Limited Partner Litigation" and "BUSINESS -- Legal Proceedings" and Note 14 of Notes to Consolidated Financial Statements, as of and for the three years ended December 31, 1996 and Note 5 of Notes to Consolidated Financial Statements as of and for the three months ended March 31, 1997, included herein, for the description of a lawsuit with respect to the sale of the Partnership's Dorman Products division and recent lawsuits involving the Partnership's General Partner related to the proposed conversion to corporate form. Certain other legal proceedings are pending which are either in the ordinary course of business or incidental to the Partnership's business. Those legal proceedings incidental to the business of the Partnership are generally not covered by insurance or other indemnity. In the opinion of management, the ultimate resolution of these matters will not have a material effect on the consolidated financial position, operations or cash flows of the Partnership. Pro Forma Liquidity and Capital Resources In connection with the proposed conversion of the Partnership to a Corporation, SunSource's cash flow is expected to improve due to the following: (i) retention of the General Partner's Management Fee in the amount of $3.3 million per year, (ii) retention of distributions on the General Partner's ownership in the Partnership and the Operating Partnership amounting to approximately $.4 million annually, and (iii) a reduction in income tax rates, offset in part by increased interest expense as discussed below. As a Corporation, the Corporation's current effective tax rate for state and federal income taxes is expected to be approximately 40% compared with the Partnership's current tax distribution rate of 49.5% (based on 125% of the maximum individual federal income tax rate of 39.6% applied to B Interest taxable ordinary income in accordance with the partnership agreement) plus the elimination of certain partnership-only state and local taxes of approximately 1.5% of Partnership taxable income. The proposed conversion to corporate form will result in SunSource reporting a negative net worth due to the exchange of Trust Preferred Securities and cash for the A Interests. The Trust Preferred Securities have certain equity characteristics but also have certain creditors' rights, thereby being classified between liabilities and equity on the balance sheet. The new 11.6% Trust Preferred Securities are cumulative, callable after five years at the SunSource's option and the interest on the Junior Subordinated Debentures is deductible for income tax purposes. SunSource's fixed charge to its Class A holders will remain at $12.2 million annually after the exchange of Trust Preferred Securities for A Interests. The holders of A Interests will continue to receive approximately $.092 per month for each current Class A interest owned, which will aggregate approximately $1.10 annually. Also, SunSource anticipates financing cost savings of approximately 100 basis points through refinancing of its current outstanding debt of $84.9 million as of June 30, 1997, with a combination of new long-term fixed rate debt of $60 million at 7.66% and a bank revolver of $90 million, of which approximately $105.4 million would be outstanding on a pro forma basis as a corporation at March 31, 1997. Borrowing rates on the five-year revolver will be determined according to the Corporation's consolidated funded debt to EBITDA ratio which will result in interest rates based on the London Interbank Offered Rate ("LIBOR") plus 1.0% to 1.5%. As a result of its refinancing, SunSource will prepay its outstanding senior notes in whole upon consummation of the proposed conversion. SunSource would incur a make-whole penalty of approximately $4.0 million as a result of prepayment of the senior notes in their entirety. The refinancing is expected to provide SunSource with additional working capital for reinvestment in its businesses and acquisition capital for future growth. Overall, debt will increase as a result of the proposed conversion due to the payment of $14.4 million to the Class A holders as part of the exchange offer previously discussed and $4.5 million in transaction costs. Also, debt will increase due to the prepayment of the senior notes previously mentioned resulting in an expected make-whole payment of about $4.0 million. Interest expense, net for the year ended December 31, 1996, is $8.1 million on a pro-forma corporate basis compared with $6.9 million as a partnership. The increase in interest expense is the result of incremental debt incurred directly related to the conversion as noted herein. 101 The Partnership's consolidated capitalization (including the current portion of bank revolving credit and senior notes) as of March 31, 1997, was $180.0 million in its current partnership form compared to $203.5 million as a corporation on a pro forma basis. Total debt as a percentage of SunSource's consolidated capitalization is expected to increase to 51.8% as a corporation on a pro forma basis from its current 46.6% as of March 31, 1997. Income Taxes As a result of the Partnership's adoption of SFAS No. 109 in 1992, the Partnership has a deferred tax asset aggregating $5.0 million as of December 31, 1996. Management believes that the Partnership's deferred tax asset will be realized through the reversal of existing temporary differences at the earlier of the date of conversion to a C corporation should the proposed conversion be approved, or after December 31, 1997, when the Partnership will be treated as a corporation for federal income tax purposes. The temporary differences expected to reverse at the date of conversion to a C corporation or after December 31, 1997, between the financial statement and tax bases, are composed of prepayment penalties in the amount of $.8 million, insurance casualty loss liabilities in the amount of $1.4 and deferred compensation liabilities in the amount of $8.3 million, net of a valuation allowance of $.2 million. See Note 13 of Notes to Consolidated Financial Statements. The minimum level of future taxable income necessary to realize the Partnership's recorded deferred tax asset at December 31, 1996, is approximately $12.5 million. For the three years ended December 31, 1996, the Partnership's consolidated net income per the financial statements reconciled to federal taxable income in thousands of dollars is shown below:
Years Ended December 31, ------------------------ 1996 1995 1994 ---- ---- ---- Consolidated Net Income per the Financial Statements ("Book") $19,267 $44,116 $29,544 Tax Adjustments to Book Income: - ------------------------------- Goodwill & Other Amortization 1,013 1,252 1,634 Depreciation 607 467 506 Deferred Compensation, net (96) 942 2,917 Self-Insurance Accrued Expenses, net (943) (776) 844 Tax gain in excess of book gain from sale of Divisions -- 1,977 1,216 Restructuring Charges 5,783 -- -- Transaction Costs 2,150 -- -- Other Increase (Decrease) to Book Income, net 853 1,893 451 ------- ------- ------- Federal Taxable Income $28,634 $49,871 $37,112 ======= ======= =======
Partnership Tax Status As previously stated, under current law, the Partnership will be taxed as a corporation for federal income tax purposes either upon conversion to a corporation should the proposed conversion be approved, or after December 31, 1997, whichever is earlier. If the proposed conversion is approved and the Partnership converts to a corporation, the Corporation will record a provision for U.S. federal, state and foreign income taxes on its taxable earnings. If the Partnership remains a limited partnership, the effect of the change in taxation after December 31, 1997 will result in the Partnership paying a corporate income tax at the Partnership level. Therefore, in accordance with the Partnership Agreement, the Partnership's income will not be allocated for tax purposes to the partners as is currently being done, and limited partners will pay taxes only on distributions from the Partnership, if any. Additionally, in accordance with the Partnership Agreement, the Partnership would no longer make tax distributions with respect to B Interests. Accordingly, a decision on 102 whether any other distribution will be made with respect to the B Interests is solely within the discretion of the General Partner. Based on current operations, it is likely that cash would be retained in the Partnership to fund its acquisition program and other partnership requirements. If the Partnership remains a limited partnership, payment of the Priority Return distribution is expected to continue to the A Interests in the amount of $.0917 per month to each A Interest to aggregate $1.10 annually. Inflation Inflation in recent years has had a modest impact on the operations of the Partnership. Continued inflation, over a period of years at higher than current rates, would result in significant increases in inventory costs and operating expenses. However, such higher cost of sales and operating expenses can generally be offset by increases in selling prices, although the ability of the Partnership's operating divisions to raise prices is dependent on competitive market conditions. 103 BUSINESS General The Partnership through the Operating Partnership is one of the largest wholesale distributors of industrial products and services in the United States. Since January 1987, the business of the Partnership and the Operating Partnership has been managed by the General Partner, a limited partnership whose general partner is Lehman/SDI, an indirect, wholly owned subsidiary of Lehman Brothers Holdings Inc. ("Lehman Holdings"). The General Partner owns 1% of the Partnership and 1% of the Operating Partnership. All of the limited partnership interests in the General Partner are beneficially owned by members of management of the Partnership and the Operating Partnership (current and former executive officers, the "Management Employees"). The current organization consists of its headquarters operation and three business segments comprised of twelve operating divisions, as follows:
Principal Year Acquired/ Location Organized -------- --------- SunSource Headquarters Philadelphia, PA 1975 Industrial Services Segment Chicago, IL 1996 Sun Inventory Management Company ("SIMCO") Divisions - Kar Products Chicago, IL 1977 - A&H Bolt & Nut Company Windsor, Ontario 1989 - SIMCO/Special-T-Metals Lenexa, KS 1992/1981 Sun Technology Services Divisions - Walter Norris Rosemont, IL 1976 - J.N. Fauver Company Madison Heights, MI 1978 - Warren Fluid Power Denver, CO 1987 - Air-Dreco Houston, TX 1988 - Activation Birmingham, AL 1991 Mexico - Hydra Power de Mexico Tlalnepantla, C.P., 1992 Mexico - SIMCO de Mexico Mexico City, Mexico 1992 Hardware Merchandising Segment - Hillman Cincinnati, OH 1982 Glass Merchandising Segment - Harding Glass Kansas City, MO 1980
On December 11, 1996, the Board of Directors of Lehman/SDI, approved management's plan to restructure its Technology Services divisions and its Glass Merchandising business. During the fourth quarter of 1996, the Partnership recorded a $6.0 million restructuring charge related to the integration and consolidation of its five domestic Technology Services divisions and the write-off of certain non-performing assets in the Glass Merchandising segment. The restructuring plan is expected to result in the elimination of 175 employees in the Technology Services divisions by December 31, 1998, through integration of its finance, administration, purchasing, warehousing and service center functions. Redeployment of the Partnership's assets in its Glass business will focus management's attention on the strategic growth in the retail sector. See Note 1 of Notes to Consolidated Financial Statements. 104 In November 1995, the Operating Partnership's Hillman division acquired the retail hardware business of Curtis Industries for $8.0 million. Annual sales of Curtis' Retail division are approximately $11 million. The acquisition of Curtis significantly expanded Hillman's position as a supplier of goods and services to the hardware home center market where Curtis has concentrated much of its attention. In addition, the Curtis product line can now be offered to Hillman's present customer base. This acquisition continues Hillman's long-term growth strategy to become a major provider of products and services to all segments of the Hardware merchandising business. On April 11, 1996, the Partnership's Industrial Services Segment, through its Warren Fluid Power Division, purchased certain assets of Hydraulic Depot, Inc. of Reno, Nevada, for an aggregate purchase price of $0.7 million. Annual sales of Hydraulic Depot, Inc., are approximately $2.5 million. This acquisition expands Warren's previous geographic markets. The Operating Partnership sold the Electrical Products Group divisions on December 5, 1994, the Dorman Products division on January 3, 1995, and the Downey Glass division on October 27, 1995, (the "divested operations or divisions sold") as listed below: Divisions Sold Principal Location - -------------- ------------------ Electrical Products Group Divisions - - American Electric Company St. Joseph, MI - - Philips & Company Columbia, MI - - Keathley-Patterson Electric Co. N. Little Rock, AR Dorman Products Division Warsaw, KY Downey Glass Division Los Angeles, CA For the year ended December 31, 1996, the Partnership had net sales of approximately $649 million, with the largest operating division contributing approximately $164 million. The Partnership's business strategy has been to identify and develop specific industrial distribution markets. However, the Partnership's current strategic plan seeks to increase its emphasis on sales of high gross-margin products by providing its customers with value added services, such as engineering design services through its Sun Technology Services divisions and inventory management and integrated supply services primarily through its SIMCO divisions. In addition, the Partnership has opened new service centers for repair of fluid power equipment and seeks to expand this service outside its core geography and across Canada. The Partnership also continues to enhance its retail service offerings in the glass segment and broaden its retail merchandising of hardware related products. Presidents of the Partnership's operating divisions exercise broad discretion in the conduct of their businesses, including responsibility for the management of their suppliers, customers and employees. Strong formal and informal planning and monitoring functions are performed by the General Partner, and the individual presidents of operating units are evaluated against the financial and non-financial goals established jointly each year with the General Partner. A substantial portion of each president's compensation is tied to the performance of his division against its annual plan. Also, certain presidents can earn substantial deferred compensation for maintaining the results of their operations in the upper quartile within the industrial distribution industry. Management believes that much of the Partnership's prior success has been the result of fostering and perpetuating the entrepreneurial drive of operating management. The Partnership evaluates on an ongoing basis the performance and prospects of each of its operating divisions in light of the Partnership's overall business strategy. Acquisition Strategy Since the organization of its predecessor in 1975, the business of the Partnership has grown primarily through acquisitions of existing distribution companies. The acquisition strategy has expanded the Partnership's operations, both geographically and in the number and type of products offered. The Partnership evaluates companies that have developed attractive product/market niches and have demonstrated their ability to achieve high returns on invested capital. The Partnership looks for companies with strong management capabilities and stable growth patterns. Prior to making certain acquisitions, an extensive operational review is performed by an external consulting firm. Prior to most acquisitions, certain agreed upon procedures are performed by internal and external auditors. 105 In accordance with the terms of its credit agreements, the Partnership was not permitted to make acquisitions in 1994. Acquisition spending amounted to $8.0 million and $0.7 million in 1995 and 1996, respectively. See Notes 5, 8 and 9 of Notes to Consolidated Financial Statements. As the result of an analysis of strategic alternatives by the Partnership, the Partnership sold the non-strategic businesses described above in 1994 and 1995. Through the sale, the Partnership strengthened its balance sheet and positioned itself to resume its acquisition program by focusing on businesses which fit its current strategic plan. The Partnership has authorized spending of up to $15.0 million per year for acquisitions in accordance with the terms of its credit agreements. Products and Services Excluding the divested operations discussed previously, the Partnership provides distribution and value-added services related to over 1,300 product lines. Such value-added services are typically provided to the Partnership's customers on a non-fee basis and are an integral component of the Partnership's marketing strategy. The Partnership recognizes revenue upon shipment of products to customers, net of any allowances for return merchandise and credits. These products and services are provided in three main business segments: (1) industrial services which consist of inventory management, engineering and integrated supply services to industrial businesses through sales of products such as fasteners (nuts, bolts, screws, etc.), hydraulic, pneumatic and electronic systems and parts; (2) retail merchandising services through sales of fasteners and related products to hardware and home center retail stores; and (3) retail glass services consisting of installation and repair through sales of glass products such as large sheet glass, auto glass, insulated glass, mirrors and specialty glass. The average single sale during the year ended December 31, 1996, was approximately $297. Inasmuch as the Partnership is principally providing distribution and related services, most of the products sold are manufactured by others. However, several divisions sell a majority of their products under their own labels. In some cases, most notably through its Technology Services divisions, the Partnership assembles products or designs systems to the specifications of the end-users and performs related product repairs. Through its Glass Merchandising segment, the Partnership produces insulated glass units according to customer specifications. In addition, several of the products which the Partnership distributes are purchased by the Partnership in bulk and subsequently repackaged in small quantities. The Partnership regularly uses a large number of suppliers and has long-term relationships with many of them. Most items which the Partnership distributes are purchased from several sources, and the Partnership believes that the loss of any single supplier would not significantly affect the operations of the Partnership viewed as a whole. No single supplier accounted for more than 5% of the Partnership's purchases for the three months ended March 31, 1997 and for the year ended December 31, 1996. The following table shows the percentages of consolidated net sales reported for the years ended December 31, 1996, 1995 and 1994 derived from the Partnership's current business segments, excluding divisions sold:
Percentage of Consolidated Net Sales for Three Months Ended March 31 Year Ended December 31, Business Segment 1997 1996 1995 1994 - ---------------- ---- ---- ---- ---- Industrial Services Technology Services divisions 46.9% 46.1% 47.6% 46.6% SIMCO divisions 25.6% 24.1% 23.0% 22.9% ----- ----- ----- ----- Total Industrial Services 72.5% 70.2% 70.6% 69.5% Hardware Merchandising 15.7% 15.9% 14.1% 13.1% Glass Merchandising 11.8% 13.9% 15.3% 17.4% ----- ----- ----- ----- 100.0% 100.0% 100.0% 100.0%
106 Marketing While the Partnership sells across three main business segments (industrial services, hardware merchandising and glass merchandising), a substantial portion of its sales are industrially based, and sales performance is tied closely to the overall performance of the non-defense-goods producing sector of Gross Domestic Product in the United States. However, risks and economic changes in the marketplace demand a customer-based focus on value-added services which vary by business segment. The principal markets for the Partnership's products and services by business segment, as determined by management are as follows: Maintenance and Repair Markets and Original Equipment Manufacturers Customers in this market are served by the divisions in the Industrial Services segment. These customers include diverse industrial plants and commercial establishments as well as producers of automotive equipment, farm equipment, machine tools and a broad range of other equipment. Hardware Merchandising This market is primarily comprised of retail hardware stores, home service centers, and lumberyards seeking merchandising services for hardware related products. Glass Merchandising This market is primarily comprised of individuals seeking automotive and residential glass replacement as well as contractors seeking glazing materials and services. The Partnership has over 180,000 customers, the largest of which accounted for less than 5% of net sales for the three months ended March 31, 1997 and for the year ended December 31, 1996. Each division maintains its own sales force which is compensated for the most part on a commission basis. The divisions' sales forces vary in size, the largest of which has approximately 740 sales people. The Partnership's products and services are sold in all 50 states. While its Glass Merchandising segment sells in regional markets, the remaining two segments sell on a national scale. In general, fluid power products and technology services are sold primarily in the upper Midwest, Southeast, Southwest, Canada and Mexico; maintenance products and inventory management services are sold nationwide in the U.S., Canada, and Mexico; retail merchandising products and services are sold nationally in the U.S. and Mexico; and retail glass products and services are sold primarily in the West, the Midwest, the Mid-Atlantic and the Southeast. Competition The distribution business is highly competitive, with the principal methods of competition being quality of service, quality of products, product availability, credit terms, price and the provision of value-added services such as engineering design, integrated supply and inventory management. The Partnership encounters competition from a large number of regional and local distributors and from several national distributors, some of which have greater financial resources than the Partnership. The wholesale distribution business is highly fragmented, with a majority of the wholesale distributors in the United States being operated as family-owned businesses. The Partnership's competitors have annual sales of approximately $5 million on the average with approximately one-half under $2 million. The Partnership believes that its business differs from that of other large national distributors in that the Partnership carries a diverse range of product lines and provides significant value-added services, while most large distributors concentrate on only one or two product groups. Insurance Arrangements Under the Partnership's current insurance programs, commercial umbrella coverage is obtained for catastrophic exposure and aggregate losses in excess of expected claims. Since October 1991, the Partnership has retained the exposure on certain expected losses related to workman's compensation, general liability and automobile. The Partnership also retains the exposure on expected losses related to health benefits of certain employees. The Partnership believes that its present insurance is adequate for its businesses. See Note 14 of Notes to Consolidated Financial Statements. 107 Investment and Borrowing Policies The Partnership invests in cash equivalents consisting of commercial paper, U.S. Treasury obligations and other liquid securities purchased with initial maturities less than 90 days. If the Conversion is approved, the Corporation expects no material change in its cash investment policy. Currently, the Partnership has financing capacity of $113.9 million consisting of $63.9 million in outstanding senior notes at a weighted average borrowing rate of 8.9% and a $50 million bank revolving credit facility at borrowing rates based on LIBOR plus 1.75% and prime. The existing senior note and bank credit agreements require the maintenance of specific coverage ratios and levels of financial position and restricts the incurrence of additional debt, the sale of assets and distributions from the Operating Partnership. On March 4, 1997, the Operating Partnership received the last of two financing commitments which together aggregate $150.0 million from lenders. These commitments are available to the Partnership until September 30, 1997. The Operating Partnership intends to utilize the debt capacity to fund transaction costs and other payments related to the Conversion, refinance its current outstanding senior notes of $63.9 million as of June 30, 1997, including interest thereon and related make-whole amount of approximately $4.0 million, and outstanding bank revolver borrowings of $21.0 million as of June 30, 1997. Also, the new credit facilities will provide for working capital for reinvestment in its businesses and acquisition capital for future growth. The new financing commitments consist of a $60.0 million five year fixed rate note at 7.66% and $90.0 million five year bank revolver with terms and conditions more favorable than the Partnership's existing senior notes and bank credit lines including fewer restrictive covenants and an effective interest rate reduction of approximately 1.00%. Borrowings under the new bank credit facility will be based on LIBOR plus 1.0% to 1.5% and prime. The new financing arrangements will limit the Corporation's ability to incur additional indebtedness, distribute dividends and repurchase either Common Stock or the Trust Preferred Securities. Employees As of July 1, 1997, the Partnership, through the Operating Partnership, employed 4,060 employees. As of December 31, 1996, the Partnership, through the Operating Partnership, employed 3,984 employees, of which 1,675 are sales personnel, 1,308 are employed as warehouse and delivery personnel, and 1,001 hold administrative positions. The Operating Partnership has collective bargaining agreements with five unions representing a total of 80 employees. In the opinion of management, employee relations are good. Backlog The Partnership's sales backlog excluding divested operations was $59,531,000 as of December 31, 1996, and $54,935,000 as of December 31, 1995. Normally, in the distribution business, orders are shipped within a week of receipt. On average, the Partnership's backlog is less than one month's sales. Federal Income Tax Considerations The Revenue Act of 1987 (the "1987 Act") amended the Code with respect to the tax treatment of publicly traded partnerships, such as the Partnership, and the passive activity losses and credits attributable thereto. Section 7704 of the Code provides that publicly traded partnerships generally will be treated as corporations for tax purposes commencing in tax years beginning after 1987. The effective date of this amendment was delayed, however, for certain "existing partnerships," such as the Partnership, until the taxable year beginning after December 31, 1997, provided that such partnerships do not add any substantial new line of business before the delayed effective date. The Partnership does not intend to add any substantial new line of business during the period when it otherwise qualifies for delayed effectiveness under Section 7704. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES." Section 469 of the Code provides that, in the case of publicly traded partnerships that are not treated as corporations under Section 7704, net losses and credits attributable to an interest in each such partnership shall not be applied against the partner's other income. Such net losses and credits are suspended and carried forward to be applied against net income from the Partnership in succeeding years. Since the commencement of operations, the Partnership has not incurred a net loss for federal income tax purposes. However, if the Partnership should incur a net loss for federal income tax purposes in any subsequent year until taxable years beginning after December 31, 1997, such net losses will be suspended at the limited partner level, carried forward and netted in a later year or years against the limited partner's share of the net income of the Partnership, or will be used when the entire investment is disposed of in a taxable transaction. Similarly, a limited partner's share of any credits of the Partnership in excess of the tax liability attributable to 108 his or her interest in the Partnership will be suspended, carried forward and applied against the tax liability attributable to the Partnership in a subsequent year or years, or may be used to increase the basis of such partnership interest when the entire investment is disposed of in a taxable transaction. Generally, these credits may not be applied against tax liability attributable to other activities. Assuming the continued effectiveness of Section 7704 of the Code in its current form, if the Partnership remains a publicly traded partnership, the Partnership would be treated as a corporation for tax purposes beginning in fiscal year 1998. Section 469 would then be inapplicable to the limited partners' treatment of income or credits attributable to the Partnership. The income of the Partnership would be taxed to it as a separate entity, and any losses of the Partnership would not be deductible by limited partners. This tax at the corporate level would reduce the amount distributable to partners and cash distributions to limited partners would be taxed at the individual level as dividends to the extent of earnings and profits. The Revenue Reconciliation Act of 1993 (the "1993 Act") amended the Code with respect to the tax treatment of unrelated business taxable income ("UBTI") in an effort to allow pension funds and other tax-exempt organizations (such as individual retirement accounts and charitable organizations) to invest in publicly traded partnerships. Such entities are subject to federal income tax on net UBTI in excess of $1,000. The 1993 Act repeals the rule that automatically treats income from publicly traded partnerships as gross income that is derived from an unrelated trade or business. As a result, investments in publicly traded partnerships will be treated the same as investments in other partnerships for purposes of the UBTI rules for partnership years beginning on or after January 1, 1994. Section 708 of the Code, in general, provides for termination of a partnership if 50 percent or more of the total interest in partnership capital and profits is sold or exchanged within a twelve-month period. However, the legislative history to the Technical and Miscellaneous Revenue Act of 1988 indicates that termination of a partnership within the meaning of Section 708 will not cause a partnership to cease to qualify as an "existing partnership" for purposes of Section 7704. Accordingly, sales or exchanges of Interests in the Partnership pursuant to trading of the Partnership's Interests on the NYSE will not impair the status of the Partnership as an "existing partnership" that qualifies for a delayed effective date under Section 7704. Properties The Partnership currently has approximately 200 warehouse and stocking facilities located throughout the United States, Canada and Mexico. Most of these include sales offices. Approximately 16% of these facilities are owned and the remainder are leased. The Partnership's principal properties are warehouse facilities used by the Operating Partnership, as follows: Division Location Description -------- -------- ----------- Hillman Cincinnati, Ohio 190,000 sq. ft. (leased) Harding Glass Denver, Colorado 184,000 sq. ft. (owned) Kar Products Itasca, Illinois 80,000 sq. ft. (owned) In the opinion of management, the Partnership's existing facilities are in good condition. Legal Proceedings A civil complaint was filed by Dorman Products of America, Ltd. ("Dorman"), a subsidiary of R&B, Inc. ("R&B"), against the Operating Partnership, in the United States District Court for the Eastern District of Pennsylvania on February 27, 1996, alleging misrepresentation of certain facts by the Operating Partnership upon which R&B allegedly based their offer to purchase the assets of the Dorman Products division of the Operating Partnership. The complaint sought damages of approximately $21 million. The Operating Partnership moved to dismiss for lack of jurisdiction and the complaint was withdrawn. On April 25, 1996, the Operating Partnership filed an action against Dorman and R&B in the Court of Common Pleas of Montgomery County, Pennsylvania alleging breach of contract, intentional interference with contractual relations and negligence and requesting a declaratory judgment that the Operating Partnership did not make any misrepresentations in connection with the sale of the division. Dorman and R&B have counterclaimed making the same allegations which were made in the original complaint. See "SPECIAL FACTORS -- Limited Partner Litigation" for a description of litigation instituted by two limited partners with respect to the Conversion. 109 In the opinion of management, the ultimate resolution of these matters will not have a material effect on the consolidated financial position, operations or cash flows of the Partnership. 110 MANAGEMENT Executive Officers and Directors The business of the Partnership and the Operating Partnership is managed by the General Partner, whose general partner is Lehman/SDI. The directors of Lehman/SDI, each of whom has served as such since February 1987, except for Mr. Eliot M. Fried, April 2, 1997 who has served since December 1994, Mr. Henri I. Talerman, who has served since March 1995, and Mr. John P. McDonnell, who has served since May 1995, are set forth below. The description of the principal occupation is for the entire five-year period unless otherwise indicated.
Principal Occupation; Five-Year Name, Age and Address Employment History; Other Directorships - --------------------------- ----------------------------------------- O. Gordon Brewer, Jr., 60 Vice President-Finance, Ikon Office Solutions, formerly Ikon Office Solutions Alco Standard Corporation (distributor of office and P. O. Box 834 paper products); Executive Officer, Alco Standard Valley Forge, PA 19482 Corporation from 1970 to present; Director, Corporate Insurance and Reinsurance Limited. Norman V. Edmonson, 57 Executive Vice President of the Partnership since 2600 One Logan Square December 1994; Group Vice President of the Philadelphia, PA 19103 Partnership prior to December 1994. Eliot M. Fried, 64 Managing Director, Lehman Brothers Inc.; Director, Lehman Brothers Axysis Technologies, Inc. ; Bridgeport Machines, Inc.; American Express Tower - 17th Energy Ventures, Inc.; Walter Industries. Floor World Financial Center New York, NY 10285 Arnold S. Hoffman, 61 Senior Managing Director, Legg Mason Wood Walker, Legg Mason Wood Walker Incorporated; Director, Intelligent Electronics Incorporated Incorporated. Mellon Bank Center, Suite 1100 1735 Market Street Philadelphia, PA 19103 Donald T. Marshall, 63 Chairman and Chief Executive Officer of the 2600 One Logan Square Partnership. Philadelphia, PA 19103 John P. McDonnell, 61 President of the Partnership since December 1994; 2600 One Logan Square Group Vice President of the Partnership prior to Philadelphia, PA 19103 December 1994. Ernest L. Ransome, III, 70 Chairman, Giles & Ransome, Inc. (distributor of Giles & Ransome construction equipment). 2975 Galloway Road Bensalem, PA 19020 Donald A. Scott, 67 Senior Partner, Morgan, Lewis & Bockius LLP; 2000 One Logan Square Director, Provident Mutual Life Insurance Company. Philadelphia, PA 19103 Henri I. Talerman, 39 Managing Director, Lehman Brothers Inc. from June Lehman Brothers 1992 to present; Senior V.P., Lehman Brothers prior to American Express Tower - 18th 1992; Director, McBride plc from May 1993 to present; Floor Financier Gerflor SA, 1992 to present; Advisory World Financial Center Director, Europe Capital Partners. New York, NY 10285
111 All directors hold office until the next annual meeting of the sole stockholder of Lehman/SDI and until their successors are duly elected and qualified. The executive officers of the Partnership and the Operating Partnership (constituting, except for Mr. Brus, the "Management Employees" referred to herein), each of whom has served as such for the past five years, except as noted, are set forth below:
Principal Occupation; Five-Year Employment History; Other Name, Age and Address Directorships ---------------------- --------------------------------- Richard J. Brus, 59 President, Sun Technology Services since 1995; 153 W. Valley Avenue President, Activation Division 1992 to 1995; and Birmingham, AL 35259 Vice President-Sales & Marketing, Activation Division, prior to 1992. Harold J. Cornelius, 48 Group Vice President. Harding Glass Industries 7201 W. 110th Street Overland Park, KS 66210 Joseph M. Corvino, 43 Vice President-Finance, Chief Financial Officer, Treasurer and 2600 One Logan Square Secretary since December 1995; Vice President and Controller Philadelphia, PA 19103 prior to December 1995. Norman V. Edmonson, 57 Executive Vice President since December 1994; Group Vice 2600 One Logan Square President prior to December 1994. Philadelphia, PA 19103 Max W. Hillman, Jr., 50 Group Vice President. Hillman Fastener 10590 Hamilton Avenue Cincinnati, OH 45231 Donald T. Marshall, 63 Chairman and Chief Executive Officer. 2600 One Logan Square Philadelphia, PA 19103 John P. McDonnell, 61 President and Chief Operating Officer since 2600 One Logan Square December 1994; Group Vice President prior to Philadelphia, PA 19103 December 1994.
All executive officers hold office at the pleasure of the board of directors. Directors and Executive Officers After the Conversion The directors of the Corporation after the Conversion will be the same as the existing directors of Lehman/SDI. Pursuant to the terms of the Stockholders Agreement, the nine directors will consist of three directors nominated by management, two directors nominated by Lehman/SDI as long as it (together with its affiliates) holds 20% or more of the outstanding Common Stock or one member if it (together with its affiliates) holds between 10% and 20% of the outstanding Common Stock, and four independent directors. The officers of the Corporation will be: Donald T. Marshall, Chairman and Chief Executive Officer of the Corporation; John P. McDonnell, President and Chief Operating Officer; Norman V. Edmonson, Executive Vice President and Joseph M. Corvino, Vice President Finance, Chief Financial Officer, Treasurer and Secretary. Compensation The following table sets forth all cash compensation paid and accrued by the Operating Partnership for services rendered during the three years ended December 31, 1996, by each of the Chief Executive Officer and the four other most highly compensated executive officers of the Partnership and the Operating Partnership whose remuneration exceeded $100,000. 112 Summary Compensation Table
Annual Compensation ---------------------------------------------- All Other Name and Principal Position Year Salary Bonus(1) Compensation - --------------------------- ---- ------ -------- ------------ Donald T. Marshall 1996 $452,509 $45,230 $11,749 (2) Chairman and Chief Executive Officer 1995 488,688 4,347 10,234 (2) 1994 454,043 221,144 8,185 (2) John P. McDonnell 1996 358,105 22,692 3,273 (2) President and Chief Operating Officer 1995 374,451 32,812 2,500 (2) 1994 295,354 96,915 2,135 (2) Norman V. Edmonson 1996 308,125 105,600 1,923 (2) Executive Vice President 1995 333,849 82,200 1,638 (2) 1994 300,477 94,400 1,418 (2) Harold J. Cornelius 1996 280,107 7,101 19,000 (3) Group Vice President 1995 291,609 27,400 -- 1994 275,375 102,729 90,128 (3) Max W. Hillman, Jr. 1996 269,816 -- 29,000 (3) Group Vice President 1995 268,920 36,250 50,186 (3) 1994 294,793 104,898 107,632 (3)
- -------------------- (1) Represents Earned Bonus for services rendered in each year. Does not include the Management Fee payable to the General Partner. See "Management Fee" below. (2) Represents primarily term life insurance premiums paid by the Operating Partnership for the benefit of the named executive officer. (3) Represents deferred compensation earned and awarded for services rendered in the year which unconditionally vests at the rate of 20% per year over the five-year period from the date earned. The above table excludes deferred compensation awards earned through 1996 by the executive officers in accordance with the Partnership's Long-Term Performance Share Plan since the awards earned are subject to reduction or forfeiture through 1998 if performance goals are not achieved. The value of the awards credited as of December 31, 1996, for each executive officer are as follows: Donald T. Marshall, $1,126,486; Norman V. Edmonson, $740,261; John P. McDonnell, $354,036; Harold J. Cornelius, $354,036; and Max W. Hillman, $354,036. Directors of Lehman/SDI who are not employees of the Partnership or Lehman Brothers Inc. are paid an annual fee of $14,000 and a fee of $1,000 for each board or committee meeting attended. Such fees are paid by the General Partner. As described under "SPECIAL FACTORS -- Determinations of the Special Committee," Messrs. Brewer and Ransome as members of the Special Committee also received a retainer of $20,000 plus a meeting fee of $1,000 per meeting for their work on the Special Committee. Deferred Compensation Plans The Partnership's deferred compensation plans are described in Note 11 to Consolidated Financial Statements. Completion of the Conversion will result in 100% vesting for all participant balances as of the date of the Conversion. The present intention is to continue operation of the plans following the Conversion. The Partnership's Long-Term Performance Share Plan (the "Share Plan") is based upon annual and cumulative performance for a five year term ending December 31, 1998. If the Conversion is approved, the participants will be entitled to 100% vesting of the awards earned through December 31, 1996 in accordance with the change of control provision of the Share Plan. See "-- Change in Control Arrangements." If the conversion is approved, the Share Plan will continue to run from January 1, 1997 to December 31, 1998, to complete the Share Plan's original five-year performance cycle. 113 Change in Control Arrangements The executive officers named above were participants in the Operating Partnership's Deferred Compensation Plans (the "Plans") in certain years. Upon a change in control, the Plans provide for payment of all vested and non-vested amounts including accrued interest. The change in control provision is triggered upon a sale of all of the Operating Partnership's business, a change in the General Partner (including its reorganization), or a change, other than due to death or retirement, in a majority of the directors of Lehman/SDI during any one-year period. See Note 11 of Notes to Consolidated Financial Statements. As a result of the proposed conversion, the change of control provisions of the Plans will be triggered because a majority of the directors of Lehman/SDI will not continue as directors of Lehman/SDI after the Conversion. Participants will be offered an opportunity to defer receipt of amounts available for payment under a new deferred compensation plan, the "Deferred Compensation Plan for Key Employees of SDI Operating Partners, L.P.," effective December 1, 1996. The Partnership estimates that approximately $9.2 million of deferred compensation balances will become payable as a result of the change of control provision and eligible for elective deferral. Management expects approximately $6.5 million of these balances eligible for payment to be deferred and $2.7 million to be paid. Payments to current and former executive officers are expected to aggregate about $0.1 million. Messrs. Marshall, McDonnell and Edmonson have waived their rights to accelerate payments. Management Fee The Operating Partnership pays the Management Fee to the General Partner. The Management Fee, payable annually on March 31 (with respect to the preceding year), is equal to 3% of the aggregate initial capital investment of $110,995,730 by the limited partners. The amount of the Management Fee paid on March 31, 1997 with respect to 1996, was $3,329,872. The amount of Management Fee paid in 1996 with respect to 1995 was $3,329,872. See footnotes (1) and (2) to the table under "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" for ownership of the General Partner. The interests of Lehman/SDI and the Management Employees, in the fee for 1996 were as follows: Lehman/SDI, $1,791,471; Harold J. Cornelius, $92,304; Joseph M. Corvino, $30,768; Norman V. Edmonson, $384,600; Max W. Hillman, Jr., $92,304; Donald T. Marshall, $599,977; and John P. McDonnell, $184,608. Certain Business Relations Mr. Scott is a partner in Morgan, Lewis & Bockius LLP, a law firm that has performed services for the Partnership during the last fiscal year. Messrs. Fried and Talerman are officers of Lehman Brothers Inc., which performed investment banking services for the Partnership during 1995 and 1996. Mr. Hoffman is an officer of Legg Mason Wood Walker, Incorporated, which performed investment banking services for the Partnership during 1996. The Partnership and the Corporation propose to have these firms perform similar services as needed during the current fiscal year. 114 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Security Ownership of Certain Beneficial Owners Since the Partnership is managed by its General Partner and has no Board of Directors, there are no "voting securities" of the Partnership outstanding within the meaning of Item 403(a) of Regulation S-K and Rule 12b-2 under the Securities Exchange Act of 1934. As set forth above, the general partner of the General Partner is Lehman/SDI, an indirect, wholly owned subsidiary of Lehman Brothers Holdings Inc., American Express Tower, World Financial Center, New York, NY 10285-1800. Security Ownership of Certain Beneficial Owners and Management The following table shows for (i) each director, (ii) each executive officer, (iii) certain persons known to the Company to own beneficially more than 5% of the outstanding interests and (iv) all officers and directors as a group, the beneficial ownership of A and B Interests of the Partnership as of July 1, 1997. None of the amounts equals more than 1% of the outstanding A Interests.
Ownership Before Conversion Ownership After Conversion --------------------------- -------------------------- Percent of Name of Beneficial A Interest B Interest Percent of B Shares of Common Stock Owner Amount(1) Amount(1) Interest Held Common Stock Held ----- --------- --------- ------------- ------------ ---- Lehman LTD I, Inc. -- 108,554 --(2) 27,138 --(2) Lehman Brothers Capital Partners I -- 5,788,124 26.7% 1,447,031 22.5% Lehman/SDI, Inc. -- -- -- 538,000 8.4% O. Gordon Brewer, Jr. 3,000 1,000 --(2) 250 --(2) Richard J. Brus 1,186 2,500 --(2) 625 --(2) Harold J. Cornelius 200 200 --(2) 27,770 --(2) Joseph M. Corvino 1,415 105,546 --(2) 35,626 --(2) Norman V. Edmonson 4,900 1,300,916 6.0% 440,729 6.9% Eliot M. Fried -- -- (3) --(3) -- --(4) Max W. Hillman, Jr. 4,000 10,000 --(2) 30,220 --(2) Arnold S. Hoffman 13,000(3)(5) 13,000(3)(5) --(2) 3,250 --(4) Donald T. Marshall 30,311 2,075,232 9.6% 698,988 10.9% John P. McDonnell 7,711 623,071 2.9%(2) 211,208 3.3% Ernest L. Ransome, III 5,000(6) 5,000 --(2) 1,250 --(2) Donald A. Scott 9,000 9,000 --(2) 2,250 --(2) Henri I. Talerman -- --(3) --(3) -- --(2) All directors and 79,723 4,145,465 19.1% 1,452,166 22.6% executive officers as a group (13 persons)
115 - -------------------- (1) In addition to the Interests listed, Lehman/SDI owns the general partnership interest, and the Management Employees beneficially own limited partnership interests, in the General Partner (the "GP Interests"). The GP Interests held by Lehman/SDI represents 53.8% of the GP Interests and the GP Interests held by the Management Employees collectively represent 46.2% of the GP Interests. The General Partner owns 1% of the Partnership and the Operating Partnership. The table does not include the GP Interests owned by the Management Employees. (2) Represents less than 1% of the outstanding B Interests or shares of Common Stock. (3) Does not include (i) 108,554 B Interests owned by Lehman LTD I, Inc., or (ii) 5,788,124 B Interests owned by Lehman Brothers Capital Partners I ("Capital Partners"), affiliates of Lehman Brothers Inc. Messrs. Hoffman and Fried, as limited partners of Capital Partners, derive economic benefit of approximately 1% from interests held by Capital Partners. An affiliate of Lehman Brothers Inc., of which Messrs. Fried and Talerman are officers, also owns all of the capital stock of Lehman/SDI. (4) Does not include 1,447,031 shares of Common Stock expected to be owned by Capital Partners after the Conversion. (5) 3,000 of these A and B Interests are owned by Hoffman Investment Co., of which Mr. Hoffman is Managing Partner. In addition, Mr. Hoffman's children own 4,000 A and B Interests with respect to which he disclaims beneficial ownership. (6) 2,500 of these A and B Interests are held in a trust, of which Mr. Ransome is a trustee. SUNSOURCE CAPITAL TRUST The Trust is a statutory business trust that was formed under the Business Trust Act pursuant to the filing of a certificate of trust with the Secretary of State of the State of Delaware and the entering into of a declaration of trust (as amended and restated, the "Declaration") among the Trustees and the Corporation and the filing of a certificate of trust with the Secretary of State of Delaware. The Declaration is qualified under the Trust Indenture Act. Upon issuance of the Trust Preferred Securities, the holders thereof will own all of the issued and outstanding Trust Preferred Securities. The Corporation has agreed to acquire Trust Common Securities in an amount equal to at least 3% of the total capital of the Trust and will own, directly or indirectly, all of the issued and outstanding Trust Common Securities. The Trust Preferred Securities and the Trust Common Securities will rank pari passu with each other and will have equivalent terms; provided that (i) if an Event of Default under the Declaration occurs and is continuing, the holders of Trust Preferred Securities will have a priority over holders of the Trust Common Securities with respect to payments in respect of distributions and payments upon liquidation, redemption or otherwise and (ii) holders of Trust Common Securities have the exclusive right (subject to the terms of the Declaration) to appoint, remove or replace Trustees and to increase or decrease the number of Trustees, subject to the right of holders of Trust Preferred Securities to appoint a Special Regular Trustee upon the occurrence of an Appointment Event. The number of Trustees of the Trust shall initially be five. Three of the Trustees will be the Regular Trustees. The fourth trustee is The Bank of New York which is unaffiliated with the Corporation and which will serve as the Property Trustee and act as the indenture trustee for purposes of the Trust Indenture Act. The fifth trustee is an affiliate of Bank of New York and will serve as the Delaware Trustee. Pursuant to the Declaration, legal title to the Junior Subordinated Debentures will be held by the Property Trustee for the benefit of the holders of the Trust Securities and the Property Trustee will have the power to exercise all rights, powers and privileges under the Indenture with respect to the Junior Subordinated Debentures. In addition, the Property Trustee will maintain exclusive control of a segregated non-interest bearing account (the "Property Account") to hold all payments in respect of the Junior Subordinated Debentures for the benefit of the holders of Trust Securities. The Property Trustee will promptly make distributions to the holders of the Trust Securities out of funds from the Property Account. The Preferred Securities Guarantee is separately qualified under the Trust Indenture Act and will be held by Bank of New York acting in its capacity as indenture trustee with respect thereto, for the benefit of the holders of the Trust Preferred Securities. Subject to the right of holders of Trust Preferred Securities to appoint a Special Regular Trustee upon the occurrence of an Appointment Event, the Corporation, as the direct or indirect owner of all of the Trust Common Securities, has the exclusive right (subject to the terms of the Declaration) to appoint, remove or replace Trustees and to increase or decrease the number of Trustees, provided that the number of Trustees shall at least be three, a majority of which shall Regular Trustees. 116 The Trust exists for the purpose of (a) issuing (i) its Trust Preferred Securities to the Corporation in consideration of the deposit by the Corporation of Junior Subordinated Debentures in the Trust as trust assets, and (ii) its Trust Common Securities to the Corporation in exchange for cash and investing the proceeds thereof in an equivalent amount of Junior Subordinated Debentures and (b) engaging in such other activities as are necessary or incidental thereto. The rights of the holders of the Trust Preferred Securities, including economic rights, rights to information and voting rights, are set forth in the Declaration, the Business Trust Act and the Trust Indenture Act. Under the Declaration, the Trust shall not, and the Trustees shall cause the Trust not to, engage in any activity other than in connection with the purposes of the Trust or other than as required or authorized by the Declaration. In particular, the Trust shall not and the Trustees shall not (a) invest any proceeds received by the Trust from holding the Junior Subordinated Debentures but shall promptly distribute from the Property Account all such proceeds to holders of Trust Securities pursuant to the terms of the Declaration and of the Trust Securities; (b) acquire any assets other than as expressly provided in the Declaration; (c) possess Trust property for other than a Trust purpose; (d) make any loans, other than loans represented by the Junior Subordinated Debentures; (e) possess any power or otherwise act in such a way as to vary the Trust assets or the terms of the Trust Securities in any way whatsoever; (f) issue any securities or other evidences of beneficial ownership of, or beneficial interests in, the assets of the Trust other than the Trust Securities; (g) incur any indebtedness for borrowed money or (h)(i) direct the time, method and place of exercising any trust or power conferred upon the Indenture Trustee with respect to the Junior Subordinated Debentures or the Property Trustee with respect to the Trust Preferred Securities, (ii) waive any past default that is waivable under the Indenture or the Declaration, (iii) exercise any right to rescind or annul any declaration that the principal of all of the Junior Subordinated Debentures shall be due and payable or (iv) consent to any amendment, modification or termination of the Indenture or the Junior Subordinated Debentures or the Declaration, in each case where such consent shall be required, unless in the case of this clause (h) the Property Trustee shall have received an unqualified opinion of nationally recognized independent tax counsel recognized as expert in such matters to the effect that such action will not cause the Trust to be classified for United States federal income tax purposes as an association taxable as a corporation or a partnership and that the Trust will continue to be classified as a grantor trust for United States federal income tax purposes. The books and records of the Trust will be maintained at the principal office of the Trust and will be open for inspection by a holder of Trust Preferred Securities or the holder's representative for any purpose reasonably related to the holder's interest in the Trust during normal business hours. Each holder of Trust Preferred Securities will be furnished annually with unaudited financial statements of the Trust as soon as available after the end of the Trust's fiscal year. Except as provided below or under the Business Trust Act and the Trust Indenture Act, holders of Trust Preferred Securities have no voting rights. If (i) distributions on the Trust Preferred Securities are in arrears for 18 consecutive months or (ii) an Event of Default under the Declaration occurs and is continuing, holders of Trust Preferred Securities shall have the right to vote, as a single class, for the appointment of a Special Regular Trustee who need not be an employee or officer of or otherwise affiliated with the Corporation. The Special Regular Trustee shall have the same rights, powers and privileges under the Declaration as the Regular Trustees. See "DESCRIPTION OF TRUST PREFERRED SECURITIES -- Voting Rights." The Property Trustee, for the benefit of the holders of the Trust Securities, is authorized under the Declaration to exercise all rights under the Indenture with respect to the Junior Subordinated Debentures to enforce the Corporation's obligations under the Junior Subordinated Debentures upon the occurrence of an Indenture Event of Default. The Property Trustee shall also be authorized to enforce the rights of holders of Trust Preferred Securities under the Preferred Securities Guarantee. If the Trust's failure to make distributions on the Trust Preferred Securities is a consequence of the Corporation's exercise of its right to extend the interest payment period for the Junior Subordinated Debentures, the Property Trustee will have no right to enforce the payment of distributions on the Trust Preferred Securities until an Event of Default shall have occurred. Holders of at least a majority in liquidation amount of the Trust Preferred Securities will have the right to direct the Property Trustee with respect to certain matters under the Declaration and the Preferred Securities Guarantee. If the Property Trustee fails to enforce its rights under the Indenture or fails to enforce the Preferred Securities Guarantee, any holder of Trust Preferred Securities may, after a period of 30 days has elapsed from such holder's written request to the Property Trustee to enforce such rights or the Preferred Securities Guarantee, to the fullest extent permitted by law, institute a legal proceeding against the Corporation to enforce such rights or the Preferred Securities Guarantee, as the case may be, See "DESCRIPTION OF TRUST PREFERRED SECURITIES -- Voting Rights." If an Indenture Event of Default occurs and is continuing with respect to the Junior Subordinated Debentures, an Event of Default under the Declaration will occur and be continuing with respect to the Trust Securities. In such event, the Declaration provides that the holder of Trust Common Securities will be deemed to have waived any such Event of Default with respect to the Trust Common Securities until all Events of Default with respect to the Trust Preferred Securities have been so cured or waived, the Property Trustee will be deemed to be acting solely on behalf of the holders of the Trust Preferred Securities and only the holders of the Trust Preferred Securities will have the right to direct the Property Trustee with respect to certain matters under the Declaration and consequently under the Indenture. In the event that any Event of Default with respect to the Trust Preferred Securities is waived by the holders of the Trust Preferred Securities as provided in the Declaration, the holders of 117 Trust Common Securities pursuant to the Declaration have agreed that such waiver also constitutes a waiver of such Event of Default with respect to the Trust Common Securities for all purposes under the Declaration without any further act, vote or consent of the holders of the Trust Common Securities. See "DESCRIPTION OF TRUST PREFERRED SECURITIES." The Declaration provides that the Trustees may treat the person in whose name a certificate for a Trust Preferred Security is registered on the books and records of the Trust as the sole holder thereof and of the Trust Preferred Securities represented thereby for purposes of receiving distributions and for all other purposes and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such certificate or in the Trust Preferred Securities represented thereby on the part of any person, whether or not the Trust shall have actual or other notice thereof. Trust Preferred Securities will be issued in fully registered form. Investors may elect to hold their Trust Preferred Securities directly or, subject to the rules and procedures of The Depository Trust Company ("DTC") described under "DESCRIPTION OF TRUST PREFERRED SECURITIES -- Book- Entry; Delivery and Form," hold interests in a global certificate registered on the books and records of the Trust in the name of DTC or its nominee. Under the Declaration: (i) the Trust and the Trustees shall be entitled to deal with DTC (or any successor depositary) for all purposes, including the payment of distributions and receiving approvals, votes or consents under the Declaration, and except as set forth in the Declaration with respect to the Property Trustee, shall have no obligation to persons owning Trust Preferred Securities ("Beneficial Owners") registered in the name of and held by DTC or its nominee; and (ii) the rights of Beneficial Owners shall be exercised only through DTC (or any successor depositary) and shall be limited to those established by law and agreements between such Owners and DTC and/or its participants. See "DESCRIPTION OF TRUST PREFERRED SECURITIES -- Book-Entry; Delivery and Form." With respect to Trust Preferred Securities registered in the name of and held by DTC or its nominee, all notices and other communications required under the Declaration shall be given to, and all distributions on such Trust Preferred Securities shall be given or made to, DTC (or its successor). In the Indenture and the Declaration, the Corporation has agreed to pay for all debts and obligations (other than with respect to the Trust Securities) and all costs and expenses of the Trust, including the fees and expenses of the Trustees and any taxes and all costs and expenses with respect thereto, to which the Trust may become subject, except for United States withholding taxes. The foregoing obligations of the Corporation under the Declaration are for the benefit of, and shall be enforceable by, any person to whom any such debts, obligations, costs, expenses and taxes are owed (a "Creditor") whether or not such Creditor has received notice hereof. Any such Creditor may enforce such obligations of the Corporation directly against the Corporation and the Corporation has irrevocably waived any right or remedy to require that any such Creditor take any action against the Trust or any other person before proceeding against the Corporation. The Corporation has agreed in the Declaration to execute such additional agreements as may be necessary or desirable in order to give full effect to the foregoing. THE FOREGOING SUMMARY OF CERTAIN PROVISIONS OF THE DECLARATION CONTAINS ALL MATERIAL ELEMENTS OF THE DECLARATION BUT DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE DECLARATION WHICH HAS BEEN FILED AS AN EXHIBIT TO THE REGISTRATION STATEMENT OF WHICH THIS PROXY STATEMENT/PROSPECTUS IS A PART. The business address of the Trust is 501 Silverside Road, Suite 17, Wilmington, DE 19809, telephone number (302) 798-6665. DESCRIPTION OF TRUST PREFERRED SECURITIES The Trust Preferred Securities will be issued pursuant to the terms of the Declaration which is qualified under the Trust Indenture Act. The Property Trustee, Bank of New York, but not the other Trustees of the Trust, will act as the indenture trustee for purposes of the Trust Indenture Act. The terms of the Trust Preferred Securities and the Declaration include those stated in the Declaration and those made part of the Declaration by the Trust Indenture Act. The summary of material terms and provisions of the Trust Preferred Securities set forth below contains all material elements of the Trust Preferred Securities, but does not purport to be complete and is subject to and qualified in its entirety by reference to the Declaration, which has been filed as an exhibit to the Registration Statement of which this Proxy Statement/Prospectus forms a part, the Business Trust Act and the Trust Indenture Act. 118 General The Declaration authorizes the Trust to issue the Trust Preferred Securities, which represent preferred undivided beneficial interests in the assets of the Trust, and the Trust Common Securities, which represent common undivided beneficial interests in the assets of the Trust. All of the Trust Common Securities will be owned, directly or indirectly, by the Corporation. The Trust Common Securities and the Trust Preferred Securities will have equivalent terms except that (i) if an Event of Default under the Declaration occurs and is continuing, the rights of the holders of the Trust Common Securities to payment in respect of periodic distributions and payments upon liquidation, redemption or otherwise are subordinated to the rights of the holders of the Trust Preferred Securities and (ii) holders of Trust Common Securities have the exclusive right (subject to the terms of the Declaration) to appoint, remove or replace Trustees and to increase or decrease the number of Trustees, subject to the right of holders of Trust Preferred Securities to appoint a Special Regular Trustee upon the occurrence of an Appointment Event. The Declaration does not permit the issuance by the Trust of any securities or other evidences of beneficial ownership of, or beneficial interests in, the assets of the Trust other than the Trust Preferred Securities and the Trust Common Securities, the incurrence of any indebtedness for borrowed money by the Trust or the making of any investment other than in the Junior Subordinated Debentures. Pursuant to the Declaration, the Property Trustee will own and hold the Junior Subordinated Debentures as trust assets for the benefit of the holders of the Trust Preferred Securities and the Trust Common Securities. The payment of distributions out of moneys held by the Property Trustee and payments on redemption of the Trust Preferred Securities or liquidation of the Trust are guaranteed by the Corporation on a subordinated basis as and to the extent described under "DESCRIPTION OF PREFERRED SECURITIES GUARANTEE." The Property Trustee will hold the Preferred Securities Guarantee for the benefit of holders of the Trust Preferred Securities. The Preferred Securities Guarantee is a full and unconditional guarantee from the time of issuance of the Trust Preferred Securities, but the Preferred Securities Guarantee covers distributions and other payments on the Trust Preferred Securities only if and to the extent that the Corporation has made a payment to the Property Trustee of interest or principal on the Junior Subordinated Debentures deposited in the Trust as trust assets. Distributions Distributions on the Trust Preferred Securities will be fixed at a rate per annum of $2.90 (11.6% of the stated liquidation amount of $25) per Trust Preferred Security. Distributions in arrears will compound monthly thereon at the rate per annum of 11.6% thereof. The term "distributions" as used herein includes any such interest payable unless otherwise stated. The amount of distributions payable for any period will be computed on the basis of a 360-day year of twelve 30-day months and for any period shorter than a full monthly period for which distributions are computed, the amount of the distribution payable will be computed on the basis of the actual number of days elapsed in such a 30-day month. Distributions on the Trust Preferred Securities will be cumulative, will accrue from the Accrual Date and, except as otherwise described below, will be payable monthly in arrears, on the last day of each calendar month of each year, commencing on July 31, 1997, but only if, and to the extent that, interest payments are made in respect of Junior Subordinated Debentures held by the Property Trustee. So long as the Corporation shall not be in default in the payment of interest on the Junior Subordinated Debentures, the Corporation has the right under the Indenture to defer payments of interest on the Junior Subordinated Debentures by extending the interest payment period from time to time for a period not exceeding 60 consecutive months and, as a consequence, distributions on the Trust Preferred Securities would not be made (but would continue to accrue with interest thereon at the rate of 11.6% per annum, compounded monthly) by the Trust during any such Extension Period. If the Corporation exercises the right to extend an interest payment period, the Corporation may not declare or pay dividends on, or redeem, purchase, acquire or make a distribution or liquidation payment with respect to, any of its Common Stock or Preferred Stock during such Extension Period. Prior to the termination of any such Extension Period, the Corporation may further extend such Extension Period; provided that such Extension Period together with all such previous and further extensions thereof may not exceed 60 consecutive months. Upon the termination of any Extension Period and the payment of all amounts then due, the Corporation may commence a new Extension Period, subject to the above requirements. The Corporation may also prepay at any time all or any portion of the interest accrued during an Extension Period. Consequently, there could be multiple Extension Periods of varying lengths (up to five Extension Periods of 60 consecutive monthly interest periods each or more numerous shorter Extension Periods) throughout the term of the Junior Subordinated Debentures. See "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER CONSIDERATIONS -- Additional Risks Applicable to Holders of A Interests," "DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES -- Interest" and "-- Option to Extend Interest Payment Period." Payments of accrued distributions will be payable to holders of Trust Preferred Securities as they appear on the books and records of the Trust on the first record date after the end of an Extension Period. 119 Distributions on the Trust Preferred Securities must be paid on the dates payable to the extent that the Property Trustee has cash on hand in the Property Account to permit such payment. The funds available for distribution to the holders of the Trust Preferred Securities will be limited to payments received by the Property Trustee in respect of the Junior Subordinated Debentures that are deposited in the Trust as trust assets. See "DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES." If the Corporation does not make interest payments on the Junior Subordinated Debentures, the Property Trustee will not make distributions on the Trust Preferred Securities. Under the Declaration, if and to the extent the Corporation does make interest payments on the Junior Subordinated Debentures deposited in the Trust as trust assets, the Property Trustee is obligated to make distributions on the Trust Securities on a Pro Rata Basis. The payment of distributions on the Trust Preferred Securities is guaranteed by the Corporation on a subordinated basis as and to the extent set forth under "DESCRIPTION OF PREFERRED SECURITIES GUARANTEE." The Preferred Securities Guarantee is a full and unconditional guarantee from the time of issuance of the Trust Preferred Securities but the Preferred Securities Guarantee covers distributions and other payments on the Trust Preferred Securities only if and to the extent that the Corporation has made a payment to the Property Trustee of interest or principal on the Junior Subordinated Debentures deposited in the Trust as trust assets. As used in this Proxy Statement/Prospectus the term "Pro Rata Basis" shall mean pro rata to each holder of Trust Securities according to the aggregate liquidation amount of the Trust Securities held by the relevant holder in relation to the aggregate liquidation amount of all Trust Securities outstanding unless, in relation to a payment, an Event of Default under the Declaration has occurred and is continuing, in which case any funds available to make such payment shall be paid first to each holder of the Trust Preferred Securities pro rata according to the aggregate liquidation amount of the Trust Preferred Securities held by the relevant holder in relation to the aggregate liquidation amount of all the Trust Preferred Securities outstanding, and only after satisfaction of all amounts owed to the holders of the Trust Preferred Securities, to each holder of Trust Common Securities pro rata according to the aggregate liquidation amount of the Trust Common Securities held by the relevant holder in relation to the aggregate liquidation amount of all the Trust Common Securities outstanding. Distributions on the Trust Preferred Securities will be made to the holders thereof as they appear on the books and records of the Trust on the relevant record dates, which will be the first business day of the month of the relevant distribution payment date. The Declaration provides that the payment dates or record dates for the Trust Preferred Securities shall be the same as the payment dates and record dates for the Junior Subordinated Debentures. Distributions payable on any Trust Preferred Securities that are not punctually paid on any distribution date as a result of the Corporation having failed to make the corresponding interest payment on the Junior Subordinated Debentures will forthwith cease to be payable to the person in whose name such Trust Preferred Security is registered on the relevant record date, and such defaulted distribution will instead be payable to the person in whose name such Trust Preferred Security is registered on the special record date established by the Regular Trustees, which record date shall correspond to the special record date or other specified date determined in accordance with the Indenture; provided, however, that distributions shall not be considered payable on any distribution payment date falling within an Extension Period unless the Corporation has elected to make a full or partial payment of interest accrued on the Junior Subordinated Debentures on such distribution payment date. Distributions on the Trust Preferred Securities will be paid through the Property Trustee who will hold amounts received in respect of the Junior Subordinated Debentures in the Property Account for the benefit of the holders of the Trust Securities. All distributions paid with respect to the Trust Securities shall be paid on a Pro Rata Basis to the holders thereof entitled thereto. If any date on which distributions are to be made on the Trust Preferred Securities is not a Business Day, then payment of the distribution to be made on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay) except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date. Mandatory Redemption Upon the repayment of the Junior Subordinated Debentures, whether at maturity, upon redemption or otherwise, the proceeds from such repayment or payment will be promptly applied to redeem Trust Preferred Securities and Trust Common Securities having an aggregate liquidation amount equal to the Junior Subordinated Debentures so repaid, upon not less than 30 nor more than 60 days notice, at the Redemption Price. The Trust Common Securities will be entitled to be redeemed on a Pro Rata Basis with the Trust Preferred Securities, except that if an Event of Default under the Declaration has occurred and is continuing, the Trust Preferred Securities will have a priority over the Trust Common Securities with respect to payment of the Redemption Price. Subject to the foregoing, if fewer than all outstanding Trust Preferred Securities and Trust Common Securities are to be redeemed, the Trust Preferred Securities and Trust Common Securities will be redeemed on a Pro Rata Basis. Special Event Redemption or Distribution; Shortening of Stated Maturity If, at any time, a Tax Event or an Investment Company Event (each as defined herein, and each a "Special Event") shall occur and be continuing, the Trust shall, unless the Junior Subordinated Debentures are redeemed in the circumstances described below, be dissolved with the result that, after satisfaction of creditors of the Trust, Junior Subordinated Debentures with an 120 aggregate principal amount equal to the aggregate stated liquidation amount of the Trust Preferred Securities and the Trust Common Securities would be distributed on a Pro Rata Basis to the holders of the Trust Preferred Securities and the Trust Common Securities in liquidation of such holders' interests in the Trust, within 90 days following the occurrence of such Special Event; provided, however, that in the case of the occurrence of a Tax Event, as a condition of such dissolution and distribution, the Regular Trustees shall have received an opinion of nationally recognized independent tax counsel experienced in such matters (a "No Recognition Opinion"), which opinion may rely on any then applicable published revenue rulings of the Internal Revenue Service, to the effect that the holders of the Trust Preferred Securities will not recognize any gain or loss for United States federal income tax purposes as a result of such dissolution and distribution of Junior Subordinated Debentures; and, provided, further, that, if at the time there is available to the Trust the opportunity to eliminate, within such 90-day period, the Special Event by taking some ministerial action, such as filing a form or making an election, or pursuing some other similar reasonable measure, which has no adverse effect on the Trust or the Corporation or the holders of the Trust Preferred Securities, the Trust will pursue such measure in lieu of dissolution. In addition, if a Tax Event shall occur and be continuing and in the opinion of nationally recognized independent tax counsel to the Trust, there would in all cases, after effecting the termination of Trust and the distribution of the Debentures to the holders of the Trust Preferred Securities in exchange therefor upon liquidation of the Trust, be more than an insubstantial risk that the Tax Event would continue, then the Corporation shall have the right to shorten the stated maturity of the Junior Subordinated Debentures to the latest date permissible without adversely affecting the deductibility of interest payable on the Junior Subordinated Debentures, but not earlier than September 30, 2002 (and thereby cause the Trust Preferred Securities to be redeemed on such earlier date) such that, in the opinion of nationally recognized independent tax counsel to the Trust, after advancing the stated maturity of the Debentures, interest paid on the Junior Subordinated Debentures will be deductible by the Corporation for federal income tax purposes. Furthermore, if in the case of the occurrence of a Tax Event, (i) the Regular Trustees have received an opinion (a "Redemption Tax Opinion") of nationally recognized independent tax counsel experienced in such matters that, as a result of a Tax Event, there is more than an insubstantial risk that the Corporation would be precluded from deducting the interest on the Junior Subordinated Debentures for United States federal income tax purposes even if the Junior Subordinated Debentures were distributed to the holders of Trust Preferred Securities and Trust Common Securities in liquidation of such holders' interests in the Trust as described above or if the Corporation shortened the stated maturity of the Junior Subordinated Debentures as described above or (ii) the Regular Trustees shall have been informed by such tax counsel that a No Recognition Opinion cannot be delivered to the Trust, the Corporation shall have the right, upon not less than 30 nor more than 60 days notice, to redeem the Junior Subordinated Debentures in whole or in part for cash within 90 days following the occurrence of such Tax Event, and promptly following such redemption Trust Preferred Securities and Trust Common Securities with an aggregate liquidation amount equal to the aggregate principal amount of the Junior Subordinated Debentures so redeemed will be redeemed by the Trust at the Redemption Price on a Pro Rata Basis at $25.25 if the redemption occurs within five years after the Effective Time of the Conversion and at $25.00 thereafter; provided, however, that if at the time there is available to the Corporation or the Regular Trustees the opportunity to eliminate, within such 90-day period, the Tax Event by taking some ministerial action, such as filing a form or making an election, or pursuing some other similar reasonable measure, which has no adverse effect on the Trust, the Corporation or the holders of the Trust Preferred Securities, the Corporation, or the Regular Trustees on behalf of the Trust, will pursue such measure in lieu of redemption and provided further that the Corporation shall have no right to redeem the Junior Subordinated Debentures while the Regular Trustees on behalf of the Trust are pursuing any such ministerial action. The Trust Common Securities will be redeemed on a Pro Rata Basis with the Trust Preferred Securities, except that, if an Event of Default under the Declaration has occurred and is continuing, the Trust Preferred Securities will have a priority over the Trust Common Securities with respect to payment of the Redemption Price. "Tax Event" means that the Regular Trustees shall have obtained an opinion (a "Dissolution Tax Opinion") of nationally recognized independent tax counsel experienced in such matters to the effect that on or after the Effective Time as a result of (a) any amendment to, or change (including any announced prospective change) in, the laws (or any regulations thereunder) of the United States or any political subdivision or taxing authority thereof or therein, (b) any amendment to, or change in, an interpretation or application of any such laws or regulations by any legislative body, court, governmental agency or regulatory authority (including the enactment of any legislation and the publication of any judicial decision or regulatory determination), (c) any interpretation or pronouncement that provides for a position with respect to such laws or regulations that differs from the theretofore generally accepted position or (d) any action taken by any governmental agency or regulatory authority, which amendment or change is enacted, promulgated, issued or effective or which interpretation or pronouncement is issued or announced or which action is taken, in each case on or after the Effective Time, there is more than an insubstantial risk that (i) the Trust is, or will be within 90 days of the date thereof, subject to United States federal income tax with respect to income accrued or received on the Junior Subordinated Debentures, (ii) the Trust is, or will be within 90 days of the date thereof, subject to more than a de minimis amount of other taxes, duties or other governmental charges or (iii) interest payable by the Corporation to the Trust on the Junior Subordinated Debentures is not, or within 90 days of the date thereof will not be, deductible by the Corporation for United States federal income tax purposes. 121 It should be noted that certain legislation proposed as recently as February 1997 would have applied to securities similar to the Junior Subordinated Debentures, with the result that the Corporation would not have been entitled to an interest deduction with respect to the payments on the Junior Subordinated Debentures. See the discussion above under "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS." No prediction can be made as to the likelihood that such legislation will be enacted or as to whether such legislation would be effective retroactively to deny interest deductions with respect to securities issued prior to the date of enactment of such legislation. See "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Additional Risks Applicable to Holders of A Interests -- Special Event Redemption or Distribution; Shortening of Stated Maturity." "Investment Company Event" means that the Regular Trustees shall have received an opinion of nationally recognized independent counsel experienced in practice under the Investment Company Act of 1940, as amended (the "1940 Act"), that as a result of the occurrence of a change in law or regulation or a change in interpretation or application of law or regulation by any legislative body, court, governmental agency or regulatory authority (a "Change in 1940 Act Law"), there is more than an insubstantial risk that the Trust is or will be considered an "investment company" which is required to be registered under the 1940 Act, which Change in 1940 Act Law becomes effective on or after the Effective Time. On the date fixed for any distribution of Junior Subordinated Debentures, upon dissolution of the Trust, (i) the Trust Preferred Securities and the Trust Common Securities will no longer be deemed to be outstanding and (ii) certificates representing Trust Preferred Securities will be deemed to represent Junior Subordinated Debentures having an aggregate principal amount equal to the stated liquidation amount of, and bearing accrued and unpaid interest equal to accrued and unpaid distributions on, such Trust Preferred Securities until such certificates are presented to the Corporation or its agent for transfer or reissuance. There can be no assurance as to the market price for the Junior Subordinated Debentures which may be distributed in exchange for Trust Preferred Securities if a dissolution and liquidation of the Trust were to occur. Accordingly, the Junior Subordinated Debentures which the investor may subsequently receive on dissolution and liquidation of the Trust may trade at a discount to the price of the Trust Preferred Securities exchanged. If the Junior Subordinated Debentures are distributed to the holders of Trust Preferred Securities upon the dissolution of the Trust, the Corporation will use its best efforts to list the Junior Subordinated Debentures on the NYSE or on such other exchange on which the Trust Preferred Securities are then listed. Redemption Procedures The Trust may not redeem fewer than all the outstanding Trust Preferred Securities unless all accrued and unpaid distributions have been paid on all Trust Preferred Securities for all monthly distribution periods terminating on or prior to the date of redemption. If the Trust gives a notice of redemption in respect of Trust Preferred Securities (which notice will be irrevocable) then immediately prior to the close of business on the redemption date, provided that the Corporation has paid to the Property Trustee a sufficient amount of cash in connection with the related redemption or maturity of the Junior Subordinated Debentures, distributions will cease to accrue on the Trust Preferred Securities called for redemption, such Trust Preferred Securities shall no longer be deemed to be outstanding and all rights of holders of such Trust Preferred Securities so called for redemption will cease, except the right of the holders of such Trust Preferred Securities to receive the Redemption Price, but without interest on such Redemption Price. Neither the Trustees nor the Trust shall be required to register or cause to be registered the transfer of any Trust Preferred Securities which have been so called for redemption. If any date fixed for redemption of Trust Preferred Securities is not a Business Day, then payment of the Redemption Price payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay) except that, if such Business Day falls in the next calendar year, such payment will be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date fixed for redemption. If the Corporation fails to repay Junior Subordinated Debentures on maturity or on the date fixed for redemption or if payment of the Redemption Price in respect of Trust Preferred Securities is improperly withheld or refused and not paid by the Property Trustee or by the Corporation pursuant to the Preferred Securities Guarantee described under "DESCRIPTION OF THE PREFERRED SECURITIES GUARANTEE," distributions on such Trust Preferred Securities will continue to accrue, from the original redemption date of the Trust Preferred Securities to the date of payment, in which case the actual payment date will be considered the date fixed for redemption for purposes of calculating the Redemption Price. If a partial redemption of the Trust Preferred Securities would result in the delisting of the Trust Preferred Securities by any national securities exchange or other organization on which the Trust Preferred Securities are then listed, the Corporation pursuant to the Indenture will only redeem Junior Subordinated Debentures in whole and, as a result, the Trust may only redeem the Trust Preferred Securities in whole. 122 Subject to the foregoing and applicable law (including, without limitation, United States federal securities laws), the Corporation or any of its subsidiaries may at any time and from time to time purchase outstanding Trust Preferred Securities by tender, in the open market or by private agreement. Subordination of Trust Common Securities Payment of distributions on, and the redemption price of, the Trust Preferred Securities and the Trust Common Securities, as applicable, shall be made pro rata based on the liquidation amount of such Trust Preferred Securities and Trust Common Securities; provided, however, that if on any distribution date or redemption date an Indenture Event of Default shall have occurred and be continuing, no payment of any distribution on, or redemption price of, any of the Trust Common Securities, and no other payment on account of the redemption, liquidation or other acquisition of such Trust Common Securities, shall be made unless payment in full in cash of all accumulated and unpaid distributions on all of the outstanding Trust Preferred Securities for all distribution periods terminating on or prior thereto, or in the case of payment of the redemption price, the full amount of such redemption price on all of the outstanding Trust Preferred Securities then called for redemption, shall have been made or provided for, and all funds available to the Property Trustee shall first be applied to the payment in full in cash of all distributions on, or redemption price of, the Trust Preferred Securities then due and payable. Liquidation Distribution Upon Dissolution In the event of any voluntary or involuntary dissolution, winding-up or termination of the Trust, the holders of the Trust Preferred Securities and Trust Common Securities at the date of dissolution, winding-up or termination of the Trust will be entitled to receive on a Pro Rata Basis solely out of the assets of the Trust, after satisfaction of creditors of the Trust (to the extent not satisfied by the Corporation as provided in the Declaration), an amount equal to the aggregate of the stated liquidation amount of $25 per Trust Security plus accrued and unpaid distributions thereon to the date of payment (such amount being the "Liquidation Distribution"), unless, in connection with such dissolution, winding-up or termination, Junior Subordinated Debentures in an aggregate principal amount equal to the aggregate stated liquidation amount of such Trust Securities and bearing accrued and unpaid interest in an amount equal to the accrued and unpaid distributions on such Trust Securities, shall be distributed on a Pro Rata Basis to the holders of the Trust Preferred Securities and Trust Common Securities in exchange therefor, after satisfaction of creditors of the Trust (to the extent not satisfied by the Corporation as provided in the Declaration). If, upon any such dissolution, the Liquidation Distribution can be paid only in part because the Trust has insufficient assets available to pay in full the aggregate Liquidation Distribution, then the amounts payable directly by the Trust on the Trust Preferred Securities and the Trust Common Securities shall be paid on a Pro Rata Basis. The holders of the Trust Common Securities will be entitled to receive distributions upon any such dissolution on a Pro Rata Basis with the holders of the Trust Preferred Securities, except that if an Event of Default under the Declaration has occurred and is continuing, the Trust Preferred Securities shall have a priority over the Trust Common Securities with respect to payment of the Liquidation Distribution. Pursuant to the Declaration, the Trust shall dissolve: (i) on _________, 2027, (ii) when all of the Trust Securities shall have been called for redemption and the amounts necessary for redemption thereof shall have been paid to the holders of Trust Securities in accordance with the terms of the Trust Securities, (iii) when all of the "Regular Trustees elect to dissolve the Trust in accordance with the terms of the Trust Securities, (iv) upon the bankruptcy of the Corporation or the Trust, (v) upon the filing of a certificate of dissolution or the equivalent with respect to the Corporation, the consent of at least a majority in liquidation amount of the Trust Securities, voting together as a single class, to dissolve the Trust, or the revocation of the charter of the Corporation and the expiration of 90 days after the date of revocation without a reinstatement thereof, or (vi) upon the entry of a decree of judicial dissolution of the Corporation or the Trust. No Merger, Consolidation or Amalgamation of the Trust The Trust may not consolidate, amalgamate, merge with or into, or be replaced by, or convey, transfer or lease its properties and assets to, any corporation or other entity. 123 Declaration Events of Default An Indenture Event of Default will constitute an event of default under the Declaration with respect to the Trust Securities (an "Event of Default"); provided that pursuant to the Declaration, the holder of the Trust Common Securities will be deemed to have waived any such Event of Default with respect to the Trust Common Securities until all Events of Default with respect to the Trust Preferred Securities have been cured or waived. Until all such Events of Default with respect to the Trust Preferred Securities have been so cured or waived, the Property Trustee will be deemed to be acting solely on behalf of the holders of the Trust Preferred Securities, and only the holders of the Trust Preferred Securities will have the right to direct the Property Trustee with respect to certain matters under the Declaration and consequently under the Indenture. In the event that any Event of Default with respect to the Trust Preferred Securities is waived by the holders of the Trust Preferred Securities as provided in the Declaration, the holders of Trust Common Securities pursuant to the Declaration have agreed that such waiver also constitutes a waiver of such Event of Default with respect to the Trust Common Securities for all purposes under the Declaration without any further act, vote or consent of the holders of the Trust Common Securities. Upon the occurrence of an Event of Default, the Property Trustee as the holder of all of the Junior Subordinated Debentures will have the right under the Indenture to declare the principal of and interest on the Junior Subordinated Debentures to be immediately due and payable. In addition, the Property Trustee will have the power to exercise all rights, powers and privileges under the Indenture. See "DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES." If the Property Trustee fails to enforce its rights with respect to the Junior Subordinated Debentures held by the Trust, to the fullest extent permitted by law, any record holder of Trust Preferred Securities may institute legal proceedings directly against the Corporation to enforce the Property Trustee's rights under such Junior Subordinated Debentures without first instituting any legal proceedings against such Property Trustee or any other person or entity. In addition, if an Event of Default under the Declaration has occurred and is continuing and such event is attributable to the failure of the Corporation to pay interest, principal or other required payments on the Junior Subordinated Debentures issued to the Trust on the date such interest, principal or other payment is otherwise payable (or, in the case of redemption, the redemption date), then a record holder of Trust Preferred Securities may, on or after the respective due dates specified in the Junior Subordinated Debentures, institute a proceeding directly or indirectly against the Corporation under the Indenture for enforcement of payment on Junior Subordinated Debentures having a principal amount equal to the aggregate liquidation amount of the Trust Preferred Securities held by such holder without first (i) directing the Property Trustee to enforce the terms of the Junior Subordinated Debentures or (ii) instituting a legal proceeding against the Corporation to enforce the Property Trustee's rights under the Junior Subordinated Debentures. In connection with such Direct Action, the Corporation will be subrogated to the rights of such record holder of Trust Preferred Securities to the extent of any payment made by the Corporation to such record holder of Trust Preferred Securities in such Direct Action. See "DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES." Voting Rights Except as provided below, under "-- Modification and Amendment of the Declaration" and "DESCRIPTION OF PREFERRED SECURITIES GUARANTEE -- Amendments and Assignment" and as otherwise required by the Business Trust Act, the Trust Indenture Act and the Declaration, the holders of the Trust Preferred Securities will have no voting rights. If (i) the Trust fails to make distributions in full on the Trust Preferred Securities for 18 consecutive months or (ii) an Event of Default under the Declaration occurs and is continuing (each, an "Appointment Event"), then the holders of the Trust Preferred Securities, acting as a single class, will be entitled, by the vote of holders of Trust Preferred Securities representing a majority in aggregate liquidation amount of the outstanding Trust Preferred Securities, to appoint a Special Regular Trustee (who need not be an officer or an employee of or otherwise affiliated with the Corporation) who shall have the same rights, powers and privileges under the Declaration as the Regular Trustees. Any holder of Trust Preferred Securities (other than the Corporation or any of its affiliates) shall have the right to nominate any person to be appointed as Special Regular Trustee. For purposes of determining whether the Trust has failed to pay distributions in full for 18 consecutive months, distributions shall be deemed to remain in arrears, notwithstanding any payments in respect thereof, until full cumulative distributions have been or contemporaneously are paid with respect to all monthly distribution periods terminating on or prior to the date of payment of such cumulative distributions. Not later than 30 days after such right to appoint a Special Regular Trustee arises, the Regular Trustees will convene a meeting for the purpose of appointing a Special Regular Trustee. If the Regular Trustees fail to convene such meeting within such 30-day period, the holders of Trust Preferred Securities representing 10% in liquidation amount of the outstanding Trust Preferred Securities will be entitled to convene such meeting. The provisions of the Declaration relating to the convening and conduct of the meetings of the holders will apply with respect to any such meeting. If, at any such meeting, holders of less than a majority in aggregate liquidation amount of Trust Preferred Securities entitled to vote for the appointment of a Special Regular Trustee vote for such appointment, no Special Regular Trustee shall be 124 appointed. Any Special Regular Trustee may be removed without cause at any time by holders of Trust Preferred Securities representing a majority in liquidation amount of the Trust Preferred Securities and holders of Trust Preferred Securities representing 10% in liquidation amount of the Trust Preferred Securities shall be entitled to convene a meeting for such purpose. Any Special Regular Trustee appointed shall cease to be a Special Regular Trustee if the Appointment Event pursuant to which the Special Regular Trustee was appointed and all other Appointment Events have been cured and cease to be continuing. Notwithstanding the appointment of any such Special Regular Trustee, the Corporation shall retain all rights under the Indenture, including the right to extend the interest payment period as provided under "DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES -- Option to Extend Interest Payment Period." If such an extension occurs, there will be no Indenture Event of Default for failure to make any scheduled interest payment during the Extension Period on the date originally scheduled. The holders of a majority in aggregate liquidation amount of the Trust Preferred Securities have the right (i) on behalf of all holders of Trust Securities, to waive any past default that is waivable under the Declaration and (ii) to direct the time, method and place of conducting any proceeding for any remedy available to the Property Trustee, or exercising any trust or power conferred upon the Property Trustee under the Declaration, including the right to direct the Property Trustee, as the holder of the Junior Subordinated Debentures, to (a) direct the time, method and place of conducting any proceeding for any remedy available to the Indenture Trustee, or exercising any trust or power conferred on the Indenture Trustee with respect to the Junior Subordinated Debentures, (b) waive any past default that is waivable under the Indenture, or (c) exercise any right to rescind or annul a declaration that the principal of all the Junior Subordinated Debentures shall be due and payable; provided that where a consent under the Indenture would require the consent of (1) holders of Junior Subordinated Debentures representing a specified percentage greater than a majority in principal amount of the Junior Subordinated Debentures or (2) each holder of Junior Subordinated Debentures affected thereby, no such consent shall be given by the Property Trustee without the prior consent of, in the case of clause (1) above, holders of Trust Preferred Securities representing such specified percentage of the aggregate liquidation amount of the Trust Preferred Securities or, in the case of clause (2) above, each holder of all Trust Preferred Securities affected thereby. The Property Trustee shall not revoke any action previously authorized or approved by a vote of the holders of Trust Preferred Securities. The Property Trustee shall notify all holders of record of Trust Preferred Securities of any notice of default received from the Indenture Trustee with respect to the Junior Subordinated Debentures. Other than with respect to directing the time, method and place of conducting any proceeding for any remedy available to the Property Trustee or the Indenture Trustee as set forth above, the Property Trustee shall be under no obligation to take any of the foregoing actions at the direction of the holders of the Trust Preferred Securities unless the Property Trustee shall have obtained an opinion of nationally recognized independent tax counsel recognized as expert in such matters to the effect that the Trust will not be classified for United States federal income tax purposes as an association taxable as a corporation or a partnership on account of such action and will be treated as a grantor trust for United States federal income tax purposes following such action. If the Property Trustee fails to enforce its rights under the Declaration (including, without limitation, its rights, powers and privileges as a holder of the Junior Subordinated Debentures under the Indenture) to the fullest extent permitted by law, any holder of Trust Preferred Securities may, upon such holder's written request to the Property Trustee to enforce such rights, institute a legal proceeding directly against the Corporation to enforce the Property Trustee's rights under the Declaration, without first instituting a legal proceeding against the Property Trustee or any other Person; provided that any holder may institute a direct action without prior request to the Property Trustee to enforce the Corporation's payment obligations on the Junior Subordinated Debentures. A waiver of an Indenture Event of Default by the Property Trustee at the direction of holders of the Trust Preferred Securities will constitute a waiver of the corresponding Event of Default under the Declaration in respect of the Trust Securities. In the event the consent of the Property Trustee as the holder of the Junior Subordinated Debentures is required under the Indenture with respect to any amendment, modification or termination of the Indenture or the Junior Subordinated Debentures, the Property Trustee shall request the direction of the holders of the Trust Securities with respect to such amendment, modification or termination and shall vote with respect to such amendment, modification or termination as directed by a majority in liquidation amount of the Trust Securities voting together as a single class; provided, however, that where any such amendment, modification or termination under the Indenture would require the consent of (i) holders of Junior Subordinated Debentures representing a specified percentage greater than a majority in principal amount of the Junior Subordinated Debentures or (ii) each holder of Junior Subordinated Debentures affected thereby, the Property Trustee may only give such consent at the direction of the holders of Trust Securities representing such specified percentage of the aggregate liquidation amount of the Trust Securities in the case of clause (i) above, or each holder of Trust Securities affected thereby, in the case of clause (ii) above; and, provided, further, that the Property Trustee shall be under no obligation to take any such action in accordance with the directions of the holders of the Trust Securities unless the Property Trustee has obtained an opinion of nationally recognized independent tax counsel recognized as expert in such matters to the effect that the Trust will not be classified for United States federal income tax purposes as an association taxable as a corporation or a partnership on account of such action and will be treated as a grantor trust for United States federal income tax purposes following such action. 125 Any required approval or direction of holders of Trust Preferred Securities may be given at a separate meeting of holders of Trust Preferred Securities convened for such purpose, at a meeting of all of the holders of Trust Securities or pursuant to written consent. The Regular Trustees will cause a notice of any meeting at which holders of Trust Preferred Securities are entitled to vote, or of any matter upon which action by written consent of such holders is to be taken, to be mailed to each holder of record of Trust Preferred Securities. Each such notice will include a statement setting forth (i) the date of such meeting or the date by which such action is to be taken, (ii) a description of any resolution proposed for adoption at such meeting on which such holders are entitled to vote or of such matter upon which written consent is sought and (iii) instructions for the delivery of proxies or consents. No vote or consent of the holders of Trust Preferred Securities will be required for the Trust to redeem and cancel Trust Preferred Securities or distribute Junior Subordinated Debentures in accordance with the Declaration. Notwithstanding that holders of Trust Preferred Securities are entitled to vote or consent under any of the circumstances described above, any of the Trust Preferred Securities at such time that are owned by the Corporation or by any entity directly or indirectly controlling or controlled by or under direct or indirect common control with the Corporation shall not be entitled to vote or consent and shall, for purposes of such vote or consent, be treated as if they were not outstanding. The procedures by which persons owning Trust Preferred Securities registered in the name of and held by DTC or its nominee may exercise their voting rights are described under "Book-Entry; Delivery and Form" below. Subject to the right of holders of Trust Preferred Securities to appoint a Special Regular Trustee upon the occurrence of an Appointment Event, holders of the Trust Preferred Securities will have no rights to increase or decrease the number of Trustees or to appoint, remove or replace a Trustee, which rights are vested exclusively in the holders of the Trust Common Securities. Modification and Amendment of the Declaration The Declaration may be modified and amended on approval of a majority of the Regular Trustees, provided that, if any proposed modification or amendment provides for, or the Regular Trustees otherwise propose to effect, (i) any action that would materially adversely affect the material powers, preferences or special rights of the Trust Securities, whether by way of amendment to the Declaration or otherwise, or (ii) the dissolution, winding-up or termination of the Trust other than pursuant to the terms of the Declaration, then the holders of the outstanding Trust Securities as a class will be entitled to vote on such amendment or proposal and such amendment or proposal shall not be effective except with the approval of at least 66 2/3% in liquidation amount of the Trust Securities, provided that if any amendment or proposal referred to in clause (i) above would adversely affect only the Trust Preferred Securities or the Trust Common Securities, then only the affected class will be entitled to vote on such amendment or proposal and such amendment or proposal shall not be effective except with the approval of 66 2/3% in liquidation amount of such class of securities. Notwithstanding the foregoing, (i) no amendment or modification may be made to the Declaration unless the Regular Trustees shall have obtained (A) either a ruling from the Internal Revenue Service or a written unqualified opinion of nationally recognized independent tax counsel experienced in such matters to the effect that such amendment will not cause the Trust to be classified for United States federal income tax purposes as an association taxable as a corporation or a partnership and to the effect that the Trust will continue to be treated as a grantor trust for purposes of United States federal income taxation and (B) a written unqualified opinion of nationally recognized independent counsel experienced in such matters to the effect that such amendment will not cause the Trust to be an "investment company" which is required to be registered under the 1940 Act; (ii) certain specified provisions of the Declaration may not be amended without the consent of all of the holders of the Trust Securities; (iii) no amendment which materially adversely affects the material rights, powers and privileges of the Property Trustee shall be made without the consent of the Property Trustee; (iv) Article IV of the Declaration relating to the obligation of the Corporation to purchase the Trust Common Securities and to pay certain obligations and expenses of the Trust as described under "SUNSOURCE CAPITAL TRUST" may not be amended without the consent of the Corporation; (v) the rights of holders of Trust Common Securities under Article V of the Declaration to increase or decrease the number of, and to appoint, replace or remove, Trustees (other than a Special Regular Trustee) shall not be amended without the consent of each holder of Trust Common Securities; and (vi) the rights of holders of Trust Preferred Securities under the Declaration to appoint or remove a Special Regular Trustee and their rights under the Declaration to vote on the election of Successor Trustees and Property Trustees shall not be amended without the consent of each holder of Trust Preferred Securities. The Declaration further provides that it may be amended without the consent of the holders of the Trust Securities to (i) cure any ambiguity, (ii) correct or supplement any provision in the Declaration that may be defective or inconsistent with any other provision of the Declaration, (iii) add to the covenants, restrictions or obligations of the Corporation, (iv) preserve the 126 status of the Trust as a grantor trust for federal income tax purposes, and (v) to conform to changes in, or a change in interpretation or application of certain 1940 Act requirements by the SEC, which amendment does not adversely affect the rights, preferences or privileges of the holders. Book-Entry; Delivery and Form Trust Preferred Securities will be issued in fully registered form. Investors may elect to hold their Trust Preferred Securities directly or, subject to the rules and procedures of DTC described below, hold interests in a global certificate (the "Trust Preferred Securities Global Certificate") registered in the name of DTC or its nominee. The laws of some jurisdictions require that certain purchasers of securities take physical delivery of securities in definitive form. Such laws may impair the ability to transfer beneficial interests in a global Trust Preferred Security. DTC is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Exchange Act. DTC holds securities that its participants ("Participants") deposit with DTC. DTC also facilitates the settlement among Participants of securities transactions, such as transfers and pledges, in deposited securities through electronic computerized book-entry changes in Participants' accounts, thereby eliminating the need for physical movement of securities certificates. Direct Participants include securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations ("Direct Participants"). DTC is owned by a number of its Direct Participants and by the NYSE, the American Stock Exchange, Inc., and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others such as securities brokers and dealers, banks and trust companies that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). The rules applicable to DTC and its Participants are on file with the Securities and Exchange Commission. Upon issuance of a Trust Preferred Securities Global Certificate, DTC will credit on its book-entry registration and transfer system the number of Trust Preferred Securities represented by such Trust Preferred Securities Global Certificate to the accounts of institutions that have accounts with DTC. Ownership of beneficial interests in a Trust Preferred Securities Global Certificate will be limited to Participants or persons that may hold interests through Participants. The ownership interest of each actual purchaser of each Trust Preferred Security ("Beneficial Owner") is in turn to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from DTC of their purchases, but Beneficial Owners are expected to receive written confirmations providing details of the transactions, as well as periodic statements of their holdings, from the Direct or Indirect Participants through which the Beneficial Owners purchased Trust Preferred Securities. Transfers of ownership interests in the Trust Preferred Securities are to be accomplished by entries made on the books of Participants acting on behalf of Beneficial Owners. DTC has no knowledge of the actual Beneficial Owners of the Trust Preferred Securities; DTC's records reflect only the identity of the Direct Participants to whose accounts such Trust Preferred Securities are credited, which may or may not be the Beneficial Owners. The Participants will remain responsible for keeping account of their holdings on behalf of their customers. So long as DTC, or its nominee, is the owner of a Trust Preferred Securities Global Certificate, DTC or such nominee, as the case may be, will be considered the sole owner and holder of record of the Trust Preferred Securities represented by such Trust Preferred Securities Global Certificate for all purposes. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Redemption notices shall be sent to Cede & Co. If less than all of the Trust Preferred Securities are being redeemed, DTC will reduce pro rata (subject to adjustment to eliminate fractional Trust Preferred Securities) the amount of interest of each Direct Participant in the Trust Preferred Securities to be redeemed. Although voting with respect to the Trust Preferred Securities is limited, in those instances in which a vote is required, neither DTC nor Cede & Co. itself will consent or vote with respect to Trust Preferred Securities. Under its usual procedures, DTC would mail an Omnibus Proxy to the Trust as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts the Trust Preferred Securities are credited on the record date (identified in a listing attached to the Omnibus Proxy). 127 Distribution payments on the Trust Preferred Securities represented by a Preferred Series Global Certificate will be made by the Property Trustee to DTC. DTC's practice is to credit Direct Participants' accounts on the relevant payment date in accordance with their respective holdings shown on DTC's records unless DTC has reason to believe that it will not receive payments on such payment date. Payments by Participants to Beneficial owners will be governed by standing instructions and customary practices and will be the responsibility of such Participants and not of DTC, the Trust or the Corporation, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of distributions to DTC is the responsibility of the Trust, disbursement of such payments to Direct Participants is the responsibility of DTC, and disbursement of such payments to the Beneficial Owners is the responsibility of Direct and Indirect Participants. DTC may discontinue providing its services as securities depository with respect to the Trust Preferred Securities at any time by giving reasonable notice to the Trust. Under such circumstances, if a successor securities depository is not obtained, Trust Preferred Security certificates will be required to be printed and delivered. Additionally, the Trust may decide to discontinue use of the system of book-entry transfers through DTC (or a successor depository). In that event, certificates for the Trust Preferred Securities will be printed and delivered. Expenses and Taxes In the Indenture and the Declaration, the Company, as borrower, has agreed to pay all debts and other obligations (other than with respect to the Trust Securities) and all costs and expenses of the Trust (including costs and expenses relating to the organization of the Trust, the fees and expenses of the Trustees and the costs and expenses relating to the operation of the Trust) and to pay any and all taxes and all costs and expenses with respect thereto (other than United States withholding taxes) to which the Trust might become subject. The foregoing obligations of the Company under the Indenture are for the benefit of, and shall be enforceable by, any person to whom any such debts, obligations, costs, expenses and taxes are owed (a "Creditor") whether or not such Creditor has received notice thereof. Any such Creditor may enforce such obligations of the Corporation directly against the Corporation, and the Corporation has irrevocably waived any right or remedy to require that any such Creditor take any action against the Trust or any other person before proceeding against the Company. The Corporation has also agreed in the Indenture to execute such additional agreements as may be necessary or desirable to give effect to the foregoing. Registrar, Transfer Agent and Paying Agent Payment of distributions and payments on redemption of the Trust Preferred Securities will be payable, the transfer of the Trust Preferred Securities will be registrable, and Trust Preferred Securities will be exchangeable for Trust Preferred Securities of other denominations of a like aggregate liquidation amount, at the principal corporate trust office of the Property Trustee in The City of New York; provided that payment of distributions may be made at the option of the Regular Trustees on behalf of the Trust by check mailed to the address of the persons entitled thereto and that the payment on redemption of any Trust Preferred Security will be made only upon surrender of such Trust Preferred Security to the Property Trustee. Registrar and Transfer Company or one of its affiliates will act as registrar and transfer agent for the Trust Preferred Securities. Registrar and Transfer Company will also act as paying agent and, with the consent of the Regular Trustees, may designate additional paying agents. Registration of transfers of Trust Preferred Securities will be effected without charge by or on behalf of the Trust, but upon payment (with the giving of such indemnity as the Trust or the Corporation may require) in respect of any tax or other governmental charges that may be imposed in relation to it. The Trust will not be required to register or cause to be registered the transfer of Trust Preferred Securities after such Trust Preferred Securities have been called for redemption. Information Concerning the Property Trustee The Property Trustee, prior to a default with respect to the Trust Securities, undertakes to perform only such duties as are specifically set forth in the Declaration and, after default, shall exercise the same degree of care as a prudent individual would exercise in the conduct of his or her own affairs. Subject to such provision, the Property Trustee is under no obligation to exercise any of the powers vested in it by the Declaration at the request of any holder of Trust Preferred Securities, unless offered reasonable indemnity by such holder against the costs, expenses and liabilities which might be incurred thereby. The Property Trustee is not required to expend or risk its own funds or otherwise incur personal financial liability in the performance of its duties if the Property Trustee reasonably believes that repayment or adequate indemnity is not reasonably assured to it. 128 Governing Law The Declaration and the Trust Preferred Securities will be governed by, and construed in accordance with, the internal laws of the State of Delaware. Miscellaneous Application has been made to list the Trust Preferred Securities on the NYSE, subject to notice of issuance. The Regular Trustees are authorized and directed to take such action as they deem reasonable in order that the Trust will not be deemed to be an "investment company" required to be registered under the 1940 Act or that the Trust will not be classified for United States federal income tax purposes as an association taxable as a corporation or a partnership and will be treated as a grantor trust for United States federal income tax purposes. In this connection, the Regular Trustees are authorized to take any action, not inconsistent with applicable law, the certificate of trust or the Declaration, that the Regular Trustees determine in their discretion to be reasonable and necessary or desirable for such purposes, as long as such action does not adversely affect the interests of holders of the Trust Securities. The Corporation and the Regular Trustees on behalf of the Trust will be required to provide to the Property Trustee annually a certificate as to whether the Corporation and the Trust, respectively, are in compliance with all the conditions and covenants under the Declaration. DESCRIPTION OF PREFERRED SECURITIES GUARANTEE Set forth below is a summary of information concerning the Preferred Securities Guarantee that will be executed and delivered by the Corporation for the benefit of the holders from time to time of Trust Preferred Securities. The Preferred Securities Guarantee is separately qualified under the Trust Indenture Act and will be held by Bank of New York acting in its capacity as indenture trustee with respect thereto, for the benefit of the holders of the Trust Preferred Securities. The terms of the Preferred Securities Guarantee include those stated in such Guarantee and those made part of the Preferred Securities Guarantee by the Trust Indenture Act. The summary set forth below contains all material elements of the Preferred Securities Guarantee but does not purport to be complete and is subject in all respects to the provisions of, and is qualified in its entirety by reference to, the Preferred Securities Guarantee, which is filed as an exhibit to the Registration Statement of which this Proxy Statement/Prospectus forms a part, and the Trust Indenture Act. General Pursuant to the Preferred Securities Guarantee, the Corporation will irrevocably and unconditionally agree, to the extent set forth therein, to pay in full, to the holders of the Trust Preferred Securities, the Guarantee Payments (as defined below) (without duplication of amounts theretofore paid by the Trust), to the extent not paid by the Trust, regardless of any defense, right of set-off or counterclaim that the Trust may have or assert. The following payments or distributions with respect to the Trust Preferred Securities to the extent not paid or made by the Trust (the "Guarantee Payments") will be subject to the Guarantee (without duplication): (i) any accrued and unpaid distributions on the Trust Preferred Securities and the redemption price, including all accrued and unpaid distributions to the date of the redemption, with respect to the Trust Preferred Securities called for redemption by the Trust but if and only to the extent that in each case the Corporation has made a payment to the Property Trustee of interest or principal on the Junior Subordinated Debentures and (ii) upon a voluntary or involuntary dissolution, winding-up or termination of the Trust (other than in connection with the distribution of Junior Subordinated Debentures to holders of Trust Preferred Securities or the redemption of all of the Trust Preferred Securities upon the maturity or redemption of the Junior Subordinated Debentures), the lesser of (a) the aggregate of the liquidation amount and all accrued and unpaid distributions on the Trust Preferred Securities to the date of payment, to the extent the Trust has funds available therefor, and (b) the amount of assets of the Trust remaining available for distribution to holders of Trust Preferred Securities in liquidation of the Trust. The Corporation's obligation to make a Guarantee Payment may be satisfied by direct payment of the required amounts by the Corporation to the holders of Trust Preferred Securities or by causing the Trust to pay such amounts to such holders. The Preferred Securities Guarantee, when taken together with the Corporation's obligations under the Junior Subordinated Debentures and the Indenture and its obligations under the Declaration, including its obligation to pay costs, expenses and certain liabilities of the Trust, constitutes a full and unconditional guarantee of amounts due on the Trust Preferred Securities. 129 Certain Covenants of the Corporation In the Preferred Securities Guarantee, the Corporation will covenant that, so long as the Trust Preferred Securities remain outstanding, the Corporation will not declare or pay any dividends on, or redeem, purchase, acquire or make a distribution or liquidation payment with respect to, any of its common stock or preferred stock or make any guarantee payment with respect thereto if at such time (i) the Corporation shall be in default with respect to its Guarantee Payments or other payment obligations under the Preferred Securities Guarantee, (ii) there shall have occurred any Indenture Event of Default or (iii) the Corporation shall have given notice of its selection of an Extension Period as provided in the Indenture and such period, or any extension thereof, is continuing. In addition, so long as any Trust Preferred Securities remain outstanding, the Corporation has agreed (i) to remain the sole direct or indirect owner of all of the outstanding Trust Common Securities and shall not cause or permit the Trust Common Securities to be transferred except to the extent permitted by the Declaration; provided that any permitted successor of the Corporation under the Indenture may succeed to the Corporation's ownership of the Trust Common Securities and (ii) to use reasonable efforts to cause the Trust to continue to be treated as a grantor trust for United States federal income tax purposes except in connection with a distribution of Junior Subordinated Debentures. Amendments and Assignment Except with respect to any changes that do not adversely affect the rights of holders of Trust Preferred Securities (in which case no consent will be required), the Preferred Securities Guarantee may be amended only with the prior approval of the holders of not less than 66 2/3% in liquidation amount of the outstanding Trust Preferred Securities. The manner of obtaining any such approval of holders of the Trust Preferred Securities will be as set forth under "DESCRIPTION OF TRUST PREFERRED SECURITIES -- Voting Rights." All guarantees and agreements contained in the Preferred Securities Guarantee shall bind the successors, assigns, receivers, trustees and representatives of the Corporation and shall inure to the benefit of the holders of the Trust Preferred Securities then outstanding. Except in connection with a consolidation, merger or sale involving the Corporation that is permitted under the Indenture, the Corporation may not assign its obligations under the Preferred Securities Guarantee. Termination of the Preferred Securities Guarantee The Preferred Securities Guarantee will terminate and be of no further force and effect as to the Trust Preferred Securities upon full payment of the Redemption Price of all Trust Preferred Securities, or upon distribution of the Junior Subordinated Debentures to the holders of Trust Preferred Securities in exchange for all of the Trust Preferred Securities, or upon full payment of the amounts payable upon liquidation of the Trust. Notwithstanding the foregoing, the Preferred Securities Guarantee will continue to be effective or will be reinstated, as the case may be, if at any time any holder of Trust Preferred Securities must restore payment of any sums paid with respect to the Trust Preferred Securities or the Preferred Securities Guarantee. Status of the Preferred Securities Guarantee The Corporation's obligations under the Preferred Securities Guarantee to make the Guarantee Payments will constitute an unsecured obligation of the Corporation and will rank (i) subordinate and junior in right of payment to all other liabilities of the Corporation, including the Junior Subordinated Debentures, except those made pari passu or subordinate by their terms, and (ii) senior to all capital stock now or hereafter issued by the Corporation and to any guarantee now or hereafter entered into by the Corporation in respect of any of its capital stock. Because the Corporation is a holding company, the Corporation's obligations under the Preferred Securities Guarantee are also effectively subordinated to all existing and future liabilities, including trade payables, of the Corporation's subsidiaries, except to the extent that the Corporation is a creditor of the subsidiaries recognized as such. The Declaration provides that each holder of Trust Preferred Securities by acceptance thereof agrees to the subordination provisions and other terms of the Preferred Securities Guarantee. The Preferred Securities Guarantee will constitute a guarantee of payment and not of collection (that is, the guaranteed party may institute a legal proceeding directly against the guarantor to enforce its rights under the guarantee without first instituting a legal proceeding against any other person or entity). The Preferred Securities Guarantee will be deposited with the Property Trustee, to be held in trust for the benefit of the holders of the Trust Preferred Securities. The Property Trustee shall enforce the Preferred Securities Guarantee on behalf of the holders of the Trust Preferred Securities although any holder of Trust Preferred Securities may bring a direct action against the Corporation to enforce the Preferred Securities Guarantee without prior notice to the Property Trustee. The holders of not less than a majority in aggregate liquidation amount of the Trust Preferred Securities, have the right to direct the time, method and place of conducting any proceeding for any remedy available in respect of the Preferred Securities Guarantee, including the giving of directions to the Property Trustee. 130 Governing Law The Preferred Securities Guarantee will be governed by and construed in accordance with the laws of the State of New York. DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES Set forth below is a description of the Junior Subordinated Debentures which will be deposited in the Trust as trust assets. The terms of the Junior Subordinated Debentures include those stated in the Indenture dated __________, 1997 (the "Indenture"), between the Corporation and Bank of New York, as trustee (the "Indenture Trustee"), the form of which has been filed as an exhibit to the Registration Statement of which this Proxy Statement/Prospectus forms a part, and those made part of the Indenture by the Trust Indenture Act. The following description contains all material elements of the Junior Subordinated Debentures but does not purport to be complete and is qualified in its entirety by reference to the Indenture and the Trust Indenture Act. Whenever particular provisions or defined terms in the Indenture are referred to herein, such provisions or defined terms are incorporated by reference herein. Section and Article references used herein are references to provisions of the Indenture. Under certain circumstances involving the dissolution of the Trust following the occurrence of a Special Event, Junior Subordinated Debentures may be distributed to the holders of the Trust Securities in liquidation of the Trust. See "DESCRIPTION OF TRUST PREFERRED SECURITIES -- Special Event Redemption or Distribution; Shortening of Stated Maturity." General The Junior Subordinated Debentures are unsecured, subordinated obligations of the Corporation, limited in aggregate principal amount to an amount equal to the sum of (i) the stated liquidation amount of the Trust Preferred Securities issued by the Trust in the Conversion and (ii) the proceeds received by the Trust upon issuance of the Trust Common Securities to the Corporation (which proceeds will be used to purchase an equal principal amount of Junior Subordinated Debentures). The entire principal amount of the Junior Subordinated Debentures will become due and payable, together with any accrued and unpaid interest thereon, on September 30, 2027. The Junior Subordinated Debentures are not subject to any sinking fund. If Junior Subordinated Debentures are distributed to holders of Trust Preferred Securities in dissolution of the Trust, such Junior Subordinated Debentures will be so issued in certificated form in denominations of $25 and integral multiples thereof and may be transferred or exchanged at the offices described below. Payments of principal and interest on Junior Subordinated Debentures will be payable, the transfer of the Junior Subordinated Debentures will be registrable, and Junior Subordinated Debentures will be exchangeable for Junior Subordinated Debentures of other denominations of a like aggregate principal amount, at the corporate trust office of the Indenture Trustee in The City of New York; provided that payment of interest may be made at the option of the Corporation by check mailed to the address of the persons entitled thereto and that the payment of principal with respect to any Junior Subordinated Debenture will be made only upon surrender of such Junior Subordinated Debenture to the Indenture Trustee. If the Junior Subordinated Debentures are distributed to the holders of Trust Preferred Securities upon the dissolution of the Trust, the Corporation will use its best efforts to list the Junior Subordinated Debentures on the NYSE or on such other exchange on which the Trust Preferred Securities are then listed. Optional Redemption Except as provided below, the Junior Subordinated Debentures may not be redeemed prior to September 30, 2002. The Corporation shall have the right to redeem the Junior Subordinated Debentures, in whole or in part, from time to time, on or after September 30, 2002, upon not less than 30 nor more than 60 days notice, at a redemption price equal to 100% of the principal amount to be redeemed, plus any accrued and unpaid interest, to the redemption date, including interest accrued during an Extension Period. The Corporation will also have the right to redeem the Junior Subordinated Debentures at any time upon the occurrence of a Tax Event if certain conditions are met as described under "DESCRIPTION OF THE TRUST PREFERRED SECURITIES -- Special Event Redemption or Distribution; Shortening of Stated Maturity." The redemption price for such redemption within five years of the Conversion will be 101% of the principal amount of the Junior Subordinated Debentures plus accrued and unpaid interest. 131 If the Corporation gives a notice of redemption in respect of Junior Subordinated Debentures (which notice will be irrevocable) then, by 11:00 a.m., New York City time, on the redemption date, the Corporation will deposit irrevocably with the Indenture Trustee funds sufficient to pay the applicable redemption price and will give irrevocable instructions and authority to pay such redemption price to the holders of the Junior Subordinated Debentures. If notice of redemption shall have been given and funds deposited as required, then upon the date of such deposit, interest will cease to accrue on the Junior Subordinated Debentures called for redemption, such Junior Subordinated Debentures will no longer be deemed to be outstanding and all rights of holders of such Junior Subordinated Debentures so called for redemption will cease, except the right of the holders of such Junior Subordinated Debentures to receive the applicable redemption price, but without interest on such redemption price. If any date fixed for redemption of Junior Subordinated Debentures is not a Business Day, then payment of the redemption price payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay) except that, if such Business Day falls in the next calendar year, such payment will be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date fixed for redemption. If payment of the redemption price in respect of Junior Subordinated Debentures is improperly withheld or refused and not paid by the Corporation, interest on such Junior Subordinated Debentures will continue to accrue compounded monthly, from the original redemption date to the date of payment, in which case the actual payment date will be considered the date fixed for redemption for purposes of calculating the applicable redemption price. If fewer than all of the Junior Subordinated Debentures are to be redeemed, the Junior Subordinated Debentures to be redeemed shall be selected by lot or pro rata or in some other equitable manner determined by the Indenture Trustee. In the event of any redemption in part, the Corporation shall not be required to (i) issue, register the transfer of or exchange any Junior Subordinated Debentures during a period beginning at the opening of business 15 days before any selection for redemption of Junior Subordinated Debentures and ending at the close of business on the earliest date on which the relevant notice of redemption is deemed to have been given to all holders of Junior Subordinated Debentures to be redeemed and (ii) register the transfer of or exchange any Junior Subordinated Debentures so selected for redemption, in whole or in part, except the unredeemed portion of any Junior Subordinated Debentures being redeemed in part. Proposed Tax Legislation Certain tax law changes have been proposed that may, if enacted, deny corporate issuers a deduction for interest in respect of certain debt obligations, such as the Junior Subordinated Debentures. See "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS -- Additional Risks Applicable to Holders of A Interests -- Special Event Redemption or Distribution; Shortening of Stated Maturity." Interest The Junior Subordinated Debentures will bear interest at an annual rate of 11.6% from the Accrual Date. Interest will be payable monthly in arrears on the last day of each calendar month of each year (each, an "Interest Payment Date"), commencing on July 31, 1997, to the person in whose name such Junior Subordinated Debenture is registered, subject to certain exceptions, at the close of business on the first day of the month in which such Interest Payment Date occurs. Interest payable on any Junior Subordinated Debenture that is not punctually paid or duly provided for on any Interest Payment Date will forthwith cease to be payable to the person in whose name such Junior Subordinated Debenture is registered on the relevant record date, and such defaulted interest will instead be payable to the person in whose name such Junior Subordinated Debenture is registered on the special record date or other specified date determined in accordance with the Indenture; provided, however, that interest shall not be considered payable by the Corporation on any Interest Payment Date falling within an Extension Period unless the Corporation has elected to make a full or partial payment of interest accrued on the Junior Subordinated Debentures on such Interest Payment Date. The amount of interest payable for any period will be computed on the basis of a 360-day year of twelve 30-day months and for any period shorter than a full monthly period for which interest is computed, the amount of interest payable will be computed on the basis of the actual number of days elapsed in such a 30-day month. If any Interest Payment Date is not a Business Day, then payment of the interest payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay), except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date. 132 Option to Extend Interest Payment Period So long as the Corporation shall not be in default in the payment of interest on the Junior Subordinated Debentures, the Corporation shall have the right to extend the interest payment period from time to time for a period not exceeding 60 consecutive months. The Corporation has no current intention of exercising its right to extend an interest payment period. No interest shall be due and payable during an Extension Period, except at the end thereof. During any Extension Period, the Corporation shall not declare or pay any dividends on, or redeem, purchase, acquire or make a distribution or liquidation payment with respect to, any of its common stock or preferred stock or make any guarantee payments with respect thereto. Prior to the termination of any such Extension Period, the Corporation may further extend the interest payment period; provided that such Extension Period together with all such previous and further extensions thereof may not exceed 60 consecutive months. On the Interest Payment Date occurring after the end of each Extension Period, the Corporation shall pay to the holders of Junior Subordinated Debentures of record on the record date for such Interest Payment Date (regardless of who the holders of record may have been on other dates during the Extension Period) all accrued and unpaid interest on the Junior Subordinated Debentures, together with interest thereon at the rate specified for the Junior Subordinated Debentures to the extent permitted by applicable law, compounded monthly ("Compounded Interest"). Upon the termination of any Extension Period and the payment of all amounts then due, the Corporation may commence a new Extension Period, subject to the above requirements. The Corporation may also prepay at any time all or any portion of the interest accrued during an Extension Period. Consequently, there could be multiple Extension Periods of varying lengths (up to five Extension Periods of 60 consecutive months each or more numerous shorter Extension Periods) throughout the term of the Junior Subordinated Debentures. The failure by the Corporation to make interest payments during an Extension Period would not constitute a default or an event of default under the Indenture or the Corporation's currently outstanding indebtedness. If the Trust shall be the sole holder of the Junior Subordinated Debentures, the Corporation shall give the Property Trustee and the Indenture Trustee notice of its selection of such Extension Period ten Business Days prior to the earlier of (i) the date the distributions on the Trust Preferred Securities are payable or (ii) the date the Trust is required to give notice to the NYSE or other applicable self-regulatory organization or to holders of the Trust Preferred Securities of the record date or the date such distribution is payable, but in any event not less than one Business Day prior to such record date. The Trust shall give notice of the Corporation's selection of such Extension Period to the holders of the Trust Preferred Securities. If Junior Subordinated Debentures have been distributed to holders of Trust Securities, the Corporation shall give the holders of the Junior Subordinated Debentures notice of its selection of such Extension Period ten Business Days prior to the earlier of (i) the next succeeding interest payment date or (ii) the date the Corporation is required to give notice to the NYSE (if the Junior Subordinated Debentures are then listed thereon) or other applicable self-regulatory organization or to holders of the Junior Subordinated Debentures of the record or payment date of such related interest payment. Compounded Interest The Corporation will make payments of Compounded Interest to the Trust with respect to the Junior Subordinated Debentures held by the Trust, and the Property Trustee will make such funds available to pay any interest on distributions in arrears in respect of the Trust Preferred Securities pursuant to the terms thereof. Certain Covenants of the Corporation Applicable to the Junior Subordinated Debentures In the Indenture, the Corporation will covenant that, so long as any Trust Preferred Securities remain outstanding, the Corporation will not declare or pay any dividends on, or redeem, purchase, acquire or make a distribution or liquidation payment with respect to, any of its common stock or preferred stock or make any guarantee payment with respect thereto if at such time (i) the Corporation shall be in default with respect to its Guarantee Payments or other payment obligations under the Preferred Securities Guarantee, (ii) there shall have occurred any Indenture Event of Default with respect to the Junior Subordinated Debentures or (iii) the Corporation shall have given notice of its selection of an Extension Period as provided in the Indenture and such period, or any extension thereof, is continuing. In addition, so long as the Trust Preferred Securities remain outstanding, the Corporation has agreed (i) not to cause or permit the Trust Common Securities to be transferred except to the extent permitted by the Declaration, provided that any permitted successor of the Corporation under the Indenture may succeed to the Corporation's ownership of the Trust Common Securities, (ii) to comply fully with all of its obligations and agreements contained in the Declaration and (iii) not to take any action which would cause the Trust to cease to be treated as a grantor trust for United States federal income tax purposes except in connection with a distribution of Junior Subordinated Debentures. 133 Subordination The Indenture provides that the Junior Subordinated Debentures are subordinate and junior in right of payment to all Senior Indebtedness of the Corporation. In the event (a) of any insolvency or bankruptcy proceedings, or any receivership, liquidation, reorganization or other similar proceedings in respect of the Corporation or its property or any proceeding for voluntary liquidation, dissolution or other winding up of the Corporation, or (b) Junior Subordinated Debentures are declared due and payable before their expressed maturity because of the occurrence of an Indenture Event of Default (under circumstances other than as set forth in clause (a) above), then the holders of all Senior Indebtedness shall first be entitled to receive payment of the full amount due thereon in money, before the holders of any of the Junior Subordinated Debentures are entitled to receive a payment on account of the principal of, premium, if any, or interest on the indebtedness evidenced by such Junior Subordinated Debentures. In the event and during the continuation of any default in payment of any Senior Indebtedness or if any event of default shall exist under any Senior Indebtedness resulting in the acceleration of the maturity thereof, or the right to accelerate maturity thereof, as "event of default" is defined therein or in the agreement under which the same is outstanding, then no payment of the principal of, premium, if any, or interest on the Junior Subordinated Debentures shall be made. The term "Senior Indebtedness" shall mean the principal of and premium, if any, and interest on (a) all indebtedness of the Corporation, whether outstanding on the date of the Indenture or thereafter created, (i) for money borrowed by the Corporation,(ii) for money borrowed by, or obligations of, others and either assumed or guaranteed, directly or indirectly, by the Corporation, (iii) in respect of letters of credit and acceptances issued or made by banks, or (iv) constituting purchase money indebtedness, or indebtedness secured by property included in the property, plant and equipment accounts of the Corporation at the time of the acquisition of such property by the Corporation, for the payment of which the Corporation is directly liable, and (b) all deferrals, renewals, extensions and refundings of, and amendments, modifications and supplements to, any such indebtedness. As used in the preceding sentence the term "purchase money indebtedness" means indebtedness evidenced by a note, debenture, bond or other instrument (whether or not secured by any lien or other security interest) issued or assumed as all or a part of the consideration for the acquisition of property, whether by purchase, merger, consolidation or otherwise, unless by its terms such indebtedness is subordinate to other indebtedness of the Corporation. Notwithstanding anything to the contrary in the Indenture or the Junior Subordinated Debentures, Senior Indebtedness shall not include (i) amounts owed to trade creditors in the ordinary course of business, (ii) any indebtedness of the Corporation which, by its terms or the terms of the instrument creating or evidencing it, is subordinate in right of payment to or pari passu with the Junior Subordinated Debentures, as the case may be, and, in particular, the Junior Subordinated Debentures shall rank pari passu with respect to all other debt securities and guarantees in respect thereof issued to any other trusts, partnerships or other entity affiliated with the Corporation which is a financing vehicle of the Corporation in connection with the issuance of preferred securities by such financing vehicle, or (iii) any indebtedness of the Corporation to a subsidiary of the Corporation. The Indenture does not limit the aggregate amount of indebtedness, including Senior Indebtedness, that may be issued. Because the Corporation will be a holding company after the Merger, the Junior Subordinated Debentures will be effectively subordinated to all existing and future liabilities, including trade payables, of the Corporation's subsidiaries. Any right of the Corporation to participate in any distribution of the assets of any of the Corporation's subsidiaries, including the Operating Partnership, upon the liquidation, reorganization or insolvency of such subsidiary (and the consequent right of the holders of the Junior Subordinated Debentures to participate in those assets) will be subject to the claims of the creditors (including trade creditors) and preferred stockholders of such subsidiary, except to the extent that claims of the Corporation itself as a creditor of such subsidiary may be recognized, in which case the claims of the Corporation would still be subordinate to any security interest in the assets of such subsidiary and any indebtedness of such subsidiary senior to that held by the Corporation. At December 31, 1996, the Operating Partnership had outstanding indebtedness of $85,244,000, all of which had been guaranteed by the Partnership. For a discussion of indebtedness to be outstanding after the Merger, see "CAPITALIZATION." There are no terms in the Trust Preferred Securities, the Junior Subordinated Debentures or the Preferred Securities Guarantee that limit the Corporation's ability to incur additional indebtedness, including indebtedness that ranks senior to or pari passu with the Junior Subordinated Debentures and the Preferred Securities Guarantee, or the ability of its subsidiaries to incur additional indebtedness. See "DESCRIPTION OF PREFERRED SECURITIES GUARANTEE -- Status of the Preferred Securities Guarantee." Indenture Events of Default The Indenture provides that any one or more of the following described events, which has occurred and is continuing, constitutes an "Indenture Event of Default" with respect to the Junior Subordinated Debentures: 134 (a) failure for 30 days to pay interest on the Subordinated Debentures when due; provided that a valid extension of the interest payment period by the Corporation shall not constitute a default in the payment of interest for this purpose; or (b) failure to pay principal of or premium, if any, on the Junior Subordinated Debentures when due whether at maturity, upon redemption, by declaration or otherwise; or (c) failure to observe or perform any other covenant contained in the Indenture with respect to the Junior Subordinated Debentures for 90 days after written notice to the Corporation from the Indenture Trustee or the holders of at least 25% in principal amount of the outstanding Junior Subordinated Debentures; or (d) certain events in bankruptcy, insolvency or reorganization of the Corporation. In each and every such case, unless the principal of all the Junior Subordinated Debentures shall have already become due and payable, either the Indenture Trustee or the holders of not less than 25% in aggregate principal amount of the Junior Subordinated Debentures then outstanding, by notice in writing to the Corporation (and to the Indenture Trustee if given by such holders), may declare the principal of all the Junior Subordinated Debentures to be due and payable immediately, and upon any such declaration the same shall become and shall be immediately due and payable. The holders of a majority in aggregate outstanding principal amount of the Junior Subordinated Debentures have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Indenture Trustee. The Indenture Trustee or the holders of not less than 25% in aggregate outstanding principal amount of the Junior Subordinated Debentures may declare the principal due and payable immediately upon an Indenture Event of Default, but the holders of a majority in aggregate outstanding principal amount of the Junior Subordinated Debentures may annul such declaration and waive the default if the default has been cured and a sum sufficient to pay all matured installments of interest and principal otherwise than by acceleration and any premium has been deposited with the Indenture Trustee. The holders of a majority in aggregate outstanding principal amount of the Junior Subordinated Debentures then outstanding may, on behalf of the holders of all the Junior Subordinated Debentures, waive any past default, except a default in the payment of principal, premium, if any, or interest (unless such default has been cured and a sum sufficient to pay all matured installments of interest and principal otherwise than by acceleration and any premium has been deposited with the Indenture Trustee) or a call for redemption of Junior Subordinated Debentures. The Corporation is required to file annually with the Indenture Trustee a certificate as to whether or not the Corporation is in compliance with all the conditions and covenants under the Indenture. An Indenture Event of Default also constitutes an Event of Default under the Declaration. See "DESCRIPTION OF TRUST PREFERRED SECURITIES -Declaration Events of Default." Modification of the Indenture The Indenture contains provisions permitting the Corporation and the Indenture Trustee, with the consent of the holders of not less than a majority in principal amount of the outstanding Junior Subordinated Debentures, to modify the Indenture or any supplemental indenture affecting the rights of the holders of such Junior Subordinated Debentures; provided that no such modification may, without the consent of the holder of each outstanding Junior Subordinated Debenture affected thereby, (i) change the time for payment of principal or interest on any Junior Subordinated Debenture; (ii) reduce the principal of, or any installment of principal of, or interest on, or reduce any premium payable upon the redemption of, any Junior Subordinated Debenture; (iii) change the coin or currency in which any Junior Subordinated Debenture or interest thereon is payable; (iv) impair the right to institute suit for the enforcement of any payment on or with respect to any Junior Subordinated Debenture; (v) reduce the percentage in principal amount of the outstanding Junior Subordinated Debentures the consent of which holders is required for modification or amendment of the Indenture or for waiver of compliance with certain provisions of the Indenture or for waiver of certain defaults; (vi) change the obligation of the Corporation to maintain an office or agency in the places and for the purposes specified in the Indenture; (vii) modify the provisions relating to waiver of certain defaults or any of the foregoing provisions; or (viii) modify the provisions with respect to the subordination of the Junior Subordinated Debentures. Book-Entry and Settlement If any Junior Subordinated Debentures are distributed to holders of Trust Preferred Securities (see "DESCRIPTION OF TRUST PREFERRED SECURITIES"), such Junior Subordinated Debentures will be issued in fully registered form. In such event, investors may elect to hold their Junior Subordinated Debentures directly or, subject to the rules and procedures of DTC, hold interests in a global certificate registered in the name of DTC or its nominee. 135 For a description of DTC and DTC's book-entry system, see "DESCRIPTION OF TRUST PREFERRED SECURITIES -- Book-Entry; Delivery and Form." As of the date of this Proxy Statement/Prospectus, the description herein of DTC's book-entry system and DTC's practices as they relate to purchases, transfers, notices and payments with respect to the Trust Preferred Securities apply in all material respects to any Junior Subordinated Debentures registered in the name of and held by DTC or its nominee. Consolidation, Merger and Sale The Indenture provides that the Corporation may not consolidate with or merge into any other person or sell, convey, transfer or lease or otherwise dispose of all or substantially all of its properties and assets to any person and may not permit any person to merge into or consolidate with the Corporation unless (i) either the Corporation will be the resulting or surviving entity or any successor or purchaser is a corporation organized under the laws of the United States of America, any State or the District of Columbia, and any such successor or purchaser expressly assumes the Corporation's obligations under the Indenture and (ii) immediately after giving effect to the transaction no Indenture Event of Default, and no event which, after notice or lapse of time or both, would become an Indenture Event of Default, shall have occurred and be continuing. Defeasance and Discharge Under the terms of the Indenture, the Corporation will be discharged from any and all obligations in respect of the Junior Subordinated Debentures (except in each case for certain obligations to register the transfer or exchange of Junior Subordinated Debentures, replace stolen, lost or mutilated Junior Subordinated Debentures, maintain paying agencies and hold moneys for payment in trust) if (i) the Corporation irrevocably deposits with the Indenture Trustee cash or U.S. Government Obligations, as trust funds in an amount certified to be sufficient to pay at maturity (or upon redemption) the principal of, premium, if any, and interest on all outstanding Junior Subordinated Debentures; (ii) the Corporation delivers to the Indenture Trustee an opinion of counsel to the effect that the holders of the Junior Subordinated Debentures will not recognize income, gain or loss for United States federal income tax purposes as a result of such defeasance and that defeasance will not otherwise alter such holders' United States federal income tax treatment of principal, premium and interest payments on such Junior Subordinated Debentures (such opinion must be based on a ruling of the Internal Revenue Service or a change in United States federal income tax law occurring after the date of such Indenture, since such a result would not occur under current tax law); and (iii) no event or condition shall exist that, pursuant to certain provisions described under "- Subordination" above, would prevent the Corporation from making payments of principal of, premium, if any, and interest on the Junior Subordinated Debentures at the date of the irrevocable deposit referred to above. Governing Law The Indenture and the Junior Subordinated Debentures will be governed by, and construed in accordance with, the laws of the State of New York. Information Concerning the Indenture Trustee The Indenture Trustee, prior to default, undertakes to perform only such duties as are specifically set forth in the Indenture and, after default, shall exercise the same degree of care as a prudent individual would exercise in the conduct of his or her own affairs. Subject to such provision, the Indenture Trustee is under no obligation to exercise any of the powers vested in it by the Indenture at the request of any holder of Junior Subordinated Debentures, unless offered reasonable indemnity by such holder against the costs, expenses and liabilities that might be incurred thereby. The Indenture Trustee is not required to expend or risk its own funds or otherwise incur personal financial liability in the performance of its duties if the Trustee reasonably believes that repayment or adequate indemnity is not reasonably assured to it. Miscellaneous The Corporation will have the right at all times to assign any of its rights or obligations under the Indenture to a direct or indirect wholly owned subsidiary of the Corporation; provided that, in the event of any such assignment, the Corporation will remain jointly and severally liable for all such obligations. Subject to the foregoing, the Indenture will be binding upon and inure to the benefit of the parties thereto and their respective successors and assigns. The Indenture provides that it may not otherwise be assigned by the parties thereto other than by the Corporation to a successor or purchaser pursuant to a consolidation, merger or sale permitted by the Indenture. 136 RELATIONSHIP AMONG THE TRUST PREFERRED SECURITIES, THE JUNIOR SUBORDINATED DEBENTURES AND THE PREFERRED SECURITIES GUARANTEE As long as payments of interest and other payments are made when due on the Junior Subordinated Debentures, such payments will be sufficient to cover distributions and other payments due on the Trust Preferred Securities primarily because (i) the aggregate principal amount of Junior Subordinated Debentures held as trust assets will be equal to the sum of the aggregate stated liquidation amount of the Trust Preferred Securities and the proceeds received by the Trust upon issuance of the Trust Common Securities to the Corporation; (ii) the interest rate and interest and other payment dates on the Junior Subordinated Debentures will match the distribution rate and distribution and other payment dates for the Trust Preferred Securities; (iii) the Indenture and Declaration provides that the Corporation shall pay for all debts and obligations (other than with respect to the Trust Securities) and all costs and expenses of the Trust, including any taxes and all costs and expenses with respect thereto, to which the Trust may become subject, except for United States withholding taxes; and (iv) the Declaration further provides that the Trustees shall not cause or permit the Trust, among other things, to engage in any activity that is not consistent with the limited purposes of the Trust. With respect to clause (iii) above, however, no assurance can be given that the Corporation will have sufficient resources to enable it to pay such debts, obligations, costs and expenses on behalf of the Trust. Payments of distributions and other payments due on the Trust Preferred Securities are guaranteed by the Corporation on a subordinated basis as and to the extent set forth under "DESCRIPTION OF PREFERRED SECURITIES GUARANTEE." If the Corporation does not make interest or other payments on the Junior Subordinated Debentures, the Trust will not make distributions or other payments on the Trust Preferred Securities. Under the Declaration, if and to the extent the Corporation does make interest or other payments on the Junior Subordinated Debentures, the Property Trustee is obligated to make distributions or other payments on the Trust Preferred Securities. The Preferred Securities Guarantee is a guarantee from the time of issuance of the Trust Preferred Securities, but the Preferred Securities Guarantee covers distributions and other payments on the Trust Preferred Securities only if and to the extent that the Corporation has made a payment to the Property Trustee of interest or principal on the Junior Subordinated Debentures deposited in the Trust as trust assets. In the event the Corporation fails to make such payments, a holder of Trust Preferred Securities may institute a legal proceeding directly against the Corporation under the Indenture to enforce payment of such distributions to such holder after the respective due dates. Taken together, the Corporation's obligations under the Junior Subordinated Debentures, the Indenture and the Preferred Securities Guarantee provide, in the aggregate, a full and unconditional guarantee of payments of distributions and other amounts due on the Trust Preferred Securities. No single document standing alone or operating in conjunction with fewer than all of the other documents constitutes such guarantee. It is only the combined operation of these documents that has the effect of providing a full and unconditional guarantee of the Trust's obligations under the Trust Preferred Securities. If an Appointment Event occurs, the Declaration provides that the holders of the Trust Preferred Securities may appoint a Special Regular Trustee who will have the same rights, powers and privileges under the Declaration as the Regular Trustees. The Property Trustee will have the power to exercise all rights, powers and privileges under the Indenture with respect to the Junior Subordinated Debentures, including its rights as the holder of the Junior Subordinated Debentures to enforce the Corporation's obligations under the Junior Subordinated Debentures upon the occurrence of an Indenture Event of Default, and will also have the right to enforce the Preferred Securities Guarantee on behalf of the holders of the Trust Preferred Securities. In addition, the holders of at least a majority in liquidation amount of the Trust Preferred Securities will have the right to direct the Property Trustee with respect to certain matters under the Declaration and the Preferred Securities Guarantee. Under certain circumstances, holders of Trust Preferred Securities may institute a legal proceeding against the Corporation to enforce the Preferred Securities Guarantee and the Corporation's payment obligations on the Junior Subordinated Debentures. See "DESCRIPTION OF TRUST PREFERRED SECURITIES" and "DESCRIPTION OF PREFERRED SECURITIES GUARANTEE." The above mechanisms and obligations, taken together, constitute a full and unconditional guarantee by the Corporation of payments due on the Trust Preferred Securities. If a Special Event shall occur and be continuing, the Trust shall be dissolved unless the Junior Subordinated Debentures are redeemed in the limited circumstances described below, with the result that Junior Subordinated Debentures held by the Trust having an aggregate principal amount equal to the aggregate stated liquidation amount of the Trust Preferred Securities and Trust Common Securities will be distributed on a Pro Rata Basis in exchange for the outstanding Trust Preferred Securities and Trust Common Securities, subject in the case of a Tax Event to the Corporation's right in certain circumstances to redeem Junior Subordinated Debentures as described under "DESCRIPTION OF TRUST PREFERRED SECURITIES -- Special Event Redemption or Distribution; Shortening of Stated Maturity." The Trust Preferred Securities represent preferred undivided 137 beneficial interests in the assets of the Trust, a statutory business trust which exists for the purpose of (a) issuing (i) its Trust Preferred Securities to the Corporation in consideration for the deposit by the Corporation of Junior Subordinated Debentures in the Trust as trust assets, and (ii) its Trust Common Securities to the Corporation in exchange for cash and investing the proceeds thereof in an equivalent amount of Junior Subordinated Debentures and (b) engaging in such other activities as are necessary or incidental thereto. Upon any voluntary or involuntary dissolution, winding-up or termination of the Trust, the holders of Trust Preferred Securities will be entitled to receive the Liquidation Distribution in cash or Junior Subordinated Debentures and will be entitled to the benefits of the Preferred Securities Guarantee with respect to any such distribution. See "DESCRIPTION OF TRUST PREFERRED SECURITIES -- Liquidation Distribution Upon Dissolution." Upon any voluntary or involuntary liquidation or bankruptcy of the Corporation, the holders of Junior Subordinated Debentures would be subordinated creditors of the Corporation, subordinated in right of payment to all Senior Indebtedness, but entitled to receive payment in full of principal, premium, if any, and interest, before any stockholders of the Corporation receive payments or distributions. A default or event of default under any Senior Indebtedness would not constitute a default or event of default under the Junior Subordinated Debentures. However, in the event of payment defaults under, or acceleration of, Senior Indebtedness, the subordination provisions of the Junior Subordinated Debentures provide that no payments may be made in respect of the Junior Subordinated Debentures. Failure to make required payments on the Junior Subordinated Debentures would constitute an event of default under the Indenture. DESCRIPTION OF CAPITAL STOCK Preferred Stock The Certificate of Incorporation of the Corporation authorizes the issuance of 1,000,000 shares of Preferred Stock, par value $.01 per share, by the Board of Directors in one or more classes or series and with such voting powers, designations, preferences and relative participating, optional or other special rights and such qualifications, limitations, or restrictions thereof as shall be set forth in the resolutions of the Board of Directors authorizing such issuance. There will be no shares of Preferred Stock outstanding after the Merger. There will be reserved for issuance 64,189 shares of Series A Junior Participating Preferred Shares pursuant to the Corporation's Stockholder Rights Plan. See "-- Stockholder Rights Plan." Common Stock The Certificate of Incorporation of the Incorporation authorizes the issuance of 20,000,000 shares of Common Stock, par value $.01 per share, of which 1,000 shares are currently outstanding and owned by the Partnership. After the Merger, there will be 6,418,936 shares of Common Stock outstanding. Holders of shares of the Corporation's Common Stock are entitled to one vote per share on all matters to be voted upon by the stockholders. There are no cumulative voting rights with respect to the election of directors. Subject to preferences that may be applicable to any outstanding Preferred Stock, holders of shares of Common Stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available therefor. In the event of liquidation, dissolution or winding up of the Corporation, the holders of shares of Common Stock are entitled to share ratably in all assets after satisfaction of liabilities, subject to prior distribution rights of Preferred Stock, if any, then outstanding. Shares of Common Stock have no preemptive, conversion or other subscription rights and there are no redemption or sinking fund provisions applicable to the Common Stock. Stockholders Agreement The Corporation and certain of its stockholders have entered into a Stockholders Agreement dated as of July __, 1997, that contains certain restrictions with respect to voting and sale of shares of Common Stock. The Stockholders Agreement requires the Corporation to include certain provisions in its bylaws. See " -- Anti-takeover Provisions -- Bylaws Provisions." In addition, the Stockholders Agreement provides that Lehman Brothers and each of the following members of management, Donald T. Marshall, John P. McDonnell, Norman V. Edmonson, Harold J. Cornelius, Max W. Hillman and Joseph M. Corvino (the "Senior Executives") will agree with the Corporation not to sell any shares of Common Stock that they beneficially own, in a single transaction or series of related transactions, to any third person(s) which, to the knowledge of Lehman Brothers and its affiliates and the Senior Executives, after reasonable inquiry, would beneficially own after such transactions more than 10% of the outstanding Common Stock (or more than 15% of the outstanding common stock if such third person(s) are eligible to report the acquisition of such shares on Schedule 13G pursuant to clauses (i), (ii) and (iii) of Rule 13d-1(b)(1) under the Exchange Act, as such rule is currently in effect.) The Stockholders Agreement also contains provisions that restrict the respective voting power of Lehman Brothers 138 and the Senior Executives. Under the terms of such restriction, such persons will agree to vote, in the same proportion as the "Unaffiliated Shares" that are voted on any such matter, that percentage of Excess Voting Shares held by them at such time that equals the percentage of outstanding Unaffiliated Shares that are voted on such matter. "Excess Voting Shares" means the shares of Common Stock beneficially owned by Lehman Brothers and its affiliates and the Senior Executives, at any time, that represents voting power in excess of the respective voting powers immediately prior to the Conversion that they would have had in a vote of the holders of A Interests and B Interests voting together as a single class. See also "-- Bylaw Provisions" below. The Stockholders Agreement contains a provision regarding nomination of the Board of Directors of the Corporation. The Board of Directors of the Corporation will consist of up to nine members, of whom three will be nominated by management, four will be independent and either one or two will be appointed by Lehman Brothers, depending upon the percentage of Common Stock held by Lehman Brothers. Anti-takeover Provisions Certain provisions of the Corporation's Bylaws, the Stockholder Rights Plan and the change in control provisions in the Deferred Compensation Plans could have an anti-takeover effect. See "MANAGEMENT -- Change in Control Arrangements." These provisions are intended to enhance the likelihood of continuity and stability in the composition of the Corporation's Board of Directors and management and in the policies formulated by the Board of Directors and to discourage an unsolicited takeover of the Corporation if the Board of Directors determines that the takeover is not in the best interests of the Corporation and its stockholders. However, these provisions could have the effect of discouraging certain attempts to acquire the Corporation or remove incumbent management even if some or a majority of stockholders deemed such an attempt to be in their best interests. Bylaws Provisions. The Bylaws provide that stockholders are permitted to call a special meeting or to require that the Board of Directors call a special meeting of stockholders if such meeting is called by holders of at least 25% of outstanding Common Stock. In addition, the stockholders may act by written consent in lieu of a meeting with a number of votes sufficient for such action. The Bylaws establish an advance notice procedure for the nomination of candidates for election as directors, other than by or at the direction of the Board of Directors, as well as for other stockholder proposals to be considered at annual meetings of stockholders. In general, notice of intent to nominate a director or raise business at such meetings must be received at least 60 days prior to any annual meeting and must contain certain specified information concerning the persons to be nominated or the matters to be brought before the meeting and concerning the stockholder submitting the proposal. Pursuant to the terms of the Stockholders Agreement, the Bylaws provide that prior to the third anniversary of the date of the Conversion, the approval of at least a majority of the Corporation's Independent Directors is required to approve and authorize (i) amendments to the Corporation's Certificate of Incorporation or Bylaws or any stockholder rights plan of the Corporation (including the redemption of the rights thereunder or waiver of any provision thereof) or any waiver of, or "opt- out" from, the benefit or effect of any anti-takeover statute or other provision applicable to the Corporation or (ii) any agreement binding the Corporation in respect of the sale, in a single transaction or a series of related transactions, of all or a substantial part of the Corporation. In addition, the approval of at least a majority of the Corporation's Independent Directors is required to approve and authorize (i) any transaction or series of related transactions between the Corporation or any of its subsidiaries, on the one hand, and SDI Partners I, L.P., Lehman Brothers Capital Partners I, L.P., Lehman Ltd. I Inc., LB I Group Inc., Lehman/SDI, Inc. or Lehman Brothers Inc. or any affiliate of these entities on the other, so long as any of such entities and its affiliates own, in the aggregate, at least 10% of the outstanding Common Stock, (ii) any amendment to, or waiver of, any provision of the Stockholders Agreement, or (iii) any amendment to the Certificate of Incorporation or Bylaws that would amend these restrictive provisions. Stockholder Rights Plan. The Corporation has adopted a Stockholder Rights Plan pursuant to a Rights Agreement, effective as of the Effective Time, between the Corporation and Registrar and Transfer Company. The Plan is designed to insure that all stockholders of the Corporation receive fair value for their shares of Common Stock in the event of any proposed takeover of the Corporation and to guard against the use of partial tender offers or other coercive tactics to gain control of the Corporation without offering fair value to the Corporation's stockholders. Under the Rights Plan, each share of Common Stock will have attached thereto a Right. Each Right entitles the registered holder to purchase from the Corporation one one-hundredth of a share of Series A Junior Participating Preferred Stock, par value $.01 per share, of the Corporation (the "Preferred Shares"), or a combination of securities and assets of equivalent value, at a Purchase Price of $75, subject to adjustment. The Purchase Price may be paid, at the option of the holder, in cash or shares of Common Stock having a value at the time of exercise equal to the Purchase Price. 139 Until the Distribution Date, ownership of the Rights will be evidenced by and will be transferred with and only with the certificates representing the shares of Common Stock, and no separate Rights Certificates will be distributed. The Distribution Date will occur upon the earlier of (i) ten days following a public announcement that a person or group has acquired, or obtained the right to acquire, beneficial ownership of 20% or more of the outstanding shares of Common Stock, or (ii) the close of business on a date fixed by the Board of Directors following the commencement of a tender offer or exchange offer that would result in a person or group beneficially owning 20% or more of the outstanding shares of Common Stock. The Rights are not exercisable until the Distribution Date and will expire at the close of business on __________, 2007, unless earlier redeemed by the Corporation as described below. The percentage ownership of shares of Common Stock held by Lehman Brothers after the Conversion will not cause a Distribution Date to occur. Except in the circumstances described below, after the Distribution Date each Right will be exercisable for one one-hundredth of a Preferred Share (a "Preferred Share Fraction"). Each Preferred Share Fraction carries voting and dividend rights that are intended to produce the equivalent of one share of Common Stock. Each Preferred Share Fraction will entitle the holder to receive dividends each calendar quarter in an amount equal to the aggregate per share amount in cash of all dividends or other distributions (other than dividends payable in Common Stock) declared on the Common Stock during the preceding quarter. Each Preferred Share Fraction will entitle the holder to one vote on all matters submitted to a vote of the stockholders of the Corporation. Each Preferred Share Fraction will have a liquidation preference equal to the greater of $1.00 per share, plus accrued dividends, or an amount per share equal to the aggregate amount to be distributed per share to holders of Common Stock. The Preferred Share Fractions are not redeemable. It is unlikely that a holder of a Right will ever exercise the Right to receive Preferred Shares. The Rights may be exercised if a "Flip-in" or "Flip-over" event occurs. If a "Flip-in" event occurs and the Distribution Date has passed, the holder of each Right, with the exception of the Acquiror, is entitled to purchase $75 worth of shares of Common Stock for $37.50. The Rights will no longer be exercisable into Preferred Shares at that time. A "Flip-in" event takes place if one of the following happens: o A person or group acquires 20% or more of the outstanding Common Stock. o A 20% stockholder merges with or acquires the Corporation and an equity security of the Corporation remains outstanding. o A 20% stockholder engages in "self-dealing" transactions with the Corporation, defined as (i) the receipt of securities from the Corporation; (ii) the sale of assets by the 20% stockholder to, from or with the Corporation having a value of more than $5,000,000 or on terms and conditions less favorable to the Corporation than the Corporation would be able to obtain in an arm's length negotiation with an unaffiliated third party; (iii) the receipt by the 20% stockholder of compensation other than for full time employment at regular rates; and (iv) the receipt by the 20% stockholder of the benefit of any loans, guarantees or other financial assistance or tax credits from the Corporation. The Board of Directors of the Corporation has the power to administer and interpret the Plan. If a "Flip-over" event occurs, the holder of Rights is entitled to purchase $75 worth of the Acquiror's stock for $37.50 for each Right held. A "Flip-over" event occurs if the Corporation is acquired or merged and no outstanding shares remain or if 50% of the Corporation's assets or earning power is sold or transferred. The Rights Plan prohibits the Corporation from entering into this sort of transaction unless the Acquiror agrees to comply with the "Flip-over" provisions of the Plan. The Rights can be redeemed by the Corporation for $.005 per right until up to ten days after the public announcement that someone has acquired 20% or more of the Corporation's Common Shares or the Board can extend the redemption period for as long as it determines appropriate. If the Rights are not redeemed or substituted by the Corporation, they will expire on _________, 2007. Limitation of Liability As permitted by the Delaware General Corporation Law (the "DGCL"), the Corporation's Certificate of Incorporation provides that directors of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL, relating to prohibited dividends or distributions or the repurchase or redemption of stock, or (iv) for any transaction from which the director derives an improper personal benefit. 140 Transfer Agent and Registrar The Transfer Agent and Registrar for the Common Stock is Registrar and Transfer Company. RESALE OF SECURITIES Securities Act Restrictions Trust Preferred Securities and shares of Common Stock received by persons who may be deemed to be "affiliates" of the Partnership may be sold by those persons only in accordance with the provisions of Rule 145 under the Securities Act, pursuant to an effective registration under the Securities Act or in transactions that are exempt from registration under the Securities Act. Rule 145 provides, in general, that the securities may be sold by the affiliate during the one year following the date the securities were acquired from the Corporation if (i) there is available adequate current public information with respect to the Corporation and (ii) the number of Trust Preferred Securities or shares of Common Stock sold within any three month period does not exceed the greater of 1% of the total number of outstanding Trust Preferred Securities or shares of Common Stock, as the case may be, or the average weekly trading volume of the particular security during the four calendar weeks immediately preceding the date of receipt of the order to execute the transaction by a broker or the date of execution of the transaction directly with a market maker and (iii) the securities are sold in transactions directly with a "market maker" or in "brokers' transactions" within the meaning of Rule 144 under the Securities Act. Rule 145 further provides that during the second year following the date the securities were acquired from the Corporation the affiliate may sell such securities if the affiliate is not an affiliate of the Corporation and there is available adequate public information with respect to the Corporation, and thereafter the affiliate may sell the securities without restriction if the affiliate is not, and has not been for at least three months, an affiliate of the Corporation. Resales by Lehman Brothers and Management Lehman Brothers and Messrs. Marshall, McDonnell and Edmonson have agreed to cooperate to execute an underwritten secondary offering of their shares of Common Stock, as soon as practicable after the effective date of the Conversion pursuant to the registration rights described below, subject to market conditions. Such parties have agreed not to sell their shares of Common Stock prior to such secondary offering; provided that such restriction will lapse with respect to sales pursuant to Rule 144 or Rule 145 under the Securities Act if the secondary offering has not been consummated within nine months after the effective date of the Conversion. Notwithstanding the foregoing, such parties have agreed that Lehman Brothers Capital Partners I L.P. may distribute shares of Common Stock that it holds to its partners at any time and that the subsequent sale or transfer of such shares by such partners (other than shares distributed to the general partner of Lehman Brothers Capital Partners I L.P.) is not restricted. In connection with the foregoing, the Corporation has entered into a registration rights agreement with Lehman Brothers and Messrs. Marshall, McDonnell and Edmonson affording registration rights with respect to all of the shares of Common Stock to be acquired by Lehman Brothers pursuant to the Conversion and 20% of the shares of Common Stock to be acquired by such individuals pursuant to the Conversion. Lehman Brothers has the right to demand registration of all or part of its registrable shares in the contemplated initial secondary offering and registration of any remaining shares pursuant to a shelf registration statement. Such individuals have the right to register their registrable shares on a pro rata basis with Lehman Brothers in the initial secondary offering. In addition, Lehman Brothers and such individuals have piggy-back registration rights with respect to all subsequent primary and secondary offerings of Common Stock. The Corporation has agreed not to sell any additional shares of Common Stock prior to the earlier of such initial secondary offering and the nine-month anniversary of the Conversion, except the issuance of unregistered shares in connection with acquisitions. LEGAL MATTERS The validity of the securities offered hereby, and certain federal income tax matters set forth under "CERTAIN FEDERAL INCOME TAX CONSEQUENCES," will be passed upon for the Partnership by Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania. Morgan, Lewis & Bockius LLP will rely as to certain matters of Delaware law on Richards, Layton & Finger, Wilmington, Delaware. Donald A. Scott, a partner in Morgan, Lewis & Bockius LLP, is a director of Lehman/SDI and of the Corporation. 141 EXPERTS The consolidated balance sheets of the Partnership at December 31, 1996 and 1995 and the consolidated statements of income, changes in partners' capital and cash flows for the three years in the period ended December 31, 1996 included and incorporated by reference in this prospectus and the balance sheet of SunSource, Inc. at December 31, 1996 included in this prospectus, have been included and incorporated herein in reliance on the reports of Coopers & Lybrand L.L.P., independent accountants, given on the authority of that firm as experts in accounting and auditing. AVAILABLE INFORMATION The Partnership is (and following the Conversion, the Corporation will be) subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files (and will file) reports and other information with the Securities and Exchange Commission (the "SEC"). Such reports and other information may be inspected and copied at the public reference facilities maintained by the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's Regional Offices at Seven World Trade Center, New York, New York 10048, and at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of this material should also be available on-line through EDGAR and may be obtained at the prescribed rates from the Public Reference Section of the SEC at its principal office in Washington, D.C. The SEC also maintains a Web site (http://www.sec.gov) that contains reports and other information regarding SunSource. Such reports and other information concerning the Partnership can also be inspected at the office of the New York Stock Exchange, 20 Broad Street, New York, New York 10005, the exchange on which the limited partnership interests are listed (and on which application has been made to list the Trust Preferred Securities and Common Stock). The Partnership, the General Partner, Lehman/SDI, Lehman Brothers Capital Partners I, L.P., LB I Group Inc., Lehman Ltd. I Inc., Norman V. Edmonson, Donald T. Marshall and John P. McDonnell have filed with the SEC a Schedule 13E-3 under the Exchange Act. The Corporation and the Trust have filed with the SEC a Registration Statement on Form S-4 under the Securities Act of 1933, as amended (the "Securities Act") with respect to the securities offered hereby. This Proxy Statement/Prospectus, which constitutes part of the Registration Statement, omits certain of the information contained in the Schedule 13E-3 and in the Registration Statement and the exhibits and schedules thereto on file with the SEC pursuant to the Exchange Act and the Securities Act and the rules and regulations of the SEC thereunder. Statements contained in this Proxy Statement/Prospectus as to the contents of any contract or other document are necessarily summaries of such documents, and, although all material elements of such documents or descriptions are set forth in this Proxy Statement/Prospectus, such statements are not necessarily complete and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement or Schedule 13E-3, each such statement being qualified in all respects by such reference. No separate financial statements of the Trust have been included or incorporated by reference herein. The Corporation and the Trust do not consider that such financial statements would be material to holders of Trust Preferred Securities because (i) all of the voting securities of the Trust will be owned, directly or indirectly, by the Corporation, a reporting company under the Exchange Act, (ii) the Trust has no independent operations but exists for the sole purpose of issuing securities representing undivided beneficial interests in its assets and investing the proceeds thereof in Junior Subordinated Debentures issued by the Corporation, and (iii) the obligations of the Trust under the Trust Preferred Securities are fully and unconditionally guaranteed by the Corporation as described herein. See "RELATIONSHIP AMONG THE TRUST PREFERRED SECURITIES, THE JUNIOR SUBORDINATED DEBENTURES AND THE PREFERRED SECURITIES GUARANTEE." INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE This Proxy Statement/Prospectus incorporates documents by reference which are not presented herewith. These documents (without exhibits, unless such exhibits are specifically incorporated by reference herein) are available without charge to each person to whom a copy of this Proxy Statement/Prospectus is delivered, upon written or oral request addressed to SunSource L.P., 2600 One Logan Square, Philadelphia, Pennsylvania 19103, Attention: Joseph M. Corvino, Secretary, telephone number (215) 665-3650. In order to ensure timely delivery of the documents, any request should be made by August __, 1997. 142 The following document of the Partnership has been filed with the SEC and is incorporated herein by reference: (a) Annual Report on Form 10-K for the fiscal year ended December 31, 1996. (b) Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1997. All documents filed by the Partnership pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Proxy Statement/Prospectus and prior to the date of the Special Meeting shall be deemed to be incorporated by reference in this Proxy Statement/Prospectus and to be a part hereof from the date of filing of such documents. Any statement contained in a document incorporated by reference herein shall be deemed to be modified or superseded for purposes hereof to the extent that a statement contained herein (or in any other subsequently filed document which also is incorporated herein) modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed to constitute a part hereof except as so modified or superseded. 143 INDEX TO FINANCIAL STATEMENTS SunSource L.P. and Subsidiaries
Unaudited Pro Forma Consolidated Financial Statements Page ---- Introduction to Unaudited Pro Forma Consolidated Financial Statements F-2 Unaudited Pro Forma Consolidated Balance Sheet as of March 31, 1997...................................................... F-3 Unaudited Pro Forma Consolidated Statements of Income: for the three months ended March 31, 1997........................... F-4 for the twelve months ended December 31, 1996....................... F-5 Unaudited Pro Forma Consolidated Statements of Cash Flows: for the three months ended March 31, 1997........................... F-6 for the twelve months ended December 31, 1996....................... F-7 Notes to Unaudited Pro Forma Consolidated Financial Statements....... F-8:14 Unaudited Historical Consolidated Financial Statements Unaudited Consolidated Balance Sheets as of March 31, 1997, March 31, 1996 and December 31, 1996 (Audited)...................... F-15 Unaudited Consolidated Statements of Income for the three months ended March 31, 1997 and 1996....................................... F-16 Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 1997 and 1996....................................... F-17 Unaudited Consolidated Statements of Changes in Partners' Capital for the years ended December 31, 1995 and 1996 and for the three months ended March 31, 1997................................... F-18 Notes to Unaudited Consolidated Financial Statements................. F-19:20 Audited Historical Consolidated Financial Statements SunSource Inc. Report of Independent Accountants.................................... F-21 Balance Sheet as of December 31, 1996................................ F-22 Notes to Balance Sheet............................................... F-23:24 SunSource L.P. Report of Independent Accountants.................................... F-25 Consolidated Balance Sheets as of December 31, 1996 and 1995......... F-26 Consolidated Statements of Income for the Years ended December 31, 1996, 1995 and 1994.................................... F-27 Consolidated Statements of Cash Flows for the Years ended December 31, 1996, 1995 and 1994.................................... F-28 Consolidated Statements of Changes in Partners' Capital for the Years ended December 31, 1996, 1995 and 1994................ F-29 Notes to Consolidated Financial Statements........................... F-30:50
F - 1 SunSource L.P. and Subsidiaries Pro Forma Consolidated Financial Statements The following unaudited pro forma consolidated financial statements of SunSource L.P. ("the Partnership"), give effect to the proposed conversion of the Partnership to corporate form. In connection with the conversion, the Partnership intends to recapitalize its existing credit facilities. The Conversion and recapitalization ("the transaction") will be effected through the formation of a new corporation, SunSource Inc. The pro forma balance sheet assumes the transaction occurred on March 31, 1997. The pro forma consolidated statements of income and cash flows for the three months ended March 31, 1997 and twelve months ended December 31, 1996, assume the transaction occurred at the beginning of the periods presented. The pro forma consolidated financial statements are not necessarily indicative of operating results, cash flows, or financial position that would have been achieved had the transaction occurred on the dates indicated and should not be construed as representative of future operating results, cash flows, or financial position. The pro forma consolidated financial statements and accompanying notes should be read in conjunction with the historical financial statements and related notes thereto included in this Proxy Statement/Prospectus. F - 2 SUNSOURCE L.P. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data)
March 31, 1997 -------------------------------------------------------- Pro Forma Adjustments ---------------------- ASSETS Partnership Amount Note* Corporation ------ ----------- ------------ ------ ----------- Current assets: Cash and cash equivalents $ 3,096 $ (3,096) 2A $ -- Accounts and notes receivable, net 91,710 -- 91,710 Inventories 101,379 101,379 Deferred income taxes -- 10,520 2B 10,520 Other current assets 4,819 -- 4,819 ----------- ---------- ----------- Total current assets 201,004 7,424 208,428 Property and equipment, net 21,442 -- 21,442 Goodwill 42,661 14,797 2C 57,458 Deferred income taxes 5,331 (2,804) 2B 2,527 Other assets 5,601 379 2D 5,980 ----------- ----------- ----------- Total assets $ 276,039 $ 19,796 $ 295,835 =========== =========== =========== LIABILITIES AND EQUITY Current liabilities: Accounts and notes payable, trade $ 56,462 $ -- $ 56,462 Current portion of senior notes 6,395 (6,395) 2E -- Distributions payable 1,944 (925) 2F 1,019 Bank revolving credit 20,000 (20,000) 2E Accrued expenses: Interest on senior notes 1,892 (1,892) 2E -- Management fee due the general partner 821 (821) 2G -- Other accrued expenses 22,666 -- 22,666 ----------- ----------- ----------- Total current liabilities 110,180 (30,033) 80,147 Senior notes 57,539 2,461 2E 60,000 Bank revolving credit -- 45,415 2E 45,415 Other liabilities 13,205 (979) 2H 12,226 ----------- ----------- ----------- Total liabilities 180,924 16,864 197,788 ----------- ----------- ----------- Guaranteed preferred beneficial interests in the Corporation's junior subordinated debentures -- 105,446 2H 105,446 ----------- ----------- ----------- Partners' Capital: General partner 969 (969) 2H -- Limited partners: Class A interests 67,642 (67,642) 2H -- Class B interests 29,868 (29,868) 2H -- Class B interests held in treasury (1,514) 1,514 2H -- Cumulative foreign currency translation adjustment (1,850) 1,850 2H -- ----------- ----------- ----------- Total partners' capital 95,115 (95,115) -- ----------- ----------- ----------- Stockholders' deficit: Preferred stock, $.01 par, 1,000,000 shares authorized, none issued -- -- 2H -- Common stock $0.01 par, 20,000,000 shares authorized; 6,418,936 shares issued and outstanding -- 64 2H 64 Accumulated deficit -- (5,613) 2H (5,613) Cumulative foreign currency translation adjustment -- (1,850) 2H (1,850) ----------- ----------- ------------ Total stockholders' deficit -- (7,399) (7,399) ----------- ----------- ------------ Total liabilities, partners' capital, preferred beneficial interests and stockholders' deficit $ 276,039 $ 19,796 $ 295,835 =========== =========== =========== Pro forma net book value per common share: $ (1.16) ============
* SEE ACCOMPANYING NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS F - 3 SUNSOURCE L.P. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands, except for per unit data)
Three Months Ended March 31, 1997 -------------------------------------------------------------- Pro Forma * Partnership Adjustments Note Corporation ----------- ----------- ----------- Net sales $ 169,016 $ -- $ 169,016 Cost of sales 101,416 -- 101,416 ------------ ----------- ----------- Gross profit 67,600 -- 67,600 ------------ ----------- ----------- Operating expenses: Selling, general and administrative expenses 58,690 -- 58,690 Management fee to general partner 821 (821) 3A -- Depreciation 1,018 -- 1,018 Amortization 455 93 3B 548 ------------ ----------- ----------- Total operating expenses 60,984 (728) 60,256 ------------ ----------- ----------- Transaction costs 350 (350) 3C -- ------------ ----------- ----------- Income from operations 6,266 1,078 7,344 Interest expense, net 1,831 318 3D 2,149 Other income, net 113 46 3E 159 Distribution on guaranteed preferred beneficial interests in Corporation's junior subordinated debentures -- (3,057) 3F (3,057) ----------- ----------- ------------ Income before income taxes 4,548 (2,251) 2,297 Provision (benefit) for income taxes (28) 1,201 3G 1,173 ------------ ----------- ----------- Net income $ 4,576 $ (3,452) 1,124 ============ =========== Estimated after-tax transaction costs of the conversion (3,422) Net loss after transaction costs of the conversion $ (2,298) ============ Net income allocated to partners: General partner $ 46 ----------- Class A limited partners $ 3,052 ----------- Class B limited partners $ 1,478 ----------- Earnings per limited partnership interest: - Class A interest $ 0.27 - Class B interest $ 0.07 Weighted average number of outstanding limited partnership interests: - Class A interests 11,099,573 - Class B interests 21,675,746 Net income per common share $ .18 Net loss per common share after transaction costs of the conversion $ (.36) Weighted average number of outstanding common shares 6,418,936 Ratio of earnings to fixed charges 1.13 1.41
*SEE ACCOMPANYING NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS F - 4 SUNSOURCE L.P. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands, except for per unit data)
Twelve Months Ended December 31, 1996 -------------------------------------------------------------- Pro Forma * Partnership Adjustments Note Corporation ----------- ----------- ----------- Net sales $ 649,254 $ -- $ 649,254 Cost of sales 386,251 -- 386,251 ------------ ----------- ----------- Gross profit 263,003 -- 263,003 ------------ ----------- ----------- Operating expenses: Selling, general and administrative expenses 221,574 -- 221,574 Management fee to general partner 3,330 (3,330) 3A -- Depreciation 3,623 -- 3,623 Amortization 1,924 370 3B 2,294 ------------ ----------- ----------- Total operating expenses 230,451 (2,960) 227,491 ------------ ----------- ----------- Restructuring charges 5,950 5,950 Transaction costs 2,150 (2,150) 3C -- ------------ ----------- ----------- Income from operations 24,452 5,110 29,562 Interest expense, net 6,875 1,272 3D 8,147 Other income, net 550 195 3E 745 Distribution on guaranteed preferred beneficial interests in Corporation's junior subordinated debentures -- (12,232) 3F (12,232) ----------- ----------- ------------ Income before income taxes 18,127 (8,199) 9,928 Provision (benefit) for income taxes (1,140) 5,841 3G 4,701 ----------- ----------- ----------- Net income $ 19,267 $ (14,040) 5,227 ============ =========== Estimated after-tax transaction costs of the conversion (3,422) Net income after transaction costs of the conversion $ 1,805 =========== Net income allocated to partners: General partner $ 193 ----------- Class A limited partners $ 12,210 ----------- Class B limited partners $ 6,864 ----------- Earnings per limited partnership interest: - Class A interest $ 1.10 - Class B interest $ 0.32 Weighted average number of outstanding limited partnership interests: - Class A interests 11,099,573 - Class B interests 21,675,746 Net income per common share $ .81 Net income per common share after transaction costs of the conversion $ .28 Weighted average number of outstanding common shares 6,418,936 Ratio of earnings to fixed charges .91 1.45
*SEE ACCOMPANYING NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS F - 5 SUNSOURCE L.P. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
Three Months Ended March 31,1997 ----------------------------------------------- Pro Forma Adjustments ----------------- Partnership Amount Note* Corporation ----------- --------- ------ ----------- Cash flows from operating activities: Net income $ 4,576 $ (3,452) $ 1,124 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,473 93 1,566 Decrease in cash value of life insurance 129 -- 129 Transaction costs 350 (350) -- Provision for deferred compensation 817 -- 817 Deferred income tax benefit (324) (3) (327) Changes in current operating items: Increase in accounts and notes receivable (13,132) -- (13,132) Decrease in inventories 1,017 -- 1,017 Increase in other current assets (147) -- (147) Increase in accounts payable 6,188 -- 6,188 Increase in accrued interest 1,419 -- 1,419 Decrease in accrued restructuring charges and transaction costs (719) 345 (374) Decrease in other accrued liabilities (3,276) 39 (3,237) Other items, net (452) -- (452) ---------- --------- ---------- Net cash used for operating activities (2,081) (3,328) 4A (5,409) ---------- --------- ---------- Cash flows from investing activities: Proceeds from sale of property and equipment 252 -- 252 Capital expenditures (1,016) -- (1,016) Other, net (52) -- (52) ---------- --------- ---------- Net cash used for investing activities (816) -- (816) ---------- --------- ---------- Cash flows from financing activities: Cash distributions to partners (3,690) 3,690 4B -- Borrowings under the bank credit agreement, net 9,000 (3,458) 4C 5,542 Repayments under other credit facilities, net (953) -- (953) Principal payments under capitalized lease obligations (30) -- (30) ---------- --------- ---------- Net cash provided by financing activities 4,327 232 4,559 ---------- --------- --------- Net increase (decrease) in cash and cash equivalents 1,430 (3,096) (1,666) Cash and cash equivalents at beginning of period 1,666 -- 1,666 ---------- --------- --------- Cash and cash equivalents at end of period $ 3,096 $ (3,096) $ -- ========== ========= =========
*SEE ACCOMPANYING NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS F - 6 SUNSOURCE L.P. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
Twelve Months Ended December 31,1996 ------------------------------------------------ Pro Forma Adjustments --------------- Partnership Amount Note* Corporation ----------- ------ ----- ----------- Cash flows from operating activities: Net income $ 19,267 $(14,040) $ 5,227 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,547 370 5,917 Increase in cash value of life insurance (157) -- (157) Restructuring charges 5,950 -- 5,950 Transaction costs 2,150 (2,150) -- Provision for deferred compensation 1,071 -- 1,071 Deferred income tax benefit (2,163) (979) (3,142) Changes in current operating items: Increase in accounts and notes receivable (2,465) -- (2,465) Increase in inventories (7,572) -- (7,572) Decrease (increase) in other current assets 70 -- 70 Increase in accounts payable 6,062 -- 6,062 Decrease in accrued interest (47) -- (47) Decrease in accrued restructuring charges and transaction costs (1,899) 1,732 (167) Decrease in other accrued liabilities (2,769) 134 (2,635) Other items, net 253 -- 253 ---------- --------- --------- Net cash provided by operating activities 23,298 (14,933) 4A 8,365 ---------- --------- --------- Cash flows from investing activities: Proceeds from sale of property and equipment 62 -- 62 Payment for purchase of assets (683) -- (683) Capital expenditures (4,341) -- (4,341) Investment in life insurance policies (1,400) -- (1,400) Other, net (39) -- (39) ---------- --------- ---------- Net cash used for investing activities (6,401) -- (6,401) ---------- --------- ---------- Cash flows from financing activities: Cash distributions to partners (25,641) 25,641 4B -- Repayment of senior notes (6,395) -- (6,395) Borrowings (repayments) under the bank credit agreement, net 11,000 (12,374) 4C (1,374) Repayments under other credit facilities, net (83) -- (83) Principal payments under capitalized lease obligations (12) -- (12) ---------- --------- ---------- Net cash used for financing activities (21,131) 13,267 (7,864) ---------- --------- ---------- Net decrease in cash and cash equivalents (4,234) (1,666) (5,900) Cash and cash equivalents at beginning of period 5,900 -- 5,900 ---------- --------- --------- Cash and cash equivalents at end of period $ 1,666 $ (1,666) $ -- ========== ========= =========
*SEE ACCOMPANYING NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS F - 7 SUNSOURCE L.P. AND SUBSIDIARY NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollars in thousands) 1. Basis of Presentation: The accompanying financial statements include pro forma consolidated accounts of SunSource L.P. (the "Partnership") and its subsidiary partnership, SDI Operating Partners, L.P. (the "Operating Partnership"). On December 11, 1996, the Partnership announced the terms of a plan to convert from its current limited partnership structure to a taxable C corporation, which must be approved by a majority of the holders of the Class A and Class B interests unaffiliated with SDI Partners I, L.P., the General Partner ("GP"), and Lehman Brothers Holdings, Inc. ("Lehman Holdings") and affiliates, each voting separately as a class. In connection with the conversion of the partnership to corporate form, the Partnership intends to refinance its outstanding long-term debt (see Note 2E). The conversion and refinancing ("the transaction") will be effected through the formation of a new corporation, SunSource Inc. ("the Corporation"). The exchange of the General Partner's 1% interest in the Operating Partnership (the "Minority Interest") for common stock of the Corporation is subject to purchase accounting in accordance with Accounting Principles Bulletin ("APB") No. 16, "Business Combinations". Accordingly, the excess of fair value of the consideration received for the Minority Interest over the book value of the General Partner's 1% interest in the Operating Partnership, which amounts to $14,797, has been recorded as goodwill by the Corporation (see Note 2C). Ownership of the General Partner's 1% Minority Interest and 1% General Partnership Interest in the Partnership will be exchanged for 1,000,000 shares of the Corporation's Common Stock (the "GP Exchange") whose recipients will be Lehman/SDI, the general partner of the General Partner and current and former officers of the Partnership, the limited partners of the General Partner (reference "Exchange of Partnership Interests", below). The Corporation will also record incremental deferred tax assets in accordance with Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for Income Taxes", relating to the temporary differences for certain assets and liabilities at the date of conversion to corporate form (see note 2B below). The incremental deferred tax benefits have not been included in the pro forma income statement due to their non-recurring nature. The Corporation will also record a tax provision on its taxable income for federal and state corporate income taxes. Transaction costs of the conversion are estimated to be $4,500, of which $2,500 has been recorded by the Partnership through March 31, 1997 and $2,000 will be recorded by the Partnership in the consolidated statement of income prior to the conversion. Concurrent with the conversion, the Corporation will incur a make-whole penalty, estimated at $4,000, related to the repayment of its existing senior notes with borrowing under new credit facilities. See Notes 2, 3 and 4 for a description of the other adjustments made on the pro forma financial statements to effect the transaction. The accompanying pro forma consolidated financial statements and related notes have not been audited. In management's opinion, all adjustments considered necessary for the fair presentation of financial position and income for the unaudited pro forma financial statements presented have been reflected. Results for periods for which pro forma statements are provided are not necessarily indicative of those to be expected in future periods, should the proposed transaction be approved. Certain information in note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles has been condensed or omitted for the unaudited pro forma statements, although management believes that disclosures are adequate to make the information presented not misleading. F - 8 SUNSOURCE L.P. AND SUBSIDIARY NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollars in thousands) 1. Basis of Presentation, continued: Exchange of Partnership Interests: The general and limited partners of the GP and the Limited Partners of the Partnership will exchange with the Corporation their respective partnership interests for Guaranteed Preferred Beneficial Interests in the Corporation's Junior Subordinated Debentures ("Trust Preferred Securities"), Common Stock and cash, which have been recorded in the accompanying pro forma Balance Sheet as of March 31, 1997 as follows: 11,099,573 Class A Limited Partnership Interests in the Partnership will be exchanged for 4,217,838 Trust Preferred Securities with a liquidation value of $25.00 per interest. Accordingly, the Preferred Securities have been recorded at estimated fair value of $105,446. Class A Limited Partnership Interests will also receive $14,429 in cash, which has been recorded as a charge to the Class A Partners' Capital Account. Class B Limited Partnership Interests in the Partnership and the general and limited partnership interests in the GP will be exchanged for 6,418,936 shares of Common Stock of the Corporation. This exchange has been recorded at the historical amounts of the Class B Limited Partnership Interests and the General Partnership Interest in the Partnership and at estimated fair value with respect to the Minority Interest (see note 2C). The following table illustrates the proposed exchange of Partnership Interests for Common Stock:
Partnership Conversion to Common Stock Corporation ----------------- --------------------------------------- --------------- Class B Class B General Common Interests % Holders % Partner Stock % ---------- ---- --------- ---- ---------- --------- ---- Public Investors 11,633,603 53.7% 2,908,401 53.7% 46,200 (c) 2,954,601 46.0% Lehman/SDI and Affiliates 5,896,678 27.2% 1,474,169 27.2% 538,000 (d) 2,012,169 31.4% Executive Officers and Directors 4,145,465 19.1% 1,036,366 19.1% 415,800 (e) 1,452,166 22.6% ---------- ------ ---------- ------ --------- --------- ----- Total 21,675,746 100.0% 5,418,936 100.0% 1,000,000 6,418,936 100.0% ========== ====== ========== ====== ========= ========= ====== (a) (b)
(a) Net of 523,400 Class B interests held in the Partnership's treasury. (b) Represents exchange of each Class B interest for .25 shares of the Corporation's Common Stock. (c) Represents limited partnership ownership of 4.62% in the GP exchanged by former officers of the Partnership. (d) Represents general partnership ownership of 53.8% in the GP exchanged by Lehman/SDI, Inc. (e) Represents limited partnership ownership of 41.58% in the GP exchanged by current officers of the Partnership. F - 9 SUNSOURCE L.P. AND SUBSIDIARY NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollars in thousands) 1. Basis of Presentation, continued: Conversion of Partners' Capital: The following table illustrates the pro forma conversion of Partners' Capital of the Partnership to Stockholder's Deficit of the Corporation as of March 31, 1997:
Pro forma Partnership Adjustments Corporation ----------- ----------- ----------- Accumulated deficit Minority interest of the GP in the Operating Partnership $ -- (a) $ 979 $ 979 Partner's Capital: General Partner 969 -- 969 Class A Interests 67,642 (119,875) (b) (52,233) Class B Interests 29,868 (64) (c) 29,804 Conversion (charges) credits: Goodwill-minority interest -- 14,797 (d) 14,797 Transaction costs -- (2,000) (e) (2,000) Make-whole penalty -- (4,000) (e) (4,000) Deferred financing fees -- (131) (e) (131) Deferred tax assets -- 7,716 (f) 7,716 Class B Interests held in treasury (1,514) -- (1,514) ---------- Total accumulated deficit -- -- (5,613) Common stock -- 64 (c) 64 Cumulative foreign currency translation adjustment (1,850) -- (1,850) ---------- ---------- ---------- Total Partners' capital /Stockholders' deficit $ 95,115 $(102,514) $ (7,399) ========== ========== ==========
(a) Minority interest of $979 is classified by the Partnership as Other liabilities in the Consolidated Balance Sheet. (b) Valuation of the Class A exchange package (see Note 2H). (c) Charge for par value of common stock - classified as a separate component of stockholder's deficit (see Note 2H). (d) Goodwill related to exchange of GP minority interest (see Note 2C). (e) Estimated charges to be recognized at the time of conversion, including unpaid transaction costs of $2,000, make-whole penalty on the prepayment of Senior Notes of $4,000, and write-off of deferred financing fees on existing debt of $131 (see Note 2D). (f) Credit for recognition of incremental deferred tax assets upon conversion (see Note 2B). F - 10 SUNSOURCE L.P. AND SUBSIDIARY NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollars in thousands) 2. Pro Forma Adjustments to Balance Sheet Dated March 31, 1997: A. Reclassify cash to new bank revolver; all excess cash is assumed to reduce current borrowing. B. Upon conversion, under SFAS No. 109, the Corporation will be entitled to record additional deferred tax assets not previously available to the Partnership due to its partnership status. These deferred tax assets represent temporary differences between book and tax bases of assets and liabilities which are expected to reverse before December 31, 1997. The net incremental deferred tax asset of $7,716 (current and long-term portion) is recorded on a pro forma basis as a credit to corporate accumulated deficit upon conversion. Additionally, the Corporation may receive a step-up in the tax basis of assets and liabilities acquired from the Partnership and, as a result, would record additional deferred tax assets at the conversion date. Should the transaction be approved, the actual amount of the aggregate additional deferred tax assets will be calculated based on temporary differences existing at the date of conversion to a C corporation. The following is the composition of the pro forma adjustment to historical deferred tax assets at March 31, 1997:
Pro Forma Current deferred tax assets: Partnership Adjustment Corporation ----------- ---------- ----------- Inventory $ -- $ 4,386 $ 4,386 Self-insurance liability -- 1,813 1,813 Accounts receivable -- 837 837 Vacation pay liability -- 772 772 Deferred compensation -- 997 997 Other current liabilities -- 798 798 Other current items, net -- 917 917 ---------- ----------- --------- Net current deferred tax assets $ -- $ 10,520 $ 10,520 ========== =========== ========= Long-term gross deferred tax assets: Deferred compensation $ 3,615 $ (1,088) $ 2,527 Restructuring charges 1,034 (1,034) -- Other items, net 853 (853) -- ----------- ----------- --------- 5,502 (2,975) 2,527 Valuation allowance for long- term deferred tax assets (171) 171 -- ----------- ----------- --------- Net long-term deferred tax assets $ 5,331 $ (2,804) $ 2,527 =========== =========== =========
C. To record the excess of fair value over book value related to the exchange of the GP's Minority Interest for Common Stock of the Corporation, as follows: Fair value of Minority Interest (i) $15,776 Less book value of the GP Minority Interest (ii) 979 ------- Excess over book value recorded as goodwill $14,797 ======= (i) Represents 92.8% of the GP Exchange (the portion allocable to the Minority Interest) valued at $17,000 in the aggregate for 1,000,000 shares of common stock, based on the closing price of the Class B interest on the New York Stock Exchange at December 11, 1996, the date of the announcement of the Corporate Conversion, adjusted for reverse stock split (see Note 1). (ii) As reported on the balance sheet of the Partnership at March 31, 1997. F - 11 SUNSOURCE L.P. AND SUBSIDIARY NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollars in thousands) 2. Pro Forma Adjustments to Balance Sheet Dated March 31, 1997, continued: D. Write-off historical balance of deferred financing fees of $131, which relate to Series A and B Senior Notes, to the Class B capital account. Capitalize estimated deferred financing fees of $510 related to commitment fees on the replacement credit facilities. E. Record the proposed refinancing of existing credit facilities. On March 4, 1997, the Operating Partnership received the last of two financing commitments, which together aggregate $150,000, from lenders. These commitments are available to the Partnership until June 30, 1997. The new financing commitments consist of a $60,000 five-year fixed rate note at 7.66% and a $90,000 five-year bank revolver based on the London Interbank Offered Rate ("LIBOR") plus 1% to 1.5% resulting in an effective interest rate reduction of approximately 1% on a combined basis. Reclassify $20,000 balance of existing revolver debt from current to long-term liabilities and record incremental pro forma debt requirements and related adjustments to the existing credit facilities which are summarized in the following table as of March 31, 1997, based on the proposed refinancing commitments (see related note disclosures):
Reclassification of available cash (Note 2A) $ (3,096) Accrued interest on senior notes 1,892 Make-whole penalty on pre-payment of existing senior notes (Note 1) 4,000 New bank credit facility commitment fees (Note 2D) 510 Transaction costs (unpaid) (Note 1) 2,000 Distribution to Class A interests ($1.30 per interest)(Note 2H) 14,429 Payment of management fee due (Note 2G) 821 Payment of distributions payable (Note 2F) 925 -------- Net incremental pro-forma debt requirement 21,481 Less pro-forma adjustments for new $60,000 7.66% senior note: Elimination of current portion of existing senior notes 6,395 Increase in long-term portion of senior notes (2,461) -------- Required pro-forma increase in bank revolving credit $ 25,415 ========
F. Record payment of $925 of the historical liability of $1,994 for distributions payable as of March 31, 1997, leaving a balance of $1,019 which represents the initial distribution payable to the new Trust Preferred Securities. G. Record payment of the management fee payable to GP at March 31, 1997. H. Issue 4,217,838 shares of Trust Preferred Securities with a liquidation value of $25.00, in exchange for all 11,099,573 Class A limited partnership interests, which amounts to .38 Preferred Securities for each Class A interest. The Trust Preferred Securities have been credited at estimated fair value of $105,446 for the newly issued shares. Holders of Class A interests will also receive $1.30 of cash per A interest, or $14,429 in the aggregate. The initial accumulated deficit of the Corporation will be charged for the difference between the fair value of the total Class A exchange package, aggregating $119,875, and the stated value of the Class A capital account at March 31, 1997 of $67,642, or $52,233 (see Note 1). The Preferred Securities have equity characteristics but creditors' rights, thereby being classified between liabilities and stockholders' equity on the balance sheet. F - 12 SUNSOURCE L.P. AND SUBSIDIARY NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollars in thousands) 2. Pro Forma Adjustments to Balance Sheet Dated March 31, 1997, continued: Authorize 1,000,000 shares of preferred stock, none being issued. Authorize 20,000,000 shares and issue 6,418,936 shares of common stock with a par value of $0.01. Holders of existing Class B limited partnership interests will be issued 5,418,936 shares of Common Stock upon conversion, in exchange for all 21,675,746 outstanding Class B interests, which amounts to .25 common shares for each Class B interest. The general partner, Lehman/SDI, Inc., and limited partners, current and former executive officers of the Partnership, in the GP, will receive 1,000,000 shares of the Corporation's Common Stock in exchange for their respective partnership interests. Common stock of the new corporation will be credited $64 from the Class B capital account for the newly issued shares. The Cumulative Foreign Currency Translation Adjustment of $1,850 will be classified as a separate component of accumulated deficit of the Corporation. See Note 1 for a description of additional charges and credits which make up the initial accumulated deficit of the Corporation at March 31, 1997 in the amount of $6,413. 3. Pro Forma Adjustments to Consolidated Statements of Income: A. To eliminate, in consolidation, the management fee paid to the GP. B. To record the amortization of the goodwill associated with the exchange of the Minority Interest using the Partnership's current estimated useful life of goodwill. C. To eliminate transaction costs related entirely to the proposed conversion which have been recorded by the Partnership through each period presented. D. Adjust interest expense, net, to reflect incremental debt incurred directly related to the conversion (the Class A exchange distribution of $1.30 per A interest, or $14,429, and the transaction costs of $4,500). The interest rate utilized to calculate the pro forma interest expense adjustment was based on current average LIBOR rates of 5.54% (1997 year-to-date through June 27) plus 125 basis points or 6.79%, which reflects pricing under the new revolving credit facility on the incremental debt. Each 1/8 percent (.00125) change in interest rate represents a $24 increase or decrease in the pro forma interest expense adjustment. E. Eliminate minority interest expense as a result of the conversion. F. Record an expense for the monthly distributions on Trust Preferred Securities; the annual yield is 11.6% on the liquidation amount of the securities of $105,446, resulting in an approximate charge of $1,019 per month. G. Adjust the provision or benefit for income taxes to reflect current and deferred income tax expense or benefit that would be expected under corporate form. Under partnership form, the Partnership books a current provision for state partnership and foreign taxes only and a deferred tax benefit relating only to those temporary differences between book and tax assets that are expected to reverse after December 31, 1997, when the Partnership would begin paying federal corporate income taxes. For pro forma purposes, the assumed combined federal and state corporate tax rate utilized is 39.875%, applied to taxable income. F - 13 SUNSOURCE L.P. AND SUBSIDIARY NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollars in thousands) 3. Pro Forma Adjustments to Consolidated Statements of Income, continued: The following table summarizes the pro forma adjustment required to record a provision for income taxes on a corporate basis: Pro forma adjustments Three Months to provision (benefit) Ended Year Ended for income taxes 3/31/97 12/31/96 ---------------------- ------------ ----------- Eliminate state partnership taxes $ (126) $ (418) Record current tax provision based on taxable income 1,330 7,238 Adjustment to deferred portion (3) (979) ----------- ----------- Total pro forma adjustments $ 1,201 $ 5,841 =========== =========== 4. Pro Forma Adjustments to Consolidated Statements of Cash Flows: A. Record changes in cash flows from operations to reflect the elimination, in consolidation, of the management fee, elimination of the transaction costs related to the Conversion and inclusion of the payment of the distribution on trust preferred securities, the goodwill amortization associated with the GP exchange, and the change in tax status. B. Eliminate cash distributions to partners which would not be paid under corporate form. C. Adjust cash flows from financing activities to reflect a reduction in required borrowings based on the net cash flow impact of all cash flow related pro forma adjustments. F - 14 Report of Independent Accountants To the Board of Directors SunSource Inc. We have audited the accompanying balance sheet of SunSource Inc. as of December 31, 1996. This financial statement is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall balance sheet presentation. We believe that our audit of the balance sheet provides a reasonable basis for our opinion. In our opinion, the balance sheet referred to above presents fairly, in all material aspects, the financial position of SunSource Inc. as of December 31, 1996 in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. 2400 Eleven Penn Center Philadelphia, Pennsylvania May 1, 1997 F - 15 SUNSOURCE INC. BALANCE SHEET as of DECEMBER 31, 1996 ASSETS ------ Receivable from SunSource L.P. $1,000 ====== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Liabilities: Commitments and Contingencies (Note 4) STOCKHOLDERS' EQUITY - --------------------- Preferred stock, $.01 par value, 1,000,000 shares authorized, no shares issued or outstanding $ -- Common stock, $.01 par value, 20,000,000 shares authorized, 1,000 shares issued and outstanding 10 Paid-In-Capital 990 ------- Total liabilities and stockholders' equity $ 1,000 ======= See accompanying notes to balance sheet F - 16 SUNSOURCE INC. NOTES TO BALANCE SHEET as of DECEMBER 31, 1996 1. Organization and Operation: SunSource Inc. (the "Corporation") is a Delaware corporation which was formed in December 1996 to accomplish the conversion of SunSource L.P. (the "Partnership") to corporate form (the "Conversion"). On December 11, 1996, the Partnership announced the terms of a plan to convert from its current limited partnership structure to a taxable C corporation. The outstanding shares of the Corporation are presently owned by the Partnership. In the Conversion, the Partnership and a subsidiary of the Partnership will merge with and into the Corporation (the "Merger"). In the Merger, the Class A limited partnership interests in the Partnership will be exchanged for Trust Preferred Securities of SunSource Capital Trust, a newly formed Delaware statutory business trust (the "Trust"), affiliated with the Corporation, and the Class B limited partnership interests in the Partnership will be exchanged for common stock of the Corporation. As a result of the Merger, the interests of the general and limited partners of the General Partner in the Partnership and the Operating Partnership will be indirectly exchanged for common stock of the Corporation. As a result of the Conversion, subsidiaries of the Corporation will own all of the partnership interests in the Operating Partnership and the General Partner. The Corporation will own, through its wholly-owned subsidiaries, 100% of the equity in the business and operations owned by the Operating Partnership, which will remain in partnership form after the Conversion. The employees of the Operating Partnership will continue as employees after the Conversion. The Corporation's only asset at December 31, 1996 is a receivable from the Partnership (see Note 3). The Corporation has not conducted any operations and all activities related to the Conversion and the Merger have been conducted by the Partnership and its General Partner. 2. Summary of Significant Accounting Policies: Income Taxes: Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes", requires the Corporation to recognize deferred tax assets and liabilities for expected future tax consequences of events that have been recognized in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the temporary differences are expected to reverse. The Corporation currently has no deferred taxes. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported periods. Actual results could differ from those estimates; however, management does not believe these differences would have a material effect on operating results. F - 17 SUNSOURCE INC. NOTES TO BALANCE SHEET as of DECEMBER 31, 1996 3. Related Party Transactions: On December 30, 1996, the Corporation recorded a receivable from the Partnership for the capital contribution to establish the Corporation. On March 11, 1997 the Partnership paid $1,000 to the Corporation to satisfy the receivable due from the Partnership. 4. Commitments and Contingencies: On January 16, 1997, a holder of Class B Interests in the Partnership, filed a purported class action which alleged that the terms of the Conversion unfairly transfer substantial equity to the General Partner of the Partnership to the detriment of the B Interests and constitute a breach of fiduciary duty. A second complaint containing substantially identical allegations was filed by a limited partner on February 11, 1997. The cases have been consolidated and an amended complaint was filed on April 16, 1997 which added claims for breach of contract and breach of a covenant of good faith and fair dealing. The Corporation was named as a defendant in these actions. In the opinion of management, the ultimate resolution of this matter will not have a material effect on the consolidated financial position, operations or cash flows of the Partnership or the Corporation. F - 18 Report of Independent Accountants The Board of Directors Lehman/SDI, Inc. We have audited the accompanying consolidated balance sheets of SunSource L.P. and subsidiary as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in partners' capital and cash flows for each of the three years in the period ended December 31, 1996. We have also audited the financial statement schedules listed in Item 14 (a)(2) of this Form 10-K. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion the financial statements referred to above present fairly, in all material respects, the consolidated financial position of SunSource L.P. and subsidiary as of December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. 2400 Eleven Penn Center Philadelphia, Pennsylvania January 29, 1997, except for Note 9 as to which the date is March 21, 1997 and Note 19 as to which the date is March 4, 1997 F - 19 SUNSOURCE L.P. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (dollars in thousands)
December 31, December 31, ASSETS 1996 1995 ------------ ----------- ------------ Current assets: Cash and cash equivalents $ 1,666 $ 5,900 Accounts and notes receivable, net of allowance for doubtful accounts of $2,208 and $1,827, respectively 78,578 75,824 Inventories 102,396 96,022 Other current assets 4,672 4,742 ----------- ----------- Total current assets 187,312 182,488 Property and equipment, net 21,409 20,181 Goodwill (net of accumulated amortization of $12,879 and $11,739, respectively) 43,036 44,250 Other intangibles (net of accumulated amortization of $14,372 and $13,724, respectively) 667 1,312 Deferred income taxes 5,007 2,844 Cash surrender value of life insurance policies 4,566 3,009 Other assets 558 507 ----------- ----------- Total assets $ 262,555 $ 254,591 =========== =========== LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Accounts payable $ 48,557 $ 42,437 Notes payable 2,670 2,753 Current portion of senior notes 6,395 6,395 Current portion of capitalized lease obligations 107 -- Distributions payable to partners 1,857 7,819 Accrued expenses: Salaries and wages 5,696 5,022 Management fee due the general partner 3,330 3,330 Income and other taxes 2,695 3,398 Other accrued expenses 15,224 15,493 ----------- ----------- Total current liabilities 86,531 86,647 Senior notes 57,539 63,934 Bank revolving credit 11,000 -- Capitalized lease obligations 504 -- Deferred compensation 8,644 7,829 Other liabilities 3,718 1,238 ----------- ----------- Total liabilities 167,936 159,648 ----------- ----------- Commitments and contingencies Partners' capital: General partner 960 963 Limited partners: Class A interests 67,642 67,642 Class B interests 29,040 29,252 Class B interests held in treasury (1,514) (1,514) Cumulative foreign currency translation adjustment (1,509) (1,400) ------------ ------------ Total partners' capital 94,619 94,943 ------------ ----------- Total liabilities and partners' capital $ 262,555 $ 254,591 ============ ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F - 20 SUNSOURCE L.P. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands, except for partnership interest amounts)
1996 1995 1994 ---------- ---------- ------- Net sales $ 649,254 $ 628,935 $ 735,861 Cost of sales 386,251 375,425 451,785 ---------- ---------- --------- Gross profit 263,003 253,510 284,076 ---------- ---------- --------- Operating expenses: Selling, general and administrative expenses 221,574 213,221 235,845 Management fee to general partner 3,330 3,330 3,330 Depreciation 3,623 3,661 4,502 Amortization 1,924 1,996 2,640 ---------- ---------- --------- Total operating expenses 230,451 222,208 246,317 ---------- ---------- --------- Restructuring charges 5,950 -- -- Transaction costs 2,150 -- -- ---------- ---------- --------- Income from operations 24,452 31,302 37,759 Interest income 69 412 66 Interest expense 6,944 7,332 9,956 Other income (expense), net 550 256 (1,748) Gain on sale of division (note 5) -- 20,644 3,523 ---------- ---------- --------- Income before provision for income taxes 18,127 45,282 29,644 Provision (benefit) for income taxes (1,140) 537 100 ---------- ---------- --------- Income before extraordinary loss 19,267 44,745 29,544 Extraordinary loss from early extinguishment of debt (note 4) -- (629) -- ---------- ---------- --------- Net income $ 19,267 $ 44,116 $ 29,544 ========== ========== ========= Net income allocated to partners: General partner $ 193 $ 441 $ 295 --------- --------- --------- Class A limited partners $ 12,210 $ 12,210 $ 12,210 --------- --------- --------- Class B limited partners $ 6,864 $ 31,465 $ 17,039 --------- --------- --------- Earnings per Limited partnership interest: Income before extraordinary loss - Class A interest $ 1.10 $ 1.10 $ 1.10 - Class B interest $ 0.32 $ 1.48 $ 0.79 Extraordinary loss - Class A interest -- -- -- - Class B interest -- $ (0.03) -- Net income - Class A interest $ 1.10 $ 1.10 $ 1.10 - Class B interest $ 0.32 $ 1.45 $ 0.79 Weighted average number of outstanding limited partnership interests: - Class A interests 11,099,573 11,099,573 11,099,573 - Class B interests 21,675,746 21,675,746 21,675,746
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F - 21 SUNSOURCE L.P. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
1996 1995 1994 --------- --------- ------- Cash flows from operating activities: Net income $ 19,267 $ 44,116 $ 29,544 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization: - Existing divisions 5,547 5,319 5,392 - Divested divisions -- 338 1,750 Decrease in cash value of life insurance (157) 58 -- Gain on sale of divisions -- (20,644) (3,523) Extraordinary loss -- 629 -- Restructuring charges 5,950 -- -- Transaction costs 2,150 -- -- Provision for deferred compensation 1,070 2,340 3,187 Deferred income tax benefit (2,163) (700) (734) Changes in current operating items: Increase in accounts and notes receivable (2,465) (3,666) (11,783) Increase in inventories (7,572) (8,209) (9,436) Decrease (increase) in other current assets 70 857 347 Increase in accounts payable 6,062 2,531 1,865 Decrease in accrued interest (47) (141) (42) Decrease in accrued restructuring charges and transaction costs (1,899) -- -- Increase (decrease) in other accrued liabilities (2,769) (6,062) 4,836 Other items, net 253 284 (3,699) ---------- ---------- ---------- Net cash provided by operating activities 23,298 17,050 17,704 ---------- ---------- --------- Cash flows from investing activities: Proceeds from sale of divisions -- 44,873 26,561 Proceeds from sale of property and equipment 62 757 724 Payment for purchase of assets (683) (7,385) -- Capital expenditures (4,341) (4,299) (4,263) Investment in life insurance policies (1,400) (3,067) -- Other, net (39) (93) 228 ---------- ---------- --------- Net cash provided by (used for) investing activities (6,401) 30,786 23,250 ---------- ---------- --------- Cash flows from financing activities: Cash distributions to partners (25,641) (27,218) (20,357) Repayment of senior notes (6,395) (18,971) (5,700) Borrowings (repayments) under the bank credit agreement, net 11,000 -- (10,000) Prepayment penalties and related costs -- (629) -- Borrowings (repayments) under other credit facilities, net (83) 44 (702) Principal payments under capitalized lease obligations (12) (65) (619) ---------- ---------- ---------- Net cash used for financing activities (21,131) (46,839) (37,378) ---------- ---------- ---------- Net (decrease) increase in cash and cash equivalents (4,234) 997 3,576 Cash and cash equivalents at beginning of period 5,900 4,903 1,327 ---------- ---------- --------- Cash and cash equivalents at end of period $ 1,666 $ 5,900 $ 4,903 ========== ========== =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F - 22 SUNSOURCE L.P. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL FOR THE YEARS ENDED (dollars in thousands) PARTNERS' CAPITAL
Cumulative Foreign Class A Class B Class B Translation General Limited Limited Treasury Adjustment TOTAL ------- ------- ------- -------- ---------- ----- Balance, December 31, 1993 $ 729 $ 67,642 $ 6,025 $ (1,514) $ (694) $ 72,188 Net income 295 12,210 17,039 -- -- 29,544 Cash distributions paid and/or declared to partners (233) (12,210) (10,764) -- -- (23,207) Change in cumulative foreign translation adjustment -- -- -- -- (644) (644) --------- --------- --------- --------- --------- --------- Balance, December 31, 1994 791 67,642 12,300 (1,514) (1,338) 77,881 Net income 441 12,210 31,465 -- -- 44,116 Cash distributions paid and/or declared to partners (269) (12,210) (14,513) -- -- (26,992) Change in cumulative foreign translation adjustment -- -- -- -- (62) (62) --------- --------- --------- --------- --------- --------- Balance, December 31, 1995 963 67,642 29,252 (1,514) (1,400) 94,943 Net income 193 12,210 6,864 -- -- 19,267 Cash distributions paid and/or declared to partners (196) (12,210) (7,076) -- -- (19,482) Change in cumulative foreign translation adjustment -- -- -- -- (109) (109) --------- --------- --------- --------- --------- --------- Balance, December 31, 1996 $ 960 $ 67,642 $ 29,040 $ (1,514) $ (1,509) $ 94,619 ========= ========= ========= ========= ========== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F - 23 SUNSOURCE L.P. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) 1. Basis of Presentation: The accompanying financial statements include the consolidated accounts of SunSource L.P. (the "Partnership") and its subsidiary partnership, SDI Operating Partners, L.P. (the "Operating Partnership"). All significant inter-company balances and transactions have been eliminated. Nature of Operations: The Partnership is one of the largest wholesale distributors of industrial products and related services in the United States. The Partnership's three segments are: (1) industrial products and services, primarily maintenance and fluid power products and inventory management services sold to industrial customers for machine and plant maintenance and for manufacturing of original equipment; (2) retail merchandising products and services, primarily fasteners and related products sold to retail hardware stores; and (3) retail glass products and services sold to construction and retail markets. Based on net sales of existing divisions for the year ended December 31, 1996, the Industrial Services Segment provides approximately 70% of the Partnership's sales through its Sun Technology Services divisions (46% of net sales) and the Sun Inventory Management Company ("SIMCO") divisions (24% of net sales). The Hardware Merchandising and Glass Merchandising segments provide approximately 16% and 14%, respectively, of the Partnership's net sales. Although its sales are primarily industrially-based, the Partnership has over 180,000 customers, the largest of which accounted for less than 5% of net sales for the year ended December 31, 1996. The Partnership's products and services are sold throughout all 50 states as well as in Canada and Mexico. Foreign sales account for less than 5% of total revenues. The average single sale during the year ended December 31, 1996 was less than three hundred dollars. Sales performance is tied closely to the overall performance of the non-defense-goods producing sector of Gross Domestic Product in the United States. Restructuring Charges: On December 11, 1996 (the "commitment date"), the Board of Directors of Lehman/SDI, Inc. ("Lehman/SDI"), the general partner of the Partnership's General Partner, approved the Partnership's plan to restructure its Technology Services divisions and its Glass Merchandising business. The Partnership recorded a provision for these charges on the commitment date in the amount of $5,950, of which $4,400 related to Technology Services and $1,550 to Glass Merchandising. The following disclosures are made in accordance with the provisions of Emerging Issues Task Force ("EITF") Abstract No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity." F - 24 SUNSOURCE L.P. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (dollars in thousands) 1. Basis of Presentation, continued: The following is a summary of the balance sheet classification of the accrued restructuring charges in the accompanying balance sheet at December 31, 1996: Termination Other Balance Sheet Classification Benefits Exit Costs Total - ---------------------------- -------- ---------- ----- Current - other accrued expenses $ 829 $896 $1,725 Long-term - other liabilities $2,014 $573 $2,587 Restructuring Charges - Technology Services Divisions The restructuring charges for the Technology Services Divisions include termination benefits of $2,955 covering 175 employees, including sales (40), warehouse (27), purchasing (16), branch operations (56) and accounting (36). Other exit costs for Technology Services include legal and consulting costs of $525 to develop severance agreements and to conduct employee meetings and lease termination and related costs of $920 to close ten leased warehouse and office facilities. The Board's approval on the commitment date provided the Partnership's management with the authority to involuntarily terminate employees. The Partnership has established the levels of benefits that the terminated employees would receive and informed the employees of their termination benefits prior to December 31, 1996. The following table summarizes the restructuring costs charged, the balance sheet classification, and payments or adjustments between the commitment date and December 31, 1996: Termination Other Balance Sheet Classification Benefits Exit Costs Total - ---------------------------- -------- ---------- ----- Opening Balance at December 11, 1996: Current - other accrued expense $ 941 $872 $1,813 Long-term - other liabilities $2,014 $573 $2,587 Payments during period: Current - other accrued expense * $ (112) $(55) $ (167) Ending Balance at December 31, 1996: Current - other accrued expense $ 829 $817 $1,646 Long-term - other liabilities $2,014 $573 $2,587 * termination benefits paid to 9 employees; other exit costs for legal and consulting charges paid. F - 25 SUNSOURCE L.P. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (dollars in thousands) 1. Basis of Presentation, continued: Restructuring Charges - Glass Merchandising Divisions The restructuring charges for the Glass Merchandising division represent primarily costs to withdraw from certain geographic markets as part of the Partnership's restructuring plan. The largest component of these charges is the write-off of unamortized goodwill from purchase business combinations in the amount of $1,321, which is not recoverable. The remaining charges represent the excess of undepreciated fixed assets over their fair value, in the amount of $150, with fair value determined using the estimated prices of similar assets. The Partnership applied the provisions of SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", in connection with the determination of these charges. The decision to withdraw from these markets was primarily strategic based on an overall review of the operations of the Glass Merchandising segment; in the Partnership's view, any recognition of asset impairment prior to the commitment date would not have been appropriate under SFAS No. 121., since the specific locations to be closed were decided upon only in the process of finalizing the restructuring plan. These amounts are included as restructuring charges since they were recognized at the commitment date as part of the overall plan of restructuring. Also included are $79 of lease termination costs recognized in accordance with EITF No. 94-3 as exit costs. The following table summarizes other exit costs charged, the balance sheet classification, and payments or adjustments between the commitment date and December 31, 1996: Balance Sheet Classification - ------------------------------------ Total ----- Opening Balance at December 11, 1996 - ------------------------------------ Unamortized Goodwill $ 1,321 Excess of undepreciated fixed assets $ 150 Current - other accrued expenses $ 79 Charges during period: - ---------------------- Unamortized Goodwill $(1,321) Excess of undepreciated fixed assets $ (150) Ending Balance at December 31, 1996: - ------------------------------------ Current - other accrued expenses $ 79 Transaction Costs: On December 11, 1996, the Partnership announced the terms of a plan to convert from its current limited partnership structure to a taxable C corporation, which must be approved by a majority of the holders of the Class A and Class B interests unaffiliated with SDI Partners I, L.P., the General Partner, each voting separately as a class. In connection with the proposed conversion, the Partnership has incurred certain costs related to the transaction which are included as a separate component of income from operations, due to the infrequent nature of the conversion transaction. F - 26 SUNSOURCE L.P. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (dollars in thousands) 2. Summary of Significant Accounting Policies: Cash Equivalents: Cash equivalents consist of commercial paper, U.S. Treasury obligations and other liquid securities purchased with initial maturities less than 90 days and are stated at cost which approximates market value. Inventories: Inventories, which consist of products purchased for resale, are valued at the lower of cost or market, cost being determined principally on the first-in, first-out method. Property and Equipment: Property and equipment, including assets acquired under capital leases, is carried at cost and includes expenditures for new facilities and major renewals. Maintenance and repairs are charged to expense as incurred. When assets are sold, or otherwise disposed of, the cost and related accumulated depreciation are removed from their respective accounts, and the resulting gain or loss is reflected in current operations. Depreciation: For financial accounting purposes, depreciation, including that related to plant and equipment acquired under capital leases, is computed on the straight-line method over the estimated useful lives of the assets, generally three to twenty-five years, or, if shorter, over the terms of the related leases. Goodwill and Other Intangible Assets: Goodwill related to the excess of acquisition cost over the fair value of net assets acquired is amortized on a straight-line basis over forty years. Other intangible assets arising principally from acquisitions by the Operating Partnership are amortized on a straight-line basis over periods ranging from three to ten years. F - 27 SUNSOURCE L.P. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (dollars in thousands) 2. Summary of Significant Accounting Policies, continued: Income Taxes: As a partnership, taxable income and losses are included on the federal tax returns of the partners; accordingly, the Partnership incurs no liability for U.S. federal income taxes. Accordingly, no current provision for federal income taxes is reflected in the accompanying consolidated financial statements. However, the Partnership does incur certain state and local income taxes on its domestic operations and foreign income taxes on its Canadian and Mexican operations. Therefore, a current provision for state, local and foreign income taxes is reflected in the accompanying consolidated financial statements. The Revenue Act of 1987 provides that certain "existing publicly traded partnerships", such as the Partnership, generally will not be treated as corporations for federal income tax purposes until after December 31, 1997, provided that such partnerships do not add any substantial new line of business before the effective date. Statement of Financial Accounting Standards ("SFAS") No. 109 requires the Partnership to recognize deferred tax assets and liabilities for expected future tax consequences of events that have been recognized in the consolidated financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the temporary differences are expected to reverse. The Partnership's deferred taxes are determined from temporary differences expected to reverse after December 31, 1997, or the date of conversion, if earlier, when the Partnership will be taxed as a corporation. Therefore, a deferred provision or benefit for state and federal income taxes is reflected in the accompanying consolidated statements of income. Retirement Benefits: Certain employees are covered under profit-sharing retirement plans ("defined contribution plans") for which contributions are determined on an annual basis in accordance with the requirements of each plan. Defined benefit plan contributions covering certain employees are funded, at a minimum, in accordance with the requirements of the Employee Retirement Income Security Act of 1974, as amended. In accordance with collective bargaining agreements, annual contributions to multi-employer pension plans are made. These contributions, which are based on fixed contributions per month for each hour worked, are charged to income as incurred. Certain employees are covered under post-retirement benefit plans for which benefits are determined in accordance with the requirements of each plan. The Partnership has elected to amortize the accumulated post-retirement benefit liability (transition obligation) resulting in delayed recognition. The impact of the adoption on the Partnership's financial position and results of operations is immaterial. F - 28 SUNSOURCE L.P. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (dollars in thousands) 2. Summary of Significant Accounting Policies, continued: Fair Value of Financial Instruments: Cash, accounts receivable, short-term borrowings, accounts payable, accrued liabilities and bank revolving credit are reflected in the consolidated financial statements at fair value because of the short-term maturity or revolving nature of these instruments. The fair values of the Partnership's debt instruments are disclosed in Note 9. Translation of Foreign Currencies: The translation of applicable foreign-currency-based financial statements into U.S. dollars is performed for balance sheet accounts using exchange rates in effect at the balance sheet date and for revenue and expense accounts using an average exchange rate during the period. The changes in the cumulative foreign translation adjustment for each period relate to translation adjustments in their entirety. Exchange adjustments resulting from foreign currency transactions are recognized in net income and were immaterial for the three years ending December 31, 1996. Use of Estimates in the Preparation of Financial Statements: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F - 29 SUNSOURCE L.P. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (dollars in thousands) 3. Ownership Structure: The General Partner of the Partnership and the Operating Partnership is SDI Partners I, L.P. (the "GP"), a Delaware limited partnership whose sole general partner is Lehman/SDI, formerly known as Shearson/SDI, Inc., an indirect, wholly-owned subsidiary of Lehman Brothers Holdings, Inc. ("Lehman Holdings"), formerly known as Shearson Lehman Brothers Holdings, Inc. The Partnership's Class A and Class B limited partnership interests outstanding, as of December 31, 1996, are held as follows: Class A Class B Interests Interests --------- --------- Public Investors 11,019,850 ( 99.3%) 11,633,603 ( 53.7%) Lehman Holdings And Affiliates -- 5,896,678 ( 27.2%) Executive Officers and Directors (a) 79,723 ( 0.7%) 4,145,465 ( 19.1%) ------------------- ------------------- Total 11,099,573 (100.0%) 21,675,746 (100.0%)(b) =================== ====================== (a) Executive officers of the Partnership and the Operating Partnership and Directors of Lehman/SDI, including beneficial ownership. (b) Net of 523,400 Class B interests held in the Partnership's treasury as of December 31, 1996. Except as expressly limited by the partnership agreement, the GP has complete and exclusive discretion in the management and control of the affairs and business of the Partnership and its subsidiary partnership. The holders of Class A and Class B interests have certain limited voting rights under the partnership agreement generally regarding the removal of the GP and the sale of all or substantially all of the assets of the Partnership or the Operating Partnership or dissolution of the Partnership. Holders of Class A interests are entitled to receive, to the extent cash is available, $1.10 annually (the "priority return") per Class A interest, which is currently paid monthly. On December 19, 1996, the Partnership declared a priority return distribution for the month of January 1997 in the amount of $1,038 or $.091666 per Class A interest payable January 31, 1997, to holders of record December 31, 1996. The Class A capital account as of December 31, 1996 and 1995, was $10.00 per Class A interest. All items of income and loss and cash distributions of the Operating Partnership are allocated 99% to the Partnership and l% to the GP. The GP is allocated l% of the Partnership's share of income or loss and cash distributions, with the remaining 99% allocated to the limited partners. Income for federal income tax purposes is allocated to the holders of Class A interests, until the Class A capital account of each holder is equal to the sum of their initial capital investment ($10.00 per Class A interest), plus any unpaid priority return. For years 1996, 1995, and 1994, federal taxable income per Class A interest amounted to $1.10 per year, all of which represented ordinary income. Any remaining income after the Class A allocation is allocated to the holders of Class B interests. The holders of Class B interests receive an allocable share of loss until the Class B capital account (as defined in the partnership agreement) of each holder is reduced to zero. Thereafter, any unallocated loss is allocated to the holders of Class A interests. F - 30 SUNSOURCE L.P. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (dollars in thousands) 3. Ownership Structure, continued: For 1996, 1995 and 1994, federal taxable income amounted to $.70, $1.6923 and $1.1146 per Class B interest, respectively. In 1996, federal taxable income consisted of ordinary income only. Federal taxable income in 1995 consisted of ordinary income of $.5326 per Class B interest and a combined capital gain of $1.1597 per Class B interest related to the sale of the Dorman Products and Downey Glass divisions (see Note 5, Acquisitions/Divestitures). Federal taxable income in 1994 consisted of ordinary income of $.7069 per Class B interest and a capital gain of $.4077 per Class B interest related to the sale of the Electrical Products Group divisions. The Class B capital account as of December 31, 1996 and 1995, was approximately $2.89 and $2.54 per Class B interest, respectively. Holders of Class B interests are entitled to receive annual cash distributions sufficient to cover their tax liabilities on taxable income allocated to the Class B interests (the "Class B Tax Distribution"). For 1996, the Class B Tax Distribution amounted to $7,663 or $.3465 per Class B interest which was partially paid in the amount of $.02 per Class B interest per month for the period January through April 1996 and $.03 for the period May through December 1996. On March 31, 1997, the Partnership intends to distribute the balance of the tax distribution due of $.0265 per Class B interest to holders of record for the entire year. For 1995, the Class B Tax Distribution amounted to $14,807 or $.6695 per Class B interest which was partially paid in the amount of $.02 per Class B interest per month for the period January through December 1995 and a partial distribution of $.15 paid on April 10, 1995 to holders of record on December 30, 1994, related to the taxable gain on the sale of the Dorman Products division on January 3, 1995. On March 29, 1996, the Partnership distributed the balance of the tax distribution of $.2795 per Class B interest, as follows: approximately $.1745 to holders of record on December 30, 1994 for the balance due on the taxable gain on the sale of Dorman Products; $.00197 per month to holders of record of Class B interests on the first day of the month during January through December 1995 for the balance due on ordinary income; and $.0814 to holders of record on September 29, 1995 related to the taxable gain on the sale of the Downey Glass division (see Note 5, Acquisitions/Divestitures). For 1994, the Class B Tax Distribution amounted to $10,895 or $.492619 per Class B interest which was partially paid in the amount of $.009352 per Class B interest per month for the period January through March 1994 and $.02 per Class B interest per month during the period April through December 1994. The monthly tax distributions were paid to holders of record on the first day of each month during 1994 and aggregated $.208056 per Class B interest for the full year 1994. On March 31, 1995, the Partnership paid the balance of the tax distribution due of $.284563 per Class B interest, as follows: approximately $.01981 per month to holders of record of Class B interests on the first day of the month during January through March 1994, $.00916 per month for April through November 1994, and $.15185 for December 1994 which includes $.14269 related to the capital gain on the sale of the Electrical Products Group divisions. (See Note 5, Acquisitions/Divestitures.) F - 31 SUNSOURCE L.P. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (dollars in thousands) 3. Ownership Structure, continued: On December 19, 1996, the Partnership in anticipation of its conversion to corporate form, suspended payment of the monthly tax-related distributions to Class B interest holders effective January 1, 1997, through March 31, 1997. Due to the delay in completion of the proposed corporate conversion, the Partnership intends to resume payment of monthly advance Class B tax distributions in April 1997 in the amount of $.03 per B Interest. On March 20, 1997, the Partnership declared a B tax distribution in the amount of $.03 per B Interest payable April 30, 1997, to holders of record April 1, 1997. The Partnership intends to pay this monthly rate to Class B holders until the effective date of the conversion since it expects to allocate sufficient Class B taxable income in the shortened tax year from January 1, 1997, through the effective date to require the B tax distribution payment. The balance of the required 1997 Class B tax distribution, if any will be paid on or before March 31, 1998. 4. Extraordinary Loss: In 1995, the Partnership recorded an extraordinary loss of $629 or approximately $.03 per Class B limited partnership interest, due to early extinguishment of a portion of the Operating Partnership's Series A 9.08% and Series B 8.44% Senior Notes (See Note 9, Long-Term Debt). 5. Acquisitions/Divestitures: On April 11, 1996, the Partnership's Industrial Services segment, through its Warren Fluid Power division purchased certain assets of Hydraulic Depot, Inc., of Reno, Nevada, for an aggregate purchase price of $700. Annual sales of Hydraulic Depot, Inc., are approximately $2,500. In November 1995, the Partnership's Hillman Fastener division purchased certain assets of the Retail division of Curtis Industries of Eastlake, Ohio, for an aggregate purchase price of $8,011 and the assumption of certain liabilities. The aggregate purchase price includes goodwill of $3,442. The purchase price and goodwill amounts include post-closing adjustments recorded in 1996. This acquisition has been accounted for as a purchase and, accordingly, the results of operations have been included in the accompanying consolidated financial statements from the date of acquisition. On October 27, 1995, the Operating Partnership sold certain assets of its Downey Glass division for a cash consideration, net of expenses, of approximately $6,237 (subject to certain post-closing adjustments) and the assumption of certain liabilities. The Operating Partnership recorded a gain on the sale in the amount of $4,144 or $.19 per Class B interest included in the 1995 consolidated statement of income. The aggregate assets sold, net of liabilities, in connection with the sale of the Downey Glass division was approximately $2,093. On January 3, 1995, the Operating Partnership sold certain assets of its Dorman Products division for a cash consideration, net of expenses, of approximately $36,600 (subject to certain post-closing adjustments) and the assumption of certain liabilities. The Operating Partnership recorded a gain on the sale in the amount of $16,500 or $.75 per Class B interest included in the 1995 consolidated statement of income. The aggregate assets sold, net of liabilities, in connection with the sale of Dorman Products was approximately $20,100. F - 32 SUNSOURCE L.P. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (dollars in thousands) 5. Acquisitions/Divestitures, continued: On December 5, 1994, the Operating Partnership sold certain assets of its Electrical Products Group divisions for a cash consideration, net of expenses, of approximately $27,800 (subject to certain post-closing adjustments) and the assumption of certain liabilities. The Operating Partnership recorded a gain on the sale in the amount of $3,523 or $.16 per Class B interest included in the 1994 consolidated statement of income. The aggregate assets sold, net of liabilities, in connection with the sale of the Electrical Products Group divisions was approximately $24,300. 6. Related Party Transactions: The GP earns a management fee annually from the Operating Partnership equal to 3% of the aggregate initial Capital Investment of the holders of Class A interests ($110,996). The management fee will be paid only after cumulative outstanding priority returns and additional required cash distributions are paid. In addition, the management fee can be paid only if the Partnership complies with covenants required by the credit agreements (see Note 8, Lines of Credit, and Note 9, Long-Term Debt). Management fees earned but not paid accumulate until paid. Management fees earned in each of years 1996, 1995 and 1994 were $3,330. The management fees for the years 1995 and 1994 were paid in full in March 1996 and 1995, respectively. Management expects to pay in full the 1996 management fee due March 31, 1997. 7. Property and Equipment: Property and equipment consist of the following at December 31, 1996 and 1995: 1996 1995 -------- ------ Land $ 3,289 $ 3,319 Buildings and leasehold improvements 18,642 18,048 Machinery and equipment 18,680 16,290 Furniture and fixtures 10,368 9,208 ------- ------- 50,979 46,865 Less accumulated depreciation 29,570 26,684 ------- ------- $21,409 $20,181 ======= ======= 8. Lines of Credit: On December 22, 1992, the Operating Partnership entered into a $50,000 bank credit agreement with three lenders. This agreement provides borrowings on a revolving credit basis at interest rates based on the London Interbank Offered Rate ("LIBOR") plus 1 and 3/4% and prime. Letters of credit commitments are issued at varying rates. The bank credit agreement's original termination date of December 22, 1995 has been extended to December 31, 1997. The credit facility requires a commitment fee of 1/2 of 1% per year on the average daily unused portion of the commitment and an annual agent's fee. There is no compensating balance requirement under this facility. As of December 31, 1996, the Operating Partnership had $33,152 available under this Credit Agreement. The $16,848 outstanding consists of bank borrowings amounting to $11,000 as reflected on the Partnership's consolidated balance sheet at December 31, 1996, and letter of credit commitments aggregating $5,848. F - 33 SUNSOURCE L.P. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (dollars in thousands) 8. Lines of Credit, continued: The bank credit agreement contains covenants restricting distributions from the Operating Partnership to the Partnership and the GP. Amounts available for distribution in accordance with the bank credit agreement at December 31, 1996, were $4,164. The agreement also requires the maintenance of specific coverage ratios and levels of financial position and restricts incurrence of additional debt and the sale of assets. The bank credit agreement did not permit the Partnership to consummate acquisitions in 1994. Amendments to the agreement were negotiated in March and December of 1994 to ease certain coverage ratios and other financial requirements in 1994 and future years. The December 1994 amendment allows for acquisition spending in 1995 and future years up to $15,000 in any calendar year, absent a default or event of default as defined in the bank credit agreement. In connection with the sale of operating divisions (see note 5, Acquisitions/ Divestitures), the Operating Partnership was required to reduce permanently the bank revolver commitment under the bank credit agreement by approximately $13,000. However, the banks waived this permanent reduction and maintained the existing bank credit commitment of $50,000. For 1995 and future years, the lenders have agreed to revise certain covenant tests to exclude the impact of cash distributions to holders of Class B interests related solely to tax gains on divisions sold. The Operating Partnership has another credit facility available in the amount of $500 for letters of credit of which no amount was outstanding at December 31, 1996. The letters of credit commitments are issued at varying rates. This facility, renewable annually, is not subject to compensating balance requirements or unused commitment fees. An indirect, wholly-owned Canadian subsidiary of the Operating Partnership has a $2,500 Canadian dollar line of credit with a local lender for working capital purposes of which $557 USD was outstanding at December 31, 1996. This facility, which is renewable annually, provides bank borrowings at an interest rate of prime plus 1/4 of 1%. There are no compensating balance requirements or commitment fees associated with this facility. Notes payable consisted of the following at December 31, 1996 and 1995: 1996 1995 ---- ---- Short-term bank borrowings drawn on working capital lines of credit $ 557 $ 463 Trade notes payable in accordance with glass inventory financing arrangements 1,193 1,474 Notes payable in accordance with insurance financing arrangements 920 816 ------ ------ $2,670 $2,753 ====== ====== The weighted average interest rate on the outstanding notes payable borrowings at December 31, 1996 and 1995 was 3.05% and 3.01%, respectively. F - 34 SUNSOURCE L.P. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (dollars in thousands) 9. Long-Term Debt: On December 22, 1992, the Operating Partnership issued $95,000 of senior notes with a final maturity of December 1, 2002, through a private placement with several institutional investors. The new senior notes were issued in two series, as follows: $65,000 Series A notes at 9.08% and $30,000 Series B notes at 8.44%. Interest is required to be paid semiannually on June 1 and December 1 on the outstanding principal of the senior notes. The Operating Partnership repaid $4,375, $3,282 and $3,900 in Series A notes, and $2,020, $1,514 and $1,800 in Series B notes in 1996, 1995 and 1994, respectively. Principal repayments required on the senior notes during each of the five years subsequent to December 31, 1996, are as follows: Series A Series B -------- -------- December 1, 1997 $4,375 $2,020 December 1, 1998 5,468 2,522 December 1, 1999 6,562 3,030 December 1, 2000 8,201 3,786 December 1, 2001 9,297 4,290 Optional prepayments, in multiples of $100, may be made at anytime, as a whole or in part, with accrued interest thereon plus a penalty ("make-whole amount"), if any, as defined in the note agreement. If the Partnership sells a significant amount of assets as defined in the note agreement, it must make an offer of prepayment of note principal to the senior noteholders determined on an applicable share basis with the bank credit agreement. The prepayment offer also must include accrued interest thereon plus a make-whole amount, if any, as defined in the note agreement. Related to the sale of operating divisions in December 1994 and January 1995 (see Note 5, Acquisition/Divestitures), the Operating Partnership was required to offer the noteholders prepayment of senior notes in the amount of $14,175. The noteholders accepted the prepayment offer which the Operating Partnership paid on March 14, 1995, including accrued interest thereon of $360 and a prepayment penalty of $629 (see Note 4, Extraordinary Loss). The senior note agreement contains covenants restricting distributions from the Operating Partnership to the Partnership and the GP. Additionally, the note agreement restricts the incurrence of additional debt and the sale of assets and requires the maintenance of specific coverage ratios and levels of financial position. Also, the senior note agreement did not permit the Partnership to consummate acquisitions in 1994. For 1994 and future years, the senior noteholders have agreed to ease certain coverage ratios and other financial requirements. Provisions made during the year for restructuring charges and transaction costs (Note 7) rendered the Operating Partnership unable to comply with certain financial covenants of the bank credit agreement and the senior note agreement. On March 21, 1997, the Partnership received the final consent in which the banks and senior note holders agreed to a modification of these covenants effective for the fiscal quarters ending December 31, 1996 through: (i) June 30, 1997 for the bank credit agreement; and (ii) September 30, 1997 for the senior note agreement. The Partnership is in compliance with the modified covenants. F - 35 SUNSOURCE L.P. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (dollars in thousands) 9. Long-Term Debt, continued: As of December 31, 1996, the fair value estimate of the Partnership's senior notes is approximately $65,000 as determined in accordance with SFAS No. 107. The Partnership discounted the future cash flows of its senior notes based on borrowing rates for debt with similar terms and remaining maturities. The fair value estimate is made at a specific point in time and is subjective in nature and involves uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimate. 10. Leases: Certain warehouse and office space and equipment are leased under capital and operating leases with terms in excess of one year. Future minimum lease payments under noncancellable leases consisted of the following at December 31, 1996: Capital Operating Leases Leases ------ ------ 1997 $151 $ 9,210 1998 151 7,696 1999 151 5,475 2000 151 4,204 2001 134 2,875 Later years -- 10,692 ---- ------- Total minimum lease payments $738 $40,152 ======= Less amounts representing interest (127) ----- Present value of Net Minimum Lease payments (including $107 currently payable) $611 ==== Total rental expenses for all operating leases amounted to $15,239 in 1996, $14,232 in 1995, and $15,153 in 1994. 11. Deferred Compensation Plans: Certain officers and employees earn performance-based compensation, payment of which is deferred until future periods. The Partnership adopted a new deferred compensation plan for its officers effective January 1, 1994. Under this plan, awards are earned based on operating performance over a five-year period which vest and are paid in cash only at the end of the fifth year. At the end of any year within the five-year program, the cumulative award is subject to reduction or forfeiture if performance goals are not achieved. Upon a change in control of the Operating Partnership, participants are entitled to payment of awards earned through completion of the most recent plan year. The amounts charged to income under this plan were $378 in 1996, $1,186 in 1995 and $850 in 1994. The portion of the Operating Partnership's deferred compensation liability attributable to this plan is $2,414 as of December 31, 1996. F - 36 SUNSOURCE L.P. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (dollars in thousands) 11. Deferred Compensation Plans, continued: For a plan adopted in 1987 and amended thereafter, certain employees earned awards which vest at the rate of 20% per year over the 5-year period following the year in which the award was earned. The awards will be paid at age 60, if elected by the employee, or upon death, disability or retirement and accrue investment earnings until paid. Upon a change in control of the Operating Partnership, participants are entitled to payment of all vested and non-vested amounts including accrued interest. The full award is charged to operations in the year earned. The amounts charged to income under the plan were $677, $1,135 and $2,295 in 1996, 1995 and 1994, respectively. During the three years ended December 31, 1996, distributions from the plan amounted to $1,160 in 1996, $1,422 in 1995, and $240 in 1994. The deferred compensation liability attributable to the plan amounted to $5,998 at December 31, 1996 of which $564 is included in other accrued expenses. Under a former plan, effective through December 31, 1986, certain employees and officers earned deferred compensation amounts which unconditionally vested at the rate of 20% per year over the 5-year period following the year in which the award was earned. Participants of the former plan have elected to defer all outstanding awards until retirement. Upon a change in control of the Operating Partnership, participants are entitled to payment of their total account balance including accrued interest. Amounts charged to income and distributions related to the former plan for the three years ended December 31, 1996 were immaterial. The portion of the Operating Partnership's deferred compensation liability attributable to this plan is $796 at December 31, 1996. In December 1995, the Operating Partnership established a Rabbi trust to assist in funding the liabilities of the Deferred Compensation plans described above. This trust purchased insurance policies on the lives of certain participants in the Deferred Compensation plans. The Operating Partnership is the sole beneficiary of these insurance policies. The cash surrender value of these insurance policies was $4,566 at December 31, 1996. The change of control provision in the deferred compensation plans is triggered upon a sale of all of the Operating Partnership's business, a change in the GP including its reorganization or a change, other than due to death or retirement, in a majority of the directors of Lehman/SDI during any one-year period. The Partnership adopted a new deferred compensation plan effective December 1, 1996, to offer key employees an opportunity to defer a portion of their compensation including bonuses and any amounts credited to the accounts of such employees which otherwise may become payable to such employees under other incentive compensation programs maintained by the Partnership. This new plan would allow participants eligible for accelerated payments under the change in control provision of the Partnership's deferred compensation plans an election to continue to defer their balances. F - 37 SUNSOURCE L.P. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (dollars in thousands) 12. Retirement Benefits, continued: Net periodic pension cost (income) in 1996, 1995, and 1994 for non-contributory defined benefit plans consists of:
1996 1995 1994 -------- -------- ------- Service cost during the period $ 879 $ 675 $ 1,102 Interest cost on projected benefit obligations 1,656 1,578 1,534 Actual return on assets (3,432) (3,503) (2,100) Net amortization and deferral 917 1,509 (270) -------- -------- -------- Net periodic pension cost $ 20 $ 259 $ 266 ======== ======== ======= Significant assumptions used in determining pension cost (income) include: 1996 1995 1994 ---- ---- ---- Discount rate 7.25% 8.25% 7.00% Rates of increase in compensation levels 6.50% 6.50% 6.50% Expected long-term rate of return on plan assets 9.75% 8.50% 9.50%
The following table sets forth the defined benefit plans' funded status and amounts recognized in the Partnership's balance sheets at December 31, 1996 and 1995:
December 31, 1996 December 31, 1995 -------------------------- -------------------------------- Assets Accumulated Assets Accumulated Exceed Benefit Exceed Benefit Accumulated Obligations Accumulated Obligations Actuarial present value of Benefit Exceed Benefit Exceed beneficial obligations: Obligations Assets Obligations Assets ----------- ------ ----------- ------ Vested benefit obligation $ 19,019 $ -0- $ 17,304 $ 1,016 ======== ======== ======== ======== Accumulated benefit obligation $ 19,290 $ -0- $ 17,450 $ 1,016 ======== ======== ======== ======== Projected benefit obligation $ 23,716 $ -0- $ 21,467 $ 1,016 Plan assets at fair value 26,519 -0- 24,220 897 -------- -------- -------- -------- Projected benefit obligation less than(in excess of) plan assets 2,803 -0- 2,753 (119) Unrecognized net loss (1,247) -0- (668) 161 Prior service cost not yet recognized in net periodic pension cost (328) - (352) - Unamortized balance of unrecognized net transition asset established at January 1, 1987 (1,648) -0- (1,693) (189) --------- --------- --------- --------- Prepaid pension cost (pension liability) recognized in the balance sheet $ (420) $ -0- $ 40 $ (469) ========= ========= ========= =========
F - 38 SUNSOURCE L.P. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (dollars in thousands) 12. Retirement Benefits, continued: The discount rate assumptions used in determining actuarial present value of benefit obligations at December 31, 1996 and 1995 was 7.25%. Certain employees of the Partnership's Kar Products, J.N. Fauver Co., and its divested Dorman Products and American Electric Co. divisions are covered by these defined benefit retirement plans. Assets of the defined benefit plans consist of insurance contracts and assets managed under a commingled trust agreement. The trust assets are invested primarily in equity and fixed income holdings. Costs charged to operations under all retirement benefit plans are as follows: 1996 1995 1994 ---- ---- ---- Defined contribution plans $1,327 $2,693 $3,498 Multi-employer pension plans 189 374 362 Defined benefit plans 20 259 266 ------ ------ ------ Total $1,536 $3,326 $4,126 ====== ====== ====== Management estimates that its share of unfunded vested liabilities under multi-employer pension plans is not material. For the years ended December 31, 1996, 1995 and 1994, the costs of post-retirement benefits charged to income were $87, $81 and $115, respectively. The 1996 and 1995 charges were determined in accordance with SFAS No. 106 on an accrual basis with costs recognized in prior years upon payment of the post-retirement obligations. The Partnership's unrecognized accumulated post-retirement benefit liability as of December 31, 1996, 1995 and 1994 was $477, $516 and $744, respectively. 13. Income Taxes: Deferred tax assets are comprised of the following at December 31, 1996 and 1995: 1996 1995 ---- ---- Gross deferred tax assets: Deferred compensation $3,292 $2,936 Deferred restructuring changes 1,034 -- Casualty Loss Insurance Program 548 -- Prepayment penalties related to early extinguishment of debt 304 299 ------ ------ 5,178 3,235 Valuation allowance for deferred tax assets (171) (391) ------- ------- Net deferred tax asset $5,007 $2,844 ======= ====== Management has determined, based on the Partnership's history of prior operating earnings and its expectations for the future, that operating income of the Partnership will more likely than not be sufficient to recognize fully these net deferred tax assets. The Partnership has no deferred tax liability at December 31, 1996 or December 31, 1995. As of December 31, 1996, the Partnership's tax basis of its assets and liabilities was greater than its financial statement basis by approximately $77,000. F - 39 SUNSOURCE L.P. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (dollars in thousands) 13. Income Taxes, continued: The provision (benefit) for income taxes consists of the following: 1996 1995 1994 -------- ------- ------ Current income taxes State and local $ 605 $ 608 $ 276 Foreign 418 629 558 ------- ------ ----- 1,023 1,237 834 ------- ------ ----- Deferred income taxes Federal (1,897) (627) (657) State and local (266) (73) (77) -------- ------- ------ (2,163) (700) (734) -------- ------- ------ Total income taxes $(1,140) $ 537 $ 100 ======== ======= ===== 14. Commitments and Contingencies: Performance and bid bonds are issued on the Partnership's behalf during the ordinary course of business through surety bonding companies as required by certain contractors. As of December 31, 1996, the Partnership had outstanding performance and bid bonds aggregating $234. As required by sureties, the Partnership has standby letters of credit outstanding in the amount of $650 as of December 31, 1996. Letters of credit are issued by the Partnership during the ordinary course of business through major domestic banks as required by certain vendor contracts, legal proceedings and acquisition activities. As of December 31, 1996, the Partnership had outstanding letters of credit in the aggregate amount of $1,872 related to these activities. As of December 31, 1996 the Partnership has guaranteed approximately $1,181 worth of lease obligations, principally relating to businesses previously divested. The Partnership is not currently aware of any existing conditions which would cause a financial loss related to these guarantees. Under the Partnership's insurance programs, commercial umbrella coverage is obtained for catastrophic exposure and aggregate losses in excess of normal claims. Beginning in 1991, the Partnership has retained risk on certain expected losses from both asserted and unasserted claims related to workman's compensation, general liability and automobile as well as the health benefits of certain employees. Provisions for losses expected under these programs are recorded based on an analysis of historical insurance claim data and certain actuarial assumptions. As of December 31, 1996, the Partnership has provided insurers letters of credit aggregating $3,326 related to certain insurance programs. On February 27, 1996, a lawsuit was filed against the Operating Partnership by the buyer of its Dorman Products division for alleged misrepresentation of certain facts by the Partnership upon which the buyer allegedly based its offer to purchase Dorman. The complaint seeks damages of approximately $21,000. On January 16, 1997, a holder of B Interests filed a purported class action alleging that the terms of the Conversion unfairly transfer substantial equity to the General Partner to the detriment of the B Interests and constitute a breach of fiduciary duty. A second complaint containing substantially identical allegations was filed by a limited partner on February 11, 1997. In the opinion of management, the ultimate resolution of these matters will not have a material effect on the consolidated financial position, operations or cash flows of the Partnership. F - 40 SUNSOURCE L.P. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (dollars in thousands) 14. Commitments and Contingencies, continued: Certain other legal proceedings are pending which are either in the ordinary course of business or incidental to the Partnership's business. Those legal proceedings incidental to the business of the Partnership are generally not covered by insurance or other indemnity. In the opinion of management, the ultimate resolution of these matters will not have a material effect on the consolidated financial position, operations or cash flows of the Partnership. 15. Statements of Cash Flows: Supplemental disclosures of cash flow information are presented below: 1996 1995 1994 ------- ------- ------- Cash paid during the period for: Interest $ 6,769 $ 7,304 $10,097 ------- ------- ------- Income taxes $ 1,189 $ 1,190 $ 792 ------- ------- ------- Supplemental schedule of non-cash investing activities: Assumed liabilities in connection with the purchase of assets (See Note 5, Acquisitions/Divestitures) $ -- $ 232 $ -- ------- ------- ------- F - 41 SUNSOURCE L.P. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (dollars in thousands) 16. Quarterly Data (unaudited): 1996 First Second Third Fourth ---- ----- ------ ----- ------ Net sales $154,892 $167,500 $167,125 $159,737 Gross profit 62,464 67,104 68,029 65,406 Net income 4,010 8,313 8,286 (1,342)* Net income (loss) per limited partnership interest - Class A $.27 $.28 $.27 $.28 - Class B $.04 $.24 $.24 ($.20) * Includes non-recurring restructuring charges and transaction costs of of $5,950 and $2,150, respectively. 1995 First Second Third Fourth ---- ----- ------ ----- ------ Net sales $154,792 $163,820 $163,214 $147,109 Gross profit 61,441 65,902 66,510 59,657 Income before 19,862** 8,377 7,828 8,678*** extraordinary loss Extraordinary loss (Note 4) (629) -- -- -- Net income 19,233 8,377 7,828 8,678 Net income per limited partnership interest: Income before extraordinary loss: - Class A $.27 $.28 $.27 $.28 - Class B $.77 $.24 $.22 $.25 Extraordinary loss: - Class A $ -- $ -- $ -- $ -- - Class B $(.03) $ -- $ -- $ -- Net Income: - Class A $.27 $.28 $.27 $.28 - Class B $.74 $.24 $.22 $.25 ** Includes gain on sale of Dorman Products division of $16,500. *** Includes gain on sale of Downey Glass division of $4,144. 17. Concentration of Credit Risk: Financial instruments which potentially subject the Partnership to concentration of credit risk consist principally of cash and cash equivalents and trade receivables. The Partnership places its cash and cash equivalents with high credit quality financial institutions. Concentrations of credit risk with respect to sales and trade receivables are limited due to the large number of customers comprising the Partnership's customer base, and their dispersion across many different industries and geographies. The Partnership performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. F - 42 SUNSOURCE L.P. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (dollars in thousands) 18. Segment Information: The following are the segment disclosures required under SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise," with respect to the Partnership's reportable segments as identified in Note 1, "Basis of Presentation" under "Nature of Operations": Year Ended December 31, Industry Segment Data: -------------------------------------- 1996 1995 1994 ================================================================================ Net Sales Industrial Services $ 456,798 $ 424,978 $ 532,719 Hardware Merchandising 103,503 84,720 72,841 Glass Merchandising 90,369 120,650 132,063 Adjustments and eliminations (1,416) (1,413) (1,762) --------- --------- --------- Consolidated Net Sales $ 649,254 $ 628,935 $ 735,861 - -------------------------------------------------------------------------------- Income from Operations Industrial Services $ 33,437 $ 31,834 $ 39,773 Hardware Merchandising 9,074 9,592 7,096 Glass Merchandising 3,037 3,387 5,756 Corporate Expenses (21,096)* (13,511) (14,866) --------- --------- --------- Consolidated Income from Operations $ 24,452 $ 31,302 $ 37,759 - -------------------------------------------------------------------------------- Identifiable Assets Industrial Services $ 166,849 $ 162,681 $ 181,545 Hardware Merchandising 46,331 36,340 24,357 Glass Merchandising 37,734 42,041 53,058 Corporate Assets 13,140 13,635 7,352 Adjustments and Eliminations (1,499) (106) (126) --------- --------- --------- Consolidated Assets $ 262,555 $ 254,591 $ 266,186 - -------------------------------------------------------------------------------- Capital Expenditures Industrial Services $ 2,180 $ 2,315 $ 2,736 Hardware Merchandising 1,985 539 339 Glass Merchandising 640 1,254 1,094 Corporate 159 191 94 --------- --------- --------- Consolidated Capital Expenditures $ 4,964 $ 4,299 $ 4,263 - -------------------------------------------------------------------------------- Depreciation and Amortization Industrial Services $ 3,448 $ 3,339 $ 4,458 Hardware Merchandising 639 401 364 Glass Merchandising 1,355 1,839 2,271 Corporate 105 78 49 --------- --------- --------- Consolidated Total $ 5,547 $ 5,657 $ 7,142 =============================================================================== * Includes non-recurring restructuring charges and transaction costs of $5,950 and $2,150, respectively. F - 43 SUNSOURCE L.P. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (dollars in thousands) 19. Subsequent Event: On March 4, 1997, the Operating Partnership received the last of two financing commitments which together aggregate $150,000 from lenders. These commitments are available to the Partnership until May 30, 1997. The Partnership intends to utilize the debt capacity to fund transaction costs and other payments related to its conversion to corporate form, refinance its current outstanding senior notes of $63,934 as of December 31, 1996, including interest thereon and related make-whole amount of approximately $5,000, and outstanding bank revolver borrowings of $11,000 as of December 31, 1996. Also, the new credit facilities will provide working capital for reinvestment in its businesses and acquisition capital for future growth. The new financing commitments consist of a $60,000 five-year fixed rate note at 7.66% and a $90,000 five-year bank revolver with terms and conditions more favorable than the Partnership's existing senior notes and bank credit lines including less restrictive covenants and an effective interest rate reduction of approximately 1.00%. Consummation of the refinancing with the new credit facilities is contingent upon approval of the Partnership's conversion into corporate form and certain other terms and conditions of closing being satisfied in a manner acceptable to the lenders. F - 44 EXHIBIT A ---------- GLOSSARY OF DEFINED TERMS --------------------------- A Interests Class A limited partnership interests in the Partnership including depositary receipts therefor. Accrual Date First day following the Effective time. Appointment Event When the Trust has failed to make full distributions on the Trust Preferred Securities for 18 consecutive months or an Event of Default under the Declaration. B Interests Class B limited partnership interests in the Partnership including depositary receipts therefor. B Tax Distribution Distribution to B Interests from Cash Available for Distribution equal to the product of (i) 125% of the then applicable maximum Federal income tax rate for individuals and (ii) the taxable income allocable to the B Interests. Business Trust Act Delaware Business Trust Act. Cash Available for Distribution All cash receipts of the Partnership less cash used to pay or establish a reserve for expenses. Code Internal Revenue Code of 1986, as amended. Common Stock Common Stock, par value $.01 per share, of the Corporation. Contribution Agreement Contribution Agreement dated _______, 1997 between the Corporation and Lehman Brothers Holdings Inc. Conversion The conversion of the Partnership to corporate form as generally described in this Proxy Statement/Prospectus and related transactions entered into pursuant to the Conversion Agreement. Conversion Agreement Agreement and Plan of Conversion, dated ______ 1997, among the Partnership, the Corporation, LPSub, Lehman/SDI and the limited partners of the General Partner. Conversion Proposal The proposal to convert the Partnership to corporate form. Corporation SunSource Inc., a Delaware corporation. Creditor Person to whom the Trust owes any debts, obligations, costs, expenses and taxes. Declaration Declaration of trust of the Trust. Depositary receipts Depositary receipts for A Interests or B Interests. Delaware Trustee The Bank of New York (Delaware), an affiliate of the Indenture Trustee. DGCL Delaware General Corporation Law. Direct Action A proceeding by a holder of Trust Preferred Securities to enforce payment of principal or interest on the Junior Subordinated Debentures. A - 1 Direct Participants Securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations that are participants in DTC. Distributions Payments with respect to the Trust Preferred Securities. DTC The Depository Trust Company Effective Time The date on which the Conversion will become effective. The specific date will be determined by the General Partner and will be publicly announced no later than the date of the Special Meeting. Event of Default Event of Default with respect to the Trust Securities. Exchange Act Securities and Exchange Act of 1934, as amended. Guarantee Payments Payments on distributions guaranteed by the Corporation pursuant to the Preferred Securities Guarantee. General Partner SDI Partners I, L.P., a Delaware limited partnership. Indenture Indenture dated as of ______________, 1997 between the Corporation and Bank of New York, as Trustee governing the Junior Subordinated Debentures. Indenture Event of Default Event of default under the Indenture with respect to the Junior Subordinated Debentures. Indenture Trustee The Bank of New York. Indirect Participants Securities brokers and dealers, banks and trust companies that clear through or maintain a custodial relationship with a Direct Participant of DTC, either directly or indirectly. Interests Limited partnership interests in the Partnership. Interest Payment Date The last day of each calendar month of each year. Investment Company Event The Regular Trustees shall have received a legal opinion that the Trust may be considered an investment company under the Investment Company Act of 1940, as amended. IRS Internal Revenue Service Junior Subordinated Debentures Junior Subordinated Debentures of the Corporation. Lehman Brothers Lehman/SDI and any of its affiliates. Lehman/SDI Lehman/SDI, Inc., a Delaware corporation, general partner of the General Partner. limited partners Holders of Interests, including holders that are admitted to the Partnership as limited partners, and holders who are merely assignees of the Interests. Liquidation Distribution Distribution on dissolution or liquidation of the Trust. LPSub LPSub Inc., a wholly owned subsidiary of the Partnership. Management Fee Management fee payable by the Operating Partnership to the General Partner of $3,330,000 annually. A - 2 Merger Merger of the Partnership and LPSub with and into the Corporation pursuant to the Conversion Agreement. NYSE New York Stock Exchange. Operating Partnership SDI Operating Partners, L.P., a Delaware limited partnership. Operating Partnership Agreement Amended and Restated Agreement of Limited Partnership of the Operating Partnership. Pari passu Equal in priority. Partners Both the holder of the general partnership interest in the Partnership and holders of A Interests and B Interests. Partnership SunSource L.P., a Delaware limited partnership. Partnership Agreement Amended and Restated Agreement of Limited Partnership of the Partnership. Preferred Securities Guarantee Guarantee by the Corporation on a subordinated basis of the payment of distributions on the Trust Preferred Securities and payments on liquidation of the Trust and redemption of Trust Preferred Securities. Preferred Share Fraction One one-hundredth of a Preferred Share, carrying voting and dividend rights that are intended to produce the equivalent of one share of Common Stock. Preferred Shares Series A Junior Participating Preferred Shares, par value $0.01 per share, of the Corporation. Priority Return Distribution to A Interests from Cash Available for Distribution annually of $1.10 simple cumulative return. Pro Rata Basis Pro rata to each holder of Trust Securities according to the aggregate liquidation amount of the Trust Securities held by the relevant holder in relation to the aggregate liquidation amount of all Trust Securities outstanding. Property Account Account maintained by the Property Trustee to hold all payments in respect of the Junior Subordinated Debentures for the benefit of the holders of the Trust Preferred Securities. Property Trustee The Bank of New York. Record Date Close of business on August 4, 1997, for the determination of limited partners entitled to vote at the Special Meeting. Redemption Price $25 plus accrued and unpaid distributions on the Trust Preferred Securities to the date of redemption. Regular Trustees Three individual trustees of the Trust. Rights Rights to purchase Preferred Shares and, in certain cases, Common Stock of the Corporation, as described in the Rights Agreement. Rights Agreement Rights Agreement dated ___________, 1997 between the Corporation and Registrar and Transfer Company, as Rights Agent. SEC Securities and Exchange Commission. A - 3 Securities Act Securities Act of 1933, as amended. Smith Barney Smith Barney, Inc., financial adviser to the Special Committee. Special Committee Elected by the Board of Directors of Lehman/SDI to consider and advise the entire Board concerning the fairness to the limited partners of the terms of the Conversion related to the exchange of general and limited partnership interests in the Partnership. The members of the Special Committee are O. Gordon Brewer, Jr. and Ernest L. Ransome, III. Special Event A Tax Event or Investment Company Event. Special Meeting The Special Meeting of the limited partners of SunSource L.P., to be held at 3000 One Logan Square, Philadelphia, Pennsylvania on September 18, 1997 at 10:00 a.m., local time. At the Special Meeting, the limited partners will vote upon the proposed Conversion. Special Regular Trustee Trustee to be elected by holders of Trust Preferred Securities if distributions are in arrears for 18 consecutive months or there is an Event of Default. SunSource The Partnership, prior to the Conversion, and the Corporation, after the Conversion, including in each case their respective subsidiaries. SunSub A SunSub A Inc., a wholly owned subsidiary of the Corporation. SunSub B SunSub B Inc., a wholly owned subsidiary of the Corporation. Tax Event The Regular Trustees shall have received a tax opinion to the effect that the payment of interest to the Trust may be taxable to the Trust or interest payable by the Corporation on the Junior Subordinated Debentures may not be deductible by the Corporation for federal income tax. Trust SunSource Capital Trust, a Delaware statutory business trust. Trust Indenture Act Trust Indenture Act of 1939, as amended. Trust Common Securities Trust Common Securities, representing common undivided beneficial interests in the assets of the Trust. Trust Preferred Securities 11.6% Trust Preferred Securities, representing preferred undivided beneficial interests in the assets of the Trust. Trust Preferred Securities Certificate representing interests in Trust Global Certificate Preferred Securities registered in the name of DTC or its nominee. Trust Securities Trust Preferred Securities and Trust Common Securities. A - 4 EXHIBIT B AGREEMENT AND PLAN OF CONVERSION AGREEMENT AND PLAN OF CONVERSION, dated as of July __, 1997, by and among SunSource Inc., a Delaware corporation (the "Corporation"); SunSource L.P., a Delaware limited partnership (the "Partnership"); LPSub Inc., a Delaware corporation ("LPSub"); Lehman/SDI, Inc. a Delaware corporation ("Lehman/SDI"); and the limited partners of SDI Partners I, L.P. ("GP Limited Partners"). B A C K G R O U N D The Partnership is a master limited partnership whose general partner is SDI Partners I, L.P. ("the General Partner") and whose Class A and Class B limited partnership interests ("A Interests" and "B Interests") are publicly held. Lehman/SDI is the general partner of the General Partner. The parties desire to convert the Partnership to corporate form (the "Conversion") and to that end have newly formed the Corporation and LPSub, a wholly owned subsidiary of the Partnership. The Partnership owns the limited partnership interest in SDI Operating Partners, L.P. (the "Operating The Corporation has also newly formed SunSource Capital Trust, a Delaware statutory business trust (the "Trust"). The Corporation will contribute Junior Subordinated Debentures to the Trust in exchange for 11.6% Trust Preferred Securities, representing preferred undivided beneficial interests in the assets of the Trust (the "Trust Preferred Securities") and cash in exchange for Trust Common Securities, representing common undivided beneficial interests in the assets of the Trust (the "Trust Common Securities"). The parties desire to accomplish the Conversion through (i) the contribution by the Partnership of the limited partnership interest in the Operating Partnership to LPSub in exchange for shares of Class A Common Stock of LPSub; (ii) the contribution by Lehman/SDI of its general partnership interest in the General Partner to LPSub in exchange for shares of Class B Common Stock of LPSub; (iii) the contribution by the GP Limited Partners of their limited partnership interests in the General Partner to the Corporation in exchange for shares of Common Stock of the Corporation; and (iv) the merger provided for herein (the "Merger") by which the Partnership and LPSub will be merged into the Corporation and the A Interests will receive Trust Preferred Securities of the Trust and cash and the B Interests and Lehman/SDI will receive Common Stock of the Corporation. NOW, THEREFORE, in consideration of the mutual representations, warranties, covenants, agreements and conditions contained herein, and in order to set forth the terms and conditions of the Conversion and the mode of carrying the same into effect, the parties hereto, intending to be legally bound, hereby agree as follows: ARTICLE I THE CONVERSION SECTION 1.1 The Contributions. Immediately prior to the Effective Time ( as hereinafter defined) (i) the Partnership shall contribute the limited partnership interest in the Operating Partnership to LPSub in exchange for 1,000 shares of Class A Common Stock of LPSub; (ii) Lehman/SDI shall contribute its general partnership interest in the General Partner to LPSub in exchange for 1,000 shares of Class B Common Stock of LPSub; (iii) the GP Limited Partners shall contribute their limited partnership interests in the General Partner to the Corporation in exchange for an aggregate of 468,000 shares of Common Stock of the Corporation, provided that 75,000 of such shares shall be held in escrow until the second anniversary of the Effective Time and shall only be distributed to the GP Limited Partners if the Corporation is then current on distributions on the Trust Preferred Securities; and (iv) the Corporation shall B-1 contribute the limited partnership interests in the General Partner to a newly formed wholly owned subsidiary. SECTION 1.2 The Merger. Subject to the terms and conditions of this Agreement, at the Effective Time, the Partnership and LPSub shall be merged with and into the Corporation (such parties to the Merger being sometimes hereinafter collectively referred to as the "Constituent Entities") pursuant to the Agreement of Merger attached hereto as Annex 1 (the "Merger Agreement") and the separate existence of the Partnership and LPSub shall cease. The Corporation shall be the surviving entity in the Merger (sometimes hereinafter referred to as the "Surviving Entity") and shall continue to be governed by the laws of the State of Delaware, and all rights, privileges, immunities and franchises of the Constituent Entities shall vest in the Surviving Entity and continue unaffected by the Merger. SECTION 1.3 Terms and Conditions of The Merger. The manner of converting the securities of the Constituent Entities shall be as set forth in Section 5 of the Merger Agreement. SECTION 1.4 Timing; Approvals (a) Limited Partner Approval. The Partnership shall submit the proposal to convert to corporate form (the "Conversion Proposal") to its limited partners for approval and adoption at a meeting to be held as soon as practicable. In connection with such meeting, the Partnership shall take such reasonable steps as shall be necessary for the prompt preparation and filing by the Partnership of a proxy statement (the "Proxy Statement") under the Securities Exchange Act of 1934 (the "Exchange Act") and by the Corporation of a registration statement (the "Registration Statement") and prospectus (the "Prospectus") under the Securities Act of 1933 (the "Securities Act"), with the Securities and Exchange Commission ("SEC") and shall cause the Proxy Statement/Prospectus to be mailed to the limited partners of the Partnership as soon as practicable. Adoption of the Conversion Proposal requires (i) the approval of limited partners holding a majority of the outstanding A Interests and B Interests, each voting separately as a class, and (ii) the approval of unaffiliated limited partners (limited partners other than affiliates of the General Partner) holding a majority of the outstanding A Interests and B Interests held by unaffiliated limited partners, each voting separately as a class (the "Class Votes"). (b) Approval by Other Parties. The Partnership and Lehman/SDI, as stockholders of LPSub at the time of the Closing (as hereinafter defined), approve and adopt the Merger Agreement. The Partnership and the GP Limited Partners, as stockholders of the Corporation at the time of the Closing, approve and adopt the Merger Agreement. LPSub, as general partner of the General Partner at the time of the Closing, approves and adopts the Merger Agreement on behalf of the General Partner. (c) Closing and Effective Time. Subject to the Conversion Proposal receiving the requisite approval by the limited partners and subject to the provisions of this Agreement, the parties shall hold a closing (the "Closing") on (i) the later of (A) the business day following the meeting of the limited partners of the Partnership to consider and vote upon the Conversion Proposal or (B) the business day on which the last of the conditions set forth in Article IV is fulfilled or waived or (ii) at such other date as the parties hereto may agree (the "Closing Date"), at 10:00 A.M. (local time) at the offices of Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania, or at such other place or time as the parties hereto may agree. The Merger shall become effective as set forth in Section 3 of the Merger Agreement (the "Effective Time"). At the Closing, the contributions provided in Section 1.1 hereof shall be made and immediately thereafter a certificate of merger shall be filed in the Office of the Secretary of State of Delaware. (d) Certificate of Incorporation and Bylaws. From and after the Effective Time, and pursuant to the Merger, the Certificate of Incorporation and Bylaws of the Corporation as attached as Annexes 2 and 3, respectively, shall continue to be the Certificate of Incorporation and Bylaws of the Corporation as the surviving entity without change or amendment until further amended in accordance with the provisions thereof and applicable law. (e) Amendment to Partnership Agreement. To the extent that any terms of this Article I shall be found to be a breach of any of the provisions of the Amended and Restated Agreement of Limited Partnership of the Partnership dated February 1, 1987 or the Amended and Restated Agreement of Limited B-2 Partnership of the Operating Partnership dated February 1, 1987, the approval and adoption of the Conversion Proposal by the limited partners as set forth in subsection 1.4(a) and by LPSub on behalf of the General Partner shall be deemed to be an amendment and waiver of any such provisions in order to effectuate the Conversion. ARTICLE II REPRESENTATIONS AND WARRANTIES SECTION 2.1 Representations and Warranties by the Partnership. The Partnership represents and warrants to the other parties that: (a) Organization and Good Standing of the Partnership, the Operating Partnership and LPSub. Each of the Partnership and the Operating Partnership is a limited partnership duly formed, validly existing and in good standing under the laws of the State of Delaware. LPSub is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. (b) Capitalization. The sole general partner of the Partnership is the General Partner and there are issued and outstanding 11,099,573 A Interests and 21,675,746 B Interests of the Partnership. The sole general partner of the Operating Partnership is the General Partner and the sole limited partner of the Operating Partnership is the Partnership. The authorized capital stock of LPSub consists of 1,001 shares of Class A Common Stock, par value $.01 per share, of which one share is outstanding and owned by the Partnership, and 1,000 shares of Class B Common Stock, of which no shares are outstanding. There is no outstanding option, warrant or other agreement or commitment to which either the Partnership, the Operating Partnership or LPSub is a party or by which it is bound providing for the issuance of any additional securities of the Partnership, the Operating Partnership or LPSub. (c) Authorization. The execution, delivery and performance of this Agreement have been duly and validly authorized by all necessary action on the part of the Partnership and LPSub other than the approval of the Conversion Proposal by the limited partners of the Partnership. This Agreement has been duly executed and delivered by the Partnership and LPSub and is enforceable against each of LPSub and the Partnership in accordance with its terms. (d) Proxy Statement; Other Information. The Partnership represents that the Registration Statement, the Proxy Statement, the Schedule 13E-3 and all other filings with the SEC in connection with the Conversion comply in all material respects with the Securities Act and the Exchange Act, as the case may be, and that these materials do not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading. (e) Consents and Approvals; No Violation. Neither the execution and delivery of this Agreement by the Partnership and LPSub nor the consummation of the transactions contemplated hereby will (i) conflict with or result in any breach of any provision of the Agreement of Limited Partnership of the Partnership (the "Partnership Agreement"); (ii) require any consent, approval, authorization or permit of, or filing with or notification to, any governmental or regulatory authority or body, except (A) pursuant to the Securities Act and the Exchange Act or the rules and requirements of any national securities exchange or the National Association of Securities Dealers, Inc., (B) the filing of a certificate of merger pursuant to the Delaware Revised Uniform Limited Partnership Act (the "Delaware RULPA") and the General Corporation Law of the State of Delaware (the "DGCL"), (C) filings under state securities laws or in connection with maintaining the good standing and qualification of the Corporation following the Effective Time, (D) Hart-Scott-Rodino Premerger Notification Act filings, if any or (E) where the failure to obtain such consent, approval, authorization or permit, or to make such filing or notification, would not in the aggregate have a material adverse effect on the Partnership or the Operating Partnership; (iii) result in a default (or give rise to any right of termination, unilateral modification or amendment, cancellation or acceleration) under any of the terms, conditions or B-3 provisions of any note, license, agreement or other instrument or obligation to which the Partnership or the Operating Partnership is a party or by which the Partnership or the Operating Partnership or any of their respective assets may be bound, except for such defaults (or rights of termination, unilateral modification or amendment, cancellation or acceleration) which in the aggregate would not have a material adverse effect on the Partnership or the Operating Partnership; or (iv) violate any order, writ, injunction, decree, judgment, ordinance, statute, rule or regulation applicable to the Partnership or the Operating Partnership or any of their respective properties or businesses, except for violations (other than of orders, writs, injunctions or decrees) which would not in the aggregate have a material adverse effect on the Partnership or the Operating Partnership. SECTION 2.2 Representations and Warranties by the Corporation. The Corporation represents and warrants to the other parties that: (a) Organization and Good Standing of the Corporation and the Trust. The Corporation is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. The Trust is a statutory business trust duly created, validly existing and in good standing under the laws of the State of Delaware. (b) Capitalization. The authorized capital stock of the Corporation consists of 1,000,000 shares of Preferred Stock, par value $.01 per share, of which none are outstanding, and 20,000,000 shares of Common Stock, par value $.01 per share, of which 1,000 shares are outstanding and owned by the Partnership. The authorized securities of the Trust consist of 4,217,837 Trust Preferred Securities, of which none are outstanding, and 130,449 Trust Common Securities, of which 100 outstanding and owned by the Corporation. There is no outstanding option, warrant or other agreement or commitment to which either the Corporation or the Trust is a party or by which it is bound providing for the issuance of any additional securities of the Corporation or the Trust except for the issuance by the Trust to the Corporation of 4,217,837 Trust Preferred Securities in exchange for Junior Subordinated Debentures and 130,349 Trust Common Securities for cash and except pursuant to this Agreement. (c) Authorization. The execution, delivery and performance of this Agreement has been duly and validly authorized by all necessary corporate action on the part of the Corporation. This Agreement has been duly executed and delivered by the Corporation and is enforceable against it in accordance with its terms. (d) Consents and Approvals; No Violation. Neither the execution and delivery of this Agreement by the Corporation nor the consummation of the transactions contemplated hereby will (i) conflict with or result in any breach of any provision of the Corporation's Certificate of Incorporation or Bylaws; (ii) require any consent, approval, authorization or permit of, or filing with or notification to, any governmental or regulatory authority or body, except (A) pursuant to the Securities Act and the Exchange Act or the rules and requirements of any national securities exchange or the National Association of Securities Dealers, Inc., (B) the filing of a certificate of merger pursuant to the Delaware RULPA and the DGCL, (C) filings under state securities laws or in connection with maintaining the good standing and qualification of the Corporation following the Effective Time, (D) Hart-Scott-Rodino Premerger Notification Act filings, if any or (E) where the failure to obtain such consent, approval, authorization or permit, or to make such filing or notification, would not in the aggregate have a material adverse effect on the Corporation; (iii) result in a default (or give rise to any right of termination, unilateral modification or amendment, cancellation or acceleration) under any of the terms, conditions or provisions of any note, license, agreement or other instrument or obligation to which the Corporation is a party or by which it or any of its assets may be bound, except for such defaults (or rights of termination, unilateral modification or amendment, cancellation or acceleration) which in the aggregate would not have a material adverse effect on the Corporation; or (iv) violate any order, writ, injunction, decree, judgment, ordinance, statute, rule or regulation applicable to the Corporation or any of its properties or businesses, except for violations (other than of orders, writs, injunctions or decrees) which would not in the aggregate have a material adverse effect on the Corporation. B-4 SECTION 2.3 Representations and Warranties by Lehman/SDI and the GP Limited Partners. Each of Lehman/SDI and the GP Limited Partners severally represents and warrants to the other parties that: (a) Organization and Good Standing. It is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation. (b) Authorization. The execution, delivery and performance of this Agreement have been duly and validly authorized by all necessary corporate action on its part. This Agreement has been duly executed and delivered by it. (c) Consents and Approvals; No Violation. Neither the execution and delivery of this Agreement by it nor the consummation of the transactions contemplated hereby will (i) conflict with or result in any breach of any provision of the Agreement of Limited Partnership of the General Partner, the Partnership Agreement or its certificate of incorporation or bylaws, as the case may be; (ii) require any consent, approval, authorization or permit of, or filing with or notification to, any governmental or regulatory authority or body, except (A) pursuant to the Securities Act and the Exchange Act or the rules and requirements of any national securities exchange or the National Association of Securities Dealers, Inc., (B) the filing of a certificate of merger pursuant to the Delaware RULPA and DGCL, (C) filings under state securities laws or in connection with maintaining the good standing and qualification of the Corporation following the Effective Time, (D) Hart-Scott-Rodino Premerger Notification Act filings, if any or (E) where the failure to obtain such consent, approval, authorization or permit, or to make such filing or notification, would not in the aggregate have a material adverse effect on the General Partner or on it; (iii) result in a default (or give rise to any right of termination, unilateral modification or amendment, cancellation or acceleration) under any of the terms, conditions or provisions of any note, license, agreement or other instrument or obligation to which it or the General Partner is a party or by which they or any of their assets may be bound, except for such defaults (or rights of termination, unilateral modification or amendment, cancellation or acceleration) which in the aggregate would not have a material adverse effect on it or on the General Partner; or (iv) violate any order, writ, injunction, decree, judgment, ordinance, statute, rule or regulation applicable to it or to the General Partner or any of its properties or businesses, except for violations (other than of orders, writs, injunctions or decrees) which would not in the aggregate have a material adverse effect on it or on the General Partner. (d) Certain Agreements. Except as disclosed in the Registration Statement, (i) there are no agreements in effect between the General Partner or any of its affiliates, on the one hand, and the Partnership and the Operating Partnership, on the other; and (ii) there are no material written agreements in effect between Lehman Brothers or any of its affiliates, on the one hand, and any member of management, on the other. (e) Ownership of Partnership Interests; Title. It is the owner of record and beneficially of the general or a limited partnership interest in the General Partner described opposite its name on Exhibit A hereto and that the information in such exhibit relating to the ultimate beneficial ownership of such interests is true and correct. It has not received any notice of any adverse claim to the ownership of any such interest and does not have any reason to know of any such adverse claim that may be justified. On the Closing Date, it shall have good and transferable title to such interest, free and clear of all liens. ARTICLE III ADDITIONAL COVENANTS AND AGREEMENTS SECTION 3.1 Legal Conditions to Conversion. Each of the parties hereto will take all reasonable actions necessary to comply promptly with all legal requirements which may be imposed on itself with respect to the Conversion. B-5 SECTION 3.2 Affiliates. Prior to the Closing Date the Partnership shall deliver to the Corporation a letter identifying all persons who are, at the time the Conversion Proposal is submitted for approval to the limited partners of the Partnership, "affiliates" of the Partnership for purposes of Rule 145 under the Securities Act. The Partnership shall use its best efforts to cause each such person to deliver to the Corporation on or prior to the Closing Date executed affiliates' letters in customary form. SECTION 3.3 Fees and Expenses. Whether or not the Conversion is consummated, all costs and expenses incurred by the Partnership in connection with this Agreement and the transactions contemplated hereunder shall be paid by the Partnership. SECTION 3.4 Stock Exchange Listing. The Corporation shall use its best efforts to cause the Trust Preferred Securities and Common Stock to be issued in the Conversion to be approved for listing on the New York Stock Exchange (the "NYSE"), subject to official notice of issuance, prior to the Closing Date. The A Interests and the B Interests will be delisted at or immediately after the Effective Time. SECTION 3.5 Indemnification. (a) The Partnership shall, and from and after the Effective Time, the Corporation shall, indemnify, defend and hold harmless each person who is now, or has been at any time prior to the date of this Agreement or who becomes prior to the Effective Time, an officer, director, partner, shareholder, agent or fiduciary of the Partnership, the Operating Partnership, the General Partner, Lehman/SDI or the Corporation (the "Companies") or an affiliate of such person (collectively, the "Indemnified Parties") against all losses, claims, damages, costs, expenses, liabilities or judgments, or amounts that are paid in settlement with the approval of the indemnifying party (which approval shall not be unreasonably withheld) of, or in connection with, any claim, action, suit, proceeding or investigation ("Proceeding") based in whole or in part out of the fact that such person is or was an officer, director, partner or shareholder of one or more of the Companies or an affiliate of such person, whether pertaining to any matter existing or occurring at or prior to the Effective Time and whether asserted or claimed prior to, or at or after, the Effective Time ("Indemnified Liabilities") in each case to the full extent a partnership or a corporation is permitted under Delaware law to indemnify such persons or entities; and the Partnership (and after the Effective Time, the Corporation) will pay or reimburse expenses in advance of the final disposition of any such Proceeding to each Indemnified Party to the full extent permitted by law upon receipt of an undertaking to repay such expenses if and when requested to do so under applicable law. Without limiting the foregoing, in the event any such Proceeding is brought against any Indemnified Party (whether arising before or after the Effective Time), (i) the Indemnified Parties may retain counsel satisfactory to them, (ii) the Partnership (and after the Effective Time, the Corporation) shall pay all reasonable fees and expenses of such counsel for the Indemnified Parties promptly as statements therefor are received, and (iii) the Partnership (and after the Effective Time, the Corporation) will use all reasonable efforts to assist in the vigorous defense of any such matter, provided that neither the Partnership nor the Corporation shall be liable for any settlement of any claim effected without its written consent, which consent, however, shall not be unreasonably withheld. Any Indemnified Party wishing to claim indemnification under this Section 3.5, upon learning of any Proceeding, shall notify the Partnership (and after the Effective Time, the Corporation) (but the failure so to notify the Partnership or the Corporation, as the case may be, shall not relieve the Partnership or the Corporation from any liability which it may have under this Section 3.5 except to the extent such failure prejudices the indemnifying party) and shall deliver to the Partnership (and after the Effective Time, the Corporation) the undertaking referred to above. The Indemnified Parties as a group may retain only one law firm to represent them with respect to each such matter unless there is, under applicable standards of professional conduct, a conflict on any significant issue between the positions of any two or more Indemnified Parties. (b) The provisions of this Section 3.5 are intended to be for the benefit of, and shall be enforceable by, each Indemnified Party and the Indemnified Party's heirs, representatives, successors and assigns. B-6 ARTICLE IV CONDITIONS TO THE CONVERSION SECTION 4.1 Conditions to Each Party's Obligation to Effect the Conversion. The respective obligations of the parties to effect the Conversion shall be subject to the satisfaction, on or before the Closing Date, of each of the following conditions: (a) Representations and Warranties and Performance. The representations and warranties of each of the other parties herein contained shall be true and correct on the Closing Date with the same effect as though made at such time. Each of the other parties shall have performed in all material respects all obligations and complied in all material respects with all agreements, undertakings, covenants and conditions required by this Agreement to be performed or complied with by it at or prior to the Closing Date. (b) Pending Litigation. There shall not be any litigation or other proceeding pending or threatened to restrain or invalidate the transactions contemplated by this Agreement. (c) Limited Partner Approval. The Conversion Proposal shall have been approved and adopted by the requisite vote of the holders of the A Interests and B Interests pursuant to the Class Votes. (d) Regulatory Approval. All authorizations, consents and permits required to perform this Agreement and the Merger Agreement shall have been obtained and the required statutory waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, if applicable, shall have expired or been terminated. (e) Registration Statement. The Registration Statement filed pursuant to Section 1.4 (a) shall have become effective under the Securities Act and shall not be the subject of any stop order or proceeding seeking a stop order. (f) NYSE Listing. The Trust Preferred Securities and the Common Stock to be issued in the Conversion shall have been approved for listing on the NYSE upon official notice of issuance. (g) Blue Sky Compliance. The Corporation shall have complied with all requirements of state securities or "blue sky" laws with respect to the issuance of the securities in the Conversion. (h) Special Committee Determination. The Special Committee shall not have withdrawn its determination that the Conversion is fair to the holders of A Interests and B Interests. (i) Fairness Opinion. The fairness opinion delivered to the Partnership by Smith Barney Inc. and included as an exhibit to the Proxy Statement/Prospectus shall not have been rescinded prior to the Closing Date. (j) Tax Opinion. The tax opinion of Morgan, Lewis & Bockius LLP delivered to the Partnership and filed as an exhibit to the Registration Statement shall not have been rescinded prior to the Closing Date. (k) Validity Opinion. The Delaware law opinion of Richards, Layton & Finger regarding the validity of the Trust Preferred Securities delivered to the Trust and filed as an exhibit to the Registration Statement shall not have been rescinded prior to the Closing Date. (l) Available Financing. The Corporation shall have available financing to refinance existing senior debt on terms acceptable to the Corporation and the General Partner or shall have received approval of the Conversion by the existing senior lenders. B-7 (m) Deferred Compensation Plan. The Corporation shall have received from Donald T. Marshall, John P. McDonnell and Norman V. Edmonson ("Management") undertakings to defer into the Deferred Compensation Plan for Key Employees of the Operating Partnership all payments due under the previous Deferred Compensation Plans and Long Term Performance Share Plan of the Operating Partnership. (n) Changes in Applicable Law. There shall have been no material change, in effect or pending, in applicable law, including with respect to the taxation of the Conversion, the Partnership, the Corporation or the Trust Preferred Securities. (o) Contribution Agreement. The Corporation shall have entered into a Contribution Agreement with Lehman Brothers Inc. on terms satisfactory to the parties hereto. (p) Stockholders Agreement. The Corporation, SDI Partners I, L.P., Lehman Brothers Inc., Lehman/SDI, Inc., Lehman Ltd I, Inc., Lehman Brothers Capital Partners I, L.P., LB I Group Inc. and Donald T. Marshall, John P. McDonnell, Norman V. Edmonson, Harold J. Cornelius, Max W. Hillman and Joseph M. Corvino shall have entered into a Stockholders Agreement on terms satisfactory to the parties hereto. (q) Registration Rights Agreement. The Corporation, certain affiliates of Lehman Brothers Inc. and Management shall have entered into a Registration Rights Agreement on terms satisfactory to the parties hereto. (r) Escrow Agreement. The Corporation and the Escrow Agent shall have entered into an Escrow Agreement on terms satisfactory to the parties hereto. (s) Resale Agreement. The Corporation, certain affiliates of Lehman Brothers Inc. and Management shall have entered into an agreement regarding resale of the Corporation's Common Stock. (t) Other Documentation. The parties hereto shall have entered into such other agreements as are contemplated by the Conversion, including, without limitation, the Indenture and Declaration of Trust in respect of the Junior Subordinated Debentures and Trust Preferred Securities, on terms satisfactory to the parties hereto. ARTICLE V TERMINATION AND ABANDONMENT SECTION 5.1 Termination and Abandonment. This Agreement may be terminated and the Conversion may be abandoned at any time prior to the Effective Time, whether before or after approval by the limited partners of the Partnership, by action of the Board of Directors of Lehman/SDI. SECTION 5.2 Amendment. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto; provided, however, that after approval of the Conversion Proposal by the limited partners of the Partnership, no amendment may be made which decreases the amount or changes the type of consideration to which the limited partners of the Partnership are entitled under this Agreement or otherwise materially adversely affects the rights of the limited partners of the Partnership without the further approval of the limited partners. SECTION 5.3 Waiver. Any time prior to the Effective Time, whether before or after the meeting referred to in Section 1.4(a), any party hereto may waive compliance with any of the agreements of any other party or with any conditions to the obligations of such party; provided, however, that after approval of the Conversion Proposal by the limited partners of the Partnership, no waiver may be given which materially adversely affects the rights of the limited partners of the Partnership without the further approval of the limited partners . Any agreement on the part of a party hereto to any such extension or waiver shall be valid if set forth in an instrument in writing signed on behalf of such party by a duly authorized officer. B-8 ARTICLE VI MISCELLANEOUS SECTION 6.1 Notices. Any notices or other communications required or permitted hereunder shall be sufficiently given if sent by telecopy or facsimile transmission (with hard copy to follow), registered or certified mail, postage prepaid, or Federal Express or similar overnight delivery services addressed, in the case of all parties at 2600 One Logan Square Philadelphia, PA 19103 Attn: Norman V. Edmonson with required copies to: Morgan, Lewis & Bockius LLP 2000 One Logan Square Philadelphia, PA 19103 Attn: Donald A. Scott, Esq. Simpson Thacher & Bartlett 425 Lexington Avenue New York, NY 10017 Attn: George R. Krouse, Esq. Dechert Price & Rhoads 4000 Bell Atlantic Tower 1717 Arch Street Philadelphia, PA 19103-2793 Attn: William G. Lawlor, Esq. or such other address as shall be furnished in writing by any party to the others prior to the giving of the applicable notice or communication. SECTION 6.2 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. SECTION 6.3 Headings. The headings herein are for convenience of reference only, do not constitute a part of this Agreement, and shall not be deemed to limit or affect any of the provisions hereof. SECTION 6.4 Entire Agreement. This Agreement constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties, with respect to the subject matter hereof. SECTION 6.5 Cooperation. Subject to the terms and conditions of this Agreement, each of the parties hereto shall use its reasonable efforts to take, or cause to be taken, such action, to execute and deliver, or cause to be executed and delivered, such governmental notifications and additional documents and instruments and to do, or cause to be done, all things necessary, proper or advisable under the provisions of this Agreement and under applicable law to consummate and make effective the transactions contemplated by this Agreement. SECTION 6.6 No Rights, Etc.. Nothing in this Agreement express or implied is intended to confer upon any other person any rights or remedies under or by reason of this Agreement. SECTION 6.7 Governing Law. This Agreement shall be governed in all respects, including validity, interpretation and effect, by the laws of the State of Delaware applicable to contracts made and to be performed in that State. B-9 SECTION 6.8 Special Committee. Any determination by the Corporation or the General Partner that any of the conditions in Article IV hereof have been satisfied or waived, or any amendment of this Agreement, shall require the affirmative vote of the Special Committee (as defined in the Registration Statement). B-10 IN WITNESS WHEREOF, the parties hereto have caused this Agreement and Plan of Conversion to be duly executed as of the date first above written. SUNSOURCE INC. By_______________________________ Chairman SUNSOURCE L.P. By SDI Partners I, L.P. Its General Partner By Lehman/SDI, Inc. Its General Partner By________________________________ Chairman LPSUB INC. By________________________________ President LEHMAN/SDI, INC. By________________________________ President DOTMAR CORP. By________________________________ President JPM CORP. By________________________________ President B-11 NORVED CORP. By___________________________ President DIACOR CORP. By___________________________ President HJC CORP. By___________________________ President MWH CORP. By___________________________ President LJC CORP. By__________________________ President CELAR CORP. By__________________________ President B-12 EXHIBIT A Entity Interests Held Lehman/SDI, Inc. 53.8% general partner interest Dotmar Corp. JPM Corp. Norved Corp. Diacor Corp. HJC Corp. MWH Corp. LJC Corp. Celar Corp. B-13 ANNEX 1 AGREEMENT OF MERGER OF SUNSOURCE L.P. (a Delaware limited partnership) AND LPSUB INC. (a Delaware corporation) WITH AND INTO SUNSOURCE INC. (a Delaware corporation) AGREEMENT OF MERGER, dated as of ___________, 1997, by and among SunSource L.P., a Delaware limited partnership (the "Partnership"), LPSub Inc., a Delaware corporation ("LPSub"; and together with the Partnership, the "Disappearing Entities"), and SunSource Inc., a Delaware corporation (the "Corporation"), with reference to the following RECITALS: A. The Partnership is a Delaware limited partnership whose general partner is SDI Partners I, L.P. Its limited partnership interests are publicly held, consisting of 11,099,573 Class A limited partnership interests ("A Interests") and 21,675,746 Class B limited partnership interests ("B Interests). B. LPSub is a Delaware corporation whose authorized and outstanding stock consists of 1,001 shares of Class A Common Stock, par value $.01 per share, all of which are owned of record and beneficially by the Partnership, and 1,000 shares of Class B Common Stock, par value $.01 per share, all of which are owned of record and beneficially by Lehman/SDI, Inc., a Delaware corporation. LPSub is the general partner of SDI Partners I, L.P. C. The Corporation is a Delaware corporation whose authorized capital stock consists of 1,000,000 shares of Preferred Stock, par value $.01 per share, of which none are outstanding, and 20,000,000 shares of Common Stock, par value $.01 per share, of which 1,000 shares are outstanding and owned by the Partnership. D. The Corporation has created SunSource Capital Trust, a Delaware statutory business trust (the "Trust"), which has authorized and issued 4,217,837 11.6% Trust Preferred Securities, representing preferred undivided beneficial interests in the assets of the Trust (the "Trust Preferred Securities") and 130,449 Trust Common Securities, representing common undivided beneficial interests in the assets of the Trust, all of which are owned by the Corporation. E. The partners of the Partnership and the Boards of Directors and stockholder of LPSub and the Corporation have approved and adopted resolutions approving and adopting this Agreement of Merger in accordance with the General Corporation Law of the State of Delaware (the "DGCL") and the Delaware Revised Uniform Limited Partnership Act (the "DRULPA"). NOW, THEREFORE, the parties hereto, in consideration of the mutual covenants herein contained and intending to be legally bound, agree as follows: 1. Parties to Merger. The Disappearing Entities and the Corporation (such parties to the merger being B-14 hereinafter sometimes collectively referred to as the "Constituent Entities") shall effect a merger (the "Merger") in accordance with and subject to the terms and conditions of this Agreement of Merger (the "Agreement"). 2. Merger. At the Effective Time (as defined in Section 3 hereof), each of the Disappearing Entities shall be merged with and into the Corporation (which latter entity shall be, and is hereinafter sometimes referred to as, the "Surviving Entity"). 3. Filing and Effective Time. A certificate of merger and such other documents and instruments as are required by, and complying in all respects with, the DGCL and DRULPA shall be filed in the Office of the Secretary of State of Delaware. The Merger shall become effective, following the filing of all such documents and instruments, at 11:59 p.m. on __________, 1997 (the "Effective Time"). 4. Effect of Merger. At the Effective Time, the separate existence of each of the Disappearing Entities shall cease, the Surviving Entity shall continue to be a corporation organized and governed by the laws of the State of Delaware and the Merger shall have the effects provided therefor by the DGCL and DRULPA. 5. Partnership Interests and Capital Stock. At the Effective Time: (a) Each A Interest of the Partnership issued and outstanding immediately prior to the Effective Time shall, by virtue of the Merger and without any action on the part of the holders thereof, be converted into 0.38 share of Trust Preferred Securities and $1.30 in cash; (b) Each B Interest of the Partnership issued and outstanding immediately prior to the Effective Time shall, by virtue of the Merger and without any action on the part of the holders thereof, be converted into 0.25 share of Common Stock of the Corporation; (c) The shares of Class B Common Stock of LPSub issued and outstanding immediately prior to the Effective Time shall, by virtue of the Merger and without any action on the part of the holder thereof, be converted into 538,000 shares of Common Stock of the Corporation; (d) The shares of Class A Common Stock of LPSub issued and outstanding immediately prior to the Effective Time shall, by virtue of the Merger and without any action on the part of the holder thereof, be canceled; and (e) No fractional interests shall be issued in the Merger but in lieu thereof each holder of A Interests shall be entitled to receive cash in an amount equal to the fraction of a Trust Preferred Security to which the holder is otherwise entitled multiplied by the average closing price of the Trust Preferred Securities for the five trading days following the Effective Time and each holder of B Interests shall be entitled to receive cash in an amount equal to the fraction of a share of Common Stock to which the holder is otherwise entitled multiplied by the average closing price of the Common Stock for the five trading days following the Effective Time. 6. Exchange of Certificates. Promptly after the Effective Time, the Corporation will mail to all former limited partners of the Partnership of record at the Effective Time a letter of transmittal containing instructions with respect to the surrender of depositary receipts for A Interests in exchange for certificates representing Trust Preferred Securities and cash and the surrender of depositary receipts for B Interests in exchange for certificates representing shares of Common Stock. Upon surrender to the Corporation of one or more depositary receipts, together with a properly completed letter of transmittal, there will be issued and mailed to former limited partners of record at the Effective Time a certificate or certificates representing the number of Trust Preferred Securities and cash or a certificate or certificates for shares of Common Stock to which such holder is entitled. From and after the Effective Time, each depositary receipt will evidence only the right to receive Trust Preferred Securities and cash or shares of Common Stock. No distributions or dividends with respect to the Trust Preferred Securities or Common Stock payable to the holders of record thereof after the Effective Time will be paid to the holder of any unsurrendered depositary receipts until such depositary receipts are surrendered for exchange, at which time accumulated distributions or dividends will be paid, without interest, subject to any applicable escheat laws. B-15 7. Further Assurances. Each of the Disappearing Entities shall at any time, or from time to time, as and when requested by the Surviving Entity, or by its successors and assigns, execute and deliver, or cause to be executed and delivered in its name by its last acting officers, or by the corresponding officers of the Surviving Entity, all such conveyances, assignments, transfers, deeds, or other instruments, and shall take, or cause to be taken, such further or other action as the Surviving Entity, or its successors and assigns, may deem required or convenient in order to evidence the transfer, vesting or devolution of any property, right, privilege, immunity, power or purpose, or to vest or perfect in or confirm to the Surviving Entity, or its successors and assigns, title to and possession of all the properties, rights, privileges, immunities, powers and purposes of the Disappearing Entities and otherwise to carry out the intent and purposes hereof. 8. Termination. Notwithstanding approval by the partners and stockholder of the Constituent Entities of this Agreement, this Agreement may be terminated at any time prior to the Effective Time by action of SDI Partners I, L.P. 9. Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of Delaware, without giving effect to principles of conflicts of law. IN WITNESS WHEREOF, the parties hereto, pursuant to the approval and authority duly given by resolutions approved and adopted by their respective partners and Boards of Directors and stockholder, have duly executed this Agreement of Merger as of the day and year first written above. SUNSOURCE L.P. By SDI Partners I, L.P., Its General Partner By LPSub Inc., Its General Partner By________________________________ Chairman LPSUB INC. By________________________________ President SUNSOURCE INC. By________________________________ Chairman B-16 ANNEX 2 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF SUNSOURCE INC. SunSource Inc., a Delaware corporation, the original Certificate of Incorporation of which was filed with the Secretary of State of the State of Delaware on December 30, 1996, HEREBY CERTIFIES that this Amended and Restated Certificate of Incorporation restating, integrating and amending its Certificate of Incorporation was duly proposed by its Board of Directors and adopted by its sole stockholder in accordance with Sections 242 and 245 of the General Corporation Law of the State of Delaware, as amended (the "GCL"). 1. Corporate Name. The name of the corporation is SunSource Inc. (hereinafter referred to as the "Corporation"). 2. Registered Office. The registered office of the Corporation is located at Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, in the County of New Castle, in the State of Delaware. The name of its registered agent at that address is The Corporation Trust Company. 3. Corporate Purpose. The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may now or hereafter be organized under the GCL. 4. Capital Stock. 4.1 Authorized Amount. The Corporation shall be authorized to issue 21,000,000 shares of capital stock, of which 20,000,000 shares shall be Common Stock, par value $0.01 per share, and 1,000,000 shares shall be Preferred Stock, par value $0.01 per share. 4.2 Authority of Board to Fix Terms of Preferred Stock. The Board of Directors of the Corporation is hereby expressly authorized at any time and from time to time to provide for the issuance of all or any shares of the Preferred Stock in one or more series, and to fix for each such series such voting powers, full or limited, or no voting powers, and such distinctive designations, preferences and relative, participating, optional or other special rights and such qualifications, limitations or restrictions thereof, as shall be stated and expressed in the resolution or resolutions adopted by the Board of Directors providing for the issuance of such series and to the fullest extent as may now or hereafter be permitted by the GCL, including, without limiting the generality of the foregoing, the authority to provide that any such series may be (i) subject to redemption at such time or times and at such price or prices; (ii) entitled to receive dividends (which may be cumulative or non-cumulative) at such rates, on such conditions, and at such times, and payable in preference to, or in such relation to, the dividends payable on any other class or classes or any other series; (iii) entitled to such rights upon the dissolution of, or upon any distribution of the assets of, the Corporation; or (iv) convertible into, or exchangeable for, shares of any other class or classes of stock, or of any other series of the same or any other class or classes of stock, or other securities or property, of the Corporation at such price or prices or at such rates of exchange and with such adjustments, all as may be stated in such resolution or resolutions. Unless otherwise provided in such resolution or resolutions, shares of Preferred Stock of any series which shall be issued and thereafter acquired by the Corporation through purchase, redemption, exchange, conversion or otherwise shall return to the status of authorized but unissued Preferred Stock. 5. Section 203. The Corporation shall not be governed by Section 203 of the Delaware General Corporation Law (pertaining to business combinations with interested stockholders), or any successor provision or provisions. 6. Liability of Directors. A director of the Corporation shall not be liable to the Corporation or its stockholders for monetary damages (including, without limitation, any judgment, amount paid in settlement, fine, penalty, punitive damages, excise tax assessed with respect to an employee benefit plan, or expense of any nature, including attorneys' fees) for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) under Section 174 of the GCL; or (iv) for any B-17 transaction from which the director derived an improper personal benefit. If the GCL is amended after the date hereof to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall automatically be eliminated or limited to the fullest extent permitted by the GCL as so amended. Neither the amendment nor repeal of this Article 6 nor the adoption of any provision of this Restated Certificate of Incorporation inconsistent with this Article 6 shall eliminate or reduce the effect of this Article 6 in respect of any matter arising or relating to any actions or omissions occurring prior to such amendment, repeal or adoption of an inconsistent provision. 7. Amendment of Bylaws. The Board of Directors shall have the power to adopt, amend or repeal the Bylaws of the Corporation. Whenever the Bylaws of the Corporation shall require for action by the Board of Directors, by the holders of any class or series of shares or by the holders of any other securities having voting power, the vote of a greater number or proportion than is required by any provision of applicable law, the Certificate of Incorporation or the general amendment provisions of the Bylaws, the provision of the Bylaws requiring such greater vote shall not be altered, amended or repealed except by such greater vote. 8. Amendment of Certificate of Incorporation. The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders are granted subject to this reservation. IN WITNESS WHEREOF, SunSource Inc. has caused this Amended and Restated Certificate of Incorporation to be signed and acknowledged on this 2nd day of June, 1997 in its name by a duly authorized officer. SUNSOURCE INC. By: _______________________________ Donald T. Marshall Chairman and Chief Executive Officer B-18 ANNEX 3 B Y L A W S OF SUNSOURCE INC. (a Delaware Corporation) --------------------- ARTICLE I Offices and Fiscal Year SECTION 1.01. Registered Office.--The registered office of the corporation shall be in the City of Wilmington, County of New Castle, State of Delaware until otherwise established by resolution of the board of directors, and a certificate certifying the change is filed in the manner provided by statute. SECTION 1.02. Other Offices.--The corporation may also have offices at such other places within or without the State of Delaware as the board of directors may from time to time determine or the business of the corporation requires. SECTION 1.03. Fiscal Year.--The fiscal year of the corporation shall end on the 31st of December in each year. ARTICLE II Notice - Waivers - Meetings SECTION 2.01. Notice, What Constitutes.--Whenever, under the provisions of the Delaware General Corporation Law ("GCL") or the certificate of incorporation or these bylaws, notice is required to be given to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail or by telegram (with messenger service specified), telex or TWX (with answerback received) or courier service, charges prepaid, or by facsimile transmission to the address (or to the telex, TWX, facsimile or telephone number) of the person appearing on the books of the corporation, or in the case of directors, supplied to the corporation for the purpose of notice. If the notice is sent by mail, telegraph or courier service, it shall be deemed to be given when deposited in the United States mail or with a telegraph office or courier service for delivery to that person or, in the case of telex or TWX, when dispatched, or in the case of facsimile transmission, when received. SECTION 2.02. Notice of Meetings of Board of Directors.--Notice of a regular meeting of the board of directors need not be given. Notice of every special meeting of the board of directors shall be given to each director by telephone or in writing at least 24 hours (in the case of notice by telephone, telex, TWX or facsimile transmission) or 48 hours (in the case of notice by telegraph, courier service or express mail) or five days (in the case of notice by first class mail) before the time at which the meeting is to be held. Every such notice shall state the time and place of the meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the board need be specified in a notice of the meeting. SECTION 2.03. Notice of Meetings of Stockholders.--Written notice of the place, date and hour of every meeting of the stockholders, whether annual or special, shall be given to each stockholder of record entitled to vote at the meeting not less than ten nor more than 60 days before the date of the meeting. Every notice of a special B-19 meeting shall state the purpose or purposes thereof. If the notice is sent by mail, it shall be deemed to have been given when deposited in the United States mail, postage prepaid, directed to the stockholder at the address of the stockholder as it appears on the records of the corporation. SECTION 2.04. Waivers of Notice. (a) Written Waiver.--Whenever notice is required to be given under any provisions of the GCL or the certificate of incorporation or these bylaws, a written waiver, signed by the person or persons entitled to the notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors, or members of a committee of directors need be specified in any written waiver of notice of such meeting. (b) Waiver by Attendance.--Attendance of a person at a meeting, either in person or by proxy, shall constitute a waiver of notice of such meeting, except where a person attends a meeting for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting was not lawfully called or convened. SECTION 2.05. Exception to Requirements of Notice. (a) General Rule.--Whenever notice is required to be given, under any provision of the GCL or the certificate of incorporation or these bylaws, to any person with whom communication is unlawful, the giving of such notice to such person shall not be required and there shall be no duty to apply to any governmental authority or agency for a license or permit to give such notice to such person. Any action or meeting which shall be taken or held without notice to any such person with whom communication is unlawful shall have the same force and effect as if such notice had been duly given. (b) Stockholders Without Forwarding Addresses.--Whenever notice is required to be given, under any provision of the GCL or the certificate of incorporation or these bylaws, to any stockholder to whom (i) notice of two consecutive annual meetings, and all notices of meetings or of the taking of action by written consent without a meeting to such person during the period between such two consecutive annual meetings, or (ii) all, and at least two, payments (if sent by first class mail) of dividends or interest on securities during a 12 month period, have been mailed addressed to such person at the person's address as shown on the records of the corporation and have been returned undeliverable, the giving of such notice to such person shall not be required. Any action or meeting which shall be taken or held without notice to such person shall have the same force and effect as if such notice had been duly given. If any such person shall deliver to the corporation a written notice setting forth the person's then current address, the requirement that notice be given to such person shall be reinstated. SECTION 2.06. Conference Telephone Meetings.--One or more directors may participate in a meeting of the board, or of a committee of the board, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Participation in a meeting pursuant to this section shall constitute presence in person at such meeting. ARTICLE III Meetings of Stockholders SECTION 3.01. Place of Meeting.--All meetings of the stockholders of the corporation shall be held at the registered office of the corporation, or at such other place within or without the State of Delaware as shall be designated by the board of directors in the notice of such meeting. SECTION 3.02. Annual Meeting.--The board of directors may fix and designate the date and time of the annual meeting of the stockholders, but if no such date and time is fixed and designated by the board, the meeting for any calendar year shall be held on the fourth Tuesday in April in such year, if not a legal holiday under the laws of Delaware, and, if a legal holiday, then on the next succeeding business day, not a Saturday, at 10 o'clock A.M., B-20 and at said meeting the stockholders then entitled to vote shall elect directors and shall transact such other business as may properly be brought before the meeting. SECTION 3.03. Special Meetings.--Special meetings of the stockholders of the corporation may be called at any time by the chairman or a majority of the board of directors, or at the request, in writing, of stockholders entitled to cast 25% of the votes that all stockholders are entitled to cast at the particular meeting. At any time, upon the written request of any person or persons who have duly called a special meeting, which written request shall state the purpose or purposes of the meeting, it shall be the duty of the secretary to fix the date of the meeting which shall be held at such date and time as the secretary may fix, not less than ten nor more than 60 days after the receipt of the request, and to give due notice thereof. If the secretary shall neglect or refuse to fix the time and date of such meeting and give notice thereof, the person or persons calling the meeting may do so. SECTION 3.04. Quorum, Manner of Acting and Adjournment. (a) Quorum.--The holders of a majority of the shares entitled to vote, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders except as otherwise provided by the GCL, by the certificate of incorporation or by these bylaws. If a quorum is not present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present or represented. At any such adjourned meeting at which a quorum is present or represented, the corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. (b) Manner of Acting.--Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors. In all matters other than the election of directors, the affirmative vote of the majority of shares present in person or represented by proxy at the meeting and entitled to vote thereon shall be the act of the stockholders, unless the question is one upon which, by express provision of the applicable statute, the certificate of incorporation or these bylaws, a different vote is required in which case such express provision shall govern and control the decision of the question. The stockholders present in person or by proxy at a duly organized meeting can continue to do business until adjournment, notwithstanding withdrawal of enough stockholders to leave less than a quorum. SECTION 3.05. Organization.--At every meeting of the stockholders, the chairman, if there be one, or in the case of a vacancy in the office or absence of the chairman, one of the following persons present in the order stated: the vice chairman, if one has been appointed, the president, the vice presidents in their order of rank or seniority, a chairman designated by the board of directors or a chairman chosen by the stockholders entitled to cast a majority of the votes which all stockholders present in person or by proxy are entitled to cast, shall act as chairman, and the secretary, or, in the absence of the secretary, an assistant secretary, or in the absence of the secretary and the assistant secretaries, a person appointed by the chairman, shall act as secretary. SECTION 3.06. Voting. (a) General Rule.--Unless otherwise provided in the certificate of incorporation, each stockholder shall be entitled to one vote, in person or by proxy, for each share of capital stock having voting power held by such stockholder. (b) Voting and Other Action by Proxy.-- (i) A stockholder may execute a writing authorizing another person or persons to act for the stockholder as proxy. Such execution may be accomplished by the stockholder or the authorized officer, director, employee or agent of the stockholder signing such writing or causing his or her signature to be affixed to such writing by any reasonable means including, but not limited to, by facsimile signature. A stockholder may authorize another person or persons to act for the stockholder as proxy by transmitting or authorizing the transmission of a telegram, cablegram, or other means of electronic transmission to the person who will be the holder of the proxy or to a proxy solicitation firm, proxy support service organization or like agent duly authorized by the person who B-21 will be the holder of the proxy to receive such transmission if such telegram, cablegram or other means of electronic transmission sets forth or is submitted with information from which it can be determined that the telegram, cablegram or other electronic transmission was authorized by the stockholder. (ii) No proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. (iii) A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only so long as, it is coupled with an interest sufficient in law to support an irrevocable power. A proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the corporation generally. SECTION 3.07. Consent of Stockholders in Lieu of Meeting.--Any action required to be taken at any annual or special meeting of stockholders of the corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Every written consent shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within 60 days of the earliest dated consent delivered in the manner required in this section to the corporation, written consents signed by a sufficient number of holders to take action are delivered to the corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to a corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. SECTION 3.08. Voting Lists.--The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting. The list shall be arranged in alphabetical order, showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. SECTION 3.09. Inspectors of Election. (a) Appointment.--All elections of directors shall be by written ballot, unless otherwise provided in the certificate of incorporation; the vote upon any other matter need not be by ballot. In advance of any meeting of stockholders the board of directors may appoint inspectors, who need not be stockholders, to act at the meeting. If inspectors are not so appointed, the chairman of the meeting may, and upon the demand of any stockholder or his proxy at the meeting and before voting begins shall, appoint inspectors. The number of inspectors shall be either one or three, as determined, in the case of judges appointed upon demand of a stockholder, by stockholders present entitled to cast a majority of the votes which all stockholders present are entitled to cast thereon. No person who is a candidate for office shall act as an inspector. In case any person appointed as an inspector fails to appear or fails or refuses to act, the vacancy may be filled by appointment made by the board of directors in advance of the convening of the meeting, or at the meeting by the chairman of the meeting. (b) Duties.--If inspectors are appointed, they shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum and the authenticity, validity B-22 and effect of proxies, shall receive votes or ballots, shall hear and determine all challenges and questions in any way arising in connection with the right to vote, shall count and tabulate all votes, shall determine the result, and shall do such acts as may be proper to conduct the election or vote with fairness to all stockholders. If there be three inspectors of election, the decision, act or certificate of a majority shall be effective in all respects as the decision, act or certificate of all. (c) Report.--On request of the chairman of the meeting or of any stockholder or his proxy, the inspectors shall make a report in writing of any challenge or question or matter determined by them, and execute a certificate of any fact found by them. SECTION 3.10. Notice of Stockholder Business and Nominations. (a) Annual Meetings of Stockholders. (i) Nominations of persons for election to the board of directors of the corporation and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders (A) pursuant to the corporation's notice of meeting, (B) by or at the direction of the board of directors or (C) by any stockholder of the corporation who was a stockholder of record at the time of giving of notice provided for in this bylaw, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this bylaw. (ii) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (C) of paragraph (a)(i) of this bylaw, the stockholder must have given timely notice thereof in writing to the secretary of the corporation and such other business must otherwise be a proper matter for stockholder action. To be timely, a stockholder's notice shall be delivered to the secretary at the principal executive offices of the corporation not later than the close of business on the 60th day nor earlier than the close of business on the 90th day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting or the l0th day following the day on which public announcement of the date of such meeting is first made by the corporation. In no event shall the public announcement of an adjournment of an annual meeting commence a new time period for the giving of a stockholder's notice as described above. Such stockholder's notice shall set forth (A) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Rule 14a-11 thereunder (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (B) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (C) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the corporation's books, and of such beneficial owner and (ii) the class or series and number of shares of the corporation which are owned of record and beneficially by such stockholder and such beneficial owner. (iii) Notwithstanding anything in the second sentence of paragraph (a)(ii) of this bylaw to the contrary, in the event that the number of directors to be elected to the board of directors of the corporation is increased and there is no public announcement by the corporation naming all of the nominees for director or specifying the size of the increased board of directors at least 70 days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this bylaw shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the secretary at the principal executive offices of the corporation not later than the close of business on the l0th day following the day on which such public announcement is first made by the corporation. (b) Special Meetings of Stockholders.--Only such business shall be conducted at a special meeting of B-23 stockholders as shall have been brought before the meeting pursuant to a proper notice of meeting. Nominations of persons for election to the board of directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to a proper notice of meeting (i) by or at the direction of the board of directors or (ii) by any stockholder of the corporation who is a stockholder of record at the time of giving of notice provided for in this bylaw, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this bylaw. In the event a special meeting of stockholders is called for the purpose of electing one or more directors to the board of directors, any stockholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in a proper notice of meeting, if the stockholder's notice required by paragraph (a)(ii) of this bylaw shall be delivered to the Secretary at the principal executive offices of the corporation not earlier than the close of business on the 90th day prior to such special meeting and not later than the close of business on the later of the 60th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the board of directors or other stockholders to be elected at such meeting. In no event shall the public announcement of an adjournment of a special meeting commence a new time period for the giving of a stockholder's notice as described above. (c) General. (i) Only such persons who are nominated in accordance with the procedures set forth in this bylaw shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this bylaw. Except as otherwise provided by law, the certificate of incorporation, or these bylaws, the chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this bylaw and, if any proposed nomination or business is not in compliance with this bylaw, to declare that such defective proposal or nomination shall be disregarded. (ii) For purposes of this bylaw, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (iii) Notwithstanding the foregoing provisions of this bylaw, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this bylaw. Nothing in this bylaw shall be deemed to affect any rights (A) of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or (B) of the holders of any series of Preferred Stock to elect directors under specified circumstances. ARTICLE IV Board of Directors SECTION 4.01. Powers.--All powers vested by law in the corporation shall be exercised by or under the authority of, and the business and affairs of the corporation shall be managed under the direction of, the board of directors. SECTION 4.02. Number and Term of Office.--The board of directors shall consist of such number of directors as may be determined from time to time by resolution of the board of directors. Each director shall hold office until the expiration of the term for which he or she was selected and until a successor shall have been elected and qualified or until his or her earlier death, resignation or removal. Directors need not be residents of Delaware or stockholders of the corporation. SECTION 4.03. Vacancies.--Vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having a right to vote as a single class may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director, and the B-24 directors so chosen shall hold office until their successors are elected and qualified or until their earlier death, resignation or removal. If there are no directors in office, then an election of directors may be held in the manner provided by statute. Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the certificate of incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. If, at the time of filling any vacancy or any newly created directorship, the directors then in office shall constitute less than a majority of the whole board (as constituted immediately prior to any such increase), the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office. SECTION 4.04. Resignations.--Any director may resign at any time upon written notice to the corporation. The resignation shall be effective upon receipt thereof by the corporation or at such subsequent time as shall be specified in the notice of resignation and, unless otherwise specified in the notice, the acceptance of the resignation shall not be necessary to make it effective. SECTION 4.05. Removal.--Any director or the entire board of directors may be removed, with or without cause, by the holders of shares entitled to cast a majority of the votes which all stockholders are entitled to cast at an election of directors. SECTION 4.06. Organization.--At every meeting of the board of directors, the chairman, if there be one, or, in the case of a vacancy in the office or absence of the chairman, one of the following officers present in the order stated: the vice chairman, if there be one, the president, the vice presidents in their order of rank and seniority, or a chairman chosen by a majority of the directors present, shall preside, and the secretary, or, in the absence of the secretary, an assistant secretary, or in the absence of the secretary and the assistant secretaries, any person appointed by the chairman of the meeting, shall act as secretary. SECTION 4.07. Place of Meeting.--Meetings of the board of directors shall be held at such place within or without the State of Delaware as the board of directors may from time to time determine, or as may be designated in the notice of the meeting. SECTION 4.08. Regular Meetings.--Regular meetings of the board of directors shall be held without notice at such time and place as shall be designated from time to time by resolution of the board of directors. SECTION 4.09. Special Meetings.--Special meetings of the board of directors shall be held whenever called by the chairman or by two or more of the directors. SECTION 4.10. Quorum, Manner of Acting and Adjournment. (a) General Rule.--At all meetings of the board a majority of the total number of directors shall constitute a quorum for the transaction of business. The vote of a majority of the directors present at any meeting at which a quorum is present shall be the act of the board of directors, except as may be otherwise specifically provided by the GCL or by the certificate of incorporation. If a quorum is not present at any meeting of the board of directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. (b) Unanimous Written Consent.--Unless otherwise restricted by the certificate of incorporation, any action required or permitted to be taken at any meeting of the board of directors may be taken without a meeting, if all members of the board consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the board. SECTION 4.11. Executive and Other Committees. (a) Establishment.--The board of directors may, by resolution adopted by a majority of the whole board, B-25 establish an Executive Committee and one or more other committees, each committee to consist of one or more directors. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee and the alternate or alternates, if any, designated for such member, the member or members of the committee present at any meeting and not disqualified from voting, whether or not they constitute a quorum, may unanimously appoint another director to act at the meeting in the place of any such absent or disqualified member. (b) Powers.--The Executive Committee, if established, and any such other committee to the extent provided in the resolution establishing such committee shall have and may exercise all the power and authority of the board of directors in the management of the business and affairs of the corporation and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the certificate of incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the board of directors as provided in Section 151(a) of the GCL, fix the designation and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation or fix the number of shares of any series of stock or authorize the increase or decrease of shares of any series), adopting an agreement of merger or consolidation under Section 251 or 252 of the GCL, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the bylaws of the corporation. The Executive Committee shall have the power or authority to declare a dividend, to authorize the issuance of stock and to adopt a certificate of ownership and merger pursuant to Section 253 of the GCL. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the board of directors. Each committee so formed shall keep regular minutes of its meetings and report the same to the board of directors when required. (c) Committee Procedures.--The term "board of directors" or "board," when used in any provision of these bylaws relating to the organization or procedures of or the manner of taking action by the board of directors, shall be construed to include and refer to the Executive Committee or other committee of the board. SECTION 4.12. Approval of Independent Directors for Certain Actions.--(a) Prior to _____________ 2000, the approval of at least a majority of the corporation's Independent Directors (as defined below) shall be required to approve (i) any amendment to the certificate of incorporation or bylaws of the corporation or any stockholder rights plan of the corporation (including the redemption of the rights thereunder or waiver of any provision thereof) or any waiver of, or "opt-out" from, the benefit or effect of any provision thereof) or other provision applicable to the corporation; or (ii) any agreement binding the corporation in respect of the sale, in a single transaction or a series of related transactions, of all or a Substantial Part of the corporation (as defined below), whether by liquidation, consolidation, dissolution, sale of capital stock or assets, tender or exchange offer, merger or other business combination. (b) The approval of at least a majority of the corporation's Independent Directors shall be required to approve and authorize (i) any transaction or series of related transactions between the corporation or any of its subsidiaries, on the one hand, and any Stockholder (as defined below) or any affiliate of a Stockholder, on the other hand, so long as any of such entities and its affiliates own, in the aggregate, at least 10% of the outstanding Common Stock, (ii) any amendment to, or waiver of, any provisions of the Stockholders Agreement, dated as of July __ , 1997, among the corporation and certain of its stockholders, or (iii) notwithstanding the terms of the preceding paragraph (a), any amendment to the certificate of incorporation or bylaws of the corporation which would amend, repeal, waive, contravene or otherwise alter this paragraph (b), including amendments of the defined terms used herein. For purposes of the foregoing: "Independent Director" means a director of the corporation who is not (apart from such directorship) (i) an officer, director, affiliate, employee, principal stockholder, consultant or partner of a Stockholder or any affiliate of a Stockholder or of any entity that was dependent upon a Stockholder or any affiliate of a Stockholder for more B-26 than 5% of its revenues or earnings in its most recent fiscal year, or (ii) an officer, employee, consultant or partner of the corporation or any affiliate of the corporation or an officer, employee, principal stockholder, consultant or partner of an entity that was dependent upon the corporation or any affiliate of the corporation for more than 5% of its revenues or earnings in its most recent fiscal year; "Stockholder" means SDI Partners I, L.P., Lehman Brothers Capital Partners I, L.P., Lehman Ltd I, Inc., LB I Group, Inc., Lehman/SDI, Inc., Lehman Brothers Inc., and their respective affiliates or successors; and "Substantial Part of the corporation" means, as of any date, thirty percent (30%) or more of (i) the outstanding capital stock of the corporation (measured by economic interest or voting power), or (ii) the book value of the consolidated tangible assets of the corporation and its subsidiaries, taken as a whole (without regard to any liabilities of the corporation or any of its subsidiaries), as of the end of its most recent fiscal quarter ending prior to the time the determination is made. SECTION 4.13. Compensation of Directors.--Unless otherwise restricted by the certificate of incorporation, the board of directors shall have the authority to fix the compensation of directors. ARTICLE V Officers SECTION 5.01. Number, Qualifications and Designation.--The officers of the corporation shall be chosen by the board of directors and shall be a chairman, a president, one or more vice presidents, a secretary, a treasurer, and such other officers as may be elected in accordance with the provisions of section 5.03 of this Article. Any number of offices may be held by the same person. Officers may, but need not, be directors or stockholders of the corporation. SECTION 5.02. Election and Term of Office.--The officers of the corporation, except those elected by delegated authority pursuant to section 5.03 of this Article, shall be elected annually by the board of directors, and each such officer shall hold office for a term of one year and until a successor is elected and qualified, or until his or her earlier resignation or removal. Any officer may resign at any time upon written notice to the corporation. SECTION 5.03. Subordinate Officers, Committees and Agents.--The board of directors may from time to time elect such other officers and appoint such committees, employees or other agents as it deems necessary, who shall hold their offices for such terms and shall exercise such powers and perform such duties as are provided in these bylaws, or as the board of directors may from time to time determine. The board of directors may delegate to any officer or committee the power to elect subordinate officers and to retain or appoint employees or other agents, or committees thereof, and to prescribe the authority and duties of such subordinate officers, committees, employees or other agents. SECTION 5.04. The Chairman.--The chairman shall be the chief executive officer of the corporation, shall preside at all meetings of the stockholders and of the board of directors, and shall perform such other duties as may from time to time be assigned by the board of directors. SECTION 5.05. The President.--The president shall be the chief operating officer of the corporation and shall perform such other duties as from time to time may be assigned by the board of directors and the chairman. SECTION 5.06. The Vice Presidents.--The vice presidents shall perform the duties of the president in the absence of the president and such other duties as may from time to time be assigned to them by the board of directors or by the president. SECTION 5.07. The Secretary.--The secretary, or an assistant secretary, shall attend all meetings of the stockholders and of the board of directors and shall record the proceedings of the stockholders and of the directors B-27 and of committees of the board in a book or books to be kept for that purpose; shall see that notices are given and records and reports properly kept and filed by the corporation as required by law; shall be the custodian of the seal of the corporation and see that it is affixed to all documents to be executed on behalf of the corporation under its seal; and, in general, shall perform all duties incident to the office of secretary, and such other duties as may from time to time be assigned by the board of directors or the president. SECTION 5.08. The Treasurer.--The treasurer, or an assistant treasurer, shall have or provide for the custody of the funds or other property of the corporation; shall collect and receive or provide for the collection and receipt of moneys earned by or in any manner due to or received by the corporation; shall deposit all funds in his or her custody as treasurer in such banks or other places of deposit as the board of directors may from time to time designate; whenever so required by the board of directors, shall render an account showing his or her transactions as treasurer and the financial condition of the corporation; and, in general, shall discharge such other duties as may from time to time be assigned by the board of directors or the president. SECTION 5.09. Officers' Bonds.--No officer of the corporation need provide a bond to guarantee the faithful discharge of the officer's duties unless the board of directors shall by resolution so require a bond in which event such officer shall give the corporation a bond (which shall be renewed if and as required) in such sum and with such surety or sureties as shall be satisfactory to the board of directors for the faithful performance of the duties of office. SECTION 5.10. Salaries.--The salaries of the officers and agents of the corporation elected by the board of directors shall be fixed from time to time by the board of directors. ARTICLE VI Certificates of Stock, Transfer, Etc. SECTION 6.01. Form and Issuance. (a) Issuance.--The shares of the corporation shall be represented by certificates unless the board of directors shall by resolution provide that some or all of any class or series of stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until the certificate is surrendered to the corporation. Notwithstanding the adoption of any resolution providing for uncertificated shares, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the corporation by, the chairman, or the president or vice president, and by the treasurer or an assistant treasurer, or the secretary or an assistant secretary, representing the number of shares registered in certificate form. (b) Form and Records.--Stock certificates of the corporation shall be in such form as approved by the board of directors. The stock record books and the blank stock certificate books shall be kept by the secretary or by any agency designated by the board of directors for that purpose. The stock certificates of the corporation shall be numbered and registered in the stock ledger and transfer books of the corporation as they are issued. (c) Signatures.--Any of or all the signatures upon the stock certificates of the corporation may be a facsimile. In case any officer, transfer agent or registrar who has signed, or whose facsimile signature has been placed upon, any share certificate shall have ceased to be such officer, transfer agent or registrar, before the certificate is issued, it may be issued with the same effect as if the signatory were such officer, transfer agent or registrar at the date of its issue. SECTION 6.02. Transfer.--Transfers of shares shall be made on the share register or transfer books of the corporation upon surrender of the certificate therefor, endorsed by the person named in the certificate or by an attorney lawfully constituted in writing. No transfer shall be made which would be inconsistent with the provisions of Article 8, Title 6 of the Delaware Uniform Commercial Code-Investment Securities. B-28 SECTION 6.03. Lost, Stolen, Destroyed or Mutilated Certificates.--The board of directors may direct a new certificate of stock or uncertificated shares to be issued in place of any certificate theretofore issued by the corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the board of directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or the legal representative of the owner, to give the corporation a bond sufficient to indemnify against any claim that may be made against the corporation on account of the alleged loss, theft or destruction of such certificate or the issuance of such new certificate or uncertificated shares. SECTION 6.04. Record Holder of Shares.--The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. SECTION 6.05. Determination of Stockholders of Record. (a) Meetings of Stockholders.--In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the board of directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the board of directors, and which record date shall not be more than 60 nor less than ten days before the date of such meeting. If no record date is fixed by the board of directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting unless the board of directors fixes a new record date for the adjourned meeting. (b) Consent of Stockholders.--In order that the corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the board of directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the board of directors, and which date shall not be more than ten days after the date upon which the resolution fixing the record date is adopted by the board of directors. Any stockholder of record seeking to have the stockholders authorize or take corporate action by written consent shall, by written notice to the secretary, request the board of directors to fix a record date. The board of directors shall promptly, but in all events within 10 days after the date on which such a request is received, adopt a resolution fixing the record date. If no record date has been fixed by the board of directors within 10 days of the date on which such a request is received, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the board of directors is required by the GCL, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to a corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the board of directors and prior action by the board of directors is required by the GCL, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the board of directors adopts the resolution taking such prior action. (c) Dividends.--In order that the corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights of the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the board of directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than 60 days prior to such action. If no record date B-29 is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the board of directors adopts the resolution relating thereto. ARTICLE VII Indemnification of Directors, Officers and Other Authorized Representatives SECTION 7.01. Indemnification of Authorized Representatives in Third Party Proceedings.--The corporation shall indemnify, to the fullest extent permitted by law, any person who was or is an authorized representative of the corporation, and who was or is a party, or is threatened to be made a party to any third party proceeding, by reason of the fact that such person was or is an authorized representative of the corporation, against expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such third party proceeding if such person acted in good faith and in a manner such person reasonably believed to be in, or not opposed to, the best interests of the corporation and, with respect to any criminal third party proceeding, had no reasonable cause to believe such conduct was unlawful. The termination of any third party proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not of itself create a presumption that the authorized representative did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to, the best interests of the corporation, and, with respect to any criminal third party proceeding, had reasonable cause to believe that such conduct was unlawful. SECTION 7.02. Indemnification of Authorized Representatives in Corporate Proceedings.--The corporation shall indemnify, to the fullest extent permitted by law, any person who was or is an authorized representative of the corporation and who was or is a party or is threatened to be made a party to any corporate proceeding, by reason of the fact that such person was or is an authorized representative of the corporation, against expenses actually and reasonably incurred by such person in connection with the defense or settlement of such corporate proceeding if such person acted in good faith and in a manner reasonably believed to be in, or not opposed to, the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such corporate proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such authorized representative is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. SECTION 7.03. Mandatory Indemnification of Authorized Representatives.--To the extent that an authorized representative or other employee or agent of the corporation has been successful on the merits or otherwise in defense of any third party or corporate proceeding or in defense of any claim, issue or matter therein, such person shall be indemnified, to the fullest extent permitted by law, against expenses actually and reasonably incurred by such person in connection therewith. SECTION 7.04. Determination of Entitlement to Indemnification.--Any indemnification under section 7.01, 7.02 or 7.03 of this Article (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the authorized representative or other employee or agent is proper in the circumstances because such person has either met the applicable standard of conduct set forth in section 7.01 or 7.02 or has been successful on the merits or otherwise as set forth in section 7.03 and that the amount requested has been actually and reasonably incurred. Such determination shall be made: (a) by the board of directors by a majority vote of a quorum consisting of directors who were not parties to such third party or corporate proceeding; or (b) if such a quorum is not obtainable, or even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion; or (c) by the stockholders. B-30 SECTION 7.05. Advancing Expenses.--Expenses actually and reasonably incurred in defending a third party or corporate proceeding shall be paid on behalf of an authorized representative by the corporation in advance of the final disposition of such third party or corporate proceeding upon receipt of an undertaking by or on behalf of the authorized representative to repay such amount if it shall ultimately be determined that the authorized representative is not entitled to be indemnified by the corporation as authorized in this Article. The financial ability of any authorized representative to make a repayment contemplated by this section shall not be a prerequisite to the making of an advance. Expenses incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the board of directors deems appropriate. SECTION 7.06. Definitions.--For purposes of this Article: (a) "authorized representative" shall mean any and all directors and officers of the corporation and any person designated as an authorized representative by the board of directors of the corporation (which may, but need not, include any person serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise); (b) "corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued; (c) "corporate proceeding" shall mean any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor or investigative proceeding by the corporation; (d) "criminal third party proceeding" shall include any action or investigation which could or does lead to a criminal third party proceeding; (e) "expenses" shall include attorneys' fees and disbursements; (f) "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; (g) "not opposed to the best interests of the corporation" shall include actions taken in good faith and in a manner the authorized representative reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan; (h) "other enterprises" shall include employee benefit plans; (i) "party" shall include the giving of testimony or similar involvement; (j) "serving at the request of the corporation" shall include any service as a director, officer or employee of the corporation which imposes duties on, or involves services by, such director, officer or employee with respect to an employee benefit plan, its participants, or beneficiaries; and (k) "third party proceeding" shall mean any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, or investigative, other than an action by or in the right of the corporation. SECTION 7.07. Insurance.--The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against the person and incurred by the person in any such capacity, or arising out of his or her status as such, whether or not the corporation would have the power or the obligation to indemnify B-31 such person against such liability under the provisions of this Article. SECTION 7.08. Scope of Article.--The indemnification of authorized representatives and advancement of expenses, as authorized by the preceding provisions of this Article, shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any agreement, vote of stockholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office. The indemnification and advancement of expenses provided by or granted pursuant to this Article shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be an authorized representative and shall inure to the benefit of the heirs, executors and administrators of such a person. SECTION 7.09. Reliance on Provisions.--Each person who shall act as an authorized representative of the corporation shall be deemed to be doing so in reliance upon rights of indemnification provided by this Article. ARTICLE VIII General Provisions SECTION 8.01. Dividends.--Subject to the restrictions contained in the GCL and any restrictions contained in the certificate of incorporation, the board of directors may declare and pay dividends upon the shares of capital stock of the corporation. SECTION 8.02. Contracts.--Except as otherwise provided in these bylaws, the board of directors may authorize any officer or officers, or any agent or agents, to enter into any contract or to execute or deliver any instrument on behalf of the corporation and such authority may be general or confined to specific instances. SECTION 8.03. Corporate Seal.--The corporation shall have a corporate seal, which shall have inscribed thereon the name of the corporation, the year of its organization and the words "Corporate Seal, Delaware". The seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. SECTION 8.04. Deposits.--All funds of the corporation shall be deposited from time to time to the credit of the corporation in such banks, trust companies, or other depositories as the board of directors may approve or designate, and all such funds shall be withdrawn only upon checks signed by such one or more officers or employees as the board of directors shall from time to time determine. SECTION 8.05. Corporate Records. (a) Examination by Stockholders.--Every stockholder shall, upon written demand under oath stating the purpose thereof, have a right to examine, in person or by agent or attorney, during the usual hours for business, for any proper purpose, the stock ledger, list of stockholders, books or records of account, and records of the proceedings of the stockholders and directors of the corporation, and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent shall be the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing which authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in Delaware or at its principal place of business. Where the stockholder seeks to inspect the books and records of the corporation, other than its stock ledger or list of stockholders, the stockholder shall first establish (i) that the stockholder has complied with the provisions of this section respecting the form and manner of making demand for inspection of such documents; and (ii) that the inspection sought is for a proper purpose. Where the stockholder seeks to inspect the stock ledger or list of stockholders of the corporation and has complied with the provisions of this section respecting the form and manner of making demand for inspection of such documents, the burden of proof shall be upon the corporation to establish that the inspection sought is for an improper purpose. B-32 (b) Examination by Directors.--Any director shall have the right to examine the corporation's stock ledger, a list of its stockholders and its other books and records for a purpose reasonably related to the person's position as a director. SECTION 8.06. Amendment of Bylaws.--Subject to Section 4.12 hereof, these bylaws may be altered, amended or repealed or new bylaws may be adopted either (a) by vote of the stockholders at a duly organized annual or special meeting of stockholders (or by their written consent), or (b) by vote of a majority of the board of directors at any regular or special meeting of directors if such power is conferred upon the board of directors by the certificate of incorporation. B-33 EXHIBIT C SMITH BARNEY FAIRNESS OPINION SMITH BARNEY - ------------ A Member of Travelers Group June 19, 1997 The Special Committee of the Board of Directors of Lehman/SDI, Inc. 2600 One Logan Square Philadelphia, PA 19103 Attention: O. Gordon Brewer, Jr. and Ernest L. Ransome, III The Special Committee of the Board of Directors of Lehman/SDI, Inc. Gentlemen: In connection with the proposed conversion of SunSource L.P. ("SunSource" or the "Partnership") to corporate form (the "Conversion"), you have requested our opinion as to the fairness, from a financial point of view, to holders of SunSource's Class A Limited Partnership Interests ("Class A Interests") and Class B Limited Partnership Interests ("Class B Interests") of the Partnership of (i) the consideration to be received by holders of Class A Interests and holders of Class B Interests, respectively, and (ii) the General Partner Consideration (as defined herein) in the Conversion. The terms of the Conversion are set forth in the Registration Statement on Form S-4, as amended, of SunSource Inc. and SunSource Capital Trust filed with the Securities and Exchange Commission on May 12, 1997 (the "Registration Statement"). The Registration Statement provides that (i) holders of Class A Interests will receive in exchange for each Class A Interest, 0.38 shares of 11.6% Trust Preferred Securities, par value $25.00 per share (the "Preferred Securities") of SunSource Capital Trust and $1.30 in cash, (ii) holders of Class B Interests will receive in exchange for each Class B Interest 0.25 share of common stock, par value $.01 per share (the "Common Stock") of a newly formed Delaware corporation (the "Company"), and (iii) the holders of the general and limited partner interests in SDI Partners I, L.P. (the "General Partner") will receive 1,000,000 shares of Common Stock in exchange for their general and limited partnership interests in the General Partner. The Common Stock to be received by the holders of such interests in the General Partner is referred to herein as the "General Partner Consideration." In arriving at our opinion, we have reviewed the Registration Statement and exhibits thereto and the limited partnership agreements of the Partnership, SDI Operating Partners L.P. (the "Operating Partnership"), and the General Partner, and held discussions with certain senior operating management of the Operating Partnership ("Management") and representatives and advisors of the Partnership, the Operating Partnership and the General Partner to discuss the business, operations and prospects of the Partnership. We have examined certain publicly available business and financial information relating to the Partnership as well as internal financial statements, forecasts and other financial and operating data concerning the Partnership prepared by Management. We have reviewed the financial terms of the Conversion as set forth in the Registration Statement in relation to, among other things: current and historical market prices and trading volumes of the Class A Interests and Class B Interests; historical and projected earnings and operating data of the Partnership; the capitalization and financial condition of the Partnership; SMITH BARNEY INC. 388 Greenwich Street, New York, NY 10013 212-816-6000 C-1 and the pro forma effect of the Conversion. We also analyzed certain financial, capital market and other publicly available information relating to the business of other companies whose operations we considered comparable to those of the Partnership. In addition to the foregoing, we conducted such other analyses and examinations and considered such other financial, economic and market criteria as we deemed appropriate in arriving at our opinion. In rendering our opinion, we have assumed and relied, without independent verification, upon the accuracy and completeness of all financial and other information publicly available or furnished to or otherwise reviewed by or discussed with us. With respect to financial forecasts and other information furnished to or otherwise reviewed by or discussed with us, we have been advised by Management that such forecasts and other information were reasonably prepared on bases reflecting the best currently available estimates and judgments of Management as to the expected future financial performance of the Partnership or the Company, as the case may be, and we further relied on the assurances of management that it is unaware of any facts that would make the information or forecasts provided to us incomplete or misleading. We are not expressing any opinion as to what the value of the Preferred Securities or the Common Stock actually will be when issued to holders of Class A Interests and Class B Interests, respectively, or the prices at which the Preferred Securities or Common Stock will trade subsequent to the Conversion. We have not made or been provided with an independent evaluation or appraisal of the assets or liabilities (contingent or otherwise) of the Partnership. We have not been asked to express an opinion as to the relative merits of the Conversion as compared to any alternative business strategies that might exist for the Partnership or the effect of any alternative transaction in which the Partnership might engage. We were not asked to solicit third-party indications of interest in acquiring all or any part of the Partnership. Our opinion is necessarily based upon financial, capital market and other conditions and circumstances, including current tax laws, existing and disclosed to us as of the date hereof. We have been engaged to render financial advisory services to the Special Committee (the "Special Committee") of the Board of Directors of Lehman/SDI, Inc. in connection with the Conversion and have received a fee for our services, including a fee for the delivery of this opinion. In the ordinary course of business, we and our affiliates may actively trade or hold the Class A Interests and Class B Interests for our own account or for the account of our customers and, accordingly, may at any time hold a long or short position in such securities. C-2 It is understood that this opinion is for the information of the Special Committee and the Board of Directors of Lehman/SDI, Inc. only and may not be used for any other purpose without prior written consent, except that this opinion may be included in any proxy statement, registration statement or similar document prepared in connection with a Conversion. Provided however, that the opinion shall be included in its entirety and any other reference to Smith Barney shall be accurate and complete and shall not be included without the consent of Smith Barney, which consent shall not be unreasonably withheld. Based upon and subject to the foregoing, our experience as investment bankers and other factors we deemed relevant, we are of the opinion that, as of the date hereof, (i) the consideration to be received in the Conversion by the holders of Class A Interests is fair from a financial point of view to such holders, (ii) the consideration to be received in the Conversion by the holders of Class B Interests is fair from a financial point of view to such holders, and (iii) the General Partner Consideration to be received in the Conversion is fair from a financial point of view to the holders of Class A Interests and to the holders of the Class B Interests, respectively. Very truly yours, SMITH BARNEY INC. C-3 EXHIBIT D MANAGEMENT PROJECTIONS Management Projections Furnished to Smith Barney To assist the Special Committee and its advisors in their due diligence, SunSource management prepared financial projections for the Partnership through the year 2001. The first set of projections was provided in July 1996, adjustments were provided in November 1996 and a second set of projections was provided in April 1997. These documents have been filed as exhibits to the Schedule 13E-3 filed with the SEC in connection with the Conversion. SunSource does not make multi-year projections in the ordinary course of running its business. Instead, the business is managed by measuring the performance of each of its twelve divisions versus the one-year projections which form the basis for their annual operating plans. The annual plan objectives are also used to determine the amount of incentive compensation earned by all levels of SunSource management for the calendar year covered by the plan, and should not be used to predict actual results. SunSource does not make its internal projections public because it considers such forecasts unreliable and to be increasingly unreliable the further in the future they extend. The July 1996 Projection was based on the actual unaudited results of operations for the six months ended June 30, 1996 and estimated results of operations for the six months ended December 31, 1996 and projections of sales growth and profit margins for the five years ended December 31, 2001. The July 1996 Projection was as follows: July 1996 Projection (dollars in millions)
5 Yr. Compound 1996 1997 1998 1999 2000 2001 Growth Rate ---- ---- ---- ---- ---- ---- ----------- Sales* ($) 648.2 705.8 766.5 832.2 903.4 981.4 8.6% Annual Growth, %/yr -- 8.89 8.60 8.57 8.56 8.63 EBITDA** ($) 43.1 49.1 56.3 63.4 70.9 78.5 12.7% % of Sales 6.65 6.96 7.34 7.62 7.85 8.00
- -------------------- * Includes commission income of $0.2 million in all years. ** Earnings before Interest, Taxes, Depreciation and Amortization SunSource sells its products and services across an extremely broad spectrum of the economy -- manufacturing, forest products, agriculture, mining, construction, energy and many other segments. As a result, SunSource's sales are broadly influenced by macroeconomic factors. It is not possible to predict with accuracy the timing or magnitude of a recession or other major economic disruption. Therefore, projections have been made on the basis of average sales growth rates expected to be realized across an economic cycle. Sales were projected to grow at a compound growth rate of 8.6% per year through 2001, generally in the range of SunSource's historical growth rates as shown below. 5 year compound growth, 1991-1995 7.02% (1990 as base year) 5 year compound growth, 1992-1996 9.09% (1991 as base year) 6 year compound growth, 1991-1996 7.30% (1990 as base year) D-1 While the overall sales growth rate was projected at 8.6%, the growth rates of the individual business segments varied significantly. Hillman was projected to have the highest average sales growth rate of approximately 12% per year due to the introduction of new product lines from the Curtis acquisition into existing Hillman accounts, introduction of Hillman products into former Curtis accounts, and additional penetration of Hillman products into existing accounts who currently buy only an estimated 60% of the full Hillman line. Sales of the six divisions comprising the Technology Services Group were projected to grow at an average rate of 8% per year. The Activation and Air-Dreco divisions, serving primarily the southeastern U.S. plus Texas and Oklahoma, showed the slowest growth rates (2%-5% per year) due to the expected cyclical slowness in the next few years of the timber and energy markets which comprise much of their demand base. The highest projected sales growth rate (7% per year) for a domestic division within the Group was expected for the Warren/Air-Draulics division which services the rapidly expanding commercial economy of Colorado, Utah, Nevada and Arizona. This region has been the beneficiary of the out-migration of business from California during much of this decade. The Group's only foreign division, Hydra Power de Mexico, was expected to grow at approximately 25% per year from its 1996 sales of $1.6 million by adding product lines and an expanded range of technical services. The Inventory Management Group is comprised of two divisions: Kar Products/A&H and Special-T Metals/SIMCO. The Group was projected to grow in the range of 9%-10% per year, with Kar/A&H projected at 6%-7% and Special-T Metals/SIMCO at 17%-22%. Kar/A&H sells across the entire commercial/industrial market spectrum of the United States and Canada. There is a very large service component to their product sales, and this is reflected in the premium pricing strategy followed by this division. Sales growth has historically been limited primarily by the division's ability to recruit and retain a highly motivated full commission sales force. Special-T Metals/SIMCO is pursuing twin strategies of becoming either a single source provider to industrial facilities for their maintenance, repair and operating (MRO) supplies, or an exclusive provider of fasteners and related products to the operations of original equipment manufacturers (OEM's). The division's strategies are expected to enjoy good success as the result of the current trend toward outsourcing of non-critical functions by the division's principal customer base. Harding Glass was projected to grow at only 4.2% per year to reflect the continued erosion of sales to the less-profitable wholesale business as glass manufacturers were expected to continue their incursions into that market. Also, the forecast reflected Harding's modest success to date in growing its full service retail glass shops. In July, SunSource's consolidated EBITDA as a percentage of sales (the "EBITDA Margin" ) was projected to increase from 6.65% in 1996 to 8.00% in 2001. Each of SunSource's three business segments had materially different projections for EBITDA Margin. At the divisional level (excluding home office administrative expenses), Hillman's EBITDA margin was projected to increase from 9.5% in 1996 to 12.1% in 2001. All of this margin improvement was due to the impact of lower operating expenses as a percentage of sales as Hillman was projected to realize positive operating leverage by selling more products through its existing distribution system and no longer having to incur the extraordinary expenses of building a national sales force. The EBITDA margin of the Technology Services Group was projected to improve from 6.9% in 1996 to 7.9% in 2001. Gross project margins were projected to improve by 0.3% of sales due to an increasing contribution from the sales of value-added services such as systems design and repair work, which tend to have higher than average gross margins. Operating expenses were expected to decrease by 0.7% of sales due to increased consolidation and centralization of administrative and logistic functions. The Inventory Management Group was projected to have a decrease in EBITDA margin from 13.1% in 1996 to 12.6% in 2001. The larger division of this Group (Kar Products/A&H Bolt) was projected to maintain its EBITDA margin at 15.6% throughout the projection period. The smaller division (Special-T Metals/SIMCO) was D-2 projected to improve its EBITDA margin from 3.5% in 1996 to 5.5% in 2001, due entirely to expected operating leverage from spreading its overhead from a sales base of $31 million in 1996 to $73 million in 2001. However, sales growth for Special-T Metals/SIMCO is projected to average approximately 18% per year during the period, versus only 7% or so for Kar/A&H. As a result, Special-T Metals/SIMCO was expected to account for 30.0% of the Inventory Management Group's sales in 2001 versus only 20.2% in 1996. This change in sales mix was expected to produce the lower EBITDA margin for the Group in 2001 versus 1996. The principal contributor to Harding's improvement in EBITDA margin from 5.0% in 1996 to 5.7% in 2001 was expected to be lower operating expenses as a percentage of sales due to consolidation of administrative expenses as a result of centralization made possible by an improved information system. In November 1996, SunSource concluded that the EBITDA Margins in the July Projection were too ambitious. A projection of significant improvement in EBITDA Margin is an appropriate goal when negotiating performance standards for purposes of incentive compensation for a given year. However, SunSource has never achieved the consistent year-to-year improvement for each year of a five-year projection. Therefore, management decided to apply a " consolidated risk adjustment" to the portfolio of divisional projections because of the improbability that the projected performance levels would be achieved by all twelve divisions in each year of the projection. The purpose of the consolidated risk adjustment was to adjust the consolidated projected performance to reflect more closely the Partnership's actual historical performance. The consolidated risk adjustments furnished to the Special Committee and its advisors in November are shown below: November Consolidated Risk Adjustments to EBITDA (dollars in millions)
1996 1997 1998 1999 2000 2001 ---- ---- ---- ---- ---- ---- Reductions in EBITDA($) 0.3 2.5 6.0 8.6 11.0 13.0
The November 1996 Projection as adjusted was as follows: November 1996 Projection (dollars in millions)
5 Yr. Compound 1996 1997 1998 1999 2000 2001 Growth Rate ---- ---- ---- ---- ---- ---- ----------- Sales* ($) 648.2 705.8 766.5 832.2 903.4 981.4 8.6% Annual Growth, %/yr -- 8.89 8.60 8.57 8.56 8.63 EBITDA ($) 42.8 46.6 50.3 54.8 59.9 65.5 8.9% % of Sales 6.60 6.60 6.56 6.58 6.63 6.67
- -------------------- * Includes commission income of $0.2 mllion in all years. D-3 The EBITDA Margins in the November Projection show an increase from 6.60% in 1996 to only 6.67% in 2001. SunSource's actual EBITDA Margins in the past five years have varied from a low of 6.4% to a high of 6.9%, with the average being 6.6%. The April 1997 Projection was based on actual audited results of operations for the year ended December 31, 1996, actual unaudited results of operations for the three months ended March 31, 1997 and estimated results of operations for the nine months ended December 31, 1997 and projections of sales growth and profit margins for the four years ended December 31, 2001. The April 1997 Projection was as follows: April 1997 Projection (dollars in millions)
5 Yr. Actual Compound 1996 1997 1998 1999 2000 2001 Growth Rate ---- ---- ---- ---- ---- ---- ----------- Sales ($) 649.3 705.8 766.5 832.2 903.4 981.4 8.6% Annual Growth, %/yr -- 8.70 8.60 8.57 8.56 8.63 EBITDA ($) 41.4 46.6 51.5 57.2 63.1 69.5 10.9% % of Sales 6.38 6.60 6.72 6.87 6.98 7.08
The sales growth rates are the same as used for the July and November Projections. The EBITDA Margins are the same as used in the November Projection, adjusted to reflect the expected profit improvements due to the restructuring of the Partnership's Technology Services Business. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Restructuring Charges." The April Projection assumes that 80% of the net benefits expected from the restructuring will be converted to profit. This reduction is intended to take account of the probability that SunSource's competitors will also be successful in lowering their costs of doing business, thereby enabling them to lower selling prices while maintaining their current profit margins. In that environment, SunSource would not realize the full amount of restructuring cost savings as improved profits. Management Projection Furnished to Prospective Lenders In January 1997, the Partnership also prepared a projection for prospective lenders in order to meet the requirement of the proposed Conversion that SunSource refinance its existing bank loans and long term debt. The primary issue to be addressed in this process was to determine the amount of financing required to support SunSource's operations during the next five years. In addition, SunSource's goal was to establish the financial capacity to support the internal growth of its core businesses, resume its acquisition program on a scale similar to its past experience, and to provide for the possibility of paying dividends on the Common Stock at some future time. It was in SunSource's interest to be optimistic in its growth assumptions underlying the Refinancing Projections to ensure that SunSource would have sufficient financial capacity to support a broad range of future possibilities. The Refinancing Projection provided to the lenders was as follows: D-4 Refinancing Projection (dollars in millions)
5 Yr. Actual Compound 1996 1997 1998 1999 2000 2001 Growth Rate ---- ---- ---- ---- ---- ---- ----------- Sales* ($) 649.3 738.1 809.9 881.7 953.6 1,031.2 9.7% Annual Growth, %/yr -- 13.36 9.73 8.87 8.15 8.14 EBITDA ($) 41.4 47.9 56.5 64.5 71.6 79.5 13.9% % of Sales 6.38 6.49 6.98 7.32 7.51 7.71
- -------------------- * For years 1997 through 2001, includes commission income of $0.3 million. The Refinancing Projection used as its starting point SunSource's 1997 Operating Plan. This plan represented the consolidation of divisional plans negotiated by the senior executives of SunSource with the management of the twelve operating divisions. 1997 management incentive compensation plans are tied to the performance levels imbedded in the 1997 Operating Plan. With respect to sales, the assumption was that the sales growth rate would decline from the 13.36% reflected in the 1997 Operating Plan toward SunSource's long term historical growth rate in the 8% range. With respect to EBITDA Margin, the projections assumed the successful completion of all of the initiatives being undertaken by the operating divisions to improve profitability, plus realization of 100% of the benefits contemplated by restructuring of the Technology Services divisions. Senior management did not make a consolidated risk adjustment to the EBITDA percentages in the Refinancing Projection to bring them to the levels of historical experience because they did not believe doing so would have a material impact on the lenders' decision processes. The amount that SunSource will actually borrow will rise and fall with the level of sales since more than 80% of SunSource's tangible assets are current assets, such as accounts receivable and inventory, which tend to closely follow sales. The agreement with the lenders provides that the interest rate paid on borrowed money varies as a function of the ratio of debt to EBITDA. As the actual ratio increases or decreases relative to the Refinancing Projection, the interest rate paid by SunSource will vary accordingly. The Refinancing Projection was provided to the Special Committee and its advisors in February 1997. The Partnership instructed the Special Committee and its advisors not to use such projections in their analysis because such projections were to be used to establish sufficient financial capacity to support a broad range of future corporate possibilities as described above. In April 1997, the lenders were furnished with the April Projection given to Smith Barney, plus additional projections based on the possibility of acquisitions and dividend payments. Qualifications with Respect to Projections The projections furnished to the Special Committee and its advisors were intended solely for their use in evaluating the fairness of the Conversion. Similarly, the projections furnished to the lenders were intended solely for their use in determining the terms for the refinancing. The recipients understand the limitations inherent in five year projections. D-5 The projections were not intended for use by public investors and should not be relied upon by them. The information was not prepared with a view to compliance with published guidelines established by the American Institute of Certified Public Accountants regarding projections or forecasts. The projections are forward looking statements which depend upon a number of important factors which could cause actual results to differ materially from those set forth. These factors include (a) a slowing of the economy or a recession which could adversely affect sales and reduce profit margins due to the inability to reduce fixed costs; (b) a reduction in sales which could cause an inventory buildup resulting in reduced cash flow and increased financing charges; (c) action by competitors which could adversely affect profit margins; (d) the failure to achieve the expense reductions contemplated by the restructuring; and (e) the failure of SunSource to convert to corporate form and realize the financial benefits from the Conversion. SunSource does not intend to update, revise or correct any of these projections after the Conversion. D-6 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 20. Indemnification of Directors and Officers Section 145 of the Delaware General Corporation Law ("Section 145") permits indemnification of directors, officers, employees and agents of a corporation under certain conditions and subject to certain limitations. Article VII of the Bylaws, requires the Registrant to indemnify directors and officers of the Registrant or any other authorized representative against expenses, judgments and any settlement amounts incurred in a third party proceeding brought by reason of the fact that the person is an authorized representative of the Registrant. The Bylaws also require indemnification of expenses incurred by an authorized representative in connection with a proceeding brought in the name of the corporation. The Bylaws further specify procedures for such indemnification. Section 145 also empowers the Registrant to purchase and maintain insurance that protects its officers, directors, employees and agents against any liabilities incurred in connection with their service in such positions. Item 21. Exhibits and Financial Statement Schedules (a) Exhibits:
Exhibit Number Description - ------ ----------- 2.1* Agreement and Plan of Conversion dated as of July __, 1997 among the Registrant, SunSource L.P., LPSub Inc., Lehman/SDI, Inc. and the limited partners of SDI Partners I, L.P. is Exhibit B to the Proxy Statement/Prospectus included in Part I and is incorporated herein by reference 3.1* Amended and Restated Certificate of Incorporation is Annex 2 to Exhibit B to the Proxy Statement/Prospectus included in Part I and is incorporated herein by reference 3.2* Bylaws are Annex 3 to Exhibit B to the Proxy Statement/Prospectus included in Part I and are incorporated herein by reference 4.1* Amended and Restated Declaration of Trust 4.2* Indenture dated as of ___________, 1997 between the Registrant and The Bank of New York 4.3* Preferred Securities Guarantee 5.1* Opinion of Morgan, Lewis & Bockius LLP regarding legality of the shares of common stock being registered 5.2* Opinion of Richards, Layton & Finger regarding validity of the Trust Preferred Securities being registered 8.1+ Opinion of Morgan, Lewis & Bockius LLP regarding certain tax matters 10.1+ Registration Rights Agreement dated as of _____________, 1997 among the Registrant, Lehman Brothers and the Senior Executives 10.2+ Stockholders Agreement dated as of _____________, 1997 among the Registrant, Lehman Brothers and certain stockholders of the Registrant 10.3+ Contribution Agreement dated as of _____________, 1997 between the Registrant and Lehman Brothers
II-1 10.4+ Deferred Compensation Plan for Key Employees of SDI Operating Partners, L.P. 10.5+ Rights Agreement dated as of ___________, 1997 between the Registrant and Registrar and Transfer Company 10.6++ Financing Commitments 23.1* Consent of Coopers & Lybrand L.L.P. 23.2* Consent of Morgan, Lewis & Bockius LLP (included in its opinions filed as Exhibits 5.1 and 8.1 hereto) 23.3* Consent of Richards, Layton & Finger (included in its opinion filed as Exhibit 5.2 hereto) 23.4* Consent of Smith Barney Inc. 24+ Powers of Attorney (included on the signature page) 25* Statement of eligibility of trustee 27.1+ Financial Data Schedule 99.1+ Form of Proxy 99.2* Selected Questions and Answers Booklet - ------------------ * Filed herewith. ** To be filed by amendment. + Previously filed. ++ Incorporated by reference to Exhibit 17(a) of the Schedule 13E-3 (File No. 5-40201) of SunSource L.P.
(b) Financial Statement Schedules: Schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto. Item 22. Undertakings (1) The undersigned registrant hereby undertakes: (a) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. II-2 (b) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (c) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (2) The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. (3) The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. (4) The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (5) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (6) The undersigned registrant hereby undertakes that: (a) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (b) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended (the "Securities Act"), the registrant has duly caused this Amendment No. 4 to Registration Statement ("Amendment No. 4") to be signed on its behalf by the undersigned, thereunto duly authorized, in Philadelphia, Pennsylvania on July 22, 1997. SUNSOURCE INC. By: * ------------------------------------- Donald T. Marshall President and Chief Executive Officer Pursuant to the Securities Act, this Amendment No. 4 has been signed by the following persons in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- * Chairman, Chief Executive - ----------------------------- Officer and Director Donald T. Marshall (principal executive officer) /s/ Joseph M. Corvino Vice President - Finance, Chief July 22, 1997 - ----------------------------- Financial Officer, Treasurer Joseph M. Corvino and Secretary (principal financial and accounting officer) /s/ Norman V. Edmonson Executive Vice President and July 22, 1997 - ----------------------------- Director Norman V. Edmonson * President, Chief Operating - ----------------------------- Officer and Director John P. McDonnell * Director - ----------------------------- O. Gordon Brewer, Jr. * Director - ----------------------------- Eliot M. Fried * Director - ----------------------------- Arnold S. Hoffman * Director - ----------------------------- Ernest L. Ransome, III * Director - ----------------------------- Donald A. Scott * Director - ----------------------------- Henri I. Talerman By /s/ Norman V. Edmonson July 22, 1997 -------------------------- As Attorney-in-Fact
S-1 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended (the "Securities Act"), the registrant has duly caused this Amendment No. 4 to Registration Statement ("Amendment No. 4") to be signed on its behalf by the undersigned, thereunto duly authorized, in Philadelphia, Pennsylvania on July 22, 1997. SUNSOURCE CAPITAL TRUST By: SUNSOURCE INC., as Sponsor By: /s/ Donald T. Marshall ------------------------------------- Donald T. Marshall President and Chief Executive Officer
Exhibit Number Description - ------ ----------- 2.1* Agreement and Plan of Conversion dated as of July __, 1997 among the Registrant, SunSource L.P., LPSub Inc., Lehman/SDI, Inc. and the limited partners of SDI Partners I, L.P. is Exhibit B to the Proxy Statement/Prospectus included in Part I and is incorporated herein by reference 3.1* Amended and Restated Certificate of Incorporation is Annex 2 to Exhibit B to the Proxy Statement/Prospectus included in Part I and is incorporated herein by reference 3.2* Bylaws are Annex B to Exhibit B to the Proxy Statement/Prospectus included in Part I and are incorporated herein by reference 4.1* Amended and Restated Declaration of Trust 4.2* Indenture dated as of ___________, 1997 between the Registrant and The Bank of New York 4.3* Preferred Securities Guarantee 5.1* Opinion of Morgan, Lewis & Bockius LLP regarding legality of the shares of common stock being registered 5.2* Opinion of Richards, Layton & Finger regarding validity of the Trust Preferred Securities being registered 8.1+ Opinion of Morgan, Lewis & Bockius LLP regarding certain tax matters 10.1+ Registration Rights Agreement dated as of _____________, 1997 among the Registrant, Lehman Brothers and the Senior Executives 10.2+ Stockholders Agreement dated as of _____________, 1997 among the Registrant, Lehman Brothers and certain stockholders of the Registrant 10.3+ Contribution Agreement dated as of _____________, 1997 between the Registrant and Lehman Brothers 10.4+ Deferred Compensation Plan for Key Employees of SDI Operating Partners, L.P. 10.5+ Rights Agreement dated as of ___________, 1997 between the Registrant and Registrar and Transfer Company 10.6++ Financing Commitments 23.1* Consent of Coopers & Lybrand L.L.P. 23.2* Consent of Morgan, Lewis & Bockius LLP (included in its opinions filed as Exhibits 5.1 and 8.1 hereto) 23.3* Consent of Richards, Layton & Finger (included in its opinion filed as Exhibit 5.2 hereto) 23.4* Consent of Smith Barney Inc. 24+ Powers of Attorney (included on the signature page) 25* Statement of eligibility of trustee 27.1+ Financial Data Schedule 99.1+ Form of Proxy 99.2* Selected Questions and Answers Booklet - ------------------ * Filed herewith. ** To be filed by amendment. + Previously filed. ++ Incorporated by reference to Exhibit 17(a) of the Schedule 13E-3 (File No. 5-40201) of SunSource L.P.
EX-4 2 EXHIBIT 4.1 AMENDED AND RESTATED DECLARATION OF TRUST of SUNSOURCE CAPITAL TRUST ___________, 1997
CROSS-REFERENCE TABLE*/ Trust Indenture Act Section Indenture Section 310(a)(1).......................................................................................................5.1 310(a)(2).......................................................................................................5.1 310(a)(3)......................................................................................................N.A. 310(a)(4)......................................................................................................N.A. 310(a)(5)....................................................................................................5.1(c) 310(b).......................................................................................................5.1(c) 310(c).........................................................................................................N.A. 311(a)..........................................................................................................2.2 311(b)..........................................................................................................2.2 311(c)..........................................................................................................2.2 312(a)..........................................................................................................2.2 312(b)..........................................................................................................2.2 312(c)..........................................................................................................2.7 313(a)..........................................................................................................2.3 313(b).....................................................................................................2.3;14.1 313(c)..........................................................................................................2.3 313(d).....................................................................................................2.3;14.1 314(a)..........................................................................................................2.4 314(b).........................................................................................................N.A. 314(c)(1).......................................................................................................2.5 314(c)(2).......................................................................................................2.5 314(c)(3).......................................................................................................2.5 314(d).........................................................................................................N.A. 314(e)..........................................................................................................2.5 314(f).........................................................................................................N.A. 315(a).........................................................................................................3.10 315(b).......................................................................................................3.8(g) 315(c)......................................................................................................3.10(a) 315(d).........................................................................................................3.10 315(e).........................................................................................................14.2 316(a)(last sentence).......................................................................(Exhibit B (Section 5)) 316(a)(1)(A).................................................................................................2.6(a) 316(a)(1)(B).................................................................................................2.6(a) 316(a)(2)......................................................................................................N.A. 316(b).......................................................................................................2.6(a)
- -------- */ This Cross-Reference Table does not constitute part of the Indenture and should not have any bearing upon the interpretation of any of its terms or provisions.
Trust Indenture Act Section Indenture Section 316(c)...............................................................................................3.6(e);12.2(b) 317(a)(1)....................................................................................................3.8(e) 317(a)(2)....................................................................................................3.8(e) 317(b).......................................................................................................3.8(i) 318(a)..........................................................................................................2.1 318(b)..........................................................................................................2.1 318(c)..........................................................................................................2.1
N.A. means not applicable.
TABLE OF CONTENTS**/ Page ARTICLE I - DEFINITIONS SECTION 1.1 Definitions...................................................................1 ARTICLE II - TRUST INDENTURE ACT SECTION 2.1 Trust Indenture Act; Application..............................................7 SECTION 2.2 Lists of Holders of Preferred Securities......................................7 SECTION 2.3 Reports by the Property Trustee...............................................7 SECTION 2.4 Periodic Reports to Property Trustee..........................................8 SECTION 2.5 Evidence of Compliance with Conditions Precedent..............................8 SECTION 2.6 Events of Default; Waiver.....................................................8 SECTION 2.7 Disclosure of Information....................................................10 ARTICLE III - ORGANIZATION SECTION 3.1 Name.........................................................................10 SECTION 3.2 Office.......................................................................10 SECTION 3.3 Purpose......................................................................11 SECTION 3.4 Authority....................................................................11 SECTION 3.5 Title to Property of the Trust...............................................11 SECTION 3.6 Powers and Duties of the Regular Trustees....................................11 SECTION 3.7 Prohibition of Actions by Trust and Trustees.................................14 SECTION 3.8 Powers and Duties of the Property Trustee....................................15 SECTION 3.9 Delaware Trustee.............................................................17 SECTION 3.10 Certain Rights and Duties of the Property Trustee............................17 SECTION 3.11 Preferential Collection of Claims Against Depositor or Trust.................19 SECTION 3.12 Registration Statement and Related Matters...................................20 SECTION 3.13 Filing of Amendments to Certificate of Trust.................................21 SECTION 3.14 Calculation of Original Issue Discount.......................................21 SECTION 3.15 Execution of Documents by Regular Trustees...................................21 SECTION 3.16 Trustees Not Responsible for Recitals or Issuance of Securities..............22 SECTION 3.17 Duration of Trust............................................................22 ARTICLE IV - SPONSOR SECTION 4.1 Purchase of Common Securities by Sponsor.....................................22 SECTION 4.2 Covenants of the Sponsor.....................................................22 SECTION 4.3 Expenses.....................................................................22 ARTICLE V - TRUSTEES SECTION 5.1 Number of Trustees; Qualifications...........................................23 - -------- **/ This Table of Contents does not constitute part of the Indenture and should not have any bearing upon the interpretation of any of its terms or provisions.
i
SECTION 5.2 Appointment, Removal and Resignation of Trustees............................26 SECTION 5.3 Vacancies Among Trustees....................................................27 SECTION 5.4 Effect of Vacancies.........................................................28 SECTION 5.5 Meetings....................................................................28 SECTION 5.6 Delegation of Power.........................................................28 ARTICLE VI - DISTRIBUTIONS SECTION 6.1 Distributions...............................................................29 ARTICLE VII - ISSUANCE OF SECURITIES SECTION 7.1 General Provisions Regarding Securities......................................29 ARTICLE VIII - DISSOLUTION OF TRUST SECTION 8.1 Dissolution of Trust.........................................................30 ARTICLE IX - TRANSFER OF INTERESTS SECTION 9.1 Transfer of Securities.......................................................31 SECTION 9.2 Transfer of Certificates.....................................................31 SECTION 9.3 Deemed Security Holders......................................................32 SECTION 9.4 Book Entry Interests.........................................................32 SECTION 9.5 Notices to Holders of Certificates...........................................32 SECTION 9.6 Appointment of Successor Clearing Agency.....................................33 SECTION 9.7 Definitive Preferred Securities Certificates.................................33 SECTION 9.8 Mutilated, Destroyed, Lost or Stolen Certificates............................33 ARTICLE X - LIMITATION OF LIABILITY; INDEMNIFICATION SECTION 10.1 Exculpation..................................................................34 SECTION 10.2 Indemnification..............................................................34 ARTICLE XI - ACCOUNTING SECTION 11.1 Fiscal Year..................................................................35 SECTION 11.2 Certain Accounting Matters...................................................35 SECTION 11.3 Banking......................................................................36 SECTION 11.4 Withholding..................................................................36 ARTICLE XII - AMENDMENTS AND MEETINGS SECTION 12.1 Amendments...................................................................36 SECTION 12.2 Meetings of the Holders of Securities; Action by Written Consent.............................................................38 ARTICLE XIII - REPRESENTATIONS OF PROPERTY TRUSTEE AND DELAWARE TRUSTEE SECTION 13.1 Representations and Warranties of Property Trustee..........................39 ARTICLE XIV - MISCELLANEOUS SECTION 14.1 Notices......................................................................41
ii
SECTION 14.2 Undertaking for Costs..........................................................42 SECTION 14.3 Governing Law..................................................................42 SECTION 14.4 Headings.......................................................................42 SECTION 14.5 Partial Enforceability.........................................................43 SECTION 14.6 Counterparts...................................................................43 SECTION 14.7 Intention of the Parties.......................................................43 SECTION 14.8 Successors and Assigns.........................................................43
iii THIS AMENDED AND RESTATED DECLARATION OF TRUST ("Declaration") is dated and effective as of June ___, 1997 by the undersigned trustees (together with all other Persons from time to time duly appointed and serving as trustees in accordance with the provisions of this Declaration, the "Trustees"), SunSource Inc., a Delaware corporation, as trust sponsor ("SunSource" or the "Sponsor"), and by the holders, from time to time, of undivided beneficial interests in the assets of the Trust to be issued pursuant to this Declaration. WHEREAS, the Sponsor and the Trustees entered into a Declaration of Trust dated as of ______________________, 1997 (the "Original Declaration") and filed a Certificate of Trust (the "Certificate of Trust") of the Trust with the office of the Secretary of State of the State of Delaware on ______________________, 1997 in order to establish a statutory business trust (the "Trust") under the Business Trust Act (as hereinafter defined); WHEREAS, the Trustees and the Sponsor desire to amend and restate the Original Declaration in its entirety as set forth herein and to continue the Trust pursuant to the Business Trust Act for the purpose of, as described more fully in Section 3.3 hereof, (i) issuing Preferred Securities (as defined herein) representing preferred undivided beneficial interests in the assets of the Trust in exchange for Debentures (as hereinafter defined) pursuant to the Conversion (as hereinafter defined) and delivering such Preferred Securities to SunSource in consideration for the deposit by SunSource as trust assets of Debentures issued under the Indenture (as hereinafter defined) and (ii) issuing and selling Common Securities (as defined herein) representing common undivided beneficial interests in the assets of the Trust to SunSource in exchange for cash and investing the proceeds thereof in additional Debentures; and NOW, THEREFORE, it being the intention of the parties hereto that the Trust constitute a business trust under the Business Trust Act and that this Declaration constitute the governing instrument of such business trust, the Trustees declare that all assets referred to in clauses (i) and (ii) of the previous Whereas clause contributed to or purchased by the Trust will be held in trust for the benefit of the Holders (as defined herein) from time to time, of the Certificates (as defined herein) representing undivided beneficial interests in the assets of the Trust issued hereunder, subject to the provisions of the Business Trust Act and this Declaration.
ARTICLE I DEFINITIONS SECTION 1.1 Definitions. (a) Capitalized terms used in this Declaration but not defined in the preamble above have the respective meanings assigned to them in this Section 1.1; (b) a term defined anywhere in this Declaration has the same meaning throughout;
1 (c) all references to "the Declaration" or "this Declaration" are to this Amended and Restated Declaration of Trust (including Exhibits A, B and C hereto (the "Exhibits")) as modified, supplemented or amended from time to time; (d) all references in this Declaration to Articles and Sections and Exhibits areto Articles and Sections of and Exhibits to this Declaration unless otherwise specified; (e) a term defined in the Trust Indenture Act has the same meaning when used in this Declaration unless otherwise defined in this Declaration or unless the context otherwise requires; and (f) a reference to the singular includes the plural and vice versa. "Affiliate" has the same meaning as given to that term in Rule 405 of the Securities Act or any successor rule thereunder. "Appointment Event" means an event defined in the terms of the Preferred Securities set forth in Exhibit B which entitles the Holders of a Majority in liquidation amount of the Preferred Securities to appoint a Special Regular Trustee. "Book Entry Interest" means a beneficial interest in a Certificate registered in the name of a Clearing Agency or a nominee thereof, ownership and transfers of which shall be maintained and made through book entries by such Clearing Agency as described in Section 9.4. "Business Day" means any day other than a day on which banking institutions in New York, New York are authorized or required by law to close. "Business Trust Act" means Chapter 38 of Title 12 of the Delaware Code, 12 Del. Code Section 3801 et seq., as it may be amended from time to time. "Certificate" means a Common Security Certificate or a Preferred Security Certificate. "Certificate of Trust" has the meaning set forth in the first Whereas clause above. "Clearing Agency" means an organization registered as a "Clearing Agency" pursuant to Section 17A of the Exchange Act that is acting as depository for the Preferred Securities and in whose name or in the name of a nominee of that organization shall be registered a Global Certificate and which shall undertake to effect book entry transfers and pledges of the Preferred Securities. "Clearing Agency Participant" means a broker, dealer, bank, other financial institution or other Person for whom from time to time the Clearing Agency effects book entry transfers and pledges of securities deposited with the Clearing Agency. 2 "Code" means the Internal Revenue Code of 1986, as amended from time to time or any successor legislation. A reference to a specific section ((Sec.)) of the Code refers not only to such specific section but also to any corresponding provision of any federal tax statute enacted after the date of this Declaration, as such specific section or corresponding provision is in effect on the date of application of the provisions of this Declaration containing such reference. "Commission" means the Securities and Exchange Commission. "Common Security" has the meaning specified in Section 7.1(b). "Common Security Certificate" means a definitive certificate in fully registered form representing a Common Security substantially in the form of Annex I to Exhibit C. "Conversion" means the conversion of SunSource L.P. to corporate form asgenerally described in the Proxy Statement/Prospectus and related transactions entered into pursuant to the Conversion Agreement. "Conversion Agreement" means the Agreement and Plan of Conversion, dated __________, 1997, among SunSource Inc., SunSource L.P., LPSub Inc., Lehman/SDI, Inc. and the limited partners of SDI Partners I, L.P. "Covered Person" means (i) any officer, director, shareholder, partner, member, representative, employee or agent of the Trust or its Affiliates, (ii) any officer, director, shareholder, employee, representative or agent of SunSource or its Affiliates and (iii) the Holders from time to time of the Securities. "Debenture Trustee" means The Bank of New York, as trustee under the Indenture until a successor is appointed thereunder and thereafter means such successor trustee. "Debentures" means the Junior Subordinated Debentures issued by SunSource under the Indenture to the Property Trustee and entitled the "Junior Subordinated Debentures." "Declaration" means this Amended and Restated Declaration of Trust, as amended from time to time. "Delaware Trustee" has the meaning set forth in Section 5.1(a) (3). "Distribution" means a distribution payable to Holders of Securities in accordance with Section 6.1. "DTC" means The Depository Trust Company, the initial Clearing Agency. "Effective Time" has the meaning set forth in the Conversion Agreement. "Event of Default" in respect of the Securities means an Indenture Event of Default has occurred and is continuing in respect of the Debentures. 3 "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time or any successor legislation. "Fiscal Year" has the meaning specified in Section 11.1. "Global Certificate" means certificate representing interests in Trust Preferred Securities held in the name of the Depository Trust Company or its nominee. "Holder" means a Person in whose name a Certificate representing a Security is registered, such Person being a beneficial owner within the meaning of the Business Trust Act. "Indemnified Person" means any Trustee, any Affiliate of any Trustee, any officers, directors, shareholders, members, partners, employees, representatives or agents of any Trustee, or any employee or agent of the Trust or its Affiliates. "Indenture" means the Indenture dated as of ____________, 1997 between SunSource and the Debenture Trustee pursuant to which the Debentures are to be issued. "Indenture Event of Default" means any event or condition defined as an "Event of Default" with respect to the Debentures under Section 6.01(a) of the Indenture has occurred and is continuing. "Investment Company" means an investment company as defined in the Investment Company Act. "Investment Company Act" means the Investment Company Act of 1940, as amended from time to time or any successor legislation. "Legal Action" has the meaning specified in Section 3.6(g). "Liquidation Distribution" has the meaning set forth in Exhibits B and C hereto establishing the terms of the Securities. "Majority in liquidation amount of the Securities" means, except as otherwise required by the Trust Indenture Act and except as provided in Section 5 of Exhibit B hereto, Holder(s) of outstanding Securities voting together as a single class or, as the context may require, Holder(s) of outstanding Preferred Securities or Common Securities voting separately as a class, who are the record owners of a relevant class of Securities whose liquidation amount (including the stated amount that would be paid on redemption, liquidation or otherwise, plus accrued and unpaid Distributions to the date upon which the voting percentages are determined) represents more than 50% of the liquidation amount of all outstanding Securities of such class. "Ministerial Action" has the meaning set forth in the terms of the Securities as set forth in Exhibits B and C hereto. "Paying Agent" has the meaning specified in Section 3.8(i). 4 "Person" means a legal person, including any individual, corporation, estate, partnership, joint venture, association, joint stock company, limited liability company, trust, unincorporated association, or government or any agency or political subdivision thereof, or any other entity of whatever nature. "Preferred Guarantee" means the Guarantee Agreement to be dated as of __________________________, 1997 of SunSource in respect of the Preferred Securities. "Preferred Security" has the meaning specified in Section 7.1 (b). "Preferred Security Beneficial Owner" means, with respect to a Book Entry Interest, a Person who is the beneficial owner of such Book Entry Interest, as reflected on the books of the Clearing Agency, or on the books of a Person maintaining an account with such Clearing Agency (directly as a Clearing Agency Participant or as an indirect participant, in each case in accordance with the rules of such Clearing Agency). "Preferred Security Certificate" means a definitive certificate in fully registered form representing a Preferred Security substantially in the form of Annex I to Exhibit B. "Property Trustee" means the Trustee meeting the eligibility requirements set forth in Section 5.1(c) and having the duties set forth for the Property Trustee herein. "Property Account" has the meaning specified in Section 3.8(c) (i). "Proxy Statement/Prospectus" means the Proxy Statement/Prospectus dated May __, 1997 relating to the Conversion. "Quorum" means a majority of the Regular Trustees or, if there are only two Regular Trustees, both such Regular Trustees. "Regular Trustee" means any Trustee other than the Property Trustee and the Delaware Trustee. "Related Party" means any direct or indirect wholly owned subsidiary of SunSource or any other Person which owns, directly or indirectly, 98% of the outstanding voting securities of SunSource. "Resignation Request" has the meaning specified in Section 5.2 (d). "Responsible Officer" means, with respect to the Property Trustee, the chairman of the board of directors, the president, any vice president, any assistant vice president, the secretary, any assistant secretary, the treasurer, any assistant treasurer, any trust officer or assistant trust officer or any other officer of the Property Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of that officer's knowledge of and familiarity with the particular subject. 5 "Rule 3a-5" means Rule 3a-5 under the Investment Company Act or any successor rule thereunder. "Securities" means the Common Securities and the Preferred Securities. "Securities Act" means the Securities Act of 1933, as amended from time to time or any successor legislation. "66-2/3% in liquidation amount of the Securities" means, except as otherwise required by the Trust Indenture Act and except as provided in Section 5 of Exhibit B hereto, Holder(s) of outstanding Securities voting together as a single class or, as the context may require, Holder(s) of outstanding Preferred Securities or Common Securities, voting separately as a class, who are the record owners of a relevant class of Securities whose liquidation amount (including the stated amount that would be paid on redemption, liquidation or otherwise, plus accrued and unpaid Distributions to the date upon which the voting percentages are determined) represents 66-2/3% or more of the liquidation amount of all outstanding Securities of such class. "Special Event" has the meaning set forth in the terms of the Securities as set forth in Exhibits B and C hereto. "Special Regular Trustee" means a Regular Trustee appointed by the Holders of a Majority in liquidation amount of the Preferred Securities in accordance with Section 5.2(a)(ii)(B). "Sponsor" or "SunSource" means SunSource Inc., a Delaware corporation, or any successor entity in a merger, in its capacity as sponsor of the Trust. "Successor Delaware Trustee" has the meaning specified in Section 5.2(b)(ii). "Successor Property Trustee" means a successor Trustee possessing the qualifications to act as Property Trustee under Section 5.1(c). "10% in liquidation amount of the Securities" means, except as otherwise required by the Trust Indenture Act and except as provided in the penultimate paragraph of paragraph 5 of Exhibit B hereto, Holder(s) of outstanding Securities voting together as a single class or, as the context may require, Holder(s) of outstanding Preferred Securities or Common Securities, voting separately as a class, who are the record owners of a relevant class of Securities whose liquidation amount (including the stated amount that would be paid on redemption, liquidation or otherwise, plus accrued and unpaid Distributions to the date upon which the voting percentages are determined) represents 10% or more of the liquidation amount of all outstanding Securities of such class. "Treasury Regulations" means the income tax regulations including temporary and proposed regulations, promulgated under the Code by the United States Treasury, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations). 6 "Trustee" or "Trustees" means each Person who has signed this Declaration as a trustee, so long as such Person shall continue in office in accordance with the terms hereof, and all other Persons who may from time to time be duly appointed, qualified and serving as Trustees in accordance with the provisions hereof, and references herein to a Trustee or the Trustees shall refer to such Person or Persons solely in their capacity as trustees hereunder. "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended from time to time or any successor legislation. ARTICLE II TRUST INDENTURE ACT SECTION 2.1 Trust Indenture Act; Application. (a) This Declaration is subject to the provisions of the Trust Indenture Act that are required to be part of this Declaration and shall, to the extent applicable, be governed by such provisions; (b) if and to the extent that any provision of this Declaration limits, qualifies or conflicts with the duties imposed by Sections 310 to 317, inclusive, of the Trust Indenture Act, such imposed duties shall control; (c) the Property Trustee shall to the extent permitted by applicable law and/or the rules and regulations of the Commission be the only Trustee which is a trustee for the purposes of the Trust Indenture Act; and (d) the application of the Trust Indenture Act to this Declaration shall not affect the nature of the Securities as equity securities representing undivided beneficial interests in the assets of the Trust. SECTION 2.2 Lists of Holders of Preferred Securities. (a) Each of the Sponsor and the Regular Trustees on behalf of the Trust shall provide the Property Trustee with such information as is required under Section 312(a) of the Trust Indenture Act within one business day after each June 1 and December 1 of each year and in the manner provided in Section 312(a); and (b) the Property Trustee shall comply with its obligations under Sections 310(b), 311 and 312(b) of the Trust Indenture Act. SECTION 2.3 Reports by the Property Trustee. Within 60 days after June 1 of each year, the Property Trustee shall provide to the Holders of the Securities such reports as are required by Section 313 of the Trust Indenture Act, if any, in the form, in the manner and at the times provided by Section 313 of the Trust Indenture 7 Act. The Property Trustee shall also comply with the requirements of Section 313(d) of the Trust Indenture Act. SECTION 2.4 Periodic Reports to Property Trustee. Each of the Sponsor and the Regular Trustees on behalf of the Trust shall provide to the Property Trustee, the Commission and the Holders of the Securities, as applicable, such documents, reports and information as required by Section 314(a)(1)-(3) (if any) of the Trust Indenture Act and the compliance certificates required by Section 314(a)(4) and (c) of the Trust Indenture Act, any such certificates to be provided in the form, in the manner and at the times required by Section 314(a)(4) and (c) of the Trust Indenture Act (provided that any certificate to be provided pursuant to Section 314(a)(4) of the Trust Indenture Act shall be provided within 120 days of the end of each Fiscal Year). SECTION 2.5 Evidence of Compliance with Conditions Precedent. Each of the Sponsor and the Regular Trustees on behalf of the Trust shall provide to the Property Trustee such evidence of compliance with any conditions precedent, if any, provided for in this Declaration which relate to any of the matters set forth in Section 314(c) of the Trust Indenture Act. Any certificate or opinion required to be given pursuant to Section 314(c) shall comply with Section 314(e) of the Trust Indenture Act. SECTION 2.6 Events of Default; Waiver. (a) Subject to Section 2.6(c), Holders of Preferred Securities may by vote of at least a Majority in liquidation amount of the Preferred Securities (A) in accordance with the terms of the Preferred Securities, direct the time, method, and place of conducting any proceeding for any remedy available to the Property Trustee, or exercising any trust or power conferred upon the Property Trustee including the right to direct the Property Trustee, as the holder of the Debentures, to (a) direct the time, method and place of conducting any proceeding for any remedy available to the Indenture Trustee, or exercising any trust or power conferred on the Indenture Trustee with respect to the Debentures, (b) waive any past default that is waivable under the Indenture, or (c) exercise any right to rescind or annul a declaration that the principal of all the Debentures shall be due and payable or (B) on behalf of the Holders of all Preferred Securities waive any past Event of Default in respect of the Preferred Securities and its consequences, provided that if the Event of Default arises out of an Indenture Event of Default: (i) which is not waivable under the Indenture, the Event of Default under this Declaration shall also not be waivable; or (ii) which requires the consent or vote of (1) holders of Debentures representing a specified percentage greater than a majority in principal amount of the Debentures, or (2) each holder of Debentures affected thereby, the Event of Default under this Declaration may only be waived by, in the case of clause (1) above, the vote of Holders of Preferred Securities representing such specified percentage of the aggregate 8 liquidation amount of the Preferred Securities, or, in the case of clause (2) above, each Holder of Preferred Securities affected thereby. Upon such waiver, any such default shall cease to exist, and any Event of Default with respect to the Preferred Securities arising therefrom shall be deemed to have been cured, for every purpose of this Declaration, but no such waiver shall extend to any subsequent or other default or Event of Default with respect to the Preferred Securities or impair any right consequent thereon. The Property Trustee shall not revoke any action previously authorized or approved by a vote of the Holders of Trust Preferred Securities. (b) Subject to Section 2.6(c), Holders of Common Securities may by vote of at least a Majority in liquidation amount of the Common Securities, (A) in accordance with the terms of the Common Securities, direct the time, method, and place of conducting any proceeding for any remedy available to the Property Trustee, or exercising any trust or power conferred upon the Property Trustee or (B) on behalf of the Holders of all of the Common Securities, waive any past Event of Default with respect to the Common Securities and its consequences, provided that, if the Event of Default arises out of an Indenture Event of Default: (i) which is not waivable under the Indenture, except where the Holders of the Common Securities are deemed to have waived such Event of Default under the Declaration as provided below, the Event of Default under this Declaration shall also not be waivable; or (ii) which requires the consent or vote of (1) holders of Debentures representing a specified percentage greater than a majority in principal amount of the Debentures or (2) each holder of Debentures, except where the holders of the Common Securities are deemed to have waived such Event of Default under this Declaration as provided below, the Event of Default under this Declaration may only be waived by, in the case of clause (1) above, the vote of Holders of Common Securities representing such specified percentage of the aggregate liquidation amount of the Common Securities, or, in the case of clause (2) above, each holder of Common Securities; and provided, further that, each Holder of Common Securities will be deemed to have waived any Event of Default with respect to the Common Securities and its consequences until all Events of Default with respect to the Preferred Securities have been cured, waived by the Holders of Preferred Securities as provided in this Declaration or otherwise eliminated and until all Events of Default with respect to the Preferred Securities have been so cured, waived or otherwise eliminated, the Property Trustee will be deemed to be acting solely on behalf of the Holders of the Preferred Securities and only the Holders of the Preferred Securities will have the right to direct the Property Trustee in accordance with the terms of this Declaration or the Securities. In the event that any Event of Default with respect to the Preferred Securities is waived by the Holders of Preferred Securities as provided in this Declaration, the Holders of Common Securities agree that such waiver shall also constitute the waiver of such Event of Default with respect to the Common Securities for all purposes under this Declaration without any further act, vote or consent of the Holders of the Common Securities. Subject to the foregoing provisions of this Section 2.6(b), upon such waiver, any such default shall cease to exist and any Event of 9 Default with respect to the Common Securities arising therefrom shall be deemed to have been cured, for every purpose of this Declaration, but no such waiver shall extend to any subsequent or other default or Event of Default with respect to the Common Securities or impair any right consequent thereon. (c) The right of any Holder of Securities to receive payment of Distributions on the Securities in accordance with this Declaration and the terms of the Securities set forth in Exhibits B and C on or after the respective payment dates therefor, or to institute suit for the enforcement of any such payment on or after such payment dates, shall not be impaired without the consent of each such Holder. (d) As provided in the terms of the Securities set forth in Exhibits B and C hereto, a waiver of an Indenture Event of Default by the Property Trustee at the written direction of the Holders of the Preferred Securities constitutes a waiver of the corresponding Event of Default under this Declaration in respect of the Securities. SECTION 2.7 Disclosure of Information. The disclosure of information as to the names and addresses of the Holders of the Securities in accordance with Section 312 of the Trust Indenture Act, regardless of the source from which such information was derived, shall not be deemed to be a violation of any existing law, or any law hereafter enacted which does not specifically refer to Section 312 of the Trust Indenture Act, nor shall the Property Trustee be held accountable by reason of mailing any material pursuant to a request made under Section 312(b) of the Trust Indenture Act. ARTICLE III ORGANIZATION SECTION 3.1 Name. The Trust continued by this Declaration is named "SunSource Capital Trust" as such name may be modified from time to time by the Regular Trustees following written notice to the Holders of Securities. The Trust's activities may be conducted under the name of the Trust or any other name deemed advisable by the Regular Trustees. SECTION 3.2 Office. The address of the principal office of the Trust is 501 Silverside Road, Suite 17, Wilmington, DE 19809. Upon ten days written notice to the Holders, the Regular Trustees may change the location of the Trust's principal office. The name of the registered agent and office of the Trust in the State of Delaware is The Bank of New York (Delaware), White Clay Center, Route 273, Newark, DE 19711 Attention: Corporate Trust Administration. At any time, the Regular Trustees may designate another registered agent and/or registered office. 10 SECTION 3.3 Purpose. The exclusive purposes and functions of the Trust are: (a)(i) to issue Preferred Securities in consideration for the deposit by SunSource as trust assets of Debentures issued under the Indenture having an aggregate principal amount equal to the aggregate liquidation amount of the Preferred Securities so delivered; (ii) to enter into such agreements and arrangements as may be necessary in connection with the Conversion and to take all action, and exercise such discretion, as may be necessary or desirable in connection with the Conversion and to file such registration statements or make such other filings under the Securities Act, the Exchange Act or state securities or "Blue Sky" laws as may be necessary or desirable in connection with the Conversion and the issuance of the Preferred Securities; and (iii) to issue and sell Common Securities to SunSource for cash and use the proceeds of such sale to purchase as trust assets an equal aggregate principal amount of Debentures issued under the Indenture; and (b) except as otherwise limited herein, to engage in only those other activities necessary, or incidental thereto. The Trust shall not borrow money, issue debt or reinvest proceeds derived from investments, pledge any of its assets or at any time while the Securities are outstanding, otherwise undertake (or permit to be undertaken) any activity that would result in or cause the Trust to be treated as anything other than a grantor trust for United States federal income tax purposes. SECTION 3.4 Authority. Subject to the limitations provided in this Declaration and to the specific duties of the Property Trustee, the Regular Trustees shall have exclusive and complete authority to carry out the purposes of the Trust. An action taken by the Regular Trustees in accordance with their powers shall constitute the act of and serve to bind the Trust and an action taken by the Property Trustee in accordance with its powers shall constitute the act of and serve to bind the Trust. In dealing with the Trustees acting on behalf of the Trust, no Person shall be required to inquire into the authority of the Trustees to bind the Trust. Persons dealing with the Trust are entitled to rely conclusively on the power and authority of the Trustees as set forth in this Declaration. SECTION 3.5 Title to Property of the Trust. Except as provided in Section 3.8 with respect to the Debentures and the Property Account or unless otherwise provided in this Declaration, legal title to all assets of the Trust shall be vested in the Trust. The Holders of Certificates shall not have legal title to any part of the assets of the Trust, but shall have an individual undivided beneficial interest in the assets of the Trust. SECTION 3.6 Powers and Duties of the Regular Trustees. The Regular Trustees shall have the exclusive power, authority and duty to cause the Trust, and shall cause the Trust, to engage in the following activities: 11 (a) to issue Preferred Securities and Common Securities, in each case in accordance with this Declaration; provided, however, that the Trust may issue no more than one series of Preferred Securities and no more than one series of Common Securities, and provided further that there shall be no interests in the Trust other than the Securities and the issuance of Securities shall be limited to a one-time, simultaneous issuance of both Preferred Securities and Common Securities; (b) in connection with the Conversion and the issuance of the Preferred Securities, at the direction of the Sponsor, to effect or cause to be effected the filings, and to execute or cause to be executed, the documents, set forth in Section 3.11; (c) to acquire as trust assets Debentures upon consummation of the Conversion and to acquire as trust assets additional Debentures with the proceeds of the sale of the Common Securities; provided, however, the Regular Trustees shall cause legal title to all of the Debentures to be vested in, and the Debentures to be held of record in the name of, the Property Trustee for the benefit of the Holders of the Preferred Securities and the Common Securities; (d) to give the Sponsor and the Property Trustee prompt written notice of the occurrence of a Special Event provided, that the Regular Trustees shall consult with the Sponsor and the Property Trustee before taking or refraining to take any Ministerial Action in relation to a Special Event; (e) to establish a record date with respect to all actions to be taken hereunder that require a record date be established, including for the purposes of Section 316(c) of the Trust Indenture Act and with respect to Distributions, voting rights, redemptions, and exchanges, and to issue relevant notices to Holders of the Preferred Securities and Common Securities as to such actions and applicable record dates; (f) to give prompt notice to the Holders of the Securities of any notice received from the Sponsor of the Sponsor's election not to make a current monthly interest payments on the Debentures under the Indenture; (g) to bring or defend, pay, collect, compromise, arbitrate, resort to legal action, or otherwise adjust claims or demands of or against the Trust ("Legal Action"), unless pursuant to Section 3.8(e), the Property Trustee has the exclusive power to bring such Legal Action; (h) to employ or otherwise engage employees and agents (who may be designated as officers with titles) and managers, contractors, advisors, and consultants and pay reasonable compensation for such services; (i) to cause the Trust to comply with the Trust's obligations under the Trust Indenture Act; 12 (j) to give the certificate to the Property Trustee required by Section 314(a)(4)of the Trust Indenture Act which certificate may be executed by any Regular Trustee; (k) to incur expenses which are necessary or incidental to carry out any of the purposes of the Trust; (l) to act as, or appoint another Person to act as, registrar and transfer agent for the Securities, the Regular Trustees hereby initially appointing the Property Trustee for such purposes; (m) to execute all documents or instruments, perform all duties and powers, and do all things for and on behalf of the Trust in all matters necessary or incidental to the foregoing; (n) to take all action which may be necessary or appropriate for the preservation and the continuation of the Trust's valid existence, rights, franchises and privileges as a statutory business trust under the laws of the State of Delaware and of each other jurisdiction in which such existence is necessary to protect the limited liability of the Holders of the Securities or to enable the Trust to effect the purposes for which the Trust has been created; (o) to take all action, not inconsistent with this Declaration or with applicable law, which the Regular Trustees determine in their discretion to be reasonable and necessary or desirable in carrying out the activities of the Trust as set out in this Section 3.6, in order that: (i) the Trust will not be deemed to be an Investment Company required to be registered under the Investment Company Act; (ii) the Trust will not be classified for United States federal income tax purposes as an association taxable as a corporation or a partnership and will be treated as a grantor trust for United States federal income tax purposes; and (iii) the Trust will comply with any requirements imposed by any taxing authority on holders of instruments treated as indebtedness for United States federal income tax purposes; provided that such action does not adversely affect the interests of Holders; (p) to take all action necessary to cause all applicable tax returns and tax information reports that are required to be filed with respect to the Trust to be duly prepared and filed by the Regular Trustees, on behalf of the Trust; (q) subject to the requirements of Rule 3a-5 and Section 317(b) of the Trust Indenture Act, to appoint one or more Paying Agents in addition to the Property Trustee; and (r) to take all actions and perform such duties as may be required of the Regular Trustees pursuant to the terms of the Securities set forth in Exhibits B and C hereto. 13 The Regular Trustees must exercise the powers set forth in this Section 3.6 in a manner which is consistent with the purposes and functions of the Trust set out in Section 3.3 and the Regular Trustees shall not take any action which is inconsistent with the purposes and functions of the Trust set forth in Section 3.3. Subject to this Section 3.6, the Regular Trustees shall have none of the powers nor any of the authority of the Property Trustee set forth in Section 3.8. SECTION 3.7 Prohibition of Actions by Trust and Trustees. The Trust shall not, and the Trustees (including the Property Trustee) shall cause the Trust not to, engage in any activity other than as required or authorized by this Declaration. In particular, the Trust shall not and the Trustees (including the Property Trustee) shall not cause the Trust to: (a) invest any proceeds received by the Trust from holding the Debentures but shall promptly distribute all such proceeds to Holders of Securities pursuant to the terms of this Declaration and of the Securities; (b) acquire any assets (including any securities) other than as expressly provided herein; (c) possess Trust property for other than a Trust purpose; (d) make any loans, other than loans represented by the Debentures; (e) possess any power or otherwise act in such a way as to vary the Trust assets or the terms of the Securities in any way whatsoever; (f) issue any securities or other evidences of beneficial ownership of, or beneficial interests in, the Trust other than the Securities; (g) incur any indebtedness for borrowed money; (h) (i) direct the time, method and place of exercising any trust or power conferred upon the Debenture Trustee with respect to the Debentures, (ii) waive any past default that is waivable under Section 6.06 of the Indenture, (iii) exercise any right to rescind or annul any declaration that the principal of all of the Debentures shall be due and payable or (iv) consent to any amendment, modification or termination of the Indenture or the Debentures, where such consent shall be required, unless in the case of this clause (h) the Property Trustee shall have received an unqualified opinion of nationally recognized independent tax counsel recognized as expert in such matters to the effect that such action will not cause the Trust to be classified for United States federal income tax purposes as an association taxable as a corporation or partnership and that the Trust will continue to be classified as a grantor trust for United States federal income tax purposes; 14 (i) acquire any investments or engage in any activities not authorized by this Declaration; (j) sell, assign, transfer, exchange, mortgage, pledge, set-off or otherwise dispose of any of the Trust Property or interests therein, including to the Holders of the Securities, except as expressly provided herein; or (k) take any action that would cause the Trust to fail or cease to qualify as a "grantor trust" for United States federal income tax purposes. SECTION 3.8 Powers and Duties of the Property Trustee. (a) The legal title to the Debentures shall be owned by and held of record in the name of the Property Trustee in trust for the benefit of the Holders of the Securities. The right, title and interest of the Property Trustee to the Debentures shall vest automatically in each Person who may hereafter be appointed as Property Trustee in accordance with Article V. Such vesting and cessation of title shall be effective whether or not conveyancing documents have been executed and delivered. (b) The Property Trustee shall not transfer its right, title and interest in the Debentures to the Regular Trustees or, if the Property Trustee does not also act as the Delaware Trustee, the Delaware Trustee. (c) The Property Trustee shall: (i) establish and maintain a segregated non-interest bearing bank account (the "Property Account") in the name of and under the exclusive control of the Property Trustee on behalf of the Holders of the Securities and on the receipt of payments of funds made in respect of the Debentures held by the Property Trustee, deposit such funds into the Property Account and, without any further acts of the Delaware Trustee or the Regular Trustees, promptly make distributions to the Holders of the Preferred Securities and Common Securities from the Property Account in accordance with Section 6.1. Funds in the Property Account shall be held uninvested, and without liability for interest thereon, until disbursed in accordance with this Declaration. The Property Account shall be an account which is maintained with a banking institution whose long term unsecured indebtedness is rated by a "nationally recognized statistical rating organization", as such term is defined for purposes of Rule 436(g)(2) under the Securities Act, at least equal to (but in no event less than "A" or the equivalent) the rating assigned to the Preferred Securities by a nationally recognized statistical rating organization; (ii) engage in such ministerial activities as shall be necessary or appropriate to effect promptly the redemption of the Preferred Securities and the Common Securities to the extent the Debentures are redeemed or mature; (iii) upon notice of distribution issued by the Regular Trustees in accordance with the terms of the Preferred Securities and the Common Securities, engage in such 15 ministerial activities as shall be necessary or appropriate to effect promptly the distribution pursuant to terms of the Securities or Debentures to Holders of Securities upon the occurrence of a Special Event; and (iv) have the legal power to exercise all of the rights, powers and privileges of a holder of the Debentures under the Indenture and, if an Event of Default occurs and is continuing, the Property Trustee, subject to Section 2.6(b), shall for the benefit of the Holders of the Securities, enforce its rights as holder of the Debentures under the Indenture, including without limitation enforcing the provisions of the Preferred Guarantee, subject to the rights of the Holders of the Preferred Securities pursuant to the terms of this Declaration and the Trust Indenture Act. (d) The Property Trustee shall take all actions and perform such duties as may be specifically required of the Property Trustee pursuant to the terms of the Securities set forth in Exhibits B and C hereto. (e) Subject to Section 3.10(a) hereof, the Property Trustee shall take any Legal Action which arises out of or in connection with an Event of Default or the Property Trustee's duties and obligations under this Declaration or the Trust Indenture Act. (f) All moneys deposited in the Property Account, and all Debentures held by the Property Trustee for the benefit of the Holders of the Securities will not be subject to any right, charge, security interest, lien or claim of any kind in favor of, or for the benefit of that Property Trustee or its agents or their creditors. (g) The Property Trustee shall, within 90 days after the occurrence of a default with respect to the Securities, transmit by mail, first class postage prepaid, to the Holders of the Securities, as their names and addresses appear upon the register, notice of all defaults with respect to the Securities known to the Property Trustee, unless such defaults shall have been cured before the giving of such notice (the term "defaults" for the purposes of this Section 3.8(g) being hereby defined to be an Indenture Event of Default, not including any periods of grace provided for in the Indenture and irrespective of the giving of any notice provided therein); provided, that, except in the case of default in the payment of the principal of (or premium, if any) or interest on any of the Debentures, the Property Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee, or a trust committee of directors and/or Responsible Officers, of the Property Trustee in good faith determine that the withholding of such notice is in the interests of the Holders of the Securities. The Property Trustee shall not be deemed to have knowledge of any default, except (i) a default in the payment of principal, premium or interest on the Debentures or (ii) any default as to which the Property Trustee shall have received written notice or a Responsible Officer charged with the administration of this Declaration shall have obtained written notice. (h) The Property Trustee shall not resign as a Trustee unless either: (i) the Trust has been completely liquidated and the proceeds therof distributed to the Holders of Securities pursuant to the terms of the Securities; or 16 (ii) a Successor Property Trustee has been appointed and accepted that appointment in accordance with Article V. (i) The Property Trustee shall act as paying agent in respect of the Securities and, subject to Section 3.6(q), may authorize one or more Persons (each, a "Paying Agent") to pay Distributions, redemption payments or liquidation payments on behalf of the Trust with respect to the Preferred Securities. Any such Paying Agent shall comply with Section 317(b) of the Trust Indenture Act. Any Paying Agent may be removed by the Property Trustee, after consultation with the Regular Trustees, at any time and a successor Paying Agent or additional Paying Agents may be appointed at any time by the Property Trustee, subject to Section 3.6(q). (j) The Property Trustee shall give prompt written notice to the Holders of the Securities of any notice received by it from SunSource of its election to defer payments of interest on the Debentures by extending the interest payment period with respect thereto. (k) Subject to this Section 3.8, the Property Trustee shall have none of the powers or the authority of the Regular Trustees set forth in Section 3.6. (l) The Property Trustee shall exercise the powers, duties and rights set forth in this Section 3.8 and Section 3.10 in a manner which is consistent with the purposes and functions of the Trust set out in Section 3.3 and the Property Trustee shall not take any action which is inconsistent with the purposes and functions of the Trust set forth in Section 3.3. SECTION 3.9 Delaware Trustee. Notwithstanding any other provision of this Declaration other than Section 5.1(a)(3), the Delaware Trustee shall not be entitled to exercise any powers, nor shall the Delaware Trustee have any of the duties and responsibilities of the Regular Trustees and the Property Trustee described in this Declaration. Except as set forth in Section 5.1(a)(3), the Delaware Trustee shall be a Trustee for the sole and limited purpose of fulfilling the requirements of Section 3807 of the Business Trust Act. No implied covenants or obligations shall be read into this Declaration against the Delaware Trustee. SECTION 3.10 Certain Rights and Duties of the Property Trustee. (a) The Property Trustee, before the occurrence of an Event of Default and after the curing of all Events of Default that may have occurred, shall undertake to perform only such duties as are specifically set forth in this Declaration, and no implied covenants shall be read into this Declaration against the Property Trustee. In case an Event of Default has occurred (that has not been cured or waived pursuant to Section 2.6), the Property Trustee shall exercise such of the rights and powers vested in it by this Declaration, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs. 17 (b) No provision of this Declaration shall be construed to relieve the Property Trustee from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that: (i) prior to the occurrence of an Event of Default and after the curing or waiving of all such Events of Default that may have occurred: (A) the duties and obligations of the Property Trustee shall be determined solely by the express provisions of this Declaration, and the Property Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Declaration, and no implied covenants or obligations shall be read into this Declaration against the Property Trustee; and (B) in the absence of bad faith on the pa Property Trustee, the Property Trustee may conclusively rely, as to the truth of the statements correctness of the opinions expressed therein, upon any certificates of opinions furnished to the Property Trustee and conforming to the requirements of this Declaration; but in the case of any such certificates or opinions that by any provision hereof are specifically required to be furnished to the Property Trustee, the Property Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Declaration; (ii) the Property Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer of the Property Trustee, unless it shall be proved that the Property Trustee was negligent in ascertaining the pertinent facts; (iii) the Property Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders as provided herein relating to the time, method and place of conducting any proceeding for any remedy available to the Property Trustee hereunder or under the Indenture, or exercising any trust or power conferred upon the Property Trustee under this Declaration; and (iv) no provision of this Declaration shall require the Property Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if it shall have reasonable ground for believing that the repayment of such funds or liability is not reasonably assured to it under the terms of this Declaration or adequate indemnity against such risk or liability is not reasonably assured to it. (c) Subject to the provisions of Section 3.10(a) and (b): (i) whenever in the administration of this Declaration, the Property Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or 18 omitting any action hereunder, the Property Trustee (unless other evidence is herein specifically prescribed) may, in the absence of bad faith on its part and, if the Trust is excluded from the definition of Investment Company solely by means of Rule 3a-5, subject to the requirements of Rule 3a-5, request and rely upon a certificate, which shall comply with the provisions of Section 314(e) of the Trust Indenture Act, signed by any two of the Regular Trustees or by an authorized officer of the Sponsor, as the case may be; (ii) The Property Trustee (A) may consult with counsel (which may be counsel to the Sponsor or any of its Affiliates and may include any of its employees) selected by it in good faith and with due care and the written advice or opinion of such counsel with respect to legal matters shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon and in accordance with such advice and opinion and (B) shall have the right at any time to seek instructions concerning the administration of this Declaration from any court of competent jurisdiction; (iii) The Property Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Property Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed by it in good faith and with due care; (iv) The Property Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Declaration at the request or direction of any Holders, unless such Holders shall have offered to the Property Trustee reasonable security and indemnity against the costs, expenses (including attorneys' fees and expenses) and liabilities that might be incurred by it in complying with such request or direction; provided that nothing contained in this clause (iv) shall relieve the Property Trustee of the obligation, upon the occurrence of an Event of Default (which has not been cured or waived) to exercise such of the rights and powers vested in it by this Declaration, and to use the same degree of care and skill in this exercise, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs; and (v) Any action taken by the Property Trustee or its agents hereunder shall bind the Holders of the Securities and the signature of the Property Trustee or its agents alone shall be sufficient and effective to perform any such action; and no third party shall be required to inquire as to the authority of the Property Trustee to so act, or as to its compliance with any of the terms and provisions of this Declaration, both of which shall be conclusively evidenced by the Property Trustee's or its agent's taking such action. SECTION 3.11 Preferential Collection of Claims Against Depositor or Trust. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other similar judicial proceeding relative to the Trust or any other obligor upon the Securities or the property of the Trust or of such other obligor or their creditors, the Property Trustee (irrespective of whether any 19 Distributions on the Securities shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Property Trustee shall have made any demand on the Trust for the payment of any past due Distributions) shall be entitled and empowered, to the fullest extent permitted by law, by intervention in such proceeding or otherwise: (a) to file and prove a claim for the whole amount of any Distributions owing and unpaid in respect of the Securities and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Property Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Property Trustee, its agents and counsel) and of the Holders allowed in such judicial proceeding, and (b) to collect and receive any moneys or other property payable or deliverablb on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Property Trustee and, in the event the Property Trustee shall consent to the making of such payments directly to the Holders, to pay to the Property Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Property Trustee, its agents and counsel, and any other amounts due the Property Trustee. Nothing herein contained shall be deemed to authorize the Property Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or compensation affecting the Securities or the rights of any Holder thereof or to authorize the Property Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 3.12 Registration Statement and Related Matters. The Trust and the Trustees hereby authorize and direct SunSource, as the sponsor of the Trust, (i) to file with the Commission and execute, in each case on behalf of the Trust, (a) the Registration Statement on Form S-4 (File No. 333-19077) (the "1933 Act Registration Statement") and any further pre-effective or post-effective amendments to such Registration Statement, relating to the registration under the Securities Act of the Preferred Securities of the Trust, (b) a Registration Statement on Form 8-A or other appropriate form (the "1934 Act Registration Statement") (including all pre-effective and post-effective amendments thereto) relating to the registration of the Preferred Securities of the Trust under Section 12(b) of the Exchange Act and (c) a Transaction Statement on Schedule 13E-3 (the "Schedule 13E-3") and any amendment or supplement thereto; (ii) to file with the New York Stock Exchange and execute on behalf of the Trust a listing application and all other applications, statements, certificates, agreements and other instruments as shall be necessary or desirable to cause the Preferred Securities to be listed on the New York Stock Exchange and (iii) to file and execute on behalf of the Trust such applications, reports, surety bonds, irrevocable consents, appointments of attorney for service of process and other papers and documents as shall be necessary or desirable to register the Preferred Securities under the securities or "Blue Sky" laws of such 20 jurisdictions as SunSource on behalf of the Trust, may deem necessary or desirable. In the event that any filing referred to in clauses (i)-(iii) above is required by the rules and regulations of the Commission, the New York Stock Exchange or state securities or blue sky laws, to be executed on behalf of the Trust by the Trustees, the Regular Trustees, in their capacities as Trustees of the Trust, are hereby authorized and directed to join in any such filing and to execute on behalf of the Trust any and all of the foregoing, it being understood that the Property Trustee and the Delaware Trustee, in their capacities as Trustees of the Trust, shall not be required to join in any such filing or execute on behalf of the Trust any such document unless required by the rules and regulations of the Commission, the New York Stock Exchange or state securities or blue sky laws. In connection with all of the foregoing, SunSource and each Trustee, solely in its capacity as Trustee of the Trust, have constituted and appointed, and hereby confirm the appointment of, Joseph M. Corvino, John J. Dabrowski and Norman V. Edmonson, and each of them, as his, her or its, as the case may be, true and lawful attorneys-in-fact, and agents, with full power of substitution and resubstitution, for SunSource or such Trustee or in SunSource's or such Trustee's name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to the 1933 Act Registration Statement, the 1934 Act Registration Statement and the Schedule 13E-3 and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as SunSource or such Trustee might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his or her substitute or substitutes, shall do or cause to be done by virtue hereof. SECTION 3.13 Filing of Amendments to Certificate of Trust. The Certificate of Trust as filed with the Secretary of State of the State of Delaware on June 17, 1997 is attached hereto as Exhibit A. On or after the date of execution of this Declaration, the Trustees shall cause the filing with the Secretary of State of the State of Delaware of such amendments to the Certificate of Trust as the Trustees shall deem necessary or desirable. SECTION 3.14 Calculation of Original Issue Discount. SunSource shall file with the Trustee promptly at the end of each calendar year (i) a written notice specifying the amount of original issue discount (including daily rates and accrual periods) accrued on outstanding Preferred Securities as of the end of such year and (ii) such other specific information relating to such original issue discount as may then be relevant under the Code. SECTION 3.15 Execution of Documents by Regular Trustees. Unless otherwise determined by the Regular Trustees and except as otherwise provided in this Declaration or required by the Business Trust Act with respect to the Certificate of Trust or otherwise, a majority of, or if there are only two, both of, the Regular Trustees are 21 authorized to execute and deliver on behalf of the Trust any documents which the Regular Trustees have the power and authority to execute or deliver pursuant to this Declaration. SECTION 3.16 Trustees Not Responsible for Recitals or Issuance of Securities. The recitals contained in this Declaration and the Securities shall be taken as the statements of the Sponsor and the Trustees do not assume any responsibility for their correctness. The Trustees make no representations as to the value or condition of the property of the Trust or any part thereof. The Trustees make no representations as to the validity or sufficiency of this Declaration or the Securities. SECTION 3.17 Duration of Trust. The Trust, absent termination pursuant to the provisions of Article VIII hereof, shall have existence until __________, 2027. ARTICLE IV SPONSOR SECTION 4.1 Purchase of Common Securities by Sponsor. The Sponsor will purchase Common Securities issued by the Trust at the same time as the Preferred Securities are issued in exchange for the Debentures, such purchase to be in an amount equal to 3% of the sum of (i) the aggregate stated liquidation amount of the Preferred Securities issued in exchange for the Debentures and (ii) the proceeds derived from the sale of the Common Securities. SECTION 4.2 Covenants of the Sponsor. For so long as the Preferred Securities remain outstanding, the Sponsor will covenant (i) to maintain directly 100 percent ownership of the Common Securities, (ii) to cause the Trust to remain a statutory business trust and not to voluntarily dissolve, wind up, liquidate, or be terminated, except as permitted by this Declaration, (iii) to use its commercially reasonable efforts to ensure that the Trust will not be an investment company for purposes of the 1940 Act, and (iv) to take no action which would be reasonably likely to cause the Trust to be classified as an association or a publicly traded partnership taxable as a corporation for United States federal income tax purposes. SECTION 4.3 Expenses. (a) The Sponsor shall be responsible for and shall pay for all debts and obligations (other than with respect to the Preferred Securities) and all costs and expenses of the Trust including without limitation costs and expenses relating to the organization of the Trust, the issuance of the Preferred Securities pursuant to the Conversion, the fees and expenses (including reasonable counsel fees and expenses) of the Trustees, which compensation shall not 22 be limited by any provision of law with regard to the compensation of a trustee of an express trust (including any amounts payable under Article X), the costs and expenses relating to the operation of the Trust, including without limitation costs and expenses of accountants, attorneys, statistical or bookkeeping services, expenses for printing and engraving and computing or accounting equipment, paying agent(s), registrar(s), transfer agent(s), duplicating, travel and telephone and other telecommunications expenses and costs and expenses incurred in connection with the disposition of Trust assets. (b) The Sponsor will pay any and all taxes (other than United States withholding taxes attributable to the Trust or its assets) and all liabilities, costs and expenses with respect to such taxes of the Trust. (c) The Sponsor's obligations under this Section 4.2 shall be for the benefit of, and shall be enforceable by, any Person to whom any such debts, obligations, costs, expenses and taxes are owed (a "Creditor") whether or not such Creditor has received notice hereof. Any such Creditor may enforce the Sponsor's obligations under this Section 4.2 directly against the Sponsor and the Sponsor irrevocably waives any right or remedy to require that any such Creditor take any action against the Trust or any other Person before proceeding against the Sponsor. The Sponsor agrees to execute such additional agreements as may be necessary or desirable in order to give full effect to the provisions of this Section 4.2. (d) As security for the performance of the obligations of the Sponsor under this Section, the Property Trustee shall have a lien prior to the Debentures upon all property and funds held or collected by the Property Trustee as such, except funds held in trust for the payment of principal of and premium (if any) or interest on, particular Debentures. Should the Property Trustee incur expenses or render services in connection with an Event of Default specified in Section 6.01 of the Indenture, those expenses (including the reasonable charges and expenses of its counsel) and the compensation for the services are intended to constitute expenses of administration under any applicable federal or state bankruptcy, insolvency, reorganization or other similar law. The provisions of this Section shall survive the termination of this Declaration. ARTICLE V TRUSTEES SECTION 5.1 Number of Trustees; Qualifications. (a) The number of Trustees initially shall be five. At any time (i) before the issuance of the Securities, the Sponsor may, by written instrument, increase or decrease the number of, and appoint, remove and replace the, Trustees, and (ii) after the issuance of the Securities and except as provided in clause (5) below and Section 5.2(a)(ii)(B) with respect to the Special Regular Trustee, the number of Trustees may be increased or decreased solely by, and Trustees may be appointed, removed or replaced solely by, vote of Holders of Common 23 Securities representing a Majority in liquidation amount of the Common Securities voting as a class; provided that in any case: (i) the number of Trustees shall be at least five unless the Trustee that acts as the Property Trustee also acts as the Delaware Trustee, in which case the number of Trustees shall be at least four (4); (ii) unless a Special Regular Trustee has been appointed (which appointment shall not impair the right of the Holders of Common Securities to increase or decrease the number of, or to appoint, remove or replace, Trustees (other than the Special Regular Trustee) as provided above), at least a majority of the Trustees shall at all times be officers, directors or employees of SunSource; (iii) if required by the Business Trust Act, one Trustee (the "Delaware Trustee") shall be either a natural person who is a resident of the State of Delaware or, if not a natural person, an entity which has its principal place of business in the State of Delaware and otherwise is permitted to act as a Trustee hereunder under the laws of the State of Delaware, except that if the Property Trustee has its principal place of business in the State of Delaware and otherwise is permitted to act as a Trustee hereunder under the laws of the State of Delaware, then the Property Trustee shall also be the Delaware Trustee and Section 3.9 shall have no application; (iv) there shall at all times be a Property Trustee hereunder which shall satisfy the requirements of Section 5.1(c); and (v) the number of Trustees shall be increased automatically by one (1) if an Appointment Event has occurred and is continuing and the Holders of a Majority in liquidation amount of the Preferred Securities appoint a Special Regular Trustee in accordance with Section 5.2(a)(ii)(B) and the terms of the Preferred Securities. Each Trustee shall be either a natural person at least 21 years of age or a legal entity which shall act through one or more duly appointed representatives. (b) The initial Regular Trustees shall be: Joseph M. Corvino John J. Dabrowski Norman V. Edmonson c/o SunSource Inc. 2600 One Logan Square Philadelphia, PA 19103 (c) There shall at all times be one Trustee which shall act as Property Trustee. In order to act as Property Trustee hereunder, such Trustee shall: (i) not be an Affiliate of the Sponsor; 24 (ii) be a corporation organized and doing business under the laws of the United States of America or any State or Territory thereof or of the District of Columbia, or a corporation or Person permitted by the Commission to act as an institutional trustee under the Trust Indenture Act, authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least $50,000,000, and subject to supervision or examination by Federal, State, Territorial or District of Columbia authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the supervising or examining authority referred to above, then for the purposes of this Section 5.1(c)(ii), the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published; and (iii) if the Trust is excluded from the definition of an Investment Company solely by reason of Rule 3a-5 and to the extent Rule 3a-5 requires a trustee having certain qualifications to hold title to the "eligible assets" (as defined in Rule 3a-5) of the Trust, the Property Trustee shall possess those qualifications. If at any time the Property Trustee shall cease to satisfy the requirements of clauses (i)-(iii) above, the Property Trustee shall immediately resign in the manner and with the effect set out in Section 5.2(d). If the Property Trustee has or shall acquire any "conflicting interest" within the meaning of Section 310(b) of the Trust Indenture Act, the Property Trustee and the Holders of the Common Securities (as if such Holders were the obligor referred to in Section 310(b) of the Trust Indenture Act) shall in all respects comply with the provisions of Section 310(b) of the Trust Indenture Act. The Preferred Guarantee shall be deemed to be specifically described in this Declaration for the purposes of clause (i) of the first proviso contained in Section 310(b) of the Trust Indenture Act. The initial Trustee which shall serve as the Property Trustee is The Bank of New York, whose address is as set forth in Section 14.1(b). (d) The initial Trustee which shall serve as the Delaware Trustee is The Bank of New York (Delaware), whose address is as set forth in Section 14.1(c). (e) Any action taken by (i) Holders of Common Securities pursuant to this Article V or (ii) Holders of Preferred Securities pursuant to this Article V to appoint or remove a Special Regular Trustee upon the occurrence of an Appointment Event, shall be taken at a meeting of Holders of Common Securities or Preferred Securities, as the case may be, convened for such purpose or by written consent as provided in Section 12.2. (f) No amendment may be made to this Section 5.1 which would change any rights with respect to the number, existence or appointment and removal of Trustees (other than any Special Regular Trustee), except with the consent of each Holder of Common Securities. (g) No amendment may be made to this Section 5.1 or Section 5.2(a)(ii)(B), which would change the rights of Holders of Preferred Securities to appoint, remove or replace a Special Regular Trustee except with the consent of each Holder of Preferred Securities. 25 SECTION 5.2 Appointment, Removal and Resignation of Trustees. (a) Subject to Section 5.2(b), Trustees may be appointed or removed without cause at any time: (i) until the issuance of the Securities, by written instrument executed by the Sponsor; and (ii) after the issuance of the Securities, (A) other than with respect to the Special Regular Trustee, by vote of the Holders of a Majority in liquidation amount of the Common Securities voting as a class; and (B) if an Appointment Event has occurred and is continuing, one (1) additional Regular Trustee (the "Special Regular Trustee") may be appointed, who need not be an Affiliate of the Sponsor, by vote of the Holders of a Majority in liquidation amount of the Preferred Securities, voting as a class and such Special Regular Trustee may be removed (otherwise than by the operation of Section 5.2(c)), only by vote of the Holders of a Majority in liquidation amount of the Preferred Securities voting as a class. (iii) notwithstanding any other provision to the contrary in this Declaration, if an Indenture Event of Default shall have occurred and be continuing, such removal of the Property Trustee or the Delaware Trustee and such election of the Successor Property Trustee or Successor Delaware Trustee shall require the affirmative vote of the Holders of a majority in liquidation amount of the Preferred Securities voting as a class. (b) (i) The Trustee that acts as Property Trustee shall not be removed in accordance with Section 5.2(a) until a Successor Property Trustee possessing the qualifications to act as Property Trustee under Section 5.1(c) has been appointed and has accepted such appointment by written instrument executed by such Successor Property Trustee and delivered to the Regular Trustees, the Sponsor and the Property Trustee being removed; and (ii) the Trustee that acts as Delaware Trustee shall not be removed in accordance with Section 5.2(a) until a successor Trustee possessing the qualifications to act as Delaware Trustee under Section 5.1(a)(3) (a "Successor Delaware Trustee") has been appointed and has accepted such appointment by written instrument executed by such Successor Delaware Trustee and delivered to the Regular Trustees, the Sponsor and the Delaware Trustee being removed. (c) A Trustee appointed to office shall hold office until his successor shall have been appointed or until his death, removal or resignation, provided that a Special Regular Trustee shall only hold office while an Appointment Event is continuing and shall cease to hold 26 office immediately after the Appointment Event pursuant to which the Special Regular Trustee was appointed and all other Appointment Events cease to be continuing. (d) Any Trustee may resign from office (without need for prior or subsequent accounting) by an instrument (a "Resignation Request") in writing signed by the Trustee and delivered to the Sponsor and the Trust, which resignation shall take effect upon such delivery or upon such later date as is specified therein; provided, however, that: (i) no such resignation of the Trustee that acts as the Property Trustee shall be effective until: (A) a Successor Property Trustee possessing the qualifications to act as Property Trustee under Section 5.1(c) has been appointed and has accepted such appointment by instrument executed by such Successor Property Trustee and delivered to the Trust, the Sponsor and the resigning Property Trustee; or (B) if the Trust is excluded from the definition of an Investment Company solely by reason of Rule 3a-5, until the assets of the Trust have been completely liquidated and the proceeds thereof distributed to the Holders of the Securities; (ii) no such resignation of the Trustee that acts as the Delaware Trustee shall be effective until a Successor Delaware Trustee has been appointed and has accepted such appointment by instrument executed by such Successor Delaware Trustee and delivered to the Trust, the Sponsor and the resigning Delaware Trustee; and (iii) no such resignation of a Special Regular Trustee shall be effective until the 60th day following delivery of the Resignation Request to the Sponsor and the Trust or such later date specified in the Resignation Request during which period the Holders of the Preferred Securities shall have the right to appoint a successor Special Regular Trustee as provided in this Article V. (e) If no Successor Property Trustee or Successor Delaware Trustee shall have been appointed and accepted appointment as provided in this Section 5.2 within 60 days after delivery to the Sponsor and the Trust of a Resignation Request or within 60 days after completion of the vote referred to in 5.2(a)(ii)(A) or 5.2(a)(ii)(B) hereof, the resigning or removed Property Trustee or Delaware Trustee may petition any court of competent jurisdiction for appointment of a Successor Property Trustee or Successor Delaware Trustee. Such court may thereupon after such notice, if any, as it may deem proper and prescribe, appoint a Successor Property Trustee or Successor Delaware Trustee, as the case may be. SECTION 5.3 Vacancies Among Trustees. If a Trustee ceases to hold office for any reason and the number of Trustees is not reduced pursuant to Section 5.1 or if the number of Trustees is increased pursuant to Section 5.1, 27 a vacancy shall occur. A resolution certifying the existence of such vacancy by a majority of the Regular Trustees shall be conclusive evidence of the existence of such vacancy. The vacancy shall be filled with a Trustee appointed in accordance with the requirements of this Article V. SECTION 5.4 Effect of Vacancies. The death, resignation, retirement, removal, bankruptcy, dissolution, liquidation, incompetence or incapacity to perform the duties of a Trustee, or any one of them, shall not operate to annul the Trust. Whenever a vacancy in the number of Regular Trustees shall occur until such vacancy is filled as provided in this Article V, the Regular Trustees in office, regardless of their number, shall have all the powers granted to the Regular Trustees and shall discharge all the duties imposed upon the Regular Trustees by this Declaration. SECTION 5.5 Meetings. Meetings of the Regular Trustees shall be held from time to time upon the call of any Trustee. Regular meetings of the Regular Trustees may be held at a time and place fixed by resolution of the Regular Trustees. Notice of any in-person meetings of the Regular Trustees shall be hand delivered or otherwise delivered in writing (including by facsimile, with a hard copy by overnight courier) not less than 48 hours before such meeting. Notice of any telephonic meetings of the Regular Trustees or any committee thereof shall be hand delivered or otherwise delivered in writing (including by facsimile, with a hard copy by overnight courier) not less than 24 hours before a meeting. Notices shall contain a brief statement of the time, place and anticipated purposes of the meeting. The presence (whether in person or by telephone) of a Regular Trustee at a meeting shall constitute a waiver of notice of such meeting except where a Regular Trustee attends a meeting for the express purpose of objecting to the transaction of any activity on the ground that the meeting has not been lawfully called or convened. Unless provided otherwise in this Declaration, any action of the Regular Trustees may be taken at a meeting by vote of a majority of the Regular Trustees present (whether in person or by telephone) and eligible to vote with respect to such matter, provided that a Quorum is present, or without a meeting by the unanimous written consent of the Regular Trustees. SECTION 5.6 Delegation of Power. (a) Any Regular Trustee may, by power of attorney consistent with applicable law, delegate to any other natural person over the age of 21 his or her power for the purpose of executing any registration statement or amendment thereto or other document or schedule filed with the Commission or making any other governmental filing (including without limitation to filings referred to in Section 3.11). (b) The Regular Trustees shall have power to delegate from time to time to such of their number or to officers of the Trust the doing of such things and the execution of such instruments either in the name of the Trust or the names of the Regular Trustees or otherwise as the Regular Trustees may deem expedient, to the extent such delegation is not prohibited by applicable law or contrary to the provisions of the Trust, as set forth herein. 28 ARTICLE VI DISTRIBUTIONS SECTION 6.1 Distributions. Holders shall receive periodic distributions, redemption payments and liquidation distributions in accordance with the applicable terms of the relevant Holder's Securities ("Distributions"). Distributions shall be made to the Holders of Preferred Securities and Common Securities in accordance with the terms of the Securities as set forth in Exhibits B and C hereto. If and to the extent that SunSource makes a payment of interest (including Compounded Interest (as defined in the Indenture)), premium and principal on the Debentures held by the Property Trustee (the amount of any such payment being a "Payment Amount"), the Property Trustee shall and is directed to promptly make a Distribution of the Payment Amount to Holders in accordance with the terms of the Securities as set forth in Exhibits B and C hereto. ARTICLE VII ISSUANCE OF SECURITIES SECTION 7.1 General Provisions Regarding Securities. (a) The Regular Trustees shall issue on behalf of the Trust securities in fully registered form representing undivided beneficial interests in the assets of the Trust in accordance with Section 7.1(b) and for the consideration specified in Section 3.3. (b) The Regular Trustees shall issue on behalf of the Trust one class of preferred securities representing preferred undivided beneficial interests in the assets of the Trust having such terms as are set forth in Exhibit B (the "Preferred Securities") which terms are incorporated by reference in, and made a part of, this Declaration as if specifically set forth herein, and one class of common securities representing common undivided beneficial interests in the assets of the Trust having such terms as are set forth in Exhibit C (the "Common Securities") which terms are incorporated by reference in, and made a part of, this Declaration as if specifically set forth herein. The Trust shall have no securities or other interests in the assets of the Trust other than the Preferred Securities and the Common Securities. (c) The Certificates shall be signed on behalf of the Trust by the Regular Trustees (or if there are more than two Regular Trustees by any two of the Regular Trustees). Such signatures may be the manual or facsimile signatures of the present or any future Regular Trustee. A Security shall not be valid until authenticated by the manual signature of an authorized signatory of the Property Trustee. The signature shall be conclusive evidence that the Security has been authenticated under this Declaration. Upon a written order of the Trust signed by one Regular Trustee, the Property Trustee shall authenticate the Security for original issue. Typographical and other minor errors or defects in any such reproduction of any such signature shall not affect the validity of any Security. In case any Regular Trustee of the Trust who shall have signed any of the Certificates shall cease to be such Regular Trustee before the Certificate so signed shall be delivered by the Trust, such Certificate nevertheless may be delivered as 29 though the person who signed such Certificate had not ceased to be such Regular Trustee; and any Certificate may be signed on behalf of the Trust by such persons as, at the actual date of the execution of such Security, shall be the Regular Trustees of the Trust, although at the date of the execution and delivery of the Declaration any such person was not such a Regular Trustee. Certificates shall be printed, lithographed or engraved or may be produced in any other manner as is reasonably acceptable to the Regular Trustees, as evidenced by their execution thereof, and may have such letters, numbers or other marks of identification or designation and such legends or endorsements as the Regular Trustees may deem appropriate, or as may be required to comply with any law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange on which Securities may be listed, or to conform to usage. (d) The consideration received by the Trust for the issuance of the Securities shall constitute a contribution to the capital of the Trust and shall not constitute a loan to the Trust. (e) Upon issuance of the Securities as provided in this Declaration, the Securities so issued shall be deemed to be validly issued, fully paid and non-assessable. (f) Every Person, by virtue of having become a Holder or a Preferred Security Beneficial Owner in accordance with the terms of this Declaration, shall be deemed to have expressly assented and agreed to the terms of, and shall be bound by this Declaration. (g) The Sponsor shall use its best efforts to cause the Preferred Securities to be, and to remain at all times, listed for qualification on the New York Stock Exchange. ARTICLE VIII DISSOLUTION OF TRUST SECTION 8.1 Dissolution of Trust. The Trust shall dissolve when: (i) all of the Securities shall have been called for redemption and the amounts necessary for redemption thereof shall have been paid to the Holders of Securities in accordance with the terms of the Securities; or (ii) the Regular Trustees elect to dissolve the Trust and distribute Debentures to Holders of Securities in exchange for all of the Securities in accordance with the terms of the Securities; or (iii) upon the expiration of the term of the Trust as set forth in Section 3.17; or (iv) upon bankruptcy of the Sponsor or the Trust; or 30 (v) upon (i) the filing of a certificate of dissolution or the equivalent with respect to the Sponsor, (ii) the consent of at least a majority in liquidation amount of the Securities, voting together as a single class to dissolve the Trust, or (iii) the revocation of the charter of the Sponsor and the expiration of 90 days after the date of revocation without a reinstatement thereof; or (vi) upon the entry of a decree of judicial dissolution of the Sponsor or the trust. The provisions of Sections 3.10 and 4.2 and Article X shall survive the termination of the Trust. As soon as practicable after the occurrence of an event referred to in this Section 8.1 and after satisfaction of liabililties to creditors, and subject to the terms of the Securities, the Trustees shall execute and the Regular Trustees shall file a certificate of cancellation with the Secretary of State of the State of Delaware. ARTICLE IX TRANSFER OF INTERESTS SECTION 9.1 Transfer of Securities. (a) Securities may only be transferred, in whole or in part, in accordance with the terms and conditions set forth in this Declaration. Any transfer or purported transfer of any Security not made in accordance with this Declaration shall be null and void. (b) Subject to this Article IX, Preferred Securities shall be freely transferable. (c) Subject to this Article IX, SunSource and any Related Party may only transfer Common Securities to SunSource or a Related Party, provided that any such transfer shall be subject to the condition that the transferor shall have obtained (1) either a ruling from the Internal Revenue Service or an unqualified written opinion addressed to the Trust and delivered to the Trustees of nationally recognized independent tax counsel experienced in such matters to the effect that such transfer will not (i) cause the Trust to be treated as issuing a class of interests in the Trust differing from the class of interests represented by the Common Securities originally issued to SunSource, (ii) result in the Trust acquiring or disposing of, or being deemed to have acquired or disposed of, an asset, or (iii) result in or cause the Trust to be treated as anything other than a grantor trust for United States federal income tax purposes and (2) an unqualified written opinion addressed to the Trust and delivered to the Trustees of a nationally recognized independent counsel experienced in such matters that such transfer will not cause the Trust to be an Investment Company or controlled by an Investment Company. SECTION 9.2 Transfer of Certificates. The Regular Trustees shall provide for the registration of Certificates and of transfers of Certificates, which will be effected without charge but only upon payment (with such indemnity as the Regular Trustees may require) in respect of any tax or other government 31 charges which may be imposed in relation to it. Upon surrender for registration of transfer of any Certificate, the Regular Trustees shall cause one or more new Certificates to be issued in the name of the designated transferee or transferees. Every Certificate surrendered for registration of transfer shall be accompanied by a written instrument of transfer in form satisfactory to the Regular Trustees duly executed by the Holder or such Holder's attorney duly authorized in writing. Each Certificate surrendered for registration of transfer shall be canceled by the Regular Trustees. A transferee of a Certificate shall be entitled to the rights and subject to the obligations of a Holder hereunder upon the receipt by such transferee of a Certificate. By acceptance of a Certificate, each transferee shall be deemed to have agreed to be bound by this Declaration. SECTION 9.3 Deemed Security Holders. The Trustees may treat the Person in whose name any Certificate shall be registered on the books and records of the Trust as the sole holder of such Certificate and of the Securities represented by such Certificate for purposes of receiving Distributions and for all other purposes whatsoever and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such Certificate or in the Securities represented by such Certificate on the part of any Person, whether or not the Trustees shall have actual or other notice thereof. SECTION 9.4 Book Entry Interests. The Preferred Securities Certificates, on original issuance, will be issued in fully registered form. With respect to any Certificates registered on the books and records of the Trust in the name of a Clearing Agency or the nominee of a Clearing Agency: (i) the Trust and the Trustees shall be entitled to deal with the Clearing Agency for all purposes of this Declaration (including the payment of Distributions on such Certificates and receiving approvals, votes or consents hereunder) as the Preferred Security Holder and the sole holder of such Certificates and, except as set forth herein or in Rule 3a-5 with respect to the Property Trustee, shall have no obligation to the Preferred Security Beneficial Owners; (ii) to the extent that the provisions of this Section 9.4 conflict with any other provisions of this Declaration, the provisions of this Section 9.4 shall control; and (iii) the rights of the Preferred Security Beneficial Owners shall be exercised only through the Clearing Agency and shall be limited to those established by law and agreements between such Preferred Security Beneficial Owners and the Clearing Agency and/or the Clearing Agency Participants. The Clearing Agency will make book entry transfers among Clearing Agency Participants and receive and transmit payments of Distributions on such Certificates to such Clearing Agency Participants. SECTION 9.5 Notices to Holders of Certificates. Whenever a notice or other communication to the Holders is required to be given under this Declaration, the relevant Trustees shall give such notices and communications to the 32 Holders and, with respect to any Preferred Security Certificate registered in the name of a Clearing Agency or the nominee of a Clearing Agency, the Trustees shall, except as set forth herein or in Rule 3a-5 with respect to the Property Trustee, have no obligations to the Preferred Security Beneficial Owners. SECTION 9.6 Appointment of Successor Clearing Agency. If any Clearing Agency elects to discontinue its services as securities depository with respect to the Preferred Securities, the Regular Trustees may, in their sole discretion, appoint a successor Clearing Agency with respect to the Preferred Securities. SECTION 9.7 Definitive Preferred Securities Certificates. If (i) a Clearing Agency elects to discontinue its services as securities depository with respect to the Preferred Securities and a successor Clearing Agency is not appointed within 90 days after such discontinuance pursuant to Section 9.6, (ii) the Regular Trustees elect after consultation with the Sponsor to terminate the book entry system through the Clearing Agency with respect to the Preferred Securities or (iii) there is an Event of Default, then upon surrender of the Certificates representing the Book Entry Interests with respect to the Preferred Securities by the Clearing Agency, accompanied by registration instructions, the Regular Trustees shall cause definitive Preferred Security Certificates to be delivered to Preferred Security Beneficial Owners in accordance with the instructions of the Clearing Agency. Neither the Trustees nor the Trust shall be liable for any delay in delivery of such instructions and each of them may conclusively rely on and shall be protected in relying on, such instructions. SECTION 9.8 Mutilated, Destroyed, Lost or Stolen Certificates. If (a) any mutilated Certificates should be surrendered to the Regular Trustees, or if the Regular Trustees shall receive evidence to their satisfaction of the destruction, loss or theft of any Certificate; and (b) there shall be delivered to the Regular Trustees such security or indemnity as may be required by them to keep each of them harmless, then in the absence of notice that such Certificate shall have been acquired by a bona fide purchaser, any two Regular Trustees on behalf of the Trust shall execute and make available for delivery, in exchange for or in lieu of any such mutilated, destroyed, lost or stolen Certificate, a new Certificate of like denomination. In connection with the issuance of any new Certificate under this Section 9.8, the Regular Trustees may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. Any duplicate Certificate issued pursuant to this Section shall constitute conclusive evidence of an ownership interest in the relevant Securities, as if originally issued, whether or not the lost, stolen or destroyed Certificate shall be found at any time. An indemnity bond must be provided by the Holder which, in the judgment of the Property Trustee, is sufficient to protect the Regular Trustees, the Sponsor or any authenticating agent from any loss which any may suffer if a security is replaced. The Trust may charge such Holder for its expenses in replacing a Security. 33 ARTICLE X LIMITATION OF LIABILITY; INDEMNIFICATION SECTION 10.1 Exculpation. (a) No Indemnified Person shall be liable, responsible or accountable in damages or otherwise to the Trust or any Covered Person for any loss, damage or claim incurred by reason of any act or omission performed or omitted by such Indemnified Person in good faith on behalf of the Trust and in a manner such Indemnified Person reasonably believed to be within the scope of the authority conferred on such Indemnified Person by this Declaration or by law, except that an Indemnified Person shall be liable for any such loss, damage or claim incurred by reason of such Indemnified Person's gross negligence (or, in the case of the Property Trustee, negligence) or willful misconduct with respect to such acts or omissions. (b) An Indemnified Person shall be fully protected in relying in good faith upon the records of the Trust and upon such information, opinions, reports or statements presented to the Trust by any Person as to matters the Indemnified Person reasonably believes are within such other Person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Trust, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, profits, losses, or any other facts pertinent to the existence and amount of assets from which Distributions to Holders of Securities might properly be paid. (c) Pursuant to Section 3803 (a) of the Business Trust Act, the Holders of Securities, in their capacities as Holders, shall be entitled to the same limitation of liability extended to stockholders of private corporations for profit organized under the General Corporation Law of the State of Delaware. SECTION 10.2 Indemnification. (a) To the fullest extent permitted by applicable law, the Sponsor shall indemnify and hold harmless each Indemnified Person from and against any loss, damage or claim incurred by such Indemnified Person by reason of any act or omission performed or omitted by such Indemnified Person in good faith on behalf of the Trust and in a manner such Indemnified Person reasonably believed to be within the scope of authority conferred on such Indemnified Person by this Declaration, except that no Indemnified Person shall be entitled to be indemnified in respect of any loss, damage or claim incurred by such Indemnified Person by reason of gross negligence (or, in the case of the Property Trustee, negligence) or willful misconduct with respect to such acts or omissions. (b) To the fullest extent permitted by applicable law, expenses (including legal fees) incurred by an Indemnified Person in defending any claim, demand, action, suit or proceeding shall, from time to time, be advanced by the Sponsor prior to the final disposition of such claim, demand, action, suit or proceeding upon receipt by the Sponsor of an undertaking by 34 or on behalf of the Indemnified Person to repay such amount if it shall be determined that the Indemnified Person is not entitled to be indemnified as authorized in Section 10.2(a). ARTICLE XI ACCOUNTING SECTION 11.1 Fiscal Year. The fiscal year ("Fiscal Year") of the Trust shall be the calendar year, or such other year as is required by the Code. SECTION 11.2 Certain Accounting Matters. (a) At all times during the existence of the Trust, the Regular Trustees shall keep, or cause to be kept, full books of account, records and supporting documents, which shall reflect in reasonable detail, each transaction of the Trust. The books of account shall be maintained on the accrual method of accounting, in accordance with generally accepted accounting principles, consistently applied. The Trust shall use the accrual method of accounting for United States federal income tax purposes. The books and records of the Trust, together with a copy of this Declaration and a certified copy of the Certificate of Trust, or any amendment thereto, shall at all times be maintained at the principal office of the Trust and shall be available upon written request for inspection by any Holder or its duly authorized representative for any purpose reasonably related to its interest in the Trust. (b) The Regular Trustees shall, as soon as available after the end of each Fiscal Year of the Trust, cause to be prepared and mailed to each Holder of Securities unaudited financial statements of the Trust for such Fiscal Year, prepared in accordance with generally accepted accounting principles, provided that if the Trust is required to comply with the periodic reporting requirements of Sections 13(a) or 15(d) of the Exchange Act, such financial statements for such Fiscal Year shall be examined and reported on by a firm of independent certified public accountants selected by the Regular Trustees (which firm may be the firm used by the Sponsor). (c) The Regular Trustees shall cause to be prepared and mailed to each Holder of Securities, an annual United States federal income tax information statement, on such form as is required by the Code, containing such information with regard to the Securities held by each Holder as is required by the Code and the Treasury Regulations. Notwithstanding any right under the Code to deliver any such statement at a later date, the Regular Trustees shall endeavor to deliver all such statements within 30 days after the end of each Fiscal Year of the Trust. (d) The Regular Trustees shall cause to be prepared and filed with the appropriate taxing authority, an annual United States federal income tax return, on such form as is required by the Code, and any other annual income tax returns required to be filed by the Regular Trustees on behalf of the Trust with any state or local taxing authority, such returns to be filed as soon as practicable after the end of each Fiscal Year of the Trust. 35 SECTION 11.3 Banking. The Trust shall maintain one or more bank accounts in the name and for the sole benefit of the Trust; provided, however, all payments of funds in respect of the Debentures held by the Property Trustee shall be made directly to the Property Account and no other funds from the Trust shall be deposited in the Property Account. The sole signatories for such accounts shall be designated by the Regular Trustees provided, however, the Property Trustee shall designate the sole signatories for the Property Account. SECTION 11.4 Withholding. The Trust and the Trustees shall comply with all withholding requirements under United States federal, state and local law. The Trust shall request, and the Holders shall provide to the Trust, such forms or certificates as are necessary to establish an exemption from withholding with respect to each Holder, and any representations and forms as shall reasonably be requested by the Trust to assist it in determining the extent of, and in fulfilling, its withholding obligations. The Trust shall file required forms with applicable jurisdictions and, unless an exemption from withholding is properly established by a Holder, shall remit amounts withheld with respect to the Holder to applicable jurisdictions. To the extent that the Trust is required to withhold and pay over any amounts to any authority with respect to distributions or allocations to any Holder, the amount withheld shall be deemed to be a distribution in the amount of the withholding to the Holder. In the event of any claimed overwithholding, Holders shall be limited to an action against the applicable jurisdiction. If the amount to be withheld was not withheld from a Distribution, the Trust may reduce subsequent Distributions by the amount of such withholding. ARTICLE XII AMENDMENTS AND MEETINGS SECTION 12.1 Amendments. (a) Except as otherwise provided in this Declaration or by any applicable terms of the Securities, this Declaration may be amended by, and only by, a written instrument executed by a majority of the Regular Trustees; provided, however, that (i) no amendment to this Declaration shall be made unless the Regular Trustees shall have obtained (A) either a ruling from the Internal Revenue Service or a written unqualified opinion of nationally recognized independent tax counsel experienced in such matters to the effect that such amendment will not cause the Trust to be classified for United States federal income tax purposes as an association taxable as a corporation or a partnership and to the effect that the Trust will continue to be treated as a grantor trust for purposes of United States federal income taxation and (B) a written unqualified opinion of nationally recognized independent counsel experienced in such matters to the effect that such amendment will not cause the Trust to be an Investment Company which is required to be registered under the Investment Company Act, (ii) at such time after the Trust has issued any Securities which remain outstanding, any amendment which would adversely affect the rights, privileges or preferences of any Holder of Securities may be 36 effected only with such additional requirements as may be set forth in the terms of such Securities, (iii) Section 4.2, Section 9.1(c) and this Section 12.1 shall not be amended without the consent of all of the Holders of the Securities, (iv) no amendment which adversely affects the rights, powers and privileges of the Property Trustee shall be made without the consent of the Property Trustee, (v) Article IV shall not be amended without the consent of the Sponsor, (vi) the rights of Holders of Common Securities under Article V to increase or decrease the number of, and to appoint, replace or remove, Trustees (other than a Special Regular Trustee) shall not be amended without the consent of each Holder of Common Securities and (vii) the rights of Holders of Preferred Securities to appoint or remove a Special Regular Trustee and the rights of Holders of Preferred Securities pursuant to Section 5.2(a)(iii) shall not be amended without the consent of each Holder of Preferred Securities. (b) No amendment shall be made, and any such purported amendment shall be void and ineffective: (i) unless, in the case of any proposed amendment, the Property Trustee shall have first received an Officer's Certificate from each of the Trust and the Sponsor that such amendment is permitted by, and conforms to, the terms of this Declaration (including the terms of the Trust Securities); (ii) unless, in the case of any proposed amendment which affects the rights, powers, duties, obligations or immunities of the Property Trustee, the Property Trustee shall have first received an opinion of counsel (who may be counsel to the Sponsor or the Trust) that such amendment is permitted by, and conforms to, the terms of this Declaration (including the terms of the Trust Securities); and (iii) to the extent the result of such amendment would be to: (A) cause the Trust to fail to continue to be classified for purposes of United States federal income taxation as a grantor trust; (B) reduce or otherwise adversely affect the powers of the Property Trustee in contravention of the Trust Indenture Act; or (C) cause the Trust to be deemed to be an Investment Company required to be registered under the 1940 Act. (c) Notwithstanding Section 12.1(a)(ii), this Declaration may be amended without the consent of the Holders of the Securities to (i) cure any ambiguity, (ii) correct or supplement any provision in this Declaration that may be defective or inconsistent with any other provision of this Declaration, (iii) to add to the covenants, restrictions or obligations of the Sponsor, and (iv) to conform to any changes in Rule 3a-5 or any change in interpretation or application of Rule 3a-5 by the Commission, which amendment does not adversely affect the rights, preferences or privileges of the Holders. 37 SECTION 12.2 Meetings of the Holders of Securities; Action by Written Consent. (a) Meetings of the Holders of Preferred Securities and/or Common Securities may be called at any time by the Regular Trustees (or as provided in the terms of the Securities) to consider and act on any matter on which Holders of such class of Securities are entitled to act under the terms of this Declaration, the terms of the Securities or the rules of any stock exchange on which the Preferred Securities are listed or admitted for trading. The Regular Trustees shall call a meeting of Holders of Preferred Securities or Common Securities, if directed to do so by Holders of at least 10% in liquidation amount of such class of Securities. Such direction shall be given by delivering to the Regular Trustees one or more calls in a writing stating that the signing Holders of Securities wish to call a meeting and indicating the general or specific purpose for which the meeting is to be called. Any Holders of Securities calling a meeting shall specify in writing the Certificates held by the Holders of Securities exercising the right to call a meeting and only those specified Certificates shall be counted for purposes of determining whether the required percentage set forth in the second sentence of this paragraph has been met. (b) Except to the extent otherwise provided in the terms of the Securities, the following provision shall apply to meetings of Holders of Securities: (i) Notice of any such meeting shall be given by mail to all the Holders of Securities having a right to vote thereat not less than 7 days nor more than 60 days prior to the date of such meeting. Whenever a vote, consent or approval of the Holders of Securities is permitted or required under this Declaration or the rules of any stock exchange on which the Preferred Securities are listed or admitted for trading, such vote, consent or approval may be given at a meeting of the Holders of Securities. Any action that may be taken at a meeting of the Holders of Securities may be taken without a meeting if a consent in writing setting forth the action so taken is signed by Holders of Securities owning not less than the minimum aggregate liquidation amount of Securities that would be necessary to authorize or take such action at a meeting at which all Holders of Securities having a right to vote thereon were present and voting. Prompt notice of the taking of action without a meeting shall be given to the Holders of Securities entitled to vote who have not consented in writing. The Regular Trustees may specify that any written consent submitted to the Holders of Securities for the purpose of taking any action without a meeting shall be returned to the Trust within the time specified by the Regular Trustees. (ii) Each Holder of a Security may authorize any Person to act for it by proxy on all matters in which a Holder of a Security is entitled to participate, including waiving notice of any meeting, or voting or participating at a meeting. No proxy shall be valid after the expiration of 11 months from the date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the Holder of the Security executing it. Except as otherwise provided herein or in the terms of the Securities, all matters relating to the giving, voting or validity of proxies shall be governed by the General Corporation Law of the State of Delaware relating to proxies, and judicial 38 interpretations thereunder, as if the Trust were a Delaware corporation and the Holders of the Securities were stockholders of a Delaware corporation. (iii) Each meeting of the Holders of the Securities shall be conducted by the Regular Trustees or by such other Person that the Regular Trustees may designate. (iv) Unless otherwise provided in the Business Trust Act, this Declaration or the rules of any stock exchange on which the Preferred Securities are then listed or admitted for trading, the Regular Trustees, in their sole discretion, shall establish all other provisions relating to meetings of Holders of Securities, including notice of the time, place or purpose of any meeting at which any matter is to be voted on by any Holders of Securities, waiver of any such notice, action by consent without a meeting, the establishment of a record date, quorum requirements, voting in person or by proxy or any other matter with respect to the exercise of any such right to vote. ARTICLE XIII REPRESENTATIONS OF PROPERTY TRUSTEE AND DELAWARE TRUSTEE SECTION 13.1 Representations and Warranties of Property Trustee. (a) The Trustee which acts as initial Property Trustee represents and warrants to the Trust and to the Sponsor at the date of this Declaration, and each Successor Property Trustee represents and warrants to the Trust and the Sponsor at the time of the Successor Property Trustee's acceptance of its appointment as Property Trustee that: (i) The Property Trustee is a banking corporation with trust powers, duly organized, validly existing and in good standing under the laws of the State of its incorporation, with trust power and authority to execute and deliver, and to carry out and perform its obligations under the terms of, this Declaration. (ii) The execution, delivery and performance by the Property Trustee of this Declaration has been duly authorized by all necessary corporate action on the part of the Property Trustee. The Declaration has been duly executed and delivered by the Property Trustee, and constitutes a legal, valid and binding obligation of the Property Trustee, enforceable against it in accordance with its terms, subject to applicable bankruptcy, reorganization, moratorium, insolvency, and other similar laws affecting creditors' rights generally and to general principles of equity and the discretion of the court (regardless of whether the enforcement of such remedies is considered in a proceeding in equity or at law). (iii) The execution, delivery and performance of this Declaration by the Property Trustee does not conflict with or constitute a breach of the Charter or By-laws of the Property Trustee. 39 (iv) No consent, approval or authorization of, or registration with or notice to, any banking authority which supervises or regulates the Property Trustee is required for the execution, delivery or performance by the Property Trustee, of this Declaration. (v) The Property Trustee satisfies the qualifications set forth in Section 5.1(c). (vi) The Property Trustee, pursuant to this Declaration, shall hold legal title to, and a valid ownership interest on behalf of the Holders of the Securities, in the Debentures and agrees that, except as expressly provided or contemplated by this Declaration, it will not create, incur or assume, or suffer to exist any mortgage, pledge, hypothecation, encumbrance, lien or other charge or security interest upon the Debentures. (b) The Trustee which acts as initial Delaware Trustee represents and warrants to the Trust and the Sponsor at the date of this Declaration, and each Successor Delaware Trustee represents and warrants to the Trust and the Sponsor at the time of the Successor Delaware Trustee's acceptance of its appointment as Delaware Trustee, that it satisfies the qualifications set forth in Section 5.1(a)(3) and that: (i) The Delaware Trustee is a Delaware corporation, duly organized, validly existing and in good standing under the laws of the State of Delaware, with power and authority to execute and deliver, and to carry out and perform its obligations under the terms of, the Declaration; (ii) The Delaware Trustee has been authorized to perform its obligations under the Certificate of Trust and the Declaration. The Declaration, under Delaware law, constitutes a legal, valid and binding obligation of the Delaware Trustee, enforceable against it in accordance with its terms, subject to applicable bankruptcy, reorganization, moratorium, insolvency, and other similar laws affecting creditors' rights generally and to general principles of equity and the discretion of the court (regardless of whether the enforcement of such remedies is considered in a proceeding in equity or at law); (iii) No consent, approval or authorization of, or registration with or notice to, any State or Federal banking authority is required for the execution, delivery or performance by the Delaware Trustee of the Declaration; and (iv) The Delaware Trustee is an entity which has its principal place of business in the State of Delaware. 40 ARTICLE XIV MISCELLANEOUS SECTION 14.1 Notices. All notices provided for in this Declaration shall be in writing, duly signed by the party giving such notice, and shall be delivered, telecopied or mailed by first class mail, as follows: (a) if given to the Trust, in care of the Regular Trustees at the Trust's mailing address set forth below (or such other address as the Regular Trustees on behalf of the Trust may give notice of to the Holders of the Securities): SunSource Capital Trust 501 Silverside Road Suite 17 Wilmington, DE 19809 Attention: Joseph M. Corvino Facsimile No: (302) 792-0777 (b) if given to the Property Trustee, at the mailing address of the Property Trustee set forth below (or such other address as the Property Trustee may give notice of to the Holders of the Securities): The Bank of New York 101 Barclay Street Floor 21 West New York, NY 10286 Attention: Corporate Trust Administration Facsimile No: (212) 815-5915 (c) if given to the Delaware Trustee, at the mailing address of the Delaware Trustee set forth below (or such other address as the Delaware Trustee may give notice of to the Holders of the Securities): The Bank of New York (Delaware) White Clay Center Route 273 Newark, DE 19711 Attention: Corporate Trust Administration Facsimile No: (212) 815-5915 (d) if given to the Holder of the Common Securities, at the mailing address of the Sponsor set forth below (or such other address as the Holder of the Common Securities may give notice to the Trust): 41 SunSource Inc. 2600 One Logan Square Philadelphia, PA 19130 Attention: Joseph M. Corvino Facsimile No: (215) 665-3662 (e) if given to any other Holder, at the address set forth on the books and records of the Trust. A copy of any notice to the Property Trustee or the Delaware Trustee shall also be sent to the Trust. All notices shall be deemed to have been given, when received in person, telecopied with receipt confirmed, or mailed by first class mail, postage prepaid except that if a notice or other document is refused delivery or cannot be delivered because of a changed address of which no notice was given, such notice or other document shall be deemed to have been delivered on the date of such refusal or inability to deliver. SECTION 14.2 Undertaking for Costs. All parties to this Declaration agree, and each Holder of any Securities by his or her acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Declaration, or in any suit against the Property Trustee for any action taken or omitted by it as Property Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section 14.2 shall not apply to any suit instituted by the Property Trustee, to any suit instituted by any Holder of Preferred Securities, or group of Holders of Preferred Securities, holding more than 10% in aggregate liquidation amount of the outstanding Preferred Securities, or to any suit instituted by any Holder of Preferred Securities for the enforcement of the payment of the principal of (or premium, if any) or interest on the Debentures, on or after the respective due dates expressed in such Debentures. SECTION 14.3 Governing Law. This Declaration and the rights of the parties hereunder shall be governed by and interpreted in accordance with the laws of the State of Delaware and all rights and remedies shall be governed by such laws without regard to principles of conflict of laws. SECTION 14.4 Headings. Headings contained in this Declaration are inserted for convenience of reference only and do not affect the interpretation of this Declaration or any provision hereof. 42 SECTION 14.5 Partial Enforceability. If any provision of this Declaration, or the application of such provision to any Person or circumstance, shall be held invalid, the remainder of this Declaration, or the application of such provision to persons or circumstances other than those to which it is held invalid, shall not be affected thereby. SECTION 14.6 Counterparts. This Declaration may contain more than one counterpart of the signature pages and this Declaration may be executed by the affixing of the signature of the Sponsor and each of the Trustees to one of such counterpart signature pages. All of such counterpart signature pages shall be read as though one, and they shall have the same force and effect as though all of the signers had signed a single signature page. SECTION 14.7 Intention of the Parties. It is the intention of the parties hereto that the Trust not be classified for United States federal income tax purposes an association taxable as a corporation or partnership but that the Trust be treated as a grantor trust for United States federal income tax purposes. The provisions of this Declaration shall be interpreted to further this intention of the parties. SECTION 14.8 Successors and Assigns. Whenever in this Declaration any of the parties hereto is named or referred to, the successors and assigns of such party shall be deemed to be included, and all covenants and agreements in this Declaration by the Sponsor and the Trustees shall bind and inure to the benefit of their respective successors and assigns, whether so expressed. 43 IN WITNESS WHEREOF, the undersigned has caused these presents to be executed as of the day and year first above written. SUNSOURCE INC., as Sponsor By:________________________________ Name: Title: -------------------------------- as Trustee -------------------------------- as Trustee -------------------------------- as Trustee THE BANK OF NEW YORK, as Property Trustee By:________________________________ Name: Title: THE BANK OF NEW YORK (DELAWARE) as Delaware Trustee By:________________________________ Name: Title: 44 EXHIBIT A CERTIFICATE OF TRUST OF SUNSOURCE CAPITAL TRUST THIS Certificate of Trust of SunSource Capital Trust (the "Trust"), dated June ___, 1997, is being duly executed and filed by the undersigned, as trustees, to form a business trust under the Delaware Business Trust Act (12 Del. Code Section 3801 et seq.). 1. Name. The name of the business trust being formed hereby is SunSource Capital Trust. 2. Delaware Trustee. The name and business address of the trustee of the Trust with a principal place of business in the State of Delaware is: The Bank of New York (Delaware), White Clay Center, Route 273, Newark, Delaware 19711 Attention: Corporate Trust Administration. 3. Effective Time. This Certificate of Trust shall be effective upon filing with the Office of the Secretary of State. IN WITNESS WHEREOF, the undersigned, being the trustees of the Trust, have executed this Certificate of Trust as of the date first above written. THE BANK OF NEW YORK (DELAWARE) as Delaware Trustee By:________________________________ Name: Title: Norman V. Edmonson, not in his individual capacity but solely as trustee of the Trust ----------------------------------- as Trustee A-1 EXHIBIT B TERMS OF PREFERRED SECURITIES Pursuant to Section 7.1 of the Amended and Restated Declaration of Trust of SunSource Capital Trust, dated as of _____________________ (as amended from time to time, the "Declaration"), the designations, rights, privileges, restrictions, preferences and other terms and provisions of the Preferred Securities are set forth below (each capitalized term used but not defined herein having the meaning set forth in the Declaration): 1. Designation and Number. Preferred Securities of the Trust with an aggregate liquidation amount with respect to the assets of the Trust of _________ ($______) and a liquidation amount with respect to the assets of the Trust of $25 per Preferred Security, are hereby designated as "11.6% Trust Preferred Securities." The Preferred Security Certificates evidencing the Preferred Securities shall be substantially in the form attached hereto as Annex I, with such changes and additions thereto or deletions therefrom as may be required by ordinary usage, custom or practice or to conform to the rules of any stock exchange on which the Preferred Securities are listed. The Preferred Securities shall be issued to SunSource and distributed to former holders of Class A Interests in SunSource L.P. upon conversion of such Class A Interests pursuant to the Conversion. In connection with such issuance to SunSource and the purchase by SunSource of the Common Securities, SunSource will deposit in the Trust as trust assets Debentures of SunSource having an aggregate principal amount equal to $_________, and bearing interest at an annual rate equal to the annual Distribution rate on the Preferred Securities and Common Securities and having payment and redemption provisions which correspond to the payment and redemption provisions of the Preferred Securities and Common Securities. 2. Distributions. (a) Periodic distributions payable on each Preferred Security will be fixed at a rate per annum of 11.6% (the "Coupon Rate") of the stated liquidation amount of $25 per Preferred Security. Distributions in arrears will bear interest at the rate per annum of 11.6% thereof, compounded monthly. The term "Distributions" as used in these terms means such periodic cash distributions and any such interest payable unless otherwise stated. A Distribution will be made by the Property Trustee only to the extent that interest payments are made in respect of the Debentures held by the Property Trustee and only to the extent the Property Trustee has funds available therefor. The amount of Distributions payable for any period will be computed for any full monthly Distribution period on the basis of a 360-day year of twelve 30-day months, and for any period shorter than a full monthly Distribution period for which Distributions are computed, Distributions will be computed on the basis of the actual number of days elapsed in such a 30-day month. (b) Distributions on the Preferred Securities will be cumulative, will accrue from (*) , 1997 and will be payable monthly in arrears, on the last day of each calendar month, - --------------- (*) Insert first day following the Effective Time. B-2 commencing on _____________, 1997, except as otherwise described below, but only if and to the extent that interest payments are made in respect of the Debentures held by the Property Trustee. So long as SunSource shall not be in default in the payment of interest on the Debentures, SunSource has the right under the Indenture for the Debentures to defer payments of interest by extending the interest payment period from time to time on the Debentures for a period not exceeding 60 consecutive monthly interest periods (each, an "Extension Period") and, as a consequence, Distributions will continue to accrue with interest thereon (to the extent permitted by applicable law) at the rate of 11.6% per annum, compounded monthly during any such Extension Period. Prior to the termination of any such Extension Period, SunSource may further extend such Extension Period; provided that such Extension Period together with all such previous and further extensions thereof may not exceed 60 consecutive monthly interest periods. Upon the termination of any Extension Period and the payment of all amounts then due, SunSource may commence a new Extension Period, subject to the above requirements. Payments of accrued Distributions will be payable to Holders of Preferred Securities as they appear on the books and records of the Trust on the first record date after the end of the Extension Period. (c) Distributions on the Preferred Securities will be payable promptly by the Property Trustee (or other Paying Agent) upon receipt of immediately available funds to the Holders thereof as they appear on the books and records of the Trust on the relevant record dates, which will be the first business day of the month of the relevant Distribution date, which record and payment dates correspond to the record and interest payment dates on the Debentures. Distributions payable on any Preferred Securities that are not punctually paid on any Distribution payment date as a result of SunSource having failed to make the corresponding interest payment on the Debentures will forthwith cease to be payable to the Person in whose name such Preferred Security is registered on the relevant record date, and such defaulted Distribution will instead be payable to the Person in whose name such Preferred Security is registered on the special record date established by the Regular Trustees, which record date shall correspond to the special record date or other specified date determined in accordance with the Indenture; provided, however, that Distributions shall not be considered payable on any Distribution payment date falling within an Extension Period unless SunSource has elected to make a full or partial payment of interest accrued on the Debentures on such Distribution payment date. Subject to any applicable laws and regulations and the provisions of the Declaration, each payment in respect of the Preferred Securities will be made as described in paragraph 9 hereof. If any date on which Distributions are payable on the Preferred Securities is not a Business Day, then payment of the Distribution payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay) except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date. (d) All Distributions paid with respect to the Preferred Securities and the Common Securities will be paid Pro Rata to the Holders thereof entitled thereto. If an Event of Default has occurred and is continuing, the Preferred Securities shall have a priority over the Common Securities with respect to Distributions. B-3 (e) In the event that there is any money or other property held by or for the Trust that is not accounted for under the Declaration, such money or property shall be distributed Pro Rata among the Holders of the Preferred Securities and Common Securities. 3. Liquidation Distribution Upon Dissolution. In the event of any dissolution of the Trust, the Holders of the Preferred Securities and Common Securities will be entitled to receive Pro Rata solely out of the assets of the Trust available for distribution to Holders of Preferred Securities and Common Securities, after satisfaction of liabilities to creditors, an amount (subject to Section 4(c) hereof) equal to the aggregate of the stated liquidation amount of $25 per Preferred Security and Common Security plus accrued and unpaid Distributions thereon to the date of payment (such amount being the "Liquidation Distribution"), unless the Trust is dissolved pursuant to Section 8.1(ii) of the Declaration upon the occurrence of a Special Event, and, in connection with such dissolution and after satisfaction of liabilities to creditors, Debentures in an aggregate principal amount equal to the aggregate stated liquidation amount of such Preferred Securities and Common Securities and bearing accrued and unpaid interest in an amount equal to the accrued and unpaid Distributions on, such Preferred Securities and Common Securities, shall be distributed Pro Rata to the Holders of the Preferred Securities and Common Securities in exchange for such Securities. If, upon any such dissolution, the Liquidation Distribution can be paid only in part because the Trust has insufficient assets available to pay in full the aggregate Liquidation Distribution, then the amounts payable directly by the Trust on the Preferred Securities and Common Securities shall be paid, subject to the next paragraph, on a Pro Rata basis. Holders of Common Securities will be entitled to receive Liquidation Distributions upon any such dissolution Pro Rata with Holders of Preferred Securities, except that if an Event of Default has occurred and is continuing, the Preferred Securities shall have a priority over the Common Securities with respect to such Liquidation Distribution. 4. Redemption and Distribution of Debentures. The Preferred Securities and Common Securities may only be redeemed if Debentures having an aggregate principal amount equal to the aggregate liquidation amount of the Preferred Securities and Common Securities are repaid, redeemed or distributed as set forth below: (a) Upon the repayment of the Debentures, in whole or in part, whether at maturity, upon redemption at any time or from time to time on or after ______________, 2002, the proceeds of such repayment will be promptly applied to redeem Pro Rata Preferred Securities and Common Securities having an aggregate liquidation amount equal to the aggregate principal amount of the Debentures so repaid or redeemed, upon not less than 30 nor more than 60 days notice, at a redemption price of $25 per Preferred and Common Security plus an amount equal to accrued and unpaid Distributions thereon to the date of redemption, payable in cash (the "Redemption Price"). The date of any such repayment or redemption of Preferred Securities and Common Securities shall be established to coincide with the repayment or redemption date of the Debentures. (b) If fewer than all the outstanding Preferred Securities and Common Securities are to be so redeemed, the Preferred Securities and the Common Securities will be redeemed Pro Rata and the Preferred Securities to be redeemed will be redeemed as described in paragraph 4(f)(ii) below; B-4 provided that if an Event of Default has occurred and is continuing, the Preferred Securities shall have a priority over the Common Securities with respect to the payment of the Redemption Price. If a partial redemption would result in the delisting of the Preferred Securities by any national securities exchange or other organization on which the Preferred Securities are then listed, SunSource pursuant to the Indenture will only redeem Debentures in whole and, as a result, the Trust may only redeem the Preferred Securities in whole. (c) If, at any time a Tax Event or an Investment Company Event (each as hereinafter defined, and each a "Special Event") shall occur and be continuing, the Regular Trustees shall, unless the Debentures are redeemed in the limited circumstances described below, dissolve the Trust and, after satisfaction of creditors, cause Debentures held by the Property Trustee having an aggregate principal amount equal to the aggregate stated liquidation amount of and accrued and unpaid interest equal to accrued and unpaid Distributions on, and having the same record date for payment as the Preferred Securities and Common Securities, to be distributed to the Holders of the Preferred Securities and Common Securities on a Pro Rata basis in liquidation of such Holders' interests in the Trust, within 90 days following the occurrence of such Special Event (the "90 Day Period"), provided, however, that in the case of the occurrence of a Tax Event, as a condition of such dissolution and distribution, the Regular Trustees shall have received an opinion of a nationally recognized independent tax counsel experienced in such matters (a "No Recognition Opinion"), which opinion may rely on any then applicable published revenue ruling of the Internal Revenue Service, to the effect that the Holders of the Preferred Securities will not recognize any gain or loss for United States federal income tax purposes as a result of the dissolution of the Trust and distribution of Debentures; and provided, further, that, if and as long as at the time there is available to the Trust the opportunity to eliminate, within the 90 Day Period, the Special Event by taking some ministerial action, such as filing a form or making an election, or pursuing some other similar reasonable measure that has no adverse effect on the Trust, SunSource, or the Holders of the Preferred Securities ("Ministerial Action"), the Trust will pursue such measure in lieu of dissolution. If in the case of the occurrence of a Tax Event, (i) the Regular Trustees have received an opinion (a "Redemption Tax Opinion") of nationally recognized independent tax counsel experienced in such matters (which may be counsel to SunSource) that, as a result of a Tax Event, there is more than an insubstantial risk that SunSource would be precluded from deducting the interest on the Debentures for United States federal income tax purposes even if the Debentures were distributed to the Holders of Preferred Securities and Common Securities in liquidation of such Holder's interest in the Trust as described in this paragraph 4(c) or if the Corporation shortened the stated maturity of the Debentures as described in the penultimate sentence of this paragraph or (ii) the Regular Trustees shall have been informed by such tax counsel that a No Recognition Opinion cannot be delivered to the Trust, SunSource shall have the right at any time, upon not less than 30 nor more than 60 days notice, to redeem the Debentures in whole or in part for cash at the Redemption Price within 90 days following the occurrence of such Tax Event, and promptly following such redemption Preferred Securities and Common Securities with an aggregate liquidation amount equal to the aggregate principal amount of the Debentures so redeemed will be redeemed by the Trust at the Redemption Price (which Redemption Price shall be $25.25 if such redemption occurs on or before _______, 2002 and shall be $25.00 thereafter) on a Pro Rata basis; provided, however, that, if at the time there is available to SunSource or the Regular Trustees on behalf of the Trust the opportunity to eliminate, within such 90 day period, the Tax Event by taking some Ministerial Action, SunSource or the Regular Trustees on behalf of the Trust will pursue such measure in lieu of redemption and provided further that SunSource shall have no right to redeem the B-5 Debentures while the Regular Trustees on behalf of the Trust are pursuing such Ministerial Action. In addition to taking any Ministerial Action, if a Tax Event occurs and is continuing and in the opinion of nationally recognized independent tax counsel to the Trust, there would in all cases, after effecting the termination of the Trust and the distribution of the Debentures to the holders of the Trust Preferred Securities in exchange therefor upon liquidation of the Trust, be more than an insubstantial risk that the Tax Event would continue, then the Corporation shall have the right to shorten the stated maturity of the Debentures to the latest date permissible without adversely affecting the deductibility of interest payable on the Debentures, but not earlier than ______________, 2002 (and thereby cause the Trust Preferred Securities to be redeemed on such earlier date) such that, in the opinion of nationally recognized independent tax counsel to the Trust, after advancing the stated maturity of the Debentures, interest paid on the Debentures will be deductible by the Corporation for federal income tax purposes. The Common Securities will be redeemed Pro Rata with the Preferred Securities, except if an Event of Default under the Indenture has occurred and is continuing, the Preferred Securities will have a priority over the Common Securities with respect to payment of the Redemption Price. "Tax Event" means that the Regular Trustees shall have obtained an opinion of nationally recognized independent tax counsel experienced in such matters (a "Dissolution Tax Opinion") to the effect that on or after ______________, 1997 as a result of (a) any amendment to, or change (including any announced prospective change) in, the laws (or any regulations thereunder) of the United States or any political subdivision or taxing authority thereof or therein, (b) any amendment to, or change in, an interpretation or application of any such laws or regulations by any legislative body, court, governmental agency or regulatory authority (including the enactment of any legislation and the publication of any judicial decision or regulatory determination), (c) any interpretation or pronouncement that provides for a position with respect to such laws or regulations that differs from the theretofore generally accepted position or (d) any action taken by any governmental agency or regulatory authority, which amendment or change is enacted, promulgated, issued or announced or which interpretation or pronouncement is issued or announced or which action is taken, in each case on or after ________________, 1997, there is more than an insubstantial risk that (i) the Trust is, or will be within 90 days of the date thereof, subject to United States federal income tax with respect to income accrued or received on the Debentures, (ii) the Trust is, or will be within 90 days of the date thereof, subject to more than a de minimis amount of taxes, duties or other governmental charges or (iii) interest payable by SunSource to the Trust on the Debentures is not, or within 90 days of the date thereof will not be, deductible by SunSource for United States federal income tax purposes. "Investment Company Event" means that the Regular Trustees shall have received an opinion of nationally recognized independent counsel experienced in practice under the Investment Company Act (which may be counsel to SunSource) that, as a result of the occurrence of a change in law or regulation or a change in interpretation or application of law or regulation by any legislative body, court, governmental agency or regulatory authority (a "Change in 1940 Act Law"), there is more than an insubstantial risk that the Trust is or will be considered an Investment Company which is required to be registered under the Investment Company Act, which Change in 1940 Act Law becomes effective on or after ______________, 1997. On and from the date fixed for any distribution of Debentures, upon dissolution of the Trust, (i) the Preferred Securities will no longer be deemed to be outstanding and (ii) certificates representing Preferred Securities will be deemed to represent beneficial interests in the Debentures having an aggregate principal amount equal to the stated liquidation amount of, and bearing accrued and unpaid interest equal to accrued and unpaid Distributions on, such Preferred Securities until such certificates are presented to SunSource or its agent for transfer or reissuance. (d) The Trust may not redeem fewer than all the outstanding Preferred Securities unless all accrued and unpaid Distributions have been paid on all Preferred Securities for all monthly Distribution periods terminating on or prior to the date of redemption. (e) If Debentures are distributed to Holders of the Preferred Securities, SunSource, pursuant to the terms of the Indenture, will use its best efforts to have the Debentures listed on the New B-6 York Stock Exchange or on such other exchange as the Preferred Securities were listed immediately prior to the distribution of the Debentures. (f) (i) Notice of any redemption of, or notice of distribution of Debentures in exchange for, the Preferred Securities and Common Securities (a "Redemption/Distribution Notice") will be given by the Regular Trustees on behalf of the Trust by mail to each Holder of Preferred Securities and Common Securities to be redeemed or exchanged not less than 30 nor more than 60 days prior to the date fixed for redemption or exchange thereof. For purposes of the calculation of the date of redemption or exchange and the dates on which notices are given pursuant to this paragraph (f)(i), a Redemption/Distribution Notice shall be deemed to be given on the day such notice is first mailed by first-class mail, postage prepaid, to Holders of Preferred Securities and Common Securities. Each Redemption/ Distribution Notice shall be addressed to the Holders of Preferred Securities and Common Securities at the address of each such Holder appearing in the books and records of the Trust. No defect in the Redemption/Distribution Notice or in the mailing of either thereof with respect to any Holder shall affect the validity of the redemption or exchange proceedings with respect to any other Holder. (ii) In the event that fewer than all the outstanding Preferred Securities are to be redeemed, the Preferred Securities to be redeemed will be redeemed Pro Rata from each Holder of Preferred Securities and, in respect of Preferred Securities registered in the name of and held of record by DTC (or successor Clearing Agency) Pro Rata from each Clearing Agency Participant (subject to adjustment to eliminate fractional Preferred Securities). (iii) If the Trust gives a Redemption/ Distribution Notice in respect of a redemption of Preferred Securities as provided in this paragraph 4 (which notice will be irrevocable) then immediately prior to the close of business on the redemption date, provided that SunSource has paid to the Property Trustee in immediately available funds a sufficient amount of cash in connection with the related redemption or maturity of the Debentures, Distributions will cease to accrue on the Preferred Securities called for redemption, such Preferred Securities will no longer be deemed to be outstanding and all rights of Holders of such Preferred Securities so called for redemption will cease, except the right of the Holders of such Preferred Securities to receive the Redemption Price, but without interest on such Redemption Price. Neither the Trustees nor the Trust shall be required to register or cause to be registered the transfer of any Preferred Securities which have been so called for redemption. If any date fixed for redemption of Preferred Securities is not a Business Day, then payment of the Redemption Price payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay) except that, if such Business Day falls in the next calendar year, such payment will be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date fixed for redemption. If payment of the Redemption Price in respect of Preferred Securities is improperly withheld or refused and not paid either by the Property Trustee or by SunSource pursuant to the Preferred Securities Guarantee, Distributions on such Preferred Securities will continue to accrue, from the original redemption date to the date of payment, in which case the actual payment date will be considered the date fixed for redemption for purposes of calculating the Redemption Price. (iv) Redemption/Distribution Notices shall be sent by the Regular Trustees on behalf of the Trust to the Holders of the Preferred Securities. B-7 (v) Upon the date of distribution of Debentures after dissolution of the Trust as a result of the occurrence of a Special Event, Preferred Security Certificates shall be deemed to represent beneficial interests in the Debentures so distributed, and the Preferred Securities will no longer be deemed outstanding and may be canceled by the Regular Trustees. The Debentures so distributed shall have an aggregate principal amount equal to the aggregate liquidation amount of the Preferred Securities so distributed. (vi) Subject to the foregoing and applicable law (including without limitation United States federal securities laws), SunSource or any of its subsidiaries may at any time and from time to time purchase outstanding Preferred Securities by tender, in the open market or by private agreement. 5. Voting Rights. (a) Except as provided under paragraph 5(b) below and as otherwise required by law and the Declaration, the Holders of the Preferred Securities will have no voting rights. (b) If (i) the Trust fails to make Distributions in full on the Preferred Securities for 18 consecutive months; or (ii) an Event of Default occurs and is continuing (each, an "Appointment Event"), then the Holders of the Preferred Securities, acting as a single class, will be entitled by the vote of Holders of Preferred Securities representing a Majority in liquidation amount of the Preferred Securities to appoint a Special Regular Trustee in accordance with paragraph 5.2(a)(ii)(B) of the Declaration. Any Holder of Preferred Securities (other than the Sponsor or any Affiliate of the Sponsor) will have the right to nominate any Person to be appointed as Special Regular Trustee. For purposes of determining whether the Trust has failed to pay Distributions in full for 18 consecutive months, Distributions shall be deemed to remain in arrears, notwithstanding any payments in respect thereof, until full cumulative Distributions have been or contemporaneously are paid with respect to all monthly Distribution periods terminating on or prior to the date of payment of such cumulative Distributions. Not later than 30 days after such right to appoint a Special Regular Trustee arises, the Regular Trustees will convene a meeting for the purpose of appointing a Special Regular Trustee. If the Regular Trustees fail to convene such meeting within such 30-day period, the Holders of Preferred Securities representing 10% in liquidation amount of the outstanding Preferred Securities will be entitled to convene such meeting in accordance with Section 12.2 of the Declaration. The record date for such meeting will be the close of business on the Business Day next preceding the day on which notice of the meeting is sent to Holders of Preferred Securities. The provisions of the Declaration relating to the convening and conduct of the meetings of the Holders will apply with respect to any such meeting. If, at any such meeting, Holders of less than a Majority in liquidation amount of Preferred Securities entitled to vote for the appointment of a Special Regular Trustee vote for such appointment, no Special Regular Trustee shall be appointed. Any Special Regular Trustee may be removed without cause at any time by the Holders of Preferred Securities representing a Majority in liquidation amount of the Preferred Securities in accordance with Section 5.2(a)(ii)(B) of the Declaration. The Holders of 10% in liquidation amount of the Preferred Securities will be entitled to convene such a meeting in accordance with Section 12.2 of the Declaration. The record date for such meeting will be the close of business on the Business Day next preceding the day on which notice of the meeting is sent to Holders of Preferred Securities. Any Special Regular Trustee appointed shall cease to be a Special Regular Trustee as provided in Section 5.2(c) of the Declaration. Notwithstanding the appointment of any such Special Regular Trustee, SunSource shall retain all rights under the Indenture, including the right to extend the interest payment period on Debentures, and any B-8 extension for a period not exceeding 60 monthly interest periods will not constitute an Event of Default under the Indenture. If any proposed amendment to the Declaration provides for, or the Regular Trustees otherwise propose to effect, (i) any action that would adversely affect the powers, preferences or special rights of the Securities, whether by way of amendment to the Declaration or otherwise, or (ii) the dissolution of the Trust, other than in connection with the distribution of Debentures held by the Property Trustee, upon the occurrence of a Special Event or in connection with the redemption of Preferred Securities as a consequence of a redemption of Debentures, then the Holders of outstanding Securities will be entitled to vote on such amendment or proposal as a class and such amendment or proposal shall not be effective except with the approval of the Holders of Securities representing 66-2/3% in liquidation amount of such Securities, provided, however, (A) if any amendment or proposal referred to in clause (i) above would adversely affect only the Preferred Securities or the Common Securities, then only the affected class will be entitled to vote on such amendment or proposal and such amendment or proposal shall not be effective except with the approval of 66-2/3% in liquidation amount of such class of Securities, (B) the rights of Holders of Preferred Securities under Article V of the Declaration to appoint and remove a Special Regular Trustee shall not be amended without the consent of each Holder of Preferred Securities, and (C) amendments to the Declaration shall be subject to such further requirements as are set forth in Sections 12.1 and 12.2 of the Declaration. In the event the consent of the Property Trustee, as the holder of the Debentures, is required under the Indenture with respect to any amendment, modification or termination of the Indenture or the Debentures, the Property Trustee shall request the written direction of the Holders of the Securities with respect to such amendment, modification or termination. The Property Trustee shall vote with respect to such amendment, modification or termination as directed by a Majority in liquidation amount of the Securities voting together as a single class; provided that where such amendment, modification or termination of the Indenture requires the consent or vote of (1) holders of Debentures representing a specified percentage greater than a majority in principal amount of the Debentures or (2) each holder of Debentures thereby affected, the Property Trustee may only vote with respect to that amendment, modification or termination as directed by, in the case of clause (1) above, the vote of Holders of Securities representing such specified percentage of the aggregate liquidation amount of the Securities, or, in the case of clause (2) above, each Holder of Securities thereby affected; and provided, further, that the Property Trustee shall be under no obligation to take any action in accordance with the directions of the Holders of Securities unless the Property Trustee shall have received, at the expense of the Sponsor, an opinion of nationally recognized independent tax counsel recognized as expert in such matters to the effect that the Trust will not be classified for United States federal income tax purposes as an association taxable as a corporation or a partnership on account of such action and will be treated as a grantor trust for United States federal income tax purposes following such action. Subject to Section 2.6 of the Declaration, and the provisions of this and the next succeeding paragraph, the Holders of a Majority in liquidation amount of the Preferred Securities, voting separately as a class shall have the right to (A) on behalf of all Holders of Preferred Securities, waive any past default that is waivable under the Declaration (subject to, and in accordance with the Declaration) and (B) direct the time, method, and place of conducting any proceeding for any remedy B-9 available to the Property Trustee, or exercising any trust or power conferred upon the Property Trustee under the Declaration, including the right to direct the Property Trustee, as the holder of the Debentures, to (i) direct the time, method and place of conducting any proceeding for any remedy available to the Debenture Trustee, or exercising any trust or power conferred on the Debenture Trustee with respect to the Debentures, (ii) exercise the remedies available to it under the Indenture as a Holder of the Debentures, (iii) waive any past default that is waivable under Section 6.06 of the Indenture, (iv) consent to any amendment, modification, or termination of the Indenture of the Debentures where such consent shall be required, or (v) exercise any right to rescind or annul a declaration that the principal of all the Debentures shall be due and payable; provided that where the taking of any action under the Indenture requires the consent or vote of (1) holders of Debentures representing a specified percentage greater than a majority in principal amount of the Debentures or (2) each holder of Debentures thereby affected, the Property Trustee may only take such action if directed by, in the case of clause (1) above, the vote of Holders of Preferred Securities representing such specified percentage of the aggregate liquidation amount of the Preferred Securities, or, in the case of clause (2) above, each Holder of Preferred Securities thereby affected. The Property Trustee shall not revoke any action previously authorized or approved by a vote of the Holders of the Preferred Securities. Other than with respect to directing the time, method and place of conducting any proceeding for any remedy available to the Property Trustee or the Debenture Trustee as set forth above, the Property Trustee shall be under no obligation to take any of the foregoing actions at the direction of the Holders of Preferred Securities unless the Property Trustee shall have received, at the expense of the Sponsor, an opinion of nationally recognized independent tax counsel recognized as expert in such matters to the effect that the Trust will not be classified for United States federal income tax purposes as an association taxable as a corporation or a partnership on account of such action and will be treated as a grantor trust for United States federal income tax purposes following such action. If the Property Trustee fails to enforce its rights under the Declaration (including without limitation its rights, powers and privileges as a holder of the Debentures under the Indenture), any Holder of Preferred Securities may, to the fullest extent permitted by law, institute a legal proceeding directly against SunSource to enforce the Property Trustee's rights under the Declaration, without first instituting a legal proceeding against the Property Trustee or any other Person; provided that any Holder may institute a direct action without prior request to the Property Trustee to enforce the Sponsor's payment obligations on the Debentures. A waiver of an Indenture Event of Default by the Property Trustee at the direction of the Holders of the Preferred Securities will constitute a waiver of the corresponding Event of Default under the Declaration in respect of the Securities. Any required approval or direction of Holders of Preferred Securities may be given at a separate meeting of Holders of Preferred Securities convened for such purpose, at a meeting of all of the Holders of Securities of the Trust or pursuant to written consent. The Regular Trustees will cause a notice of any meeting at which Holders of Preferred Securities are entitled to vote, or of any matter upon which action by written consent of such Holders is to be taken, to be mailed to each Holder of record of Preferred Securities. Each such notice will include a statement setting forth (i) the date of such meeting or the date by which such action is to be taken, (ii) a description of any resolution proposed for adoption at such meeting on which such Holders are entitled to vote or of such matter upon which written consent is sought and (iii) instructions for the delivery of proxies or consents. B-10 No vote or consent of the Holders of Preferred Securities will be required for the Trust to redeem and cancel Preferred Securities in accordance with the Declaration. Notwithstanding that Holders of Preferred Securities are entitled to vote or consent under any of the circumstances described above, any of the Preferred Securities at such time that are owned by SunSource or by any entity directly or indirectly controlling or controlled by or under direct or indirect common control with SunSource shall not be entitled to vote or consent and shall, for purposes of such vote or consent, be treated as if they were not outstanding. Except as provided in this paragraph 5, Holders of the Preferred Securities will have no rights to increase or decrease the number of Trustees or to appoint, remove or replace a Trustee, which voting rights are vested solely in the Holders of the Common Securities. 6. Pro Rata Treatment. A reference in these terms of the Preferred Securities to any payment, distribution or treatment as being "Pro Rata" shall mean pro rata to each Holder of Securities according to the aggregate liquidation amount of the Securities held by the relevant Holder in relation to the aggregate liquidation amount of all Securities outstanding unless, in relation to a payment, an Event of Default has occurred and is continuing, in which case any funds available to make such payment shall be paid first to each Holder of the Preferred Securities pro rata according to the aggregate liquidation amount of Preferred Securities held by the relevant Holder relative to the aggregate liquidation amount of all Preferred Securities outstanding, and only after satisfaction of all amounts owed to the Holders of the Preferred Securities, to each Holder of Common Securities pro rata according to the aggregate liquidation amount of Common Securities held by the relevant Holder relative to the aggregate liquidation amount of all Common Securities outstanding. 7. Ranking. The Preferred Securities rank pari passu and payment thereon will be made Pro Rata with, the Common Securities except that where an Event of Default occurs and is continuing, the rights of Holders of Preferred Securities to payment in respect of Distributions and payments upon liquidation, redemption or otherwise rank in priority to the rights of Holders of the Common Securities. 8. Mergers, Consolidations or Amalgamations. The Trust may not consolidate, amalgamate, merge with or into, or be replaced by, or convey, transfer or lease its properties and assets to, any corporation or other body. 9. Transfer, Exchange, Method of Payments. Payment of Distributions and payments on redemption of the Preferred Securities will be payable, the transfer of the Preferred Securities will be registrable, and Preferred Securities will be exchangeable for Preferred Securities of other denominations of a like aggregate liquidation amount, at the principal corporate trust office of the Property Trustee in The City of New York; provided that payment of Distributions may be made at the option of the Regular Trustees on behalf of the Trust by check mailed to the address of the persons entitled thereto and that the payment on redemption of any Preferred Security will be made only upon surrender of such Preferred Security to the Property Trustee. 10. Acceptance of Indenture and Preferred Guarantee. Each Holder of Preferred Securities, by the acceptance thereof, agrees to the provisions of (i) the Preferred Guarantee, including B-11 the subordination provisions therein and (ii) the Indenture and the Debentures, including the subordination provisions of the Indenture. 11. No Preemptive Rights. The Holders of Preferred Securities shall have no preemptive rights to subscribe to any additional Preferred Securities or Common Securities. 12. Miscellaneous. These terms shall constitute a part of the Declaration. The Trust will provide a copy of the Declaration and the Indenture to a Holder without charge on written request to the Trust at its principal place of business. B-12 Annex I Certificate Number Number of Trust Preferred Securities ___-1 CUSIP NO. 867949 20 8 Certificate Evidencing Trust Preferred Securities of SunSource Capital Trust 11.6% Trust Preferred Securities (liquidation amount $25 per Preferred Security) SunSource Capital Trust, a statutory business trust formed under the laws of the State of Delaware (the "Trust"), hereby certifies that _________ (the "Holder") is the registered owner of _____ (______) preferred securities of the Trust representing preferred undivided beneficial interests in the assets of the Trust designated the 11.6% Trust Preferred Securities (liquidation amount $25 per Trust Preferred Security) (the "Trust Preferred Securities"). The Trust Preferred Securities are transferable on the books and records of the Trust, in person or by a duly authorized attorney, upon surrender of this certificate duly endorsed and in proper form for transfer. The designations, rights, privileges, restrictions, preferences and other terms and provisions of the Trust Preferred Securities are set forth in, and this certificate and the Trust Preferred Securities represented hereby are issued and shall in all respects be subject to the terms and provisions of, the Amended and Restated Declaration of Trust of the Trust dated as of _________, 1997, as the same may be amended from time to time (the "Declaration") including the designation of the terms of Trust Preferred Securities as set forth in Exhibit B thereto. The Trust Preferred Securities and the Common Securities issued by the Trust pursuant to the Declaration represent undivided beneficial interests in the assets of the Trust, including the Debentures (as defined in the Declaration) issued by SunSource Inc., a Delaware corporation ("SunSource"), to the Trust pursuant to the Indenture referred to in the Declaration. The Holder is entitled to the benefits of the Guarantee Agreement of SunSource dated as of _________, 1997 (the "Guarantee") to the extent provided therein. The Trust will furnish a copy of the Declaration, the Guarantee and the Indenture to the Holder without charge upon written request to the Trust at its principal place of business or registered office. The Holder of this Certificate, by accepting this Certificate, is deemed to have (i) agreed to the terms of the Indenture and the Debentures, including that the Debentures are subordinate and junior in right of payment to all Senior Indebtedness (as defined in the Indenture) as and to the extent provided in the Indenture and (ii) agreed to the terms of the Guarantee, including that the Guarantee is subordinate and junior in right of payment to all other liabilities of SunSource, including the Debentures, except those made pari passu or subordinate by their terms, and senior to all capital stock 1 now or hereafter issued by SunSource and to any guarantee now or hereafter entered into by SunSource in respect of any of its capital stock. Upon receipt of this certificate, the Holder is bound by the Declaration and is entitled to the benefits thereunder. IN WITNESS WHEREOF, the Trustees of the Trust have executed this certificate this ____ day of _________, 1997. SUNSOURCE CAPITAL TRUST By:_________________________, as trustee Name: Title: By:_________________________, as trustee Name: Title: PROPERTY TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Preferred Securities referred to in the within-mentioned Declaration. Dated: _______ __, ____ THE BANK OF NEW YORK, as Property Trustee By:_________________________ Name: Title: 2 ASSIGNMENT FOR VALUE RECEIVED, the undersigned assigns and transfers this Trust Preferred Security to: - ---------------------------------------------------------------- - ---------------------------------------------------------------- (Insert assignee's social security or tax identification number) - ---------------------------------------------------------------- - ---------------------------------------------------------------- (Insert address and zip code of assignee) and irrevocably appoints - ---------------------------------------------------------------- - ---------------------------------------------------------------- agent to transfer this Trust Preferred Security Certificate on the books of the Trust. The agent may substitute another to act for him or her. Date: _______________________________ Signature: __________________________ (Sign exactly as your name appears on the other side of this Trust Preferred Security Certificate) 1 EXHIBIT C TERMS OF COMMON SECURITIES Pursuant to Section 7.1 of the Amended and Restated Declaration of Trust of SunSource Capital Trust dated as of ______________, 1997 (as amended from time to time, the "Declaration"), the designations, rights, privileges, restrictions, preferences and other terms and provisions of the Common Securities are set forth below (each capitalized term used but not defined herein having the meaning set forth in the Declaration): 1. Designation and Number. Common Securities of the Trust with an aggregate liquidation amount with respect to the assets of the Trust of ______ ($____) and a liquidation amount with respect to the assets of the Trust of $25 per Common Security, are hereby designated as "11.6% Trust Common Securities." The Common Security Certificates evidencing the Common Securities shall be substantially in the form attached hereto as Annex I, with such changes and additions thereto or deletions therefrom as may be required by ordinary usage, custom or practice. The Common Securities are to be issued and sold to SunSource Inc. ("SunSource") in consideration of $_____ in cash. In connection with the Conversion and the purchase by SunSource of the Common Securities, SunSource will deposit in the Trust, and the Trust will purchase, respectively, as trust assets Debentures of SunSource having an aggregate principal amount equal to $_______, and bearing interest at an annual rate equal to the annual Distribution rate on the Preferred Securities and Common Securities and having payment and redemption provisions which correspond to the payment and redemption provisions of the Preferred Securities and Common Securities. 2. Distributions. (a) Periodic distributions payable on each Common Security will be fixed at a rate per annum of 11.6% (the "Coupon Rate") of the stated liquidation amount of $25 per Common Security. Distributions in arrears for more than one month will bear interest at the rate per annum of 11.6% thereof (to the extent permitted by applicable law), compounded monthly. The term "Distributions" as used in these terms means such periodic cash distributions and any such interest payable unless otherwise stated. A Distribution will be made by the Property Trustee only to the extent that interest payments are made in respect of the Debentures held by the Property Trustee and only to the extent the Property Trustee has funds available therefor. The amount of Distributions payable for any period will be computed for any full monthly Distribution period on the basis of a 360-day year of twelve 30-day months, and for any period shorter than a full monthly Distribution period for which Distributions are computed, Distributions will be computed on the basis of the actual number of days elapsed in such a 30-day month. (b) Distributions on the Common Securities will be cumulative, will accrue from the first day following (**) , 1997 and will be payable monthly in arrears, on the last day of each - --------------- (**) Insert Effective Time. C-1 calendar month, commencing on May 31, 1997, except as otherwise described below, but only if and to the extent that interest payments are made in respect of the Debentures held by the Property Trustee. So long as SunSource shall not be in default in the payment of interest on the Debentures, SunSource has the right under the Indenture for the Debentures to defer payments of interest by extending the interest payment period from time to time on the Debentures for a period not exceeding 60 consecutive months (each, an "Extension Period") and, as a consequence Distributions will continue to accrue with interest thereon (to the extent permitted by applicable law) at the rate of 11.6% per annum, compounded monthly during any such Extension Period. Prior to the termination of any such Extension Period, SunSource may further extend such Extension Period; provided that such Extension Period together with all such previous and further extensions thereof may not exceed 60 consecutive monthly interest periods. Upon the termination of any Extension Period and the payment of all amounts then due, SunSource may commence a new Extension Period, subject to the above requirements. Payments of accrued Distributions will be payable to Holders of Common Securities as they appear on the books and records of the Trust on the first record date after the end of the Extension Period. (c) Distributions on the Common Securities will be payable promptly by the Property Trustee (or other Paying Agent) upon receipt of immediately available funds to the Holders thereof as they appear on the books and records of the Trust on the relevant record dates which will be the first business day of the month prior to the relevant Distribution date which record and payment dates correspond to the record and interest payment dates on the Debentures. Distributions payable on any Common Securities that are not punctually paid on any Distribution date as a result of SunSource having failed to make the corresponding interest payment on the Debentures will forthwith cease to be payable to the Person in whose name such Common Security is registered on the relevant record date, and such defaulted Distribution will instead be payable to the Person in whose name such Common Security is registered on the special record date established by the Regular Trustees, which record date shall correspond to the special record date or other specified date determined in accordance with the Indenture; provided, however, that Distributions shall not be considered payable on any Distribution payment date falling within an Extension Period unless SunSource has elected to make a full or partial payment of interest accrued on the Debentures on such Distribution payment date. Subject to any applicable laws and regulations and the provisions of the Declaration, each payment in respect of the Common Securities will be made as described in paragraph 9 hereof. If any date on which Distributions are payable on the Common Securities is not a Business Day, then payment of the Distribution payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay) except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date. (d) All Distributions paid with respect to the Common Securities and the Preferred Securities will be paid Pro Rata to the Holders thereof entitled thereto. If an Event of Default has occurred and is continuing, the Preferred Securities shall have a priority over the Common Securities with respect to Distributions. C-2 (e) In the event that there is any money or other property held by or for the Trust that is not accounted for under the Declaration, such money or property shall be distributed Pro Rata among the Holders of the Preferred Securities and Common Securities. 3. Liquidation Distribution Upon Dissolution. In the event of any dissolution of the Trust, the Holders of the Preferred Securities and Common Securities will be entitled to receive Pro Rata solely out of the assets of the Trust available for distribution to Holders of Preferred Securities and Common Securities, after satisfaction of liabilities to creditors, an amount equal to the aggregate of the stated liquidation amount of $25 per Preferred Security and Common Security plus accrued and unpaid Distributions thereon to the date of payment (such amount being the "Liquidation Distribution"), unless the Trust is dissolved pursuant to Section 8.1(ii) of the Declaration upon the occurrence of a Special Event, and, in connection with such dissolution, and after satisfaction of liabilities to creditors, Debentures in an aggregate principal amount equal to the aggregate stated liquidation amount of such Preferred Securities and Common Securities bearing accrued and unpaid interest in an amount equal to the accrued and unpaid Distributions on, such Preferred Securities and Common Securities, shall be distributed Pro Rata to the Holders of the Preferred Securities and Common Securities in exchange for such Securities. If, upon any such dissolution, the Liquidation Distribution can be paid only in part because the Trust has insufficient assets available to pay in full the aggregate Liquidation Distribution, then the amounts payable directly by the Trust on the Preferred Securities and Common Securities shall be paid, subject to the next paragraph, on a Pro Rata basis. Holders of Common Securities will be entitled to receive Liquidation Distributions upon any such dissolution Pro Rata with Holders of Preferred Securities, except that if an Event of Default has occurred and is continuing, the Preferred Securities shall have a priority over the Common Securities with respect to such Liquidation Distribution. 4. Redemption and Distribution of Debentures. The Preferred Securities and Common Securities may only be redeemed if Debentures having an aggregate principal amount equal to the aggregate liquidation amount of the Preferred Securities and Common Securities are repaid, redeemed or distributed as set forth below: (a) Upon the repayment of the Debentures, in whole or in part, whether at maturity, upon redemption at any time or from time to time on or after _____________, 2002, the proceeds of such repayment will be promptly applied to redeem Pro Rata Preferred Securities and Common Securities having an aggregate liquidation amount equal to the aggregate principal amount of the Debentures so repaid or redeemed, upon not less than 30 nor more than 60 days notice, at a redemption price of $25 per Preferred and Common Security plus an amount equal to accrued and unpaid Distributions thereon to the date of redemption, payable in cash (the "Redemption Price"). The date of any such repayment or redemption of Preferred Securities and Common Securities shall be established to coincide with the repayment or redemption date of the Debentures. (b) If fewer than all the outstanding Preferred Securities and Common Securities are to be so redeemed, the Preferred Securities and the Common Securities will be redeemed Pro Rata and the Common Securities to be redeemed will be redeemed as described in paragraph 4(e)(ii) below. If a C-3 partial redemption would result in the delisting of the Preferred Securities by any national securities exchange or other organization on which the Preferred Securities are then listed, SunSource pursuant to the Indenture will only redeem Debentures in whole and, as a result, the Trust may only redeem the Common Securities in whole. (c) If, at any time, a Tax Event or an Investment Company Event (each as hereinafter defined, and each a "Special Event") shall occur and be continuing, the Regular Trustees shall, unless the Debentures are redeemed in the limited circumstances described below, dissolve the Trust and, after satisfaction of creditors, cause Debentures held by the Property Trustee having an aggregate principal amount equal to the aggregate stated liquidation amount of and accrued and unpaid interest equal to accrued and unpaid Distributions on, and having the same record date for payment as the Preferred Securities and Common Securities, to be distributed to the Holders of the Preferred Securities and Common Securities on a Pro Rata basis in liquidation of such Holders' interests in the Trust, within 90 days following the occurrence of such Special Event (the "90 Day Period"), provided, however, that in the case of the occurrence of a Tax Event, as a condition of such dissolution and distribution, the Regular Trustees shall have received an opinion of a nationally recognized independent tax counsel experienced in such matters (a "No Recognition Opinion"), which opinion may rely on any then applicable published revenue rulings of the Internal Revenue Service, to the effect that the Holders of the Preferred Securities will not recognize any gain or loss for United States federal income tax purposes as a result of the dissolution of the Trust and distribution of Debentures; and provided, further, that, if and as long as at the time there is available to the Trust the opportunity to eliminate, within the 90 Day Period, the Special Event by taking some ministerial action, such as filing a form or making an election, or pursuing some other similar reasonable measure that has no adverse effect on the Trust, SunSource, or the Holders of the Preferred Securities ("Ministerial Action") the Trust will pursue such measure in lieu of dissolution. If in the case of the occurrence of a Tax Event, (i) the Regular Trustees have received an opinion (a "Redemption Tax Opinion") of nationally recognized independent tax counsel experienced in such matters that, as a result of a Tax Event, there is more than an insubstantial risk that SunSource would be precluded from deducting the interest on the Debentures for United States federal income tax purposes even if the Debentures were distributed to the Holders of Preferred Securities and Common Securities in liquidation of such Holder's interest in the Trust as described in this paragraph 4(c) or (ii) the Regular Trustees shall have been informed by such tax counsel that a No Recognition Opinion cannot be delivered to the Trust, SunSource shall have the right at any time, upon not less than 30 nor more than 60 days notice, to redeem the Debentures in whole or in part for cash at the Redemption Price within 90 days following the occurrence of such Tax Event, and promptly following such redemption Preferred Securities and Common Securities with an aggregate liquidation amount equal to the aggregate principal amount of the Debentures so redeemed will be redeemed by the Trust at the Redemption Price on a Pro Rata basis: provided, however, that, if at the time there is available to SunSource or the Regular Trustees on behalf of the Trust the opportunity to eliminate, within such 90 day period, the Tax Event by taking some Ministerial Action, SunSource or the Regular Trustees on behalf of the Trust will pursue such measure in lieu of redemption, and provided further that SunSource shall have no right to redeem the Debentures while the Regular Trustees on behalf of the Trust are pursuing such Ministerial Action. The Common Securities will be redeemed Pro Rata with the Preferred Securities, except if an Event of Default under the Indenture has occurred and is C-4 continuing, the Preferred Securities will have a priority over the Common Securities with respect to payment of the Redemption Price. "Tax Event" means that the Regular Trustees shall have obtained an opinion of nationally recognized independent tax counsel experienced in such matters (a "Dissolution Tax Opinion") to the effect that on or after (***) , 1997 as a result of (a) any amendment to, or change (including any announced prospective change) in, the laws (or any regulations thereunder) of the United States or any political subdivision or taxing authority thereof or therein, (b) any amendment to, or change in, an interpretation or application of any such laws or regulations by any legislative body, court, governmental agency or regulatory authority (including the enactment of any legislation and the publication of any judicial decision or regulatory determination), (c) any interpretation or pronouncement that provides for a position with respect to such laws or regulations that differs from the theretofore generally accepted position or (d) any action taken by any governmental agency or regulatory authority, which amendment or change is enacted, promulgated, issued or announced or which interpretation or pronouncement is issued or announced or which action is taken, in each case on or after (***) , 1997, there is more than an insubstantial risk that (i) the Trust is, or will be within 90 days of the date thereof, subject to United States federal income tax with respect to income accrued or received on the Debentures, (ii) the Trust is, or will be within 90 days of the date thereof, subject to more than a de minimis amount of taxes, duties or other governmental charges or (iii) interest payable by SunSource to the Trust on the Debentures is not, or within 90 days of the date thereof will not be, deductible by SunSource for United States federal income tax purposes. "Investment Company Event" means that the Regular Trustees shall have received an opinion of nationally recognized independent counsel experienced in practice under the Investment Company Act that, as a result of the occurrence of a change in law or regulation or a change in interpretation or application of law or regulation by any legislative body, court, governmental agency or regulatory authority (a "Change in 1940 Act Law"), there is more than an insubstantial risk that the Trust is or will be considered an Investment Company which is required to be registered under the Investment Company Act, which Change in 1940 Act Law becomes effective on or after (***) , 1997. On and from the date fixed for any distribution of Debentures, upon dissolution of the Trust, (i) the Common Securities will no longer be deemed to be outstanding and (ii) any certificates representing Common Securities will be deemed to represent beneficial interests in the Debentures having an aggregate principal amount equal to the stated liquidation amount of, and bearing accrued and unpaid interest equal to accrued and unpaid Distributions on, such Common Securities until such certificates are presented to SunSource or its agent for transfer or reissuance. (d) The Trust may not redeem fewer than all the outstanding Common Securities unless all accrued and unpaid Distributions have been paid on all Common Securities for all monthly Distribution periods terminating on or prior to the date of redemption. - --------------- (***) Insert Effective Time. C-5 (e) (i) Notice of any redemption of, or notice of distribution of Debentures in exchange for, the Preferred Securities and Common Securities (a "Redemption/Distribution Notice") will be given by the Regular Trustees on behalf of the Trust by mail to each Holder of Preferred Securities and Common Securities to be redeemed or exchanged not less than 30 nor more than 60 days prior to the date fixed for redemption or exchange thereof. For purposes of the calculation of the date of redemption or exchange and the dates on which notices are given pursuant to this paragraph (e)(i), a Redemption/Distribution Notice shall be deemed to be given on the day such notice is first mailed by first-class mail, postage prepaid, to Holders of Preferred Securities and Common Securities. Each Redemption/Distribution Notice shall be addressed to the Holders of Preferred Securities and Common Securities at the address of each such Holder appearing in the books and records of the Trust. No defect in the Redemption/Distribution Notice or in the mailing of either thereof with respect to any Holder shall affect the validity of the redemption or exchange proceedings with respect to any other Holder. (ii) In the event that fewer than all the outstanding Common Securities are to be redeemed, the Common Securities to be redeemed will be redeemed Pro Rata from each Holder of Common Securities (subject to adjustment to eliminate fractional Common Securities). (iii) If the Trust gives a Redemption/ Distribution Notice in respect of a redemption of Common Securities as provided in this paragraph 4 (which notice will be irrevocable) then immediately prior to the close of business on the redemption date, provided that SunSource has paid to the Property Trustee in immediately available funds a sufficient amount of cash in connection with the related redemption or maturity of the Debentures, Distributions will cease to accrue on the Common Securities called for redemption, such Common Securities will no longer be deemed to be outstanding and all rights of Holders of such Common Securities so called for redemption will cease, except the right of the Holders of such Common Securities to receive the Redemption Price, but without interest on such Redemption Price. Neither the Trustees nor the Trust shall be required to register or cause to be registered the transfer of any Common Securities which have been so called for redemption. If any date fixed for redemption of Common Securities is not a Business Day, then payment of the Redemption Price payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay) except that, if such Business Day falls in the next calendar year, such payment will be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date fixed for redemption. If payment of the Redemption Price in respect of Common Securities is improperly withheld or refused and not paid by the Property Trustee, Distributions on such Common Securities will continue to accrue, from the original redemption date to the date of payment, in which case the actual payment date will be considered the date fixed for redemption for purposes of calculating the Redemption Price. (iv) Redemption/Distribution Notices shall be sent by the Regular Trustees on behalf of the Trust to the Holders of the Common Securities. (v) Upon the date of distribution of Debentures after dissolution of the Trust as a result of the occurrence of a Special Event, Common Security Certificates shall be deemed to represent beneficial interests in the Debentures so distributed, and the Common Securities will no longer be deemed outstanding and may be canceled by the Regular Trustees. The Debentures so distributed shall C-6 have an aggregate principal amount equal to the aggregate liquidation amount of the Common Securities so distributed. 5. Voting Rights. (a) Except as provided under paragraph 5(b) below and as otherwise required by law and the Declaration, the Holders of the Common Securities will have no voting rights. (b) Except as provided in the Declaration with respect to a Special Regular Trustee, Holders of Common Securities have the sole right under the Declaration to increase or decrease the number of Trustees, and to appoint, remove or replace a Trustee, any such increase, decrease, appointment, removal or replacement to be approved by Holders of Common Securities representing a Majority in liquidation amount of the Common Securities. If any proposed amendment to the Declaration provides for, or the Regular Trustees otherwise propose to effect, (i) any action that would materially adversely affect the material powers, preferences or special rights of the Securities, whether by way of amendment to the Declaration or otherwise, or (ii) the dissolution of the Trust, other than in connection with the distribution of Debentures held by the Property Trustee, upon the occurrence of a Special Event or in connection with the redemption of Common Securities as a consequence of a redemption of Debentures, then the Holders of outstanding Securities will be entitled to vote on such amendment or proposal as a class and such amendment or proposal shall not be effective except with the approval of the Holders of Securities representing 66-2/3% in liquidation amount of such Securities; provided, however, (A) if any amendment or proposal referred to in clause (i) above would materially adversely affect only the Preferred Securities or the Common Securities, then only the affected class will be entitled to vote on such amendment or proposal and such amendment or proposal shall not be effective except with the approval of 66-2/3% in liquidation amount of such class of Securities, (B) the rights of Holders of Common Securities under Article V of the Declaration to increase or decrease the number of, and to appoint, replace or remove, Trustees (other than a Special Regular Trustee) shall not be amended without the consent of each Holder of Common Securities, and (C) amendments to the Declaration shall be subject to such further requirements as are set forth in Sections 12.1 and 12.2 of the Declaration. In the event the consent of the Property Trustee as the holder of the Debentures, is required under the Indenture with respect to any amendment, modification or termination of the Indenture or the Debentures, the Property Trustee shall request the written direction of the Holders of the Securities with respect to such amendment, modification or termination. The Property Trustee shall vote with respect to such amendment, modification or termination as directed by a Majority in liquidation amount of the Securities voting together as a single class; provided that where such amendment, modification or termination of the Indenture requires the consent or vote of (1) holders of Debentures representing a specified percentage greater than a majority in principal amount of the Debentures or (2) each holder of Debentures, the Property Trustee may only vote with respect to that amendment, modification or termination as directed by, in the case of clause (1) above, the vote of Holders of Securities representing such specified percentage of the aggregate liquidation amount of the Securities, or, in the case of clause (2) above, each Holder of Securities; and provided, further, that the Property Trustee shall be under no obligation to take any action in accordance with the directions of the C-7 Holders of the Securities unless the Property Trustee shall have received, at the expense of the Sponsor, an opinion of nationally recognized independent tax counsel recognized as an expert in such matters to the effect that the Trust will not be classified for United States federal income tax purposes as an association taxable as a corporation or a partnership on account of such action and will be treated as a grantor trust for United States federal income tax purposes following such action. Subject to Section 2.6 of the Declaration, and the provisions of this and the next succeeding paragraph, the Holders of a Majority in liquidation amount of the Common Securities, voting separately as a class shall have the right to (A) on behalf of all Holders of Common Securities, waive any past default that is waivable under the Declaration (subject to, and in accordance with the Declaration) and (B) direct the time, method, and place of conducting any proceeding for any remedy available to the Property Trustee, or exercising any trust or power conferred upon the Property Trustee under the Declaration, including the right to direct the Property Trustee, as holder of the Debentures, to (i) direct the time, method and place of conducting any proceeding for any remedy available to the Debenture Trustee, or exercising any trust or power conferred on the Debenture Trustee with respect to the Debentures, (ii) waive any past default and its consequences that is waivable under Section 6.06 of the Indenture, or (iii) exercise any right to rescind or annul a declaration that the principal of all the Debentures shall be due and payable; provided that where the taking of any action under the Indenture requires the consent or vote of (1) holders of Debentures representing a specified percentage greater than a majority in principal amount of the Debentures or (2) each holder of Debentures, the Property Trustee may only take such action if directed by, in the case of clause (1) above, the vote of Holders of Common Securities representing such specified percentage of the aggregate liquidation amount of the Common Securities, or, in the case of clause (2) above, each Holder of Common Securities. Pursuant to this paragraph, the Property Trustee shall not revoke, or take any action inconsistent with, any action previously authorized or approved by a vote of the Holders of the Preferred Securities, and shall not take any action in accordance with the direction of the Holders of the Common Securities under this paragraph if the action is prejudicial to the Holders of Preferred Securities. Other than with respect to directing the time, method and place of conducting any proceeding for any remedy available to the Property Trustee or the Debenture Trustee as set forth above, the Property Trustee shall be under no obligation to take any of the foregoing actions at the direction of the Holders of Common Securities unless the Property Trustee shall have received, at the expense of the Sponsor, an opinion of nationally recognized independent tax counsel recognized as expert in such matters to the effect that the Trust will not be classified for United States federal income tax purposes as an association taxable as a corporation or a partnership on account of such action and will be treated as a grantor trust for United States income tax purposes following such action. Notwithstanding any other provision of these terms, each Holder of Common Securities will be deemed to have waived any Event of Default with respect to the Common Securities and its consequences until all Events of Default with respect to the Preferred Securities have been cured, waived by the Holders of Preferred Securities as provided in the Declaration or otherwise eliminated, and until all Events of Default with respect to the Preferred Securities have been so cured, waived by the Holders of Preferred Securities or otherwise eliminated, the Property Trustee will be deemed to be acting solely on behalf of the Holders of Preferred Securities and only the Holders of the Preferred Securities will have the right to direct the Property Trustee in accordance with the terms of the Declaration or of the Securities. In the event that any Event of Default with respect to the Preferred Securities is waived by the Holders of Preferred Securities as provided in the Declaration, the Holders C-8 of Common Securities agree that such waiver shall also constitute the waiver of such Event of Default with respect to the Common Securities for all purposes under the Declaration without any further act, vote or consent of the Holders of the Common Securities. A waiver of an Indenture Event of Default by the Property Trustee at the direction of the Holders of the Preferred Securities will constitute a waiver of the corresponding Event of Default under the Declaration in respect of the Securities. Any required approval of Holders of Common Securities may be given at a separate meeting of Holders of Common Securities convened for such purpose, at a meeting of all of the Holders of Securities of the Trust or pursuant to written consent. The Regular Trustees will cause a notice of any meeting at which Holders of Common Securities are entitled to vote, or of any matter upon which action by written consent of such Holders is to be taken, to be mailed to each Holder of record of Common Securities. Each such notice will include a statement setting forth (i) the date of such meeting or the date by which such action is to be taken, (ii) a description of any resolution proposed for adoption at such meeting on which such Holders are entitled to vote or of such matter upon which written consent is sought and (iii) instructions for the delivery of proxies or consents. No vote or consent of the Holders of Common Securities will be required for the Trust to redeem and cancel Common Securities in accordance with the Declaration. 6. Pro Rata Treatment. A reference in these terms of the Common Securities to any payment, distribution or treatment as being "Pro Rata" shall mean pro rata to each Holder of Securities according to the aggregate liquidation amount of the Securities held by the relevant Holder in relation to the aggregate liquidation amount of all Securities outstanding unless, in relation to a payment, an Event of Default has occurred and is continuing, in which case any funds available to make such payment shall be paid first to each Holder of the Preferred Securities pro rata according to the aggregate liquidation amount of Preferred Securities held by the relevant Holder relative to the aggregate liquidation amount of all Preferred Securities outstanding, and only after satisfaction of all amounts owed to the Holders of the Preferred Securities, to each Holder of Common Securities pro rata according to the aggregate liquidation amount of Common Securities held by the relevant Holder relative to the aggregate liquidation amount of all Common Securities outstanding. 7. Ranking. The Common Securities rank pari passu with the Preferred Securities except that where an Event of Default occurs and is continuing, the rights of Holders of Common Securities to payment in respect of Distributions and payments upon liquidation, redemption or otherwise are subordinate to the rights of Holders the Preferred Securities. 8. Mergers, Consolidations or Amalgamations. The Trust may not consolidate, amalgamate, merge with or into, or be replaced by, or convey, transfer or lease its properties and assets to, any corporation or other body. 9. Transfers, Exchanges, Method of Payments. Payment of Distributions and payments on redemption of the Common Securities will be payable, the transfer of the Common Securities will be registrable, and Common Securities will be exchangeable for Common Securities ofother denominations of a like aggregate liquidation amount, at the principal corporate trust office of C-9 the Property Trustee in The City of New York; provided that payment of Distributionsmay be made at the option of the Regular Trustees on behalf of the Trust by check mailed to the address of the persons entitled thereto and that the payment on redemption of any Common Security will be made only upon surrender of suchCommon Security to the Property Trustee. Notwithstanding the foregoing, transfers of Common Securities are subject to conditions set forth in Section 9.1(c) of the Declaration. 10. Acceptance of Indenture. Each Holder of Common Securities, by the acceptance thereof, agrees to the provisions of the Indenture and the Debentures, including the subordination provisions thereof. 11. No Preemptive Rights. The Holders of Common Securities shall have no preemptive rights to subscribe to any additional Common Securities or Preferred Securities. 12. Miscellaneous. These terms shall constitute a part of the Declaration. The Trust will provide a copy of the Declaration and the Indenture to a Holder without charge on written requestto the Trust at its principal place of business. C-10 Annex I TRANSFER OF THIS CERTIFICATE IS SUBJECT TO THE CONDITIONS SET FORTH IN THE DECLARATION REFERRED TO BELOW Certificate Number Number of Trust Common Securities C-1 Certificate Evidencing Trust Common Securities of SunSource Capital Trust 11.6% Trust Common Securities (liquidation amount $25 per Common Security) SunSource Capital Trust, a statutory business trust formed under the laws of the State of Delaware (the "Trust"), hereby certifies that SunSource Inc. (the "Holder") is the registered owner of _____ (______) common securities of the Trust representing common undivided beneficial interests in the assets of the Trust designated the 11.6% Trust Common Securities (liquidation amount $25 per Common Security) (the "Trust Common Securities"). The Trust Common Securities are transferable on the books and records of the Trust, in person or by a duly authorized attorney, upon surrender of this certificate duly endorsed and in proper form for transfer and satisfaction of the other conditions set forth in the Declaration (as defined below) including without limitation Section 9.1(c) thereof. The designations, rights, privileges, restrictions, preferences and other terms and provisions of the Trust Common Securities are set forth in, and this certificate and the Trust Common Securities represented hereby are issued and shall in all respects be subject to the terms and provisions of, the Amended and Restated Declaration of Trust of the Trust dated as of _________, 1997, as the same may be amended from time to time (the "Declaration") including the designation of the terms of Trust Common Securities as set forth in Exhibit C thereto. The Trust Common Securities and the Preferred Securities issued by the Trust pursuant to the Declaration represent undivided beneficial interests in the assets of the Trust, including the Debentures (as defined in the Declaration) issued by SunSource Inc., a Delaware corporation, to the Trust pursuant to the Indenture referred to in the Declaration. The Trust will furnish a copy of the Declaration and the Indenture to the Holder without charge upon written request to the Trust at its principal place of business or registered office. The Holder of this Certificate, by accepting this Certificate, is deemed to have agreed to the terms of the Indenture and the Debentures, including that the Debentures are subordinate and junior 1 in right of payment to all Senior Indebtedness (as defined in the Indenture) as and to the extent provided in the Indenture. Upon receipt of this certificate, the Holder is bound by the Declaration and is entitled to the benefits thereunder. IN WITNESS WHEREOF, the Trustees of the Trust have executed this certificate this _____ day of _________, 1997. SUNSOURCE CAPITAL TRUST By:_________________________, as trustee Name: Title: By:_________________________, as trustee Name: Title: PROPERTY TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Common Securities referred to in the within-mentioned Declaration. Dated: _______ __, ____ THE BANK OF NEW YORK, as Property Trustee By:_________________________ Name: Title: 2 ASSIGNMENT FOR VALUE RECEIVED, the undersigned assigns and transfer this Trust Common Security Certificate to: ____________________________________________________________ ____________________________________________________________ (Insert assignee's social security or tax identification number) ____________________________________________________________ ____________________________________________________________ (Insert address and zip code of assignee) and irrevocably appoints ____________________________________________________________ ____________________________________________________________ _____________________________________________________ agent to transfer this Trust Common Security Certificate on the books of the Trust. The agent may substitute another to act for him or her. Date: ________________________ Signature: _________________________________ (Sign exactly as your name appears on the other side of this Trust Common Security Certificate) 1 EX-4 3 EXHIBIT 4.2 SUNSOURCE INC. AND THE BANK OF NEW YORK AS TRUSTEE INDENTURE Dated as of ___________, 1997 11.6% Junior Subordinated Debentures
CROSS-REFERENCE TABLE*/ Trust Indenture Act Section Indenture Section - --------------------------- ----------------- 310(a)(1)......................................................................................................7.09 310(a)(2)......................................................................................................7.09 310(a)(3)......................................................................................................N.A. 310(a)(4)......................................................................................................N.A. 310(a)(5)......................................................................................................7.08 310(b).........................................................................................................7.08 310(c).........................................................................................................N.A. 311(a).........................................................................................................7.14 311(b).........................................................................................................7.14 311(c).........................................................................................................N.A. 312(a).........................................................................................................5.01 312(b).........................................................................................................5.02 312(c).........................................................................................................5.02 313(a).........................................................................................................5.04 313(b).........................................................................................................5.04 313(c)..................................................................................................5.04; 13.04 313(d).........................................................................................................5.04 314(a)..................................................................................................5.03; 13.04 314(b).........................................................................................................N.A. 314(c)(1)...............................................................................................5.03; 13.06 314(c)(2).....................................................................................................13.06 314(c)(3)......................................................................................................N.A. 314(d).........................................................................................................N.A. 314(e)........................................................................................................13.06 314(f).........................................................................................................N.A. 315(a)...................................................................................................7.01(b)(1) 315(b)..................................................................................................6.07; 13.04 315(c)......................................................................................................7.01(a) 315(d)......................................................................................................7.01(b) 315(e).........................................................................................................6.08 316(a)(last sentence)..........................................................................................8.04 316(a)(1)(A)...................................................................................................6.06 316(a)(1)(B)...................................................................................................6.06 316(a)(2)......................................................................................................N.A. 316(b).........................................................................................................6.04 316(c)...................................................................................................2.03; 8.01 - --------
*/ This Cross-Reference Table does not constitute part of the Indenture and should not have any bearing upon the interpretation of any of its terms or provisions.
Trust Indenture Act Section Indenture Section - --------------------------- ----------------- 317(a)(1)...................................................................................................6.02(b) 317(a)(2)...................................................................................................6.02(c) 317(b).........................................................................................................4.03 318(a)........................................................................................................13.08 318(b).........................................................................................................N.A. 318(c)........................................................................................................13.08
N.A. means not applicable. TABLE OF CONTENTS**/
Page ARTICLE ONE - DEFINITIONS SECTION 1.01. Definitions............................................................................2 ARTICLE TWO - ISSUE, DESCRIPTION, TERMS, EXECUTION, REGISTRATION AND EXCHANGE OF DEBENTURES SECTION 2.01 Designation and Maturity...............................................................7 SECTION 2.02 Form of Debentures.....................................................................8 SECTION 2.03 Interest Payments......................................................................8 SECTION 2.04 Extension of Interest Payment Period...................................................8 SECTION 2.05 Notice of Shortening of Stated Maturity or Extension of Interest Payment Period.........................................................................9 SECTION 2.06 Date and Denomination; Payment of Interest.............................................9 SECTION 2.07 Execution and Authentication..........................................................11 SECTION 2.08 Exchange of Debentures................................................................12 SECTION 2.09 Temporary Debentures..................................................................13 SECTION 2.10 Replacement of Debentures.............................................................13 SECTION 2.11 Cancellation of Surrendered Debentures................................................14 SECTION 2.12 No Rights of Third Parties............................................................14 SECTION 2.13 Authenticating Agent..................................................................14 SECTION 2.14 Global Debenture......................................................................15 SECTION 2.15 CUSIP Numbers.........................................................................16 ARTICLE THREE - OPTIONAL REDEMPTION OF DEBENTURES SECTION 3.01 Optional Redemption...................................................................16 SECTION 3.02 Redemption upon Tax Event; Shortening of Stated Maturity..............................16 SECTION 3.03 Notice of Redemption..................................................................18 SECTION 3.04 Surrender of Debentures...............................................................19 ARTICLE FOUR - PARTICULAR COVENANTS OF THE COMPANY SECTION 4.01 Payments of Principal and Interest....................................................19 SECTION 4.02 Maintain Office or Agency.............................................................20 SECTION 4.03 Appointment of Paying Agent...........................................................20 SECTION 4.04 Appointment of Trustee................................................................21 SECTION 4.05 Restrictions upon Dividends, Redemptions, etc.........................................21 SECTION 4.06 Listing of Debentures.................................................................21 SECTION 4.07 Compliance with Declaration...........................................................21 SECTION 4.08 Transfer of Trust Common Securities...................................................21
- -------- **/ This Table of Contents does not constitute part of the Indenture and should not have any bearing upon the interpretation of any of its terms or provisions. i
ARTICLE FIVE - DEBENTUREHOLDERS' LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE SECTION 5.01 List of Debentureholders..............................................................22 SECTION 5.02 Preservation and Disclosure of List...................................................22 SECTION 5.03 Documents Provided to Trustee.........................................................23 SECTION 5.04 Information to Debentureholders.......................................................24 ARTICLE SIX - REMEDIES OF THE TRUSTEE AND DEBENTUREHOLDERS ON EVENT OF DEFAULT SECTION 6.01 Events of Default.....................................................................26 SECTION 6.02 Payment by the Company................................................................28 SECTION 6.03 Application of Payments...............................................................29 SECTION 6.04 Limitation on Suits...................................................................30 SECTION 6.05 Remedies Cumulative; Waivers..........................................................30 SECTION 6.06 Direction by Debentureholders.........................................................31 SECTION 6.07 Notice of Defaults....................................................................31 SECTION 6.08 Undertaking to Pay Costs..............................................................32 SECTION 6.09 Waiver of Usury, Stay or Extension Laws...............................................32 ARTICLE SEVEN - CONCERNING THE TRUSTEE SECTION 7.01 Duties of Trustee.....................................................................33 SECTION 7.02 Reliance; Consultation with Counsel...................................................34 SECTION 7.03 Absence of Reliance upon Trustee......................................................35 SECTION 7.04 Ownership of Debentures...............................................................35 SECTION 7.05 Moneys Held in Trust..................................................................36 SECTION 7.06 Compensation..........................................................................36 SECTION 7.07 Officers' Certificates................................................................36 SECTION 7.08 Conflicting Interests.................................................................36 SECTION 7.09 Trustee...............................................................................42 SECTION 7.10 Resignation and Removal of Trustee....................................................42 SECTION 7.11 Successor Trustee.....................................................................43 SECTION 7.12 Merger, Consolidation of Trustee......................................................44 SECTION 7.13 Trustee's Application for Instructions from the Company...............................44 SECTION 7.14 Trustee as Creditor...................................................................45 ARTICLE EIGHT - CONCERNING THE DEBENTUREHOLDERS SECTION 8.01 Action by Debentureholders............................................................48 SECTION 8.02 Proof of Action by Debentureholder....................................................49 SECTION 8.03 Registered Holder.....................................................................49 SECTION 8.04 Determination of Requisite Debentureholders...........................................49 SECTION 8.05 Revocation of Action; Binding Effect..................................................50 ARTICLE NINE - SUPPLEMENTAL INDENTURES SECTION 9.01 Supplemental Indentures...............................................................50 SECTION 9.02 Approval of Supplemental Indentures...................................................51 SECTION 9.03 Effect of Supplemental Indenture......................................................53
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SECTION 9.04 Affected Debentures...................................................................53 SECTION 9.05 Opinion of Counsel....................................................................53 ARTICLE TEN - CONSOLIDATION, MERGER, SALE OR CONVEYANCE SECTION 10.01 Consolidation, Merger, etc. of Company................................................53 SECTION 10.02 Successor Corporation.................................................................54 SECTION 10.03 Opinion of Counsel Provided to Trustee................................................54 ARTICLE ELEVEN - SATISFACTION AND DISCHARGE OF INDENTURE; UNCLAIMED MONEYS SECTION 11.01 Satisfaction and Discharge............................................................54 SECTION 11.02 Deposits held in Trust................................................................56 SECTION 11.03 Moneys held by Paying Agent...........................................................56 SECTION 11.04 Repayment to Company..................................................................57 SECTION 11.05 Indemnification of Trustee............................................................57 ARTICLE TWELVE - IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS SECTION 12.01 Immunity..............................................................................57 ARTICLE THIRTEEN - MISCELLANEOUS PROVISIONS SECTION 13.01 Successors and Assigns................................................................58 SECTION 13.02 Actions by Predecessor................................................................58 SECTION 13.03 Surrender of Power....................................................................58 SECTION 13.04 Notices...............................................................................58 SECTION 13.05 Governing Law.........................................................................58 SECTION 13.06 Officers' Certificate from Company....................................................58 SECTION 13.07 Date of Payments......................................................................59 SECTION 13.08 Certain Duties under Trust Indenture Act..............................................59 SECTION 13.09 Counterparts..........................................................................59 SECTION 13.10 Severability..........................................................................59 SECTION 13.11 Assignment by Company.................................................................60 SECTION 13.12 Holders of Preferred Securities as Third Party Beneficiaries..........................60 ARTICLE FOURTEEN - SUBORDINATION OF DEBENTURES SECTION 14.01 Subordination.........................................................................60 SECTION 14.02 Payments upon Liquidation, etc. ......................................................60 SECTION 14.03 Receipt of Payments; Subrogation......................................................61 SECTION 14.04 Application of Payments to Debentures.................................................63 SECTION 14.05 Banking Effect........................................................................63 SECTION 14.06 Knowledge of Trustee..................................................................63 SECTION 14.07 Rights of Trustee as Holder of Senior Indebtedness....................................63 SECTION 14.08 Paying Agent..........................................................................64 EXHIBIT A - FORM OF DEBENTURE
iii THIS INDENTURE, is dated as of the ____ day of ___________, 1997, between SunSource Inc., a corporation duly organized and existing under the laws of the State of Delaware (hereinafter sometimes referred to as the "Company"), and The Bank of New York, a New York banking corporation, as Trustee (hereinafter sometimes referred to as the "Trustee"): WHEREAS, for its lawful corporate purposes, the Company has fully authorized the execution and delivery of this Indenture to provide for the issuance of junior subordinated debentures (hereinafter referred to as the "Debentures"), in an aggregate principal amount of $___________ to be issued as in this Indenture provided, as registered Debentures without coupons, to be authenticated by the certificate of the Trustee; WHEREAS, to provide the terms and conditions upon which the Debentures are to be authenticated, issued and delivered, the Company has duly authorized the execution of this Indenture; WHEREAS, the Debentures and the certificate of authentication to be borne by the Debentures (the "Certificate of Authentication") are to be substantially in such forms as may be approved by the Board of Directors (as defined below); WHEREAS, the Company has caused to be formed SunSource Capital Trust (the "Trust") as a statutory business trust under the Business Trust Act of the State of Delaware (12 Del. Code Section 3801 et seq.) pursuant to a declaration of trust dated __________, 1997 (as amended and restated, the "Declaration") and the filing of a certificate of trust with the Secretary of State of the State of Delaware on __________, 1997; and WHEREAS, in the merger of SunSource L.P. (the "Partnership") and a subsidiary of the Partnership with and into SunSource Inc., each Class A limited partnership interest in the Partnership will be exchanged for $1.30 in cash and 0.38 of an 11.6% Trust Preferred Security of the Trust; and WHEREAS, in connection with such exchange and the purchase by the Company of the Common Securities (as defined in the Declaration) of the Trust, the Company will deposit as trust assets Junior Subordinated Debentures; and WHEREAS, pursuant to the Declaration, the legal title to the Debentures shall be owned and held of record in the name of The Bank of New York, as Trustee or its successor under the Declaration (the "Trustee") in trust for the benefit of holders of the Preferred Securities and the Common Securities; and AND WHEREAS, all acts and things necessary to make the Debentures issued pursuant hereto, when executed by the Company and authenticated and delivered by the Trustee as in this Indenture provided, the valid, binding and legal obligations of the Company, and to constitute these presents a valid indenture and agreement according to its terms, have been done and performed or will be done and performed prior to the issuance of such Debentures, and the execution of this Indenture has been and the issuance hereunder of the Debentures has been or will be prior to issuance in all respects duly authorized, and the Company, in the exercise of the legal right and power in it vested, executes this Indenture and proposes to make, execute, issue and deliver the Debentures: NOW, THEREFORE, THIS INDENTURE WITNESSETH: That in order to declare the terms and conditions upon which the Debentures are and are to be authenticated, issued and delivered, and in consideration of the premises and of the acquisition and acceptance of the Debentures by the holders thereof, the Company covenants and agrees with the Trustee, for the equal and proportionate benefit (subject to the provisions of this Indenture) of the respective holders from time to time of the Debentures, without any discrimination, preference or priority of any one Debenture over any other by reason of priority in the time of issue, sale or negotiation thereof, or otherwise, except as provided herein, as follows: ARTICLE ONE DEFINITIONS SECTION 1.01. Definitions. The terms defined in this Section (except as in this Indenture otherwise expressly provided or unless the context otherwise requires) for all purposes of this Indenture, and any resolution of the Board of Directors of the Company shall have the respective meanings specified in this Section. All other terms used in this Indenture which are defined in the Trust Indenture Act of 1939, as amended, or which are by reference in such Act defined in the Securities Act of 1933, as amended (except as herein otherwise expressly provided or unless the context otherwise requires), shall have the meanings assigned to such terms in the Trust Indenture Act and in the Securities Act as in force at the date of this instrument. "Accrual Date" means the first day following the Effective Time. "Affiliate" of the Company means any company at least a majority of whose outstanding voting stock shall at the time be owned by the Company, or by one or more direct or indirect subsidiaries of the Company or by the Company and one or more direct or indirect subsidiaries of the Company. For the purposes only of this definition of the term "Affiliate", the term "voting stock", as applied to the stock of any company, shall mean stock of any class or classes having ordinary voting power for the election of a majority of the directors of such company, other than stock having such power only by reason of the occurrence of a contingency. "Authenticating Agent" means an authenticating agent with respect to all or any of the series of Debentures, as the case may be, appointed with respect to all or any series of the 2 Debentures, as the case may be, by the Trustee pursuant to Section 2.13. "Board of Directors" means the Board of Directors of the Company, or any committee of such Board duly authorized to act hereunder. "Board Resolution" means a copy of one or more resolutions, certified by the secretary or an assistant secretary of the Company to have been adopted or consented to by the Board of Directors and to be in full force and effect, and delivered to the Trustee. "Business Day," means any day other than a day on which banking institutions in New York, are authorized or required by law to close. "Certificate" means a certificate signed by the principal executive officer, the principal financial officer or the principal accounting officer of the Company. The Certificate need not comply with the provisions of Section 13.06. "Common Securities" means the common undivided beneficial interests in the assets of the Trust. "Company" means SunSource Inc., a corporation duly organized and existing under the laws of the State of Delaware, and, subject to the provisions of Article Ten, shall also include its successors and assigns. "Conversion " means the conversion of SunSource L.P. to corporate form as generally described in the Proxy Statement/Prospectus and related transactions entered into pursuant to the Conversion Agreement. "Conversion Agreement " means the Agreement and Plan of Conversion, dated __________, 1997, among SunSource Inc., SunSource L.P., LPSub Inc., Lehman/SDI, Inc. and the limited partners of SDI Partners I, L.P. "Corporate Trust Office" means the office of the Trustee at which at any particular time its corporate trust business shall be principally administered, which office at the date of the execution of this Indenture is located at 101 Barclay Street, Floor 21 West, New York, New York 10286, Attention: Corporate Trust Administration. "Debenture" or "Debentures" means any Debenture or Debentures, as the case may be, authenticated and delivered under this Indenture. "Debentureholder", "holder of Debentures", "registered holder", or other similar term, means the person or persons in whose name or names a particular Debenture shall be registered on the books of the Company kept for the purpose in accordance with the terms of this Indenture. 3 "Declaration" means the Amended and Restated Declaration of Trust of the Trust. "Default" means any event, act or condition which with notice or lapse of time, or both, would constitute an Event of Default. "Depository" means, with respect to any Debentures, for which the Company shall determine that such Debentures will be issued as a Global Debenture, The Depository Trust Company, New York, New York, another clearing agency, or any successor registered as a clearing agency under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or other applicable statute or regulation, which, in each case, shall be designated by the Company pursuant to Section 2.14. "Effective Time " means the effective date of the Conversion. "Event of Default" means any event specified in Section 6.01(a), continued for the period of time, if any, therein designated. "Global Debenture" means a Debenture executed by the Company and delivered by the Trustee to the Depository or pursuant to the Depository's instruction, all in accordance with the Indenture, which shall be registered in the name of the Depository or its nominee. "Governmental Obligations" means securities that are (i) direct obligations of the United States of America for the payment of which its full faith and credit is pledged or (ii) obligations of a person controlled or supervised by and acting as an agency or instrumentality of the United States of America, the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case, are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank (as defined in Section 3(a) (2) of the Securities Act of 1933, as amended) as custodian with respect to any such Governmental Obligation or a specific payment of principal of or interest on any such Governmental Obligation held by such custodian for the account of the holder of such depository receipt; provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the Governmental Obligation or the specific payment of principal of or interest on the Governmental Obligation evidenced by such depository receipt. "Guarantee Agreement" means the guarantee, dated as of ___________, 1997, of the Company for the benefit of holders of Preferred Securities issued by the Trust. "Indenture" means this instrument as originally executed, or, if amended as herein provided, as so amended. "Interest Payment Date" when used with respect to any installment of interest on a 4 Debenture means the last day of each calendar month, commencing _____________, 1997. "Officers' Certificate" means a certificate signed by the Chairman, the President or a Vice President and by the Treasurer or an Assistant Treasurer or the Controller or an Assistant Controller or the Secretary or an Assistant Secretary of the Company and who shall be satisfactory to the Trustee. Each such certificate shall include the statements provided for in Section 13.06, if and to the extent required by the provisions thereof. "Opinion of Counsel" means an opinion in writing signed by legal counsel, who may be an employee of or counsel for the Company and who shall be satisfactory to the Trustee. Each such opinion shall include the statements provided for in section 13.06, if and to the extent required by the provisions thereof. "Outstanding," when used with reference to Debentures, subject to the provisions of Section 8.01, means, as of any particular time, all Debentures theretofore authenticated and delivered by the Trustee under this Indenture, except (a) Debentures theretofore canceled by the Trustee or any paying agent, or delivered to the Trustee or any paying agent for cancellation or which have previously been canceled; (b) Debentures or portions thereof for the payment or redemption of which moneys or Governmental Obligations in the necessary amount shall have been deposited in trust with the Trustee or with any paying agent (other than the Company) or shall have been set aside and segregated in trust for the holders of such Debentures by the Company (if the Company shall act as its own paying agent); provided, however, that if such Debentures or portions of such Debentures are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given as in Article Three provided, or provision satisfactory to the Trustee shall have been made for giving such notice; and (c) Debentures in lieu of or in substitution for which other Debentures shall have been authenticated and delivered pursuant to the terms of Section 2.07. "Person" means a legal person, including any individual, corporation, estate, partnership, joint venture, association, joint stock company, limited liability company, trust, unincorporated association, or government or any agency or political subdivision thereof, or any other entity of whatever nature. "Predecessor Debenture" of any particular Debenture means every previous Debenture evidencing all or a portion of the same debt as that evidenced by such particular Debenture; and, for the purposes of this definition, any Debenture authenticated and delivered under Section 2.07 in lieu of a lost, destroyed or stolen Debenture shall be deemed to evidence the same debt as the lost, destroyed or stolen Debenture. "Preferred Securities" means the preferred undivided beneficial interests in the assets of the Trust. "Property Trustee" means the entity performing the function of the Property Trustee 5 under the Declaration. "Responsible Officer" when used with respect to the Trustee means the chairman of the board of directors, the president, any vice president, any assistant vice president, the secretary, any assistant secretary, the treasurer, any assistant treasurer, any trust officer, or assistant trust officer or any other officer of the Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of that officer's knowledge of and familiarity with the particular subject. "Security Exchange" when used with respect to the Debentures which are held as trust assets of the Trust pursuant to the Declaration of the Trust, means the distribution of the Debentures of such series by the Trust in exchange for the Preferred Securities and Common Securities of the Trust in dissolution of the Trust pursuant to the Declaration of Trust of the Trust. "Senior Indebtedness" means the principal of and premium, if any, and interest on (a) all indebtedness of the Company, whether outstanding on the date of this Indenture or thereafter created, (i) for money borrowed by the Company, (ii) for money borrowed by, or obligations of, others and either assumed or guaranteed, directly or indirectly, by the Company, (iii) in respect of letters of credit and acceptances issued or made by banks, or (iv) constituting purchase money indebtedness, or indebtedness secured by property included in the property, plant and equipment accounts of the Company at the time of the acquisition of such property by the Company, for the payment of which the Company is directly liable, and (b) all deferrals, renewals, extensions and refundings of, and amendments, modifications and supplements to, any such indebtedness. As used in the preceding sentence the term "purchase money indebtedness" means indebtedness evidenced by a note, debenture, bond or other instrument (whether or not secured by any lien or other security interest) issued or assumed as all or a part of the consideration for the acquisition of property, whether by purchase, merger, consolidation or otherwise, unless by its terms such indebtedness is subordinate to other indebtedness of the Company. Notwithstanding anything to the contrary in this Indenture or the Debentures, Senior Indebtedness shall not include (i) amounts owed to trade creditors in the ordinary course of business, (ii) any indebtedness of the Company which, by its terms or the terms of the instrument creating or evidencing it, is subordinate in right of payment to or pari passu with the Debentures, as the case may be, and, in particular, the Debentures shall rank pari passu with all other debt securities and guarantees in respect of those debt securities, issued to any other trusts, partnerships or any other entity affiliated with the Company which is a financing vehicle of the Company ("Financing Entity") in connection with an issuance of preferred securities by such Financing Entity, or (iii) any indebtedness of the Company to a Subsidiary. "Subsidiary" means any corporation at least a majority of whose outstanding voting stock shall at the time be owned, directly or indirectly, by the Company or by one or more subsidiaries or by the Company and one or more Subsidiaries. For the purposes only of this definition of the 6 term "Subsidiary", the term "voting stock", as applied to the stock of any corporation, shall mean stock of any class or classes having ordinary voting power for the election of a majority of the directors of such corporation, other than stock having such power only by reason of the occurrence of a contingency. "Trust" means SunSource Capital Trust, a statutory business trust created under the laws of the State of Delaware. "Trustee" means The Bank of New York and, subject to the provisions of Article Seven, shall also include its successors and assigns, and, if at any time there is more than one person acting in such capacity hereunder, "Trustee" shall mean each such person. "Trust Indenture Act", subject to the provisions of Section 9.01 and 9.02, means the Trust Indenture Act of 1939, as amended. ARTICLE TWO ISSUE, DESCRIPTION, TERMS, EXECUTION, REGISTRATION AND EXCHANGE OF DEBENTURES SECTION 2.01 Designation and Maturity. (a) There shall be and is hereby authorized a series of Debentures designated the "11.6% Junior Subordinated Debentures," limited in aggregate principal amount to the sum of (i) the stated liquidation amount of the Trust Preferred Securities issued by the Trust in the Conversion, plus (ii) a dollar amount equal to the principal amount of Debentures purchased by the Trust with the proceeds received by the Trust from the purchase by the Company of the Common Securities of the Trust, which amount shall be as set forth in any written order of the Company for the authentication and delivery of Debentures. (b) The Debentures shall be issued in the form of registered Debentures without coupons. The Debentures shall mature and the principal shall be due and payable together with all accrued and unpaid interest thereon, including Compounded Interest (as hereinafter defined) on ___________, 2027; provided, however, if a Tax Event shall occur and be continuing and in the opinion of nationally recognized independent tax counsel to the Trust, there would in all cases, after effecting the termination of Trust and the distribution of the Debentures to the holders of the securities in exchange therefor upon liquidation of the Trust, be more than an insubstantial risk that the Tax Event would continue, then the Company shall have the right to shorten the stated maturity of the Junior Subordinated Debentures to a date not earlier than _______, 2002 such that, in the opinion of nationally recognized independent tax counsel to the Trust, after advancing the stated maturity of the Debentures, interest paid on the Junior Subordinated Debentures will be deductible by the Company for federal income tax purposes. 7 SECTION 2.02 Form of Debentures. The Debentures shall be issued in certificated form in substantially the form attached hereto as Exhibit A. Principal and interest on the Debentures issued in certificated form will be payable, the transfer of such Debentures will be registrable and such Debentures will be exchangeable for Debentures bearing identical terms and provisions at the office or agency of the Trustee in the Borough of Manhattan, The City and State of New York; provided, however, that payment of interest may be made at the option of the Company by check mailed to the registered holder at such address as shall appear in the Debenture register and that the payment of principal with respect to the Debentures will only be made upon surrender of the Debentures to the Trustee. Notwithstanding the foregoing, so long as the Trustee is the legal owner and record holder of the Debentures, the payment of the principal of and interest on (including Compounded Interest, if any) on the Debentures held by the Trustee will be made by the Company in immediately available funds on the payment date therefor at such place and to the Property Account (as defined in the Declaration) established and maintained by the Trustee pursuant to the Declaration. SECTION 2.03 Interest Payments. Each Debenture will bear interest at the rate of 11.6% per annum from the Accrual Date until the principal thereof becomes due and payable, and on any overdue principal and (to the extent that payment of such interest is enforceable under applicable law) on any overdue installment of interest at the same rate per annum, compounded monthly, payable (subject to the provisions of Article Three) monthly in arrears on each Interest Payment Date commencing on ____________, 1997, to the person in whose name such Debenture or any predecessor Debenture is registered, at the close of business on the regular record date for such interest installment, which, except as set forth below, shall be the close of business on the first day of the month in which such Interest Payment Date occurs. Any such interest installment not punctually paid or duly provided for shall forthwith cease to be payable to the registered holders on such regular record date, and may be paid to the person in whose name the Debenture (or one or more Predecessor Debentures) is registered at the close of business on a special record date to be fixed by the Trustee for the payment of such defaulted interest, notice whereof shall be given to the registered holders of the Debentures not less than ten days prior to such special record date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Debentures may be listed, and upon such notice as may be required by such exchange. SECTION 2.04 Extension of Interest Payment Period. So long as the Company is not in default in the payment of interest on the Debentures, the Company shall have the right, at any time during the term of the Debentures, from time to time to extend the interest payment period of such Debentures for up to 60 consecutive months (the "Extension Period"), at the end of which period the Company shall pay all interest accrued and unpaid thereon (together with interest thereon at the rate of 11.6% per annum to the extent permitted by applicable law, compounded monthly ("Compounded Interest")). During such Extension Period the Company shall not declare or pay any dividend on, or redeem, purchase, acquire or make a distribution or liquidation payment with respect to, any of its common stock or preferred stock, or make any 8 guarantee payments with respect thereto. Prior to the termination of any such Extension Period, the Company may pay all or any portion of the interest accrued on the Debentures on any Interest Payment Date to holders of record on the regular record date for such Interest Payment Date or from time to time further extend such Period, provided that such Extension Period together with all such further extensions thereof shall not exceed 60 consecutive months. Upon the termination of any Extension Period and upon the payment of all accrued and unpaid interest then due, together with Compounded Interest, the Company may select a new Extension Period, subject to the foregoing requirements. No interest shall be due and payable during an Extension Period, except at the end thereof. At the end of the Extension Period the Company shall pay all interest accrued and unpaid on the Debentures including any Compounded Interest which shall be payable to the holders of the Debentures in whose names the Debentures are registered in the Debenture register on the first record date after the end of the Extension Period. SECTION 2.05 Notice of Shortening of Stated Maturity or Extension of Interest Payment Period. (a) So long as the Property Trustee is the legal owner and holder of record of the Debentures, at the time the Company elects to shorten the stated maturity of the Debentures or selects an Extension Period, the Company shall give both the Property Trustee and the Trustee written notice of such change ten business days prior to the earlier of (i) the next succeeding date on which distributions on the Trust Preferred Securities are payable or (ii) the date the Trust is required to give notice of the record date or the date such distributions are payable to the New York Stock Exchange or other applicable self-regulatory organization or to holders of the Trust Preferred Securities, but in any event not less than one business day prior to such record date. The Company shall cause the Trust to give notice of the Company's election to shorten the stated maturity or selection of such Extension Period to the holders of the Preferred Securities. (b) If Debentures have been distributed to holders of Preferred Securities and Common Securities, at the time the Company elects to shorten the stated maturity of the Debentures or selects an Extension Period, the Company shall give the holders of the Debentures and the Trustee written notice of such change ten business days prior to the earlier of (i) the next succeeding Interest Payment Date or (ii) the date the Company is required to give notice of the record or payment date of such interest payment to the New York Stock Exchange or other applicable self-regulatory organization or to holders of the Debentures. SECTION 2.06 Date and Denomination; Payment of Interest. The Debentures shall be issuable as registered Debentures and in the denominations of $25 or any integral multiple thereof. Each Debenture shall be dated the date of its authentication. Interest on the Debentures shall be computed on the basis of a 360-day year composed of twelve 30-day months. The interest installment on any Debenture which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the person in whose name said Debenture (or one or more Predecessor Debentures) is registered at the close of business on the regular record date for such interest installment. In the event that any Debenture or portion thereof is called for redemption and the redemption date is subsequent to a regular record date 9 with respect to any Interest Payment Date and prior to such Interest Payment Date, interest on such Debenture will be paid upon presentation and surrender of such Debenture as provided in Section 3.03. Any interest on any Debenture which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date (herein called "Defaulted Interest") shall forthwith cease to be payable to the registered holder on the relevant regular record date by virtue of having been such holder; and such Defaulted Interest shall be paid by the Company, at its election, as provided in clause (1) or clause (2) below: (1) The Company may make payment of any Defaulted Interest on Debentures to the persons in whose names such Debentures (or their respective Predecessor Debentures) are registered at the close of business on a special record date for the payment of such Defaulted Interest, which shall be fixed in the following manner: the Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each such Debenture and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the persons entitled to such Defaulted Interest as in this clause provided. Thereupon the Trustee shall fix a special record date for the payment of such Defaulted Interest which shall not be more than 15 nor less than ten days prior to the date of the proposed payment and not less than ten days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such special record date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the special record date therefor to be mailed, first class postage prepaid, to each Debentureholder at his or her address as it appears in the Debenture Register (as hereinafter defined), not less than ten days prior to such special record date. Notice of the proposed payment of such Defaulted Interest and the special record date therefor having been mailed as aforesaid, such Defaulted Interest shall be paid to the persons in whose names such Debentures (or their Predecessor Debentures) are registered on such special record date and shall be no longer payable pursuant to the following clause (2). (2) The Company may make payment of any Defaulted Interest on any Debentures in any other lawful manner not inconsistent with the requirements of any securities exchange on which such Debentures may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this clause, such manner of payment shall be deemed practicable by the Trustee. Subject to the foregoing provisions of this Section, each Debenture of a series delivered under this Indenture upon transfer of or in exchange for or in lieu of any other Debenture of such series shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Debenture. 10 SECTION 2.07 Execution and Authentication. The Debentures shall, subject to the provisions of Section 2.09, be printed on steel engraved borders or fully or partially engraved, or legibly typed, as the proper officers of the Company may determine, and shall be signed on behalf of the Company by its Chairman, President or one of its Vice Presidents, under its corporate seal attested by its Secretary or one of its Assistant Secretaries. The signature of the Chairman, President or a Vice President and/or the signature of the Secretary or an Assistant Secretary in attestation of the corporate seal, upon the Debentures, may be in the form of a facsimile signature of a present or any future Chairman, President or Vice President and of a present or any future Secretary or Assistant Secretary and may be imprinted or otherwise reproduced on the Debentures and for that purpose the Company may use the facsimile signature of any person who shall have been a Chairman, President or Vice President, or of any person who shall have been a Secretary or Assistant Secretary, notwithstanding the fact that at the time the Debentures shall be authenticated and delivered or disposed of such person shall have ceased to be the Chairman, President or a Vice President, or the Secretary or an Assistant Secretary, of the Company, as the case may be. The seal of the Company may be in the form of a facsimile of the seal of the Company and may be impressed, affixed, imprinted or otherwise reproduced on the Debentures. Only such Debentures as shall bear thereon a Certificate of Authentication substantially in the form provided in Exhibit A hereto, executed manually by an authorized signatory of the Trustee, or by any Authenticating Agent with respect to such Debentures, shall be entitled to the benefits of this Indenture or be valid or obligatory for any purpose. Such certificate executed by the Trustee, or by any Authenticating Agent appointed by the Trustee with respect to such Debentures, upon any Debenture executed by the Company shall be conclusive evidence that the Debenture so authenticated has been duly authenticated and delivered hereunder and that the holder is entitled to the benefits of this Indenture. At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Debentures executed by the Company to the Trustee for authentication, together with a written order of the Company for the authentication and delivery of such Debentures, signed by its Chairman, President or any Vice President and its Treasurer or any Assistant Treasurer, and the Trustee in accordance with such written order shall authenticate and make available for delivery such Debentures. In authenticating such Debentures and accepting the additional responsibilities under this Indenture in relation to such Debentures, the Trustee shall be entitled to receive, and (subject to Section 7.01) shall be fully protected in relying upon, an Opinion of Counsel stating that the form and terms thereof have been established in conformity with the provisions of this Indenture. The Trustee shall not be required to authenticate such Debentures if the issue of such Debentures pursuant to this Indenture will affect the Trustee's own rights, duties or immunities under the Debentures and this Indenture or otherwise in a manner which is not reasonably acceptable to the Trustee. 11 SECTION 2.08 Exchange of Debentures. (a) Debentures may be exchanged upon presentation thereof at the office or agency of the Trustee designated for such purpose in the Borough of Manhattan, the City and State of New York, for other Debentures of authorized denominations, and for a like aggregate principal amount, upon payment of a sum sufficient to cover any tax or other governmental charge in relation thereto, all as provided in this Section. In respect of any Debentures so surrendered for exchange, the Company shall execute, the Trustee shall authenticate and such office or agency shall deliver in exchange therefor the Debenture or Debentures which the Debentureholder making the exchange shall be entitled to receive, bearing numbers not contemporaneously outstanding. (b) The Company shall keep, or cause to be kept, at its office or agency designated for such purpose a register or registers (herein referred to as the "Debenture Register") in which, subject to such reasonable regulations as it may prescribe, the Company shall register the Debentures and the transfers of Debentures as in this Article provided and which at all reasonable times shall be open for inspection by the Trustee. The registrar for the purpose of registering Debentures and transfer of Debentures as herein provided shall be appointed as authorized by Board Resolution (the "Debenture Registrar"). Upon surrender for transfer of any Debenture at the office or agency of the Trustee designated for such purpose in the Borough of Manhattan, the City and State of New York, the Company shall execute, the Trustee shall authenticate and such office or agency shall deliver in the name of the transferee or transferees a new Debenture or Debentures as the Debenture presented for a like aggregate principal amount. All Debentures presented or surrendered for exchange or registration of transfer, as provided in this Section, shall be accompanied (if so required by the Company or the Debenture Registrar) by a written instrument or instruments of transfer, in form satisfactory to the Company or the Debenture Registrar, duly executed by the registered holder or by the registered holder's duly authorized attorney in writing. (c) No service charge shall be made for any exchange or registration of transfer of Debentures, or issue of new Debentures in case of partial redemption, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge in relation thereto, other than exchanges pursuant to Section 2.08, the second paragraph of Section 3.03 and Section 9.04 not involving any transfer. (d) The Company shall not be required (i) to issue, exchange or register the transfer of any Debentures during a period beginning at the opening of business 15 days before the day of the mailing of a notice of redemption of less than all the outstanding Debentures and ending at the close of business on the day of such mailing, nor (ii) to register the transfer of or exchange any Debentures or portions thereof called for redemption. The provisions of this Section 2.08 are, with respect to any Global Debenture, subject to Section 2.14 hereof. 12 SECTION 2.09 Temporary Debentures. At all times prior to distribution of Debentures to the holders of Trust Preferred Securities, and, upon such distribution, pending the preparation of definitive Debentures, the Company may execute, and the Trustee shall authenticate and make available for delivery, temporary Debentures (printed, lithographed or typewritten) of any authorized denomination, and substantially in the form of the definitive Debentures in lieu of which they are issued, but with such omissions, insertions and variations as may be appropriate for temporary Debentures, all as may be determined by the Company. Every temporary Debenture shall be executed by the Company and be authenticated by the Trustee upon the same conditions and in substantially the same manner, and with like effect, as the definitive Debentures. Upon distribution of Debentures to the holders of Trust Preferred Securities, without unnecessary delay the Company will execute and will furnish definitive Debentures and thereupon any or all temporary Debentures may be surrendered in exchange therefor (without charge to the holders), at the office or agency of the Trustee designated for the purpose in the Borough of Manhattan, the City and State of New York, and the Trustee shall authenticate and such office or agency shall deliver in exchange for such temporary Debentures an equal aggregate principal amount of definitive Debentures of such series, unless the Company advises the Trustee to the effect that definitive Debentures need not be executed and furnished until further notice from the Company. Until so exchanged, the temporary Debentures shall be entitled to the same benefits under this Indenture as definitive Debentures authenticated and delivered hereunder. SECTION 2.10 Replacement of Debentures. In case any temporary or definitive Debenture shall become mutilated or be destroyed, lost or stolen, the Company (subject to the next succeeding sentence) shall execute, and upon its request the Trustee (subject as aforesaid) shall authenticate and make available for delivery, a new Debenture bearing a number not contemporaneously outstanding, in exchange and substitution for the mutilated Debenture, or in lieu of and in substitution for the Debenture so destroyed, lost or stolen. In every case the applicant for a substituted Debenture shall furnish to the Company and to the Trustee such security or indemnity as may be required by them to save each of them harmless, and, in every case of destruction, loss or theft, the applicant shall also furnish to the Company and to the Trustee evidence to their satisfaction of the destruction, loss or theft of the applicant's Debenture and of the ownership thereof. The Trustee may authenticate any such substituted Debenture and deliver the same upon the written request or authorization of any officer of the Company. Upon the issuance of any substituted Debenture, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. In case any Debenture which has matured or is about to mature shall become mutilated or be destroyed, lost or stolen, the Company may, instead of issuing a substitute Debenture, pay or authorize the payment of the same (without surrender thereof except in the case of a mutilated Debenture) if the applicant for such payment shall furnish to the Company and to the Trustee such security or indemnity as they may require to save them harmless, and, in case of destruction, loss or theft, evidence to the satisfaction of the Company and the Trustee of the destruction, loss or theft of such Debenture and of the ownership thereof. 13 Every Debenture issued pursuant to the provisions of this Section in substitution for any Debenture which is mutilated, destroyed, lost or stolen shall constitute an additional contractual obligation of the Company, whether or not the mutilated, destroyed, lost or stolen Debenture shall be found at any time, or be enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Debentures duly issued hereunder. All Debentures shall be held and owned upon the express condition that the foregoing provisions are exclusive with respect to the replacement or payment of mutilated, destroyed, lost or stolen Debentures, and shall preclude (to the extent lawful) any and all other rights or remedies, notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement or payment of negotiable instruments or other securities without their surrender. SECTION 2.11 Cancellation of Surrendered Debentures. All Debentures surrendered for the purpose of payment, redemption, exchange or registration of transfer shall, if surrendered to the Company or any paying agent, be delivered to the Trustee for cancellation, or, if surrendered to the Trustee, shall be canceled by it, and no Debentures shall be issued in lieu thereof except as expressly required or permitted by any of the provisions of this Indenture. On request of the Company, the Trustee shall deliver to the Company canceled Debentures held by the Trustee. In the absence of such request the Trustee may dispose of canceled Debentures in accordance with its standard procedures, provided, however, that the Trustee shall not be required to destroy such cancelled Debentures and deliver a certificate of disposition to the Company. If the Company shall otherwise acquire any of the Debentures, however, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Debentures unless and until the same are delivered to the Trustee for cancellation. SECTION 2.12 No Rights of Third Parties. Nothing in this Indenture or in the Debentures, express or implied, shall give or be construed to give to any person, firm or corporation, other than the parties hereto and the holders of the Debentures, any legal or equitable right, remedy or claim under or in respect of this Indenture, or under any covenant, condition or provision herein contained; all such covenants, conditions and provisions being for the sole benefit of the parties hereto and of the holders of the Debentures. SECTION 2.13 Authenticating Agent. So long as any of the Debentures remains outstanding there may be an Authenticating Agent for Debentures which the Trustee shall have the right to appoint. Said Authenticating Agent shall be authorized to act on behalf of the Trustee to authenticate Debentures issued upon exchange, transfer or partial redemption thereof, and Debentures so authenticated shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Trustee hereunder. All references in this Indenture to the authentication of Debentures by the Trustee shall be deemed to include authentication by an Authenticating Agent except for authentication upon original issuance or pursuant to Section 2.07 hereof. Each Authenticating Agent shall be acceptable to the Company and shall be a corporation which has a combined capital and surplus, as most recently reported or determined by it, sufficient under the laws of any jurisdiction under which it is organized or in 14 which it is doing business to conduct a trust business, and which is otherwise authorized under such laws to conduct such business and is subject to supervision or examination by Federal or State authorities. If at any time any Authenticating Agent shall cease to be eligible in accordance with these provisions, it shall resign immediately. Any Authenticating Agent may at any time resign by giving written notice of resignation to the Trustee and to the Company. The Trustee may at any time (and upon request by the Company shall) terminate the agency of any Authenticating Agent by giving written notice of termination to such Authenticating Agent and to the Company. Upon resignation, termination or cessation of eligibility of any Authenticating Agent, the Trustee may appoint an eligible successor Authenticating Agent acceptable to the Company. Any successor Authenticating Agent, upon acceptance of its appointment hereunder, shall become vested with all the rights, powers and duties of its predecessor hereunder as if originally named as an Authenticating Agent pursuant hereto. SECTION 2.14 Global Debenture. (a) If the Debentures have been distributed to the holders of Trust Preferred Securities, Debentureholders may elect to hold such Debentures through the Depository, in which event the Company shall execute and the Trustee shall, in accordance with Section 2.07, authenticate and deliver, one or more Global Debentures which (i) shall represent, and shall be denominated in an aggregate amount equal to the aggregate principal amount of, all Debentures to be so held, (ii) shall be registered in the name of the Depository or its nominee, (iii) shall be delivered by the Trustee to the Depository or pursuant to the Depository's instruction and (iv) shall bear a legend substantially to the following effect: "Except as otherwise provided in Section 2.14 of the Indenture, this Debenture may be transferred, in whole but not in part, only to another nominee of the Depository or to a successor Depository or to a nominee of such successor Depository." (b) Notwithstanding the provisions of Section 2.08, the Global Debenture may be transferred, in whole but not in part and in the manner provided in Section 2.08, only to another nominee of the Depository for such series, or to a successor Depository for such series selected or approved by the Company or to a nominee of such successor Depository. (c) If at any time the Depository notifies the Company that it is unwilling or unable to continue as Depository for such series or if at any time the Depository shall no longer be registered or in good standing under the Exchange Act, or other applicable statute or regulation and a successor Depository is not appointed by the Company within 90 days after the Company receives such notice or becomes aware of such condition, as the case may be, this Section 2.14 shall no longer be applicable to the Debentures and the Company will execute, and subject to Section 2.08, the Trustee will authenticate and make available for delivery Debentures in definitive registered form without coupons, in authorized denominations, and in an aggregate principal amount equal to the principal amount of the Global Debentures in exchange for such Global Debenture. In addition, the Company may at any time determine that the Debentures shall no longer be represented by one or more Global Debentures and that the provisions of this 15 Section 2.14 shall no longer apply to the Debentures. In such event the Company will execute and subject to Section 2.08, the Trustee, upon receipt of an Officers' Certificate evidencing such determination by the Company, will authenticate and deliver Debentures in definitive registered form without coupons, in authorized denominations, and in an aggregate principal amount equal to the principal amount of the Global Debentures in exchange for such Global Debentures. Upon the exchange of the Global Debentures for such Debentures in definitive registered form without coupons, in authorized denominations, the Global Debentures shall be canceled by the Trustee. Such Debentures in definitive registered form issued in exchange for the Global Debentures pursuant to this Section 2.14(c) shall be registered in such names and in such authorized denominations as the Depository, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Trustee. The Trustee shall make available for delivery such Debentures to the Depository for delivery to the persons in whose names such Debentures are so registered. SECTION 2.15 CUSIP Numbers. The Company in issuing Debentures may use "CUSIP" numbers (if then generally in use), and, if so, the Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to Debentureholders; provided, that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Debentures or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Debentures, and any such redemption shall not be affected by any defect in or omission of such numbers. The Company will promptly notify the Trustee of any change in the CUSIP numbers. ARTICLE THREE OPTIONAL REDEMPTION OF DEBENTURES SECTION 3.01 Optional Redemption. Except as provided in Section 3.02, the Debentures may not be redeemed by the Company prior to __________, 2002. Subject to the terms of this Article Three, the Company shall have the right to redeem the Debentures, in whole or in part, from time to time, on or after __________, 2002, at a redemption price equal to 100% of the principal amount to be redeemed plus any accrued and unpaid interest thereon, including Compounded Interest, if any, to the date of such redemption (the "Optional Redemption Price"). Any redemption pursuant to this paragraph will be made upon not less than 30 nor more than 60 days' notice, at the Optional Redemption Price. SECTION 3.02 Redemption upon Tax Event; Shortening of Stated Maturity. If, at any time, a Tax Event (as defined below) shall occur or be continuing after receipt of a Dissolution Tax Opinion (as defined below) and (i) the Regular Trustees of the Trust and the Company shall have received an opinion (a "Redemption Tax Opinion") of a nationally recognized independent tax counsel experienced in such matters that, as a result of a Tax Event, there is more than an insubstantial risk that the Company would be precluded from deducting the interest on the Debentures for United States federal income tax purposes even if the Debentures were distributed to the holders of Trust 16 Preferred Securities and Common Securities in liquidation of such holder's interest in the Trust as set forth in the Declaration or if the Corporation shortened the Stated Maturity of the Debentures as described in the last sentence of this paragraph (ii) the Regular Trustees shall have been informed by such tax counsel that a No Recognition Opinion (as defined below) cannot be delivered to the Trust, the Company shall have the right at any time, upon not less than 30 nor more than 60 days notice, to redeem the Debentures in whole or in part for cash at a redemption price equal to 101% of the principal amount of the Debentures if the Redemption occurs prior to ____________, 2002 or 100% thereafter, within 90 days following the occurrence of such Tax Event; provided, however, that, if at the time there is available to the Company or the Trustee, on behalf of the Trust the opportunity to eliminate, within such 90 day period, the Tax Event by taking some ministerial action ("Ministerial Action"), such as filing a form or making an election, or pursuing some other similar reasonable measure, which has no adverse effect on the Trust, the Company or the holders of the Trust Preferred Securities, the Company or the Trustee on behalf of the Trust will pursue such measure in lieu of redemption and provided further that the Company shall have no right to redeem the Debentures while the Regular Trustees on behalf of SunSource Capital Trust are pursuing any such Ministerial Action. In addition to taking any Ministerial Action, if a Tax Event occurs and is continuing and in the opinion of nationally recognized independent tax counsel to the Trust, there would in all cases, after effecting the termination of the Trust and the distribution of the Debentures to the holders of the Trust Preferred Securities in exchange therefor upon liquidation of the Trust, be more than an insubstantial risk that the Tax Event would continue, then the Corporation shall have the right to shorten the stated maturity of the Debentures to the latest date permissible without adversely affecting the deductibility of interest payable on the Debentures, but not earlier than ______________, 2002 (and thereby cause the Trust Preferred Securities to be redeemed on such earlier date) such that, in the opinion of nationally recognized independent tax counsel to the Trust, after advancing the stated maturity of the Debentures, interest paid on the Debentures will be deductible by the Corporation for federal income tax purposes. "Tax Event" means that the Company and the Regular Trustees shall have obtained an opinion of nationally recognized independent tax counsel experienced in such matters (a "Dissolution Tax Opinion") to the effect that on or after the Effective Time, as a result of (a) any amendment to, or change (including any announced prospective change) in, the laws (or any regulations thereunder) of the United States or any political subdivision or taxing authority thereof or therein, (b) any amendment to, or change in, an interpretation or application of any such laws or regulations by any legislative body, court, governmental agency or regulatory authority (including the enactment of any legislation and the publication of any judicial decision or regulatory determination), (c) any interpretation or pronouncement that provides for a position with respect to such laws or regulations that differs from the theretofore generally accepted position or (d) any action taken by any governmental agency or regulatory authority, which amendment or change is enacted, promulgated, issued or announced or which interpretation or pronouncement is issued or announced or which action is taken, in each case on or after the Effective Time, there is more than an insubstantial risk that (i) the Trust is, or will be within 90 days of the date thereof, subject to United States federal income tax with respect to income accrued or received on the Debentures, (ii) the Trust is, or will be within 90 days of the date thereof, subject to more than a de minimis amount of taxes, duties or other governmental charges or (iii) interest payable by the Company to the Trust on the Debentures is not, or within 90 days of the date thereof will not be, deductible by the Company for United States federal income tax purposes. "No Recognition Opinion" means an opinion of a nationally recognized independent tax counsel experienced in such matters, which opinion may rely on any then applicable published revenue ruling of the Internal Revenue Service, to the effect that the holders of the Trust Preferred Securities will not recognize any gain or loss for United States federal income tax purposes as a result of a dissolution of the Trust and distribution of the Debentures as provided in the Declaration. 17 SECTION 3.03 Notice of Redemption. (a) In case the Company shall desire to exercise such right to redeem all or, as the case may be, a portion of the Debentures in accordance with the right reserved so to do, it shall give notice of such redemption to holders of the Debentures to be redeemed by mailing, first class postage prepaid, a notice of such redemption not less than 30 days and not more than 60 days before the date fixed for redemption to such holders at their last addresses as they shall appear upon the Debenture Register. Any notice which is mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the registered holder receives the notice. In any case, failure duly to give such notice to the holder of any Debenture designated for redemption in whole or in part, or any defect in the notice, shall not affect the validity of the proceedings for the redemption of any other Debentures. In the case of any redemption of Debentures prior to the expiration of any restriction on such redemption provided in the terms of such Debentures or elsewhere in this Indenture, the Company shall furnish the Trustee with an Officers' Certificate evidencing compliance with any such restriction. Each such notice of redemption shall include the CUSIP numbers of Debentures to be redeemed and shall specify the date fixed for redemption and the redemption price at which Debentures are to be redeemed, and shall state that payment of the redemption price of such Debentures to be redeemed will be made at the office or agency of the Trustee in the Borough of Manhattan, the City and State of New York, upon presentation and surrender of such Debentures, that interest accrued to the date fixed for redemption will be paid as specified in said notice, and that from and after said date interest will cease to accrue. If less than all the Debentures are to be redeemed, the notice to the holders of Debentures to be redeemed in whole or in part shall specify the particular Debentures to be so redeemed. In case any Debenture is to be redeemed in part only, the notice which relates to such Debenture shall state the portion of the principal amount thereof to be redeemed, and shall state that on and after the redemption date, upon surrender of such Debenture, a new Debenture or Debentures in principal amount equal to the unredeemed portion thereof will be issued. By 10:00 a.m., New York City time, on the redemption date, the Company will deposit irrevocably with the Trustee funds sufficient to pay the applicable redemption price and will give irrevocable instructions and authority to pay such redemption price to the holders of the Debentures. (b) If less than all the Debentures are to be redeemed, the Company shall give the Trustee at least 45 days notice in advance of the date fixed for redemption as to the aggregate principal amount of Debentures to be redeemed, and thereupon the Trustee shall select, by lot or in such other manner as it shall deem appropriate and fair in its discretion and which may provide for the selection of a portion or portions (equal to $25 or any integral multiple thereof) of the principal amount of such Debentures of a denomination larger than $25, the Debentures to be redeemed and shall thereafter promptly notify the Company in writing of the numbers of the Debentures to be redeemed, in whole or in part. 18 The Company may, if and whenever it shall so elect, by delivery of instructions signed on its behalf by its Chairman, President or any Vice President, instruct the Trustee or any paying agent to call all or any part of the Debentures for redemption and to give notice of redemption in the manner set forth in this Section, such notice to be in the name of the Company or its own name as the Trustee or such paying agent may deem advisable. In any case in which notice of redemption is to be given by the Trustee or any such paying agent, the Company shall deliver or cause to be delivered to, or permit to remain with, the Trustee or such paying agent, as the case may be, such Debenture Register, transfer books or other records, or suitable copies or extracts therefrom, sufficient to enable the Trustee or such paying agent to give any notice by mail that may be required under the provisions of this Section. SECTION 3.04 Surrender of Debentures. (a) If the giving of notice of redemption shall have been completed as above provided, the Debentures or portions of Debentures to be redeemed specified in such notice shall become due and payable on the date and at the place stated in such notice at the applicable redemption price, together with interest (including Compounded Interest) accrued to the date fixed for redemption and interest on such Debentures or portions of Debentures shall cease to accrue on and after the date fixed for redemption, unless the Company shall default in the payment of such redemption price and accrued interest with respect to any such Debenture or portion thereof. On presentation and surrender of such Debentures on or after the date fixed for redemption at the place of payment specified in the notice, said Debentures shall be paid and redeemed at the applicable redemption price, together with interest (including Compounded Interest) accrued thereon to the date fixed for redemption (but if the date fixed for redemption is an Interest Payment Date, the interest installment payable on such date shall be payable to the registered holder at the close of business on the applicable record date pursuant to Section 2.03). (b) Upon presentation of any Debenture which is to be redeemed in part only, the Company shall execute and the Trustee shall authenticate and the office or agency where the Debenture is presented shall deliver to the holder thereof, at the expense of the Company, a new Debenture or Debentures, of authorized denominations in principal amount equal to the unredeemed portion of the Debenture so presented. ARTICLE FOUR PARTICULAR COVENANTS OF THE COMPANY The Company covenants and agrees as follows: SECTION 4.01 Payments of Principal and Interest. The Company will duly and punctually pay or cause to be paid the principal of (and premium, if any) and interest on the Debentures at the time and place and in the manner provided herein and established with respect to the Debentures. 19 SECTION 4.02 Maintain Office or Agency. So long as the Debentures remain outstanding, the Company agrees to maintain an office or agency with respect to the Debentures, where (i) Debentures may be presented for payment, (ii) Debentures may be presented as hereinabove authorized for registration of transfer and exchange, and (iii) notices and demands to or upon the Company in respect of the Debentures and this Indenture may be given or served, such designation to continue with respect to such office or agency until the Company shall, by written notice signed by its Chairman, President or a Vice President and delivered to the Trustee, designate some other office or agency for such purposes or any of them. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Company hereby appoints the Trustee as its agent to receive all such presentations, notices and demands. SECTION 4.03 Appointment of Paying Agent. (a) If the Company shall appoint one or more paying agents for the Debentures, other than the Trustee, the Company will cause each such paying agency to execute and deliver to the Trustee an instrument in which such agent shall agree with the Trustee, subject to the provisions of this Section: (1) that it will hold all sums held by it as such agent for the payment of the principal of (and premium, if any) or interest on the Debentures (whether such sums have been paid to it by the Company or by any other obligor of such Debentures) in trust for the benefit of the persons entitled thereto: (2) that it will give the Trustee notice of any failure by the Company (or by any other obligor of such Debentures) to make any payment of the principal of (and premium, if any) or interest on the Debentures when the same shall be due and payable; (3) that it will, at any time during the continuance of any failure referred to in the preceding paragraph (a)(2) above, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such paying agent; and (4) that it will perform all other duties of paying agent as set forth in this Indenture. (b) If the Company shall act as its own paying agent with respect to any series of the Debentures, it will on or before each due date of the principal of (and premium, if any) or interest on Debentures, set aside, segregate and hold in trust for the benefit of the persons entitled thereto a sum sufficient to pay such principal (and premium, if any) or interest so becoming due on Debentures until such sums shall be paid to such persons or otherwise disposed of as herein provided and will promptly notify the Trustee of such action, or any failure (by it or any other obligor on such Debentures) to take such action. Whenever the Company shall have one or more paying agents, it will, by 10:00 a.m., New York City time, on each due date of the principal of (and premium, if any) or interest on any Debentures, deposit with the paying agent a sum 20 sufficient to pay the principal (and premium, if any) or interest so becoming due, such sum to be held in trust for the benefit of the persons entitled to such principal, premium or interest, and (unless such paying agent is the Trustee) the Company will promptly notify the Trustee of its action or failure so to act. (c) Anything in this Section to the contrary notwithstanding, (i) the agreement to hold sums in trust as provided in this Section is subject to the provisions of Section 11.04, and (ii) the Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or direct any paying agent to pay, to the Trustee all sums held in trust by the Company or such paying agent, such sums to be held by the Trustee upon the same terms and conditions as those upon which such sums were held by the Company or such paying agent; and, upon such payment by any paying agent to the Trustee, such paying agent shall be released from all further liability with respect to such money. SECTION 4.04 Appointment of Trustee. The Company, whenever necessary to avoid or fill a vacancy in the office of Trustee, will appoint, in the manner provided in Section 7.10, a Trustee, so that there shall at all times be a Trustee hereunder. SECTION 4.05 Restrictions upon Dividends, Redemptions, etc. So long as any Trust Preferred Securities remain outstanding, the Company will not declare or pay any dividend on, or redeem, purchase, acquire or make a distribution or liquidation payment with respect to, any of its common stock or preferred stock, or make any guarantee payments with respect thereto, if at such time (i) the Company shall be in default with respect to its Guarantee Payments (as defined in the Guarantee Agreement) or other payment obligations under the Guarantee Agreement, (ii) there shall have occurred any Event of Default hereunder or (iii) the Company shall have given notice of its selection of an Extension Period and such Period, or any extension thereof, is continuing. SECTION 4.06 Listing of Debentures. In connection with the distribution of the Debentures to the holders of the Trust Preferred Securities, the Company will use its best efforts to list such Debentures on the New York Stock Exchange or on such other exchange as the Trust Preferred Securities are then listed and traded. SECTION 4.07 Compliance with Declaration. The Company covenants and agrees for the benefit of the holders of the Trust Preferred Securities to comply fully with all of its obligations and agreements under the Declaration, including, without limitation, its obligations under Article IV thereof. SECTION 4.08 Transfer of Trust Common Securities. Prior to the distribution of Debentures to the holders of Trust Preferred Securities and for so long as the Trust Preferred Securities remain outstanding, the Company covenants and agrees for the benefit of the holders of the Preferred Securities (i) not to cause or permit the Trust Common Securities to be transferred except as permitted by the Declaration, (ii) to comply fully with all of its obligations 21 contained in the Declaration and (iii) not to take any action which would cause the Trust to cease to be treated as a grantor trust for United States federal income tax purposes, except in connection with a distribution of the Debentures as provided in the Declaration. ARTICLE FIVE DEBENTUREHOLDERS' LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE SECTION 5.01 List of Debentureholders. The Company will furnish or cause to be furnished to the Trustee (a) on a monthly basis on each regular record date (as defined in Section 2.03) a list, in such form as the Trustee may reasonably require, of the names and addresses of the holders of Debentures as of such regular record date, provided, that the Company shall not be obligated to furnish or cause to furnish such list at any time that the list shall not differ in any respect from the most recent list furnished to the Trustee by the Company and (b) at such other times as the Trustee may request in writing within 30 days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished; provided, however, no such list need be furnished for any series for which the Trustee shall be the Debenture Registrar. SECTION 5.02 Preservation and Disclosure of List. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, all information as to the names and addresses of the holders of Debentures contained in the most recent list furnished to it as provided in Section 5.01 and as to the names and addresses of holders of Debentures received by the Trustee in its capacity as Debenture Registrar (if acting in such capacity). (b) The Trustee may destroy any list furnished to it as provided in Section 5.01 upon receipt of a new list so furnished. (c) In case three or more holders of Debentures (hereinafter referred to as "applicants") apply in writing to the Trustee, and furnish to the Trustee reasonable proof that each such applicant has owned a Debenture for a period of at least six months preceding the date of such application, and such application states that the applicants desire to communicate with other holders of Debentures or holders of all Debentures with respect to their rights under this Indenture or under such Debentures, and is accompanied by a copy of the form of proxy or other communication which such applicants propose to transmit, then the Trustee shall within five business days after the receipt of such application, at its election, either: (1) afford to such applicants access to the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 5.02; or (2) inform such applicants as to the approximate number of holders of 22 Debentures whose names and addresses appear in the information preserved at the time by the Trustee, in accordance with the provisions of subsection (a) of this Section 5.02, and as to the approximate cost of mailing to such Debentureholders the form of proxy or other communication, if any, specified in such application. (d) If the Trustee shall elect not to afford such applicants access to such information, the Trustee shall, upon the written request of such applicants, mail to each holder of Debentures whose name and address appears in the information preserved at the time by the Trustee in accordance with the provisions of subsection (a) of this Section 5.02, a copy of the form of proxy or other communication which is specified in such request, with reasonable promptness after a tender to the Trustee of the material to be mailed and of payment, or provision for the payment, of the reasonable expenses of mailing, unless within five days after such tender, the Trustee shall mail to such applicants and file with the Securities and Exchange Commission (the "Commission"), together with a copy of the material to be mailed, a written statement to the effect that, in the opinion of the Trustee, such mailing would be contrary to the best interests of the holders of Debentures, or would be in violation of applicable law. Such written statement shall specify the basis of such opinion. If the Commission, after opportunity for a hearing upon the objections specified in the written statement so filed, shall enter an order refusing to sustain any of such objections or if, after the entry of an order sustaining one or more of such objections, the Commission shall find, after notice and opportunity for hearing, that all the objections so sustained have been met and shall enter an order so declaring, the Trustee shall mail copies of such material to all such Debentureholders with reasonable promptness after the entry of such order and the renewal of such tender; otherwise, the Trustee shall be relieved of any obligation or duty to such applicants respecting their application. (e) Each and every holder of the Debentures, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any paying agent nor any Debenture Registrar shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the holders of Debentures in accordance with the provisions of subsection (b) of this Section, regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under said subsection (b). SECTION 5.03 Documents Provided to Trustee. (a) The Company covenants and agrees to file with the Trustee, within 15 days after the Company is required to file the same with the Commission, copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may from time to time by rules and regulations prescribe) which the Company may be required to file with the Commission pursuant to Section 13 or Section 15 (d) of the Exchange Act; or, if the Company is not required to file information, documents or reports pursuant to either of such sections, then to file with the Trustee and the Commission in accordance with the rules and regulations prescribed from time to time by the Commission, such of the supplementary and periodic information, documents and reports which may be required pursuant to Section 13 of the Exchange Act, in 23 respect of a security listed and registered on a national securities exchange as may be prescribed from time to time in such rules and regulations. (b) The Company covenants and agrees to file with the Trustee and the Commission, in accordance with the rules and regulations prescribed from time to time by the Commission, such additional information, documents and reports with respect to compliance by the Company with the conditions and covenants provided for in this Indenture as may be required from time to time by such rules and regulations. (c) The Company covenants and agrees to transmit by mail, first class postage prepaid, or reputable over-night delivery service which provides for evidence of receipt, to the Debentureholders, as their names and addresses appear upon the Debenture Register, within 30 days after the filing thereof with the Trustee, such summaries of any information, documents and reports required to be filed by the Company pursuant to subsections (a) and (b) of this Section as may be required by rules and regulations prescribed from time to time by the Commission. (d) The Company covenants and agrees to furnish to the Trustee, on or before April 15 in each calendar year in which any of the Debentures are outstanding, or on or before such other day in each calendar year as the Company and the Trustee may from time to time agree upon, a Certificate as to such officer's knowledge of the Company's compliance with all conditions and covenants under this Indenture. For purposes of this subsection (d), such compliance shall be determined without regard to any period of grace or requirement of notice provided under this Indenture. SECTION 5.04 Information to Debentureholders. (a) On or before August 1 in each year in which any of the Debentures are outstanding, the Trustee shall transmit by mail, first class postage prepaid, to the Debentureholders, as their names and addresses appear upon the Debenture Register, a brief report dated as of the preceding June 1, with respect to any of the following events which may have occurred within the previous twelve months (but if no such event has occurred within such period no report need be transmitted): (1) any change to its eligibility under Section 7.09, and its qualifications under Section 7.08; (2) the creation of or any material change to a relationship specified in paragraphs (1) through (10) of subsection (c) of Section 7.08; (3) the character and amount of any advances (and if the Trustee elects so to state, the circumstances surrounding the making thereof) made by the Trustee (as such) which remain unpaid on the date of such report, and for the reimbursement of which it claims or may claim a lien or charge, prior to that of the Debentures, on any property or funds held or collected by it as Trustee if such advances so remaining unpaid aggregate more than 1/2 of 1% of the principal amount of the Debentures outstanding on the date of such report; 24 (4) any change to the amount, interest rate, and maturity date of all other indebtedness owing by the Company, or by any other obligor on the Debentures, to the Trustee in its individual capacity, on the date of such report, with a brief description of any property held as collateral security therefor, except any indebtedness based upon a creditor relationship arising in any manner described in paragraph (2), (3), (4), or (6) of subsection (b) of Section 7.13; (5) any change to the property and funds, if any, physically in the possession of the Trustee as such on the date of such report; (6) any release, or release and substitution, of property subject to the lien of this Indenture (and the consideration thereof, if any) which it has not previously reported; (7) any additional issue of Debentures which the Trustee has not previously reported; and (8) any action taken by the Trustee in the performance of its duties under this Indenture which it has not previously reported and which in its opinion materially affects the Debentures or the Debentures of any series, except any action in respect of a default, notice of which has been or is to be withheld by it in accordance with the provisions of Section 6.07. (b) The Trustee shall transmit by mail, first class postage prepaid, to the Debentureholders, as their names and addresses appear upon the Debenture Register, a brief report with respect to the character and amount of any advances (and if the Trustee elects so to state, the circumstances surrounding the making thereof) made by the Trustee as such since the date of the last report transmitted pursuant to the provisions of subsection (a) of this Section (or if no such report has yet been so transmitted, since the date of execution of this Indenture), for the reimbursement of which it claims or may claim a lien or charge prior to that of the Debentures on property or funds held or collected by it as Trustee, and which it has not previously reported pursuant to this subsection if such advances remaining unpaid at any time aggregate more than 10% of the principal amount of Debentures outstanding at such time, such report to be transmitted within 90 days after such time. (c) A copy of each such report shall, at the time of such transmission to Debentureholders, be filed by the Trustee with the Company, with each stock exchange upon which any Debentures are listed (if so listed) and also with the Commission. The Company agrees to notify the Trustee when any Debentures become listed on any stock exchange. 25 ARTICLE SIX REMEDIES OF THE TRUSTEE AND DEBENTUREHOLDERS ON EVENT OF DEFAULT SECTION 6.01 Events of Default. (a) Whenever used herein with respect to Debentures, "Event of Default" means any one or more of the following events which has occurred and is continuing: (1) default in the payment of any installment of interest upon any of the Debentures, as and when the same shall become due and payable, and continuance of such default for a period of 30 days; provided, however, that a valid extension of an interest payment period by the Company in accordance with the terms hereof, shall not constitute a default in the payment of interest for this purpose; (2) default in the payment of the principal of (or premium, if any, on) any of the Debentures as and when the same shall become due and payable whether at maturity, upon redemption, by declaration or otherwise; (3) failure on the part of the Company duly to observe or perform any other of the covenants or agreements on the part of the Company contained in such Debentures or otherwise established with respect to such Debentures or contained in this Indenture for a period of 90 days after the date on which written notice of such failure, requiring the same to be remedied and stating that such notice is a "Notice of Default" hereunder, shall have been given to the Company by the Trustee, by registered or certified mail, or to the Company and the Trustee by the holders of at least 25% in principal amount of the Debentures at the time outstanding; (4) a decree or order by a court having jurisdiction in the premises shall have been entered adjudging the Company as bankrupt or insolvent, or approving as properly filed a petition seeking liquidation or reorganization of the Company under the Federal Bankruptcy Code or any other similar applicable Federal or State law, and such decree or order shall have continued unvacated and unstayed for a period of 90 days; or an involuntary case shall be commenced under such Code in respect of the Company and shall continue undismissed for a period of 90 days or an order for relief in such case shall have been entered; or a decree or order of a court having jurisdiction in the premises shall have been entered for the appointment on the ground of insolvency or bankruptcy of a receiver or custodian or liquidator or Trustee or assignee in bankruptcy or insolvency of the Company or of its property, or for the winding up or liquidation of its affairs, and such decree or order shall have remained in force unvacated and unstayed for a period of 90 days; or (5) the Company shall institute proceedings to be adjudicated a voluntary bankrupt, or shall consent to the filing of a bankruptcy proceeding against it, or shall file a petition or answer or consent seeking liquidation or reorganization under the Federal Bankruptcy 26 Code or any other similar applicable Federal or State law, or shall consent to the filing of any such petition, or shall consent to the appointment on the ground of insolvency or bankruptcy of a receiver or custodian or liquidator or Trustee or assignee in bankruptcy or insolvency of it or of its property, or shall make an assignment for the benefit of creditors. (b) In each and every such case, unless the principal of all the Debentures of that series shall have already become due and payable, either the Trustee or the holders of not less than 25% in aggregate principal amount of the Debentures then outstanding hereunder, by notice in writing to the Company (and to the Trustee if given by such Debentureholders), may declare the principal of all the Debentures to be due and payable immediately, and upon any such declaration the same shall become and shall be immediately due and payable, anything contained in this Indenture or in the Debentures to the contrary notwithstanding. (c) Section 6.01(b), however, is subject to the condition that if, at any time after the principal of the Debentures shall have been so declared due and payable, and before any judgment or decree for the payment of the moneys due shall have been obtained or entered as hereinafter provided, the Company shall pay or shall deposit with the Trustee a sum sufficient to pay all matured installments of interest upon all the Debentures and the principal of (and premium, if any, on) any and all Debentures that shall have become due otherwise than by acceleration (with interest upon such principal and premium, if any, and, to the extent that such payment is enforceable under applicable law, upon overdue installments of interest, at the rate per annum expressed in the Debentures to the date of such payment or deposit) and the amount payable to the Trustee under Section 7.06, and any and all defaults under the Indenture, other than the nonpayment of principal on Debentures which shall not have become due by their terms, shall have been remedied or waived as provided in Section 6.06 then and in every such case the holders of a majority in aggregate principal amount of the Debentures then outstanding (subject to, in the case of Debentures held as trust assets of the Trust and with respect to which a Security Exchange has not theretofore occurred, such consent of the holders of the Preferred Securities and the Common Securities of the Trust as may be required under the Declaration), by written notice to the Company and to the Trustee, may rescind and annul such declaration and its consequences with respect to the Debentures; but no such rescission and annulment shall extend to or shall affect any subsequent default, or shall impair any right consequent thereon. (d) In case the Trustee shall have proceeded to enforce any right with respect to the Debentures and such proceedings shall have been discontinued or abandoned because of such rescission or annulment or for any other reason or shall have been determined adversely to the Trustee, then and in every such case the Company and the Trustee shall be restored respectively to their former positions and rights hereunder, and all rights, remedies and powers of the Company and the Trustee shall continue as though no such proceedings had been taken. (e) If, prior to a Security Exchange with respect to the Debentures of any series, a Default with respect to the Debentures of such series shall have occurred, the Company expressly acknowledges that under the circumstances set forth in the Declaration, any holder of Preferred 27 Securities of the Trust may enforce directly against the Company the applicable Property Trustee's rights hereunder. In furtherance of the foregoing and for the avoidance of any doubt, the Company acknowledges that, under the circumstances described in the Declaration, any such holder of Preferred Securities, in its own name, in the name of the Trust or in the name of the holders of the Preferred Securities issued by the Trust, may institute or cause to be instituted a proceeding, including, without limitation, any suit in equity, an action at law or other judicial or administrative proceeding, to enforce the applicable Property Trustee's rights hereunder directly against the Company as issuer of the applicable series of Debentures, and may prosecute such proceeding to judgment or final decree, and enforce the same against the Company. SECTION 6.02 Payment by the Company. (a) The Company covenants that (1) in case default shall be made in the payment of any installment of interest on any of the Debentures as and when the same shall have become due and payable, and such default shall have continued for a period of ten business days, or (2) in case default shall be made in the payment of the principal of (or premium, if any, on) any of the Debentures when the same shall have become due and payable, whether upon maturity of the Debentures or upon redemption or upon declaration or otherwise, then, upon demand of the Trustee, the Company will pay to the Trustee, for the benefit of the holders of the Debentures, the whole amount that then shall have become due and payable on all such Debentures for principal (and premium, if any) or interest, or both, as the case may be, with interest upon the overdue principal (and premium, if any) and (to the extent that payment of such interest is enforceable under applicable law and without duplication of any other amounts paid by the Company or the Trust in respect thereof) upon overdue installments of interest at the rate per annum expressed in the Debentures; and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, and the amount payable to the Trustee under Section 7.06. (b) In case the Company shall fail forthwith to pay such amounts upon such demand, the Trustee, in its own name and as Trustee of an express trust, shall be entitled and empowered to institute any action or proceedings at law or in equity for the collection of the sums so due and unpaid, and may prosecute any such action or proceeding to judgment or final decree, and may enforce any such judgment or final decree against the Company or other obligor upon the Debentures and collect in the manner provided by law out of the property of the Company or other obligor upon the Debentures wherever situated the moneys adjudged or decreed to be payable. (c) In case of any receivership, insolvency, liquidation, bankruptcy, reorganization, readjustment, arrangement, composition or other judicial proceedings affecting the Company, any other obligor on such Debentures, or the creditors or property of either, the Trustee shall have the power to intervene in such proceedings and take any action therein that may be permitted by the court and shall (except as may be otherwise provided by law) be entitled to file such proofs of claim and other papers and documents as may be necessary or advisable in order to have the claims of the Trustee and of the holders of Debentures allowed for the entire amount due and payable by the Company or such other obligor under the Indenture at the date of 28 institution of such proceedings and for any additional amount which may become due and payable by the Company or such other obligor after such date, and to collect and receive any moneys or other property payable or deliverable on any such claim, and to distribute the same after the deduction of the amount payable to the Trustee under Section 7.06; and any receiver, assignee or Trustee in bankruptcy or reorganization is hereby authorized by each of the holders of Debentures to make such payments to the Trustee, and, in the event that the Trustee shall consent to the making of such payments directly to such Debentureholders, to pay to the Trustee any amount due it under Section 7.06. (d) All rights of action and of asserting claims under this Indenture, or under any of the terms established with respect to Debentures, may be enforced by the Trustee without the possession of any of such Debentures, or the production thereof at any trial or other proceeding relative thereto, and any such suit or proceeding instituted by the Trustee shall be brought in its own name as Trustee of an express trust, and any recovery of judgment shall, after provision for payment to the Trustee of any amounts due under Section 7.06, be for the ratable benefit of the holders of the Debentures. In case of an Event of Default hereunder, the Trustee may in its discretion proceed to protect and enforce the rights vested in it by this Indenture by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any of such rights, either at law or in equity or in bankruptcy or otherwise, whether for the specific enforcement of any covenant or agreement contained in the Indenture or in aid of the exercise of any power granted in this Indenture, or to enforce any other legal or equitable right vested in the Trustee by this Indenture or by law. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Debentureholder any plan of reorganization, arrangement, adjustment or composition affecting the Debentures or the rights of any holder thereof or to authorize the Trustee to vote in respect of the claim of any Debentureholder in any such proceeding. SECTION 6.03 Application of Payments. Any moneys collected by the Trustee pursuant to Section 6.02 shall be applied in the order following, at the date or dates fixed by the Trustee and, in case of the distribution of such moneys on account of principal (or premium, if any) or interest, upon presentation of the several Debentures of that series, and stamping thereon the payment, if only partially paid, and upon surrender thereof if fully paid: FIRST: To the payment of costs and expenses of collection and of all amounts payable to the Trustee under Section 7.06; SECOND: To the payment of the amounts then due and unpaid upon Debentures for principal (and premium, if any) and interest, in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the 29 amounts due and payable on such Debentures for principal (and premium, if any) and interest, respectively; and THIRD: To the Company. SECTION 6.04 Limitation on Suits. No holder of any Debenture shall have any right by virtue or by availing of any provision of this Indenture to institute any suit, action or proceeding in equity or at law upon or under or with respect to this Indenture or for the appointment of a receiver or Trustee, or for any other remedy hereunder, unless such holder previously shall have given to the Trustee written notice of an Event of Default and of the continuance thereof with respect to Debentures specifying such Event of Default, as hereinbefore provided, and unless also the holders of not less than 25% in aggregate principal amount of the Debentures then outstanding shall have made written request upon the Trustee to institute such action, suit or proceeding in its own name as Trustee hereunder and shall have offered to the Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be incurred therein or thereby, and the Trustee for 60 days after its receipt of such notice, request and offer of indemnity, shall have failed to institute any such action, suit or proceeding; it being understood and intended, and being expressly covenanted by the taker and holder of every Debenture with every other such taker and holder and Trustee, that no one or more holders of Debentures shall have any right in any manner whatsoever by virtue or by availing of any provision of this Indenture to affect, disturb or prejudice the rights of the holders of any other of such Debentures, or to obtain or seek to obtain priority over or preference to any other such holder, or to enforce any right under this Indenture, except in the manner herein provided and for the equal, ratable and common benefit of all holders of Debentures. For the protection and enforcement of the provisions of this Section, each and every Debentureholder and the Trustee shall be entitled to such relief as can be given either at law or in equity. Notwithstanding any other provisions of this Indenture, however, the right of any holder of any Debenture to receive payment of the principal of (and premium, if any) and interest on such Debenture, as therein provided, on or after the respective due dates expressed in such Debenture (or in the case of redemption, on the redemption date), or to institute suit for the enforcement of any such payment on or after such respective dates or redemption date, shall not be impaired or affected without the consent of such holder. SECTION 6.05 Remedies Cumulative; Waivers. (a) All powers and remedies given by this Article to the Trustee or to the Debentureholders shall, to the extent permitted by law, be deemed cumulative and not exclusive of any others thereof or of any other powers and remedies available to the Trustee or the holders of the debentures, by judicial proceedings or otherwise, to enforce performance or observance of the covenants and agreements contained in this Indenture or otherwise established with respect to such Debentures. (b) No delay or omission of the Trustee or of any holder of any of the Debentures to exercise any right or power accruing upon any Event of Default occurring and 30 continuing as aforesaid shall impair any such right or power, or shall be construed to be a waiver of any such default or an acquiescence therein; and, subject to the provisions of Section 6.04, every power and remedy given by this Article or by law to the Trustee or to the Debentureholders may be exercised from time to time, and as often as shall be deemed expedient, by the Trustee or by the Debentureholders. SECTION 6.06 Direction by Debentureholders. The holders of a majority in aggregate principal amount of the Debentures at the time outstanding, determined in accordance with Section 8.04 (with, in the case of any series of Debentures held as trust assets of the Trust and with respect to which a Security Exchange has not theretofore occurred, such consent of holders of the Trust Preferred Securities and the Trust Common Securities of the Trust as may be required under the Declaration), shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee with respect to such series; provided, however, that such direction shall not be in conflict with any rule of law or with this Indenture or unduly prejudicial to the rights of holders of Debentures at the time outstanding determined in accordance with Section 8.04 not parties thereto. Subject to the provisions of Section 7.01, the Trustee shall have the right to decline to follow any such direction if the Trustee in good faith shall, by a Responsible Officer or Officers of the Trustee, determine that the proceeding so directed would involve the Trustee in personal liability. The holders of a majority in aggregate principal amount of the Debentures at the time outstanding affected thereby, determined in accordance with section 8.04 (with, in the case of any series of Debentures held as trust assets of the Trust and with respect to which a Security Exchange has not theretofore occurred, such consent of holders of the Trust Preferred Securities and the Trust Common Securities of the Trust as may be required under the Declaration), may on behalf of the holders of all of the Debentures waive any past default in the performance of any of the covenants contained herein or established pursuant to section 2.01 and its consequences, except a default in the payment of the principal of, or premium, if any, or interest on, any of the Debentures as and when the same shall become due by the terms of such Debentures otherwise than by acceleration (unless such default has been cured and a sum sufficient to pay all matured installments of interest and principal and any premium has been deposited with the Trustee (in accordance with Section 6.01(c)) or a call for redemption of Debentures or a default in respect of a covenant or provision hereof which under Article 9 cannot be modified or amended without the consent of the Debentureholder of each outstanding security affected thereby. Upon any such waiver, the default covered thereby shall be deemed to be cured for all purposes of this Indenture and the Company, the Trustee and the holders of the Debentures shall be restored to their former positions and rights hereunder, respectively; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon. SECTION 6.07 Notice of Defaults. The Trustee shall, within 90 days after the occurrence of a default, transmit by mail, first class postage prepaid, to the holders of Debentures, as their names and addresses appear upon the Debenture Register, notice of all defaults known to the Trustee, unless such defaults shall have been cured before the giving of 31 such notice (the term "defaults" for the purposes of this Section being hereby defined to be the events specified in subsections (1), (2), (3), (4) and (5) of Section 6.01(a), not including any periods of grace provided for therein and irrespective of the giving of notice provided for by subsection (3) of Section 6.01(a)); provided, that, except in the case of default in the payment of the principal of (or premium, if any) or interest on any of the Debentures, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee, or a trust committee of directors and/or Responsible Officers, of the Trustee in good faith determine that the withholding of such notice is in the interests of the holders of Debentures; provided further, that in the case of any default of the character specified in Section 6.01(a)(3) with respect to Debentures no such notice to the holders of the Debentures shall be given until at least 30 days after the occurrence thereof. The Trustee shall not be deemed to have knowledge of any default, except (i) a default under subsection (a)(1) or (a)(2) of Section 6.01 as long as the Trustee is acting as paying agent or (ii) any default as to which the Trustee shall have received written notice or a Responsible Officer charged with the administration of this Indenture shall have obtained written notice. SECTION 6.08 Undertaking to Pay Costs. All parties to this Indenture agree, and each holder of any Debentures by his or her acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section shall not apply to any suit instituted by the Trustee, to any suit instituted by any Debentureholder, or group of Debentureholders, holding more than 10% in aggregate principal amount of the outstanding Debentures, or to any suit instituted by any Debentureholder for the enforcement of the payment of the principal of (or premium, if any) or interest on any Debenture of such series, on or after the respective due dates expressed in such Debenture or established pursuant to this Indenture. SECTION 6.09 Waiver of Usury, Stay or Extension Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any usury, stay or extension law wherever enacted, now or at any time hereafter in force which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law has been enacted. 32 ARTICLE SEVEN CONCERNING THE TRUSTEE SECTION 7.01 Duties of Trustee. (a) The Trustee, prior to the occurrence of an Event of Default with respect to Debentures and after the curing of all Events of Default with respect to Debentures which may have occurred, shall undertake to perform with respect to the Debentures such duties and only such duties as are specifically set forth in this Indenture, and no implied covenants shall be read into this Indenture against the Trustee. In case an Event of Default with respect to the Debentures has occurred (which has not been cured or waived), the Trustee shall exercise with respect to the Debentures such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. (b) No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (1) prior to the occurrence of an Event of Default with respect to the Debentures and after the curing or waiving of all such Events of Default with respect to which may have occurred: (i) the duties and obligations of the Trustee shall with respect to the Debentures be determined solely by the express provisions of this Indenture, and the Trustee shall not be liable with respect to the Debentures except for the performance of such duties and obligations as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (ii) in the absence of bad faith on the part of the Trustee, the Trustee may with respect to Debentures conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture; (2) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer or Responsible Officers of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; (3) the Trustee shall not be liable with respect to any action taken or omitted to 33 be taken by it in good faith in accordance with the direction of the holders of not less than a majority in principal amount of the Debentures at the time outstanding relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee under this Indenture with respect to the Debentures; and (4) none of the provisions contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if there is reasonable ground for believing that the repayment of such funds or liability is not reasonably assured to it under the terms of this Indenture or adequate indemnity against such risk is not reasonably assured to it. (c) Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section. SECTION 7.02 Reliance; Consultation with Counsel. Except as otherwise provided in Section 7.01: (a) The Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond, security or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) Any request, direction, order or demand of the Company mentioned herein shall be sufficiently evidenced by a Board Resolution or an instrument signed in the name of the Company by the Chairman, President or any Vice President and by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer (unless other evidence in respect thereof is specifically prescribed herein); (c) The Trustee may consult with counsel of its selection and the advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken or suffered or omitted hereunder in good faith and in reliance thereon; (d) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request, order or direction of any of the Debentureholders, pursuant to the provisions of this Indenture, unless such Debentureholders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby; nothing herein contained shall, however, relieve the Trustee of the obligation, upon the occurrence of an Event of Default with respect to a series of the Debentures (which has not been cured or waived) to exercise with respect to the Debentures such of the rights and powers vested in it by this Indenture, and to use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the 34 circumstances in the conduct of his or her own affairs; (e) The Trustee shall not be liable for any action taken or omitted to be taken by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture; (f) The Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond, security, or other papers or documents, unless requested in writing so to do by the holders of not less than a majority in principal amount of the outstanding Debentures (determined as provided in Section 8.04); provided, however, that if the payment within a reasonable time to the Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Indenture, the Trustee may require reasonable indemnity against such costs, expenses or liabilities as a condition to so proceeding. The reasonable expense of every such examination shall be paid by the Company or, if paid by the Trustee, shall be repaid by the Company upon demand; and (g) The Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder. SECTION 7.03 Absence of Reliance upon Trustee. (a) The recitals contained herein and in the Debentures (other than the Certificate of Authentication on the Debentures) shall be taken as the statements of the Company, and the Trustee assumes no responsibility for the correctness of the same. (b) The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Debentures. (c) The Trustee shall not be accountable for the use or application by the Company of any of the Debentures or of the proceeds of such Debentures, or for the use or application of any moneys paid over by the Trustee in accordance with any provision of this Indenture or established pursuant to Section 2.01, or for the use or application of any moneys received by any paying agent other than the Trustee. SECTION 7.04 Ownership of Debentures. The Trustee or any paying agent or Debenture Registrar, in its individual or any other capacity, may become the owner or pledgee of Debentures with the same rights it would have if it were not Trustee, paying agent or Debenture Registrar. 35 SECTION 7.05 Moneys Held in Trust. Subject to the provisions of Section 11.04, all moneys received by the Trustee shall, until used or applied as herein provided, be held in trust for the purposes for which they were received, but need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any moneys received by it hereunder except such as it may agree with the Company to pay thereon. SECTION 7.06 Compensation. (a) The Company covenants and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to, such compensation as the parties shall agree to in writing from time to time (which shall not be limited by any provision of law in regard to the compensation of a Trustee of an express trust) for all services rendered by it in the execution of the trusts hereby created and in the exercise and performance of any of the powers and duties hereunder of the Trustee, and the Company will pay or reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any of the provisions of this Indenture (including the reasonable compensation and the expenses and disbursements of its counsel and of all persons not regularly in its employ) except any such expense, disbursement or advance as may arise from its negligence or bad faith or wilful misconduct. The Company also covenants to indemnify the Trustee (and its officers, agents, directors and employees) for, and to hold it harmless against, any loss, liability or expense incurred without negligence or bad faith on the part of the Trustee and arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending itself against any claim of liability in the premises. (b) The obligations of the Company under this Section to compensate and indemnify the Trustee and to pay or reimburse the Trustee for expenses, disbursements and advances shall constitute additional indebtedness hereunder. Such additional indebtedness shall be secured by a lien prior to that of the Debentures upon all property and funds held or collected by the Trustee as such, except funds held in trust for the benefit of the holders of particular Debentures. SECTION 7.07 Officers' Certificates. Except as otherwise provided in Section 7.01, whenever in the administration of the provisions of this Indenture the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or suffering or omitting to take any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may, in the absence of negligence or bad faith or willful misconduct on the part of the Trustee, be deemed to be conclusively proved and established by an Officers' Certificate delivered to the Trustee and such certificate, in the absence of negligence or bad faith on the part of the Trustee, shall be full warrant to the Trustee for any action taken, suffered or omitted to be taken by it under the provisions of this Indenture upon the faith thereof. SECTION 7.08 Conflicting Interests. (a) If the Trustee has or shall acquire any conflicting interest, as defined in this Section, with respect to the Debentures and if the Default to which such conflicting interest relates has not been cured, duly waived or otherwise eliminated, within 90 days after ascertaining that it has such conflicting interest, it shall either eliminate such 36 conflicting interest, except as otherwise provided herein, or resign in the manner and with the effect specified in Section 7.10 and the Company shall promptly appoint a successor trustee in the manner provided herein. (b) In the event that the Trustee shall fail to comply with the provisions of subsection (a) of this Section, the Trustee shall, within ten days after the expiration of such 90-day period, transmit notice of such failure by mail, first class postage prepaid, to the Debentureholders as their names and addresses appear upon the registration books. (c) For the purposes of this Section the Trustee shall be deemed to have a conflicting interest with respect to the Debentures if a Default has occurred and is continuing and: (1) the Trustee is Trustee under another indenture under which any other securities, or certificates of interest or participation in any other securities, of the Company are outstanding, unless such other indenture is a collateral trust indenture under which the only collateral consists of Debentures issued under this Indenture; provided that there shall be excluded from the operation of this paragraph any other indenture or indentures under which other securities, or certificates of interest or participation in other securities, of the Company are outstanding if (i) this Indenture and such other indenture or indentures and all series of securities issuable thereunder are wholly unsecured and rank equally and such other indenture or indentures (and such series) are hereafter qualified under the Trust Indenture Act, unless the Commission shall have found and declared by order pursuant to subsection (b) of Section 305 or subsection (c) of Section 307 of the Trust Indenture Act, that differences exist between the provisions of this Indenture and the provisions of such other indenture or indentures (or such series), which are so likely to involve a material conflict of interest as to make it necessary in the public interest or for the protection of investors to disqualify the Trustee from acting as such under this Indenture with respect to the Debentures and such other series or such other indenture or indentures, or (ii) the Company shall have sustained the burden of proving, on application to the Commission and after opportunity for hearing thereon, that the Trusteeship under this Indenture with respect to the Debentures and such other indenture or indentures is not so likely to involve a material conflict of interest as to make it necessary in the public interest or for the protection of investors to disqualify the Trustee from acting as such under this Indenture with respect to the Debentures and under such other indentures; (2) the Trustee or any of its directors or executive officers is an underwriter for the Company; (3) the Trustee directly or indirectly controls or is directly or indirectly controlled by or is under direct or indirect common control with an underwriter for the Company; (4) the Trustee or any of its directors or executive officers is a director, officer, partner, employee, appointee or representative of the Company, or of an underwriter (other than 37 the Trustee itself) for the Company who is currently engaged in the business of underwriting, except that (A) one individual may be a director and/or an executive officer of the Trustee and a director and/or an executive officer of the Company, but may not be at the same time an executive officer of both the Trustee and the Company; (B) if and so long as the number of directors of the Trustee in office is more than nine, one additional individual may be a director and/or an executive officer of the Trustee and a director of the Company; and (C) the Trustee may be designated by the Company or by an underwriter for the Company to act in the capacity of transfer agent, registrar, custodian, paying agent, fiscal agent, escrow agent, or depository, or in any other similar capacity, or, subject to the provisions of paragraph (1) of this subsection (c), to act as Trustee whether under an indenture or otherwise; (5) 10% or more of the voting securities of the Trustee is beneficially owned either by the Company or by any director, partner, or executive officer thereof, or 20% or more of such voting securities is beneficially owned, collectively, by any two or more of such persons; or 10% or more of the voting securities of the Trustee is beneficially owned either by an underwriter for the Company or by any director, partner, or executive officer thereof, or is beneficially owned, collectively by any two or more such persons; (6) the Trustee is the beneficial owner of, or holds as collateral security for an obligation which is in default (as hereinafter in this subsection (c) defined), (A) 5% or more of the voting securities, or 10% or more of any other class of security, of the Company, not including the Debentures issued under this Indenture and securities issued under any other indenture under which the Trustee is also Trustee, or (B) 10% or more of any class of security of an underwriter for the Company; (7) the Trustee is the beneficial owner of, or holds as collateral security for an obligation which is in default (as hereinafter in this subsection (c) defined), 5% or more of the voting securities of any person who, to the knowledge of the Trustee, owns 10% or more of the voting securities of, or controls directly or indirectly or is under direct or indirect common control with, the Company; (8) the Trustee is the beneficial owner of, or holds as collateral security for an obligation which is in default (as hereinafter in this subsection (c) defined), 10% or more of any class of security of any person who, to the knowledge of the Trustee, owns 50% or more of the voting securities of the Company; (9) the Trustee owns, on the date of Default upon the Debentures or any anniversary of such Default while such Default upon the Debentures issued under this Indenture remains outstanding, in the capacity of executor, administrator, testamentary or inter vivos Trustee, guardian, committee or conservator, or in any other similar capacity, an aggregate of 25% or more of the voting securities, or of any class of security, of any person, the beneficial ownership of a specified percentage of which would have constituted a conflict interest under paragraph (6), (7), or (8) of this subsection (c). As to any such securities of which the Trustee 38 acquired ownership through becoming executor, administrator or testamentary Trustee of an estate which includes them, the provisions of the preceding sentence shall not apply, for a period of two years from the date of such acquisition, to the extent that such securities in such estate do not exceed 25% of such voting securities or 25% of any such class of security. Promptly after the dates of any such Default upon the Debentures issued under this Indenture and annually in each succeeding year that the Debentures issued under this Indenture remain in Default, the Trustee shall make a check of its holding of such securities in any of the above-mentioned capacities as of such dates. If the Company fails to make payment in full of principal of or interest on any of the Debentures when and as the same becomes due and payable, and such failure continues for 30 days thereafter, the Trustee shall make a prompt check of its holding of such securities in any of the above-mentioned capacities as of the date of the expiration of such 30-day period, and after such date, notwithstanding the foregoing provisions of this paragraph (9), all such securities so held by the Trustee, with sole or joint control over such securities vested in it, shall, but only so long as such failure shall continue, be considered as though beneficially owned by the Trustee for the purposes of paragraphs (6), (7) and (8) of this subsection (c); or (10) except under the circumstances described in paragraph (1), (3), (4), (5) or (6) of subsection (b) of Section 7.13 the Trustee shall be or shall become a creditor of the Company. For purposes of paragraph (1) of this subsection (c), and of Section 6.06, the term "series of securities" or "securities" means a series, class or group of securities issuable under an indenture pursuant to whose terms holders of one such series may vote to direct the indenture Trustee, or otherwise take action pursuant to a vote of such holders, separately from holders of another such series; provided, that, "series of securities" or "series" shall not include any series of securities issuable under an indenture if all such series rank equally and are wholly secured. The specification of percentages in paragraphs (5) to (9), inclusive, of this subsection (c) shall not be construed as indicating that the ownership of such percentages of securities of a person is or is not necessary or sufficient to constitute direct or indirect control for the purposes of paragraph (3) or (7) of this subsection (c). For the purposes of paragraphs (6), (7), (8) and (9) of this subsection (c) only, (A) the terms "security" and "securities" shall include only such securities as are generally known as corporate securities, but shall not include any note or other evidence of indebtedness issued to evidence an obligation to repay moneys lent to a person by one or more banks, trust companies or banking firms, or any certificate of interest or participation in any such note or evidence of indebtedness; (B) an obligation shall be deemed to be in "default", when a default in payment of principal shall have continued for 30 days or more and shall not have been cured; and (C) the Trustee shall not be deemed to be the owner or holder of (i) any security which it holds as collateral security (as Trustee or otherwise) for any obligation which is not in default as defined in clause (B) above, or (ii) any security which it holds as collateral security under this Indenture, irrespective of any Default hereunder, or (iii) any security which it holds as agent for collection, 39 or as custodian, escrow agent or depositary, or in any similar representative capacity. Except as above provided, the word "security" or securities" as used in this Indenture shall mean any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral trust certificate, pre-organization certificate or subscription, transferable share, investment contract, voting trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, or, in general, any interest or instrument commonly known as a "security", or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. (d) For the purposes of this Section: (1) The term "underwriter" when used with reference to the Company shall mean every person, who, within one year prior to the time as of which the determination is made, has purchased from the Company with a view to, or has offered or sold for the Company in connection with, the distribution of any security of the Company, or has participated or has had a direct or indirect participation in any such undertaking, or has participated or has had a participation in the direct or indirect underwriting of any such undertaking, but such term shall not include a person whose interest was limited to a commission from an underwriter or dealer not in excess of the usual and customary distributors' or sellers' commission. (2) The term "director" shall mean any member of the board of directors of a corporation or any individual performing similar functions with respect to any organization whether incorporated or unincorporated. (3) The term "person" shall mean an individual, a corporation, a partnership, an association, a joint-stock company, a trust, an unincorporated organization or a government or political subdivision thereof. As used in this paragraph, the term "trust" shall include only a trust where the interest or interests of the beneficiary or beneficiaries are evidenced by a security. (4) The term "voting security" shall mean any security presently entitling the owner or holder thereof to vote in the direction or management of the affairs of a person, or any security issued under or pursuant to any trust, agreement or arrangement whereby a Trustee or Trustees or agent or agents for the owner or holder of such security are presently entitled to vote in the direction or management of the affairs of a person. (5) The term "Company" shall mean any obligor upon the Debentures. (6) The term "executive officer" shall mean the chairman of the board of directors, president, every vice president, every assistant vice president, every trust officer, the cashier, the secretary, and the treasurer of a corporation, and any individual customarily performing similar functions with respect to any organization whether incorporated or 40 unincorporated. (e) The percentages of voting securities and other securities specified in this Section shall be calculated in accordance with the following provisions: (1) A specified percentage of the voting securities of the Trustee, the Company or any other person referred to in this Section (each of whom is referred to as a "person" in this paragraph) means such amount of the outstanding voting securities of such person as entitles the holder or holders thereof to cast such specified percentage of the aggregate votes which the holders of all the outstanding voting securities of such person are entitled to cast in the direction or management of the affairs of such person. (2) A specified percentage of a class of securities of a person means such percentage of the aggregate amount of securities of the class outstanding. (3) The term "amount", when used in regard to securities, means the principal amount if relating to evidences of indebtedness, the number of shares if relating to capital shares and the number of units if relating to any other kind of security. (4) The term "outstanding" means issued and not held by or for the account of the issuer. The following securities shall not be deemed outstanding within the meaning of this definition: (i) securities of an issuer held in a sinking fund relating to securities of the issuer of the same class; (ii) securities of an issuer held in a sinking fund relating to another class of securities of the issuer, if the obligation evidenced by such other class of securities is not in default as to principal or interest or otherwise; (iii) securities pledged by the issuer thereof as security for an obligation of the issuer not in default as to principal or interest or otherwise; and (iv) securities held in escrow if placed in escrow by the issuer thereof, provided, however, that any voting securities of an issuer shall be deemed outstanding if any person other than the issuer is entitled to exercise the voting rights thereof. (5) A security shall be deemed to be of the same class as another security if both securities confer upon the holder or holders thereof substantially the same rights and privileges; provided, however, that, in the case of secured evidences of indebtedness, all of which are issued under a single indenture, differences in the interest rates or maturity dates of various series thereof shall not be deemed sufficient to constitute such series different classes; and provided, further, that, in the case of unsecured evidences of indebtedness, differences in the interest rates 41 or maturity dates thereof shall not be deemed sufficient to constitute them securities of different classes, whether or not they are issued under a single indenture. (f) Except in the case of a default in the payment of the principal of (or premium, if any) or interest on any Debentures issued under this Indenture, or in the payment of any sinking or analogous fund installment, the Trustee shall not be required to resign as provided by this Section 7.08 if such Trustee shall have sustained the burden of proving, on application to the Commission and after opportunity for hearing thereon, that (i) the default under the Indenture may be cured or waived during a reasonable period and under the procedures described in such application and (ii) a stay of the Trustee's duty to resign will not be inconsistent with the interests of Debentureholders. The filing of such an application shall automatically stay the performance of the duty to resign until the Commission orders otherwise. Any resignation of the Trustee shall become effective only upon the appointment of a successor trustee and such successor's acceptance of such an appointment. SECTION 7.09 Trustee. There shall at all times be a Trustee with respect to the Debentures issued hereunder which shall at all times be a corporation organized and doing business under the laws of the United States of America or any State or Territory thereof or of the District of Columbia, or a corporation or other person permitted to act as Trustee by the Commission, authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least 50 million dollars, and subject to supervision or examination by Federal, State, Territorial, or District of Columbia authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. The Company may not, nor may any person directly or indirectly controlling, controlled by, or under common control with the Company, serve as Trustee. In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, the Trustee shall resign immediately in the manner and with the effect specified in Section 7.10. SECTION 7.10 Resignation and Removal of Trustee. (a) The Trustee or any successor hereafter appointed, may at any time resign with respect to the Debentures by giving written notice thereof to the Company and by transmitting notice of resignation by mail, first class postage prepaid, to the Debentureholders, as their names and addresses appear upon the Debenture Register. Upon receiving such notice of resignation, the Company shall promptly appoint a successor trustee with respect to Debentures by written instrument, in duplicate, executed by order of the Board of Directors, one copy of which instrument shall be delivered to the resigning Trustee and one copy to the successor trustee. If no successor trustee shall have been so appointed and have accepted appointment within 30 days after the mailing of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor trustee with respect to Debentures, or any Debentureholder who has 42 been a bona fide holder of a Debenture or Debentures for at least six months may, subject to the provisions of Section 6.08, on behalf of himself and all others similarly situated, petition any such court for the appointment of a successor trustee. Such court may thereupon after such notice, if any, as it may deem proper and prescribe, appointment a successor trustee. (b) In case at any time any of the following shall occur: (1) the Trustee shall fail to comply with the provisions of subsection (a) of Section 7.08 after written request therefor by the Company or by any Debentureholder who has been a bona fide holder of a Debenture or Debentures for at least six months; or (2) the Trustee shall cease to be eligible in accordance with the provisions of Section 7.09 and shall fail to resign after written request therefor by the Company or by any such Debentureholder; or (3) the Trustee shall become incapable of acting, or shall be adjudged a bankrupt or insolvent, or a receiver of the Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, the Company may remove the Trustee with respect to all Debentures and appoint a successor trustee by written instrument, in duplicate, executed by order of the Board of Directors, one copy of which instrument shall be delivered to the Trustee so removed and one copy to the successor trustee. If no successor trustee shall have been so appointed and have accepted appointment within 30 days after the mailing of such notice of removal, the removed Trustee may petition any court of competent jurisdiction for the appointment of a successor trustee with respect to Debentures, , or, subject to the provisions of Section 6.08, unless the Trustee's duty to resign is stated as provided herein, any Debentureholder who has been a bona fide holder of a Debenture or Debentures for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor trustee. Such court may thereupon after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint a successor trustee. (c) The holders of a majority in aggregate principal amount of the Debentures at the time outstanding may at any time remove the Trustee and appoint a successor trustee. (d) Any resignation or removal of the Trustee and appointment of a successor trustee with respect to the Debentures pursuant to any of the provisions of this Section shall become effective upon acceptance of appointment by the successor trustee as provided in Section 7.11. SECTION 7.11 Successor Trustee. (a) Every successor trustee so appointed shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee 43 shall become effective and such successor trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on the request of the Company or the successor trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor trustee all the rights, powers, and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor trustee all property and money held by such retiring Trustee hereunder. (b) Upon request of any such successor trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor trustee all such rights, power and trusts referred to in paragraph (a) of this Section, as the case may be. (c) No successor trustee shall accept its appointment unless at the time of such acceptance such successor trustee shall be qualified and eligible under this Article. (d) Upon acceptance of appointment by a successor trustee as provided in this Section, the Company shall transmit notice of the succession of such Trustee hereunder by mail, first class postage prepaid, to the Debentureholders, as their names and addresses appear upon the Debenture Register. If the Company fails to transmit such notice within ten days after acceptance of appointment by the successor trustee, the successor trustee shall cause such notice to be transmitted at the expense of the Company. SECTION 7.12 Merger, Consolidation of Trustee. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided such corporation shall be qualified under the provisions of Section 7.08 and eligible under the provisions of Section 7.09, without the execution or filing of any paper or any further act on the part of any of the parties hereto, anything herein to the contrary notwithstanding. In case any Debentures shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Debentures so authenticated with the same effect as if such successor trustee had itself authenticated such Debentures. SECTION 7.13 Trustee's Application for Instructions from the Company. Any application by the Trustee for written instructions from the Company may, at the option of the Trustee, set forth in writing any action proposed to be taken or omitted by the Trustee under this Indenture and the date on and/or after which such action shall be taken or such omission shall be effective. The Trustee shall not be liable for any action taken by, or omission of, the Trustee in accordance with a proposal included in such application (which date shall not be less than three Business Days after the date any officer of the Company actually receives such application, unless any such officer shall have consented in writing to any earlier date) unless prior to taking 44 any such action (or the effective date in the case of an omission), the Trustee shall have received written instructions in response to such application specifying the action to be taken or omitted. SECTION 7.14 Trustee as Creditor. (a) Subject to the provisions of subsection (b) of this Section, if the Trustee shall be or shall become a creditor, directly or indirectly, secured or unsecured, of the Company within three months prior to a default, as defined in subsection (b) of this Section, or subsequent to such a default, then, unless and until such default shall be cured, the Trustee shall set apart and hold in a special account for the benefit of the Trustee individually, the holders of the Debentures and the holders of other indenture securities (as defined in subsection (c) of this Section): (1) an amount equal to any and all reductions in the amount due and owing upon any claim as such creditor in respect of principal or interest, effected after the beginning of such three month period and valid as against the Company and its other creditors, except any such reduction resulting from the receipt or disposition of any property described in paragraph (2) of this subsection, or from the exercise of any right of set-off which the Trustee could have exercised if a petition in bankruptcy had been filed by or against the Company upon the date of such default; and (2) all property received by the Trustee in respect of any claim as such creditor, either as security therefor, or in satisfaction or composition thereof, or otherwise, after the beginning of such three month period, or an amount equal to the proceeds of any such property, if disposed of, subject, however, to the rights, if any, of the Company and its other creditors in such property or such proceeds. Nothing herein contained, however, shall affect the right of the Trustee: (A) to retain for its own account (i) payments made on account of any such claim by any person (other than the Company) who is liable thereon, and (ii) the proceeds of the bona fide sale of any such claim by the Trustee to a third person, and (iii) distributions made in cash, securities, or other property in respect of claims filed against the Company in bankruptcy or receivership or in a case for reorganization pursuant to the Federal Bankruptcy Code or applicable State law; (B) to realize, for its own account, upon any property held by it as security for any such claim, if such property was so held prior to the beginning of such three months' period; (C) to realize, for its own account, but only to the extent of the claim hereinafter mentioned, upon any property held by it as security for any such claim, if such claim was created after the beginning of such three month period and such property was received as security therefor simultaneously with the creation thereof, and if the Trustee shall sustain the burden of proving that at the time such property was so received the Trustee had no reasonable cause to believe that a default, as defined in subsection (c) of this Section, would occur within three 45 months; or (D) to receive payment on any claim referred to in paragraph (B) or (C), against the release of any property held as security for such claim as provided in such paragraph (B) or (C), as the case may be, to the extent of the fair value of such property. For the purposes of paragraphs (B), (C) and (D), property substituted after the beginning of such three month period for property held as security at the time of such substitution shall, to the extent of the fair value of the property released, have the same status as the property released, and, to the extent that any claim referred to in any of such paragraphs is created in renewal of or in substitution for or for the purpose of repaying or refunding any pre-existing claim of the Trustee as such creditor, such claim shall have the same status as such pre-existing claim. If the Trustee shall be required to account, the funds and property held in such special account and the proceeds thereof shall be apportioned among the Trustee, the Debentureholders and the holders of other indenture securities in such manner that the Trustee, the Debentureholders and the holders of other indenture securities realize, as a result of payments from such special account and payments of dividends on claims filed against the Company in bankruptcy or receivership or in a case for reorganization pursuant to the Federal Bankruptcy Code or applicable State law, the same percentage of their respective claims, figured before crediting to the claim of the Trustee anything on account of the receipt by it from the Company of the funds and property in such special account and before crediting to the respective claims of the Trustee, the Debentureholders and the holders of other indenture securities dividends on claims filed against the Company in bankruptcy or receivership or in a case for reorganization pursuant to the Federal Bankruptcy Code or applicable State law, but after crediting thereon receipts on account of the indebtedness represented by their respective claims from all sources other than from such dividends and from the funds and property so held in such special account. As used in this paragraph, with respect to any claim, the term "dividends" shall include any distribution with respect to such claim, in bankruptcy or receivership or in a case for reorganization pursuant to the Federal Bankruptcy Code or applicable State law, whether such distribution is made in cash, securities, or other property, but shall not include any such distribution with respect to the secured portion, if any, of such claim. The court in which such bankruptcy, receivership or a case for reorganization is pending shall have jurisdiction (i) to apportion between the Trustee, the Debentureholders and the holders of other indenture securities, in accordance with the provisions of this paragraph, the funds and property held in such special account and the proceeds thereof, or (ii) in lieu of such apportionment, in whole or in part, to give to the provisions of this paragraph due consideration in determining the fairness of the distributions to be made to the Trustee, the Debentureholders and the holders of other indenture securities with respect to their respective claims, in which event it shall not be necessary to liquidate or to appraise the value of any securities or other property held in such special account or as security for any such claim, or to make a specific allocation of such distributions as between the secured and unsecured portions of such claims, or otherwise to apply the provisions of this paragraph as a mathematical formula. 46 Any Trustee who has resigned or been removed after the beginning of such three months' period shall be subject to the provisions of this subsection (a) as though such resignation or removal had not occurred. If any Trustee has resigned or been removed prior to the beginning of such three month period, it shall be subject to the provisions of this subsection (a) if and only if the following conditions exist: (i) the receipt of property or reduction of claim which would have given rise to the obligation to account, if such Trustee had continued as Trustee, occurred after the beginning of such three month period; and (ii) such receipt of property or reduction of claim occurred within three months after such resignation or removal. (b) There shall be excluded from the operation of subsection (a) of this Section a creditor relationship arising from: (1) the ownership or acquisition of securities issued under any indenture, or any security or securities having a maturity of one year or more at the time of acquisition by the Trustee; (2) advances authorized by a receivership or bankruptcy court of competent jurisdiction, or by this Indenture, for the purpose of preserving any property other than cash which shall at any time be subject to the lien, if any, of this Indenture or of discharging tax liens or other prior liens or encumbrances thereon, if notice of such advance and of the circumstances surrounding the making thereof is given to the Debentureholders at the time and in the manner provided in this Indenture; (3) disbursements made in the ordinary course of business in the capacity of Trustee under an indenture, transfer agent, registrar, custodian, paying agent, subscription agent, fiscal agent or depositary, or other similar capacity; (4) an indebtedness created as a result of services rendered or premises rented; or an indebtedness created as a result of goods or securities sold in a cash transaction as defined in subsection (c) of this Section; (5) the ownership of stock or of other securities of a company organized under the provisions of Section 25(a) of the Federal Reserve Act, as amended, which is directly or indirectly a creditor of the Company; or (6) the acquisition, ownership, acceptance or negotiation of any drafts, bills of exchange, acceptance or obligations which fall within the classification of self-liquidating paper as defined in subsection (c) of this Section. 47 (c) As used in this Section: (1) The term "default" shall mean any failure to make payment in full of the principal of (or premium, if any) or interest upon any of the Debentures or upon the other indenture securities when and as such principal (or premium, if any) or interest becomes due and payable. (2) The term "other indenture securities" shall mean securities upon which the Company is an obligor (as defined in the Trust Indenture Act) outstanding under any other indenture (A) under which the Trustee is also Trustee, (B) which contains provisions substantially similar to the provisions of subsection (a) of this Section, and (C) under which a default exists at the time of the apportionment of the funds and property held in said special account. (3) The term "cash transaction" shall mean any transaction in which full payment for goods or securities sold is made within seven days after delivery of the goods or securities in currency or in checks or other orders drawn upon banks or bankers and payable upon demand. (4) The term "self-liquidating paper" shall mean any draft, bill of exchange, acceptance or obligation which is made, drawn, negotiated or incurred by the Company for the purpose of financing the purchase, processing, manufacture, shipment, storage or sale of goods, wares or merchandise and which is secured by documents evidencing title to, possession of, or a lien upon, the goods, wares or merchandise or the receivables or proceeds arising from the sale of the goods, wares or merchandise previously constituting the security, provided the security is received by the Trustee simultaneously with the creation of the credit or relationship with the Company arising from the making, drawing, negotiating or incurring of the draft, bill of exchange, acceptance or obligation. (5) The term "Company" shall mean any obligor upon any of the Debentures. ARTICLE EIGHT CONCERNING THE DEBENTUREHOLDERS SECTION 8.01 Action by Debentureholders. Whenever in this Indenture it is provided that the holders of a majority or specified percentage in aggregate principal amount of the Debentures may take any action (including the making of any demand or request, the giving of any notice, consent or waiver or the taking of any other action) the fact that at the time of taking any such action the holders of such majority or specified percentage of that series have joined therein may be evidenced by any instrument or any number of instruments of similar tenor executed by such holders of Debentures in person or by agent or proxy appointed in writing. 48 If the Company shall solicit from the Debentureholders any request, demand, authorization, direction, notice, consent, waiver or other action, the Company may, at its option, as evidenced by an Officers' Certificate, fix in advance a record date for the determination of Debentureholders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other action, but the Company shall have no obligation to do so. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other action may be given before or after the record date, but only the Debentureholders of record at the close of business on the record date shall be deemed to be Debentureholders for the purposes of determining whether Debentureholders of the requisite proportion of outstanding Debentures have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other action, and for that purpose the outstanding Debentures shall be computed as of the record date; provided that no such authorization, agreement or consent by such Debentureholders on the record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than six months after the record date. SECTION 8.02 Proof of Action by Debentureholder. Subject to the provisions of Section 7.01, proof of the execution of any instrument by a Debentureholder (such proof will not require notarization) or his agent or proxy and proof of the holding by any person of any of the Debentures shall be sufficient if made in the following manner; (a) The fact and date of the execution by any such person of any instrument may be proved in any reasonable manner acceptable to the Trustee. (b) The ownership of Debentures shall be proved by the Debenture Register of such Debentures or by a certificate of the Debenture Registrar thereof. (c) The Trustee may require such additional proof of any matter referred to in this Section as it shall deem necessary. SECTION 8.03 Registered Holder. Prior to the due presentment for registration of transfer of any Debenture, the Company, the Trustee, any paying agent and any Debenture Registrar may deem and treat the person in whose name such Debenture shall be registered upon the books of the Company as the absolute owner of such Debenture (whether or not such Debenture shall be overdue and notwithstanding any notice of ownership or writing thereon made by anyone other than the Debenture Registrar) for the purpose of receiving payment of or on account of the principal of, premium, if any, and (subject to Section 2.03) interest on such Debenture and for all other purposes; and neither the Company nor the Trustee nor any paying agent nor any Debenture Registrar shall be affected by any notice to the contrary. SECTION 8.04 Determination of Requisite Debentureholders. In determining whether the holders of the requisite aggregate principal amount of Debentures have concurred in any direction, consent or waiver under this Indenture, Debentures which are owned by the Company 49 or any other obligor on the Debentures or by any Subsidiary of the Company or of such other obligor on the Debentures shall be disregarded and deemed not to be outstanding for the purpose of any such determination, except that for the purpose of determining whether the Trustee shall be protected in relying on any such direction, consent or waiver, only Debentures which the Trustee actually knows are so owned shall be so disregarded. Debentures so owned which have been pledged in good faith may be regarded as outstanding for the purposes of this Section, if the pledgee shall establish to the satisfaction of the Trustee the pledgee's right so to act with respect to such Debentures and that the pledgee is not a person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any such other obligor. In case of a dispute as to such right, any decision by the Trustee taken upon the advice of counsel shall be full protection to the Trustee. SECTION 8.05 Revocation of Action; Binding Effect. At any time prior to (but not after) the evidencing to the Trustee, as provided in Section 8.01, of the taking of any action by the holders of the majority or percentage in aggregate principal amount of the Debentures specified in this Indenture in connection with such action, any holder of a Debenture which is shown by the evidence to be included in the Debentures the holders of which have consented to such action may, by filing written notice with the Trustee, and upon proof of holding as provided in Section 8.02, revoke such action so far as concerns such Debenture. Except as aforesaid any such action taken by the holder of any Debenture shall be conclusive and binding upon such holder and upon all future holders and owners of such Debenture, and of any Debenture issued in exchange therefor, on registration of transfer thereof or in place thereof, irrespective of whether or not any notation in regard thereto is made upon such Debenture. Any action taken by the holders of the majority or percentage in aggregate principal amount of the Debentures specified in this Indenture in connection with such action shall be conclusively binding upon the Company, the Trustee and the holders of all the Debentures. ARTICLE NINE SUPPLEMENTAL INDENTURES SECTION 9.01 Supplemental Indentures. In addition to any supplemental indenture otherwise authorized by this Indenture, the Company, when authorized by a Board Resolution, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto (which shall conform to the provisions of the Trust Indenture Act as then in effect), without the consent of the Debentureholders, for one or more of the following purposes: (a) to evidence the succession of another corporation to the Company, and the assumption by any such successor of the covenants of the Company contained herein or otherwise established with respect to the Debentures; or (b) to add to the covenants of the Company such further covenants, restrictions, 50 conditions or provisions for the protection of the holders of the Debentures as the Board of Directors and the Trustee shall consider to be for the protection of the holders of Debentures, and to make the occurrence, or the occurrence and continuance, of a default in any of such additional covenants, restrictions, conditions or provisions a default or an Event of Default with respect to such series permitting the enforcement of all or any of the several remedies provided in this Indenture as herein set forth; provided, however, that in respect of any such additional covenant, restriction, condition or provision such supplemental indenture may provide for a particular period of grace after default (which period may be shorter or longer than that allowed in the case of other defaults) or may provide for an immediate enforcement upon such default or may limit the remedies available to the Trustee upon such default or may limit the right of the holders of a majority in aggregate principal amount of the Debentures to waive such default; or (c) to convey, transfer, assign, mortgage or pledge any property to or with the Trustee or to surrender any right or power herein conferred upon the Company; or (d) to cure any ambiguity or to correct or supplement any provision contained herein or in any supplemental indenture which may be defective or inconsistent with any other provision contained herein or in any supplemental indenture, or to make such other provisions in regard to matters or questions arising under this Indenture as shall not be inconsistent with the provisions of this Indenture and shall not adversely affect the interests of the holders of the Debentures. The Trustee is hereby authorized to join with the Company in the execution of any such supplemental indenture, and to make any further appropriate agreements and stipulations which may be therein contained, but the Trustee shall not be obligated to enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. Any supplemental indenture authorized by the provisions of this Section may be executed by the Company and the Trustee without the consent of the holders of any of the Debentures at the time outstanding, notwithstanding any of the provisions of Section 9.02. SECTION 9.02 Approval of Supplemental Indentures. With the consent (evidenced as provided in Section 8.01) of the holders of not less than a majority in aggregate principal amount of the Debentures (and, if a Security Exchange has not theretofore occurred, such consent of holders of the Preferred Securities and the Common Securities of the Trust as may be required under the Declaration), the Company, when authorized by a Board Resolution, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto (which shall conform to the provisions of the Trust Indenture Act as then in effect) for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of any supplemental indenture or of modifying in any manner the rights of the holders of the Debentures under this Indenture; provided, however, that no such supplemental indenture shall (i) extend the fixed maturity of any Debentures, or reduce the 51 principal amount thereof, or reduce the rate or extend the time of payment of interest thereon, or reduce any premium payable upon the redemption thereof, without the consent of the holder of each Debenture so affected, (ii) change the place of payment where, or the coin or currency in which, the Debentures or interest thereon, are payable, (iii) reduce the aforesaid percentage of Debentures, the holders of which are required to consent to any such supplemental indenture, (iv) modify any of the provisions of this Section 9.02 or Section 6.06, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be waived without the consent of the holder of each Debenture thereby affected, (v) modify the provisions of Article Fourteen of this Indenture with respect to the subordination of outstanding Debentures in a manner adverse to the holders thereof, (vi) impair the right to institute suit for the enforcement of any payment on or with respect to any Debenture, (vii) reduce the percentage in principal amount of the outstanding Debentures the consent of which holders is required for modification or amendment of the Indenture or for waiver of compliance with certain provisions of the Indenture or for waiver of certain defaults, (viii) change the obligation of the Company to maintain an office or agency in the places and for the purposes specified herein or (ix) modify the provisions relating to waiver of certain defaults or any of the foregoing provisions, without the consent of the holders of each Debenture (and, in the case of any Debentures held as trust assets of the Trust and with respect to which a Security Exchange has not theretofore occurred, such consent of the holders of the Preferred Securities and the Common Securities of the Trust as may be required under the Declaration) then outstanding and affected thereby provided, further, that, so long as the Preferred Securities remain outstanding (i) no such amendment shall be made that adversely affects the holders of such Preferred Securities in any material respect, and no termination of this Indenture shall occur, and no waiver of any Event of Default or compliance with any covenant under this Indenture shall be effective, without the prior consent of the holders of at least a majority in liquidation amount of such Preferred Securities then outstanding unless and until the principal (and premium, if any) of the Debentures and all accrued and, subject to Section 2.07, unpaid interest (including any Compounded Interest) thereon have been paid in full and (ii) no amendment shall be made to Section 6.01(e) of this Indenture that would impair the rights of the holders of Preferred Securities provided therein without the prior consent of the holders of each Preferred Security then outstanding unless and until the principal (and premium, if any) of the Debentures and all accrued and (subject to Section 2.06) unpaid interest (including any Compounded Interest) thereon have been paid in full. Upon the request of the Company, accompanied by a Board Resolution authorizing the execution of any such supplemental indenture, and upon the filing with the Trustee of evidence of the consent of Debentureholders (and, in the case of any Debentures held as trust assets of the Trust and with respect to which a Security Exchange has not theretofore occurred, such consent of holders of the Preferred Securities and the Common Securities of the Trust as may be required under the Declaration) required to consent thereto as aforesaid, the Trustee shall join with the Company in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion but shall not be obligated to enter into such supplemental indenture. 52 It shall not be necessary for the consent of the Debentureholders affected thereby under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof. Promptly after the execution by the Company and the Trustee of any supplemental indenture pursuant to the provisions of this Section, the Trustee shall transmit by mail, first class postage prepaid, a notice, setting forth in general terms the substance of such supplemental indenture, to the Debentureholders affected thereby as their names and addresses appear upon the Debenture Register. Any failure of the Trustee to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture. SECTION 9.03 Effect of Supplemental Indenture. Upon the execution of any supplemental indenture pursuant to the provisions of this Article or of Section 10.01, this Indenture shall be and be deemed to be modified and amended in accordance therewith and the respective rights, limitations of rights, obligations, duties and immunities under this Indenture of the Trustee, the Company and the holders of Debentures affected thereby shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments, and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes. SECTION 9.04 Affected Debentures. Debentures affected by a supplemental indenture, authenticated and delivered after the execution of such supplemental indenture pursuant to the provisions of this Article or of Section 10.01, may bear a notation in form approved by the Company, provided such form meets the requirements of any exchange upon which such Debentures may be listed, as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Debentures so modified as to conform, in the opinion of the Board of Directors, to any modification of this Indenture contained in any such supplemental indenture may be prepared by the Company, authenticated by the Trustee and delivered in exchange for the Debentures then outstanding. SECTION 9.05 Opinion of Counsel. The Trustee, subject to the provisions of Section 7.01, may receive an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant to this Article is authorized or permitted by, and conforms to, the terms of this Article and that it is proper for the Trustee under the provisions of this Article to join in the execution thereof. ARTICLE TEN CONSOLIDATION, MERGER, SALE OR CONVEYANCE SECTION 10.01 Consolidation, Merger, etc. of Company. The Company shall not consolidate with or merge into any other Person or transfer or lease its properties and assets 53 substantially as an entirety to any Person, and the Company shall not permit any other Person to consolidate with or merge into the Company, unless: (a) either the Company shall be the continuing corporation, or the corporation (if other than the Company) formed by such consolidation or into which the Company is merged or to which the properties and assets of the Company substantially as an entity are transferred or leased shall be a corporation organized and existing under the laws of the United States of America or any State thereof or the District of Columbia and shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, all the obligations of the Company under the Debentures and this Indenture; and (b) immediately after giving effect to such transaction no Event of Default, and no event which, after notice or lapse of time or both, would become an Event of Default, shall have happened and be continuing. SECTION 10.02 Successor Corporation. The successor corporation formed by such consolidation or into which the Company is merged or to which such transfer or lease is made shall succeed to and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor corporation had been named as the Company herein, and thereafter (except in the case of a lease to another Person) the predecessor corporation shall be relieved of all obligations and covenants under the Indenture and the Debentures and, in the event of such conveyance or transfer, any such predecessor corporation may be dissolved and liquidated. SECTION 10.03 Opinion of Counsel Provided to Trustee. The Trustee, subject to the provisions of Section 7.01, may receive an Opinion of Counsel as conclusive evidence that any such consolidation, merger, sale, conveyance, transfer or other disposition, and any such assumption, comply with the provisions of this Article. ARTICLE ELEVEN SATISFACTION AND DISCHARGE OF INDENTURE; UNCLAIMED MONEYS SECTION 11.01 Satisfaction and Discharge. (a) If at any time (1) the Company shall have paid or caused to be paid the principal of and interest on all the Debentures Outstanding hereunder (other than Debentures which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 2.07) as and when the same shall have become due and payable, or (2) the Company shall have delivered to the Trustee for cancellation all Debentures theretofore authenticated (other than any Debentures which shall have been destroyed, lost or stolen and which shall have been replaced or paid as provided in Section 2.07) or (3) (A) all the Debentures not theretofore delivered to the Trustee for cancellation shall have become due and payable, or are by their terms to become due and payable within one year or are to be called for 54 redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption, and (B) the Company shall have irrevocably deposited or caused to be deposited with the Trustee as trust funds the entire amount in cash (other than moneys repaid by the Trustee or any paying agent to the Company in accordance with Section 11.04) or Government Obligations, maturing as to principal and interest at such times and in such amounts as will insure the availability of cash, or a combination thereof, sufficient in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay the principal and interest on all Debentures on each date that such principal or interest is due and payable; and if, in any such case, the Company shall also pay or cause to be paid all other sums payable hereunder by the Company, then this Indenture shall cease to be of further effect (except as to (i) rights of registration of transfer and exchange of Debentures and the Company's right of optional redemption, if any, (ii) substitution of mutilated, defaced, destroyed, lost or stolen Debentures, (iii) rights of holders of Debentures to receive payments of principal thereof and interest thereon, upon the original stated due dates therefor (but not upon acceleration), (iv) the rights, obligations, duties and immunities of the Trustee hereunder, (v) the rights of the holders of Debentures as beneficiaries hereof with respect to the property so deposited with the Trustee payable to all or any of them, and (vi) the obligations of the Company under Section 4.02) and the Trustee, on demand of the Company accompanied by an Officers' Certificate and an Opinion of Counsel and at the cost and expense of the Company, shall execute proper instruments acknowledging such satisfaction of and discharging this Indenture; provided, that the rights of holders of the Debentures to receive amounts in respect of principal of and interest on the Debentures held by them shall not be delayed longer than required by then-applicable mandatory rules or policies of any securities exchange upon which the Debentures are listed. The Company agrees to reimburse the Trustee for any costs or expenses thereafter reasonably and properly incurred and to compensate the Trustee for any services thereafter reasonably and properly rendered by the Trustee in connection with this Indenture or the Debentures. (b) The following provisions shall apply to the Debentures unless specifically otherwise provided in a Board Resolution or indenture supplemental hereto provided pursuant to Section 2.01. In addition to discharge of the Indenture pursuant to the next preceding paragraph, the Company shall be deemed to have paid and discharged the entire indebtedness on all the Debentures on the date of the deposit referred to in subparagraph (1) below, and the provisions of this Indenture with respect to the Debentures shall no longer be in effect (except as to (i) rights of registration of transfer and exchange of Debentures and the Company's right of optional redemption, if any, (ii) substitution of mutilated, defaced, destroyed, lost or stolen Debentures, (iii) rights of holders of Debentures to receive payments of principal thereof and interest thereon, upon the original stated due dates therefor (but not upon acceleration), if any, (iv) the rights, obligations, duties and immunities of the Trustee hereunder, (v) the rights of the holders of Debentures as beneficiaries hereof with respect to the property so deposited with the Trustee payable to all or any of them and (vi) the obligations of the Company under Section 4.02) and the Trustee, at the expense of the Company, shall at the Company's request, execute proper instruments acknowledging the same, if 55 (1) with reference to this provision the Company has irrevocably deposited or caused to be irrevocably deposited with the Trustee as trust funds in trust, specifically pledged as security for, and dedicated solely to, the benefit of the holders of the Debentures (i) cash in an amount, or (ii) Governmental Obligations maturing as to principal and interest at such times and in such amounts as will insure the availability of cash or (iii) a combination thereof, sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay the principal and interest on all Debentures of such series on each date that such principal or interest is due and payable; (2) such deposit will not result in a breach or violation of, or constitute a default under, any agreement or instrument to which the Company is a party or by which it is bound; (3) the Company has delivered to the Trustee an Opinion of Counsel based on the fact that (x) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (y) since the date hereof, there has been a change in the applicable Federal income tax law, in either case to the effect that, and such opinion shall confirm that, the holders of the Debentures will not recognize income, gain or loss for Federal income tax purposes as a result of such deposit, defeasance and discharge and will be subject to Federal income tax on the same amount and in the same manner and at the same times, as would have been the case if such deposit, defeasance and discharge had not occurred; (4) the Company has delivered to the Trustee an Officer's Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for relating to the defeasance contemplated by this provision have been complied with; and (5) no event or condition shall exist that, pursuant to the provisions of Section 14.02 or 14.03, would prevent the Company from making payments of the principal of or interest on the Debentures on the date of such deposit. SECTION 11.02 Deposits held in Trust. Subject to Section 11.04, all moneys deposited with the Trustee (or other Trustee) pursuant to Section 11.01 shall be held in trust and applied by it to the payment, either directly or through any paying agent (including the Company acting as its own paying agent), to the holders of the particular Debentures for the payment or redemption of which such moneys have been deposited with the Trustee, of all sums due and to become due thereon for principal and interest; but such money need not be segregated from other funds except to the extent required by law. SECTION 11.03 Moneys held by Paying Agent. In connection with the satisfaction and discharge of this Indenture with respect to any Debentures, all moneys then held by any paying agent under the provisions of this Indenture with respect to such Debentures shall, upon demand of the Company, be repaid to it or paid to the Trustee and thereupon such paying agent shall be released from all further liability with respect to such moneys. 56 SECTION 11.04 Repayment to Company. Any moneys deposited with or paid to the Trustee or any paying agent for the payment of the principal of or interest on any Debenture and not applied but remaining unclaimed for two years after the date upon which such principal or interest shall have become due and payable, shall, upon the written request of the Company and unless otherwise required by mandatory provisions of applicable escheat or abandoned or unclaimed property law, be repaid to the Company by the Trustee for such Debentures or such paying agent, and the holder of the Debentures shall, unless otherwise required by mandatory provisions of applicable escheat or abandoned or unclaimed property laws, thereafter look only to the Company for any payment which such holder may be entitled to collect, and all liability of the Trustee or any paying agent with respect to such moneys shall thereupon cease; provided, however, that the Trustee or such paying agent, before being required to make any such repayment with respect to moneys deposited with it for any payment series, shall at the expense of the Company, mail by first-class mail to holders of such Debentures at their addresses as they shall appear on the Debenture Register, notice, that such moneys remain and that, after a date specified therein, which shall not be less than thirty days from the date of such mailing or publication, any unclaimed balance of such money then remaining will be repaid to the Company. SECTION 11.05 Indemnification of Trustee. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the Governmental Obligations deposited pursuant to Section 11.01 or the principal or interest received in respect of such obligations. ARTICLE TWELVE IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS SECTION 12.01 Immunity. No recourse under or upon any obligations, covenant or agreement of this Indenture, or of any Debenture, or for any claim based thereon or otherwise in respect thereof, shall be had against any incorporator, stockholder, officer or director, past, present or future as such, of the Company or of any predecessor or successor corporation, either directly or through the Company or any such predecessor or successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that this Indenture and the obligations issued hereunder are solely corporate obligations, and that no such personal liability whatever shall attach to, or is or shall be incurred by, the incorporators, stockholders, officers or directors as such, of the Company or of any predecessor or successor corporation, or any of them, because of the creation of the indebtedness hereby authorized, or under or by reason of the obligations, covenants or agreements contained in this Indenture or in any of the Debentures or implied therefrom; and that any and all such personal liability of every name and nature, either at common law or in equity or by constitution or statute, of, and any and all such rights and claims against, every such incorporator, stockholder, officer or director as such, because of the creation 57 of the indebtedness hereby authorized, or under or by reason of the obligations, covenants or agreements contained in this Indenture or in any of the Debentures or implied therefrom, are hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issuance of such Debentures. ARTICLE THIRTEEN MISCELLANEOUS PROVISIONS SECTION 13.01 Successors and Assigns. All the covenants, stipulations, promises and agreements in this Indenture contained by or on behalf of the Company shall bind its successors and assigns, whether so expressed or not. SECTION 13.02 Actions by Predecessor. Any act or proceeding by any provision of this Indenture authorized or required to be done or performed by any board, committee or officer of the Company shall and may be done and performed with like force and effect by the corresponding board, committee or officer of any corporation that shall at the time be the lawful sole successor of the Company. SECTION 13.03 Surrender of Power. The Company by instrument in writing executed by authority of two-thirds of its Board of Directors and delivered to the Trustee may surrender any of the powers reserved to the Company and thereupon such power so surrendered shall terminate both as to the Company and as to any successor corporation. SECTION 13.04 Notices. Except as otherwise expressly provided herein any notice or demand which by any provision of this Indenture is required or permitted to be given or served by the Trustee or by the holders of Debentures to or on the Company may be given or served by being deposited first class postage prepaid in a post-office letterbox addressed (until another address is filed in writing by the Company with the Trustee), as follows: SunSource Inc., 2600 One Logan Square, Philadelphia, PA 19103, Attention: Secretary. Any notice, election, request or demand by the Company or any Debentureholder to or upon the Trustee shall be deemed to have been sufficiently given or made, for all purposes, if given or made in writing at the Corporate Trust Office of the Trustee. SECTION 13.05 Governing Law. This Indenture and each Debenture shall be deemed to be a contract made under the laws of the State of New York without regard to the conflicts of laws provisions thereof, and for all purposes shall be construed in accordance with the laws of said State. SECTION 13.06 Officers' Certificate from Company. (a) Upon any application or demand by the Company to the Trustee to take any action under any of the provisions of this Indenture, the Company shall furnish to the Trustee an Officers' Certificate stating that all 58 conditions precedent provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent have been complied with, except that in the case of any such application or demand as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or demand, no additional certificate or opinion need be furnished. (b) Each certificate or opinion provided for in this Indenture and delivered to the Trustee with respect to compliance with a condition or covenant in this Indenture (other than the certificate provided pursuant to Section 5.03(d) of this Indenture) shall include (1) a statement that the person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such person, the person has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. SECTION 13.07 Date of Payments. Except as provided pursuant to Section 2.01 pursuant to a Board Resolution, and as set forth in an Officers' Certificate, or established in one or more indentures supplemental to the Indenture, in any case where the date of maturity of interest or principal of any Debenture or the date of redemption of any Debenture shall not be a business day then payment of interest or principal (and premium, if any) may be made on the next succeeding business day with the same force and effect as if made on the nominal date of maturity or redemption, and no interest shall accrue for the period after such nominal date, except that if such business day is in the next calendar year, such payment shall be made on the immediately preceding business day, with the same force and effect as if made on such date. SECTION 13.08 Certain Duties under Trust Indenture Act. If and to the extent that any provision of this Indenture limits, qualifies or conflicts with the duties imposed by Sections 310 to 317, inclusive, of the Trust Indenture Act, such imposed duties shall control. SECTION 13.09 Counterparts. This Indenture may be executed in any number of counterparts, each of which shall be an original; but such counterparts shall together constitute but one and the same instrument. SECTION 13.10 Severability. In case any one or more of the provisions contained in this Indenture or in the Debentures of any series shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Indenture or of such Debentures, but this Indenture and such Debentures shall be construed as if such invalid or illegal or unenforceable provision had never been contained herein or therein. 59 SECTION 13.11 Assignment by Company. The Company will have the right at all times to assign any of its rights or obligations under this Indenture to a direct or indirect wholly owned Subsidiary of the Company; provided that, in the event of any such assignment, the Company will remain jointly and severally liable for all such obligations. Subject to the foregoing, this Indenture is binding upon and inures to the benefit of the parties hereto and their respective successors and assigns. This Indenture may not otherwise be assigned by the parties hereto. SECTION 13.12 Holders of Preferred Securities as Third Party Beneficiaries. The Company hereby acknowledges that, to the extent specifically set forth herein, prior to a Security Exchange with respect to the Debentures held as trust assets of the Trust, the holders of the Preferred Securities of the Trust shall expressly be third party beneficiaries of this Indenture. ARTICLE FOURTEEN SUBORDINATION OF DEBENTURES SECTION 14.01 Subordination. The Company, for itself, its successors and assigns, covenants and agrees, and each holder of a Debenture, by its acceptance thereof, likewise covenants and agrees, that the payment of the principal of, premium, if any, and interest on, each and all of the Debentures is hereby expressly subordinated, to the extent and in the manner hereinafter in this Article Fourteen set forth, in right of payment to the prior payment in full in cash of all Senior Indebtedness. SECTION 14.02 Payments upon Liquidation, etc. (a) In the event of any insolvency or bankruptcy proceedings, and any receivership, liquidation, reorganization or other similar proceedings in connection therewith, relative to the Company or to its creditors, as such, or to its property, and in the event of any proceedings for voluntary liquidation, dissolution or other winding up of the Company, whether or not involving insolvency or bankruptcy, and in the event of any execution sale, then the holders of Senior Indebtedness shall be entitled to receive payment in full of principal thereof and interest due thereon (including without limitation, except to the extent, if any, prohibited by mandatory provisions of law, post-petition interest in any such proceedings) in cash of all Senior Indebtedness before the holders of Debentures are entitled to receive any payment on account of the principal of or interest on the indebtedness evidenced by the Debentures, and to that end the holders of Senior Indebtedness shall be entitled to receive for application in payment thereof any payment or distribution of any kind or character, whether in cash or property or securities, which may be payable or deliverable in connection with any such proceedings or sale in respect of the principal of or interest on the Debentures other than securities of the Company as reorganized or readjusted or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment the payment of which is subordinate, at least to the extent 60 provided in this Article Fourteen with respect to the Debentures, to the payment of all indebtedness of the nature of Senior Indebtedness, provided that the rights of the holders of the Senior Indebtedness are not altered by such reorganization or readjustment; (b) In the event and during the continuation of any default in payment of any Senior Indebtedness or if any event of default, as therein defined, shall exist under any Senior Indebtedness or any agreement pursuant to which any Senior Indebtedness is issued, no payment of the principal of, premium if any, or interest on the Debentures shall be made and the Company covenants that it will, upon becoming aware of any such default or event of default, provide written notice to the Trustee of such default or event of default; (c) In the event that the Debentures are declared due and payable before their expressed maturity pursuant to the Indenture (under circumstances when the provisions of subsection (a) of this Section 14.02 shall not be applicable), the holders of all Senior Indebtedness shall be entitled to receive payment in full in cash of such Senior Indebtedness before such holders of Debentures are entitled to receive any payment on account of the principal of or interest on the Debentures; and (d) No holder of Senior Indebtedness shall be prejudiced in its right to enforce subordination of the Debentures by any act or failure to act on the part of the Company. SECTION 14.03 Receipt of Payments; Subrogation. In the event that, notwithstanding the provisions of Section 14.02, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities (other than securities of the Company as reorganized or readjusted or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment the payment of which is subordinate, at least to the extent provided in this Article Fourteen with respect to the Debentures, to the payment of all indebtedness of the nature of Senior Indebtedness, provided that the rights of the holders of the Senior Indebtedness are not altered by such reorganization or readjustment) shall be received by the holders or by the Trustee for their benefit in connection with any proceedings or sale referred to in subsection (a) of Section 14.02 before all Senior Indebtedness is paid in full in cash, such payment or distribution shall be paid over to the holders of such Senior Indebtedness or their representative or representatives or to the Trustee or Trustees under any indenture under which any instruments evidencing any of such Senior Indebtedness may have been issued, ratably according to the aggregate amounts remaining unpaid on account of the Senior Indebtedness held or represented by each, for application to the payment of all Senior Indebtedness remaining unpaid until all such Senior Indebtedness shall have been paid in full in cash, after giving effect to any concurrent payment or distribution to the holders of such Senior Indebtedness. From and after the payment in full in money of all Senior Indebtedness, the holders of Debentures (together with the holders of any other indebtedness of the Company which is subordinate in right of payment to the payment in full of all Senior Indebtedness, which is not subordinate in right of payment to the Debentures and which by its terms grants such right of 61 subrogation to the holder thereof) shall be subrogated to the rights of the holders of Senior Indebtedness to receive payments or distributions of assets or securities of the Company applicable to the Senior Indebtedness until the Debentures shall be paid in full in cash, and, for the purposes of such subrogation, no such payments or distributions to the holders of Senior Indebtedness of assets or securities, which otherwise would have been payable or distributable to holders of Debentures , shall, as between the Company, its creditors other than the holders of Senior Indebtedness, and the holders of the Debentures, be deemed to be a payment by the Company to or on account of the Senior Indebtedness, it being understood that the provisions of this Article Fourteen are and are intended solely for the purpose of defining the relative rights of the holders of the Debentures, on the one hand, and the holders of the Senior Indebtedness, on the other hand, and nothing contained in this Article Fourteen or elsewhere in this Indenture or in the Debentures is intended to or shall impair as between the Company, its creditors other than the holders of Senior Indebtedness, and the holders of the Debentures, the obligation of the Company, which is unconditional and absolute, to pay to the holders of the Debentures the principal of and interest on the Debentures as and when the same shall become due and payable in accordance with their terms, or to affect the relative rights of the holders of the Debentures and creditors of the Company other than the holders of the Senior Indebtedness, nor shall anything herein or therein prevent the Trustee or the holder of any Debenture from exercising all remedies otherwise permitted by applicable law upon default under this Indenture subject to the rights of the holders of Senior Indebtedness, under Section 14.02, to receive cash, property or securities of the Company otherwise payable or deliverable to the holders of the Debentures. Upon any distribution or payment in connection with any proceedings or sale referred to in subsection (a) of Section 14.02, the Trustee, as between the Trustee and the holders of the Debentures subject to the provisions of Sections 7.01 and 7.02 hereof, shall be entitled to rely upon a certificate of the liquidating Trustee or agent or other person making any distribution or payment to the Trustee for the purpose of ascertaining the holders of Senior Indebtedness entitled to participate in such payment or distribution, the amount of such Senior Indebtedness or the amount payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article Fourteen. In the event that the Trustee determines, in good faith, that further evidence is required with respect to the right of any person as a holder of Senior Indebtedness to participate in any payment or distribution pursuant to this Section 14.03, the Trustee may request such person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of Senior Indebtedness held by such person, as to the extent to which such person is entitled to participate in such payment or distribution, and as to other facts pertinent to the rights of such person under this Section 14.03, and if such evidence is not furnished, the Trustee may defer any payment to such person pending judicial determination as to the right of such person to receive such payment. The Trustee, however, shall not be deemed to owe any fiduciary duty to the holders of Senior Indebtedness, and shall not be liable to any such holders if it shall in good faith pay over or distribute to holders of Debentures or the Company or any other person moneys or assets to which any holders of Senior Indebtedness shall be entitled by virtue of Article Fourteen of this 62 Indenture or otherwise. SECTION 14.04 Application of Payments to Debentures. Nothing contained in this Article Fourteen or elsewhere in this Indenture, or in any of the Debentures, shall prevent at any time, (a) the Company, except under the conditions described in Section 14.02, from making payments of principal of or interest on the Debentures, provided, however, that payments of principal of or interest on the Debentures shall be made by the Company only within three business days of the due dates for such payments as provided in Article Two or (b) the application by the Trustee of any moneys deposited with it hereunder to the payment of or on account of the principal of or interest on the Debentures, if at the time of such deposit the Trustee did not have written notice in accordance with Section 14.06 of any event prohibiting the making of such deposit by the Company or if in the event of redemption, the Trustee did not have such written notice prior to the time that the notice of redemption pursuant to Section 3.02 was given (which notice of redemption shall in no event be given more than 60 days prior to the date fixed for redemption). SECTION 14.05 Banking Effect. Each Debentureholder by his acceptance of a Debenture authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination as provided in this Article Fourteen and appoints the Trustee as attorney-in-fact for any and all such purposes, including, in the event of any dissolution, winding up, liquidation or reorganization of the Company (whether in bankruptcy, insolvency or receivership proceedings or upon an assignment for the benefit of creditors or otherwise) tending towards liquidation of the business and assets of the Company, the immediate filing of a claim for the unpaid balance of such Debentureholder's Debentures in the form required in said proceedings and cause said claim to be approved. SECTION 14.06 Knowledge of Trustee. Notwithstanding the provisions of this Article Fourteen or any other provisions of this Indenture, the Trustee shall not be charged with the knowledge of the existence of any facts which would prohibit the making of any payment of moneys to the Trustee, unless and until the Trustee shall have received written notice thereof from the Company or from the holder or the representative of any class of Senior Indebtedness; provided, however, that if at least two business days prior to the date upon which by the terms hereof any such monies may become payable for any purpose (including, without limitation, the payment of either the cash amount payable at maturity or interest on any Debenture) the Trustee shall not have received with respect to such monies the notice provided for in this Section 14.06, then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such monies and to apply the same to the purpose for which they were received, and shall not be affected by any notice to the contrary, which may be received by it on or after such two business days prior to such date. SECTION 14.07 Rights of Trustee as Holder of Senior Indebtedness. The Trustee shall be entitled to all the rights set forth in this Article Fourteen with respect to any Senior Indebtedness which may at any time be held by it, to the same extent as any other holder of 63 Senior Indebtedness. SECTION 14.08 Paying Agent. In case at any time any paying agent other than the Trustee shall be appointed by the Company and be then acting hereunder, the term "Trustee" as used in this Article Fourteen shall in such case (unless the context shall otherwise require) be construed as extending to and including such paying agent within its meaning as fully for all intents and purposes as if such paying agent were named in this Article Fourteen in place of the Trustee. The Bank of New York, as Trustee, hereby accepts the trust in this Indenture declared and provided, upon the terms and conditions hereinabove set forth. 64 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed as of the day and year first above written. SUNSOURCE INC. By ______________________________ THE BANK OF NEW YORK, as Trustee By _______________________________ 65 EXHIBIT A FORM OF DEBENTURE (FORM OF FACE OF DEBENTURE) No. CUSIP NO. 867948 AA __ SUNSOURCE INC. 11.6% JUNIOR SUBORDINATED DEBENTURE, DUE 2027 SunSource Inc., a corporation duly organized and existing under the laws of the State of Delaware (herein referred to as the "Company," which term includes any successor corporation under the Indenture hereinafter referred to) for value received, hereby promises to pay to ______________, or registered assigns, the principal sum of _______ Dollars on ___________, 2027, and to pay interest on said principal sum from * , 1997 or from the most recent interest payment date (each such date, an "Interest Payment Date") to which interest has been paid or duly provided for (subject to deferral as set forth herein) monthly in arrears on each Interest Payment Date commencing , 1997 at the rate of 11.6% per annum plus Compounded Interest (as defined below), if any, until the principal hereof shall have become due and payable, and on any overdue principal and premium, if any, and (without duplication and to the extent that payment of such interest is enforceable under applicable law) on any overdue installment of interest at the same rate per annum. The amount of interest payable on an Interest Payment Date shall be computed on the basis of a 360-day year of twelve 30-day months and for any period shorter than a full monthly interest period for which interest is computed, the amount of interest payable will be computed on the basis of the actual number of days elapsed in such 30-day month. In the event that any date on which interest is payable on this Debenture is not a business day, then payment of interest payable on such date will be made on the next succeeding day which is a business day (and without any interest or other payment in respect of any such delay), except that, if such business day is in the next succeeding calendar year, such payment shall be made on the immediately preceding business day, in each case with the same force and effect as if made on such date. The interest installment so payable, and punctually paid or duly provided for, on any Interest Pyament date will, as provided in the Indenture, be paid to the person in which name this Debtenture (or one or more Predecessor Debentures, as defined in such Indenture) is registered at the close of business on the regular record date for such interest installment, which, except as set forth below, shall be the close of business on the first day of the month in which such Interest Payment Date occurs. Any such interest installment not punctually - ------------------------ * Insert Effective Date A-1 paid or duly provided for shall forthwith cease to be payable to the registered holders on such regular record date, and may be paid to the person in whose name the Debenture (or one or more Predecessor Debentures) is registered at the close of business on a special record date to be fixed by the Trustee for the payment of such defaulted interest, notice whereof shall be given to the registered holders of the Debentures not less than ten days prior to such special record date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Debentures may listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture. The principal of (and premium, if any) and the interest on this Debenture shall be payable at the office or agency of the Trustee maintained for that purpose in the Borough of Manhattan, The City and State of New York, in any coin or currency of the United States of America which at the time of payment is legal tender for payment of public and private debts; provided, however, that payment of interest may be made at the option of the Company by check mailed to the registered holder at such address as shall appear in the Debenture register and the payment of principal will be made only upon the surrender of this Debenture to the Trustee. Notwithstanding the foregoing, so long as the owner and record holder of this Debenture is the Property Trustee (as defined in the Indenture referred to on the reverse hereof), the payment of the principal of (and premium, if any) and interest (including Compounded Interest, if any) on this Debenture will be made at such place and to such account of the Property Trustee as may be designated by the Property Trustee. The indebtedness evidenced by this Debenture is, to the extent provided in the Indenture, subordinate and subject in right of payment to the prior payment in full of all Senior Indebtedness, and this Debenture is issued subject to the provisions of the Indenture with respect thereto. Each Holder of this Debenture, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination so provided and (c) appoints the Trustee his attorney-in-fact for any and all such purposes. Each Holder hereof, by his acceptance hereof, hereby waives all notice of the acceptance of the subordination provisions contained herein and in the Indenture by each holder of Senior Indebtedness, whether now outstanding or hereafter incurred, and waives reliance by each such Holder upon said provisions. This Debenture shall not be entitled to any benefit under the Indenture hereinafter referred to, be valid or become obligatory for any purpose until the Certificate of Authentication hereon shall have been signed by or on behalf of the Trustee. Unless the Certificate of Authentication hereon has been executed by the Trustee referred to on the reverse side hereof, this Debenture shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. A-2 The provisions of this Debenture are continued on the reverse side hereof and such continued provisions shall for all purposes have the same effect as though fully set forth at this place. IN WITNESS WHEREOF, the Company has caused this Debenture to be executed. Dated___________________________ SUNSOURCE INC. By _______________________ Chairman Attest: By______________________________ (FORM OF CERTIFICATE OF AUTHENTICATION) CERTIFICATE OF AUTHENTICATION This is one of the Debentures described in the within-mentioned Indenture. ______________________________ ______________________________ or _________________________ as Trustee as Authentication Agent By____________________________ _________________________ Authorized Signatory Authorized Signatory A-3 (FORM OF REVERSE OF DEBENTURE) This Debenture is one of a duly authorized series of Debentures of the Company (herein sometimes referred to as the "Debentures"), specified in the Indenture, all issued or to be issued in one or more series under and pursuant to an Indenture dated as of ________, 1997 (herein referred to as the "Indenture") duly executed and delivered between the Company and The Bank of New York, a New York banking corporation, as Trustee (herein referred to as the "Trustee"), to which Indenture and all indentures supplemental thereto reference is hereby made for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Company and the holders of the Debentures, and, to the extent specifically set forth in the Indenture, the holders of Senior Indebtedness and Preferred Securities. Except as provided in the next paragraph, the Debentures may not be redeemed by the Company prior to _________, 2002. The Company shall have the right to redeem this Debenture, in whole or in part, from time to time, on or after ______, 2002 (an "Optional Redemption") at a redemption price equal to 100% of the principal amount to be redeemed plus any accrued and unpaid interest thereon, including Compounded Interest, if any, to the date of such redemption (the "Optional Redemption Price"). Any redemption pursuant to this paragraph will be made upon not less than 30 nor more than 60 days' notice, at the Optional Redemption Price. If, at any time, a Tax Event (as defined below) shall occur or be continuing after receipt of a Dissolution Tax Opinion (as defined below) and (i) the Regular Trustees of the Trust and the Company shall have received an opinion (a "Redemption Tax Opinion") of a nationally recognized independent tax counsel experienced in such matters that, as a result of a Tax Event, there is more than an insubstantial risk that the Company would be precluded from deducting the interest on the Debentures for United States federal income tax purposes even if the Debentures were distributed to the holders of Trust Preferred Securities and Common Securities in liquidation of such holder's interest in the Trust as set forth in the Declaration or if the Corporation shortened the Stated Maturity of the Debentures as described in the last sentence of this paragraph (ii) the Regular Trustees shall have been informed by such tax counsel that a No Recognition Opinion (as defined below) cannot be delivered to the Trust, the Company shall have the right at any time, upon not less than 30 nor more than 60 days notice, to redeem the Debentures in whole or in part for cash at a redemption price equal to 101% of the principal amount of the Debentures if the Redemption occurs prior to ____________, 2002 or 100% thereafter, within 90 days following the occurrence of such Tax Event; provided, however, that, if at the time there is available to the Company or the Trustee, on behalf of the Trust the opportunity to eliminate, within such 90 day period, the Tax Event by taking some ministerial action ("Ministerial Action"), such as filing a form or making an election, or pursuing some other similar reasonable measure, which has no adverse effect on the Trust, the Company or the holders of the Trust Preferred Securities, the Company or the Trustee on behalf of the Trust will pursue such measure in lieu of redemption and provided further that the Company shall have no right to redeem the Debentures while the Regular Trustees on behalf of SunSource Capital Trust are pursuing any such Ministerial Action. In addition to taking any Ministerial Action, if a Tax Event occurs and is continuing and in the opinion of nationally recognized independent tax counsel to the Trust, there would in all cases, after effecting the termination of the Trust and the distribution of the Debentures to the holders of the Trust Preferred Securities in exchange therefor upon liquidation of the Trust, be more than an insubstantial risk that the Tax Event would continue, then the Corporation shall have the right to shorten the stated maturity of the Debentures to the latest date permissible without adversely affecting the deductibility of interest payable on the Debentures, but not earlier than ______________, 2002 (and thereby cause the Trust Preferred Securities to be redeemed on such earlier date) such that, in the opinion of nationally recognized independent tax counsel to the Trust, after advancing the stated maturity of the Debentures, interest paid on the Debentures will be deductible by the Corporation for federal income tax purposes. A-4 "Tax Event" means that the Company and the Regular Trustees shall have obtained an opinion of nationally recognized independent tax counsel experienced in such matters (a "Dissolution Tax Opinion") to the effect that on or after the Effective Time, as a result of (a) any amendment to, or change (including any announced prospective change) in, the laws (or any regulations thereunder) of the United States or any political subdivision or taxing authority thereof or therein, (b) any amendment to, or change in, an interpretation or application of any such laws or regulations by any legislative body, court, governmental agency or regulatory authority (including the enactment of any legislation and the publication of any judicial decision or regulatory determination), (c) any interpretation or pronouncement that provides for a position with respect to such laws or regulations that differs from the theretofore generally accepted position or (d) any action taken by any governmental agency or regulatory authority, which amendment or change is enacted, promulgated, issued or announced or which interpretation or pronouncement is issued or announced or which action is taken, in each case on or after the Effective Time, there is more than an insubstantial risk that (i) the Trust is, or will be within 90 days of the date thereof, subject to United States federal income tax with respect to income accrued or received on the Debentures, (ii) the Trust is, or will be within 90 days of the date thereof, subject to more than a de minimis amount of taxes, duties or other governmental charges or (iii) interest payable by the Company to the Trust on the Debentures is not, or within 90 days of the date thereof will not be, deductible by the Company for United States federal income tax purposes. "No Recognition Opinion" means an opinion of a nationally recognized independent tax counsel experienced in such matters, which opinion may rely on any then applicable published revenue ruling of the Internal Revenue Service, to the effect that the holders of the Trust Preferred Securities will not recognize any gain or loss for United States federal income tax purposes as a result of a dissolution of the Trust and distribution of the Debentures as provided in the Declaration. If the Debentures are only partially redeemed by the Company pursuant to an Optional Redemption or as a result of a Tax Event as described above, the Debentures will be redeemed pro rata or by lot or in some other equitable manner determined by the Trustee. In the event of redemption of this Debenture in part only, a new Debenture or Debentures for the unredeemed portion hereof will be issued in the name of the Debentureholder hereof upon the cancellation hereof. In case an Event of Default, as defined in the Indenture, shall have occurred and be continuing, the principal of all of the Debentures may be declared, and upon such declaration shall become, due and payable, in the manner, with the effect and subject to the conditions provided in the Indenture. The Indenture contains provisions for defeasance at any time of the entire indebtedness of this Debenture upon compliance by the Company with certain conditions set forth therein. A-5 The Indenture contains provisions permitting the Company and the Trustee, with the consent of the holders of not less than a majority in aggregate principal amount of the Debentures affected at the time outstanding, as defined in the Indenture (and, in the case of any Debentures held as trust assets of a SunSource Capital Trust and with respect to which a Security Exchange has not theretofore occurred, such consent of holders of the Preferred Securities and the Common Securities of such SunSource Capital Trust as may be required under the Declaration of Trust of such SunSource Capital Trust), to execute supplemental indentures for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or of any supplemental indenture or of modifying in any manner the rights of the holders of the Debentures; provided, however, that no such supplemental indenture shall (a) extend the fixed maturity of any Debentures, or reduce the principal amount thereof, or reduce the rate or extend the time of payment of interest thereon, or reduce any premium payable upon the redemption thereof, without the consent of the holder of each Debenture so affected, (b) change the place of payment where, or the coin or currency in which, the Debentures or interest thereon, are payable, (c) reduce the aforesaid percentage of Debentures, the holders of which are required to consent to any such supplemental indenture, (d) modify any of the provisions of the Indenture relating to supplemental indentures or direction by debentureholders, except to increase any such percentage or to provide that certain other provisions of the Indenture cannot be waived without the consent of the holder of each Debenture thereby affected, (e) modify the provisions of the Indenture with respect to the subordination of outstanding Debentures in a manner adverse to the holders thereof, (f) impair the right to institute suit for the enforcement of any payment on or with respect to any Debenture, (g) reduce the percentage in principal amount of the outstanding Debentures the consent of which holders is required for modification or amendment of the Indenture or for waiver of compliance with certain provisions of the Indenture or for waiver of certain defaults, (h) change the obligation of the Company to maintain an office or agency in the places and for the purposes specified herein or (i) modify the provisions relating to waiver of certain defaults or any of the foregoing provisions, without the consent of the holders of each Debenture (and, in the case of any Debentures held as trust assets of the Trust and with respect to which a Security Exchange has not theretofore occurred, such consent of the holders of the Preferred Securities and the Common Securities of the Trust as may be required under the Declaration) then outstanding and affected thereby provided, further, that, so long as the Preferred Securities remain outstanding (i) no such amendment shall be made that adversely affects the holders of such Preferred Securities in any material respect, and no termination of the Indenture shall occur, and no waiver of any Event of Default or compliance with any covenant under the Indenture shall be effective, without the prior consent of the holders of at least a majority in liquidation amount of such Preferred Securities then outstanding unless and until the principal (and premium, if any) of the Debentures and all accrued and unpaid interest (including any Compounded Interest) thereon have been paid in full and (ii) no amendment shall be made to the Indenture that would impair the rights of the holders of Preferred Securities to institute an action in an Event of Default without the prior consent of the holders of each Preferred Security then outstanding unless and until the principal (and premium, if any) of the Debentures and all accrued and unpaid interest (including any Compounded Interest) thereon have been paid in full. The Indenture also contains provisions permitting the holders of a majority in aggregate principal A-6 amount of the Debentures at the time outstanding affected thereby (with, in the case of any series of Debentures held as trust assets of the Trust and with respect to which a Security Exchange has not theretofore occurred, such consent of holders of the Trust Preferred Securities and the Trust Common Securities of the Trust as may be required under the Declaration), on behalf of the holders of all of the Debentures, to waive any past default in the performance of any of the covenants contained in the Debenture or established pursuant to the Indenture and its consequences, except a default in the payment of the principal of, or premium, if any, or interest on, any of the Debentures as and when the same shall become due by the terms of such Debentures otherwise than by acceleration (unless such default has been cured and a sum sufficient to pay all matured installments of interest and principal and any premium has been deposited with the Trustee (in accordance with the Indenture)) or a call for redemption of Debentures or a default in respect of a covenant or provision of the Indenture which cannot be modified or amended without the consent of the Debentureholder of each outstanding security affected thereby. Upon any such waiver, the default covered thereby shall be deemed to be cured for all purposes of the Indenture and the Company, the Trustee and the holders of the Debentures shall be restored to their former positions and rights hereunder, respectively; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon. No reference herein to the Indenture (other than such Section) and provision of this Debenture or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and premium, if any, and interest on this Debenture at the time and place at the rate and in the manner herein prescribed. So long as the Company is not in default in the payment of interest on the Debentures, the Company shall have the right, at any time during the term of the Debentures, from time to time to extend the interest payment period of such Debentures for up to 60 consecutive months (the "Extension Period"), at the end of which period the Company shall pay all interest accrued and unpaid thereon (together with interest thereon at the rate of 11.6% per annum to the extent permitted by applicable law, compounded monthly ("Compounded Interest")). During such Extension Period the Company shall not declare or pay any dividend on, or redeem, purchase, acquire or make a distribution or liquidation payment with respect to, any of its common stock or preferred stock, or make any guarantee payments with respect thereto. Prior to the termination of any such Extension Period, the Company may pay all or any portion of the interest accrued on the Debentures on any Interest Payment Date to holders of record on the regular record date for such Interest Payment Date or from time to time further extend such Period, provided that such Extension Period together with all such further extensions thereof shall not exceed 60 consecutive months. Upon the termination of any Extension Period and upon the payment of all accrued and unpaid interest then due, together with Compounded Interest, the Company may select a new Extension Period, subject to the foregoing requirements. No interest shall be due and payable during an Extension Period, except at the end thereof. At the end of the Extension Period the Company shall pay all interest accrued and unpaid on the Debentures including any Compounded Interest which shall be payable to the holders of the Debentures in whose names the Debentures are registered in the Debenture register on the first record date after the end of the A-7 Extension Period. As provided in the Indenture and subject to certain limitations therein set forth, this Debenture is transferable by the registered holder hereof on the Debenture register of the Company, upon surrender of this Debenture for registration of transfer at the office or agency of the Trustee in the Borough of Manhattan, The City and State of New York accompanied by a written instrument or instruments of transfer in form satisfactory to the Company or the Trustee duly executed by the registered holder here of or the holder's attorney duly authorized in writing, and thereupon one or more new Debentures of authorized denominations and for the same aggregate principal amount will be issued to the designated transferee or transferees. No service charges will be made for any exchange or registration of transfer of Debentures, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge in relation thereto. Prior to due presentment for registration of transfer of this Debenture, the Company, the Trustee, any paying agent and any Debenture Registrar may deem and treat the registered holder hereof as the absolute owner hereof (whether or not this Debenture shall be overdue and notwithstanding any notice of ownership or writing hereon made by anyone other than the Debenture Registrar) for the purpose of receiving payment of or on and for all other purposes, and neither the Company nor the Trustee nor any paying agent nor any Debenture Registrar shall be affected by any notice to the contrary. No recourse shall be had for the payment of the principal of or the interest on this Debenture, or for any claim based hereon, or otherwise in respect hereof, or based on or in respect of the Indenture, against any incorporator, stockholder, officer or director, past, present or future, as such, of the Company or of any predecessor or successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issuance hereof, expressly waived and released. The Debentures are issuable only in registered form without coupons in denominations of $25 and any integral multiple thereto. As provided in the Indenture and subject to certain limitations therein set forth, Debentures are exchangeable for a like aggregate principal amount of Debentures of a difference authorized denomination, as requested by the holder surrendering same. All terms used in this Debenture that are defined in the Indenture shall have the meanings assigned to them in the Indenture. A-8 EX-4 4 EXHIBIT 4.3 GUARANTEE AGREEMENT This GUARANTEE AGREEMENT, dated as of ___________, 1997, is executed and delivered by SunSource Inc., a Delaware corporation (the "Guarantor"), for the benefit of the Holders (as defined herein) from time to time of the Preferred Securities (as defined herein) of SunSource Capital Trust, a Delaware statutory business trust (the "Trust"). WHEREAS, pursuant to an Amended and Restated Declaration of Trust (the "Declaration"), dated as of __________, 1997, among the Trustees of the Trust named therein, SunSource Inc., as Sponsor, and the Holders from time to time of undivided beneficial interests in the assets of the Trust, the Trust is issuing as of the date hereof in accordance with the Conversion (as defined in the Declaration) $____ aggregate liquidation amount of its 11.6% Trust Preferred Securities (the "Preferred Securities") representing preferred undivided beneficial interests in the assets of the Trust and having the terms set forth in Exhibit B to the Declaration; WHEREAS, the Preferred Securities will be issued by the Trust upon deposit of the Guarantor's Debentures (as defined in the Declaration) with the Trust as trust assets; and WHEREAS, the Guarantor desires to irrevocably and unconditionally agree, to the extent set forth herein, to pay to the Holders of the Preferred Securities the Guarantee Payments (as defined herein) and to make certain other payments on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the benefits to be received by the Guarantor in the Conversion, the Guarantor executes and delivers this Guarantee Agreement for the benefit of the Holders from time to time of the Preferred Securities. ARTICLE I SECTION 1.01. As used in this Guarantee Agreement, the terms set forth below shall, unless the context otherwise requires, have the following meanings. Capitalized or otherwise defined terms used but not otherwise defined herein shall have the meanings assigned to such terms in the Declaration as in effect on the date hereof. "Guarantee Payments" shall mean the following payments or distributions, without duplication, with respect to the Preferred Securities, to the extent not paid or made by the Trust: (i) any accrued and unpaid Distributions and the redemption price, including all accrued and unpaid Distributions to the date of redemption (the "Redemption Price"), with respect to the Preferred Securities called for redemption by the Trust but if and only to the extent that in each case the Guarantor has made a payment to the Property Trustee or, if no Property Trustee is required pursuant to the Declaration, the Trust, of interest or principal on the Debentures and (ii) upon a voluntary or involuntary dissolution, winding-up or termination of the Trust (other than in connection with the distribution of Preferred Securities to the holders of Debentures as provided in the Declaration or the redemption of all of the Preferred Securities upon the maturity or redemption of the Debentures), the lesser of (a) the aggregate of the liquidation amount and all accrued and unpaid Distributions on the Preferred Securities to the date of payment, to the extent the Trust has funds available therefor, and (b) the amount of assets of the Trust remaining available for distribution to Holders in liquidation of the Trust (in either case, the "Liquidation Distribution"). "Holder" shall mean any holder, as registered on the books and records of the Trust, of any Preferred Securities; provided, however, that in determining whether the holders of the requisite percentage of Preferred Securities have given any request, notice, consent or waiver hereunder, "Holder" shall not include the Guarantor or any entity directly or indirectly controlling or controlled by or under direct or indirect common control with the Guarantor. ARTICLE II SECTION 2.01. The Guarantor irrevocably and unconditionally agrees to pay in full to the Holders the Guarantee Payments (without duplication of amounts theretofore paid by the Trust) regardless of any defense, right of set-off or counterclaim which the Trust may have or assert. The Guarantor's obligation to make a Guarantee Payment may be satisfied by direct payment of the required amounts by the Guarantor to the Holders or by causing the Trust to pay such amounts to the Holders. SECTION 2.02. The Guarantor hereby waives notice of acceptance of this Guarantee Agreement and of any liability to which it applies or may apply, presentment, demand for payment, any right to require a proceeding first against the Trust or any other Person before proceeding against the Guarantor, protest, notice of nonpayment, notice of dishonor, notice of redemption and all other notices and demands. SECTION 2.03. The obligations, covenants, agreements and duties of the Guarantor under this Guarantee Agreement shall in no way be affected or impaired by reason of the happening from time to time of any of the following: (a) the release or waiver, by operation of law or otherwise, of the performance or observance by the Trust of any express or implied agreement, covenant, term or condition relating to the Preferred Securities to be performed or observed by the Trust; (b) the extension of time for the payment by the Trust of all or any portion of the Distributions (other than an extension of time for payment of Distributions that results from the extension of any interest payment period on the Debentures), Redemption Price, Liquidation Distribution or any other sums payable under the terms of the Preferred Securities or the extension of time for the performance of any other obligation under, arising out of, or in connection with, the Preferred Securities; 2 (c) any failure, omission, delay or lack of diligence on the part of the Holders to enforce, assert or exercise any right, privilege, power or remedy conferred on the Holders pursuant to the terms of the Preferred Securities, or any action on the part of the Trust granting indulgence or extension of any kind; (d) the voluntary or involuntary liquidation, dissolution, sale of any collateral, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment of debt of, or other similar proceedings affecting, the Trust or any of the assets of the Trust; (e) any invalidity of, or defect or deficiency in, the Preferred Securities; (f) the settlement or compromise of any obligation guaranteed hereby or hereby incurred; or (g) any other circumstance whatsoever that might otherwise constitute a legal or equitable discharge or defense of a guarantor, it being the intent of this Section 2.03 that the obligations of the Guarantor hereunder shall be absolute and unconditional under any and all circumstances. There shall be no obligation of the Holders to give notice to, or obtain consent of, the Guarantor with respect to the happening of any of the foregoing. SECTION 2.04. The Guarantor expressly acknowledges that (i) this Guarantee Agreement is subject to the provisions of the Trust Indenture Act that are required to be part of this Guarantee Agreement and shall, to the extent applicable, be governed by such provisions; (ii) this Guarantee Agreement will be deposited with the Property Trustee to be held for the benefit of the Holders of the Preferred Securities; (iii) the Property Trustee has the right to enforce this Guarantee Agreement on behalf of the Holders of the Preferred Securities; (iv) the Holders of Preferred Securities representing not less than a majority in aggregate liquidation amount of the Preferred Securities have the right to direct the time, method and place of conducting any proceeding for any remedy available in respect of this Guarantee Agreement including the giving of directions to the Property Trustee; and (v) any Holder of the Preferred Securities may enforce this Guarantee Agreement, institute a legal proceeding directly against the Guarantor to enforce its rights under this Guarantee Agreement, without first instituting a legal proceeding against the Trust or any other person or entity; provided, that any Holder may institute direct action without prior request to the Property Trustee to enforce the Sponsor's payment obligations on the Debentures. SECTION 2.05. This Guarantee Agreement creates a guarantee of payment and not merely of collection. This Guarantee Agreement will not be discharged except by payment of the Guarantee Payments in full (without duplication of amounts theretofore paid by the Trust). SECTION 2.06. The Guarantor shall be subrogated to all (if any) rights of the Holders of Preferred Securities against the Trust in respect of any amounts paid to the Holders by the Guarantor under this Guarantee Agreement; provided, however, that the Guarantor shall not 3 (except to the extent required by mandatory provisions of law) be entitled to enforce or exercise any rights which it may acquire by way of subrogation or any indemnity, reimbursement or other agreement, in all cases as a result of payment under this Guarantee Agreement, if, at the time of any such payment, any amounts are due and unpaid under this Guarantee Agreement. If any amount shall be paid to the Guarantor in violation of the preceding sentence, the Guarantor agrees to hold such amount in trust for the Holders and to pay over such amount to the Holders. SECTION 2.07. The Guarantor acknowledges that its obligations hereunder are independent of the obligations of the Trust with respect to the Preferred Securities and that the Guarantor shall be liable as principal and as debtor hereunder to make Guarantee Payments pursuant to the terms of this Guarantee Agreement notwithstanding the occurrence of any event referred to in subsections (a) through (g), inclusive, of Section 2.03 hereof. ARTICLE III SECTION 3.01. So long as any Preferred Securities remain outstanding, the Guarantor will not declare or pay any dividend on, or redeem, purchase, acquire or make a distribution or liquidation payment with respect to, any of its common stock or preferred stock, or make any guarantee payment with respect thereto, if at such time (i) the Guarantor shall be in default with respect to its Guarantee Payments or other payment obligations hereunder, (ii) there shall have occurred any Event of Default under the Indenture or (iii) the Guarantor shall have given notice of its selection of an Extension Period (as defined in the Indenture) and such period, or any extension thereof, is continuing. In addition, so long as any Preferred Securities remain outstanding, the Guarantor (i) will remain the sole direct or indirect owner of all of the outstanding Common Securities and shall not cause or permit the Common Securities to be transferred except to the extent such transfer is permitted under Section 8.1(c) of the Declaration, provided that any permitted successor of the Guarantor under the Indenture may succeed to the Guarantor's ownership of the Common Securities; and (ii) will use its reasonable efforts to cause the Trust to continue to be treated as a grantor trust for United States federal income tax purposes except in connection with a distribution of Debentures as provided in the Declaration. SECTION 3.02. This Guarantee Agreement will constitute an unsecured obligation of the Guarantor and will rank (i) subordinate and junior in right of payment to all other liabilities of the Guarantor, including the Debentures, except those made pari passu or subordinate by their terms, and (ii) senior to all capital stock now or hereafter issued by the Guarantor and to any guarantee now or hereafter entered into by the Guarantor in respect of any of its capital stock. ARTICLE IV SECTION 4.01. This Guarantee Agreement shall terminate and be of no further force 4 and effect upon full payment of the Redemption Price of all Preferred Securities, upon the distribution of Debentures to Holders of Preferred Securities in exchange for all of the Preferred Securities or upon full payment of the amounts payable in accordance with the Declaration upon liquidation of the Trust. Notwithstanding the foregoing, this Guarantee Agreement will continue to be effective or will be reinstated, as the case may be, if at any time any Holder must restore payment of any sums paid with respect to Preferred Securities or this Guarantee Agreement. ARTICLE V SECTION 5.01. All guarantees and agreements contained in this Guarantee Agreement shall bind the successors, assigns, receivers, trustees and representatives of the Guarantor and shall inure to the benefit of the Holders of the Preferred Securities then outstanding. Except in connection with a consolidation, merger or sale involving the Guarantor that is permitted under Article Ten of the Indenture, the Guarantor shall not assign its obligations hereunder. SECTION 5.02. Except with respect to any changes which do not materially adversely affect the material rights of Holders (in which case no consent of Holders will be required), this Guarantee Agreement may only be amended with the prior approval of the Holders of not less than 66-2/3% in liquidation amount of all the outstanding Preferred Securities. The provisions of Section 11.2 of the Declaration concerning meetings of Holders shall apply to the giving of such approval. SECTION 5.03. Any notice, request or other communication required or permitted to be given hereunder shall be in writing, duly signed by the party giving such notice, and delivered, telecopied or mailed by first class mail as follows: (a) if given to the Guarantor, to the address set forth below or such other address as the Guarantor may give notice of to the Holders of the Preferred Securities: SunSource Inc. 2600 One Logan Square Philadelphia, PA 19103 Facsimile No.: (215) 665-3662 Attention: Joseph M. Corvino (b) if given to the Trust, in care of the Regular Trustees (with copy to the Property Trustee), at the Trust's (and the Property Trustee's) address set forth below or such other address as the Regular Trustees on behalf of the Trust (or the Property Trustee) may give notice to the Holders of the Preferred Securities: 5 SunSource Capital Trust 501 Silverside Road Suite 17 Wilmington, DE 19809 Facsimile No.: (302) 792-0777 Attention: Joseph M. Corvino with copy to: The Bank of New York 101 Barclay Street Floor 21 West New York, New York 10286 Facsimile No.: 212-815-5915 Attention: Corporate Trust Administration (c) if given to any Holder of Preferred Securities, at the address set forth on the books and records of the Trust. All notices hereunder shall be deemed to have been given when received in person, telecopied with receipt confirmed, or mailed by first class mail, postage prepaid except that if a notice or other document is refused delivery or cannot be delivered because of a changed address of which no notice was given, such notice or other document shall be deemed to have been delivered on the date of such refusal or inability to deliver. SECTION 5.04. The masculine, feminine and neuter genders used herein shall include the masculine, feminine and neuter genders. SECTION 5.05. This Guarantee Agreement is solely for the benefit of the Holders and is not separately transferable from the Preferred Securities. SECTION 5.06. THIS GUARANTEE AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. 6 THIS GUARANTEE AGREEMENT is executed as of the day and year first above written. SUNSOURCE INC. By: ___________________________ Name: Title: 7 EX-5.1 5 EXHIBIT 5.1 [Letterhead of Morgan, Lewis & Bockius LLP] July 22, 1997 SunSource Inc. 2600 One Logan Square Philadelphia, PA 19103 Re: SunSource Inc. Registration Statement on Form S-4 (No. 333-19077) -------------------------------------------------- Ladies and Gentlemen: We have acted as counsel to SunSource Inc., a Delaware corporation (the "Company"), in connection with the preparation of the above-referenced Registration Statement on Form S-4 (the "Registration Statement"), relating to, among other things, the offering of up to 6,418,936 shares of the Company's common stock, par value $0.01 per share (the "Common Stock"), of which all are to be newly issued by the Company in connection with the conversion of SunSource L.P., a Delaware limited partnership to corporate form (the "Conversion"). In rendering the opinion set forth below, we have reviewed (a) the Registration Statement and the exhibits thereto; (b) the Company's Amended and Restated Certificate of Incorporation, as amended; (c) the Company's Bylaws; (d) certain records of the Company's corporate proceedings as reflected in its minute and stock books; (e) a draft of the Agreement and Plan of Conversion pertaining to the Conversion; and (f) such other documents as we have deemed relevant. In our examination, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the conformity with the original of all documents submitted to us as copies thereof. Based upon the foregoing, we are of the opinion that, when issued by the Company in the manner contemplated in the Registration Statement, the Common Stock will be validly issued, fully paid and nonassessable. Our opinion set forth above is limited to the General Corporation Law of the State of Delaware, as amended. We hereby consent to the use of this opinion as Exhibit 5 to the Registration Statement. In giving such opinion, we do not thereby admit that we are acting within the category of persons whose consent is required under Section 7 of the Act or the rules or regulations of the Securities and Exchange Commission thereunder. Very truly yours, Morgan, Lewis & Bockius LLP EX-5.2 6 OPINION RE: LEGALITY [Letterhead of Richards, Layton & Finger] July __, 1997 SunSource Capital Trust 501 Silverside Road Suite 17 Wilmington, Delaware 19809 Re: SunSource Capital Trust ----------------------- Ladies and Gentlemen: We have acted as special Delaware counsel for SunSource Capital Trust, a Delaware business trust (the "Trust"), in connection with the matters set forth herein. At your request, this opinion is being furnished to you. For purposes of giving the opinions hereinafter set forth, our examination of documents has been limited to the examination of originals or copies of the following: (a) The Certificate of Trust of the Trust, dated as of June 13, 1997 (the "Certificate"), as filed in the office of the Secretary of State of the State of Delaware (the "Secretary of State") on June 17, 1997; (b) The Declaration of Trust of the Trust, dated as of June 13, 1997, among SunSource Inc., a Delaware corporation ("SunSource"), as sponsor, and the trustees of the Trust named therein; SunSource Capital Trust July __, 1997 Page 2 (c) Amendment No. 4 to the Registration Statement (the "Registration Statement") on Form S-4, including a preliminary proxy statement/prospectus (the "Prospectus"), relating to the 11.6% Trust Preferred Securities of the Trust representing preferred undivided beneficial interests in the assets of the Trust (each, a "Trust Preferred Security" and collectively, the "Trust Preferred Securities"), as proposed to be filed by SunSource and the Trust with the Securities and Exchange Commission on or about July __, 1997; (d) A form of Amended and Restated Declaration of Trust of the Trust, to be entered into among SunSource, as sponsor, the trustees of the Trust named therein, and the holders, from time to time, of undivided beneficial interests in the assets of the Trust (the "Declaration"), attached as an exhibit to the Registration Statement; and (e) A Certificate of Good Standing for the Trust, dated July __, 1997, obtained from the Secretary of State. Initially capitalized terms used herein and not otherwise defined are used as defined in the Declaration. For purposes of this opinion, we have not reviewed any documents other than the documents listed in paragraphs (a) through (e) above. In particular, we have not reviewed any document (other than the documents listed in paragraphs (a) through (e) above) that is referred to in or incorporated by reference into the documents reviewed by us. We have assumed that there exists no provision in any document that we have not reviewed that is inconsistent with the opinions stated herein. We have conducted no independent factual investigation of our own but rather have relied solely upon the foregoing documents, the statements and information set forth therein and the additional matters recited or assumed herein, all of which we have assumed to be true, complete and accurate in all material respects. With respect to all documents examined by us, we have assumed (i) the authenticity of all documents submitted to us as authentic originals, (ii) the conformity with the originals of all documents submitted to us as copies or forms, and (iii) the genuineness of all signatures. For purposes of this opinion, we have assumed (i) that the Declaration and the Certificate are in full force and effect and have not been amended, (ii) except to the extent provided in paragraph 1 below, the due creation or due organization or due formation, as the case may be, and valid existence in good standing of each party to the documents examined by us under the laws of the jurisdiction governing its creation, organization or formation, (iii) the legal capacity of natural persons who are signatories to SunSource Capital Trust July __, 1997 Page 3 the documents examined by us, (iv) that each of the parties to the documents examined by us has the power and authority to execute and deliver, and to perform its obligations under, such documents, (v) the due authorization, execution and delivery by all parties thereto of all documents examined by us, (vi) the receipt by each Person to whom a Trust Preferred Security is to be issued by the Trust (collectively, the "Trust Preferred Security Holders") of a certificate for such Trust Preferred Security in the form prescribed by the Declaration and the payment for the Trust Preferred Security acquired by it, in accordance with the Declaration and the Registration Statement, and (vii) that the Trust Preferred Securities are issued and sold to the Trust Preferred Security Holders in accordance with the Declaration and the Registration Statement. We have not participated in the preparation of the Registration Statement and assume no responsibility for its contents. This opinion is limited to the laws of the State of Delaware (excluding the securities laws of the State of Delaware), and we have not considered and express no opinion on the laws of any other jurisdiction, including federal laws and rules and regulations relating thereto. Our opinions are rendered only with respect to Delaware laws and rules, regulations and orders thereunder that are currently in effect. Based upon the foregoing, and upon our examination of such questions of law and statutes of the State of Delaware as we have considered necessary or appropriate, and subject to the assumptions, qualifications, limitations and exceptions set forth herein, we are of the opinion that: 1. The Trust has been duly created and is validly existing in good standing as a business trust under the Delaware Business Trust Act. 2. The Trust Preferred Securities will represent valid and, subject to the qualifications set forth in paragraph 3 below, fully paid and nonassessable undivided beneficial interests in the assets of the Trust. 3. The Trust Preferred Security Holders, as beneficial owners of the Trust, will be entitled to the same limitation of personal liability extended to stockholders of private corporations for profit organized under the General Corporation Law of the State of Delaware. We note that the Trust Preferred Security Holders may be obligated to make payments as set forth in the Declaration. SunSource Capital Trust July __, 1997 Page 4 We consent to the filing of this opinion with the Securities and Exchange Commission as an exhibit to the Registration Statement. In addition, we hereby consent to the use of our name under the heading "Legal Matters" in the Prospectus. In giving the foregoing consents, we do not thereby admit that we come within the category of Persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the rules and regulations of the Securities and Exchange Commission thereunder. Except as stated above, without our prior written consent, this opinion may not be furnished or quoted to, or relied upon by, any other Person for any purpose. Very truly yours, PMA/GWL/jj EX-23.1 7 CONSENT Exhibit 23.1 Consent of Independent Accountants We consent to the incorporation by reference and inculusion in this registration statement of Form S-4 (File No. 333-19077) of our report dated January 29, 1997, except for Note 9 as to which the date is March 21, 1997 and Note 19 as to which the date is March 4, 1997, on our audits of the consolidated financial statements and financial statement schedules of SunSource L.P. and to the inclusion of our report dated May 1, 1997 on the audit of the Balance sheet of SunSource Inc. We also consent to the reference to our firm under the caption "Experts." /s/ COOPERS & LYBRAND L.L.P. ----------------------------------- COOPERS & LYBRAND L.L.P. 2400 Eleven Penn Center Philadelphia, Pennsylvania July 21, 1997 EX-23.4 8 CONSENT CONSENT OF SMITH BARNEY The Special Committee of the Board of Directors Lehman/SDI, Inc. 2600 One Logan Square Philadelphia, PA 19103 Attention: O. Gordon Brewer, Jr. and Ernest L. Ransome, III Members of the Special Committee We hereby consent to the (i) inclusion of our opinion letter to the Special Committee of the Board of Directors of Lehman/SDI, Inc. as Exhibit C to the Proxy Statement/Prospectus on SunSource Inc. and SunSource Capital Trust relating to the proposed corporate conversion and merger of SunSource, L.P. into SunSource, Inc., and (ii) references made to our firm and such opinion in such Proxy Statement/Prospectus. In giving such consent, we do not admit that we come within the category of persons whose consent is required under, and we do not admit that we are "experts" for purposes of, the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. By: /s/ Smith Barney Inc. --------------------------- Smith Barney Inc. New York, NY July 15, 1997 EX-25 9 FORM T-1 THIS CONFORMING PAPER FORMAT DOCUMENT IS BEING SUBMITTED PURSUANT TO RULE 901(d) OF REGULATION S-T ================================================================================ FORM T-1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(b)(2) |__| ---------------------- THE BANK OF NEW YORK (Exact name of trustee as specified in its charter) New York 13-5160382 (State of incorporation (I.R.S. employer if not a U.S. national bank) identification no.) 48 Wall Street, New York, N.Y. 10286 (Address of principal executive offices) (Zip code) ---------------------- SUNSOURCE INC. (Exact name of obligor as specified in its charter) Delaware 23-2874736 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 2600 One Logan Square Philadelphia, Pennsylvania 19103 (Address of principal executive offices) (Zip code) ---------------------- Guarantee of Preferred Securities of SunSource Capital Trust (Title of the indenture securities) ================================================================================ 1. General information. Furnish the following information as to the Trustee: (a) Name and address of each examining or supervising authority to which it is subject.
- -------------------------------------------------------------------------------------------- Name Address - -------------------------------------------------------------------------------------------- Superintendent of Banks of the State of 2 Rector Street, New York, New York N.Y. 10006, and Albany, N.Y. 12203 Federal Reserve Bank of New York 33 Liberty Plaza, New York, N.Y. 10045 Federal Deposit Insurance Corporation Washington, D.C. 20429 New York Clearing House Association New York, New York 10005
(b) Whether it is authorized to exercise corporate trust powers. Yes. 2. Affiliations with Obligor. If the obligor is an affiliate of the trustee, describe each such affiliation. None. 16. List of Exhibits. Exhibits identified in parentheses below, on file with the Commission, are incorporated herein by reference as an exhibit hereto, pursuant to Rule 7a-29 under the Trust Indenture Act of 1939 (the "Act") and 17 C.F.R. 229.10(d). 1. A copy of the Organization Certificate of The Bank of New York (formerly Irving Trust Company) as now in effect, which contains the authority to commence business and a grant of powers to exercise corporate trust powers. (Exhibit 1 to Amendment No. 1 to Form T-1 filed with Registration Statement No. 33-6215, Exhibits 1a and 1b to Form T-1 filed with Registration Statement No. 33-21672 and Exhibit 1 to Form T-1 filed with Registration Statement No. 33-29637.) 4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to Form T-1 filed with Registration Statement No. 33-31019.) -2- THIS CONFORMING PAPER FORMAT DOCUMENT IS BEING SUBMITTED PURSUANT TO RULE 901(d) OF REGULATION S-T 6. The consent of the Trustee required by Section 321(b) of the Act. (Exhibit 6 to Form T-1 filed with Registration Statement No. 33-44051.) 7. A copy of the latest report of condition of the Trustee published pursuant to law or to the requirements of its supervising or examining authority. -3- SIGNATURE Pursuant to the requirements of the Act, the Trustee, The Bank of New York, a corporation organized and existing under the laws of the State of New York, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in The City of New York, and State of New York, on the 17th day of July, 1997. THE BANK OF NEW YORK By: /S/STEPHEN J. GIURLANDO ------------------------------- Name: STEPHEN J. GIURLANDO Title: ASSISTANT VICE PRESIDENT -4- Exhibit 7 - -------------------------------------------------------------------------------- Consolidated Report of Condition of THE BANK OF NEW YORK of 48 Wall Street, New York, N.Y. 10286 And Foreign and Domestic Subsidiaries, a member of the Federal Reserve System, at the close of business March 31, 1997, published in accordance with a call made by the Federal Reserve Bank of this District pursuant to the provisions of the Federal Reserve Act. Dollar Amounts ASSETS in Thousands Cash and balances due from depos- itory institutions: Noninterest-bearing balances and currency and coin .................. $ 8,249,820 Interest-bearing balances .......... 1,031,026 Securities: Held-to-maturity securities ........ 1,118,463 Available-for-sale securities ...... 3,005,838 Federal funds sold and Securities pur- chased under agreements to resell...... 3,100,281 Loans and lease financing receivables: Loans and leases, net of unearned income .................32,895,077 LESS: Allowance for loan and lease losses ..............633,877 LESS: Allocated transfer risk reserve........................429 Loans and leases, net of unearned income, allowance, and reserve 32,260,771 Assets held in trading accounts ...... 1,715,214 Premises and fixed assets (including capitalized leases) ................ 684,704 Other real estate owned .............. 21,738 Investments in unconsolidated subsidiaries and associated companies .......................... 195,761 Customers' liability to this bank on acceptances outstanding ............ 1,152,899 Intangible assets .................... 683,503 Other assets ......................... 1,526,113 ----------- Total assets ......................... $54,746,131 =========== LIABILITIES Deposits: In domestic offices ................ $25,614,961 Noninterest-bearing ......10,564,652 Interest-bearing .........15,050,309 In foreign offices, Edge and Agreement subsidiaries, and IBFs ... 15,103,615 Noninterest-bearing .........560,944 Interest-bearing .........14,542,671 Federal funds purchased and Securities sold under agreements to repurchase. 2,093,286 Demand notes issued to the U.S. Treasury ........................... 239,354 Trading liabilities .................. 1,399,064 Other borrowed money: With remaining maturity of one year or less .......................... 2,075,092 With remaining maturity of more than one year ......................... 20,679 Bank's liability on acceptances exe- cuted and outstanding .............. 1,160,012 Subordinated notes and debentures .... 1,014,400 Other liabilities .................... 1,840,245 ----------- Total liabilities .................... 50,560,708 ----------- EQUITY CAPITAL Common stock ........................ 942,284 Surplus ............................. 731,319 Undivided profits and capital reserves .......................... 2,544,303 Net unrealized holding gains (losses) on available-for-sale securities ........................ ( 19,449) Cumulative foreign currency transla- tion adjustments .................. ( 13,034) ------------ Total equity capital ................ 4,185,423 ----------- Total liabilities and equity capital ........................... $54,746,131 =========== I, Robert E. Keilman, Senior Vice President and Comptroller of the above-named bank do hereby declare that this Report of Condition has been prepared in conformance with the instructions issued by the Board of Governors of the Federal Reserve System and is true to the best of my knowledge and belief. Robert E. Keilman We, the undersigned directors, attest to the correctness of this Report of Condition and declare that it has been examined by us and to the best of our knowledge and belief has been prepared in conformance with the instructions issued by the Board of Governors of the Federal Reserve System and is true and correct. -- Alan R. Griffith | J. Carter Bacot |-- Directors Thomas A. Renyi | -- - -------------------------------------------------------------------------------- EX-99.2 10 SELECTED QUESTIONS AND ANSWERS [LOGO] SUNSOURCE Selected Questions and Answers This booklet answers key questions about the proposal to convert the Partnership to corporate form and related matters August __, 1997 - -------------------------------------------------------------------------------- This booklet is neither an offer to sell nor a solicitation of an offer to buy any securities. Such offer or solicitation may be made only by means of the Proxy Statement/Prospectus. This booklet is accompanied by, should be read in conjunction with, and is qualified by the more detailed information contained in, the Proxy Statement/Prospectus relating to the Conversion. - -------------------------------------------------------------------------------- Voting Information Meeting Date: September 18, 1997 Meeting Location: 3000 One Logan Square, 30th Floor 18th and Cherry Streets Philadelphia, PA 19103 Meeting Time: 10:00 a.m. Vote Required: Approval of the Conversion will require the affirmative votes of (1) a majority of the outstanding A Interests and B Interests, each class voting separately; and (2) a majority of the outstanding unaffiliated A Interests and unaffiliated B Interests (Interests held by holders not affiliated with the General Partner), each class voting separately. How to Vote: You may vote "For" or "Against" the proposal or you may "Abstain" by so indicating on the enclosed Proxy Card, signing and dating it, and returning it in the self-addressed envelope enclosed for that purpose. You must sign the Proxy Card exactly as your name appears on your Proxy Card. Joint owners should both sign. When signing as an attorney, executor, administrator, trustee or guardian, please give your full title. Abstentions and broker non-votes will be treated as present for the purpose of determining a quorum but will have the effect of votes against the Conversion Proposal. Please return your Proxy Card as soon as possible, regardless of whether you plan to attend the meeting. You may revoke your proxy at any time prior to the meeting by giving written notice to the Partnership, by submitting a later dated Proxy Card or by voting in person at the meeting. If you wish to vote in person, you may do so at the meeting, regardless of whether you have previously granted a proxy. The General Partner urges you to consider the Conversion carefully and to vote FOR the Conversion by returning the enclosed Proxy Card as soon as possible. - -------------------------------------------------------------------------------- Key Terms Partnership SunSource L.P., the existing publicly-owned limited partnership. Corporation SunSource Inc., the new corporation. SunSource The Partnership before the Conversion or the Corporation after the Conversion. Conversion The conversion of the Partnership to corporate form and related transactions as described in the Proxy Statement dated August __, 1997. A Interests Class A limited partnership interests in the Partnership. B Interests Class B limited partnership interests in the Partnership. - -------------------------------------------------------------------------------- SUNSOURCE INC. SUNSOURCE L.P. Selected Questions and Answers --------------------- 1. What has been proposed for approval by holders of SunSource limited partnership interests? You are being asked to consider and vote on a proposal to convert the Partnership to a publicly-traded corporation. After the Conversion, the business currently conducted by the Partnership will be conducted by the Corporation, with the same operating management as the Partnership. 2. What is the reason for the proposal? The Conversion is being proposed in response to a provision of the Revenue Act of 1987 which amended the tax treatment of publicly-traded master limited partnerships (MLP's) such as the Partnership. In accordance with existing tax law, the Partnership's "grandfathered" MLP status will end after December 31, 1997, after which it will be taxable as a corporation. There are bills pending in Congress that would change this deadline, but we still believe the Conversion is desirable for the reasons set forth in the answer to Question 6. 3. If the Conversion occurs, what will be exchanged for each of my A Interests? Each A Interest will receive 0.38 of an 11.6% Trust Preferred Security plus $1.30 in cash. The Trust Preferred Securities will represent undivided beneficial interests in the assets of SunSource Capital Trust, which will hold 11.6% Junior Subordinated Debentures of the Corporation. Since the annual distribution on the Trust Preferred Securities will be $2.90 per share, the 0.38 exchange ratio means that you will receive after the Conversion $1.10 per year per A Interest, the same as the Priority Return you are presently receiving on your A Interest. Distributions will be made monthly as is presently the case. The Trust Preferred Securities will have a liquidation preference of $25. Under the exchange ratio, the current A Interest liquidation preference of $10.00 will be exchanged for 0.38 Trust Preferred Securities, with a liquidation preference of $9.50, plus $1.30 in cash at the time of the Conversion. - -------------------------------------------------------------------------------- Risk factors, conflicts of interest and other important considerations In evaluating the Conversion, limited partners should take into account the following risk factors and other special considerations which are discussed at greater length in the answer to Question 5 in this booklet and under "RISK FACTORS, CONFLICTS OF INTEREST AND OTHER IMPORTANT CONSIDERATIONS" in the Proxy Statement/Prospectus: o conflicts of interest between the General Partner and the limited partners and between the A Interests and the B Interests. o no independent representation of the limited partners. o a taxable transaction to the A Interests. o no dissenters' rights for nonconsenting limited partners. o uncertainty regarding market price for Trust Preferred Securities and Common Stock, including the effect which the possible sale of Common Stock by Lehman Brothers might have on the market price of the Common Stock. o terms of Trust Preferred Securities, including the ability of the Corporation to defer payments for up to five years, the subordination of underlying Junior Subordinated Debentures, limited voting rights, and optional redemption after five years. - -------------------------------------------------------------------------------- -1- 3. If the Conversion occurs, what will be exchanged for each of my B Interests? Each B Interest will be exchanged for 0.25 share of Common Stock of the Corporation. This is effectively a reverse stock split of one-for-four which is intended to increase the price of a share of Common Stock. It is believed that a higher share price should make the Corporation's stock more attractive to investors and brokers who generally avoid, or are not permitted to purchase, lower-priced stocks. Each B Interest is currently allocated its share of Partnership taxable income and receives a cash distribution with which to pay income taxes. Since the Corporation will pay income taxes, no taxable income will be allocated to the holders of Common Stock, thereby eliminating the need for cash distributions to shareholders for income tax payments. The Corporation has not yet established a dividend policy for its Common Stock but may in the future decide to do so, subject to, among other things, earnings, financial condition, capital requirements, availability of acquisition candidates, level of indebtedness and contractual restrictions with respect to the payment of dividends. 4. What do the partners of the General Partner receive in the Conversion? The holders of interests in the General Partner will receive 1,000,000 shares of Common Stock in exchange for their General Partner Interests. Thereafter, the management fee of $3,330,000 per year and the General Partner's 1.99% share (approximately $400,000) of the Partnership's distributions will be retained by wholly owned subsidiaries of the Corporation. In addition, certain owners of the General Partner Interests (Lehman Brothers and six senior members of management) have agreed to certain restrictions with respect to voting and sale of shares of Common Stock to be received by them. See "DESCRIPTION OF CAPITAL STOCK -- Stockholders Agreement." 5. Are there any special factors I should consider in voting on the Conversion?
- ------------------------------------------------------------------------------------------------------------------------------------ RISKS TO HOLDERS OF A INTERESTS RISKS TO HOLDERS OF B INTERESTS The proposed Conversion necessitates the allocation of The proposed Conversion necessitates the allocation of the total value of the Partnership among the holders of the A the total value of the Partnership among the holders of the B Interests, the holders of the B Interests and the General Interests, the holders of the A Interests and the General Partner. It would be in the General Partner's interest to Partner. It would be in the General Partner's interest to have have its partners receive maximum consideration, undertake its partners receive maximum consideration, undertake the the least possible responsibilities and assume minimum risk, least possible responsibilities and assume minimum risk, all all at the limited partners' expense. Also, it would be in the at the limited partners' expense. Also, it would be in the interest of the holders of A Interests to receive the interest of the holders of B Interests to receive the maximum maximum consideration for their A Interests, at the consideration for their B Interests, at the expense of the expense of the General Partner and the holders of the B General Partner and the holders of the A Interests. Interests. o Holders of B Interests were not separately o Holders of A Interests were not separately represented in establishing the terms of the represented in establishing the terms of the Conversion. Such representation might have Conversion. Such representation might have caused the terms of the Conversion to be different caused the terms of the Conversion to be different in some material respects from those described in some material respects from those described herein. herein. - ------------------------------------------------------------------------------------------------------------------------------------
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- ------------------------------------------------------------------------------------------------------------------------------------ RISKS TO HOLDERS OF A INTERESTS RISKS TO HOLDERS OF B INTERESTS o Unlike A Interests, which are not subject to o If the Conversion is approved, holders of B mandatory or optional redemption by the Interests will no longer have the right to receive tax Partnership, the Junior Subordinated Debentures distributions with respect to their allocable share of held by the Trust may be redeemed by the the Partnership's taxable income since they will no Corporation at 100% of the principal amount plus longer be taxed with respect to income of the accrued and unpaid interest at any time after corporation. September 30, 2002 or, if certain conditions are met, earlier at 101% of the principal amount plus o The Board of Directors has not yet established a accrued and unpaid interest upon the occurrence of policy regarding the payment of dividends on the a Tax Event. See "DESCRIPTION OF JUNIOR Common Stock after the Effective Time of the SUBORDINATED DEBENTURES -- Optional Conversion. The payment of dividends will be at Redemption." This redemption will result in the the discretion of the Corporation's Board of redemption of the Trust Preferred Securities. Directors and will depend, among other things, on earnings, financial condition, capital requirements, o Upon the occurrence of a Tax Event, if certain availability of acquisition candidates, level of conditions are met, the Corporation shall have the indebtedness, contractual restrictions with respect right under certain circumstances to shorten the to the payment of dividends and other factors that maturity of the Junior Subordinated Debentures to the Corporation's Board of Directors deems a date not earlier than ______, 2002. See relevant. It should be noted that the Corporation's "DESCRIPTION OF TRUST PREFERRED unaudited pro forma balance sheet for the three SECURITIES -- Special Event Redemption or months ended March 31, 1997 reflects a Distribution; Shortening of Stated Maturity." If stockholders' deficit of approximately $7.4 million the Corporation exercises such right, there can be and a negative net book value per common share of no assurance that the shortening of the maturity of $1.16. Counsel has advised the Partnership and the the Junior Subordinated Debentures will not have Corporation that under Delaware law, dividends or an effect on the market price of the Trust Preferred distributions on the stock of a Delaware Securities or Junior Subordinated Debentures that corporation may be declared or paid out of surplus, may be distributed in exchange for Trust Preferred so that the net assets of the corporation after such Securities. payment shall at least equal the amount of its capital. However, such a dividend or distribution is o In view of the cash payment of $1.30 to the holders permissible under such provision only if the of A Interests, the liquidation preference for 0.38 corporation's board of directors concludes that (a) of a Trust Preferred Security will be $9.50 immediately following payment of such dividend compared to a liquidation preference for an A or distribution, the fair market value of the Interest of $10.00. corporation's assets will exceed its liabilities and (b) the payment of such dividend or distribution is o If the Conversion is approved, holders of A being made out of the corporation's surplus (net Interests will no longer have their contractual right assets minus capital) and not out of capital in under the Partnership Agreement to the Priority contravention of Delaware law. In case there shall Return, although they will be entitled to be no surplus, dividends may also be paid out of distributions on the Trust Preferred Securities net profits for the fiscal year and/or the preceding in an amount equal to such fiscal year. fiscal year. In evaluating the fairness of the proposed Priority Return before dividends, if any, are paid Conversion, the Special Committee did not consider the on the Common Stock. The Board of Directors of pro forma stockholders' deficit and negative book value to the Corporation will have discretion to defer be a significant negative factor, because the accounting payments on the Junior Subordinated Debentures measures of stockholders' equity and net book value were for up to five years. If such payments are deferred, not viewed by the Special Committee's financial advisor, the Trust will be unable to make distributions on Smith Barney, as primary determinants of value for ongoing the Trust Preferred Securities, and the Corporation industrial concerns like the Corporation or the will be prohibited from paying dividends on the Partnership. Common Stock. o If distributions on the Trust Preferred Securities are o Holders of Trust Preferred Securities will be in arrears, the Board of Directors will not be able to required to accrue original issue discount income declare and pay dividends on the Common Stock. with respect to any unpaid distributions on the Trust Preferred Securities. o Holders of B Interests have no dissenters' or appraisal rights in the Conversion. Therefore, holders of B Interests will not be entitled to receive cash payments from SunSource for the fair value of their Interests if they dissent and the Conversion is approved and consummated. o Prior to the Conversion, there has been no public market for the Common Stock. The Common - ------------------------------------------------------------------------------------------------------------------------------------
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- ------------------------------------------------------------------------------------------------------------------------------------ RISKS TO HOLDERS OF A INTERESTS RISKS TO HOLDERS OF B INTERESTS o The obligations of the Corporation under the Junior Stock received by the holders of the B Interests Subordinated Debentures will be unsecured may trade at prices below the historical trading obligations and will be subordinate and junior in levels of the B Interests. right of payment to senior indebtedness of the Corporation and the Operating Partnership and will o If a large number of holders of Common Stock be structurally subordinated to all liabilities and were to offer their securities for sale immediately obligations of the Operating Partnership and the after consummation of the Conversion, the market Corporation's other subsidiaries. As of March 31, could decline. 1997 (on a pro forma basis, assuming the Merger had occurred on such date), the Corporation and o The Corporation has agreed to file a registration the Operating Partnership would have had statement for the sale of shares of Common Stock approximately $106.2 million principal amount of by Lehman Brothers and, subject to certain senior indebtedness outstanding, and the Operating limitations, by management, after the Conversion. Partnership and the Corporation's other Lehman Brothers and management have agreed to subsidiaries would have had approximately $92.4 cooperate to execute an underwritten secondary million of indebtedness and other liabilities. offering of all or some portion of their shares of Common Stock as soon as practicable after the o There are no terms in the Trust Preferred Securities effective date of the Conversion, subject to market or the Junior Subordinated Debentures that limit conditions. The Corporation has agreed not to sell the Corporation's or its subsidiaries' ability to any additional shares of Common Stock prior to the incur additional indebtedness. earlier of such initial secondary offering and the nine-month anniversary of the Conversion, except o The receipt of Trust Preferred Securities and cash the issuance of unregistered shares in connection by the holders of A Interests will be a taxable with acquisitions. In addition, Lehman Brothers event. The receipt of Trust Preferred Securities, Capital Partners I, an affiliate of Lehman/SDI Common Stock and cash by holders who hold both holding 5,788,124 B Interests, may distribute to its A Interests and B Interests will be a taxable event. partners the shares of Common Stock it receives as a result of the Conversion (a majority of which o Holders of A Interests currently have the right to shares would be freely tradeable immediately after vote as a class on mergers and together with the such distribution). See "RESALE OF SECURITIES holders of B Interests on the sale of substantially -- Resales by Lehman Brothers and Management." all the assets of the Partnership, amendment of the Partnership Agreement, dissolution and removal of o Certain provisions of Delaware law and the the General Partner. The Trust Preferred Securities Corporation's organizational documents, as well as will not have these voting rights. provisions of the Stockholders Agreement dated as of July ___, 1997 among the Corporation and o Holders of A Interests have no dissenters' or certain of its stockholders (the "Stockholders appraisal rights in the Conversion. Therefore, Agreement") and the stockholder rights plan, holders of A Interests will not be entitled to receive contain provisions that may reduce the likelihood cash payments from SunSource for the fair value of of a takeover of the Corporation that, if successful, their Interests if they dissent and the Conversion is might permit stockholders to receive a premium approved and consummated. over the market price for the Common Stock. See "DESCRIPTION OF CAPITAL STOCK." Such o Prior to the Conversion, there has been no public provisions could also have a negative effect on the market for the Trust Preferred Securities. Because market price of the Common Stock. the consideration received by the holders of A Interests includes $1.30 in cash for each A Interest, o A benefit to the partners of the General Partner of it is likely that .38 of a Trust Preferred Security the Conversion which is not shared by the limited received in respect of each A Interest will trade at partners is the elimination of liability, if any, of the prices below the market price of the A Interest partners of the General Partner for obligations and immediately prior to the Conversion. liabilities of SunSource which occur after the Conversion. o The Corporation intends to list the Trust Preferred Securities on the New York Stock Exchange o The fiduciary duties owed by the directors of the ("NYSE"). The Trust Preferred Securities may Corporation after the Conversion may be less than trade at prices that do not fully reflect the value of those owed by the General Partner of the - ------------------------------------------------------------------------------------------------------------------------------------
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- ------------------------------------------------------------------------------------------------------------------------------------ RISKS TO HOLDERS OF A INTERESTS RISKS TO HOLDERS OF B INTERESTS accrued but unpaid interest with respect to the Partnership before the Conversion, which may underlying Junior Subordinated Debentures. A result in decreased potential liability of the holder of Trust Preferred Securities that disposes of directors of the Corporation. its Trust Preferred Securities between record dates for payments of distributions (and consequently o Certain members of management will receive does not receive a distribution from the Trust for accelerated payments under certain deferred the period prior to such disposition) will compensation plans of the Operating Partnership as nevertheless be required to include as ordinary a result of the Conversion. income, accrued but unpaid interest on the Junior Subordinated Debentures through the date of o In addition to the factors noted above, an disposition. Such holder will recognize a capital investment in SunSource (whether in partnership or loss to the extent the amount realized with respect corporate form) is subject to risks associated with to the Trust Preferred Securities is less than its operating conditions, competitive factors, economic adjusted tax basis. Subject to certain limited conditions, industry conditions and equity market exceptions, capital losses cannot be applied to conditions. offset ordinary income for United States federal income tax purposes. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES -- Certain Tax Consequences of the Conversion to Holders of A Interests." o If a large number of holders of Trust Preferred Securities were to offer their securities for sale immediately after consummation of the Conversion, the market price of the Trust Preferred Securities could decline. o A benefit to the partners of the General Partner of the Conversion which is not shared by the limited partners is the elimination of liability, if any, of the partners of the General Partner for obligations and liabilities of SunSource which occur after the Conversion. o Certain members of management will receive accelerated payments under certain deferred compensation plans of the Operating Partnership as a result of the Conversion. See "MANAGEMENT -- Change in Control Arrangements." o In addition to the factors noted above, an investment in SunSource (whether in partnership or corporate form) is subject to risks associated with operating conditions, competitive factors, economic conditions, industry conditions and market conditions. - ------------------------------------------------------------------------------------------------------------------------------------
6. What are the reasons the General Partner believes the Conversion would be beneficial? The General Partner believes that the Conversion will provide SunSource and the holders of B Interests the following benefits: -5- o Expansion of Potential Investor Base. Expand the base of potential investors in SunSource to include persons and institutional entities who do not typically invest in limited partnership securities. In addition, the General Partner anticipates that the Common Stock (as compared to Interests) will receive additional investor interest through increased review and evaluation by research analysts. o Conservation of Cash. The Corporation will conserve cash by the retention of the annual management fee of $3,330,000 and the retention of distributions on the General Partner's ownership in the Partnership and the Operating Partnership amounting to approximately $400,000 annually. o Tax Consequences to the Corporation. Although the Corporation will have to pay tax on its income, SunSource will conserve additional cash (i) because the interest payable on the Junior Subordinated Debentures, which will approximately equal the Priority Return currently paid on the A Interests, will be deductible for federal income tax purposes, resulting in a corporate tax benefit of approximately $4,900,000 annually and (ii) because of the difference in rates between the B Tax Distribution, which will be eliminated, and the tax that will become payable by the Corporation. If the Conversion is not approved and the Partnership is taxed as a corporation, the Priority Return would have to be paid from net income after corporate income taxes after December 31, 1997. o Acquisition Currency. The Corporation will have greater flexibility to consummate acquisitions due to conservation of cash resources and the ability to use capital stock as acquisition currency. o Greater Access to Equity Markets. The Corporation will also have greater access to public and private equity capital markets at a potentially lower cost of capital. o Tax Reporting. Simplify and reduce costs of tax reporting for investors in SunSource. The General Partner also believes that the Conversion will provide the holders of A Interests with benefits in the form of the cash payment of $1.30, the continuation of the $1.10 distribution and the continuation of a tradeable security, and will simplify and reduce costs of tax reporting for holders. In addition, to the extent the benefits described above for the holders of B Interests strengthen the financial condition of the Corporation, there is greater assurance that the $1.10 of annual distributions will continue to be paid. 7. What is the impact of the Conversion on earnings per B Interest? If the Conversion is approved, net income available to the Common Stock will be increased because the management fee of $3,330,000 and distributions on the General Partner's ownership in the Partnership and the Operating Partnership amounting to approximately $400,000 annually will be retained within the corporate family. The Corporation would also save approximately $4,900,000 per year in income taxes due to its ability to deduct from taxable income the interest paid on the Junior Subordinated Debentures. On the other hand, an additional 1,000,000 shares of Common Stock will be outstanding and held by the former owners of the General Partner Interests (Lehman Brothers and its affiliates, and management). 8. What is the impact on earnings per share if the Conversion is not approved? If the Conversion is not approved, the Partnership's present intention is to continue to operate as a partnership, which will be taxable as a corporation after December 31, 1997 under current tax law. Based on pro forma results for the twelve months ended December 31, 1996, SunSource would have generated net income of $0.204 per B Interest (after the reverse stock split) if the Partnership were -6- to have converted to corporate form on January 1, 1996, but a net loss of $0.076 per B Interest (after the reverse stock split) if the Conversion were not approved and the Partnership were taxed as a corporation effective January 1, 1996. Of the $0.280 increase in earnings per B Interest in the pro forma results for the Conversion, $0.232 is attributable to the exchange of A Interests for Trust Preferred Securities and cash (and the tax benefits of the deduction of the interest payments on the related Junior Subordinated Debentures) and $0.048 is attributable to the retention of the General Partner's management fee and respective 1% ownership interests in the Partnership and the Operating Partnership in exchange for the issuance of 1,000,000 shares of Common Stock (after the reverse stock split). See"SPECIAL FACTORS --- Consequences if the Conversion is Not Approved." If the Conversion is not approved and the Partnership is taxed as a corporation, tax distributions to B Interests would be eliminated after December 31, 1997 because there would be no taxable income allocated to the B Interests after that date. 9. How was the allocation of value determined among the A Interests, B Interests, and the General Partner Interests? On June 12, 1996, the Board of Directors of Lehman/SDI appointed a Special Committee to review, evaluate and reach a determination with respect to the fairness of the terms of the Conversion to the limited partners, and to make a recommendation to the Board of Directors with respect to the Conversion. The Special Committee was authorized to retain its own legal counsel and financial advisor to assist them in their work. O. Gordon Brewer, Jr. and Ernest L. Ransome, III were appointed to serve on the Special Committee. Except for their directorship in Lehman/SDI, Inc. and membership on the Special Committee, the members of the Special Committee are not otherwise affiliated with SunSource, Lehman Brothers, or their affiliates. Their combined holdings of limited partnership interests are 8,000 A Interests and 6,000 B Interests. The Special Committee selected Dechert Price & Rhoads as its independent legal counsel and Smith Barney, Inc. to act as its independent financial advisor. The Special Committee, its advisors, and the General Partner had numerous meetings in the ensuing months for the purpose of negotiating the terms of the Conversion. On December 11, 1996, the Special Committee recommended to the Board of Directors that the terms of the Conversion were fair to the holders of the Partnership's A Interests and B Interests. The Board of Directors voted unanimously to accept the recommendation of the Special Committee. On June 19, 1997, the Special Committee unanimously determined to reaffirm its recommendation to the Board of Directors of Lehman/SDI based upon Smith Barney's updated written fairness opinion as of such date, a copy of which is included as Exhibit C to the Proxy Statement/Prospectus. See "SPECIAL FACTORS -- Allocation of Interests in the Conversion;" "-- Determinations of the Special Committee." 10. Have any opinions as to the fairness of the Conversion been received? Yes. Smith Barney, Inc. delivered its written opinion to the Special Committee on December 10, 1996 to the effect that, as of such date based upon and subject to certain matters as stated therein, (i) the consideration to be received in the Conversion by the holders of A Interests is fair, from a financial point of view, to such holders, (ii) the consideration to be received in the Conversion by the holders of B Interests is fair, from a financial point of view, to such holders, and (iii) the General Partner consideration to be received in the Conversion is fair, from a financial point of view, to the holders of the A Interests and to the holders of the B Interests, respectively. See "SPECIAL FACTORS - Opinion of Smith Barney." A similar opinion was rendered by Smith Barney on June 19, 1997, a copy of which is included as Exhibit C to the Proxy Statement/Prospectus. PH02/170278.5 -7- 11. Where will the Trust Preferred Securities and the Common Stock trade? The Trust Preferred Securities and the Common Stock are expected to be listed on the New York Stock Exchange. 12. What will be the market values of the Trust Preferred Securities and the Common Stock? Smith Barney has not expressed any opinion as to what the values of the Trust Preferred Securities or Common Stock will actually be when issued to holders of A Interests or B Interests, respectively, nor as to the prices at which they will trade subsequent to the Conversion. There can be no assurance that holders will be able to sell their securities at favorable prices or that the trading prices for the securities will be comparable to the trading prices prior to the consummation of the Conversion. See "SPECIAL FACTORS - Opinion of Smith Barney." (a) Trust Preferred Securities. Prior to the Conversion, there has been no public market for the Trust Preferred Securities. Because the consideration received by the holders of A Interests includes $1.30 in cash for each A Interest, it is likely that the Trust Preferred Securities received in respect of each A Interest will trade at prices below the market price of the A Interests immediately prior to the Merger. If a large number of holders of Trust Preferred Securities were to offer their securities for sale immediately after consummation of the Conversion, the market prices of the Trust Preferred Securities could decline substantially absent a corresponding demand for the securities from other investors. (b) Common Stock. Prior to the Conversion there has been no public market for the Common Stock. The Common Stock received by the holders of B Interests could trade at prices substantially below the historical trading level of the B Interests (adjusted for the one-for-four reverse stock split) if a large number of holders of Common Stock were to offer their shares for sale shortly after the Conversion and there was an absence of corresponding demand for the Common Stock from institutional and retail investors. The Corporation has agreed to file registration statements for the sale of shares of Common Stock by Lehman/SDI, Inc. and certain of its affiliates (collectively, "Lehman Brothers") and, subject to certain limitations, by management, after the Conversion. Lehman Brothers and management have agreed to cooperate to execute an underwritten secondary offering of all or some portion of their shares of Common Stock as soon as practicable after the effective date of the Conversion, subject to market conditions. The Corporation has agreed not to sell any additional shares of Common Stock prior to the earlier of such initial secondary offering and the nine-month anniversary of the Conversion, except in connection with certain acquisitions. In addition, Lehman Brothers Capital Partners I, an affiliate of Lehman/SDI, Inc. holding 5,788,124 B Interests, may distribute the shares of Common Stock it receives in the Merger (a majority of which shares would be freely tradeable immediately after such distribution) to its partners. See"RESALE OF SECURITIES - Resales by Lehman Brothers and Management." Issuances of additional shares of Common Stock or Preferred Stock by the Corporation could adversely affect the existing stockholders' equity interest in the Corporation and the market price of the Common Stock. 13. What are the significant tax aspects of the Conversion to holders of limited partnership interests? For investors who hold only A Interests, the Conversion will be a taxable transaction. Gain or loss -8- will be recognized in an amount equal to the difference between the sum of cash and the fair market value of Trust Preferred Securities received in the exchange and the exchanging holder's tax basis in the A Interests exchanged. Such gain or loss will be long-term gain or loss if the A Interests have been held for more than one year. The General Partner believes that the distribution of $1.30 in cash per A Interest will be adequate to fund the tax liability for the great majority of holders of A Interests. For investors who hold only B Interests, the exchange should be tax-free under current tax law, except to the extent of any cash received in lieu of fractional shares. Any such cash should result in capital gain to the recipient, assuming the B Interests are held as capital assets. For investors who hold both A Interests and B Interests, the tax treatment is somewhat more complex. Generally, gain will be recognized on an aggregate basis in an amount equal to the lesser of (i) the difference between the sum of cash and the fair market value of the Trust Preferred Securities and Common Stock received in the exchange and the exchanging holder's aggregate tax basis in the A Interests and B Interests exchanged or (ii) the amount of cash and Trust Preferred Securities received in the exchange. Such gain should be treated as long-term capital gain provided that the A interests have been held for more than one year. Losses generally would not be recognized but apportioned as part of the tax basis in the Trust Preferred Securities and Common Stock. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES - General Tax Treatment of the Conversion; -Certain Tax Consequences of the Conversion to Holders of B Interests; and Certain Tax Consequences of the Conversion to Holders of A Interests." 14. Will dissenting holders of A Interests and B Interests be entitled to appraisal rights? No. If the limited partners approve the Conversion, all holders of Interests will be bound by such approval even though they, individually, may have voted against the Conversion. 15. What impact does the Conversion have on voting rights? If the Conversion is approved, the A Interest holders will generally be exchanging limited partnership voting rights for corporate creditors' rights. If the Conversion is approved, the B Interest holders will be exchanging limited partnership voting rights for shareholder voting rights. The General Partner and its affiliates presently own 46.3% of the B Interests. After the Conversion, this ownership percentage will increase to 54.0% of the Common Stock. However, the General Partner and its affiliates have entered into a Stockholders Agreement that will effectively limit the voting power of Lehman Brothers and six senior executives to the respective voting powers they had immediately prior to the Conversion. See "DESCRIPTION OF CAPITAL STOCK - Stockholders Agreement." 16. Who can I call for more information? In order to respond to your questions, SunSource has appointed D.F. King & Co., Inc. as the Information Agent for limited partners desiring additional information. You may call them toll free at 1-800-488-8075. Please have your Proxy Card available when you call. -9- 17. What should I do if my Interests are held by a broker or bank? If your Interests are held for you by a broker or bank, only your broker or banker can vote your Interests and only after receiving specific voting instructions from you. Please sign and return the accompanying voting instruction form in the enclosed return envelope as soon as possible. 18. How should I vote on the Conversion? You are urged to review the accompanying Proxy Statement/Prospectus carefully and consult with your personal financial and tax advisor before voting on the Conversion. In making your decision, you should consider that the General Partner urges you to vote "FOR" the adoption of the Conversion proposal. The vote of each SunSource limited partner is important. You are urged to mark, date and sign the accompanying Proxy Card and return it in the enclosed postage paid envelope as soon as possible. By returning the Proxy Card promptly, you will save the Partnership additional solicitation expenses. -10- -----END PRIVACY-ENHANCED MESSAGE-----