PRER14A: Preliminary revised proxy soliciting materials
Published on August 16, 2001
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. 1)
SUNSOURCE INC.
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
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(2) Form, schedule or registration statement no.:
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(3) Filing party:
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(4) Date filed:
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[SunSource, Inc. Logo]
3000 One Logan Square
Philadelphia, PA 19103
Phone: (215) 282-1290
A MERGER PROPOSAL -- YOUR VOTE IS VERY IMPORTANT
To the stockholders of SunSource Inc.:
Allied Capital Corporation and SunSource Inc. have entered into a merger
agreement where Allied Capital has agreed to acquire SunSource in a merger. If
the merger is completed, SunSource common stockholders will receive $10.375 in
cash for each share they own or an aggregate of approximately $72 million and
SunSource will become an independently managed, private Allied Capital portfolio
company, referred to as New SunSource.
If the merger is completed, certain SunSource officers, directors and
stockholders have agreed to continue as stockholders and/or members of
management of New SunSource to ensure continuity. Allied Capital will own
approximately 94% of New SunSource, and the continuing stockholders will own
approximately 6% of New SunSource, on a fully diluted basis, taking into account
the rollover options as discussed in the accompanying proxy statement. The
members of management who are continuing stockholders and will also continue as
management of New SunSource are: Maurice Andrien, Joseph Corvino, Max Hillman,
Stephen Miller, Richard Hillman, George Heredia, Gary Seeds, Terry Rowe, James
Waters, Dennis Blake, Richard Buller, Kenneth Foskey, Michael Mueller, Mark
Yeary and John Marshall. Certain of the continuing stockholders will be granted
options to purchase 14% of the common stock of New SunSource.
SunSource will hold a special meeting of stockholders at 10:00 a.m. Eastern
time, on , 2001 at the law offices of Morgan Lewis & Bockius LLP,
1701 Market Street, Room 18A and B (18th Floor), Philadelphia, Pennsylvania
19103, to consider and vote upon the merger. The holders of a majority of the
outstanding shares of SunSource common stock must approve the merger at the
SunSource special meeting. SunSource stockholders representing approximately 20%
of the outstanding shares of SunSource common stock as of the record date for
the special meeting have agreed to vote the shares of SunSource common stock
owned by them in favor of the merger. In addition, the merger is subject to
various other conditions. The terms and conditions of the merger and related
transactions are more fully described in the proxy statement.
A special committee of disinterested, independent directors of SunSource has
evaluated the merits, and negotiated the terms, of the merger. The special
committee has received a written opinion of Janney Montgomery Scott LLC, the
special committee's financial advisor, that, subject to the qualifications
contained in the opinion, the cash price of $10.375 per share was fair to the
holders of SunSource common stock from a financial point of view. The price of
$10.375 represents a 109% premium to the closing price of the common stock on
June 18, 2001 (the last full trading day before the public announcement of the
merger). The closing price of SunSource common stock, which trades on the
American Stock Exchange under the symbol "SDP", on , 2001 was $
per share. Please read carefully the opinion of Janney Montgomery Scott LLC,
which is attached as Appendix B to the accompanying proxy statement. In
addition, more detailed information about the analysis of Janney Montgomery
Scott LLC is given in the section entitled "Opinion of SunSource's Financial
Advisor" in the accompanying proxy statement.
The special committee has unanimously recommended that SunSource's board of
directors adopt the merger agreement and approve the merger and believes that
the proposed merger is both substantively and procedurally fair to the
unaffiliated holders of SunSource's common stock. SunSource's board of directors
believes that the proposed merger is both substantively and procedurally fair to
the holders of SunSource common stock, including those unaffiliated holders of
common stock. The board of directors has approved the merger and determined the
merger to be advisable and in the best interests of SunSource stockholders and
recommends that you vote "FOR" the adoption of the merger agreement and the
approval of the merger.
YOUR VOTE IS VERY IMPORTANT. Whether or not you plan to attend the special
meeting, please take time to vote on the proposal by completing and mailing the
enclosed proxy card, or voting over the telephone or via the internet.
Sincerely,
Maurice P. Andrien, Jr.
President and Chief Executive Officer
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS: APPROVED OR DISAPPROVED OF THE MERGER; PASSED UPON THE MERITS OR
FAIRNESS OF THE TRANSACTION; OR PASSED UPON THE ADEQUACY OR ACCURACY OF THE
DISCLOSURES IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The proxy statement is dated , 2001, and was mailed to you on or about
, 2001.
[SunSource, Inc. Logo]
3000 ONE LOGAN SQUARE
PHILADELPHIA, PA 19103
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NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
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To Our Stockholders:
A special meeting of stockholders of SunSource Inc. will be held at
10:00 a.m., Eastern time, on , 2001, at the law offices of
Morgan Lewis & Bockius LLP, 1701 Market Street, Room 18A and B (18th Floor),
Philadelphia, Pennsylvania 19103, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt the merger
agreement by and among Allied Capital Corporation, Allied Capital
Lock Acquisition Corporation, a wholly owned subsidiary of Allied
Capital, and SunSource, pursuant to which SunSource common
stockholders will receive $10.375 in cash for each share they own,
and approve the merger; and
2. To grant discretionary authority to vote in favor of an adjournment
of the meeting, if necessary.
This proposal is more fully described in the proxy statement that
accompanies this notice, which you should read carefully.
We have fixed the close of business on , 2001 as the
record date for the determination of our stockholders entitled to vote at this
meeting, and any and all adjournments or postponements thereof.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE VOTE YOUR SHARES.
YOU MAY COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND MAIL IT IN THE
POSTAGE-PAID ENVELOPE OR YOU MAY VOTE OVER THE TELEPHONE OR VIA THE INTERNET. IT
IS IMPORTANT THAT YOUR INTERESTS BE REPRESENTED AT THE SPECIAL MEETING. YOU CAN
REVOKE YOUR PROXY AT ANY TIME BY DELIVERING TO THE SECRETARY OF SUNSOURCE A
WRITTEN REVOCATION PRIOR TO THE SPECIAL MEETING, BY SUBMITTING A NEW PROXY CARD
OR BY VOTING IN PERSON AT THE SPECIAL MEETING.
By Order of the Board of Directors
of SunSource Inc.
Joseph M. Corvino
Secretary
Philadelphia, Pennsylvania
, 2001
PLEASE DO NOT SEND ANY SUNSOURCE INC. STOCK CERTIFICATES AT THIS TIME.
TABLE OF CONTENTS
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SUMMARY TERM SHEET
This summary highlights all material information from this proxy statement
but may not contain all of the information that is important to you. To
understand the merger proposal fully as it relates to you and for a more
complete description of the legal terms of the merger, you should read carefully
this entire document and the documents to which we have referred you. See "Where
You Can Find More Information" on page 98. Each item in this summary includes a
page reference directing you to a more complete description of that item.
THE SUNSOURCE SPECIAL MEETING (PAGE 16)
- A special meeting of stockholders of SunSource will be held at 10:00
a.m., Eastern time, on , 2001, at the law offices of Morgan
Lewis & Bockius LLP, 1701 Market Street, Room 18A and B (18th Floor),
Philadelphia, Pennsylvania 19103, to consider and vote upon the proposal
to approve and adopt the merger agreement with Allied Capital and approve
the merger.
- The stockholders will also be asked to consider and vote on a proposal to
grant discretionary authority to vote in favor of an adjournment of the
meeting, if necessary.
- You can vote at the SunSource special meeting only if you owned shares of
SunSource common stock at the close of business on , 2001,
which is the record date.
- Allied Capital and SunSource intend to complete the merger promptly after
the SunSource special meeting, if regulatory approvals and other required
matters are completed by that time. It is expected that the merger will
be completed by September 30, 2001.
THE PARTIES TO THE MERGER
- SunSource Inc. SunSource, a Delaware corporation, is a provider of
value-added services and products to retail and industrial markets in
North America. SunSource currently operates in two business segments
through indirect wholly owned subsidiaries: (1) The Hillman Group, Inc.;
and (2) SunSource Technology Services, LLC, or STS. These subsidiaries
represent businesses within the distribution industry which are
characterized by a potential for value-added services, economies of scale
and opportunities for further consolidation. Also, SunSource has a
minority investment in an affiliate, G-C Sun Holdings, L.P., which owns
Kar Products.
SunSource's principal executive offices are located at 3000 One Logan
Square, Philadelphia, Pennsylvania 19103, and its telephone number is
(215) 282-1290.
- Allied Capital Corporation. Allied Capital, a Maryland corporation, is
the nation's largest business development company. As a business
development company, Allied Capital provides private investment capital
to private companies and undervalued public companies in a variety of
different industries and in diverse geographic locations throughout the
United States. Allied Capital has been investing in growing businesses
for over 40 years and has financed thousands of private companies
nationwide.
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Allied Capital's principal executive offices are located at 1919
Pennsylvania Ave., N.W., Washington, D.C. 20006, and its phone number is
(202) 331-1112.
- Allied Capital Lock Acquisition Corporation. Allied Capital Lock
Acquisition Corporation, referred to as merger sub, is a newly formed
Delaware corporation and a wholly owned subsidiary of Allied Capital.
Merger sub was formed for the sole purpose of effecting the merger.
Merger sub's principal executive offices are located at 1919 Pennsylvania
Ave., N.W., Washington, D.C. 20006, and its phone number is (202)
331-1112.
THE MERGER PROPOSAL (PAGE 17)
- Allied Capital plans to acquire SunSource in a cash merger. As a result
of the merger, SunSource will become an independently managed, privately
held portfolio company of Allied Capital referred to as New SunSource.
New SunSource will continue in one or more of the lines of business in
which SunSource now operates.
- The merger and related transactions will be accomplished as follows:
- Allied Capital will exercise its existing warrant, received in
connection with a financing transaction completed December 29, 2000,
to purchase 284,725 shares of SunSource common stock through a
cashless exercise.
- Following the exercise of the warrant, certain continuing
stockholders will purchase 163,202 shares of SunSource common stock
from Allied Capital for $10.375 per share in cash. In addition,
Allied Capital will sell to SunSource the remaining 121,523 shares
of SunSource common stock that were acquired through exercise of its
warrant for $10.375 per share in cash.
- In order to ensure continuity and continued financial risk, Allied
Capital required that certain members of the SunSource management
team and certain stockholders continue as stockholders of New
SunSource. To provide a mechanism for continued ownership in New
SunSource by the continuing stockholders SunSource will create a new
Series B preferred stock.
- Certain SunSource officers, directors and stockholders will exchange
244,188 of their shares of SunSource common stock (including the
shares purchased from Allied Capital) for an equal number of shares
of Series B preferred stock. Holders of Series B preferred stock
will not exchange their shares in the merger for cash.
- After the recapitalization described above, each share of SunSource
common stock will be converted into the right to receive $10.375 per
share in cash in the merger.
- The shares of Series B preferred stock held by the continuing
stockholders will be converted into an equal number of shares of New
SunSource common stock following the merger.
- The continuing stockholders will roll over their existing options to
purchase 443,000 shares of SunSource common stock into options to
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purchase shares of New SunSource common stock which will continue
with the same terms and conditions as the original SunSource options.
- Following the merger, Allied Capital will own approximately 94% of
New SunSource common stock, and the continuing stockholders will own
approximately 6% of the New SunSource common stock, on a fully
diluted basis. As used in connection with the ownership of the
stockholders of New SunSource, the term "fully diluted" includes the
dilution resulting from the cashless exercise of the rollover
options and any additional "in-the-money" options and excludes the
dilution from any new option grants.
- The merger agreement is attached at the back of this proxy statement as
Appendix A. We encourage you to read the merger agreement, as it is the
legal document that governs the merger.
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- The following diagrams depict in summary form the structure of the
recapitalization and merger assuming the SunSource stockholders approve
the merger and all other conditions are satisfied.
[Current Structure Flow Chart]
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YOU WILL RECEIVE CASH IN THE MERGER (PAGE 19)
- If the merger is completed, you will receive $10.375 in cash for each
share of SunSource common stock that you own. Fractional shares of
SunSource common stock will be converted into cash in the same
proportion.
- Please do not send in your stock certificates. You will receive written
instructions to do so after the merger.
THE SUNSOURCE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE MERGER (PAGE 28)
- The SunSource board of directors believes that the merger is advisable
and in the best interests of SunSource and its affiliated and
unaffiliated stockholders. The SunSource board of directors unanimously
recommends that you vote "FOR" approval of the merger proposal.
SUNSOURCE'S REASONS FOR THE MERGER (PAGE 26)
- The SunSource board of directors approved the merger for the following
reasons:
- PURCHASE PRICE -- SunSource's board of directors determined that the
purchase price represents a substantial premium to the market price of
SunSource common stock. In making that determination, the SunSource
board of directors considered that the current market price of
SunSource common stock was $4.96 per share on June 18, 2001, the day
before the public announcement of the merger; thus, $10.375
represented a 109% premium over the $4.96 price. Also, during the
52-week period ended June 15, 2001 the highest closing market price
for SunSource stock was $5.38 and the lowest closing market price was
$2.88.
- HIGHLY LEVERAGED CAPITAL STRUCTURE -- The board of directors
considered SunSource's highly leveraged capital structure. The board
of directors determined that SunSource's current financial position
would limit its access to equity markets in the future and hinder its
ability to maintain and grow its business segments. By becoming a
portfolio company of Allied Capital, SunSource will have access to a
funding source with significant financial resources to support its
future growth.
- RECOMMENDATION OF SPECIAL COMMITTEE -- After extensive discussions and
negotiations with Allied Capital, and discussions with the board's
financial advisors and certain members of SunSource's management, the
special committee concluded that the merger and the related
transactions are fair to the unaffiliated and affiliated stockholders.
The special committee has unanimously recommended the merger and the
related transactions to the board of directors.
FAIRNESS OPINION OF SUNSOURCE'S FINANCIAL ADVISOR (PAGE 29)
- The SunSource board of directors has received an opinion of SunSource's
financial advisor, Janney Montgomery Scott LLC, as to the fairness to the
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affiliated and unaffiliated stockholders, from a financial point of view,
of the consideration to be received in the merger. Janney's opinion is
directed to the SunSource board of directors and does not constitute a
recommendation to any stockholder as to how to vote with respect to
matters relating to the proposed merger. Janney's opinion is based on
analyses that contain estimates and valuation ranges which are not
necessarily indicative of actual values or predictive of future results
or values. Janney's fees were $325,000 plus out-of-pocket expenses.
INTERESTS OF SUNSOURCE'S OFFICERS AND DIRECTORS IN THE MERGER (PAGE 38)
- When considering the recommendation by the SunSource board of directors
to vote "FOR" the merger proposal, you should be aware that, as described
below, specific officers, directors and stockholders of SunSource have
interests in the merger that are different from, and may conflict with,
your interests. The continuing stockholders will not exchange all of
their shares of SunSource common stock for cash in the merger, and will
continue as officers, directors and stockholders of New SunSource and may
benefit from such continued ownership. In addition, senior officers of
SunSource will benefit from compensation and employment arrangements in
the ordinary course of business. If the merger is completed, Allied
Capital will continue indemnification arrangements for officers and
directors of SunSource. The SunSource board of directors was aware of
these interests and considered them in approving the merger.
- More specifically, these interests include the following:
- In order to assure continuity and continued financial risk, Allied
Capital required that certain members of the SunSource management team
and certain stockholders continue as stockholders of New SunSource.
The continuing stockholders will collectively own approximately 6% of
New SunSource common stock on a fully diluted basis after the merger
is consummated.
- The members of management who are continuing stockholders will also
continue as management of New SunSource.
The following table sets forth the positions that the continuing
stockholders will have with New SunSource and the percentage
ownership in New SunSource of each of the continuing stockholders
after the merger on a fully diluted basis:
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* Less than 1%.
- Messrs. Andrien, Corvino, Max Hillman and Miller have each entered into
new employment agreements, which will become effective upon the
consummation of the merger and will supersede any previous agreement
between the parties. Messrs. Andrien, Corvino and Hillman will each have
four-year employment agreements with New SunSource, under which they will
receive $343,000, $250,000 and $350,000, respectively, in annual base
salary, and a performance bonus to be determined by the board of
directors. Mr. Miller has a one-year agreement, under which he will
receive $350,000 in annual base salary and a performance bonus to be
determined by the board of directors.
- A new stock option plan will become effective upon the consummation of
the merger, under which options to purchase approximately 1.3 million
shares of New SunSource common stock, or 15% of the fully diluted shares
outstanding at the time of the merger, will be authorized for issuance.
The new option plan will be in addition to the existing SunSource option
plan that will continue in effect after the merger. All of the continuing
stockholders except John P. McDonnell will be granted options, which will
have a ten-year term, generally vest over four years and have an exercise
price approximately equal to the per share value of New SunSource, as
determined by the New SunSource board of directors, at the time of the
grant. The per share amount of any distributions made after the grant
date in connection with the related transactions described in this proxy
statement will reduce the exercise price. Upon a change of control, all
unvested options will immediately vest. Specifically, Mr. Andrien will
receive 3.75%; Mr. Corvino will receive 1.00%; Mr. Miller will receive
1.50%; Mr. Max Hillman will receive 3.00%; Mr. Richard Hillman will
receive 0.75%; Messrs. Heredia, Seeds, Rowe, Waters and Foskey will each
receive
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0.50%; Messrs. Blake, Buller, Mueller and Yeary will each receive 0.33%;
and Mr. Marshall will receive 0.18%. The balance of 1% will be reserved
for future issuances.
- At the closing, the continuing stockholders have agreed to enter into a
stockholders agreement with Allied Capital and New SunSource. The
stockholders agreement imposes certain requirements on the parties
related to the voting of New SunSource common stock, the sale or transfer
of New SunSource common stock and other matters. Under certain
circumstances a continuing stockholder can require New SunSource to
purchase his shares upon a termination of employment. Similarly, New
SunSource can require that a continuing stockholder sell his shares to
New SunSource upon a termination of employment.
RELATED TRANSACTIONS (PAGE 43)
- In connection with the merger, Allied Capital and SunSource have taken or
intend to take the following actions:
- On June 29, 2001, Allied Capital purchased an unsecured subordinated
note, with an outstanding principal balance of approximately $12.5
million, from a SunSource creditor for $8.5 million. Upon the consent
of SunSource's senior lenders, Allied Capital intends to exchange the
note for $8.5 million of SunSource subordinated debt. Allied Capital
currently holds $30.0 million of SunSource subordinated debt which was
issued on December 28, 2001.
- In consideration for the structuring of certain post-merger
transactions and the restructuring of the post-merger capital
structure of New SunSource, Allied Capital will receive from SunSource
a fee of approximately $2 million at the effective time of the merger.
- In order to raise capital and separate unrelated businesses, it is
expected that New SunSource will sell certain assets of STS in a
management buyout transaction for approximately $25 million. It is
anticipated that the transaction will be structured so that a portion
of the debt financing will be provided by New SunSource and an
independent lender, and that a portion of the equity financing will be
provided by Allied Capital and STS management, including Maurice
Andrien, Joseph Corvino and Justin Jacobi, President of STS, as well
as certain of STS' regional managers and other employees. The
management team is expected to invest approximately $1 million. In
addition, it is anticipated that Maurice Andrien may enter into a
consulting agreement with STS for a total annual compensation of
approximately $280,000.
CHANGE OF CONTROL BENEFITS (PAGE 44)
- SunSource will have obligations under certain severance and employment
agreements as a result of the merger. Among other things:
- outstanding options to purchase shares of SunSource common stock,
other than rollover options, will be required after notice to be
surrendered in exchange for the issuance by SunSource of a number of
shares of SunSource common stock for each option surrendered equal to
the quotient of: (i) the amount, if any, by which $10.375 exceeds the
exercise price for such option divided by (ii) $10.375;
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- amounts accrued and vested in SunSource's deferred compensation plan
will be eligible to be paid out pursuant to the terms and conditions
of the plan;
- pursuant to his current employment agreement, Maurice Andrien has a
right to receive a $1 million payment upon the consummation of the
merger, and the restrictions on Mr. Andrien's restricted stock grant
of 100,000 shares will lapse; and
- SunSource may trigger obligations under severance agreements with
certain employees, including Joseph Corvino, Justin Jacobi and the
employees in the Philadelphia office.
VOTE REQUIRED TO APPROVE THE MERGER
- The merger proposal requires the approval of the holders of the majority
of the outstanding shares of SunSource common stock. If you do not return
your proxy, vote over the telephone or via the internet, or vote in
person, it will have the effect of a vote "against" the merger proposal.
Brokers who hold your shares of SunSource common stock as nominees cannot
vote those shares unless you instruct them to, following the procedure
they give you.
VOTING POWER; VOTING BY MANAGEMENT (PAGE 16)
- On the record date, shares of SunSource common stock were
outstanding, of which shares, or % of the shares were
owned by directors and executive officers of SunSource. Each share of
SunSource common stock entitles the holder to one vote.
- Certain SunSource officers, directors and stockholders, who collectively
owned approximately 1.4 million shares, or approximately 20%, of
SunSource's outstanding shares as of the record date, have executed
voting agreements in which they have agreed to vote the SunSource common
stock owned by them in favor of the merger proposal.
REVOKING PROXIES (PAGE 16)
- You can revoke a proxy previously given by you by giving written notice
to the Secretary of SunSource at the address on the proxy card, by filing
another proxy, by revoting your shares over the telephone or via the
internet, or by attending the SunSource special meeting and voting in
person.
FEDERAL INCOME TAX CONSEQUENCES (PAGE 55)
- The cash received by holders of SunSource common stock in the merger
generally will be taxable for U.S. federal income tax purposes (depending
on the tax basis of your shares and your specific holding period).
CONSENTS AND REGULATORY APPROVALS (PAGE 53)
- On June 19, 2001 SunSource received a written consent to the change of
control of SunSource that would result from the merger from SunSource's
senior lenders.
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- Under the Hart-Scott-Rodino Act the merger may not be completed unless
certain filings are made with the Antitrust Division of the U.S.
Department of Justice and the U.S. Federal Trade Commission and certain
waiting periods expire or are terminated. On July 11, 2001, Allied
Capital and SunSource submitted the required filings to the FTC and the
Antitrust Division, and on July 27, 2001 the parties received notice that
they had received early termination of the statutory waiting period.
- A prediction cannot be made as to whether all required regulatory
approvals for the merger will be obtained, or whether any approvals will
include conditions that may be detrimental to Allied Capital or
SunSource.
CONDITIONS TO COMPLETION OF THE MERGER (PAGE 53)
- The merger will be completed only if specific conditions, including,
among other things, the following, are met or waived:
- the SunSource stockholders approve the merger;
- no court orders prevent the merger or impose limitations on the
operations of New SunSource after the merger, and no governmental
proceedings are pending or threatened that would prevent the merger;
- the issuance of the shares upon exercise of Allied Capital's warrant
and the purchase by SunSource of 121,523 shares acquired by Allied
Capital upon the exercise of the warrant has been consummated;
- the recapitalization of SunSource, including the equity purchase by
the continuing stockholders of 163,202 shares of SunSource common
stock from Allied Capital, has been consummated;
- from the date of the merger agreement through the closing date, there
shall not have been any change, event, occurrence or state of facts
that has caused, or would reasonably be expected to cause, a material
adverse effect on the business, properties, assets, condition
(financial or otherwise), liabilities or operations of SunSource and
its subsidiaries, taken as a whole, or The Hillman Group,
individually, or on Allied Capital and its subsidiaries taken as a
whole;
- the representations and warranties made by Allied Capital and
SunSource continue to be accurate except for inaccuracies that would
not have and would not reasonably be expected to have, individually or
in the aggregate, a material adverse effect and covenants of the
parties shall have been performed in all material respects;
- holders of not more than ten percent (10%) of SunSource's outstanding
shares have exercised dissenters' rights in accordance with Delaware
law; and
- the new employment agreements of Maurice Andrien, Joseph Corvino, Max
Hillman and Stephen Miller are in full force and effect without any
changes from the form delivered to Allied Capital, and none of such
employees shall have expressed an intention not to perform under such
employment agreements.
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TERMINATION OF THE MERGER AGREEMENT (PAGE 54)
- Even if the SunSource stockholders approve the merger, Allied Capital and
SunSource can agree at any time to terminate the merger agreement without
completing the merger. The merger agreement can also be terminated if,
among other things, any of the following occurs:
- the merger is not completed by December 31, 2001;
- a court or other governmental authority prohibits the merger;
- the covenants contained in the merger agreement or the voting
agreement shall have been breached in any material respect; or
- the closing conditions contained in the merger agreement are not
satisfied.
- SunSource can also terminate the merger agreement if, prior to
stockholder approval of the merger, SunSource's board of directors
authorizes the acceptance of a more favorable acquisition proposal.
SUNSOURCE CANNOT SOLICIT OTHER OFFERS (PAGE 52)
- SunSource has agreed not to encourage, solicit, discuss or negotiate with
anyone other than Allied Capital regarding a merger or sale of SunSource,
unless SunSource receives an unsolicited acquisition proposal and
SunSource's board of directors determines that it is consistent with its
fiduciary obligations to the SunSource stockholders under applicable law
to pursue such proposal and, in the case of any such discussions or
negotiations, SunSource's board of directors determines that such
proposal is superior to the merger.
- If the merger agreement is terminated as a result of SunSource's
acceptance of a superior acquisition proposal, SunSource will pay Allied
Capital a termination fee of $2,270,000. The termination fee is intended
to compensate Allied Capital for the loss of opportunities, and for its
efforts and expenses incurred to structure the merger if SunSource
accepts a superior acquisition proposal.
SUNSOURCE COMMON STOCK AND TRUST PREFERRED SECURITIES (PAGE 56)
- Following the merger, SunSource common stock will be delisted and will no
longer trade on the American Stock Exchange or any other exchange.
SunSource intends to terminate its registration with regard to its common
stock pursuant to Section 12(g)(4) of the Securities Exchange Act of
1934.
- The SunSource trust preferred securities will remain outstanding and will
continue to trade on the American Stock Exchange under the symbol SDP.PR
upon consummation of the merger.
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DISSENTERS' RIGHTS OF APPRAISAL (PAGE 45)
- SunSource stockholders will be entitled to dissenters' rights of
appraisal under Section 262 of the Delaware General Corporation Law, a
copy of which is attached to this proxy statement as Appendix C.
Dissenters' rights of appraisal allow stockholders to dissent from the
merger and receive a fair cash payment for their shares. Certain
procedural steps, including delivering to SunSource a written demand for
appraisal of your shares prior to the vote on the merger and not voting
in favor of the merger, must be followed by stockholders wishing to
perfect and exercise their dissenters' rights under Delaware law. Failure
to comply with those procedures will result in the forfeiture of
dissenters' rights.
12
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHEN AND WHERE IS THE SUNSOURCE SPECIAL MEETING?
A: The SunSource special meeting of stockholders will be held at 10:00 a.m.,
Eastern time, on , 2001 at the law offices of Morgan Lewis &
Bockius LLP, 1701 Market Street, Room 18A and B (18th Floor), Philadelphia, PA
19103.
Q: WHAT IS HAPPENING?
A: You are being asked to vote on a merger proposal to permit Allied Capital to
acquire SunSource in a cash merger.
To ensure continuity and continued financial risk, Allied Capital required
certain members of SunSource's management team and certain stockholders to
continue as stockholders of New SunSource.
Allied Capital will own approximately 94% of New SunSource, and the
continuing stockholders will own approximately 6% of New SunSource, on a fully
diluted basis taking into account the rollover options described in this proxy
statement. In addition, certain continuing stockholders will be granted options
to purchase 14% of the common stock of New SunSource. If the merger agreement is
approved and the merger is consummated, you would no longer be a stockholder of
SunSource.
Q: WHY ARE ALLIED CAPITAL AND SUNSOURCE PROPOSING TO MERGE?
A: SunSource will become an independently managed, private portfolio company of
Allied Capital.
SunSource's board of directors believes that the merger is in the best
interest of stockholders. SunSource approved the merger because:
- SunSource's board of directors determined that the purchase price
represents a substantial premium to the market price of SunSource common
stock;
- SunSource's highly leveraged capital structure limited its ability to
access the equity markets and to maintain and grow its various business
segments;
- SunSource will have access to a funding source with significant financial
resources to support its future growth.
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: You will receive $10.375 in cash for each share of SunSource common stock
that you own.
On , 2001, the most recent practicable date prior to the
printing of this proxy statement, the closing price of SunSource common stock on
the American Stock Exchange was $ per share.
Q: ARE SUNSOURCE STOCKHOLDERS ENTITLED TO APPRAISAL RIGHTS?
A: Yes. Stockholders of SunSource will be entitled to appraisal rights under
Section 262 of the Delaware General Corporation Law. Please see the section
entitled "Dissenters' Rights of Appraisal" for a more detailed description of
your appraisal rights.
Q: WHEN DO YOU EXPECT TO COMPLETE THE MERGER OF ALLIED CAPITAL AND SUNSOURCE?
A: We are working to complete the merger by September 30, 2001. We currently
expect to complete the merger promptly following the SunSource special meeting.
If necessary or desirable, Allied Capital and SunSource may agree to complete
the merger at a later date.
Q: WHAT ARE THE FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER?
A: The cash you receive for your shares generally will be taxable for U.S.
federal income tax purposes as a capital gain or capital loss (depending on the
tax basis of your shares and your specific holding period).
Q: WHO MUST APPROVE THE MERGER?
A: In addition to the approvals by the Allied Capital board of directors and
the
13
SunSource board of directors, each of which has already been obtained, the
merger must be approved by the SunSource stockholders.
Q: WHAT STOCKHOLDER VOTE IS REQUIRED TO APPROVE THE MERGER PROPOSAL?
A: The affirmative vote of the holders of the majority of the outstanding
shares of SunSource common stock as of the record date is required to approve
the merger proposal.
Q: WHO ARE THE MEMBERS OF THE SPECIAL COMMITTEE?
A: The special committee consists of O. Gordon Brewer, Norman V. Edmonson, and
Arnold S. Hoffman. All the members of the special committee are non-employee
members of SunSource's board of directors. The special committee was appointed
to review, consider and make recommendations to the board of directors regarding
potential sales transactions of SunSource.
Q: WHAT IS THE SIGNIFICANCE OF THIS MERGER BEING A "GOING-PRIVATE" TRANSACTION?
A: The parties engaging in this merger are required to provide to all SunSource
stockholders certain information about the transaction and to make certain
filings with the Securities and Exchange Commission. Because of the
participation by certain SunSource stockholders and certain members of SunSource
management as continuing stockholders after the merger, conflicts of interest
exist, and therefore, additional disclosures are required. Specifically, the
continuing stockholders will not exchange all of their shares of SunSource
common stock for cash in the merger, and may benefit from such continued
ownership. In addition, certain continuing shareholders will continue as
officers and directors of New SunSource and senior officers of SunSource will
benefit from compensation and employment arrangements.
Q: DOES THE SUNSOURCE BOARD OF DIRECTORS RECOMMEND APPROVAL OF THE MERGER
PROPOSAL?
A: Yes. After careful consideration, the SunSource board of directors
unanimously recommends that you vote "FOR" the merger proposal on the enclosed
proxy card, or over the telephone or via the internet. For a more complete
description of the recommendation of the SunSource board of directors, see the
sections entitled "Reasons for the Recommendation of SunSource's Board of
Directors" and "Recommendation of the SunSource Board of Directors."
Q: HAS THE MERGER BEEN DETERMINED TO BE FAIR TO THE UNAFFILIATED SUNSOURCE
STOCKHOLDERS?
A: After careful consideration, the SunSource board of directors and the Allied
Capital board of directors and the merger sub board of directors believe that
the merger and the related transactions are fair to the unaffiliated
stockholders of SunSource. In addition, the continuing stockholders, including
Maurice Andrien, Joseph Corvino, Max Hillman, Stephen Miller, Richard Hillman,
George Heredia, Gary Seeds, Terry Rowe, Jim Waters, Dennis Blake, Rick Buller,
Ken Foskey, Michael Mueller, Mark Yeary, John McDonnell and John Marshall,
believe that the merger and related transactions are fair to the unaffiliated
stockholders of SunSource. Those parties based their belief on the information
provided for under "Reasons for the Recommendation of SunSource's Board of
Directors", "Allied Capital's Reasons for the Merger," "Belief of the Filing
Persons in the Fairness of the Merger" and "Fairness Opinion of SunSource's
Financial Advisor."
Q: WHAT WILL HAPPEN TO SUNSOURCE'S TRUST PREFERRED SECURITIES?
A: The SunSource trust preferred securities will remain outstanding and will
continue to trade on the American Stock Exchange under the symbol SDP.PR upon
the consummation of the merger.
14
Q: WHAT DO I NEED TO DO NOW?
A: We urge you to read this proxy statement, including its appendices,
carefully, and to consider how the merger proposal will affect you as a
stockholder. You also may want to review the documents referenced under "Where
You Can Find More Information" and consult with your accounting, legal and tax
advisors.
Q: HOW DO I VOTE MY SHARES?
A: You may indicate how you want to vote on your proxy card and then sign and
mail your proxy card in the enclosed return envelope as soon as possible so that
your shares may be represented at the SunSource special meeting. You may also
vote over the telephone or via the internet by following the instructions with
your proxy card. You may also attend the SunSource special meeting in person
instead of submitting a proxy.
If you fail to return your proxy card, vote over the telephone or via the
internet, vote in person at the SunSource special meeting, or if you mark your
proxy "abstain," the effect will be a vote "against" the merger proposal. IF YOU
SIGN AND SEND IN YOUR PROXY WITHOUT INDICATING HOW YOU WANT TO VOTE, YOUR PROXY
WILL BE COUNTED AS A VOTE FOR THE MERGER PROPOSAL UNLESS YOUR SHARES ARE HELD IN
A BROKERAGE ACCOUNT.
Q: IF MY SHARES ARE HELD IN A BROKERAGE ACCOUNT, WILL MY BROKER VOTE MY SHARES
FOR ME?
A: Your broker will NOT be able to vote your shares without instructions from
you on how to vote. Therefore, it is important that you follow the directions
provided by your broker regarding how to instruct your broker to vote your
shares. If you fail to provide your broker with instructions, it will have the
same effect as a vote "against" the merger proposal.
Q: MAY I CHANGE MY VOTE AFTER I HAVE MAILED IN MY SIGNED PROXY CARD?
A: You may change your vote at any time before the vote takes place at the
SunSource special meeting. To do so, you may either complete and submit a new
proxy card or send a written notice stating that you would like to revoke your
proxy. You may also change your vote if you voted over the telephone or via the
internet simply by revoting. The last recorded vote will be what is counted at
the meeting. In addition, you may attend the SunSource special meeting and vote
in person. However, if you elect to vote in person at the SunSource special
meeting and your shares are held by a broker, bank or other nominee, you must
bring to the SunSource special meeting a letter from the broker, bank or other
nominee confirming your beneficial ownership of the shares.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: NO. After the completion of the merger, Allied Capital will send you
instructions explaining how to exchange SunSource common stock certificates for
the appropriate amount of cash.
Q: WHO MAY I CONTACT WITH ANY ADDITIONAL QUESTIONS?
A: You may call Investor Relations of SunSource at (215) 282-1290, or Investor
Relations of Allied Capital at (888) 818-5298.
15
THE SUNSOURCE SPECIAL MEETING
GENERAL
This proxy statement is accompanied by the Notice of Special Meeting and
proxy cards solicited by the SunSource board of directors for use at the special
meeting of SunSource stockholders to be held on , 2001 at
, at the law offices of Morgan Lewis & Bockius LLP, 1701 Market Street,
Room 18A and B (18th Floor), Philadelphia, Pennsylvania 19103.
PURPOSE OF THE SUNSOURCE SPECIAL MEETING
At the SunSource special meeting, holders of SunSource common stock as of
the record date will consider and vote upon the proposal to approve and adopt
the merger agreement and the merger with Allied Capital.
The SunSource board of directors has unanimously approved the merger
agreement and the merger and recommends a vote "FOR" approval and adoption of
the merger proposal.
VOTING INFORMATION
This proxy statement is being furnished in connection with the solicitation
of proxies by the SunSource board of directors for use at the SunSource special
meeting. The cost of the solicitation of proxies will be borne by SunSource.
SunSource will pay brokers, nominees, fiduciaries or other custodians their
reasonable expenses for sending proxy material to, and obtaining information
from, persons for whom they hold shares of common stock of SunSource. SunSource
expects the solicitation of proxies will be primarily by mail, but directors,
officers and other employees of SunSource may also solicit in person, by
telephone or by mail. SunSource has engaged a proxy solicitation firm to solicit
proxies from stockholders and has agreed to pay a fee of approximately $7,500
plus expenses for its services.
Only stockholders of record at the close of business on ,
2001 will be entitled to vote at the SunSource special meeting. The total number
of shares of stock outstanding and entitled to vote at the meeting as of the
record date was shares of SunSource common stock. Each share of
SunSource common stock is entitled to one vote.
If the accompanying proxy is executed and returned in time for the
SunSource special meeting, your shares will be voted in accordance with the
instructions. Any proxy may be revoked at any time before it is voted by written
notice, mailed or delivered to the Secretary of SunSource, by submission of a
new proxy card, or, if you voted over the telephone or via the Internet, by
revoting; but if not so revoked, the shares represented by such proxy will be
voted in the manner directed by the stockholder. If no direction is made,
proxies received from stockholders will be voted "for" the merger proposal set
forth in the notice of the special meeting.
STOCKHOLDER AND BOARD APPROVALS
The merger proposal is being submitted at the SunSource special meeting for
approval by the stockholders of SunSource. The approval of a majority of the
outstanding shares of common stock of SunSource is required for the approval of
the merger proposal. Abstentions and broker non-votes, as described below, will
have the same effect as casting a vote "against" the merger proposal.
16
Pursuant to a voting agreement, specific officers, directors and
stockholders of SunSource have agreed to vote their shares of SunSource common
stock held as of the record date in favor of the merger proposal. A total of
approximately 1.4 million shares of SunSource common stock, representing
approximately 20% of the outstanding SunSource common stock, is represented by
the voting agreement.
QUORUM AND ADJOURNMENTS
Under Delaware law, not less than a quorum of stockholders as of the record
date must be present in order to conduct business at the special meeting. A
quorum is constituted by the presence in person or by proxy of the holders of a
majority of the outstanding shares of SunSource common stock. Votes cast by
proxy or in person at the SunSource special meeting will be tabulated by the
inspector of election appointed for the meeting who will determine whether or
not a quorum is present. Proxies properly executed and marked with a negative
vote or an abstention, or broker non-votes, will be considered to be present at
the SunSource special meeting for the purposes of determining the existence of a
quorum for the transaction of business. Broker non-votes exist where a broker
proxy indicates that the broker is not authorized to vote on a particular
proposal.
The stockholders will also be asked to consider and vote on a proposal to
grant discretionary authority to vote in favor of an adjournment of the meeting,
if necessary.
Adjournments may be made for the purpose of, among other things, soliciting
additional proxies. Any adjournment may be made from time to time by approval of
the holders of shares representing a majority of the votes present in person or
by proxy at the meeting, whether or not a quorum exists, without further notice
other than by an announcement made at the meeting. SunSource does not currently
intend to seek an adjournment of the meeting. Abstentions and broker non-votes
will be treated for purposes of the adjournment as votes "against" the
adjournment.
THE MERGER PROPOSAL
This section of the proxy statement describes the proposed merger and
related transactions. While this section summarizes the material terms of the
merger and related transactions, this summary may not contain all of the
information that is important to each stockholder. Stockholders should carefully
read this entire document and the merger agreement attached as Appendix A for a
more complete understanding of the merger.
GENERAL
The merger agreement provided Allied Capital the option to pay the merger
consideration in cash or Allied Capital stock. On June 29, 2001, Allied Capital
informed SunSource of its election to pay the merger consideration in cash.
Allied Capital plans to acquire SunSource in a cash merger, where a newly
created acquisition subsidiary of Allied Capital will merge with and into
SunSource. At the SunSource special meeting, you will be asked to vote to
approve and adopt the merger agreement and the merger with Allied Capital. The
merger agreement provides that the merger will be completed if approved by the
SunSource stockholders and all other conditions of the merger agreement are
satisfied or waived.
The effect of the merger is to create an independently managed, private
portfolio company of Allied Capital, New SunSource, that will operate in one or
more of the lines of business in which SunSource now operates as described in
this proxy statement.
17
In order to ensure continuity and continued financial risk, Allied Capital
required that certain members of the SunSource management team and certain
stockholders continue as stockholders of New SunSource. To provide a mechanism
for the continued ownership of New SunSource by the continuing stockholders,
SunSource will create a new Series B preferred stock that will not be exchanged
in the merger for cash. The rights, preferences and privileges of the new Series
B preferred stock shall be identical to the rights, preferences and privileges
of the existing SunSource common stock.
Assuming stockholder approval and all other required approvals are received
and all other conditions are met or waived, the merger and related transactions
will be accomplished as follows:
- Immediately prior to the recapitalization of SunSource, Allied Capital
will exercise its existing warrant to purchase 284,725 shares of
SunSource common stock through a cashless exercise. Following the
exercise of the warrant, certain continuing stockholders will purchase
163,202 shares of SunSource common stock from Allied Capital for $10.375
per share in cash. In addition, Allied Capital will sell to SunSource the
remaining 121,523 shares of SunSource common stock that were acquired
through exercise of its warrant for $10.375 per share in cash.
- SunSource will create a new Series B preferred stock. The continuing
stockholders will exchange 244,188 shares of SunSource common stock
(including the 163,202 shares purchased from Allied Capital) for an equal
number of shares of Series B preferred stock.
- Allied Capital has created an acquisition subsidiary, the merger sub,
that will merge with and into SunSource, and each share of SunSource
common stock will be converted into the right to receive $10.375 in cash.
- The Series B preferred stockholders will not exchange their shares for
cash in the merger, but will continue as owners of New SunSource. The
shares of Series B preferred stock held by the continuing stockholders
will be converted into an equal number of shares of common stock of New
SunSource following the merger.
- Certain stockholders will also roll over their existing options to
purchase 443,000 shares of SunSource common stock. The rollover options
will remain in effect pursuant to the same terms and conditions as the
original option except that the options will become fully vested in
connection with the merger.
- The value of the continuing stockholders' investment, including the
rollover options, will be approximately $5.3 million.
- Allied Capital will own approximately 94% of New SunSource common stock,
and the continuing stockholders will own approximately 6% of the New
SunSource common stock on a fully diluted basis. As used in connection
with the ownership of the shareholders of New SunSource, the term "fully
diluted" includes the dilution resulting from the cashless exercise of
the rollover options and any additional "in the money" options and
excludes any dilution from the new option grants.
EQUITY PURCHASE
The continuing stockholders have agreed, pursuant to the terms of equity
purchase agreements entered into with Allied Capital, to acquire or maintain
investments in the equity of SunSource immediately prior to the effective time
of the merger. The equity purchase arrangement is a part of the recapitalization
which is a condition to closing the merger. The investment of the continuing
stockholders will consist of the following:
18
- 163,202 shares of SunSource common stock purchased from Allied Capital
for cash equal to $10.375 per share or approximately $1.7 million in the
aggregate following Allied Capital's exercise of the common stock warrant
dated as of December 28, 2000 issued by SunSource to Allied Capital in
connection with a financing transaction completed December 28, 2000;
- 80,986 shares of SunSource common stock owned by continuing shareholders
prior to the effective time; or
- the rollover of 443,000 outstanding stock options issued to management
pursuant to SunSource's existing stock option plan.
Certain continuing stockholders have placed approximately $1.5 million,
representing the purchase price of the shares of SunSource common stock to be
purchased by them from Allied Capital, in an escrow account pursuant to an
escrow agreement dated June 18, 2001 by and among such stockholders, Allied
Capital and Citibank, N.A., acting in its capacity as escrow agent. The
remainder of the purchase price will be contributed by the remaining continuing
stockholders prior to the closing of the merger.
The aggregate value of the continuing stockholders' investment, including
the value of the rollover options (calculated for each rollover option by
multiplying the number of shares of common stock such rollover option is
exercisable into by the difference between $10.375 and the exercise price
applicable to such rollover option), is approximately $5.3 million which will
provide management with approximately 6% of the outstanding shares of New
SunSource common stock on a fully-diluted basis at the effective time.
THE EXCHANGE
If the merger is completed, you will receive $10.375 in cash for each share
of SunSource common stock that you own. Except for the continuing stockholders,
current holders of common stock of SunSource will not share in any of the future
earnings and potential growth of New SunSource. Fractional shares of SunSource
common stock will be exchanged for a proportionate, fractional amount of the per
share consideration described above.
As soon as practicable after the effective time of the merger, Registrar
and Transfer Company, as the exchange agent for the merger, will mail to each
holder of record of SunSource common stock as of the effective time a
transmittal letter to be used in forwarding such stockholder's certificates
representing such shares for surrender to Registrar and Transfer Company. Upon
such surrender, Registrar and Transfer Company will forward such holder a check
for the amount such stockholder is entitled to receive.
SUNSOURCE STOCKHOLDERS SHOULD NOT FORWARD STOCK CERTIFICATES TO REGISTRAR
AND TRANSFER COMPANY UNTIL THEY HAVE RECEIVED TRANSMITTAL LETTERS, NOR SHOULD
THEY RETURN STOCK CERTIFICATES WITH THE ENCLOSED PROXY.
Until surrendered to Registrar and Transfer Company, outstanding stock
certificates previously issued by SunSource will, from the effective time of the
merger, represent the right to receive $10.375 per share that such certificate
represents. Therefore, in order to receive cash, SunSource stockholders should
surrender all outstanding certificates previously issued by SunSource as soon as
possible after receiving a transmittal letter.
BACKGROUND OF THE MERGER
In October of 2000, Maurice P. Andrien, Jr., the chief executive officer of
SunSource, was contacted by the First Party regarding a possible acquisition of
SunSource. Mr. Andrien briefly
19
discussed a possible acquisition with the First Party, but did not discuss a
proposed price or detail regarding the structure of a possible transaction.
Following his initial contact with the First Party, Mr. Andrien contacted the
Second Party regarding the possible acquisition of SunSource. Mr. Andrien
advised both the First Party and the Second Party that he would be unable to
pursue more detailed discussions until first obtaining the approval of the board
of directors of SunSource, or the board, to proceed with discussions regarding a
potential acquisition of SunSource.
At the regular meeting of the board on October 31, 2000, Mr. Andrien
advised the board of his contact with the First Party and the Second Party
regarding a possible acquisition of SunSource. At this meeting, the board
discussed at length the advisability of pursuing a potential sale transaction at
the present time. This included a general discussion of the current financial
position of SunSource, the results of operations and the business of SunSource
on both an historical and prospective basis, and current industry, economic and
market conditions affecting SunSource. The board also discussed SunSource's
continuing need for additional capital, as well as the financial performance and
operations of STS. After discussion of these factors, the board determined that
it was advisable at the present time to further evaluate the possibility of a
sale transaction. The board then authorized Mr. Andrien to proceed with further
meetings with each of the parties to obtain information regarding a possible
acquisition of SunSource.
At the October 31, 2000 meeting of the board, Joseph M. Corvino, the chief
financial officer of SunSource, also presented a proposal for a debt
restructuring involving an unsecured subordinated debt investment by Allied
Capital. After the discussion, the board authorized SunSource management to
proceed with the negotiation of the subordinated debt investment by Allied
Capital.
At a special meeting of the board on November 17, 2000, the board again
discussed the advisability of pursuing a possible sale transaction, including
SunSource's continuing need for additional capital and the performance of STS.
Mr. Andrien then summarized a meeting which had taken place with representatives
of the First Party on November 10, 2000. At the meeting with the First Party,
representatives of the First Party indicated that any proposal for the
acquisition of SunSource would be subject to due diligence and that the First
Party would require a 30 day exclusivity period during which due diligence was
to be completed. Mr. Andrien also updated the board with regard to the status of
the proposed subordinated debt investment by Allied Capital.
At the November 17, 2000 board meeting, the board carefully considered the
advisability of granting the First Party an exclusivity period during which it
would conduct due diligence. After discussion and consultation with legal
advisors present at the meeting, the board determined that it did not have
sufficient information to approve a grant of exclusivity in favor of the First
Party. The board again discussed the advisability of pursuing a possible sale
transaction at the present time. After the discussion, and based upon the
financial position and capitalization of SunSource, the results of operations
and the business of SunSource, on both an historical and prospective basis, and
the current industry, economic and market conditions affecting SunSource, as
well as the performance of STS, the board determined that it was advisable to
undertake careful consideration of strategic alternatives available to
SunSource. The board then appointed a special committee consisting of three
independent directors, including O. Gordon Brewer, Norman V. Edmonson and Arnold
S. Hoffman, to review, consider and make recommendations regarding a potential
sale transaction. The special committee was also authorized to approve an
exclusivity arrangement with the First Party of
20
up to 30 days if the special committee determined that such an arrangement was
in the best interests of SunSource and its stockholders.
On November 21, 2000, Allied Capital sent to SunSource a written
preliminary expression of interest regarding an acquisition of SunSource to be
structured as a stock for stock merger.
At a meeting of the special committee on November 21, 2000, Mr. Andrien
reported that the First Party continued to insist on an exclusivity period prior
to commencing further due diligence with respect to a sale transaction, but that
the First Party was significantly advanced over the Second Party in terms of its
analysis and public due diligence review of a potential sale transaction. The
special committee then discussed in detail each of the parties, including the
desire and ability each might have to complete a sale transaction from a
financial perspective and otherwise. After the discussion, the special committee
determined that a transaction with Allied Capital was less desirable because a
cash transaction was preferred at the present time. The Special Committee also
determined that transaction with the First Party had the greatest probability of
success given the advanced nature of the First Party's analysis and due
diligence review. Based upon this determination, and after consultation with
legal advisors present at the meeting, the special committee determined that it
was advisable for SunSource to enter into a 30 day exclusivity arrangement with
the First Party.
At a meeting of the special committee on November 27, 2000, the special
committee again discussed the exclusivity arrangement with the First Party.
After the discussion, the special committee confirmed its prior determination
that entering into such an agreement with the First Party was advisable to
SunSource. Later in the day on November 27, 2000, SunSource entered into a 30
day exclusivity arrangement with the First Party which also contained mutual
confidentiality provisions. This exclusivity arrangement was subject to
termination by SunSource in the event SunSource were to receive a superior
offer. Following execution of the exclusivity arrangement, the First Party began
to conduct its due diligence investigation from non-public sources.
At a meeting of the special committee on November 30, 2000, Mr. Andrien
informed the special committee that the Second Party continued to express
interest in making a proposal for the acquisition of SunSource. The special
committee discussed possible alternatives for responding to the Second Party in
light of the exclusivity arrangement with the First Party. After discussion and
consultation with legal advisors present at the meeting, the special committee
directed Mr. Andrien not to respond to the Second Party due to the exclusivity
arrangement with the First Party. On December 4, 2000, the Second Party
submitted a written expression of interest with respect to the acquisition of
SunSource. The written expression of interest submitted by the Second Party was
subject to satisfactory completion of due diligence by the Second Party.
At a meeting of the special committee on December 5, 2000, the special
committee carefully considered the possibility of terminating the exclusivity
arrangement with the First Party in response to the written expression of
interest submitted by the Second Party. The special committee then discussed
factors affecting a decision to terminate the exclusivity arrangement with the
First Party, including the fact that meaningful due diligence had not been
completed by the Second Party and the special committee's perception that
completion of due diligence by the Second Party was likely to result in a
reduction of the suggested price and the fact that due diligence with the First
Party was nearly complete. Based upon these factors, and after further
discussion and consultation with legal advisors present at the meeting, the
special committee determined that such expression of interest was not
sufficiently likely to lead to the completion of a transaction at the suggested
price to warrant termination of the exclusivity
21
arrangement with the First Party. Accordingly, the special committee elected not
to terminate the exclusivity arrangement with the First Party at the present
time.
At a meeting of the special committee on December 11, 2000, the special
committee again considered the expression of interest submitted by the Second
Party. After discussion, the special committee directed Mr. Andrien to attempt
to negotiate an amendment to the exclusivity arrangement with the First Party to
permit a discussion with the Second Party for the limited purpose of evaluating
whether such expression of interest was reasonably likely to lead to the
completion of a transaction at the suggested price. On December 13, 2000, the
First Party agreed to amend the exclusivity arrangement to permit a discussion
with the Second Party for such limited purpose. On December 14, 2000, Norman V.
Edmonson, a member of the special committee, contacted the Second Party and,
following his discussion with the Second Party, reported to the special
committee that he did not receive any information which would change the special
committee's prior determination that the expression of interest was not
sufficiently likely to lead to the completion of a transaction at the suggested
price to warrant termination of the exclusivity arrangement with the First
Party.
On December 15, 2000, following a discussion of proposals from various
investment banks, the special committee engaged Janney Montgomery Scott LLC to
act as financial advisor, and to provide a fairness opinion, to the board in
connection with a possible sale transaction involving SunSource.
On December 27, 2000, the special committee received a letter from the
First Party with respect to a sale transaction. The letter from the First Party
conditioned the closing of the proposed transaction upon a sale of STS and upon
the continuation of financing provided by SunSource's current lenders.
At a meeting of the special committee on December 28, 2000, the special
committee discussed the letter from the First Party. At this meeting, the
special committee reviewed the performance of STS and discussed at length the
implications of the condition requiring a sale of STS. After lengthy discussion
and consultation with legal advisors present at the meeting, the special
committee determined that the condition regarding the sale of STS was
unacceptable because of the uncertainty such a condition would introduce as to
whether the sale transaction would close and the potential damage to SunSource
if such a transaction were not to close after being publicly announced. The
special committee directed its legal advisors to draft a response letter to the
First Party advising the First Party of this decision.
On December 28, 2000, SunSource completed a $30 million unsecured
subordinated debt facility with Allied Capital. Prior to that time, Allied
Capital had been focused on the completion of the debt facility and had not
actively pursued a possible acquisition of SunSource.
At meetings of the special committee on January 15, 2001 and January 24,
2001, representatives of the First Party made presentations to the special
committee outlining a proposed plan for the disposition of STS. However, the
First Party continued to require the sale of STS as a condition to closing. This
condition continued to remain unacceptable to the special committee for the
reasons discussed by the special committee at its December 28, 2000 meeting. As
a result, after early February of 2001, no further discussions took place
regarding a sale transaction with the First Party.
Following the expiration of the exclusivity arrangement with the First
Party in late December of 2000, the Second Party continued to express interest
in acquiring SunSource. The special committee authorized the Second Party to
begin its due diligence investigation in early January of 2001. During the
course of its due diligence investigation, the Second Party raised
22
concerns over certain rights in favor of a third party which would be triggered
upon a change in control of SunSource. The Second Party indicated that, unless
such rights were waived, it would only be willing to make an offer for the
acquisition of SunSource at a price below the special committee's expectations.
The special committee directed Mr. Andrien to discuss a possible waiver of such
right with such third party, but the parties were unable to reach agreement on
an acceptable waiver. Discussions regarding a sale transaction with the Second
Party continued through February and late March of 2001 but did not result in a
proposal for the acquisition of SunSource by the Second Party.
In mid-February of 2001, Allied Capital contacted Mr. Andrien regarding a
possible acquisition of SunSource by Allied Capital. At the time, Allied Capital
was familiar with SunSource and its operations as the result of the completion
of the $30 million subordinated debt facility in late December of 2000 and the
due diligence investigation related to such transaction.
At a meeting of the special committee on March 6, 2001, Mr. Andrien
reported to the special committee that Allied Capital had expressed an interest
in acquiring SunSource. At this meeting, the special committee discussed a
possible acquisition of SunSource by Allied Capital, including strategy for
conducting negotiations with Allied Capital. In particular, the special
committee determined to advise Allied Capital that the special committee would
not consider any sale transaction conditioned upon a sale of STS.
At a regular meeting of the Board on March 28, 2001, Arnold S. Hoffman, the
Chairman of the special committee, updated the Board as to the status of
discussions with the First Party, the Second Party and Allied Capital. Mr.
Hoffman also summarized the terms orally outlined by Allied Capital for a sale
transaction, including Allied Capital's indication that a sale of STS would not
be a condition to closing in a sale transaction. Mr. Andrien and Mr. Corvino
then gave a presentation of SunSource's operations and financial performance,
including the performance of STS. Following this presentation, the Board
discussed at length the performance of STS. After discussion, the board
determined that it was advisable to pursue a sale transaction with Allied
Capital which would not be conditioned upon a sale of STS. The board then
authorized the special committee to review, consider and make recommendations to
the board regarding a potential sale transaction with Allied Capital.
On April 4, 2001, SunSource and Allied Capital executed a Mutual
Nondisclosure Agreement, and Allied Capital began its due diligence
investigation. On April 6, 2001, Allied Capital presented preliminary terms to
SunSource wherein Allied Capital offered to purchase all of the outstanding
stock of SunSource in a stock for stock merger, subject to completion of due
diligence. Allied Capital proposed an exchange ratio to be based on a share
price for SunSource common stock of $10.25 per share, and a share price for
Allied Capital stock to be based on a 20-day average market price for the 20
trading days ending 2 days prior to the date of signing a definitive merger
agreement. Allied Capital also conditioned its proposal on the continued
employment of, and equity participation by, certain key employees of SunSource.
The Allied Capital proposal was not conditioned on a sale of STS or the
continued financing provided by SunSource's current lenders.
During early April of 2001, Mr. Hoffman discussed with representatives of
Janney the status of Janney's valuation of SunSource and the preliminary results
of Janney's valuation analysis.
On April 13, 2001, the special committee met with representatives of Allied
Capital to continue to discuss terms of a potential sale transaction. At this
meeting, the special committee reviewed the proposed $10.25 per share price and
based upon the valuation analysis performed
23
to date by Janney, attempted to negotiate an increase in the price. Following
the discussion, Allied Capital indicated its intention to increase the price to
$10.50 per share, subject to completion of additional due diligence. Allied
Capital indicated, however, that it would not increase the price to more than
$10.50 per share.
At a special meeting of the Board on April 19, 2001, the Chairman of the
special committee summarized the status of negotiations with Allied Capital. A
representative of Janney and SunSource's legal advisors attended the meeting.
The board discussed the terms proposed by Allied Capital and reviewed the status
of negotiations. Janney then gave a presentation to the board regarding the
proposal from Allied Capital, including a review of the valuation methodologies
and analyses used by Janney to arrive at a range for the equity value of
SunSource. The board discussed the presentation made by Janney and asked
questions regarding Janney's valuation methodologies and analysis. Mr. Hoffman
also stated that Allied Capital had indicated an intention to increase the price
to $10.50 per share, but that this price remained subject to additional due
diligence.
At the April 19, 2001 meeting of the board, the board discussed at length
the advisability of conducting an open auction or further soliciting other
potential buyers. The board then discussed the impediments to the transaction
with the First Party caused by the condition requiring a sale of STS as well as
the impediments to a transaction with the Second Party caused by the third party
rights triggered by a change in control. The board reviewed the fact that, as a
result of these impediments, both the First Party and the Second Party had
suggested a price below the special committee's and the board's expectations.
The board also discussed Allied Capital's proposal, including the fact that it
was not conditioned upon the sale of STS, and discussed the possible adverse
impact an open auction or further solicitation was likely to have on the
proposed transaction with Allied Capital. The board also discussed the
possibility that an open auction or further solicitation would have an adverse
impact on STS's customer base, potentially resulting in a lower price than the
price proposed by Allied Capital. The board then confirmed with Janney that
Janney would be willing to render a fairness opinion at the price proposed by
Allied Capital. After general discussion, the board determined that, based upon
the foregoing, an open auction or further solicitation was not advisable at the
present time. The board then determined that it was necessary to move forward
with Allied Capital as expeditiously as possible and authorized the special
committee to negotiate a definitive merger agreement with Allied Capital on the
terms proposed.
Throughout April and early May of 2001, Allied Capital continued to conduct
its due diligence investigation, and representatives of Allied Capital and
SunSource continued to discuss an appropriate structure and other terms that
would be necessary to complete a merger transaction.
In early May of 2001, Allied Capital advised the special committee that,
while its implied enterprise value of SunSource would not change, based upon
receipt of additional due diligence regarding the number of outstanding shares
and options, the per share price would be reduced to $10.375 per share.
On May 30, 2001, Allied Capital presented a draft merger agreement to
SunSource and its legal advisors. At a meeting of the special committee on June
4, 2001, the special committee discussed the initial draft of the Merger
Agreement with its legal advisors. In particular, the special committee reviewed
and discussed the exchange ratio, the terms of the required management
participation, the establishment of a collar on the Allied Capital stock
consideration, the termination fee, the definition of material adverse effect,
the conditions to closing and the option for Allied Capital to pay the merger
consideration in cash rather than Allied Capital stock. Following this meeting,
the special committee and its financial and legal
24
advisors continued to meet regularly to discuss the status of negotiations with
Allied Capital and the issues arising during negotiations.
At a special meeting of the Board on June 7, 2001, the special committee
reviewed the status of negotiations and summarized unresolved issues for the
board. At this meeting, the board discussed at length the proposed price, as
well as the other terms and conditions of the proposed sale transaction with
Allied Capital. Mr. Hoffman reported to the board that the special committee
continued to support the proposed sale transaction with Allied Capital, and
that, based on conversations with Janney, believed the proposed price to be fair
to SunSource and its stockholders, both affiliated and unaffiliated. After
discussion, the board confirmed that the special committee should continue the
negotiation of the definitive merger agreement with Allied Capital on the terms
presented to the board.
On June 13, 2001, for purposes of evaluating an investment in Allied
Capital in the event Allied Capital elected to pay the merger consideration in
Allied Capital stock, the special committee met with representatives of
PricewaterhouseCoopers to discuss a due diligence report on Allied Capital
prepared by PricewaterhouseCoopers at the request of the special committee.
On June 17, 2001, the special committee met to review the final terms of
the merger agreement prior to making its recommendation to the board. At this
meeting, the special committee reviewed the proposed price and other terms and
conditions of the proposed sale transaction with Allied Capital. Following
discussion, the special committee determined to recommend approval of the merger
agreement to the board.
At a special meeting of the board on June 18, 2000 called for the purpose
of considering approval of the definitive merger agreement and related
transactions, Mr. Andrien reviewed the key terms of the merger agreement and
summarized the status of negotiations with Allied Capital. At the meeting,
Janney reviewed the financial terms of the merger and rendered its oral opinion,
subsequently confirmed by a written opinion dated as of June 18, 2001, to the
effect that as of that date, based upon and subject to the assumptions,
limitations and qualifications set forth in its written opinion, both the
proposed exchange ratio and the proposed cash consideration, if Allied Capital
elected to pay the merger consideration in cash, were fair to the affiliated and
unaffiliated stockholders of SunSource from a financial point of view. Following
Janney's presentation, the board considered the terms and provisions of the
draft merger agreement. The special committee then recommended that the board
approve the draft merger agreement and related transactions. After general
discussion, and consideration of the factors described under "-- Recommendation
of the SunSource Board of Directors and "Reasons for the Recommendation of the
SunSource Board of Directors," the board concluded that the merger was in the
best interests of SunSource and its stockholders and unanimously approved the
merger agreement and the transactions contemplated by the merger agreement.
The parties agreed to enter into a definitive agreement and plan of merger
as of June 18, 2001 subject to finalizing the transaction documents. The merger
agreement was executed by the parties on June 19, 2001.
Following the execution of the definitive merger agreement and other
ancillary documents, a joint press release announcing the merger agreement was
issued on June 19, 2001.
On July 2, 2001, SunSource and Allied Capital issued a joint press release
announcing that Allied Capital had elected to pay the consideration in the
merger in cash and not Allied Capital common stock.
25
At a meeting of the board on August 15, 2001, the board reviewed and
discussed certain revisions to the report by Janney issued in connection with
its fairness opinion, as well as the board's approval process. At this meeting,
Janney presented certain revisions to its report and gave its oral confirmation,
subsequently confirmed by written opinion, that, as of June 18, 2001, on the
basis of the revised report, based upon and subject to the assumptions,
limitations and qualifications set forth in its written opinion, the merger
consideration is fair to the affiliated and unaffiliated stockholders of
SunSource from a financial point of view. After lengthy discussions with its
legal and financial advisors present at the meeting, the board adopted the
fairness opinion of Janney on the basis of the revised report and confirmed its
prior determination that the terms of the merger are fair to SunSource and the
affiliated and unaffiliated stockholders of SunSource.
REASONS FOR THE RECOMMENDATION OF THE SUNSOURCE BOARD OF DIRECTORS
The SunSource board of directors and the special committee consulted with
senior management, as well as the board's financial advisor and legal counsel,
and approved the merger after determining that it was fair to and in the best
interests of SunSource's affiliated and unaffiliated stockholders. In reaching
its conclusion to approve the merger, the board of directors considered the
following information and factors:
- PURCHASE PRICE PREMIUM. The board of directors determined, with the
advice of its financial advisor, that the $10.375 per share price
represents a substantial premium to the market price of SunSource's
common stock and, with the advice of its legal counsel, that the other
material terms of the merger agreement, taken as a whole, were as
favorable as those found in comparable acquisition transactions. The
closing price per share of SunSource's common stock on the New York Stock
Exchange was $4.96 per share on the day the board of directors approved
the merger; thus, $10.375 represented a 109% premium over the $4.96 per
share market price. Also, during the 52-week period ended June 15, 2001
the highest closing market price of SunSource's common stock was $5.38
per share and the lowest was $2.88 per share. The board of directors of
SunSource considered that the net book value of SunSource was less than
its liquidation value. However, due to the performance of STS, as
discussed below, the board of directors determined that a liquidation was
not the best alternative. Therefore, a sale of SunSource as a going
concern was determined to be the best alternative. The board of directors
also considered that they had not received any firm offers, despite the
efforts to negotiate with the First Party and the Second Party, for an
acquisition or merger of SunSource from other third parties.
- HIGHLY LEVERAGED CAPITAL STRUCTURE. The board of directors considered
SunSource's highly leveraged capital structure including its senior debt,
subordinated debt and trust preferred securities which, in the aggregate,
represent a total debt of approximately 96% of SunSource's consolidated
capitalization as of March 31, 2001. SunSource's current financial
position would limit its access to the equity markets in the future
thereby limiting its ability to support and maintain the growth of its
various business segments. The board of directors considered that by
becoming a portfolio company of Allied Capital, New SunSource would have
access to a funding source with significant financial resources. See
"-- Fairness Opinion of SunSource's Financial Advisors" and "-- SunSource
Inc. and Subsidiaries Consolidated Financial Statements";
- PERFORMANCE OF STS. SunSource's board of directors considered the
performance of the STS business including its operating losses since 1998
and its impact on the overall valuation of SunSource. Also, the board of
directors decided that the risks of potential losses of STS customers did
not warrant conducting an open auction or further soliciting
26
other potential buyers to acquire STS in lieu of the Allied Capital
transaction to acquire all business segments of SunSource. See
"-- Background of the Merger" and "-- Fairness Opinion of SunSource's
Financial Advisor."
- CONSUMMATION OF THE MERGER. SunSource's board of directors considered
the likelihood of consummation of the merger, including the terms and
conditions of the merger agreement and the limited conditions to the
consummation of the merger.
- FAIRNESS OPINION. The opinion of Janney Montgomery Scott states that as
of its date, and based on and subject to the matters described in the
opinion, the consideration provided for in the merger was fair, from a
financial point of view, to SunSource's stockholders, including
unaffiliated stockholders, and describes the related financial analyses
performed by Janney Montgomery Scott in connection with its opinion. The
board of directors of SunSource has adopted the analysis of Janney
Montgomery Scott. See "-- Fairness Opinion of SunSource's Financial
Advisor"; and
- RECOMMENDATION OF SPECIAL COMMITTEE. In December 2000, SunSource's board
of directors appointed a special committee comprising independent and
disinterested directors to review, consider and make recommendations
regarding a potential sale transaction of SunSource. Upon extensive
discussions and negotiations with Allied Capital, in particular the
consideration to be paid, the terms of the required management
participation, the establishment of a collar on the Allied Capital stock
consideration, the termination fee, the definition of material adverse
effect and the conditions to closing, the special committee concluded
that the merger and the related transactions are both substantively and
procedurally fair to the affiliated and unaffiliated stockholders of
SunSource. The special committee has unanimously recommended the merger
with Allied Capital and the related transactions to the SunSource board
of directors.
The board of directors and the special committee also considered certain
potentially negative factors and risks in its deliberations concerning the
merger, including, without limitation, the following:
- The possibility that the merger would not be consummated following the
execution of the merger agreement;
- The possible disruption of SunSource's business operations pending
completion of the merger; and
- The structure and amount of the termination fee and its effect on the
financial condition of SunSource. See "The Merger
Agreement -- Termination; Fees."
SunSource's board of directors and the special committee considered that
specified officers, directors and stockholders of the company would continue as
officers, directors and stockholders of New SunSource, and as a result such
officers and directors would benefit from compensation and employment
arrangements in the ordinary course of business, and that all such persons will
be entitled to any benefits that may arise from continued ownership of New
SunSource.
In view of the variety of factors considered in connection with its
evaluation of the merger agreement, SunSource's board of directors and the
special committee found it impracticable to, and did not, quantify, rank or
otherwise assign relative weights to the factors considered or determine that
any factor was of particular importance in reaching its determination that the
merger agreement and the transactions contemplated by the merger agreement are
fair to, and in the best interests of, SunSource's affiliated and unaffiliated
stockholders. Rather, the members of SunSource's board of directors and the
special committee each viewed their
27
respective recommendations as being based upon their own judgment, in light of
the totality of the information presented and considered, of the overall effect
of the merger agreement and the transactions contemplated by the merger
agreement, including the merger, on SunSource's stockholders compared to any
alternative transaction. The above discussion of the information and factors
considered by SunSource's board of directors and the special committee is not
all-inclusive but is believed to include all material factors considered by
SunSource's board of directors and the special committee.
RECOMMENDATION OF SUNSOURCE'S BOARD OF DIRECTORS
SunSource's board of directors believes that the merger is in the best
interest of SunSource and its stockholders. Accordingly, SunSource's board of
directors has, by a unanimous vote of the directors, approved the merger
agreement and the transactions contemplated by the merger agreement.
THE SUNSOURCE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF
THE COMMON STOCK OF THE COMPANY VOTE "FOR" THE MERGER PROPOSAL.
ALLIED CAPITAL'S REASONS FOR THE MERGER
Allied Capital's board of directors believes its investment in New
SunSource will enhance Allied Capital's investment portfolio, both with respect
to current investment return and potential future capital gain. Allied Capital's
investment in New SunSource is expected to include subordinated debt and common
stock. Allied Capital will control directly approximately 94% of the voting
common stock of New SunSource (on a fully diluted basis). In addition to
receiving a current investment return through interest, dividends and fee
income, Allied Capital believes there is opportunity to add value to New
SunSource and to position its investment for future capital gain.
Allied Capital believes that the merger is the most appropriate means of
acquiring New SunSource as a portfolio company. The Allied Capital board of
directors believes that the expected investment return from its investment in
New SunSource is consistent with Allied Capital's overall portfolio return
objectives.
BELIEF OF THE FILING PERSONS IN THE FAIRNESS OF THE MERGER
The rules of the Securities and Exchange Commission require that each of
SunSource, Maurice Andrien, Joseph Corvino, Max Hillman, Stephen Miller, Richard
Hillman, George Heredia, Gary Seeds, Terry Rowe, Jim Waters, Dennis Blake, Rick
Buller, Ken Foskey, Michael Mueller, Mark Yeary, John McDonnell, John Marshall,
merger sub and Allied Capital express its or his belief as to the fairness of
the merger to the holders of SunSource common stock.
The special committee of SunSource did not retain an independent
representative to act solely on behalf of the unaffiliated holders of SunSource
common stock for purposes of negotiating the merger or advising such
stockholders as to the fairness of the merger. The special committee, however,
which consisted entirely of independent and disinterested directors, has worked
with Janney Montgomery Scott LLC to ensure the fairness of the transaction to
the unaffiliated holders of SunSource common stock. None of the individuals
listed above has undertaken any formal evaluation of the fairness of the
transaction to the unaffiliated holders of SunSource common stock and did not
find it practicable to quantify or assign relative weights to the various
factors considered by them.
28
Each of the persons listed above believes that the merger is procedurally
fair to the unaffiliated holders of SunSource common stock based on their
consideration of, among other things, the following factors:
- SunSource's requirement that the merger be approved by the holders of a
majority of the shares of common stock;
- the special committee of SunSource consisted entirely of disinterested
and independent non-employee directors, and was constituted to evaluate
the merger;
- the unanimous approval of the special committee of SunSource of the
merger; and
- all of the other factors contained under "-- Reasons for the
Recommendation of SunSource's Board of Directors."
The merger is not structured so that the approval of at least a majority of
the unaffiliated shares is required and an independent representative was not
retained to act solely on behalf of the unaffiliated stockholders for purposes
of negotiating the terms of the merger, and each of the persons listed above was
aware of these facts in arriving at his or its belief that the merger is
procedurally fair to the unaffiliated holders of SunSource common stock. As of
June 18, 2001, affiliated stockholders held approximately 23% of SunSource's
common stock.
Each of the persons listed above believes that the merger is substantively
fair to the unaffiliated holders of SunSource common stock. In reaching that
conclusion, the persons listed above considered, among other things, the factors
contained in the analysis presented under "-- Reasons for the Recommendation of
SunSource's Board of Directors" and "-- Fairness Opinion of SunSource's
Financial Advisor."
The board of directors of SunSource and the special committee have
unanimously concluded that the merger is both substantively and procedurally
fair to the unaffiliated holders of SunSource common stock and has approved the
merger agreement for the reasons referred to above and for the reasons set forth
in "Reasons for the Recommendation of SunSource's Board of Directors."
FAIRNESS OPINION OF SUNSOURCE'S FINANCIAL ADVISOR
The board of directors retained Janney in December 2000 as its financial
advisor to review possible merger transactions and to render an opinion as to
the fairness, from a financial point of view, of the consideration to be
received by the stockholders of SunSource common stock. As described herein,
Janney's opinion, dated June 18, 2001, together with the related presentation to
the board of directors, was only one of many factors taken into consideration by
the board of directors in making its determination to approve the merger.
At the June 18, 2001 meeting of SunSource's board of directors,
representatives of Janney made a presentation with respect to the merger and
rendered to the board of directors its oral opinion, subsequently confirmed in
writing as of the same date, that as of such date, and based on the assumptions
made, matters considered and limits of the review undertaken by Janney, the
consideration to be received in the merger was fair to the stockholders,
including unaffiliated stockholders, of SunSource, from a financial point of
view. On August 15, 2001, Janney presented a revised report to the board of
directors based on additional information concerning the comparable transaction
analysis presented on June 18, 2001 and reissued the fairness opinion as of June
18, 2001.
THE FULL TEXT OF JANNEY'S WRITTEN OPINION, DATED AUGUST 15, 2001, INITIALLY
DELIVERED ON JUNE 18, 2001, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS
CONSIDERED AND LIMITATIONS ON REVIEW UNDERTAKEN, IS ATTACHED TO THIS PROXY
STATEMENT AS APPENDIX B AND IS
29
INCORPORATED HEREIN BY REFERENCE. JANNEY'S OPINION IS DIRECTED TO THE BOARD OF
DIRECTORS OF SUNSOURCE AND ADDRESSES THE FAIRNESS OF THE CONSIDERATION TO BE
RECEIVED IN THE MERGER BY SUNSOURCE'S STOCKHOLDERS FROM A FINANCIAL POINT OF
VIEW. JANNEY'S OPINION DOES NOT ADDRESS THE UNDERLYING DECISION OF SUNSOURCE TO
ENGAGE IN THE MERGER AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER
AS TO HOW SUCH STOCKHOLDER SHOULD VOTE OR AS TO ANY OTHER ACTION SUCH
STOCKHOLDER SHOULD TAKE IN CONNECTION WITH THE TRANSACTION.
In connection with its opinion, Janney reviewed:
- annual reports on Form 10-K of SunSource for the years 1997, 1998, 1999
and 2000;
- quarterly reports on Form 10-Q of SunSource for the quarters ended March
31, 2000 and March 31, 2001;
- financial projections prepared by the management of SunSource for the
years ending December 31, 2001 through December 31, 2005;
- audited financial results for Kar for the years ended December 31, 1997
through December 31, 2000; unaudited financial results for Kar for the
quarters ended March 31, 2000 and March 31, 2001; and projections
prepared by the management of Kar for the year ending December 31, 2001;
- the stock prices, operating results, financial conditions and future
earnings estimates of publicly traded companies that Janney deemed
comparable to SunSource, Hillman, STS and Kar;
- the financial terms of mergers and acquisitions of companies that Janney
deemed comparable to SunSource, Hillman, STS and Kar;
- the terms of the merger agreement and related documents in draft form;
- such other studies and analyses and considered such other information and
factors, as it deemed appropriate.
Janney assumed that the final terms of the merger agreement and related
documents reviewed by it in draft form would not vary materially from the drafts
reviewed by it. Janney also held discussions with certain members of the
management of SunSource regarding its business, operating results, financial
condition and prospects. Janney did not independently verify any of the
information described above and for purposes of its opinion assumed the
accuracy, completeness and fairness of all such information. Janney did not make
and it was not provided with an independent evaluation or appraisal of the
assets of SunSource. With respect to the financial forecast information
furnished by or discussed with SunSource, Janney assumed that such information
was prepared on the basis of reasonable assumptions and reflected the best
currently available judgments and estimates of the management of SunSource as to
the likely future financial performance of SunSource. Janney's opinion is
necessarily based on the market, economic and other conditions as they existed
and should be evaluated as of June 18, 2001.
In arriving at its opinion, Janney did not ascribe a specific value to
SunSource, but made its determination as to the fairness, from a financial point
of view, of the consideration to be received by the stockholders of SunSource
common stock in the merger on the basis of a variety of financial and
comparative analyses, including those described below. The summary of analyses
performed by Janney as set forth below does not purport to be a complete
description of the analyses underlying Janney's opinion. The presentation of a
fairness opinion is a complex analytic process involving various determinations
as to the most appropriate and relevant methods of financial analysis and the
application of those methods to the particular
30
circumstances and therefore, such an opinion is not readily susceptible to
partial or summary description. The estimates contained in such analyses and the
ranges of valuations resulting from any particular analysis are not necessarily
indicative of actual values or predictive of future results or values, which may
be significantly more or less favorable than those suggested by such analyses.
In addition, analyses relating to the value of the business or securities do not
purport to be appraisals and estimates are inherently subject to substantial
uncertainty. In arriving at its opinion, Janney made qualitative judgments as to
the significance and relevance of each analysis and factor considered by it.
Accordingly, Janney 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 an incomplete view of all the processes
underlying such analyses and its opinions.
In rendering its opinion, Janney considered, the condition of the U.S.
stock markets and the current level of economic activity, particularly in the
distribution industry. No company used in the analysis of certain other publicly
traded companies nor any transaction used in the analysis of selected mergers
and acquisitions summarized above are identical to SunSource, Hillman, STS and
Kar or the merger. In addition, Janney believes that both the analysis of
certain other publicly traded companies and the analysis of selected mergers and
acquisitions are not simply mathematical. Rather, such analyses must take into
account differences in the financial and operating characteristics of these
companies and other factors, such as general economic conditions, conditions in
the markets in which such companies compete and strategies and operating plans
for such companies, that could affect the public trading value and acquisition
value of these companies.
Background
Janney noted to the board of directors that for analytical purposes
SunSource was compromised of three separate businesses:
- The Hillman Group, a wholly-owned subsidiary;
- SunSource Technology Services, LLC, also a wholly-owned subsidiary; and
- Kar Products, Inc., in which SunSource holds a 44% minority interest
Janney indicated that due to the differences between the operations,
profitability and financial condition of Hillman, STS and Kar, it was
appropriate to value each on an independent basis.
Janney also noted that SunSource's recent reported financial results were
affected by various acquisitions and divestitures during 2000, and that for
analytical purposes it was appropriate to review SunSource's financial results
on a pro forma basis, i.e., as if the following acquisitions and divestitures
were effective as of January 1, 2000:
- on March 2, 2000, SunSource contributed its Kar operations to a newly
formed partnership, G-C Sun Holdings LP ("G-C");
- on April 7, 2000, SunSource acquired Axxess Technologies, Inc.;
- on April 13, 2000, SunSource sold substantially all of the assets of its
Harding Glass, Inc. subsidiary;
- on October 4, 2000, G-C acquired all of the outstanding stock of Brampton
Fastener Company Limited;
- on November 3, 2000, Hillman purchased inventory and certain other assets
of the Sharon-Philstone division of Pawtucket Fasteners, LP; and
31
- in December 2000, SunSource's board of directors approved a plan to
liquidate SunSource Integrated Services de Mexico, S.A. de C.V.
Further, Janney noted that SunSource's outstanding bank revolving credit,
senior bank debt, unsecured subordinated notes and guaranteed preferred
beneficial interests in junior subordinated debentures were obligations of
SunSource, and that Janney did not believe it was appropriate to, and therefore
did not, allocate such debt among Hillman, STS and Kar. Janney noted that G-C
had outstanding indebtedness in addition to the SunSource debt. Because
SunSource holds a minority interest in Kar, accounts for its investment in Kar
under the equity method, and is not a direct borrower or guarantor of the Kar
debt, it is not included as part of the SunSource debt.
Certain Projections
SunSource does not as a matter of policy make public forecasts or
projections as to future performance or earnings. However, in the course of
discussions with Allied Capital, SunSource prepared projections of its
anticipated future operating performance for the three calendar years ending
December 31, 2004. Certain of these projections are summarized below.
Such projections were prepared assuming that the merger had not occurred
and upon estimates and assumptions (including with respect to industry
performance, general economic and business conditions and other matters) that
inherently are subject to material uncertainties and risk, all of which are
difficult to quantify and many of which are beyond the control of SunSource. The
projections were not prepared with a view to public disclosure or compliance
with the published guidelines of the Securities and Exchange Commission or the
guidelines established by the American Institute of Certified Public Accountants
regarding projections or forecasts. SunSource's internal operating projections
are, in general prepared solely for internal use in connection with capital
budgeting and other management decisions and are subjective in many respects and
thus susceptible to various interpretations. Certain assumptions on which the
projections were based related to the achievement of strategic goals, objectives
and targets over the applicable periods that are more favorable than historical
results. There can be no assurance that the assumptions made in preparing the
projections will prove accurate, and actual results may be materially greater or
less than those contained in the projections. Neither SunSource, Janney nor any
person assumes any responsibility for the accuracy of any of the projections.
Neither SunSource's independent auditors, nor any other independent accountants
or financial advisors, including Janney, have compiled, examined or performed
any procedures with respect to the projections contained herein, nor have they
expressed any opinion or any form of assurance on such information or its
achievability, and assume no responsibility for, and disclaim any association
with, the projections. The inclusion of the projections should not be regarded
as an indication that SunSource, Janney or any other person who received such
information, considers it an accurate prediction of future events. SunSource
does not intend to update, revise or correct such projections if they become
inaccurate (even in the short term).
SunSource's management believed that the assumptions used in the
preparation of the estimates were reasonable at the time they were made.
SunSource management's belief as to the reasonableness of its assumptions was
based on the history of operations of Hillman and STS. SunSource's management
indicated that they believe and continue to believe that the EBITDA of Hillman
will grow by 19.3% in 2002, 11.6% in 2003 and 8.7% in 2004. Furthermore,
SunSource's management indicated that they believe and continue to believe that
the deficit EBITDA of STS will decrease by 78.3% in 2002, become positive EBITDA
in 2003 and increase by 120.1% in 2004. SunSource provided these estimates to
Janney and Janney relied on these estimates without independent verification.
32
The projections above constitute forward looking statements and involve
numerous risks and uncertainties. SunSource's actual results may differ
significantly from those discussed herein. Factors that might cause such a
difference include, but are not limited to, the effect of changing economic or
business conditions and the impact of competition and other factors.
The following is a brief summary of the material factors considered and
analyses performed by Janney and presented to the board of directors at its
meeting on June 18, 2001.
Historical Stock Price
Janney reviewed the trading volume and price history of SunSource's common
stock for the period from June 7, 1999 through June 15, 2001. Janney also
reviewed for the same period the relationship between movements in the closing
prices of SunSource's common stock, the S&P 500 Index, and an index of the
following six comparable public companies:
Applied Industrial Technologies
Barnes Group
Genuine Parts Company
Handleman Company
Industrial Distribution Group
Source Information Management Company
Janney noted that SunSource's common stock under-performed the index of
comparable public companies for the period from October 5, 2000 through June 15,
2001, and under-performed the S&P 500 Index from August 31, 2000 through January
25, 2001. Janney observed that SunSource's stock price decreased 65.5% from
$14.50 on June 7, 1999 to $5.00 on June 15, 2001, and ranged from $2.88 to $5.38
in the 52 week period ending June 15, 2001.
Premiums Paid
Janney reviewed certain publicly available information regarding the
premiums paid since December 1, 2000, by acquirors of publicly traded companies
with market capitalizations from between $50 to $200 million. Janney's review
calculated the price paid as a multiple of the price of the target's stock price
four weeks prior to the announcement of the acquisition. Janney noted that the
median and average premiums paid for the 52 transactions reviewed were 44.4% and
56.1%, respectively, and that the premium to be paid in the merger as a multiple
of SunSource's stock price four weeks prior to the announcement of the merger
was 159%.
The reviews of historical stock price performance and premiums paid were
presented to the board of directors to provide background information and to add
context to the other analyses performed by Janney, as described below.
The Hillman Group
Analysis of Selected Publicly Traded Comparable Companies
Using publicly available information, Janney compared the operating
performance, financial performance and capitalization of Hillman with
corresponding data and ratios for certain similar publicly traded companies.
Janney selected these companies from the universe of possible companies based
upon Janney's view as to the comparability of financial and operating
33
characteristics of these companies to Hillman. With respect to each such
analysis, Janney made such comparisons among the following companies:
Among the multiples calculated and reviewed by Janney were the comparable
companies' enterprise value, defined as market capitalization, adjusted for debt
and cash, as a multiple of EBITDA (earnings before interest, taxes, depreciation
and amortization) and EBIT (earnings before interest and taxes). The financial
information used in connection with these multiples was based on the latest
reported 12 month period (LTM) as derived from publicly available information.
The comparable companies were found to have the following trading ranges:
Janney noted that: (i) the enterprise value of the comparable companies as
a multiple of the latest reported 12 month period EBITDA ranged from 4.2x to
9.5x, with a median of 6.6x; applying these multiples to Hillman's latest 12
month EBITDA of $39.9 million resulted in low, high and median enterprise values
of $169.1 million, $378.5 million and $263.8 million, respectively; and (ii) the
enterprise value of the comparable companies as a multiple of the latest
reported 12 month period EBIT ranged from 6.2x to 15.8x, with a median of 8.4x;
applying these multiples to Hillman's latest 12 month EBIT of $27.3 million
resulted in low, high and median values of $169.2 million, $432.0 million and
$228.2 million, respectively.
Analysis of Selected Comparable Transactions
Janney reviewed publicly available information relating to six merger and
acquisition transactions in respect of companies that it deemed in industries
most comparable to Hillman's business. These selected comparable transactions
included:
Janney examined multiples of the enterprise value in each of the
transactions to such acquired companies' EBIT and EBITDA. Except for the
transaction data involving SunSource's acquisition of Axxess Technologies, in
which case Janney had access to non-public information, EBIT and EBITDA
consisted of the latest twelve months of publicly available financial
information on the respective date of each transaction, and multiples were based
on information available at the time of announcement of such transaction,
without taking into
34
account differing market and other conditions during the period during which
such transactions occurred.
Janney noted that: (i) the enterprise value of the comparable transactions
as a multiple of the latest reported 12 month period EBITDA ranged from 6.3x to
10.2x, with a median of 7.7x; applying these multiples to Hillman's latest 12
month EBITDA of $39.9 million resulted in low, high and median enterprise values
of $252.0 million, $408.6 million and $307.5 million, respectively; and (ii) the
enterprise value of the comparable transactions as a multiple of the latest
reported 12 month period EBIT ranged from 7.4x to 19.4x, with a median of 8.3x;
applying these multiples to Hillman's latest 12 month EBIT of $27.3 million
resulted in low, high and median enterprise values of $201.5 million, $528.8
million and $225.8 million, respectively.
Discounted Cash Flow Analysis
Janney prepared a discounted cash flow analysis of the future unleveraged
free cash flows that Hillman's operations could be expected to generate during
various periods using projections provided to Janney by SunSource. Unleveraged
free cash flows of Hillman were projected over a period ending December 31,
2005. A terminal value was calculated utilizing an exit multiple between 5.5x
and 7.5x projected EBITDA in fiscal 2005. The estimated future unleveraged free
cash flows and the terminal value were discounted to present values using a
range of discount rates from between 15.0% and 19.0%. The discount rate range
selected by Janney was based on an estimate of the weighted average cost of
capital for small capitalization stocks, adjusted for company specific
considerations. Janney arrived at a range of estimated enterprise value of
Hillman of between $241.8 million and $345.2 million. Based on a midpoint exit
multiple of 6.5x EBITDA in the fiscal year 2005, and a midpoint discount rate of
17.0%, this analysis produced a midpoint enterprise value of Hillman of $290.1
million.
Janney noted to the board of directors that the median values of the
aforementioned analyses were $263.8 million, $228.2 million, $307.5 million,
$225.8 million and $290.1 million, and that these median values, together with
the other data reviewed, supported a determination of an enterprise value range
of Hillman of from between $230 million to $270 million.
SunSource Technology Services
Because STS's EBIT, EBITDA and net income were negative for 1999, 2000 and
for the latest twelve months ended March 31, 2001, and were projected by
SunSource to be negative for 2001 and 2002, Janney noted that any analysis of
multiples thereof would not be meaningful. Janney noted, however, that
notwithstanding its historical and projected losses, STS's balance sheet had a
positive net tangible book value of $31.4 million as of March 31, 2001. Janney
did not estimate the costs that would be incurred in winding up operations in an
orderly liquidation of STS's assets.
Discounted Cash Flow Analysis
Janney prepared a discounted cash flow analysis of the future unleveraged
free cash flows that STS's operations could be expected to generate during
various periods using projections provided to Janney by SunSource. Unleveraged
free cash flows of STS were projected over a period ending December 31, 2005. A
terminal value was calculated utilizing an exit multiple between 5.5x and 7.5x
projected EBITDA in fiscal 2005. The estimated future unleveraged free cash
flows and the terminal value were discounted to present values using a range of
discount rates from between 15.0% and 19.0%. Janney arrived at a range of
estimated enterprise values of
35
STS of between $10.7 million and $19.8 million. Based on a midpoint exit
multiple of 6.5x EBITDA in the fiscal year 2005, and a midpoint discount rate of
17.0%, this analysis produced a midpoint enterprise value of STS of $14.9
million.
In light of STS's net tangible book value, as well as the discounted cash
flow analysis described above, Janney indicated to the board of directors that
the foregoing comparisons supported a determination of an enterprise value range
of STS of from between $20 million to $25 million.
Kar Products, Inc.
Analysis of Selected Publicly Traded Comparable Companies
Using publicly available information, Janney compared the operating
performance, financial performance and capitalization of Kar with respective
corresponding data and ratios for certain similar publicly traded companies.
Janney selected these companies from the universe of possible companies based
upon Janney's view as to the comparability of financial and operating
characteristics of these companies to Kar. With respect to each such analysis,
Janney made such comparison among the following companies:
Barnes Group
Hughes Supply
Industrial Distribution Group
Lawson Products
Among multiples calculated and reviewed by Janney were the comparable
companies' (i) enterprise value to the latest reported 12 month period EBIT and
EBITDA and (ii) equity value, defined as common stock equity market value to the
latest reported 12 month period and estimated net income. The financial
information used in connection with the multiples set forth below assumed Kar
debt, net of cash, of $99.2 million, and was based on the latest reported 12
month period as derived from publicly available information and on estimated EPS
for calendar year 2001 for the Kar comparable companies as reported as the
consensus estimates by I/B/E/S.
The comparable companies were found to have the following trading ranges:
Janney noted that: (i) the enterprise value of the comparable companies as
a multiple of the latest reported 12 month period EBITDA ranged from 6.4x to
7.9x, with a median of 6.6x; applying these multiples to Kar's latest 12 month
EBITDA of $24.1 million, and adjusting for debt and cash, resulted in equity
values of $55.0 million, $91.2 million and $59.9 million, respectively; (ii) the
enterprise value of the Kar comparable companies as a multiple of the latest
reported 12 month period EBIT ranged from 7.6x to 12.5x, with a median of 10.6x;
applying these multiples to Kar's latest 12 month EBIT of $16.7 million, and
adjusting for debt and cash, resulted in equity values of $27.9 million, $109.9
million and $78.1 million, respectively; and (iii) the equity value of the Kar
comparable companies as a multiple of the latest reported 12 month period net
income ranged from 11.5x to 15.3x, with a median of 12.8x;
36
applying these multiples to Kar's latest twelve month net income of $3.6 million
resulted in equity values of $41.8 million, $55.7 million and $46.6 million,
respectively. Because only one of the Kar comparable companies had reported
consensus estimates for 2001 net income, Janney did not rely on the quantitative
results of Kar equity value as a multiple of Kar's estimated 2001 net income.
Janney indicated to the board of directors that applying the median values
of the aforementioned analyses to Kar's latest 12 month EBITDA, latest 12 month
EBIT and latest 12 month net income resulted in equity values of $59.9 million,
$78.1 million and $46.6 million, and that these median values, together with the
other data reviewed, supported a total equity value range of Kar of from between
$45 million to $70 million. Applying SunSource's 44% ownership percentage in Kar
to the total equity value range supported an equity value range of SunSource's
ownership interest in Kar of approximately $20 million to $30 million, before
application of the discount described below.
Janney noted that (i) SunSource's 44% interest in Kar was a minority
interest and (ii) the G-C limited partnership agreement governing Kar provides
the majority owner of Kar a "call" on SunSource's interest in Kar, i.e., a right
to purchase SunSource's interest in Kar, in the event of a change of control of
SunSource. Janney indicated that the terms of the call provision reduced the
marketability of Kar to a third party, and that an interest in a business is
generally worth less if it is a minority interest and/or if it is not readily
marketable. In addition, Janney noted that the G-C partnership agreement
contains certain shareholder preference provisions that could reduce the
distributions to SunSource in the event of a sale of Kar to an amount less than
its ownership percentage would otherwise indicate. As a result, Janney noted
that an illiquidity discount of 30% to 35% from the equity value range to
SunSource derived from public company multiples was appropriate.
Based on the above, Janney indicated to the board of directors that the
foregoing comparisons supported a determination of an equity value range of
SunSource's 44% ownership interest in Kar of from between $15 million to $20
million.
SunSource Inc.
Based on the above, Janney indicated to the board of directors that the
foregoing comparisons supported a determination of an enterprise value range of
SunSource of from between $265 million to $315 million, equaling the sum of the
ranges of Hillman, STS and Kar. After subtracting the value of the SunSource
debt, net of cash, assumed to be $220.3 million, the resulting equity value
range of SunSource equaled from between $44.7 million to $94.7 million, or,
based on an assumed 7.529 million diluted shares outstanding, from between $5.94
per share to $12.58 per share. Janney noted that the percentage differences
between the high end and the low end of the equity value and the per share value
ranges was significantly wider than the percentage difference between the high
end and the low end of the enterprise value range because of the substantial
amount of SunSource debt outstanding.
Janney is a nationally recognized investment banking firm and, as part of
its investment banking activities is regularly engaged in the valuation of
businesses and securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of securities, private
placements and valuations for corporate and other purposes. The board of
directors retained Janney to act as its financial advisor based on Janney's
qualifications, reputation and experience. Pursuant to the terms of Janney's
engagement, the fee payable to Janney consists of (i) $25,000 which was paid
upon Janney's retention by the board of directors, (ii) $150,000 upon the
delivery of Janney's opinion and (iii) $150,000 upon the
37
closing of the merger. In addition, SunSource has agreed to reimburse Janney for
its reasonable out-of-pocket expenses and to indemnify Janney for certain costs,
expenses and liabilities related to or arising out of Janney's rendering of
services under its engagement as financial advisor, or to contribute to payments
Janney may be required to make in respect thereof.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the SunSource board of directors with
respect to the merger, SunSource stockholders should be aware that certain
members of SunSource's management, one of whom is a member of the SunSource
board of directors, have certain interests in the merger in addition to those of
the stockholders generally. The members of the special committee of the board of
directors and members of the SunSource board of directors were aware of these
interests when they considered and approved the merger agreement. See
"-- Related Transactions" and "Security Ownership of Certain Beneficial Owners
and Management of SunSource."
Continuing Ownership in New SunSource
As described above in "The Merger Proposal," Allied Capital conditioned its
offer for SunSource on the continued ownership by certain stockholders and
members of management. Allied Capital wanted to assure that the key members of
New SunSource's management team and other key stockholders had continuing
ownership and continued financial risk in New SunSource. Maurice Andrien, Joseph
Corvino, Max Hillman, Stephen Miller, Richard Hillman, George Heredia, Gary
Seeds, Terry Rowe, Jim Waters, Dennis Blake, Rick Buller, Ken Foskey, Michael
Mueller, Mark Yeary, John McDonnell, and John Marshall, the continuing
stockholders, will continue to own an aggregate of approximately 6% of New
SunSource common stock after the merger on a fully diluted basis.
Prior to the merger, certain continuing stockholders collectively will
purchase 163,202 shares of SunSource common stock from Allied Capital for a cash
price of $10.375 per share. These shares, together with 80,986 shares of
SunSource common stock held by certain of the continuing stockholders, will be
exchanged in the SunSource recapitalization for an equal number of shares of
Series B preferred stock. Such Series B preferred stock will be converted to New
SunSource common stock following the merger. In addition, certain stockholders
will rollover their existing options to purchase 443,000 shares of common stock
of SunSource into options to purchase an equal number of shares of common stock
of New SunSource. The continuing stockholders have entered into an equity
purchase agreement committing to these
38
arrangements. The SunSource shares and options covered by the equity purchase
agreement are summarized in the following table:
Management of New SunSource
Upon consummation of the merger, Maurice Andrien will be appointed Chairman
of the board of directors of New SunSource and Joseph Corvino will be appointed
Senior Vice President of New SunSource pursuant to the terms of their new
employment agreements.
The board of directors of New SunSource will be composed of seven members,
four of which will be nominated by Allied Capital. Allied Capital intends to
appoint William L. Walton, Joan M. Sweeney, G. Cabell Williams III and Daniel L.
Russell to the New SunSource board of directors. Pursuant to the stockholders
agreement, Messrs. Andrien, Max Hillman and Miller will also be appointed to the
board of directors of New SunSource and are referred to as the minority
directors. Each of Messrs. Andrien, Max Hillman and Miller will continue as a
director until he ceases to be employed by New SunSource for any reason provided
that Mr. Miller will serve on the board for a period of two years regardless of
whether he is employed by New SunSource. If any of Messrs. Andrien, Max Hillman
or Miller cease to be a director for any reason, the resulting vacancy will be
filled by Joseph Corvino or Richard Hillman in that order, so long as such
person is still employed by New SunSource. Messrs. Andrien, Max Hillman, Miller,
Corvino and Richard Hillman are referred to as the eligible directors. At such
time as fewer than three of the eligible directors are employed by New
SunSource, the number of minority directors shall be reduced to equal the number
of eligible directors and the number of members of the New SunSource board shall
be reduced by an equal amount.
39
The members of management who are continuing stockholders will continue as
management of New SunSource as follows:
New Employment Agreements
Concurrently with the signing of the merger agreement, SunSource entered
into employment agreements with each of Maurice Andrien, Joseph Corvino, Max
Hillman and Stephen Miller. These agreements will become effective upon the
consummation of the merger and will supersede any previous agreement between the
parties. Each agreement, with the exception of Mr. Miller's, provides for a
four-year term, with annual renewals thereafter, and specifies each executive's
compensation during the term of the agreement, in accordance with the
achievement of established performance standards. Mr. Miller's agreement
provides for a one-year term of employment with annual renewals thereafter. Mr.
Andrien will serve as Chairman of the Board of New SunSource, Mr. Corvino will
serve as Senior Vice President of New SunSource, Mr. Hillman will serve as Chief
Executive Officer of the Hillman Group and Mr. Miller will serve as the Vice
Chairman of the Hillman Group.
The annual base salaries for Messrs. Andrien, Corvino, Hillman and Miller
will be $343,000, $250,000, $350,000 and $350,000, respectively. The board of
directors has the right to increase the base salary during the term of the
agreements. In addition, the board of directors may provide, in its sole
discretion, an annual incentive cash bonus. This bonus will be
40
determined with reference to each executive's performance in accordance with
performance criteria to be established by the New SunSource board of directors
in its sole discretion.
If during the term of employment New SunSource terminates their employment
without cause or they resign with good cause, Messrs. Andrien, Corvino, and
Hillman are each entitled to payments equal to two times such individual's
annual salary and bonus, and Mr. Andrien is guaranteed payments of not less than
$1 million. If Mr. Miller is terminated without cause or resigns with good cause
during the term of his employment, or his employment is terminated by the
expiration of his one year term, he is entitled to his salary and bonus that he
was entitled to during his one year employment term until the second anniversary
of the effective time of the merger.
In addition, in the event of a termination without cause following a change
of control that occurs on or after the third anniversary of the effective time
of the merger or if they cease to be employed by SunSource for certain reasons
at any time following the expiration of their four year employment term, Messrs.
Andrien, Corvino and Hillman are each entitled to a payment equal to one year's
salary and bonus, and each agreement also prohibits the hiring or solicitation
for hire of any SunSource employees for a period of two years following
termination of their employment with SunSource. Mr. Miller and Mr. Max Hillman
are also subject to a one year non-competition period subject to certain
extensions.
Stockholders Agreement
The continuing stockholders have agreed to enter into a stockholders
agreement with Allied Capital and New SunSource at the closing of the merger.
The stockholders agreement imposes certain requirements on the parties relating
to the voting of New SunSource common stock, the sale or transfer of New
SunSource common stock and certain other matters.
The stockholders agreement provides, among other things, for the following:
- The continuing stockholders will only transfer their shares of New
SunSource common stock to certain family members or trusts or
corporations created for the benefit of certain family members, unless
Allied Capital consents in writing;
- The continuing stockholders will have tag along rights to participate in
a sale if Allied Capital proposes to sell 30% or more of its New
SunSource common stock to a third party, and Allied Capital will have
take along rights to require the continuing stockholders to participate
in a sale or other business combination involving New SunSource;
- New SunSource has a call right and certain of the continuing stockholders
have a put right with respect to their shares of New SunSource common
stock if their employment with New SunSource is terminated for certain
reasons;
- Allied Capital and the continuing stockholders have certain pre-emptive
rights in the event that New SunSource issues any new equity securities;
- The stockholders agreement provides for approval by the continuing
stockholders of certain proposed transactions between Allied Capital and
New SunSource;
- The stockholders agreement provides the continuing stockholders with
certain registration rights in the event that New SunSource completes a
public offering.
41
Stock Options of New SunSource
Upon consummation of the merger, a new stock option plan will be adopted by
New SunSource. The new plan will be in addition to the existing SunSource option
plan that will continue in effect after the merger; provided, however, the only
options outstanding under the existing plan will be the rollover options.
Pursuant to the new plan, approximately 1.3 million shares, or 15% of New
SunSource's fully diluted common shares, will be reserved for issuance. Options
granted pursuant to the plan will have a ten-year term, and an exercise price
approximately equal to the per share value of New SunSource, as determined by
the New SunSource board of directors, at the time of grant. The per share amount
of any distributions made after the grant date in connection with the related
transactions described in this proxy statement will reduce the exercise price.
Options will generally vest over four years, with 25% of the options granted on
each anniversary of the grant date through the end of the fourth year, except
that options granted to Mr. Miller will vest 100% on the first anniversary date
of the grant date, unless, on the anniversary of the grant date, he is a member
of the board of directors of New SunSource, in which case his options shall vest
over two years, with 50% vesting on each anniversary of the grant date through
the end of the second year.
In the event of the death or total disability of an optionee, vesting shall
accelerate to include any options that would vest during the one-year period
after the event, and shall be exercisable for the one-year period. In addition,
if an optionee is terminated without cause, or resigns for good reason (as
defined in the employment agreements), all unvested options shall immediately
vest in full.
Vested options will be exercisable at any time until 90 days after
termination of employment, except in the case of termination of an optionee's
employment without cause or for good reason, or the non-renewal of an employment
agreement at the end of its stated term, in which case the vested options will
be exercisable until the later of five years from the closing of the merger or
one year from employment termination.
Upon a change of control (as defined in the employment agreements), unless
New SunSource is the surviving entity (except for a change of control resulting
from the sale of substantially all of the assets of New SunSource), all unvested
options shall immediately vest, cashless exercises shall be permitted, and any
options not exercised at or prior to the change of control shall terminate.
Options representing 14% of New SunSource's fully diluted shares
outstanding will be granted to the continuing stockholders after the
consummation of the merger. Specifically, Mr. Andrien will receive 3.75%; Mr.
Corvino will receive 1.00%; Mr. Miller will receive 1.50%; Mr. Max Hillman will
receive 3.00%; Mr. Richard Hillman will receive 0.75%; Messrs. Heredia, Seeds,
Rowe, Waters and Foskey will each receive 0.50%; Messrs. Blake, Buller and
Muller and Yeary will each receive 0.33%; and Mr. Marshall will receive 0.18%.
The remaining 1% will be reserved for future issuances.
Voting and Support Agreement
Allied Capital has entered into a voting and support agreement with Maurice
Andrien, Joseph Corvino, Max Hillman, Stephen Miller, Richard Hillman, Stewart
Bliss, Gordon Brewer, Norman Edmonson, Arnold Hoffman, Robert Keith, Donald
Marshall, Geoffrey Shepard and Francis Ziegler, each of whom is a stockholder of
SunSource. The parties to the voting and support agreement represent
approximately 20% of the outstanding shares of SunSource. Pursuant to this
agreement, the stockholders of SunSource listed above agreed to vote for the
merger proposal and for matters designed to facilitate the merger and against
any action that
42
would cause a breach of the merger agreement or otherwise hinder the completion
and consummation of the merger. Should the SunSource board of directors have a
fiduciary duty to accept a superior acquisition proposal and as a result the
merger agreement is terminated, obligations under the voting and support
agreement will be terminated.
RELATED TRANSACTIONS
Note Purchase
On June 29, 2001, Allied Capital purchased an unsecured subordinated note,
with an original principal balance of $11 million, from a SunSource creditor for
$8.5 million. SunSource, through its Hillman Group subsidiary, had entered into
the note on April 7, 2000 in connection with its acquisition of Axxess
Technologies, Inc. The note had a balance of approximately $12.5 million on June
30, 2001, and is currently accruing interest at a rate equal to the prime rate
plus 3%, in accordance with the existing terms of the note.
To induce Allied Capital to purchase the note, SunSource entered into a
letter agreement in which SunSource agreed to conditions that would during such
time that Allied Capital owns the note: 1) limit additional debt that SunSource
can incur, 2) restrict prepayment of the junior trust preferred notes, 3)
require SunSource to use its best efforts to obtain the consent of its senior
lenders to allow the repurchase of this note and allow a concurrent investment
by Allied Capital in SunSource, and 4) prohibit the Hillman Group from
transferring or assigning its obligation under the note.
Upon consent of SunSource's senior lenders, it is anticipated that Allied
Capital will exchange the note for $8.5 million of SunSource subordinated debt.
The terms of this additional subordinated debt investment will be on
substantially similar terms as Allied Capital's $30 million subordinated debt
investment in SunSource that was completed in December 2000.
Fee
Allied Capital has provided certain services to SunSource relating to
actions it will implement or may consider implementing after the effective time,
including analysis of SunSource's capital structure and alternatives for
restructuring its outstanding indebtedness, recapitalization or restructuring of
certain of its subsidiaries and investments, and negotiation of new employment
agreements with key employees. In consideration for such services, Allied
Capital will receive from SunSource a fee of approximately $2 million at the
effective time of the merger.
Subordinated Debt
In connection with the closing of the merger, Allied Capital intends to
invest $1.5 million in additional subordinated debt, on terms substantially
similar to Allied Capital's $30 million subordinated debt investment that was
completed in December 2000. In aggregate, Allied Capital will have approximately
$40 million invested in the subordinated debt of SunSource (the $30 million from
December 28, 2000, the $8.5 million in connection with the note purchase and
$1.5 million in connection with the closing).
STS Sale of Assets
In order to raise capital and separate unrelated businesses, it is expected
that New SunSource will sell certain assets of STS in a management buyout
transaction for approximately $25 million.
43
It is anticipated that a portion of the debt financing will be provided by
New SunSource, and an independent lender, and that a portion of the equity
financing will be provided by Allied Capital and STS management including
Maurice Andrien, Joseph Corvino and Justin Jacobi, President of STS, as well as
certain of STS' regional managers and other employees. The management team is
expected to invest approximately $1 million. The sale of STS is expected to
close shortly after the merger is consummated.
The value of STS, as contemplated in this transaction, is consistent with
the value of STS as determined by Janney Montgomery Scott. See "Fairness Opinion
of SunSource's Financial Advisor -- SunSource Technology Services."
In addition, it is anticipated that Maurice Andrien may enter into a
consulting agreement with STS for a total annual compensation of approximately
$280,000.
Amendment to Rights Agreement
SunSource is a party to a rights agreement that establishes a poison pill
mechanism as a defense against hostile takeovers. Even though Allied Capital's
offer to acquire SunSource was not hostile, SunSource amended the rights
agreement to provide that the provisions of the agreement would not be triggered
by a merger transaction with Allied Capital.
Termination of Stockholders Agreement
In connection with SunSource's conversion to corporate form in September
1997, certain members of management and certain other stockholders of SunSource
entered into a stockholders agreement pursuant to which the parties agreed to
certain restrictions on the voting and transfer of their shares of SunSource
common stock. In connection with the merger, the stockholders agreement was
terminated by an agreement executed by each of the parties to the stockholders
agreement.
CHANGE OF CONTROL BENEFITS
Options
Prior to the effective time, SunSource will take all action necessary in
accordance with the terms of SunSource's existing stock option plan to provide
notice to each optionee of the merger and to require that all optionees
surrender their outstanding SunSource stock options, other than rollover
options, in exchange for the issuance by SunSource of a number of shares of
SunSource common stock for each option surrendered equal to the quotient of (i)
the amount, if any, by which $10.375 exceeds the exercise price for such option
divided by (ii) $10.375. As of June 18, 2001, there are 773,495 options to
purchase SunSource common stock with an exercise price above $10.375 and 591,000
options to purchase SunSource common stock with an exercise price below $10.375.
After providing notice to the optionees of their right to exercise, the stock
options with an exercise price above $10.375 that remain outstanding will be
cancelled without any consideration, pursuant to the terms of the existing stock
option plan.
Deferred Compensation
As a result of the merger, the amounts accrued and vested in SunSource's
deferred compensation plan will be eligible to be paid out pursuant to the terms
and conditions of the plan.
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Employment and Severance Agreements
SunSource will have the following obligations under severance and
employment agreements as a result of the merger:
- SunSource must pay Maurice P. Andrien, Jr. $1 million under the terms of
Mr. Andrien's employment agreement with SunSource upon consummation of
the merger;
- Upon consummation of the merger, the restrictions will lapse on Mr.
Andrien's SunSource common stock under the terms of the restricted stock
grant of 100,000 shares from SunSource to Mr. Andrien dated January 26,
2000;
- Under the terms of Joseph M. Corvino's current severance agreement with
SunSource, SunSource must pay Mr. Corvino his salary for 24 months in the
event he is involuntarily terminated within one year of the consummation
of the merger, 24 months in the event Mr. Corvino voluntarily terminates
his employment after providing written notice within 275 days of the
consummation of the merger and 24 months if Mr. Corvino is terminated
prior to or after the first anniversary of the consummation of the
merger. This agreement will be superseded by Mr. Corvino's new employment
agreement, which will become effective upon the consummation of the
merger;
- Under the terms of Justin M. Jacobi's severance agreement with SunSource,
SunSource must pay Mr. Jacobi's salary for 30 months in the event he is
terminated involuntarily within one year of the consummation of the
merger; and
- Each of Edward L. Tofani, Ken Gerland, John P. Drummy, Sharon E. Abney,
Diane P. Karaoulis, Elizabeth Waters, Vincenzo Battaglia and Geoffrey D.
Marsh have severance agreements with SunSource that entitle them to
salary and benefits for periods ranging from 3 to 12 months in the event
of involuntary termination within two years of the consummation of the
merger.
FINANCING OF MERGER
Based on the shares of SunSource common stock outstanding as of the
record date, the total cash consideration payable to holders of outstanding
common stock immediately prior to the merger will be $ . These funds
are expected to be borrowed under Allied Capital's unsecured $467.5 million
revolving credit facility which can be expanded up to $600 million. The
facility, with a syndicate of banks, for which Bank of America, N.A. is the
administrative agent, has a maturity in August 2003. At Allied Capital's option,
the facility bears interest at a rate equal to (i) LIBOR plus 1.25% for the
applicable interest period or (ii) the higher of (a) the Bank of America, N.A.
prime rate or (b) the Federal Funds rate plus 0.50%. The interest rate adjusts
at the beginning of each new interest period, usually every thirty days. The
interest rate was 5.04% at June 30, 2001, and the facility requires an annual
facility fee equal to 0.25% of the committed amount. The credit facility
requires monthly interest payments and all principal is due upon its expiration.
At June 30, 2001, the amount outstanding on the credit facility was $164.8
million. The amount available under Allied Capital's credit facility is adequate
to enable Allied Capital to pay the total cash consideration.
DISSENTERS' RIGHTS OF APPRAISAL
Under Delaware law, if you do not wish to accept the cash payment provided
for in the merger agreement, you have the right to dissent from the merger and
to receive payment in cash for the fair value of your SunSource common stock as
determined by the Delaware Court of Chancery. SunSource stockholders electing to
exercise appraisal rights must comply with the
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provisions of Section 262 of the Delaware General Corporation Law in order to
perfect their rights. SunSource will require strict compliance with the
statutory procedures.
The following is intended as a brief summary of the material provisions of
the Delaware statutory procedures required to be followed by a stockholder in
order to dissent from the merger and perfect appraisal rights. This summary,
however, is not a complete statement of all applicable requirements and is
qualified in its entirety by reference to Section 262 of the Delaware General
Corporation Law, the full text of which appears in Appendix C of this proxy
statement.
Section 262 requires that stockholders be notified not fewer than 20 days
before the special meeting to vote on the merger that appraisal rights will be
available. A copy of Section 262 must be included with such notice. This proxy
statement constitutes SunSource's notice to its stockholders of the availability
of appraisal rights in connection with the merger in compliance with the
requirements of Section 262. If you wish to consider exercising your appraisal
rights, you should carefully review the text of Section 262 because failure to
timely and properly comply with the requirements of Section 262 will result in
the loss of your appraisal rights under Delaware law.
If you elect to demand appraisal of your shares, you must satisfy each of
the following conditions:
- You must deliver to SunSource a written demand for appraisal of your
shares before the vote with respect to the merger is take. This written
demand for appraisal must be in addition to and separate from any proxy
or vote abstaining from or voting against the merger. Voting against or
failing to vote for the merger by itself does not constitute a demand for
appraisal within the meaning of Section 262.
- You must not vote in favor of the merger.
If you fail to comply with either of these conditions and the merger is
completed, you will be entitled to receive the cash payment for your shares of
SunSource common stock as provided for in the merger agreement, but you will
have no appraisal rights with respect to your shares of SunSource common stock.
All demands for appraisal should be addressed to Joseph Corvino, Secretary
of SunSource at the company address, before the vote on the merger is taken at
the special meeting and should be executed by, or on behalf of, the record
holder of the shares of SunSource common stock. The demand must reasonably
inform SunSource of the identity of the stockholder and the intention of the
stockholder to demand appraisal of his or her shares.
To be effective, a demand for appraisal by a holder of SunSource common
stock must be made by, or on behalf of the recordholder made by the beneficial
owner if he or she does not also hold the shares of record. The beneficial
holder must, in such cases, have the registered owner submit the required demand
in respect of such shares.
A person having a beneficial interest in shares of SunSource common stock
that are held of record in the name of another person, such as a broker,
fiduciary, depositary or other nominee, must act promptly to cause the record
holder to follow the steps summarized herein properly and in a timely manner to
perfect appraisal rights. If the shares of SunSource common stock are owned of
record by a person other than the beneficial owner, including a broker,
fiduciary (such as a trustee, guardian or custodian), depositary or other
nominee, such demand must be executed by or for the record owner. If the shares
of SunSource common stock are owned of record by more than one person, as in a
joint tenancy or tenancy in common, such demand must be executed by or for all
joint owners. An authorized agent, including an agent
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for two or more joint owners, may execute the demand for appraisal for a
stockholder of record; however, the agent must identify the record owner and
expressly disclose the fact that, in exercising the demand, such person is
acting as agent for the record owner. If a stockholder holds shares of SunSource
common stock through a broker who in turn holds the shares through a central
securities depository nominee such as Cede & Co., a demand for appraisal of such
shares must be made by or on behalf of the depository nominee and must identify
the depository nominee as record holder.
A record holder, such as a broker, fiduciary, depositary or other nominee,
who holds shares of SunSource common stock as a nominee for others, may exercise
appraisal rights with respect to the shares held for all or less than all
beneficial owners of shares as to which such person is the record owner. In such
case, the written demand must set forth the number of shares covered by such
demand. Where the number of shares is not expressly stated, the demand will be
presumed to cover all of SunSource common stock outstanding is the name of such
record owner.
Within 10 days after the effective date of the merger, SunSource, as the
surviving corporation, must give written notice that the merger has become
effective to each SunSource stockholder who has properly filed a written demand
for appraisal and who did not vote in favor of the merger. Within 120 days after
the effective date, either the surviving corporation or any stockholder who has
complied with the requirements of Section 262 may file a petition in the
Delaware Court of Chancery, with a copy served on SunSource in the case of a
petition filed by a stockholder demanding a determination of the fair value of
the shares held by all stockholders entitled to appraisal. The surviving
corporation has no obligation to file such a petition in the event there are
dissenting stockholders. Accordingly, the failure of a stockholder to file such
a petition within the period specified could nullify such stockholder's
previously written demand for appraisal. Within 120 days after the effective
time, any stockholder who has theretofore complied with the applicable
provisions of Section 262 will be entitled, upon written request, to receive
from the surviving corporation a statement setting forth the aggregate number of
shares of SunSource common stock not voting in favor of the merger and with
respect to which demands for appraisal were received by the surviving
corporation and the number of holders of such shares. Such statement must be
mailed (i) within 10 days after the written request therefor has been received
by the surviving corporation or (ii) within 10 days after the expiration of the
period for the delivery of demands as described above, whichever is later.
If a petition for appraisal is duly filed by a stockholder and a copy of
the petition is delivered to the surviving corporation, the surviving
corporation will then be obligated within 20 days after receiving service of a
copy of the petition to provide the Chancery Court with a duly verified list
containing the names and addresses of all stockholders who have demanded an
appraisal of their shares. After notice to dissenting stockholders, the Chancery
Court is empowered to conduct a hearing upon the petition, to determine those
stockholders who have complied with Section 262 and who have become entitled to
the appraisal rights provided thereby. The Chancery Court may require the
stockholders who have demanded payment for their shares to submit their stock
certificates to the Register in Chancery for notation thereon of the pendency of
the appraisal proceedings; and if any stockholder fails to comply with such
direction, the Chancery Court may dismiss the proceedings as to such
stockholder.
After determination of the stockholders entitled to appraisal of their
shares of SunSource common stock, the Chancery Court will appraise the shares,
determining their fair value exclusive of any element of value arising from the
accomplishment or expectation of the merger, together with a fair rate of
interest, if any, to be paid upon the amount determined to
47
be the fair value. When the value is determined, the Chancery Court will direct
the payment of such value, with interest thereon accrued during the pendency of
the proceeding, if the Chancery Court so determines, to the stockholders in
exchange for certificates representing such shares. Moreover, SunSource does not
anticipate offering more than the merger consideration to any stockholder
exercising appraisal rights and reserves the right to assert, in any appraisal
proceeding, that, for purposes of Section 262, the "fair value" of a share of
SunSource common stock is less than the merger consideration. In determining
"fair value", the Delaware Court is required to take into account all relevant
factors. In Weinberger v. UOP, Inc. the Delaware Supreme Court discussed the
factors that could be considered in determining fair value in an appraisal
proceeding, stating that "proof of value by any techniques or methods which are
generally considered acceptable in the financial community and otherwise
admissible in court" should be considered and that "[f]air price obviously
requires consideration of all relevant factors involving the value of a
company." The Delaware Supreme Court has stated that in making this
determination of fair value that court must consider market value, asset value,
dividends, earnings prospectus, the nature of the enterprise and any other
factors which could be ascertained as of the date of the merger which throw any
light on future prospects of the merged corporation. Section 262 provides that
fair value is to be "exclusive of any element of value arising from the
accomplishment or expectation of the merger." In Cede & Co. v. Technicolor,
Inc., the Delaware Supreme Court stated that such exclusion is a "narrow
exclusion [that] does not encompass known elements of value," but which rather
applies only to the speculative elements of value rising for such
accomplishment, or expectation. In Weinberger, the Delaware Supreme Court
construed Section 262 to mean that "elements of future value, including the
nature of the enterprise, which are known or susceptible of proof as of the date
of the merger and not the product of speculation, may be considered."
You should be aware that the fair value of your shares as determined under
Section 262 could be more, the same, or less than the value that you are
entitled to receive pursuant to the merger agreement.
Costs of the appraisal proceeding may be imposed upon the surviving
corporation and/or the stockholders participating in the appraisal proceeding by
the Chancery Court as the Chancery Court deems equitable in the circumstances.
However, costs do not include attorneys' and expert witness fees. Each
dissenting stockholder is responsible for his or her attorneys' and expert
witness expenses, although, upon the application of a stockholder, the Chancery
Court may order all or a portion of the expenses incurred by any stockholder in
connection with the appraisal proceeding, including, without limitation,
reasonable attorneys' fees and the fees and expenses of experts, to be charged
pro rata against the value of all shares entitled to appraisal. Any stockholder
who had demanded appraisal rights will not, after the effective date, be
entitled to vote shares subject to such demand for any purpose or to receive
payments of dividends or any other distribution with respect to such shares
(other than with respect to payment as of a record date prior to the effective
date).At any time within 60 days after the effective date, any stockholder who
has demanded an appraisal has the right to withdraw the demand and to accept the
cash payment specified in the merger agreement for his or her shares of
SunSource common stock. If no petition for appraisal is filed within 120 days
after the effective date of the merger, or if such stockholder delivers a
written withdrawal of his or her demand for appraisal and an acceptance of the
merger within 60 days after the effective date of the merger, then the right of
such stockholder to appraisal will cease and such stockholder will be entitled
to receive the cash payment for shares of his or her SunSource common stock
pursuant to the merger agreement. Any withdrawal of a demand for appraisal made
more than 60 days after the effective date of the merger may only be made with
the written approval of the surviving corporation and no appraisal proceeding in
the Delaware
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Court of Chancery shall be dismissed as to any stockholder without the approval
of the Court of Chancery, and such approval may be conditional upon such terms
as the Court of Chancery deems just.
THE MERGER AGREEMENT
TERMS OF THE MERGER
The merger agreement provided Allied Capital the option to pay the merger
consideration in cash or Allied Capital stock. On June 29, 2001, Allied Capital
informed SunSource of its election to pay the merger consideration in cash.
Pursuant to the terms of the merger agreement, at the effective time of the
merger:
(i) each share of SunSource common stock issued and outstanding as of
the closing date will be converted into the right to receive for $10.375 in
cash and all outstanding shares of SunSource common stock will cease to
exist and each certificate representing such shares will represent the
right to receive such amount;
(ii) each share of SunSource Series B preferred stock issued and
outstanding as of the closing date will be converted into one fully paid
and nonassessable share of New SunSource common stock;
(iii) all shares of SunSource common stock held in the treasury of
SunSource will be canceled and will cease to exist;
(iv) present holders of SunSource common stock will cease to have any
rights as holders of such shares, but will have the right to the cash
consideration to be paid; and
(v) each share of common stock of the merger sub issued and
outstanding immediately prior to the effective time will be converted into
that number of fully paid and nonassessable shares of New SunSource common
stock that will result in Allied Capital's ownership being equal to
approximately 94% on a fully diluted basis of the total number of shares of
New SunSource common stock.
The shares of SunSource trust preferred securities issued by SunSource
Capital Trust will remain outstanding.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains various representations and warranties
relating to, among other things:
- the due organization, power and standing of SunSource and Allied Capital
and similar corporate matters;
- the authorization, execution, delivery and enforceability of the merger
agreement;
- the absence of conflicts under charters or bylaws, the absence of
violations of any instruments or law, and required consents or approvals;
- the capital structure of SunSource;
- outstanding options and other stock rights of SunSource;
- subsidiaries of SunSource;
- amendment or termination of certain agreements of SunSource;
49
- SunSource's corporate records;
- certain documents filed by each of SunSource and Allied Capital with the
Commission and the accuracy of financial and other information contained
therein;
- SunSource's real property;
- SunSource's intellectual property;
- title to SunSource's assets and any liens on such assets;
- litigation against SunSource;
- retirement and other employee benefit plans of SunSource;
- employee matters involving SunSource;
- status of certain employment agreements of SunSource;
- SunSource's insurance coverage;
- status of certain of SunSource's customer relationships;
- corporate action approving the merger agreement;
- transactions with directors, officers, consultants and affiliates of
SunSource;
- conduct of business by SunSource since December 31, 2000;
- brokers' and finders' fees with respect to the merger;
- compliance by SunSource with applicable laws;
- governmental permits of SunSource;
- inventory of SunSource;
- material liabilities of SunSource;
- receivables of SunSource;
- taxes and tax returns of SunSource;
- SunSource's compliance with environmental laws;
- material agreements and contracts of SunSource;
- opinion of financial advisor to SunSource; and
- the absence of material adverse changes.
CERTAIN COVENANTS
SunSource has agreed, among other things, prior to the consummation of the
merger, unless Allied Capital agrees in writing or as otherwise required or
permitted by the merger agreement, to carry on its business in the usual,
regular and ordinary course in substantially the same manner as conducted prior
to the date of the merger agreement. In addition, SunSource has agreed that,
among other things, prior to the consummation of the merger,
50
unless Allied Capital agrees in writing or as otherwise required or permitted by
the merger agreement, it shall not (and shall cause its subsidiaries not to):
- amend its certificate of incorporation or bylaws;
- issue or purchase any shares of capital stock or any of its indebtedness,
effect any stock split or otherwise change its capitalization;
- issue any option or other right to acquire shares of its capital stock;
- enter into or amend any commitments, contracts or other agreements
involving the payment or receipt of an amount in excess of $150,000 in
any one year or $300,000 in the aggregate for any current or former
officer, director or employee of SunSource or increase any compensation
of any such person so that such person's compensation is in excess of
$150,000 in any year or $300,000 in the aggregate;
- change its accounting practices except as required by law or generally
accepted accounting principles;
- enter into any lease or grant any lien except in the ordinary course of
business consistent with past practice;
- make any loan or advance to any stockholder, officer, director, or
employee of SunSource or, except in the ordinary course of business, make
any other loan or advance;
- terminate or fail to renew any material contract or agreement;
- enter into any contract obligating SunSource to pay more than $50,000
unless such contract is terminable by SunSource within 30 days;
- declare or make any dividend or other payment on its capital stock or
redeem, retire purchase or otherwise acquire shares of its capital stock
except in the ordinary course of business consistent with past practice;
- acquire or dispose of any assets, subject to certain exceptions;
- pay any liabilities before they come due except in the ordinary course of
business;
- revalue any assets or write-down the value of any loans or receivables of
SunSource or its subsidiaries in excess of $50,000 unless required by
generally accepted accounting principles;
- accelerate the collection or make any sales to third parties of any
receivables or delay the payment of any payables;
- change any tax accounting practices or elections, file any amended tax
return or settle any tax claim in excess of $50,000; or
- make or commit to make any reduction in the prices charged to customers,
or increase the rate of rebates payable to customers or slotting fees
payable to distributors except in the ordinary course of business.
In addition, SunSource and Allied Capital have agreed to operate their
respective businesses so that the representations and warranties of each company
shall continue to be true up to and including the closing date.
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NO SHOPPING
SunSource has agreed that it will not, directly or indirectly, initiate,
solicit or encourage inquiries or submissions of proposals or offers from any
person relating to any merger, reorganization, share exchange, consolidation or
similar transaction or any sale of all or more than ten percent (10%) of the
assets or any equity securities of SunSource. SunSource has further agreed not
to, directly or indirectly engage in negotiations concerning, or provide
confidential information to or have discussions with any person relating to, an
acquisition proposal. Notwithstanding the foregoing, the SunSource board of
directors may furnish information to, or enter into discussions or negotiations
with, any person or entity that makes an unsolicited bona fide acquisition
proposal or recommend such an acquisition proposal to the SunSource
stockholders, if, and only to the extent that, (i) the SunSource board of
directors determines in good faith after consultation with outside legal counsel
that such action is consistent with its fiduciary duties under applicable law
and (ii) in the case of engaging in negotiations or discussions with any person
or recommending an acquisition proposal to stockholders, the SunSource board of
directors determines in good faith (after consultation with its financial
advisor) that the acquisition proposal in question would, if accepted, be
reasonably likely to be consummated and would, if consummated, result in a
transaction more favorable to the SunSource stockholders from a financial point
of view than the merger with Allied Capital. SunSource has agreed to promptly
notify Allied Capital if any such inquiries or proposals are received by, any
such information is requested from, or any such negotiations or discussions are
sought to be initiated or continued with SunSource, such notice to include the
material terms of any such proposal.
EXPENSES AND FEES
Allied Capital, merger sub and SunSource shall bear their respective
expenses incurred in connection with the merger, including fees of investment
bankers, agents, representatives, counsel and accountants. The expenses incurred
by SunSource in connection with the merger are estimated to be approximately
$4.5 million, as set forth below:
INDEMNIFICATION
As provided in the merger agreement, Allied Capital has agreed that all
rights to indemnification existing in favor of the directors, officers or
employees of SunSource as provided in SunSource's certificate of incorporation
or bylaws shall survive the merger and continue in full force and effect for a
period of not less than six years from the closing date. Further, Allied Capital
has agreed for six years after the closing date to maintain the current level of
directors' and officers' insurance and indemnification policies.
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CONDITIONS
The respective obligations of SunSource and Allied Capital to consummate
the merger are subject to the fulfillment of the following conditions, among
others:
- the merger agreement and the transactions contemplated thereby will have
been approved and adopted by the requisite vote of the holders of the
issued and outstanding shares of capital stock of SunSource entitled to
vote thereon;
- all applicable waiting periods with respect to filings made under the
Hart-Scott-Rodino Act, or in connection with the merger and related
transactions shall have passed, or early termination of such waiting
periods shall have been granted; and
- no court order or other legal or regulatory restraint shall have been
issued preventing the merger or restricting the operation of SunSource's
business after the merger, and no proceedings by any governmental entity
are pending or threatened to prevent or modify the merger.
The obligations of Allied Capital to effect the merger are also subject to
the satisfaction or waiver prior to the closing date of the following
conditions, among others:
- SunSource and the holders of SunSource common stock who are parties to
the voting agreement shall have performed in all material respects all of
their respective obligations required to be performed by them under the
merger agreement and the voting agreement, and the representations and
warranties of SunSource set forth in the merger agreement shall be true
as of the closing date except for failures to be true that would not
have, and would not reasonably be expected to have, individually or in
the aggregate, a material adverse effect on SunSource and its
subsidiaries, taken as a whole, or on The Hillman Group, individually;
- from the date of the merger agreement through the closing date, there
shall not have occurred any change or event that has caused, or would
reasonably be expected to cause, a material adverse effect on SunSource
and its subsidiaries, taken as a whole, or on The Hillman Group,
individually;
- The employment agreements of Maurice Andrien, Joseph Corvino, Max Hillman
and Stephen Miller shall be in full force and effect without any change
from the form delivered to Allied Capital on the date of the merger
agreement, and no such individual shall have expressed an intention not
to perform such employment agreement;
- The SunSource recapitalization, including the equity purchase by the
continuing stockholders shall have been consummated;
- The holders of not more than ten percent (10%) of SunSource's outstanding
shares of common stock exercise dissenters' rights in accordance with
Delaware law; and
- SunSource shall have delivered the shares of common stock of SunSource
issued in connection with the exercise of the Allied Capital warrant, and
SunSource shall have purchased 121,523 shares of common stock of
SunSource from Allied Capital.
The obligations of SunSource to effect the merger are also subject to the
satisfaction or waiver prior to the closing date of the following conditions,
among others:
- Allied Capital and merger sub shall have performed in all material
respects all obligations required to be performed by them under the
merger agreement, and the
53
representations and warranties of Allied Capital and merger sub set forth in the
merger agreement shall be true as of the closing date, except for failures to be
true that would not have, and could not reasonably be expected to have,
individually or in the aggregate, a material adverse effect on Allied
Capital and its subsidiaries, taken as a whole; and
- from the date of the merger agreement through the closing date, there
shall not have occurred any change or event that has caused, or would
reasonably be expected to cause, a material adverse effect on Allied
Capital and its subsidiaries, taken as a whole.
Unless prohibited by law, Allied Capital, SunSource and merger sub may
waive a condition that has not been satisfied and complete the merger anyway. We
cannot be certain whether or when any of these conditions will be satisfied, or,
where permissible, waived, or that we will complete the merger. If SunSource's
board of directors were to waive any condition, this action could be subject to
conflicts of interest among the directors. However, SunSource does not expect to
waive any condition that if not satisfied would constitute a material change in
the transaction, and will resolicit proxies if required to do so by the federal
securities laws.
TERMINATION; FEES
The merger agreement may be terminated and the merger may be abandoned at
any time prior to the closing date, before or after the approval by the
stockholders of SunSource:
- by the mutual consent of SunSource and Allied Capital;
- by action of either SunSource or Allied Capital if the merger shall not
have been consummated by December 31, 2001; provided that such
termination right shall not be available to a party whose failure to
fulfill any obligation under the merger agreement caused the merger not
to have been consummated by such date;
- by action of the SunSource board of directors if at any time prior to
approval of the Merger by the SunSource stockholders, the SunSource board
of directors determines in good faith, on the basis of advice of its
financial advisors and outside counsel, that an acquisition proposal made
in compliance with the requirements described under "No Shopping" above
is a superior acquisition proposal, if and only if SunSource enters into
a definitive agreement containing the terms of the superior acquisition
proposal, provided that SunSource may not exercise such termination right
until three business days after notifying Allied Capital of such superior
acquisition proposal and SunSource's intention (subject to any action
Allied Capital may take) to accept it;
- by action of SunSource's board of directors if (i) the conditions
precedent to SunSource's obligations under the merger agreement have not
been met or waived by SunSource at such time as any such condition is no
longer capable of satisfaction or (ii) Allied Capital materially breaches
its obligations under the merger agreement and such breach continues for
10 days after receipt of notice of such breach from SunSource;
- by action of the Allied Capital board of directors if (i) SunSource or
holders of SunSource common stock who are parties to the voting agreement
shall have breached any of their respective covenants or agreements under
the merger agreement or obligations under the voting agreement in any
material respect and such breach continues for a period of ten days after
the receipt of notice of such breach from Allied Capital or (ii) any of
the conditions precedent to Allied Capital's obligations under the
54
merger agreement have not been met or waived by Allied Capital at such
time as any such condition is no longer capable of satisfaction; or
- by action of either SunSource or Allied Capital if a court or other
governmental authority has issued a final and non-appealable order that
permanently restrains, enjoins or otherwise prohibits the merger.
In the event that the merger agreement is terminated as a result of
SunSource's acceptance of another acquisition proposal, then SunSource must pay
Allied Capital a termination fee of $2,270,000.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
This section discusses the material United States federal income tax
consequences of the merger to SunSource stockholders whose shares of SunSource
common stock will be surrendered in the merger in exchange for the right to
receive cash consideration of $10.375 per share, without interest. The
discussion below applies only to stockholders that hold SunSource shares as
capital assets at the time of the merger, and the discussion may not apply to
stockholders that are subject to special tax rules, such as financial
institutions, insurance companies, dealers in securities, persons that
mark-to-market their securities, persons that hold SunSource shares as part of a
"straddle," "hedge" or "synthetic security transaction" (including a
"conversion" transaction), persons with a "functional currency" other than the
U.S. dollar, retirement plans and tax-exempt organizations, stockholders who
acquired SunSource shares pursuant to the exercise of stock options, pursuant to
participation in an employee stock purchase plan or otherwise as compensation or
stockholders that are nonresident alien individuals, foreign corporations,
foreign partnerships, foreign trusts or foreign estates. Furthermore, the
discussion below does not address the federal income tax consequences of the
continuing stockholders who are exchanging shares of SunSource common stock for
shares of Series B preferred stock. The discussion below is based upon federal
income tax laws as now in effect and interpreted and does not take into account
possible changes in these tax laws or interpretations, any of which may be
applied retroactively. The discussion does not include any description of the
tax laws of any state, local or foreign government that may be applicable to our
stockholders.
This section does not discuss all aspects of federal income taxation that
may be relevant to a specific stockholder in light of such stockholder's
particular circumstances and income tax situation. Each stockholder should
consult his, her or its own tax advisor as to the specific tax consequences of
the merger, including the application and effect of federal, state, local,
foreign and other tax laws or changes to those laws.
For federal income tax purposes, SunSource stockholders generally will
recognize capital gain or capital loss equal to the difference between the cash
received by the stockholder pursuant to the merger agreement and the
stockholder's adjusted tax basis in the shares surrendered pursuant to the
merger. If, at the time of the merger, a noncorporate stockholder's holding
period for SunSource shares is more than one year, any gain recognized generally
will be subject to federal income tax at a maximum rate of 20%.
Consideration received by SunSource stockholders in the merger may be
subject to backup withholding at a 30.5% rate (31% for payments occurring before
August 7, 2001). Backup withholding generally will apply only if the stockholder
fails to furnish a correct social security number or other taxpayer
identification number or otherwise fails to comply with applicable backup
withholding rules and certification requirements. A corporation may be exempt
from
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backup withholding. Any amounts withheld under the backup withholding rules will
be allowed as a credit against the stockholder's federal income tax liability
and may entitle the stockholder to a refund, provided the stockholder furnishes
specified required information to the Internal Revenue Service.
DELISTING AND DEREGISTRATION OF SUNSOURCE COMMON STOCK
Following the consummation of the merger, SunSource common stock will be
delisted from the American Stock Exchange and will become eligible for
termination of registration pursuant to Section 12(g)(4) of the Exchange Act.
SunSource intends to terminate the registration of SunSource common stock under
the Exchange Act as soon as practicable following the consummation of the
merger. New SunSource expects to save approximately $250,000 annually as a
result of the SunSource common stock being deregistered.
TRUST PREFERRED SECURITIES
In connection with the conversion of SunSource to corporate form, 11.6%
trust preferred securities of SunSource Capital Trust were issued. On March 31,
2001, the trust preferred securities were valued at $67.5 million. See Note 14
to the SunSource consolidated financial statements as of and for the three years
ended December 31, 2000.
The SunSource trust preferred securities will remain outstanding and will
continue to trade on the American Stock Exchange under the symbol SDP.PR
following consummation of the merger. As a result, SunSource will continue to be
subject to the reporting requirements of the securities laws as long as the
trust preferred securities remain outstanding.
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INFORMATION RELATING TO SUNSOURCE
BUSINESS
SunSource Inc. is one of the largest providers of value-added services and
products to retail and industrial markets in North America. SunSource currently
operates in two business segments through indirect wholly owned subsidiaries:
(1) The Hillman Group, Inc.; and (2) SunSource Technology Services, LLC, or STS.
These subsidiaries represent businesses within the distribution industry that
are characterized by a potential for value-added services, economies of scale
and opportunities for further consolidation. Also, SunSource has an investment
in an affiliate, G-C Sun Holdings, L.P., operating as Kar Products.
In December 2000, the board of directors approved a plan to liquidate
SunSource's Integrated Supply -- Mexico business segment. The Mexican segment
has been accounted for as a discontinued operation and, accordingly, its results
of operations were segregated from the results of SunSource's ongoing businesses
including restatement of prior periods presented. The liquidation process has
been substantially completed as of June 30, 2001.
On March 2, 2000, SunSource contributed its Kar Products operations to a
newly formed partnership, G-C Sun Holdings, L.P., which is affiliated with
Glencoe Capital L.L.C. Glencoe contributed cash equity to the new partnership in
exchange for a 51% controlling interest while SunSource retained the remaining
49% interest. SunSource received $105 million in cash proceeds from the
transaction through repayment of assumed debt by G-C. On October 4, 2000, G-C
acquired all of the outstanding stock of Brampton Fastener Co. Limited (d/b/a
Brafasco). As a result of this transaction, SunSource holds a 44% ownership in
G-C. SunSource accounts for its investment in G-C in accordance with the equity
method. Kar Products distributes maintenance, repair and operating parts and
supplies and offers customized inventory management services to commercial and
industrial customers of all sizes in the U.S. and Canada.
On April 7, 2000, SunSource acquired Axxess Technologies, Inc. of Tempe,
Arizona through a stock merger transaction. Axxess manufactured and distributed
key duplication and identification systems. The transaction was structured as a
purchase of 100% of the stock of the privately held company and repayment of
outstanding Axxess debt in exchange for $87 million in cash and $23 million in
subordinated notes. Axxess' sales aggregated $20.0 million for the three months
ended March 31, 2000, and $82.1 million for the year ended December 31, 1999.
The results of operations for Axxess are included in the results of The Hillman
Group from the date of acquisition.
On April 13, 2000, SunSource sold substantially all of the assets of its
Harding Glass, Inc. subsidiary to VVP America for a cash purchase price of $30.6
million plus the assumption by VVP of certain liabilities aggregating $12.6
million, subject to certain post-closing adjustments. Proceeds from the sale of
Harding were used to repay SunSource's outstanding debt. Harding sales
aggregated $28.0 million from January 1, 2000 through April 12, 2000, and $118.3
million for the year ended December 31, 1999.
A plan to dispose of SunSource's Harding Glass business was approved by the
Board of Directors in December 1999. From December 1999 through the date of
sale, Harding was accounted for as a discontinued operation and, accordingly,
its results of operations were segregated from results of SunSource's ongoing
businesses including restatement of prior periods presented.
On October 4, 2000, SunSource's Kar Products affiliate, through the
partnership formed with Glencoe Capital, acquired all of the outstanding stock
of Brampton Fastener Co. Limited,
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d/b/a Brafasco, a supplier of maintenance and repair products to industrial
customers based in Toronto, Canada. Brafasco had sales of $28.5 million ($CDN)
for the year ended December 31, 2000. As a result of this transaction, SunSource
holds a 44% ownership in the Kar Products affiliate.
On November 3, 2000, SunSource's Hillman Group purchased inventory and
other assets of the Sharon-Philstone division of Pawtucket Fasteners, L.P. of
Rhode Island. Hillman assumed the sales and servicing of the Sharon-Philstone
division, distributors of fasteners to the retail hardware marketplace with
annual sales of approximately $14 million for the twelve months ended prior to
the acquisition. The purchase price was $5.5 million for inventory and other
assets including certain post-closing adjustments.
On May 16, 2001, the board of directors approved a plan of legal
reorganization. In execution of the plan of legal reorganization, the following
steps were taken: First, on May 31, 2001, The Hillman Group formed STS as a
single member limited liability company and a wholly owned subsidiary. Second,
on June 1, 2001, SunSource and certain of its subsidiaries undertook the
majority of the remaining steps of the corporate restructuring whereby: (i)
Axxess Technologies and SunSource Corporate Group, Inc. merged with and into The
Hillman Group, (ii) SunSource Industrial Services, Inc. merged with and into
SunSub A Inc., (iii) SunSub A merged with and into SunSource Investment Company,
Inc., (iv) all of the outstanding capital stock of A&H Holding Company, Inc.,
SunSource Inventory Management Company, Inc. and SunSource Technology Services
Inc. was contributed by Investment Company to The Hillman Group, (v) A&H merged
with and into Inventory Management Company, (vi) Inventory Management Company
and Technology Services merged with and into STS and (vii) Investment Company
contributed all of it interest in SunSub C Inc. to The Hillman Group and STS
distributed all of its interest in SunSub C to The Hillman Group. Third and
finally, J.N. Fauver (Canada) Limited organized under the laws of the Providence
of Nova Scotia and changed its name to SunSource Technology Services Canada,
Ltd. on June 26, 2001.
On August 3, 2001, STS distributed its common stock investment in SunSource
Integrated Services de Mexico, SA de CV, the Mexican business segment, to The
Hillman Group, Inc. to segregate the STS business from the remaining business
interests of SunSource Inc.
THE HILLMAN GROUP INC. The Hillman Group, with pro forma sales of $232
million in 2000, sells to hardware stores, home centers, mass merchants, pet
suppliers, and other retail outlets principally in the U.S., Canada, Mexico and
South America. Their product line includes thousands of small parts, such as
fasteners and related hardware items, keys and accessories, and identification
items, such as tags and letters, numbers, and signs. Services offered include
design and installation of merchandising systems and maintenance of appropriate
in-store inventory levels.
SUNSOURCE TECHNOLOGY SERVICES, LLC. STS with sales of $225 million in
2000, is a leading provider of systems and parts and engineering services for
hydraulic, pneumatic, electronic and related systems to major industrial
concerns as well as to small and medium-size businesses throughout the U.S. and
Canada. STS provides engineering and design of both products and processes and
the assembly and repair of complex systems, which enable its customers to
outsource engineering and other functions previously performed in-house.
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SunSource's current organization, including its principal subsidiaries and
affiliate, is as follows:
Industry Overview
SunSource operates in large, fragmented industries characterized by
multiple channels of supply. These channels of supply currently are experiencing
significant changes driven by the widespread availability of management
information systems. With better information, manufacturers, distributors and
customers are all able to track their expenses, investments and returns on
investments more accurately. The distribution industry is driven by the
following trends which are rendering the traditional producer-controlled
channels vulnerable to being replaced by new channels organized around customer
requirements and value-added services:
- Manufacturers are increasing their reliance on distributors in order to
enhance their profitability and improve their returns on capital.
- Customers are increasing their reliance on value-added distributors as
their contacts with the manufacturers diminish or cease altogether.
- Customers are outsourcing non-core functions to high quality service
providers.
- Channels of distribution are in the process of consolidation.
- Managerial skills required for success in industrial distribution are
changing dramatically.
The Hillman Group focuses on the retail sector by delivering merchandising
systems, point-of-sale displays and product support and sales installation
services through its nationwide field service work force. STS, through its
applications engineers and technical support personnel, provides customized
solutions to complex problems encountered by its customers. STS differentiates
itself from other industrial distributors with its technical and problem-solving
capabilities, product offerings and related services, such as engineering design
and integrated supply arrangements.
As a result of the impact of e-commerce, the industrial distribution
industry will experience changing channels of distribution. It is SunSource's
opinion that distributors will capture the vast majority of industrial supply
sales transacted through the internet as a result of their market and product
knowledge and services, including fulfillment capabilities. A number of new
business-to-business companies forming electronic marketplaces have emerged as
intermediaries in the industrial channel. However, most new business to business
companies are dependent on existing distributors for fulfillment of transactions
negotiated through these exchanges. To survive and prosper in this evolving
channel, SunSource believes that the critical requirements for success among
existing distributors will be market knowledge and value-added services,
including superior support and fulfillment capabilities.
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Risk Factors
Restructuring
In December 1996, SunSource announced a three-year restructuring plan to
integrate and consolidate the sales, distribution, finance and administrative
operations of its six domestic divisions of Technology Services, a predecessor
of STS, (hydraulic and pneumatic distributors that were acquired by SunSource
between 1976 and 1991).
STS and its predecessor have experienced a reduction of nearly $100 million
in revenues since 1998 principally as a result of implementation problems with
its integration plan resulting in a loss of $11.8 million in 1999 and $5.6
million in 2000 from earnings before interest, taxes, depreciation and
amortization and non-recurring items.
In June 1999, as a result of existing business conditions in Technology
Services, SunSource announced additional steps to further reduce Technology
Services' workforce, reduce inventories and implement corrective actions.
In December 2000, Technology Services enacted plans to lower its break-even
point to a $225 million annual sales level as a result of soft market conditions
in the industrial sector during the last six months of 2000 and the expectation
of economic instability continuing into 2001.
The restructuring activities have resulted in consolidation of the sales
organizations, finance, information systems, distribution networks and
administrative responsibilities for STS.
Integration of the STS divisions could have an adverse impact on
SunSource's ability to restore profitability in STS. There can be no assurance
that SunSource's restructuring plans will be successful or that profitability in
STS will be restored to historical levels.
Changing Industry Environment
The industrial distribution industry is undergoing significant change.
Historically, industrial distributors have served as suppliers of industrial
products and as extensions of manufacturers' sales forces by selling products
through the distribution channels to original equipment manufacturers,
retailers, end users and other customers. In recent years, both manufacturers
and customers have been increasingly reliant on suppliers such as SunSource to
reduce purchasing costs and provide a broad range of value-added services,
including inventory management programs, integrated supply arrangements,
electronic ordering capabilities, engineering design and technical support
services. In addition, customers' desire to consolidate their supplier
relationships has required the suppliers to achieve purchasing efficiencies,
expand their geographic coverage and increase product and service offerings
through acquisitions of other distributors. These changes in the industrial
distribution business are causing the industry to become more competitive. There
can be no assurance that SunSource will be able to compete effectively in or
adapt to the changing industry environment.
Competition
The distribution industry is highly competitive, with the principal methods
of competition being price, quality of service, quality of products, product
availability, credit terms and the provision of value-added services, such as
engineering design, integrated supply and inventory management. SunSource
encounters competition from a large number of regional and local distributors
and from several national distributors, some of which have greater financial
resources than SunSource and offer a greater variety of products.
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Seasonality and Industry Cycles
In the past, SunSource has experienced seasonal fluctuations in sales and
operating results from quarter to quarter. Typically, the first calendar quarter
is the weakest due to the effect of weather on construction activity, which
produces a slowdown of sales of material and equipment in the construction
market. Fluctuations in SunSource's quarterly operating results could result in
significant volatility in, and otherwise adversely affect, the market price of
the common shares.
Some of the principal markets for the products and services offered by
SunSource are subject to cyclical fluctuations that generally affect demand for
industrial, commercial and consumer durable goods. Cyclical fluctuations can
affect a number of factors, such as pricing, availability and demand for
SunSource's products, growth rates in the markets served by SunSource's
customers, the delivery and performance of vendors, and the availability of
suitable acquisition candidates. Changes in general economic conditions also
could have a material adverse effect on SunSource's business, results of
operations and financial condition.
Dependence on Information Systems
SunSource believes that its proprietary computer software programs are an
integral part of its business and growth strategies. SunSource depends on its
information systems generally to process orders, to manage inventory and
accounts receivable collections, to purchase, sell and ship products efficiently
and on a timely basis, to maintain cost-effective operations and to provide
superior service to its customers. There can be no assurance that the
precautions, which SunSource has taken against certain events that could disrupt
the operations of its information systems, will prevent the occurrence of such a
disruption. Any such disruption could have a material adverse effect on
SunSource's business and results of operations.
The Hillman Group, Inc.
The Hillman Group, with annualized sales of $232 million, includes Axxess,
which was acquired by SunSource on April 7, 2000 and merged into The Hillman
Group on June 1, 2001. The results of Axxess are included in the results of the
Hillman Group from the date of acquisition.
The Hillman Group believes that it is the leading provider of fasteners and
related small hardware items, including keys and related accessories, and
identification items, such as, tags and letters, numbers and signs, or LNS, to
retail outlets in North America. Retail outlets served by The Hillman Group are
hardware stores, home centers, mass merchants, pet suppliers, grocery stores and
drug stores. Through its field sales and service organization, The Hillman Group
complements its extensive product selection with value-added services for the
retailer.
Sales and service representatives regularly visit retail outlets to review
stock levels, reorder items in need of replacement and interact with the store
owner to offer new product and merchandising ideas. Thus, thousands of items can
be actively managed with the retailer experiencing a substantial reduction in
paperwork and labor costs. Service representatives also assist in organizing the
products in a consumer-friendly manner. The Hillman Group complements its broad
range of products with value-added merchandising services such as displays,
product identification stickers, retail price stickers, store rack and drawer
systems, assistance in rack positioning and store layout, and inventory and
restocking services. Periodically, The Hillman Group introduces new products and
package designs with color-coding for ease of shopping by consumers, and
modifies rack designs to improve the attractiveness of individual store
displays. In effect, The Hillman Group functions as a merchandising manager for
retailers, supporting these services with high order fill rates and
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rapid delivery from its eight distribution centers across the United States. In
2000, The Hillman Group typically shipped orders within an average of 48 hours
and achieved a 96% order fill rate.
As a result of the Axxess acquisition, the The Hillman Group also
manufactures and markets a value-added mix of high-tech and conventional
products in two core product categories: key duplication systems and
identification systems. For example, the patent-protected Axxess Precision Key
Duplication System(TM), which had been placed in over 10,000 retail locations as
of December 31, 2000, has proven to be a profitable revenue source within the
Big Box retailer market (defined as mass merchants, home centers and
large-format grocery/drug centers).
In addition, the Axxess acquisition provided the Hillman Group with a
commercialized, innovative, consumer-operated vending system, Quick-Tag(TM),
which provides custom engraved specialty items, such as pet identification tags,
luggage tags and other engraved identification tags. Axxess initially targeted
the pet identification market with its Quick-Tag system, and has facilitated the
process of obtaining a pet tag by providing pet owners with a quick and highly
convenient means to custom engrave tags while shopping at large format retail
stores, such as Wal-Mart and PETsMART. Axxess had developed other applications
for its Quick-Tag(TM) interactive engraving technology, including luggage tags,
key chains and military-style identification tags. As of December 31, 2000, more
than 2,800 Quick-Tag(TM) machines had been placed in retail locations, which are
currently being supported by the Hillman Group's sales and service
representatives.
PRODUCTS AND SUPPLIERS. The Hillman Group buys its products from
approximately 1,000 vendors, the largest of which accounted for 13% of the
group's annual purchases in 2000 and the top five of which accounted for 33% of
its purchases in 2000. About half of its purchases are from overseas suppliers,
with the balance from domestic manufacturers and master distributors. The
Hillman Group's fastener product line includes both standard and specialty nuts,
bolts, washers, screws and anchors. The line also includes brass, plastic,
stainless steel and other miscellaneous fasteners. The depth of the line, over
35,000 products, is believed to be the largest among suppliers servicing the
hardware retail segment. Non-fastener products feature picture hanging items and
accessories, keys and accessories, LNS, rope and chain accessories, and an
extensive list of specialty items. To assure quality from its vendors, The
Hillman Group conducts periodic on-site evaluations and random sampling of
products and communicates the results of such evaluations and samples to
vendors. The Hillman Group also tracks the performance of its vendors based on
delivery time and accuracy of shipments.
The Hillman Group provides a line of metal key products for major retailers
and the automotive sector. The Hillman Group manufactures two metal key
duplication systems that are niche-marketed to retail outlets (primarily mass
merchants and home centers) and a code cutting system for use in automotive
dealerships and in vehicle fleet environments.
The Axxess Precision Key Duplication System(TM) creates precise duplicate
keys while minimizing the technical skill required by operators of the system.
The system was developed in response to retailers' needs for reducing the miscut
rate on keys. The keys provide retailers with a greater gross profit per square
foot than the average of all products sold in grocery and mass merchant
channels. The Hillman Group also markets a conventional key cutting system. Key
styles marketed include standard brass keys, Color Plus(TM) keys, rubber head
keys and high security vehicle anti-theft key blanks. The conventional system is
marketed to retailers who do not experience high employee turnover and therefore
do not have the same labor constraints as mass merchants, home centers or
grocery and drug retailers.
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The key cutting system developed for the automotive industry, PC+ Code
Cutter, produces automobile keys using alphanumeric codes based on a vehicles
identification number. Utilizing a proprietary computer program, the PC+ Code
Cutter identifies and then cuts keys based on the automobiles original key
pattern. The PC+ Code Cutter is distributed through Barnes Distribution, a
distribution company serving vehicular and industrial markets. Since its
introduction in February 1996, more than 5,000 PC+ Code Cutter systems have been
sold and/or leased.
The Hillman Group also markets key accessories in conjunction with its key
duplication systems. Popular accessories include the Key Light(TM), Valet
KeyChain(TM), key identifiers, key coils and key clips. The Key Mates(TM) line
of key accessories includes a broad range of products such as key chains, tags,
lights, floats, holders, whistles and a host of other miscellaneous items that
complement the use of keys.
Quick-Tag(TM) is a patented, state-of-the-art consumer-operated vending
system that custom engraves specialty products such as pet identification tags,
military-style I.D. tags, holiday ornaments and luggage tags. Using an
interactive touch screen, customers input information, such as a pet name and
telephone number, and the system's proprietary technology engraves the tag in
less than two minutes. The Quick-Tag system does not require incremental labor
and generates high levels of customer satisfaction and attractive margins for
the retailer. The Quick-Tag custom engraving systems generate retail profit per
square foot in excess of the typical retail average.
Letters, numbers and signs include packaged self-adhesive letters and
numbers, mailbox numbers and accessories, house numbers and letters, contractor
safety program signs, and driveway markers and reflectors. Typical retailers
dedicate approximately eight linear feet of retail space for this product and
view it as a significant contributor to their retail offerings.
The Hillman Group purchases a wide variety of materials and components to
manufacture the Axxess Key Duplication and Quick-Tag engraving machines, many of
which are manufactured to its specifications. Management does not believe that
it is overly dependent on any one supplier because the components do not
generally require proprietary technology and The Hillman Group has identified or
used alternate suppliers for its primary sourcing needs.
MARKETS AND CUSTOMERS. The Hillman Group services approximately 15,000
franchise and independent, or F&I retail outlets. These individual dealers are
typically members of the larger cooperatives, such as TruServ, Ace and
Do-it-Best. The Hillman Group sells directly to the cooperative's retail
locations and also supply many fastener items to the cooperative's central
warehouses. These central warehouses distribute to their members that do not
have a requirement for The Hillman Group's in-store service. These arrangements
with the cooperatives reduce credit risk and logistic expense for The Hillman
Group and reduce central warehouse inventory and delivery costs for the
cooperatives.
In 2000, The Hillman Group's products sold to the F&I retailers typically
account for approximately 7% of the retailer's revenues and over 25% of a
hardware store's traffic. A typical hardware store maintains in inventory
thousands of different items, many of which generate small dollar sales, but
large profits. It is difficult for a retailer to monitor economically all stock
levels and to reorder the products from multiple vendors. The problem is
compounded by the necessity of receiving small shipments of inventory at
different times and having to stock the goods. However, failure to have these
small items consistently available will have an adverse effect on store traffic,
thereby denying the retailer the opportunity to sell items that generate higher
dollar sales.
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In addition, the Hillman Group sells its products to national accounts such
as Wal-Mart, Home Depot, Lowes, K-Mart, PETsMART and PetCo. The Hillman Group's
status as a national supplier of unique, proprietary products to rapidly growing
Big Box retailers allowed it to develop a formidable market position and high
barriers to entry within its product categories. Management believes that the
dynamics, which make its services attractive to hardware retailers, are present
with these larger customers as well.
The Hillman Group serves over 21,000 customers, the top five of which
accounted for approximately 32% of its annualized sales as of December 31, 2000.
The Hillman Group's telemarketing activity also sells to approximately 5,000
smaller hardware outlets and over 6,000 non-hardware accounts through its
telemarketing operation. New business is also being cultivated internationally
in such places as Canada, Mexico, South and Central America, and the Caribbean.
SALES AND MARKETING. Hillman's direct sales organization consists of over
230 people, managed by 20 field managers. Each sales representative is
responsible for approximately 50 full service accounts that they call on
approximately every two weeks. Coupled with the efforts of the marketing
department, the sales force not only sells products, but can sell merchandising
and technological support capabilities as well. The marketing department
provides support through the development of new products, sales collateral,
promotional items, merchandising aids and marketing services, such as
advertising and trade show management. Its electronic data exchange, or EDI,
system is used by a number of its large customers.
With the acquisition of Axxess, the respective field service groups were
integrated to produce a national sales and service organization. Currently over
200 service people and 15 field managers focus on Big Box retailers, pet super
stores, large national discount chains and grocery stores. This organization
reorders products, details store shelves and sets up in-store promotions.
The Hillman Group believes that a significant source of its competitive
advantage rests in its ability to provide a greater level of customer service
than its competitors. The Hillman Group's products are covered directly by the
field service organization, which provides service support through field visits.
These field visits provide The Hillman Group with critical information relating
to consumer buying patterns and retailing trends, and complement their new
product development efforts. Field service representatives also help retail
customers to improve the efficiency and profitability of The Hillman Group's
on-site merchandising systems by consulting with customers in the areas of EDI,
product planning, inventory control, systems interface and store operations.
COMPETITION. The principal competitors in the hardware store marketplace
for the Hillman Group's F&I business are Midwest Fasteners, Serv-A-Lite, Elco
and Hyko. The first three competitors carry mainly fastener products, while the
latter is the major competitor in letters numbers and signs. The Hillman Group
competes primarily on field service, merchandising, product availability, price
and breadth of product line.
Management estimates that as of December 31, 2000 The Hillman Group sold to
approximately 65% of the full service hardware stores in the F&I marketplace.
The hardware outlets that purchase products, but not services, from The Hillman
Group also purchase products from local and regional distributors and
cooperatives. Competition in this segment is based primarily on price and
availability.
The primary competitors in the national accounts marketplace for fasteners
are Crown-Bolt, with an estimated 50% market share in 2000, Elco and the Newell
Group. The Hillman Group estimates its share of fasteners in this market as of
December 31, 2000 to be less than 10%.
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Competition is based primarily on in-store service and price. Other competitors
are local and regional distributors.
The total domestic market for keys was estimated to be 600 million units at
the retail level with year 2000 sales of over $900 million. The key duplication
market can be segmented into three primary retail categories: hardware stores,
locksmiths and Big Box retailers. The Hillman Group maintains the leading market
position with an approximate 28% market share on a unit basis in the overall key
duplication market, including an estimated 67% market share in the home
center/mass merchant retail segment. To displace the Hillman Group's market
position, a competitor would have to develop a full range of products with
demonstrably better technology without infringing on patents and buyback
existing inventory from retailers. Management believes that these substantial
competitive barriers help preserve its unique position within the key
duplication market segment.
Hyko is the primary competitor in LNS in hardware stores, home centers and
mass merchants. Management estimates that Hillman has the leading market
position in LNS at an approximate 48% market share.
In the engraving market segment, management estimates that the Quick-Tag
engraving system has a 17% market share in the pet tag market. Competitors in
this market are specialty retailers, direct mail order and retailers with
in-store mail order capability. The Hillman Group has patent protected
proprietary technology that is a major barrier to entry and preserves this
market segment.
SunSource Technology Services, LLC
STS, with sales of $225 million in 2000, offers a full range of
technology-based products and services to its customers. Its product lines
include hydraulic, pneumatic, electronic and filtration parts and equipment.
Services include engineering design, equipment repair, product upgrades, and
assembly of subsystems.
STS seeks to build strong relationships with its customers by providing
technological/problem-solving capabilities along with quality products. STS
relies on its engineering and fabricating capabilities to provide customized
solutions for specific applications requiring product engineering, assembly or
fabrication. To help a customer better understand how it is performing relative
to industry best practices, STS can perform a technology review of the
customer's facilities covering areas such as electronic systems, hydraulics,
pneumatics, repair activities and inventory management. STS can demonstrate to
its customers those areas in which they meet industry best practices and, when
they do not, offer detailed, cost-efficient steps to improve their performance
to meet those standards. STS also conducts multiple-day training programs to
help customers stay current with evolving technologies relevant to their
operations.
STS has benefited from the trend for manufacturers to move toward increased
standardization of products. As a result of this trend, many such products have
to be modified and used in combination with other components in order to meet
customers' performance requirements. STS recognized this trend as an opportunity
to set up a formal system to customize standardized products to meet the more
specialized needs of its customers. SunSource believes that there is a growing
market for such customized solutions among medium and smaller original equipment
manufacturers, or OEM, who do not have the capabilities to develop such
products.
STS has 20 repair centers throughout the United States to provide customers
with convenient and reliable sources for the repair of worn-out hydraulic power
equipment. Repair
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centers have been useful in gaining market share as they have helped STS achieve
an expanded relationship with many of its customers. Repair centers also provide
STS with an opportunity to win new customers because many of the local
distributors do not have the resources to provide comparable repair services.
STS plans to continue its program of establishing service centers for the repair
and overhaul of hydraulic equipment in major industrial markets around the
country.
PRODUCTS AND SUPPLIERS. STS carries a diverse selection of fluid power and
related technical products. STS has an estimated 23,000 items products, in the
following four product categories: hydraulics, pneumatics, electronics and
filtration. Typically, hydraulic systems are employed for dealing with heavy
loads in applications such as mining, manufacturing, construction or
agriculture. An example of a hydraulic application is the system that controls
the positioning of the scraping blade of a road grader -- an integrated system
of motors, pumps, valves, tubing, sensors and electronic controls. Pneumatic
systems are similar to hydraulic systems, except that air or some other gas is
substituted for hydraulic fluid. Pneumatic systems are preferred for lighter
weight applications, such as light manufacturing and packaging lines.
STS has a broad supply base which includes most major manufacturers of
fluid power and related technical products in the United States. STS' top five
suppliers accounted for approximately 37% of its 2000 sales. Because of the
fragmented nature of the industry, manufacturers of this type of equipment
historically have awarded their franchises on a limited geographical basis. One
of STS' larger suppliers is Sauer-Sunstrand, whose products are distributed in
most of STS' territories.
In 1999, STS lost certain vendor relationships in limited geographic
regions, which for the most part have been replaced with other vendor product
lines. In recent years there has been considerable consolidation among
suppliers, a trend, which management believes, will continue and benefit STS. In
addition, STS seeks to provide valuable market and product information that
enhances its relationships with its key suppliers by helping them improve their
product offering in response to changing market demands.
MARKETS AND CUSTOMERS. As of December 31, 2000, STS served over 28,000
customers, the top five of which accounted for approximately 15% of its 2000
sales. Approximately 60% of sales are to OEM customers who incorporate the
equipment or systems purchased into their final products. The remaining 40% of
sales in 2000 are to the construction industry (5%) and to
replacement/maintenance markets (35%).
Within the MRO and OEM markets, STS sells to construction equipment
manufacturers, industrial wholesale distributors, metalworking equipment
manufacturers, farm and garden equipment manufacturers, industrial specialized
machinery manufacturers and automobile and auto parts manufacturers.
SALES AND MARKETING. STS markets its products nationwide, principally
through a network of outside account managers supported by application engineers
and customer service representatives. In order to become more responsive to the
increasing demands of customers, STS has devoted substantial resources to make
its sales force more specialized both in terms of technical training and
industry knowledge.
STS employs approximately 230 outside sales representatives. Each customer
has a primary sales representative who might be assisted by technology
specialists or industry specialists. Technology specialists are available in the
fields of hydraulics, pneumatics, mobile equipment, lubrication, filtration,
automation and other specialties, while industry specialists bring particular
expertise in industries such as pulp and paper, construction equipment,
injection molding or heavy metal working.
66
To support the outside sales representatives, STS employs approximately 150
customer service representatives, who collectively function to take orders from
customers on the telephone, answer questions and solve problems. In addition,
EDI capability has been established for use with selected customers and vendors,
and STS is in the early stages of designing a presence on the Internet.
OPERATIONS. STS has six regional distribution centers with over $30
million of inventory logistically supporting the local needs of its customers.
Its Trend computer system provides a common information technology platform for
the entire company, promoting more efficient transactional functionality and
increasing information flow and knowledge sharing within STS and between its
customers and its suppliers.
COMPETITION. Most of STS' competitors are relatively small companies with
sales of less than $20 million and one or two facilities. Many of these
companies offer considerable depth in certain product lines, together with
related technical support. STS competes with these companies on price, product
offering and range of ancillary technical services. The largest national
competitors of STS are Motion Industries, Sophus Berendsen, and Applied
Industrial Technologies.
Insurance Arrangements
Under SunSource's current insurance programs, commercial umbrella coverage
is obtained for catastrophic exposure and aggregate losses in excess of expected
claims. Since October 1991, SunSource has retained the exposure on certain
expected losses related to worker's compensation, general liability and
automobile. SunSource also retains the exposure on expected losses related to
health benefits of certain employees. SunSource believes that its present
insurance is adequate for its businesses. See Note 17 of Notes to Consolidated
Financial Statements of SunSource as of and for the three years ended December
31, 2000.
Employees
As of December 31, 2000, SunSource's total operations employed
approximately 2,100 employees, of which approximately 1,015 were sales
personnel, approximately 780 were employed as warehouse and delivery personnel,
and approximately 305 were administrative positions. In the opinion of
management, employee relations are good.
Backlog
SunSource's sales backlog on a consolidated basis from ongoing operations
was $48.6 million as of December 31, 2000, and $50.1 million as of December 31,
1999, mostly in STS.
Properties
SunSource currently has approximately forty-eight (48) leased warehouse and
stocking facilities located throughout the United States and Canada. Most of
these include sales offices. SunSources principal properties are as follows:
In the opinion of management, SunSource's existing facilities are in good
condition.
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DIVIDENDS
On June 30, 1999, the board of directors of SunSource suspended
indefinitely the quarterly cash dividend of $0.10 per common share.
LEGAL PROCEEDINGS
SunSource is a party to certain lawsuits in the normal course of its
business. While the outcome of these legal proceedings cannot at this time be
predicted with certainty, SunSource does not expect that these proceedings will
have a material effect on SunSource's financial condition or results of
operations.
Litigation originally instituted on February 27, 1996 is pending in the
Court of Common Pleas of Montgomery County, Pennsylvania in which Dorman
Products of America, Ltd, and its parent, R&B, Inc., allege that
misrepresentations of certain facts were made by SunSource, upon which R&B
allegedly based its offer to purchase the assets of SunSource's Dorman Products
division. 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 SunSource.
68
SUNSOURCE SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth selected consolidated financial information
of SunSource and the predecessor partnership as of and for the five years ended
December 31, 2000 and for the six month period ended June 30, 2001 and 2000.
SunSource's audited historical financial statements for all periods shown except
the quarterly periods are derived from SunSource's financial statements which
have been audited by PricewaterhouseCoopers LLP, independent accountants, as
indicated in their reports thereon. The financial information should be read in
conjunction with financial statements including the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". Quarterly financial information is derived from unaudited financial
data, but in the opinion of SunSource's management reflects all adjustments
(consisting only of normal recurring adjustments) which are necessary to present
fairly the results for such interim periods. Interim results at and for the six
months ended June 30, 2001 are not necessarily indicative of the results that
may be expected for the fiscal year ending December 31, 2001.
- -------------------------
(1) Prior to the Conversion, the Partnership had Class A and Class B limited
partnership interests ("interests"). The earnings per interest for income
from continuing operations in 1996 were $1.10 and $0.19 for Class A and
Class B interests, respectively. For income from discontinued segments, the
earnings per interest were $0.13 for Class B interests in 1996. The Class A
interests had no earnings per interest for discontinued segments in 1996.
The earnings per interest for net income were $1.10 and $0.32 for Class A
and Class B interests, respectively in 1996. The cash distributions declared
per interest in 1996 were $1.10 for Class A interests and $0.33 for Class B
interests.
(2) All periods represent basic and diluted net income (loss) per common share
except for year 2000 which represents diluted only. The basic income per
common share for gain on contribution of subsidiaries in 2000 was $7.16. For
income before discontinued operations, the basic income per common share was
$3.98 in 2000. The loss from discontinued operations in 2000 had a loss per
common share of $0.38. The basic net income per common share in 2000 was
$3.60.
(3) Includes current portion of long-term debt.
69
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
The following discussion for the six months ended June 30, 2001 and 2000
and the fiscal years ended December 31, 2000, 1999 and 1998 provides information
which management believes is relevant to an assessment and understanding of
SunSource's operations and financial condition. This discussion should be read
in conjunction with the consolidated financial statements and notes thereto
appearing elsewhere herein.
SunSource is one of the largest providers of value-added services and
products to retail and industrial markets in North America. SunSource is
organized into two business segments which are The Hillman Group and STS. Also,
SunSource has an investment in an affiliate, G-C Sun Holdings, L.P., operating
as Kar Products.
The Hillman Group provides merchandising services and products, such as,
fasteners and related hardware items, keys and accessories and identification
items to retail outlets, primarily hardware stores, home centers and mass
merchants. STS offers a full range of technology-based products and services to
small, medium and large manufacturers. Kar Products offers personalized
inventory management systems of maintenance, repair and operations products to
industrial manufacturing customers and maintenance and repair facilities.
In December 1999, the Board of Directors approved a plan to dispose of the
SunSource's Harding Glass, Inc. subsidiary which was completed through its sale
on April 13, 2000. Harding was accounted for as a discontinued operation and,
accordingly, its results of operations were segregated from results of the
SunSource's ongoing businesses including restatement of prior periods presented.
In 1999, SunSource recorded a loss of $2.2 million after-tax from Harding's
operations and an estimated loss on its expected disposal of $23.8 million or
$3.53 per common share unadjusted for any potential future tax benefits. In
2000, SunSource recorded an additional loss on disposal of the discontinued
Harding segment of $5.3 million less an income tax benefit of $7.2 million
resulting in income from discontinued operations of $1.9 million or $.27 per
common share on a basic and diluted basis. Through December 31, 2000, SunSource
recorded a loss on the discontinued Harding segment of $22.0 million in the
aggregate or $3.20 and $3.19 per basic and diluted common share, respectively,
net of tax benefits. No additional loss on disposal has been recorded for the
six months ended June 30, 2001.
In December 2000, the board of directors approved a plan to liquidate
SunSource's Integrated Supply - Mexico business. The Mexican business has been
accounted for as a discontinued operation and, accordingly, its results of
operations were segregated from the results of SunSource's ongoing businesses
including restatement of prior periods presented. In 2000, SunSource recorded an
after-tax loss of $0.1 million or $0.02 per common share on a basic and diluted
basis from its Mexican operations and an estimated after-tax loss on its
expected liquidation of $4.4 million or $0.64 per common share on a basic and
diluted basis. No additional loss on disposal was recorded for the six months
ended June 30, 2001. The liquidation process has been substantially completed as
of June 30, 2001.
Stock Exchange Listing
Effective June 19, 2001, SunSource transferred listing of its common stock
and trust preferred securities from the New York Stock Exchange to the American
Stock Exchange utilizing its same ticker symbols SDP and SDP.PR, respectively.
70
Financing Arrangements
On December 15, 1999, SunSource refinanced its $90 million bank revolving
credit and $60 million senior notes with $155 million in senior secured credit
facilities. On April 7, 2000, SunSource amended the credit agreement to reduce
the senior secured credit facility to $136.5 million consisting of a $21.5
million term loan and a $115 million revolving credit line. The amended senior
debt arrangement expires December 15, 2004. The availability of the revolving
credit line is based on SunSource's balances in receivables and inventories,
evaluated on a monthly basis.
As a result of the refinancing on December 15, 1999, SunSource incurred an
extraordinary loss of $0.2 million (net of $0.1 million in deferred tax
benefits)in 1999 due to the write-off of capitalized financing costs as a result
of the early extinguishment of the former credit facilities.
On December 28, 2000, SunSource issued $30 million of unsecured
subordinated notes to Allied. The cash proceeds generated from this issuance
were used to reduce SunSource's senior secured term loan and improve SunSource's
overall credit availability.
On June 29, 2001, Allied Capital purchased an unsecured subordinated note,
with an original principal balance of $11 million, from a SunSource creditor for
$8.5 million. SunSource, through its Hillman Group subsidiary, had entered into
the note on April 7, 2000, in connection with its acquisition of Axxess. The
note had a balance of approximately $12.5 million on June 30, 2001, and is
currently accruing interest at a rate of prime plus 3%, in accordance with the
existing terms of the note. To induce Allied to purchase the note, SunSource
entered into a letter agreement in which SunSource agreed to conditions that
would, during such time that Allied owns the note: 1) limit additional debt that
SunSource can incur, 2) restrict prepayment of the guaranteed preferred
beneficial interests, 3) require SunSource to use its best efforts to obtain the
consent of its senior lenders to allow the repurchase of this note and allow a
concurrent investment by Allied Capital in SunSource, and 4) prohibit the
Hillman Group from transferring or assigning its obligation under the note.
Restructuring Charges and Asset Write-downs
In the second quarter of 1999, SunSource recorded restructuring charges and
asset write-downs aggregating $10.2 million. These non-recurring charges and
write-downs were a result of SunSource's plan to reposition STS and Kar
Products, write-down key machines at The Hillman Group, and realign corporate
overhead expenses. SunSource completed this restructuring during the fourth
quarter of 1999.
STS charges and write-downs aggregated $5.4 million including termination
benefits of $2.8 million, an inventory write-down of $2.1 million, and other
exit costs of $0.5 million. STS terminated 94 employees as a result of the 1999
restructuring.
The Kar Products charge amounted to $1.0 million, comprised solely of
termination benefits. Kar Products terminated 10 employees as a result of the
1999 restructuring.
The Hillman Group's asset write-down was $3.3 million which was primarily
the result of The Hillman Group's decision not to seek recovery of key machines
from retailers. The write-down represented the remaining net book value of key
machine capitalized costs as of June 30, 1999.
See Note 1 of "Notes to Consolidated Financial Statements" for the three
years ended December 31, 2000 for the accounting recognition of the
restructuring charges.
71
Results of Operations
SEGMENT SALES AND PROFITABILITY FROM ONGOING OPERATIONS FOR THE SIX MONTHS ENDED
JUNE 30, 2001 & 2000
(DOLLARS IN THOUSANDS)
- -------------------------
(a) Includes sales, gross profit and EBITDA from Axxess Technologies, Inc. since
its date of acquisition on April 7, 2000.
(b) Represents sales, gross profit and EBITDA from the Company's Kar Products,
Inc. and A & H Bolt & Nut Company Limited business (collectively, the "Expediter
Segment") which was contributed on March 2, 2000 to a newly formed partnership
affiliated with Glencoe Capital L.L.C.
(c) Represents sales from an Integrated Supply contract that was terminated in
2000. A loss from termination of this contract was recorded in the fourth
quarter of 1999.
(d) Represents Equity in Earnings from the contributed Expediter Segment.
(e) "EBITDA" (earnings before interest, taxes, depreciation and amortization) is
defined as income (loss) from ongoing operations before depreciation and
amortization.
72
SEGMENT SALES AND PROFITABILITY FROM CONTINUING OPERATIONS FOR EACH OF THE THREE
YEARS ENDED DECEMBER 31, 2000
(DOLLARS IN THOUSANDS)
- -------------------------
(a) Includes sales, gross profit and EBITDA from Axxess Technologies, Inc. which
was acquired on April 7, 2000 through a stock merger transaction.
(b) Represents sales, gross profit and EBITDA from Kar Products, Inc. and A & H
Bolt & Nut Company Limited business (collectively, the "Expediter Segment")
which was contributed on March 2, 2000 to a newly formed partnership affiliated
with Glencoe Capital L.L.C.
(c) Represents sales, gross profit and EBITDA from the OEM Fastener Business,
which was sold on July 1, 1999 and contracts terminated in 1998, 1999 and 2000.
(d) Represents Equity in Earnings from the Contributed Expediter Segment since
March 2, 2000.
(e) Excludes $1,032 of nonrecurring charges to realign operations with current
sales levels for the three and twelve months ended December 31, 2000.
(f) Excludes $805 of nonrecurring charges for the three and twelve months ended
December 31, 2000.
(g) In December 1999, the SunSource board of directors approved a proposal to
freeze the benefit accruals under Technology Services' J. N. Fauver Pension Plan
(the "Fauver Plan"). As a result, SunSource recorded a curtailment gain of
$5,608 in December 1999. In December 2000, the SunSource board of directors
approved a proposal to merge the Fauver Plan with another SunSource owned plan
and terminate the merged plans as of December 31, 2000. As a result SunSource
recorded a loss on termination of the merged pension plans of $4,279 in December
2000.
(h) As shown in notes (e) and (f).
73
(i) "EBITDA" (earnings before interest, taxes, depreciation and amortization) is
defined as income (loss) from ongoing operations before depreciation and
amortization.
Six Months Ended June 30, 2001 and 2000
Net sales from ongoing operations increased $5.7 million or 2.6% in the
second half of 2001 to $226.5 million from $220.8 million in 2000. Sales
variances by business segment are as follows:
The Hillman Group's sales increased $24.6 million in the first half of 2001
to $122.4 million from $97.8 million in the first half of 2000 primarily as a
result of the acquisition of Axxess and Sharon Philstone, and strong sales from
the national accounts. On a pro forma basis including Axxess, The Hillman
Group's sales increased 4.5% in the first half of 2001 over the same prior-year
period. STS' sales decreased $18.9 million or 15.4% in the first half of 2001 to
$104.2 million from $123.1 million in 2000 mainly as a result of soft market
conditions experienced by original equipment manufacturers in certain industrial
sectors in the first half of 2001.
SunSource's consolidated gross margin from ongoing operations was 41.6% in
the first half of 2001 compared with 37.4% in the first half of 2000. On a
comparable basis, including Axxess, the consolidated gross margin from ongoing
operations was 39.1% for the six months ended June 30, 2000. The Hillman Group's
gross margin improved 1.8% in the comparison period as a result of higher margin
sales of keys and identification items related to the acquisition of Axxess,
price increases for certain fastener products and productivity gains in the
various manufacturing operations. STS' gross margin of 24.2% in the first half
of 2001 increased slightly from 23.7% in the first half of 2000 primarily as a
result of a change in sales mix.
SunSource's selling, general and administrative expenses from ongoing
operations on a comparable basis, including Axxess, decreased $4.8 million from
$79.9 million in the first half of 2000 to $75.1 million in the first half of
2001. Selling expenses on a comparable basis, including Axxess, decreased $1.7
million primarily as a result of headcount and travel expense reductions at STS
offset by conversion costs associated with the Hillman Group's purchase of
inventory and other assets of Sharon-Philstone. Warehouse and delivery expenses
on a comparable basis, including Axxess, decreased by $0.7 million as a result
of reduced property taxes at the Hillman Group and reduced equipment costs and
license fees at STS. General and administrative expenses on a comparable basis,
including Axxess, decreased by $2.4 million primarily as a result of headcount
reductions which occurred in the fourth quarter of 2000 at STS and reduced
corporate expenses.
74
Total selling, general and administrative expenses from ongoing operations
on a comparable basis, including Axxess, as a percentage of sales compared with
the first half of 2000 are as follows:
EBITDA from ongoing operations for the first half of 2001 was $19.9 million
including Axxess and corporate expenses compared with $11.2 million for the same
prior-year period. EBITDA from ongoing operations on a pro forma basis including
Axxess for the first half of 2000 was $14.5 million.
SunSource's consolidated operating profit margin for ongoing operations
(EBITDA as a percentage of sales) after corporate expenses increased to 8.8% in
the first half of 2001 compared with 5.1% in the first half of 2000. The Hillman
Group's operating profit margin increased to 17.8% in the first half of 2001
compared with 14.1% primarily as a result of the acquisition of Axxess and
operational efficiencies. STS had an operating loss of 0.3% compared with a
nominal operating profit in the first half of 2000 primarily as a result of
reduced sales levels.
Depreciation expense increased $2.5 million to $6.1 million in the first
half of 2001 from $3.6 million in the same period of 2000 primarily as a result
of the acquisition of Axxess.
Amortization expenses increased $0.5 million to $1.9 million as a result of
the acquisition of Axxess.
Interest expense, net increased $0.8 million in the first half of 2001 from
$5.5 million in the first half of 2000, primarily as a result of additional
interest and related amortization of deferred financing fees in connection with
SunSource's December 2000 issuance of $30.0 million of unsecured subordinated
notes.
SunSource pays interest to the Trust on the Junior Subordinated Debentures
underlying the Trust Preferred Securities at the rate of 11.6% per annum on
their face amount of $105.4 million, or $12.2 million per annum in the
aggregate. The Trust distributes an equivalent amount to the holders of the
Trust Preferred Securities. For the six months ended June 30, 2001 and 2000,
SunSource paid $6.1 million in interest on the Junior Subordinated Debentures,
equivalent to the amounts distributed by the Trust on the Trust Preferred
Securities.
SunSource recorded a provision for income taxes of $1.9 million on a
pre-tax loss of $0.6 million for the six months ended June 30, 2001 as a result
of non-deductible goodwill and other items related to acquisition and
divestiture activities. SunSource's effective tax rate was 11.8% in the first
half of 2000 due primarily to a significant portion of the gain from the
contribution of Kar being non-taxable as a result of SunSource's remaining
ownership in G-C, offset by non-deductible items related to the acquisition of
Axxess.
75
Years Ended December 31, 2000 and 1999
Net sales from ongoing operations increased $36.4 million or 9.1% in 2000
to $436.7 million from $400.3 million in 1999. Sales variances by business
segment are as follows:
The Hillman Group's sales increased $60.2 million or 39.7% in 2000 to
$212.1 million from $151.9 million in 1999 primarily due to the acquisition of
Axxess in early April 2000. STS' sales decreased $23.8 million or 9.6% in 2000
to $224.5 million from $248.4 million in 1999 primarily as a result of the
restructuring of its sales force in early 1999 and soft market conditions
experienced in the second half of 2000.
SunSource's sales backlog on a consolidated basis was $48.6 million as of
December 31, 2000, compared with $50.1 million at December 31, 1999, a decrease
of 3.0%, primarily in STS.
SunSource's consolidated gross margin from ongoing operations was 39.4% in
2000 compared with 34.9% in 1999 before the inventory write-down in 1999 related
to restructuring of $2.1 million. On a comparable basis, excluding Axxess, the
consolidated gross margin from ongoing operations was 35.8% for the twelve
months ended December 31, 2000. The Hillman Group's gross margin increased 3.1%
in the comparison period as a result of higher margin sales of keys, and
identification items related to the acquisition of Axxess. STS' gross margin was
23.3% in 2000 compared with 23.6% in 1999 before the aforementioned inventory
write-down primarily as a result of a change in sales mix.
SunSource recorded non-recurring charges related to ongoing operations
which aggregated $6.1 million in 2000. These non-recurring charges were composed
of $4.3 million related to the merger and termination of SunSource's defined
benefit plans, and $1.8 million related to severance and other termination costs
incurred in STS and its corporate headquarters, of which $1.7 million is
reflected in selling, general and administrative expenses. In 1999, SunSource
recorded a $5.6 million gain on curtailment of a defined benefit plan and
restructuring charges and asset write-downs of $8.1 million as previously
discussed.
SunSource's selling, general and administrative expenses from ongoing
operations on a comparable basis (excluding Axxess and the aforementioned
charges) decreased $15.1 million from $145.2 million in 1999 to $130.1 million
in 2000. Selling expenses on a comparable basis, decreased $6.9 million
primarily as a result of reduced sales commissions The Hillman Group's business
and cost savings at STS associated with the 1999 restructuring. Warehouse and
delivery expenses, decreased $1.8 million as a result primarily of facility
reorganizations at STS. General and administrative expenses on a comparable
basis decreased by $6.4 million as a result of headcount reductions associated
with the 1999 restructuring at STS and reduced corporate overhead expenses.
76
Selling, general and administrative expenses from ongoing operations as a
percentage of sales excluding Axxess, and the previously mentioned non-recurring
items compared with 1999 are as follows:
EBITDA from ongoing operations for the year ended December 31, 2000, before
the aforementioned non-recurring charges of $6.1 million was $22.7 million
compared with an EBITDA loss from ongoing operations of $5.1 million in 1999
excluding the aforementioned 1999 non-recurring items. See Segment Sales and
Profitability schedule for the components of EBITDA from ongoing operations for
years 2000 and 1999.
SunSource's consolidated operating profit margin (EBITDA as a percentage of
sales) from ongoing operations increased to 5.2% in 2000 compared with a 1.3%
operating loss in 1999, excluding the aforementioned items. The Hillman Group's
operating profit margin increased to 16.1% in 2000 compared with 10.4% in 1999
primarily as a result of the acquisition of Axxess and operational efficiencies.
Excluding the Axxess acquisition, The Hillman Group's operating profit margin
was 12.0% in 2000. STS had an operating loss of 2.5% in 2000 compared with an
operating loss of 4.8% before the 1999 restructuring charges related to
integration and consolidation activities in the STS operation.
Interest expense, net increased $1.4 million in 2000 from $9.9 million in
1999 due primarily to the acquisition of Axxess and amortization of deferred
financing fees related to SunSource's December 1999 refinancing, the April 2000
amendment to the credit agreement and the December 2000 subordinated debt
issuance.
For the years ended December 31, 2000 and 1999, SunSource paid $12.2
million in interest on the Junior Subordinated Debentures, equivalent to the
amounts distributed by the trust on the Trust Preferred Securities.
See Note 6 of Notes to Consolidated Financial Statements of SunSource for
the three years ended December 31, 2000, for income taxes and disclosures
related to 2000 and 1999 income tax events.
Years Ended December 31, 1999 and 1998
Net sales from ongoing operations decreased $49.7 million or 11.0% in 1999
to $400.2 million from $449.9 million in 1998. Sales variances by business
segment are as follows:
77
The Hillman Group's sales increased $26.1 million or 20.7% in 1999 to
$151.9 million from $125.8 million in 1998 as a result of growth from new
accounts and expansion of new and existing product lines. STS sales decreased
$75.7 million or 23.4% in 1999 to $248.4 million from $324.1 million in 1998 as
a result of the restructuring of the sales force in 1999 as well as the effects
of the global economy.
SunSource's consolidated gross margin from ongoing operations was 34.9% in
1999 (before the inventory write-down of $2.1 million related to the 1999
restructuring) compared with 34.6% in 1998. The Hillman Group's gross margin
increased 0.6% in the comparison period as a result of substantial increases in
sales of keys to major U.S. hardware chains and home centers carrying higher
margins than hardware and related products. STS' gross margin before the
aforementioned inventory charge decreased 4.0% in 1999 as a result of the
decrease in sales levels in relation to the fixed cost component of cost of
goods sold for service and repair facilities and changes in sales mix.
SunSource's selling, general and administrative expenses from continuing
operations, before a gain on curtailment of a defined benefit plan of $5.6
million and restructuring charges of $8.1 million increased by $11.0 million to
$145.2 million in 1999 from $134.2 million in 1998. Selling expenses increased
$2.4 million primarily as a result of 1998 acquisition activity in The Hillman
Group. Warehouse and delivery expenses increased $4.9 million as a result of
integration costs for the 1998 acquisitions in The Hillman Group and facility
reorganization costs at STS offset slightly by decreases from cost savings
associated with the 1999 restructuring. The increase in general and
administrative expenses of $3.7 million is attributable to the integration of
the newly acquired businesses in The Hillman Group in 1998 and increased
facilities costs in the STS division offset by cost savings associated with the
1999 restructuring.
Selling, general and administrative expenses from ongoing operations as a
percentage of sales compared with 1998 excluding the previously mentioned
non-recurring items in 1999 are as follows:
Overall, as a percentage of sales, total selling, general and
administrative expenses increased due mainly to the decrease in sales levels in
relation to the fixed cost component of selling, general and administrative
expenses.
78
EBITDA from ongoing operations was a loss of $5.1 million for the year
ended December 31, 1999 excluding the aforementioned 1999 non-recurring items
compared with $22.3 million earned in the prior year. The 1998 period excludes a
charge of $1.6 million for outstanding litigation matters related to divested
businesses. See Segment Sales and Profitability Schedule for the components of
EBITDA from ongoing operations for years 1999 and 1998.
SunSource's consolidated operating profit margin (EBITDA from ongoing
operations, as a percentage of sales) and before the aforementioned
non-recurring items declined to a loss of 1.3% in 1999 compared with an
operating profit margin of 5.0% in the prior year. The Hillman Group's operating
profit margin excluding the 1999 restructuring charges decreased to 10.4% in
1999 from 10.7% in 1998 as a result of sales discounts and allowances to attract
new accounts and increased selling expenses for new field staff related
primarily to 1998 acquisition activities. STS had an operating loss of 4.8% in
1999 compared with an operating profit margin of 4.8% in 1998, primarily
reflecting reduced 1999 sales and increased expenses related to the
reorganization of sales and administrative functions.
Interest expense, net increased $2.9 million in 1999 from $7.0 million in
1998 due primarily to increased borrowings on SunSource's revolving credit
facility as a result of cash requirements to fund SunSource's acquisition
activities and working capital requirements.
For the years ended December 31, 1999 and 1998, SunSource paid $12.2
million in interest on the Junior Subordinated Debentures, equivalent to the
amounts distributed by the trust on the Trust Preferred Securities.
See Note 6 of Notes to Consolidated Financial Statements of SunSource for
the three years ended December 31, 2000, for income taxes and disclosures
related to 1999 and 1998 income tax events.
Liquidity and Capital Resources
SunSource's cash position of $1.9 million as of June 30, 2001, decreased
$0.9 million from the balance at December 31, 2000. Cash was provided during
this period primarily from net borrowings under the bank revolver ($17.0
million) and proceeds from the liquidation of the Mexico segment ($1.5 million).
Cash was used during this period predominantly for net working capital
investments in operations ($6.0 million), capital expenditures ($6.8 million),
construction in progress ($1.0 million), costs associated with the sale and
liquidation of discontinued operations ($0.9 million), repayment of subordinated
notes ($2.8 million), repayments under other credit facilities ($0.4 million),
principal payments under capitalized lease obligations ($0.5 million), and other
items, net ($1.0 million).
SunSource's net interest coverage ratio from continuing operations for the
six months ended June 30, 2001 increased to .96x (earnings before interest,
distributions on trust preferred securities and income taxes, excluding
non-recurring events, over net interest expense and distributions on trust
preferred securities), from .79x in the 2000 comparison period (including Kar
for the first two months of 2000) as a result of increased earnings.
SunSource is compliant with its debt covenant requirements as of and for
the six months ended June 30, 2001. SunSource's fixed charge coverage ratio for
the first half of 2001 is 1.05x (adjusted EBITDA less capital expenditures over
fixed charges, as defined in the credit agreements) compared with a minimum
requirement of 1.0x. In addition, SunSource's senior debt leverage ratio as of
June 30, 2001 was 3.17x (total debt excluding trust preferred securities over
adjusted EBITDA) compared with a maximum requirement of 4.0x resulting in excess
senior borrowing capacity of $12.8 million.
79
SunSource's working capital position of $91.2 million at June 30, 2001,
represents an increase of $14.3 million from the December 31, 2000 level of
$76.9 million as a result of working capital reinvestments of $16.6 million and
repayment of subordinated notes of $2.8 million, offset by a decrease in
restricted cash used for deferred compensation funding of $3.3 million, a
decrease in net assets held for sale due to collection of liquidation proceeds
of $1.5 million and other items, net of $.3 million. SunSource's current ratio
increased to 2.2x at June 30, 2001 from 1.9x at December 31, 2000.
As of June 30, 2001, SunSource had $17.5 million available under its
secured credit facilities. SunSource had approximately $75.8 million of
outstanding debt at June 30, 2001, consisting of a $2.4 million senior secured
term loan currently at 6.75%, bank revolver borrowings totaling $72.1 million at
an effective interest rate of 6.75%, and capitalized lease obligations and other
debt of $1.3 million at various interest rates.
As of June 30, 2001, SunSource's total debt (including distributions
payable) as a percentage of its consolidated capitalization (total debt, trust
preferred securities and stockholders' equity) was approximately 48.7% compared
with 45.0% at December 31, 2000 and 43.6% as of June 30, 2000. SunSource's
consolidated capitalization (including distributions payable) as of June 30,
2001, was approximately $243.5 million compared to $231.9 million at December
31, 2000 and $252.6 million at June 30, 2000.
SunSource has spent $6.8 million for capital expenditures through June 30,
2001, primarily for key duplication machines and machinery and equipment. In
addition, SunSource has spent $1.0 million in the second quarter of 2001 for
materials and supplies and component parts for construction in progress of key
duplication machines for placement next quarter. SunSource expects to incur
total fixed capital spending of $15.2 million in 2001 primarily for The Hillman
Group which represents an increase of $6.8 million compared to total year 2000
as a result of the acquisition of Axxess and growth in national accounts for key
machines.
On June 30, 1999, the Board of Directors of SunSource suspended
indefinitely the quarterly cash dividend of $.10 per common share.
On August 6, 1998, SunSource's Board of Directors authorized $15.0 million
for management to repurchase up to 10% of SunSource's outstanding common shares
through open market transactions and private block trades dependent upon market
conditions. SunSource subsequently suspended the repurchase program on March 16,
1999. SunSource has acquired and placed into treasury 479,100 common shares
through December 31, 1999, at an average cost of $18.17 per common share.
SunSource has deferred tax assets aggregating $28.4 million as of June 30,
2001, as determined in accordance with SFAS 109. Management believes that
SunSource's deferred tax assets will be realized through the reversal of
existing temporary differences between the financial statement and tax bases, as
well as through future taxable income.
Inflation
Inflation in recent years has had a modest impact on the operations of
SunSource. 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
SunSource's operating divisions to raise prices is dependent on competitive
market conditions.
80
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 133, or SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 established accounting and
reporting standards for derivative financial instruments and hedging activities,
and requires SunSource to recognize all derivatives as either assets or
liabilities on the balance sheet and measure them at fair value. Gains and
losses resulting from changes in fair value are accounted for depending on the
use of the derivative and whether it is designated and qualifies for hedge
accounting. In June 1999, the Financial Accounting Standards Board issued SFAS
137, which deferred the implementation of SFAS 133. SunSource adopted SFAS 133
during the first quarter of 2001. The adoption of SFAS 133 has not had a
material impact on SunSource's financial position and results of operations.
On June 26, 2000 the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101B which extended the implementation date of Staff
Accounting Bulletin 101, or SAB 101, "Revenue Recognition" to the three-month
period ending December 31, 2000. SAB 101 provides guidance on the recognition,
presentation, and disclosure of revenue in financial statements. The adoption of
SAB 101 has not had a material impact on SunSource's financial position and
results of operations.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" ("FAS
141") and SFAS No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). FAS
141 requires that all business combinations be accounted for under the purchase
method, and the use of the pooling-of-interests method is prohibited for
business combinations initiated after June 30, 2001. FAS 141 also establishes
criteria for the separate recognition of intangible assets acquired in a
business combination. FAS 142 requires that goodwill no longer be amortized to
earnings, but instead be subject to periodic testing for impairment. FAS 142 is
effective for fiscal years beginning after December 15, 2001, with earlier
application permitted only in specified circumstances. Management is currently
evaluating the expected impact of FAS 142.
PRICE RANGE OF COMMON STOCK
As a result of SunSource's September 30, 1997 conversion from partnership
to corporate form, SunSource's common shares began trading on the New York Stock
Exchange on October 1, 1997, under the symbol "SDP". On June 19, 2001, the
shares began trading on the American Stock Exchange under the symbol "SDP." The
following table sets forth the high and
81
low closing sale prices on the New York Stock Exchange or the American Stock
Exchange, as applicable, for the common shares:
As of , 2001 there were approximately holders of record
of SunSource's common shares. The total number of common shares outstanding as
of , 2001 was .
MANAGEMENT OF SUNSOURCE
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information regarding SunSource's
executive officers:
All executive officers serve at the pleasure of SunSource's board of
directors. There are no family relationships between any of SunSource's
executive officers and directors.
The following is a summary of the business experience of the executive
officers listed above during at least the last five years. Periods prior to the
conversion on September 30, 1997 relate to SunSource's predecessor, SunSource
L.P.
Maurice P. Andrien, Jr. See information contained under "Biographical
Information -- Continuing Stockholders."
Joseph M. Corvino See information contained under "Biographical
Information -- Continuing Stockholders."
82
Max W. Hillman, Jr. See information contained under "Biographical
Information -- Continuing Stockholders."
Justin M. Jacobi has been the President and COO of SunSource Technology
Services, LLC since November 2000. Mr. Jacobi held various positions with
Applied Industrial Technologies, Inc., since July 1994 including Unit President
of the Fluid Power Products division from February 2000 to November 2000.
Donald T. Marshall has been the Chairman since April, 1999. Mr. Marshall
served as Chairman and CEO from December 1988 to April 1999.
Stephen W. Miller See information contained under "Biographical
Information -- Continuing Stockholders."
DIRECTORS
The following table sets forth certain information regarding SunSource's
directors:
83
BIOGRAPHICAL INFORMATION -- CONTINUING STOCKHOLDERS
The following is a summary of the biographies of the continuing
stockholders, for at least the last five years. Unless otherwise indicated
below, all of the continuing stockholders are United States citizens and none
were convicted in a criminal proceeding or party to a judicial or administrative
proceeding that resulted in an injunction, prohibition or finding of a violation
of federal or state securities laws.
Maurice P. Andrien, Jr. is currently President and Chief Executive Officer
of SunSource Inc., One Logan Square, Suite 3000, Philadelphia, Pennsylvania
19103, whose principal business is distribution of value-added services and
products to retail and industrial markets in North America. Mr. Andrien has held
such position since April 1999. From June 1998 to April 1999, Mr. Andrien was
President and Chief Operating Officer of Unican Security Systems, Ltd., Decarie
Boulevard, Montreal, Quebec, Canada. From April 1992 to June 1998, Mr. Andrien
was President and Chief Executive Officer of Curtis Industries, Inc., 6140
Parkland Boulevard, Mayfield Heights, Ohio.
Dennis G. Blake is currently Vice President of Marketing for The Hillman
Group, Inc., 10590 Hamilton Avenue, Cincinnati, Ohio 45231, whose principal
business is the sale and service of fasteners and related small hardware items,
and the manufacture and marketing of key duplication and identification systems.
Mr. Blake has held such position for the last five years.
Richard A. Buller is currently the Vice President of Materials Management
for The Hillman Group, Inc., 10590 Hamilton Avenue, Cincinnati, Ohio 45231,
whose principal business is the sale and service of fasteners and related small
hardware items, and the manufacture and marketing of key duplication and
identification systems. Mr. Buller has held such position since 1998. From 1996
to 1998, Mr. Buller was Director of Materials Management for The Hillman Group,
Inc. at the Cincinnati, Ohio address, above.
Joseph M. Corvino is currently Vice President of Finance, Secretary,
Treasurer and Chief Financial Officer of SunSource Inc., whose principal
business is distribution of value-added services and products to retail and
industrial markets in North America. Mr. Corvino has held such positions for the
last five years.
Kenneth H. Foskey is currently Vice President of Information Systems and
New Business Development for The Hillman Group, Inc., 10590 Hamilton Avenue,
Cincinnati, Ohio 45231, whose principal business is the sale and service of
fasteners and related small hardware items, and the manufacture and marketing of
key duplication and identification systems. Mr. Foskey has held such position
since 1997. From 1996 to 1997, Mr. Foskey held the position of Vice
84
President of Information Systems for The Hillman Group, Inc. at the Cincinnati,
Ohio address, above.
George L. Heredia is currently Senior Vice President of Marketing for The
Hillman Group, Inc., 9185 South Farmer Avenue, Tempe, Arizona 85284, whose
principal business is the sale and service of fasteners and related small
hardware items, and the manufacture and marketing of key duplicating and
identification systems. Mr. Heredia has held such position since April 2000.
During the five years prior to April 2000, Mr. Heredia has held the positions of
Senior Vice President of Marketing and Senior Vice President of Operations for
Axxess Technologies Inc., 9185 South Farmer Avenue, Tempe, Arizona 85284.
Max W. Hillman, Jr. is currently Co-Chief Executive Officer of The Hillman
Group, Inc., 10590 Hamilton Avenue, Cincinnati, Ohio 45231, whose principal
business is the sale and service of fasteners and related small hardware items,
and the manufacture and marketing of key duplication and identification systems.
Mr. Hillman has held the position of Co-Chief Executive Officer of The Hillman
Group, Inc. since April 2000. From 1999 to April 2000 Mr. Hillman held the
position of Chief Executive Officer of The Hillman Group, Inc. at the
Cincinnati, Ohio address, above. From 1991 to 1999, Mr Hillman was a Group Vice
President for The Hillman Group, Inc. at the Cincinnati, Ohio address, above.
Richard P. Hillman is currently the President of The Hillman Group, Inc.,
10590 Hamilton Avenue, Cincinnati, Ohio 45231, whose principal business is the
sale and service of fasteners and related small hardware items, and the
manufacture and marketing of key duplication and identification systems. Mr.
Hillman has held such position since 1991.
John H. Marshall III is currently Regional Vice President of Sales for The
Hillman Group, Inc., 10590 Hamilton Avenue, Cincinnati, Ohio 45231, whose
principal business is the sale and service of fasteners and related small
hardware items, and the manufacture and marketing of key duplication and
identification systems. Mr. Marshall has held the position of Regional Vice
President of Sales for The Hillman Group, Inc. since April 1998. From January
1997 to April 1998, Mr. Marshall held the position of Regional Sales Manager
and, form May 1995 to January 1997, Mr. Marshall held the position of District
Manager for The Hillman Group, Inc. at the Cincinnati, Ohio address, above.
John P. McDonnell is currently employed as a consultant to SunSource
Technology Services, LLC. Mr. McDonnell has been employed as a consultant for
SunSource Technology Services since January 2000. During the five years prior to
January 2000, Mr. McDonnell has held various management positions with several
of SunSource's subsidiaries.
Stephen W. Miller is currently the Co-Chief Executive Officer of The
Hillman Group, Inc., 9185 South Farmer Avenue, Tempe, Arizona 85284, whose
principal business is the sale and service of fasteners and related small
hardware items, and the manufacture and marketing of key duplication and
identification systems. Mr. Miller has held the position of Co-Chief Executive
Officer of The Hillman Group, Inc. since April 2000. From January 1994 to April
2000, Mr. Miller held the positions of Chief Executive Officer, Chairman of the
Board and President of Axxess Technologies, Inc., 8990 South Kyrene Road, Tempe,
Arizona 85284.
Michael A. Mueller is currently the Vice President of Engineering for The
Hillman Group, Inc., 8990 South Kyrene Road, Tempe, Arizona 85284, whose
principal business is the sale and service of fasteners and related small
hardware items, and the manufacture and marketing of key duplication and
identification systems. Mr. Mueller has held such position since April 2000.
Prior to April 2000, Mr. Mueller was Vice President of Engineering for Axxess
Technologies, Inc., 8990 South Kyrene Road, Tempe, Arizona 85284.
85
Terry R. Rowe is currently the Senior Vice President of National Accounts
for The Hillman Group, Inc., 9185 South Farmer Avenue, Tempe, Arizona 85284,
whose principal business is the sale and service of fasteners and related small
hardware items, and the manufacture and marketing of key duplication and
identification systems. Mr. Rowe has held such position with The Hillman Group
since 1992.
Gary L. Seeds is currently Executive Vice President of Sales for The
Hillman Group, Inc., 10590 Hamilton Avenue, Cincinnati, Ohio 45231, whose
principal business is the sale and service of fasteners and related small
hardware items, and the manufacture and marketing of key duplication and
identification systems. Mr. Seeds has held such position for the last five
years.
James P. Waters is currently Vice President and Chief Financial Officer of
The Hillman Group, Inc., 10590 Hamilton Avenue, Cincinnati, Ohio 45231, whose
principal business is the sale and service of fasteners and related small
hardware items, and the manufacture and marketing of key duplication and
identification systems. Mr. Waters has held such position since September 1999.
From November 1997 to September 1999, Mr. Waters was Vice President of Finance
for Curtis Industries, Inc., 6140 Parkland Boulevard, Mayfield Heights, Ohio.
From May 1993 to November 1997, Mr. Waters was Director of Finance for Curtis
Industries, Inc., 6140 Parkland Boulevard, Mayfield Heights, Ohio.
Mark Yeary is currently Vice President of Manufacturing for The Hillman
Group, Inc., 8990 South Kyrene Road, Tempe, Arizona 85284, whose principal
business is the sale and service of fasteners and related small hardware items,
and the manufacture and marketing of key duplication and identification systems.
Mr. Yeary has held such position since April, 2000. Prior to April, 2000, Mr.
Yeary held the position of Vice President, Manufacturing for Axxess
Technologies, Inc. at the Tempe, Arizona address, above.
MANAGEMENT OF ALLIED CAPITAL
Allied Capital's board of directors is classified into three approximately
equal classes with three-year terms, with only one of the three classes expiring
each year. Directors serve until their successors are elected and qualified.
DIRECTORS
Information regarding Allied Capital's board of directors is as follows:
86
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* Interested persons of Allied Capital, as defined in the 1940 Act.
(1) Includes service as a director of any of Allied Capital's predecessor
companies.
EXECUTIVE OFFICERS
Information regarding Allied Capital's executive officers is as follows:
- ---------------
(1)Mr. Walton and Ms. Sweeney also serve as directors of merger sub.
(2)Mr. Williams also serves as a director and President of merger sub.
(3)Mr. Russell is a director and Secretary of merger sub.
BIOGRAPHICAL INFORMATION
Directors
William L. Walton has been the Chairman, Chief Executive Officer and
President of Allied Capital since 1997. He has served on the Allied Capital
Board of Directors since 1986, and was named Chairman and CEO in February 1997.
Mr. Walton has an extensive background in general management, marketing,
strategic planning, mergers and acquisitions and financial analysis. Mr. Walton
previously served as Managing Director of New York-based Butler Capital
Corporation (1987-1991) and was the personal venture capital advisor for William
S. Paley, founder and Chairman of CBS. In addition, he was a Senior Vice
President in Lehman Brothers Kuhn Loeb's Investment Banking Group. Mr. Walton
also founded and managed two start-up businesses in the emerging education
industry (1992-1996). Mr. Walton is a director of Nobel Learning Communities,
Inc., Riggs National Corporation and the National Venture Capital Association.
He received both a B.A. and a M.B.A. from Indiana University.
George C. Williams, Jr. is Chairman Emeritus of Allied Capital. Mr.
Williams was an officer of Allied Capital's predecessor companies from the later
of 1959 or the inception of the relevant entity and President or Chairman and
Chief Executive Officer of the predecessor companies from the later of 1964 or
each entity's inception until 1991. Mr. Williams is the father of G. Cabell
Williams III, an executive officer of Allied Capital.
Brooks H. Browne has been the President of Environmental Enterprises
Assistance Fund since 1993. Mr. Browne is a director of SEAF, Corporation
Financiera Ambiental (Panama),
87
Empresas Ambientales de Centro America (Costa Rica) Renewable Energy and Energy
Efficiency Fund, Terra Capital Investors Limited, the Solar Development
Foundation and Yayasan Bina Usaha Lingkungan (Indonesia) (environmental
nonprofit or investment funds).
John D. Firestone has been a Partner of Secor Group (venture capital) since
1978. Mr. Firestone is a director of Security Storage Company of Washington, DC,
Bryn Mawr Bank Corporation and the National Organization on Disability. Mr.
Firestone is a Senior Advisor to GeoPortals.com, and a Trustee of the Washington
Ballet.
Anthony T. Garcia is currently a private investor. Mr. Garcia was General
Manager of Breen Capital Group (investor in tax liens) from 1997 to 2000. Mr.
Garcia was a Senior Vice President of Lehman Brothers Inc. from 1985 to 1996.
Lawrence I. Hebert is a director and President and Chief Executive Officer
of Riggs Bank N.A. (a subsidiary of Riggs National Corporation) since February
2001; Director of Riggs National Corporation since 1988. He also serves as a
director of Riggs Investment Management Corporation and Riggs Bank Europe
Limited (indirect subsidiaries of Riggs National Corporation). Mr. Hebert is the
President and a director of Perpetual Corporation (owner of Allbritton
Communications Company and ALLNEWSCO, Inc.). Mr. Hebert is a director of
ALLNEWSCO, Inc. (news programming service), the President of Westfield News
Advertiser, Inc. (owner of a television station and newspapers), trustee of The
Allbritton Foundation and Vice Chairman of Allbritton Communications Company.
Mr. Hebert previously served as Vice Chairman (1983 to 1998), President (1984 to
1998) and Chairman and Chief Executive Officer (1998 to 2001) of Allbritton
Communications Company.
John I. Leahy has been the President of Management and Marketing Associates
(a management consulting firm) since 1986. Mr. Leahy was the President and Group
Executive Officer, Western Hemisphere of Black & Decker Corporation from 1982 to
1985. Mr. Leahy is a director of Kar Kraft Systems, Inc., Cavanaugh Capital,
Inc., Acorn Products, Inc., The Wills Group Thulman-Eastern Company and
Gallagher Fluid Seals, Inc.
Robert E. Long is the CEO and Director of Goodwyn, Long & Black Investment
Management, Inc. and has been the Chairman and Chief Executive Officer of
Emerald City Radio Partners, LLC since 1997. Mr. Long was the President of
Business News Network, Inc. from 1995 to 1998, was the Chairman and Chief
Executive Officer of Southern Starr Broadcasting Group, Inc. from 1991 to 1995,
and a director and the President of Potomac Asset Management, Inc. from 1983 to
1991. Mr. Long is a director of AmBase Corporation, CSC Scientific, Inc., and
Advanced Solutions International, Inc.
Warren K. Montouri has been a Partner of Montouri & Roberson (real estate
investment firm) since 1980. Mr. Montouri was a director of C&S/Sovran Bank from
1970 to 1990, a director of Sovran Financial Corporation from 1989 to 1990, a
director of NationsBank, N.A. from 1990 to 1996, a director of BB&T Bank
(formerly Franklin National Bank) from 1996 to 2000, a trustee of Suburban
Hospital from 1991 to 1994, and a trustee of The Audubon Naturalist Society from
1979 to 1985.
Guy T. Steuart II has been a director and President of Steuart Investment
Company (manages, operates, and leases real and personal property and holds
stock in operating subsidiaries engaged in various businesses) since 1960. Mr.
Steuart is Trustee Emeritus of Washington and Lee University.
T. Murray Toomey, Esq. has been an attorney at law since 1949. Mr. Toomey
is a director of The National Capital Bank of Washington and Federal Center
Plaza Corporation. He is also a trustee of The Catholic University of America.
88
Laura W. van Roijen has been a private real estate investor since 1992. Ms.
van Roijen was the Chairman of CWV & Associates (RTC qualified contracting firm)
from 1991 to 1994, a director and the Treasurer of Black Possum Inc. (retail
concern) from 1994 to 1996, the President of Volta Place, Inc. (real estate
advisory firm) from 1991 to 1994, and Vice President (from 1986 to 1991) and
Market Director (from 1989 to 1991) of Citicorp Real Estate, Inc.
Executive Officers who are not Directors
Joan M. Sweeney, Managing Director and Chief Operating Officer, has been
employed by Allied Capital since 1993. Ms. Sweeney oversees all company
operations and is responsible for strategic planning, financial management,
information technology, marketing, investor relations, and all regulatory
compliance. Prior to joining Allied Capital, Ms. Sweeney spent ten years of her
career consulting with private and small public companies at both Ernst & Young
and Coopers & Lybrand. Ms. Sweeney was a member of the Commission Division of
Enforcement in the late 1980s.
Scott S. Binder, Managing Director, has worked with Allied Capital since
1991 and is responsible for the telecommunications and broadcasting/cable
investments within the private finance group. Prior to joining Allied Capital,
Mr. Binder formed and was President of Overland Communications Group, which
owned and operated cable television systems and radio stations. He also has
worked in the specialty finance and leasing industry.
Samuel B. Guren, Managing Director, joined Allied Capital in 1999 to
develop Allied Capital's private equity investment business. Mr. Guren has more
than 26 years of venture capital investing experience. Prior to joining Allied
Capital, Mr. Guren was the Senior Managing Partner at Baird Capital. He also
served as a Senior Managing Partner at William Blair Venture Partners for 15
years.
Philip A. McNeill, Managing Director, has been employed by Allied Capital
since 1993 and is responsible for co-managing the private finance group. Before
joining Allied Capital, he served as a vice president of M&T Capital
Corporation. Prior to entering the private finance industry, he was founding
director of Western Oklahoma National Bank, and structured and managed numerous
privately negotiated investments.
John M. Scheurer, Managing Director, has been employed by Allied Capital
since 1991 and manages the real estate finance group. He has more than 22 years
of experience in commercial finance and real estate lending and management.
Prior to joining Allied Capital, Mr. Scheurer worked in various capacities with
Capital Recovery Advisors, Inc. and First American Bank. He also started his own
company, The Scheurer Company, and co-founded Hunter & Associates, a major
leasing and consulting real estate firm in the Washington, DC area.
Thomas H. Westbrook, Managing Director, has been with Allied Capital since
1991 and is responsible for the business services investments within the private
finance group. Prior to joining Allied Capital, Mr. Westbrook worked with North
Carolina Enterprise Fund and was a lending officer in NationsBank's corporate
lending unit. He is the former president of the southern RASBIC and has served
on the NASBIC Board of Governors.
G. Cabell Williams, III, Managing Director, has been employed by Allied
Capital since 1981 and is responsible for co-managing the operations of the
private finance group. He has over 19 years of private finance experience, and
has structured numerous types of private debt and equity finance transactions.
Mr. Williams has served in many capacities during his tenure at Allied Capital.
Penni F. Roll, Executive Vice President and Chief Financial Officer, has
been employed by Allied Capital since 1995. Ms. Roll is responsible for
financial management and reporting,
89
accounting, loan servicing, special servicing, portfolio monitoring and
regulatory compliance activities. Prior to joining Allied Capital, she spent
seven years in the financial services practice at KPMG Peat Marwick, including
serving as a Manager from 1993 to 1995.
Daniel L. Russell, Secretary and director of merger sub, also serves as a
Principal in Allied Capital's private finance group. Prior to joining Allied
Capital in 1998, Mr. Russell spent six years with KPMG Peat Marwick LLP in the
firm's financial services group, including serving as a Senior Manager.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF SUNSOURCE
On August 10, 2001, the name, address, and share ownership of persons who
beneficially owned 5% or more of the outstanding SunSource common stock,
SunSource's executive officers and the members of the SunSource board of
directors, and the percentage of shares of SunSource common stock, and the
percentage of New SunSource common stock that would be owned by such persons
upon consummation of the merger based upon their holdings and outstanding shares
at August 10, 2001, are as follows:
90
91
- ---------------
* less than 1%
(1) Includes rollover options.
(2)Includes 19,600 shares beneficially owned.
(3) Includes (a) 107,000 shares owned directly of which 100,000 are restricted
shares, and (b) 180,000 shares underlying options of which 50,000 are
currently vested and 130,000 will vest upon consummation of the merger.
(4) Includes (a) 39,626 shares owned directly, and (b) 95,000 shares underlying
options of which 12,000 are currently vested and 83,000 will vest upon
consummation of the merger.
(5) Includes (a) 32,220 shares owned directly, and (b) 105,000 shares
underlying options of which 49,166 are currently vested and 55,834 will
vest upon consummation of the merger.
(6) Includes (a) 203,208 shares owned directly, and (b) 80,000 shares
underlying options all of which will vest upon consummation of the merger.
(7) Includes (a) 703,988 shares owned directly, and (b) 220,000 shares
underlying options of which 142,000 are currently vested and 78,000 will
vest upon consummation of the merger.
(8) Includes (a) 20,000 shares owned directly, and (b) 50,000 shares underlying
options of which 6,250 are currently vested and 43,750 will vest upon
consummation of the merger.
(9) Includes 421,753 shares owned directly.
(10) Includes 9,619 shares owned directly.
(11) Includes 6,660 shares owned directly.
(12) Includes (a) 2,000 shares owned by Hoffman Investment Co., of which Mr.
Hoffman is Managing Partner, (b) 1,000 shares owned by Mr. Hoffman's
children with respect to which he disclaims beneficial ownership.
(13) Includes 26,551 shares owned directly.
(14) Includes 11,741 shares owned directly.
(15) Includes 14,339 shares owned directly.
(16) Represents 36,000 shares underlying options of which 15,833 are currently
vested and 20,167 will vest upon consummation of the merger.
(17) Represents 10,000 shares underlying options of which 1,250 are currently
vested and 8,750 will vest upon consummation of the merger.
(18) Represents 24,500 shares underlying options of which 11,875 are currently
vested and 12,625 will vest upon consummation of the merger.
(19) Represents 15,000 shares underlying options of which 6,000 are currently
vested and 9,000 will vest upon consummation of the merger.
(20) Represents 9,000 shares underlying options of which 1,000 are currently
vested and 8,000 will vest upon consummation of the merger.
(21) Represents 15,000 shares underlying options of which 6,000 are currently
vested and 9,000 will vest upon consummation of the merger.
(22) Includes (a) 175 shares owned directly and (b) 13,000 shares underlying
options of which 4,917 are currently vested and 8,083 will vest upon
consummation of the merger.
(23) Represents 15,000 shares underlying options of which 6,000 are currently
vested and 9,000 will vest upon consummation of the merger.
(24) Represents 10,000 shares underlying options of which 1,250 are currently
vested and 8,750 will vest upon consummation of the merger.
(25) Represents 10,000 shares underlying options of which 1,250 are currently
vested and 8,750 will vest upon consummation of the merger.
(26) Represents 7,500 shares underlying options of which 3,333 are currently
vested and 4,167 will vest upon consummation of the merger.
Additionally, following the transaction, Allied Capital will own
approximately 94% of the common stock of New SunSource and merger sub will be
merged with and into New SunSource and therefore, will not own any stock of New
SunSource.
92
TRANSACTIONS IN COMMON STOCK BY CERTAIN PERSONS
SUNSOURCE COMMON STOCK PURCHASE PRICE INFORMATION
The following tables set forth information regarding acquisitions of
SunSource common stock by affiliates of SunSource, showing the number of shares
of SunSource common stock purchased by each affiliate, the range of prices paid
for those shares and the average price paid per quarter for the past two years.
Allied Capital and its executive officers and directors and merger sub and its
officers and directors have not purchased any shares of SunSource common stock
in the past two years. Transactions made on behalf of participants in the
SunSource 401(k) plan are included in their respective beneficial ownership. See
"Security Ownership of Certain Beneficial Owners and Management of SunSource."
93
94
95
Certain 5% stockholders may have engaged in transactions in SunSource
common stock during the past 60 days.
No officers, directors or affiliates of SunSource have engaged in any
transactions in SunSource common stock during the past 60 days.
TRANSACTIONS AND ARRANGEMENTS CONCERNING SUNSOURCE COMMON STOCK
To SunSource's knowledge, no transactions in SunSource's common stock other
than (i) ordinary purchases under SunSource's 401(k) plan or (ii) those
transactions disclosed in "SunSource Common Stock Purchase Price Information",
have been effected during the past 60 days by SunSource or its executive
officers, directors, affiliates or subsidiaries, by Allied Capital or its
executive officers, directors, affiliates or subsidiaries, by merger sub or its
executive officers, directors, or affiliates or by its executive officers,
directors, affiliates or subsidiaries or by any of the continuing stockholders.
In the past two fiscal years, no purchases of SunSource common stock were
made by SunSource, Allied Capital or merger sub (except as disclosed in periodic
reports filed by SunSource with the SEC) other than as set forth in this proxy
statement.
Except as set forth in this proxy statement, neither SunSource, Allied
Capital, merger sub or any of their affiliates, executive officers or directors
or any person controlling SunSource, Allied Capital or merger sub is a party to
any contract, arrangement or understanding or relationship with any other person
relating directly, or indirectly, to, or in connection with respect to any
securities of SunSource (including, without limitation, any contract,
arrangement, understanding or relationship concerning the transfer or the voting
of any such securities, joint
96
ventures, loan or option arrangement, puts or calls, guarantees of loans,
guarantees against loss or the giving of withholding of proxies, consents or
authorizations). Except as described in this proxy statement, in the past two
fiscal years, no contracts or negotiations concerning a merger, consolidation,
or acquisition, a tender offer for or other acquisition of any securities of
SunSource, an election of directors to the SunSource board, or a sale or other
transfer of a material amount of assets of SunSource, has been entered into or
has occurred between any affiliates of SunSource or between SunSource or any of
its affiliates and any unaffiliated person or between Maurice Andrien, Joseph
Corvino, Max Hillman, Stephen Miller, Richard Hillman, George Heredia, Gary
Seeds, Terry Rowe, Jim Waters, Dennis Blake, Rick Buller, Ken Foskey, Michael
Mueller, Mark Yeary, John McDonnell or John Marshall and SunSource and its
affiliates, or between Allied Capital or its executive officers, directors,
affiliates or subsidiaries and SunSource and its affiliates or between merger
sub or its executive officers, directors, or affiliates and SunSource and its
affiliates. Except as described in this proxy statement, in the past three
years, SunSource has not made any underwritten public offering of its stock that
was (i) registered under the Securities Act of 1933, (ii) exempt from
registration under the Securities Act of 1933 pursuant to Regulation A.
None of the executive officers and directors of Allied Capital, SunSource,
merger sub Maurice Andrien, Joseph Corvino, Max Hillman, Stephen Miller, Richard
Hillman, George Heredia, Gary Seeds, Terry Rowe, Jim Waters, Dennis Blake, Rick
Buller, Ken Foskey, Michael Mueller, Mark Yeary, John McDonnell or John Marshall
or Allied Capital, SunSource or merger sub have been a party to any judicial or
administrative proceeding during the past five years that resulted in a
judgment, decree or final order enjoining the person from future violations of,
or prohibiting activities subject to, federal or state securities laws, or a
finding of any violation of federal or state securities laws.
1998 PUBLIC OFFERING
On March 25, 1998, SunSource closed in a public offering of 1,988,063
shares of its common stock at an offering price to the public of $28.25 per
share. Of the 1,988,063 shares offered, 1,488,063 of the shares were sold by
selling stockholders and 500,000 share were sold by SunSource for aggregate
proceeds to SunSource of $14,125,000. The underwriters subsequently exercised
their over allotment option for 296,408 shares yielding an additional $8,373,526
in proceeds to SunSource.
FORWARD-LOOKING STATEMENTS
This document and documents to which we refer you in this document include
various forward-looking statements about Allied Capital, SunSource and New
SunSource that are subject to risks and uncertainties. Forward-looking
statements include information concerning future results of operations of Allied
Capital, SunSource and New SunSource. Also, statements that use the words
"anticipate," "believe," "could," "estimate," "expect," "forecast," "intend,"
"may," "plan," "possible," "project," "should," "will," or similar expressions
are forward-looking statements. Many factors, some of which are discussed
elsewhere in this document and in documents to which we have referred you, could
affect the future financial results of Allied Capital, SunSource and New
SunSource. These factors could cause actual results to differ materially from
those expressed in forward-looking statements contained in this document or
related documents. These factors include adverse changes in economic conditions
and in the markets served by Allied Capital and SunSource and a significant
delay in the completion of the merger.
97
STOCKHOLDER PROPOSALS FOR
SUNSOURCE 2002 ANNUAL MEETING
The 2002 annual meeting of the stockholders of SunSource will be held only
if the merger transaction discussed in this proxy statement is not approved. An
eligible stockholder who wants to have a qualified proposal considered for
inclusion in the proxy statement for the 2002 annual meeting must notify the
Secretary of SunSource. The proposal must be received at SunSource's offices no
later than December 1, 2001. A stockholder must have been a record or beneficial
owner of at least one percent of the outstanding shares of common stock of
SunSource or shares of common stock of SunSource with a market value of $1,000
for at least one year prior to submitting the proposal and must continue to own
such shares through the date on which the meeting is held.
OTHER MATTERS
It is not expected that any matters other than those described in this
proxy statement will be brought before the SunSource special meeting. If any
other matters are presented, however, it is the intention of the persons named
in the SunSource proxy to vote the proxy in accordance with the discretion of
the persons named in such proxy.
INDEPENDENT ACCOUNTANTS
The financial statements as of December 31, 2000 and December 31, 1999 and
for each of the three years in the period ended December 31, 2000, including in
this proxy statement, have been audited by PricewaterhouseCoopers LLP,
independent accountants, as stated in their report appearing herein.
WHERE YOU CAN FIND MORE INFORMATION
SunSource files annual, quarterly and special reports, proxy statements and
other information with the Commission. You may read and copy any reports,
statements, or other information filed by SunSource at the Commission's public
reference rooms at 450 5th Street, N.W., Washington, D.C. 20549. Please call the
Commission at 1-202-942-8090 for more information on the public reference rooms.
The Commission also maintains an Internet site at "http://www.sec.gov" that
contains reports, proxy and information statements, and other information
regarding issuers, like SunSource, that file electronically with the Commission.
Copies may also be obtained, after paying a duplicating fee, by electronic
request to publicinfo@sec.gov or by written request to Public Reference Section,
Washington, D.C. 20549-0102.
You can inspect reports, proxy statements, and other information about
SunSource at the offices of The American Stock Exchange, 86 Trinity Place, New
York, New York 10006.
We have not authorized anyone to provide you with information that is
different from, or in addition to, what is contained or referred to in this
proxy statement. SunSource has supplied all information contained in this proxy
statement relating to SunSource, and Allied Capital has supplied all information
contained in this proxy statement relating to Allied Capital. If you are in a
jurisdiction where the solicitation of proxies is unlawful, or if you are a
person to whom it is unlawful to direct these types of activities, then the
offer presented in this document does not extend to you. The information
contained in this document speaks only as of the date of this document unless
the information specifically indicates that another date applies.
98
SUNSOURCE INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
99
SUNSOURCE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
SUNSOURCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED,
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-2
SUNSOURCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED,
(DOLLARS IN THOUSANDS)
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-3
SUNSOURCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS'
EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 2001 (UNAUDITED)
(DOLLARS IN THOUSANDS)
- ---------------
(1)Cumulative foreign translation adjustment represents the only item of other
comprehensive income.
(2)Ending accumulated deficit includes $814 in undistributed earnings related to
the Company's investment in G-C Sun Holdings, L.P. which the Company accounts
for under the equity method.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-4
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION:
The accompanying financial statements include the consolidated accounts of
SunSource Inc. (the "Company" or "SunSource") and its wholly-owned subsidiaries,
principally The Hillman Group, Inc. (the "Hillman Group" or "Hillman"), and
SunSource Technology Services Company, L.L.C. ("Technology Services" or "STS"),
and includes an investment trust, SunSource Capital Trust (the "Trust"). The
Company also has an investment in an affiliate, G-C Sun Holdings, L.P.,
operating as Kar Products. All significant intercompany balances and
transactions have been eliminated. The Company is one of the leading providers
of value-added services and products to retail and industrial markets in North
America.
The accompanying consolidated financial statements and related notes are
unaudited; however, in management's opinion all adjustments (consisting of
normal recurring accruals) considered necessary for the fair presentation of
financial position, income and cash flows for the periods shown have been
reflected. Results for the interim period are not necessarily indicative of
those to be expected for the full year.
Certain information in note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
has been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission for quarterly reports on Form 10-Q
requirements although the Company believes that disclosures are adequate to make
the information presented not misleading. It is suggested that these financial
statements be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's report on Form 10-K for the year ended
December 31, 2000, Form 10-Q for the quarter ended March 31, 2001, and Form 8-K,
Report of Unscheduled Material Events, filed on June 21, 2001.
DISCONTINUED OPERATIONS:
In December 1999, the Company's Board of Directors approved management's
plan to dispose of the glass business, Harding Glass, Inc. ("Harding"). In
December 2000, the Company's Board of Directors also approved management's plan
to liquidate the Company's Integrated Supply -- Mexico business (the "Mexican
segment"). Accordingly, Harding and the Mexican business segments have been
accounted for as discontinued operations with their respective results of
operations segregated from results of the Company's ongoing businesses including
restatement of the prior periods presented. On April 13, 2000, the Company
consummated the sale of Harding. The liquidation of the Mexican Segment was
substantially completed as of June 30, 2001. See Note 3, Contribution of
Subsidiaries/Acquisitions/ Divestitures.
F-5
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION: -- (CONTINUED)
DISCONTINUED OPERATIONS: -- (CONTINUED)
Following is summary financial information for the Company's discontinued
Harding and Mexican operations:
No additional loss on disposal of the discontinued segments has been
recorded during the six months ended June 30, 2001.
F-6
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION: -- (CONTINUED)
DISCONTINUED OPERATIONS: -- (CONTINUED)
As of June 30, 2001, the Company had net assets held for sale of the
discontinued operations of $260 consisting of receivables, prepaid assets, and
property and equipment, and accrued liabilities of $1,460, which consists
primarily of severance and other termination-related benefits.
INVENTORIES
Inventories consisting predominantly of finished goods are valued at the
lower of cost or market, cost being determined principally on the first-in,
first-out method.
2. RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards Board ("the FASB") issued
Statement of Financial Accounting Standards ("SFAS") 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 established accounting
and reporting standards for derivative financial instruments and hedging
activities, and requires the Company to recognize all derivatives as either
assets or liabilities on the balance sheet and measure them at fair value. Gains
and losses resulting from changes in fair value are accounted for depending on
the use of the derivative and whether it is designated and qualifies for hedge
accounting. In June 1999, the FASB issued SFAS 137, which deferred the
implementation of SFAS 133. The Company adopted SFAS 133 during the first
quarter of 2001. The adoption of SFAS 133 has not had a material impact on the
Company's financial position and results of operations.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" ("FAS
141") and SFAS No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). FAS
141 requires that all business combinations be accounted for under the purchase
method, and the use of the pooling-of-interests method is prohibited for
business combinations initiated after June 30, 2001. FAS 141 also establishes
criteria for the separate recognition of intangible assets acquired in a
business combination. FAS 142 requires that goodwill no longer be amortized to
earnings, but instead be subject to periodic testing for impairment. FAS 142 is
effective for fiscal years beginning after December 15, 2001, with earlier
application permitted only in specified circumstances. Management is currently
evaluating the expected impact of FAS 142.
3. CONTRIBUTION OF SUBSIDIARIES/ACQUISITIONS/DIVESTITURES:
On March 2, 2000, the Company contributed the interests in its Kar
Products, Inc. and A & H Bolt & Nut Company Limited operations (collectively,
"Kar" or the "Kar Products" business) to a newly-formed partnership affiliated
with Glencoe Capital, L.L.C. ("Glencoe"). Glencoe contributed cash equity to the
new partnership, G-C Sun Holdings, L.P. ("G-C"). The Company received $105,000
in cash proceeds from the transaction through repayment of assumed debt by G-C
and retained a minority ownership in G-C. Affiliates of Glencoe hold a
controlling interest in G-C. SunSource recorded a pre-tax gain on the
transaction of approximately $49,115 in the first quarter of 2000. Sales from
Kar aggregated $22,122 from January 1, 2000 to March 2, 2000. The Company
accounts for its investment in the partnership under the equity method. As of
June 30, 2001, SunSource's consolidated balance sheet includes $1,429 in other
assets which represents the Company's investment in G-C.
On April 7, 2000, the Company's Hillman Group acquired Axxess Technologies,
Inc. ("Axxess" or "Axxess Technologies") of Tempe, Arizona through a stock
merger transaction. Axxess is a manufacturer
F-7
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
3. CONTRIBUTION OF SUBSIDIARIES/ACQUISITIONS/DIVESTITURES: -- (CONTINUED)
of key duplication and identification systems. The transaction was structured as
a purchase of 100% of the stock of the privately held company and repayment of
outstanding Axxess debt in exchange for $87,000 in cash and $23,000 in
subordinated notes. In connection with the sale of Harding on April 13, 2000,
the Company repaid $9,600 of these subordinated notes leaving a balance of
$13,400 comprised as follows: 1) a $2,400 15% note which was paid on April 7,
2001 and 2) an $11,000 note which is payable in seven equal quarterly
installments commencing the earlier of i) the first calendar quarter after
payment in full of the Term Loan extended by the Company's senior lenders or ii)
March 31, 2004. Interest on the $11,000 subordinated note ranges from prime plus
1% to prime plus 5% with a maximum rate at any time of 15%. The aggregate
consideration for the transaction was $111,537, including transaction costs of
$1,537, plus the assumption of certain liabilities aggregating $14,018. The
Hillman Group recorded goodwill and other intangible assets of $48,259 related
to this acquisition. Axxess' sales aggregated $19,364 for the three months ended
March 31, 2000, and its results of operations are included in the results of the
Hillman Group from the date of acquisition.
The following disclosures indicate the Company's estimate of pro forma
financial results for the six months ended June 30, 2000 had the Axxess
acquisition been consummated on January 1, 2000:
On April l3, 2000, the Company sold substantially all of the assets of
Harding for a cash purchase price of $30,592 plus the assumption by the buyer of
certain liabilities aggregating $12,693, subject to certain post-closing
adjustments.
On October 4, 2000, the Company's Kar Products affiliate through the
partnership formed with Glencoe Capital acquired all of the outstanding stock of
Brampton Fastener Co. Limited, d/b/a Brafasco, based in Toronto, Canada. G-C
purchased the outstanding stock of Brafasco for cash and notes. Brafasco is a
supplier of maintenance and repair products serving primarily industrial
customers. Brafasco had sales of $28,534 ($CDN) for the year ended December 31,
2000. As a result of this transaction, the Company holds a 44% ownership in the
Kar Products affiliate.
On November 3, 2000, the Company's Hillman Group purchased inventory and
other assets of the Sharon-Philstone division of Pawtucket Fasteners, L.P. of
Rhode Island. Hillman assumed the sales and servicing of the Sharon-Philstone
division, distributors of fasteners to the retail hardware marketplace with
annual sales of approximately $14,000 for the twelve-month period prior to
acquisition. The purchase price was $5,460 for inventory and other assets
including certain post-closing adjustments.
In December 2000, the Board approved a plan to liquidate the Mexican
segment which provided comprehensive inventory management services of
maintenance, repair and operating materials to large manufacturing plants in
Mexico. The Company recorded a pre-tax loss on liquidation of approximately
$4,572 representing non-cash charges for accumulated translation losses, the
write-down of inventories and other assets, and other liquidation-related costs.
The liquidation process was substantially completed as of June 30, 2001.
F-8
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
3. CONTRIBUTION OF SUBSIDIARIES/ACQUISITIONS/DIVESTITURES: -- (CONTINUED)
On June 19, 2001, the Company announced that it had signed a definitive
merger agreement in which Allied Capital Corporation ("Allied") would acquire
all of the outstanding common stock of the Company for cash or stock aggregating
approximately $72,000 or $10.375 per SunSource common share. Upon consummation
of the merger SunSource will become a privately owned portfolio company
controlled by Allied. Management of the Company will participate with Allied in
the buyout transaction and will retain an approximate 6% ownership position on a
fully diluted basis in the new portfolio company. On July 2, 2001, Allied
announced that it had elected the cash option to complete the acquisition. It is
anticipated that the merger transaction will close by September 30, 2001.
4. LINES OF CREDIT/NOTES PAYABLE/LONG-TERM DEBT:
On December 15, 1999, the Company refinanced its $60,000 senior notes and
$90,000 bank revolving credit with $155,000 in senior credit facilities (the
"Credit Agreement") consisting of $130,000 in revolving bank credit (the
"Revolver") and a $25,000 term loan (the "Term Loan"). The Credit Agreement has
a five-year term whose revolver availability is based on the Company's eligible
receivables and inventory balances (the "Borrowing Base") evaluated on a monthly
basis. On April 7, 2000, the Company amended the Credit Agreement to reduce the
Revolver to $115,000.
As of June 30, 2001, the Company's Borrowing Base was $89,592 consisting of
eligible receivables and inventory balances totaling $95,770 less letter of
credit commitments outstanding of $6,178. As of June 30, 2001, the Company had
$17,507 available under the Revolver. The Company had $75,767 of outstanding
debt at June 30, 2001, consisting of bank revolver borrowings of $72,085, an
outstanding Term Loan of $2,375 and capital lease obligations and other debt of
$1,307. The Company and its domestic and foreign corporate subsidiaries are
borrowers and guarantors ("Credit Parties") under the Credit Agreement. Each
credit party assigned, pledged and granted a security interest in and to all its
assets as collateral.
Accounts payable includes $6,690 representing checks issued and outstanding
as of June 30, 2001, for which funds would have been drawn against the Company's
revolving credit facility if they had been presented on that date.
On April 7, 2000, in connection with the acquisition of Axxess, the Company
issued a $12,000 unsecured subordinated note. In connection with the sale of
Harding on April 13, 2000, the Company repaid $9,600 of this unsecured
subordinated note and the balance of $2,400 was repaid on April 6, 2001 along
with accrued interest of $385.
On April 7, 2000, in connection with the acquisition of Axxess, the Company
through its Hillman Group subsidiary issued an $11,000 unsecured subordinated
note. The note is payable in seven equal quarterly installments commencing the
earlier of i) the first calendar quarter after payment in full of the Term Loan
or ii) March 31, 2004. Interest on the subordinated note ranges from prime plus
1% to prime plus 5% with a maximum rate at any time of 15%. Interest is payable
upon maturity and compounds annually. On June 29, 2001, Allied purchased the
subordinated note from its holders for $8,500. To induce Allied to purchase the
note, SunSource entered into a letter agreement in which SunSource agreed to
conditions that would, during such time that Allied owns the note: 1) limit
additional debt that the Company can incur, 2) restrict prepayment of the
guaranteed preferred beneficial interests, 3) require the Company to use its
best efforts to obtain the consent of its senior lenders to allow the repurchase
of this note and allow a concurrent investment by Allied in the Company, and 4)
prohibit the Hillman Group from transferring or assigning its obligation under
the note. As of June 30, 2001, the Company's
F-9
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
4. LINES OF CREDIT/NOTES PAYABLE/LONG-TERM DEBT: -- (CONTINUED)
consolidated balance sheet included $12,494 in long-term unsecured subordinated
notes related to the Axxess acquisition of which $1,494 represents accrued
interest.
On December 28, 2000, the Company issued $30,000 of unsecured subordinated
notes (the "Subordinated Debt Issuance") which mature December 28, 2006.
Interest on the Subordinated Debt Issuance is 12.5%, and interest payments are
required quarterly commencing January 1, 2001. The Company issued the holder of
the subordinated notes the right to purchase 285,000 shares of the Company's
common stock at a nominal value. As of June 30, 2001, the Company's consolidated
balance sheet carries the subordinated debt at $29,178 which reflects a discount
of $822 to record the fair market value of stock purchase rights issued to the
holders of the subordinated debt. The note discount is being amortized over the
life of the debt issuance.
5. CONTINGENCIES:
On February 27, 1996, a lawsuit was filed against the Company by the buyer
of its Dorman Products division for alleged misrepresentation of certain facts
by the Company upon which the buyer allegedly based its offer to purchase
Dorman. The complaint seeks damages of approximately $21,000.
Certain other legal proceedings are pending which are either in the
ordinary course of business or incidental to the Company's business. Those legal
proceedings incidental to the business of the Company are generally not covered
by insurance or other indemnity.
In the opinion of management, the ultimate resolution of the pending
litigation matters will not have a material effect on the consolidated financial
position, operations or cash flows of the Company.
6. STOCKHOLDERS' EQUITY:
EARNINGS PER SHARE:
The Company computes earnings per share in accordance with SFAS 128,
"Earnings per Share". SFAS 128 requires the presentation of basic and diluted
earnings per share for companies with complex capital structures. Basic earnings
per share is a per share measure of an entity's performance computed by dividing
income or loss available to common stockholders (the numerator) by the weighted
average number of common shares outstanding during the period (the denominator).
Diluted earnings per share measures the entity's performance taking into
consideration common shares outstanding (as computed under basic earnings per
share) and dilutive potential common shares, such as stock options. However,
entities with a net loss do not include common stock equivalents in the
computation of diluted earnings per share, as the effect would be anti-dilutive.
For the six months ended June 30, 2001, the Company recorded a net loss.
Therefore, basic and diluted earnings per share are equal during these periods,
as potential common shares are not included as inclusion of such shares would
have an anti-dilutive effect.
Under the Company's Equity Compensation Plan, certain executives and key
employees were granted a total of 1,156,500 options through June 30, 2001, to
purchase the Company's common shares having a potentially dilutive effect on
earnings per share. Due to market conditions, the shares granted under this plan
did not have a material dilutive effect on earnings per share for the six months
ended June 30, 2000.
F-10
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
6. STOCKHOLDERS' EQUITY: -- (CONTINUED)
COMMON SHARES ISSUED TO CERTAIN NON-EMPLOYEE DIRECTORS:
Under the Company's Stock Compensation Plan for Non-Employee Directors,
certain non-employee directors were issued 16,807 common shares in the first six
months of 2001, which resulted in a compensation charge of $58.
7. SEGMENT INFORMATION:
The Company has two reportable segments which are the Hillman Group and
Technology Services. The two segments are disaggregated based on the products
and services provided, markets served, marketing strategies and delivery
methods. The Company measures segment profitability and allocates corporate
resources based on each segment's Earnings Before Interest, Taxes, Depreciation
and Amortization ("EBITDA") which is defined as income from operations before
depreciation and amortization. The Company also measures the segments on
performance of their tangible asset base.
F-11
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS)
7. SEGMENT INFORMATION: -- (CONTINUED)
Following is a tabulation of segment information for the six months ended
June 30, 2001 and 2000. Corporate information is included to reconcile segment
data to the consolidated financial statements.
Following is a supplemental table of segment tangible assets for ongoing
operations as of June 30, 2001, and December 31, 2000.
F-12
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
SunSource Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of SunSource Inc. and its subsidiaries at December 31, 2000 and 1999
and the results of their operations and their cash flows for each of the three
years in the period ending December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the accompanying index
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and the significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 8, 2001
F-13
SUNSOURCE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-14
SUNSOURCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-15
SUNSOURCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS)
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-16
SUNSOURCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 2000
(DOLLARS IN THOUSANDS)
- ---------------
(1) Cumulative foreign translation adjustment represents the only item of other
comprehensive income.
(2) Accumulated deficit in 2000 includes $709 in undistributed earnings related
to the Company's investment in G-C Sun Holdings, L.P. which the Company
accounts for under the equity method.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-17
SUNSOURCE INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION ACCOUNTS
(DOLLARS IN THOUSANDS)
- ---------------
Notes:
(A) Includes write-off of accounts receivable (net of bad debt recoveries) and
inventories.
(B) Write-off of deferred financing fee as a result of early extinguishment of
debt related to the Company's bank revolving credit.
F-18
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION:
The accompanying financial statements include the consolidated accounts of
SunSource Inc. (the "Company" or "SunSource") and its indirect wholly-owned
subsidiaries including The Hillman Group, Inc. (the "Hillman Group"), SunSource
Technology Services, Inc. ("Technology Services"or "STS"), SunSub C, formerly
Harding Glass, Inc. ("Harding") and SunSource Capital Trust (the "Trust"). For
1998 the accompanying financial statements include the consolidated accounts of
the Company, its predecessor, SunSource L.P. (the "Partnership"), and its
wholly-owned subsidiaries including SDI Operating Partners, L.P. (the "Operating
Partnership") and the Trust. All significant inter-company balances and
transactions have been eliminated.
Effective with the close of business on December 31, 1998, the Company
reorganized the Operating Partnership by contributing its assets and liabilities
to newly-formed, indirect, wholly-owned corporate subsidiaries organized
according to the Company's current operating structure (the "Reorganization").
As a result of the Reorganization, the Operating Partnership and its general
partner, SDI Partners I, L.P.(the "G.P.") cease to exist. In connection with the
Reorganization, the Company amended its debt financing agreements (see Notes 10
and 11).
NATURE OF OPERATIONS:
The Company is one of the leading providers of value-added services and
products to retail and industrial markets in North America. The Company
currently operates through two segments: (1) the Hillman Group and (2)
Technology Services. The Company also has an investment in an affiliate, G-C Sun
Holdings, L.P., operating as Kar Products.
The Hillman Group provides small hardware-related products, keys and
accessories and identification items including merchandising services to retail
outlets, primarily hardware stores, home centers, lumberyards and mass
merchants. STS provides engineering, repair and fabrication services as well as
parts and equipment to manufacturers throughout the U.S. and Canada. Kar
Products distributes maintenance and repair parts and offers customized
inventory management services to commercial and industrial customers of all
sizes in the U.S. and Canada.
The Hillman Group and STS accounted for 49%, and 51% respectively, of the
Company's consolidated 2000 net sales from ongoing operations. On a consolidated
basis, the Company has over 50,000 customers, the largest of which accounted for
less than 10% of net sales. The Company's foreign sales in Canada accounted for
less than 5% of its consolidated 2000 net sales. The average single sale was
less than four hundred dollars. Sales performance is tied closely to the overall
performance of the non-defense-goods producing sector of Gross Domestic Product
in the United States.
DISCONTINUED OPERATIONS:
In December 1999, the Company's Board of Directors approved management's
plan to dispose of the Company's Harding business. In December 2000, the
F-19
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION: -- (CONTINUED)
DISCONTINUED OPERATIONS: -- (CONTINUED)
Company's Board of Directors also approved management's plan to liquidate the
Company's Integrated Supply - Mexico business (the "Mexican segment").
Accordingly, Harding and the Mexican segment have been accounted for as
discontinued operations with results of operations segregated from results of
the Company's ongoing businesses including restatement of the prior periods
presented. On April 13, 2000, the Company consummated the sale of Harding.
SunSource expects to complete the liquidation of the Mexican Segment by June 30,
2001. See Note 4, Acquisitions and Divestitures.
For the year ended December 31, 1999, the Company recorded an after-tax
loss of $2,188 from Harding's operations and an estimated loss on its expected
disposal of $23,834 unadjusted for any potential future tax benefits. For the
year ended December 31, 2000, the Company recorded an additional loss on
disposal of the discontinued Harding segment of $5,322 less an income tax
benefit of $7,191. Through December 31, 2000, the Company has recorded a loss on
disposal of the discontinued Harding segment of $21,965 in the aggregate, net of
tax benefits.
The estimated loss recorded during the year ended December 31, 2000 on the
liquidation of the Mexican segment was $4,370 net of an income tax benefit of
$202.
F-20
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION: -- (CONTINUED)
DISCONTINUED OPERATIONS: -- (CONTINUED)
Following is summary financial information for the Company's discontinued
Harding and Mexican operations:
As of December 31, 2000 and 1999, the Company had net assets held for sale
of the discontinued operations of $1,767 and $37,079, respectively, consisting
of receivables, inventories, prepaid assets, and property and equipment, and
accrued
F-21
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION: -- (CONTINUED)
DISCONTINUED OPERATIONS: -- (CONTINUED)
liabilities of $2,407 and $2,703, respectively, reserved for the loss on
disposal of the discontinued segments.
CONVERSION TO CORPORATE FORM:
On September 25, 1997, the limited partners of the Partnership approved the
conversion of the Partnership to a corporation effective at the close of
business on September 30, 1997 (the "Conversion"). As a result of the
Conversion, the Class A limited partnership interests in the Partnership were
converted into cash and Guaranteed Preferred Beneficial Interests in the
Company's Junior Subordinated Debentures (the "Trust Preferred Securities",
which were issued by the Trust), and the Class B limited partnership interests
in the Partnership were converted into common stock of the Company and the
general and limited partnership interests in the GP, which was also the general
partner of the Partnership, were exchanged with the Company for 1,000,000 shares
of its common stock.
1999 RESTRUCTURING CHARGES AND ASSET WRITE-DOWNS:
On June 29, 1999, the Board of Directors of SunSource Inc. approved the
Company's restructuring plan to reposition Technology Services and Kar Products,
write-down impaired assets at the Hillman Group, and realign corporate overhead
expenses. As a result of this plan, the Company recorded a restructuring charge
of $10,248.
The Technology Services charge and write-downs aggregated $5,392 including
termination benefits of $2,744, an inventory write-down of $2,130, other exit
costs of $415 and a write-down of unamortized leasehold improvements of $103.
The termination benefits of $2,744 covered approximately 94 employees. The other
exit costs and write-down of unamortized leasehold improvements were related to
lease buyouts and losses on the sale of owned facilities as a result of
Technology Services' facilities consolidation. The inventory write-down of
$2,130 was the result of a reduction in vendor lines resulting principally from
the facility consolidation process.
The Kar Products charge amounted to $1,020 comprised solely of termination
benefits for about 10 employees.
The Hillman Group's asset write-down was $3,300 and was primarily the
result of the Hillman Group's decision not to seek recovery of key machines from
retailers. The write-down represented the total net book value of key machines
that had been capitalized as of June 30, 1999.
The Corporate Headquarters component of the restructuring charge aggregated
$536 comprised of other exit costs of $434 and termination benefits of $102 for
two employees. The other exit costs included lease termination costs of $101 and
unamortized leasehold improvements of $333 on certain assets.
F-22
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION: -- (CONTINUED)
1999 RESTRUCTURING CHARGES AND ASSET WRITE-DOWNS: -- (CONTINUED)
The following table summarizes the restructuring costs and asset
write-downs charged, the balance sheet classification, and payments or
adjustments made during 2000.
The Board's approval of the restructuring plan provided the Company's
management with the authority to involuntarily terminate employees. The Company
established the levels of benefits that the terminated employees received and
informed the employees of their termination benefits prior to the close of
business on June 30, 1999. Termination payments to date represent severance
payments for approximately 106 employees. The remaining $295 in other accrued
expense at December 31, 2000, is primarily associated with termination benefits.
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.
RESTRICTED CASH:
Restricted cash represents cash received as a result of the surrender of
life insurance policies by the Company on December 29, 2000 and held in a Rabbi
Trust to fund deferred compensation liabilities due to the Company's employees.
(See Note 13.)
INVENTORIES:
Inventories consisting predominantly of finished goods are valued at the
lower of cost or market, cost being determined principally on the first-in,
first-out method.
F-23
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
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 thirty 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 in the acquisition of Axxess Technologies, Inc. ("Axxess")
and the purchase of inventory and other assets of the Sharon-Philstone division
of Pawtucket Fasteners, L.P. ("Sharon-Philstone") discussed in Note 4 is
amortized on a straight-line basis over twenty-five years. All other 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 are amortized on a
straight-line basis over periods ranging from three to ten years.
LONG-LIVED ASSETS:
Under the provisions of Statement of Financial Accounting Standard ("SFAS")
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of", the Company has evaluated its long-lived assets and
certain identifiable intangibles including goodwill for financial impairment,
and will continue to evaluate them, based on the estimated undiscounted future
cash flows, as events or changes in circumstances indicate that the carrying
amount of such assets may not be fully recoverable. See Note 1, "Restructuring
Charges" for information on the write-down of assets related to the Hillman
Group's key machines.
INCOME TAXES:
Deferred income taxes are computed using the liability method. Under this
method, deferred income tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
(temporary differences) and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
F-24
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
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.
Certain employees are covered under post-retirement benefit plans for which
benefits are determined in accordance with the requirements of each plan.
REVENUE RECOGNITION:
Revenue from sales of products is recorded upon the passing of title and
risks of ownership which usually occurs upon the shipment of goods.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Cash, accounts receivable, short-term borrowings, accounts payable, accrued
liabilities and bank revolving credit are reflected in the consolidated
financial statements at fair value due to short-term maturity or revolving
nature of these instruments. The fair values of the Company's debt instruments
are disclosed in Note 11. The fair value of the Trust Preferred Securities is
disclosed in Note 14.
TRANSLATION OF FOREIGN CURRENCIES:
The translation of applicable foreign-currency-based financial statements
into U.S. dollars is performed for balance sheet accounts using exchange rates
in effect at the balance sheet date and for revenue and expense accounts using
an average exchange rate during the period.
Exchange adjustments resulting from foreign currency transactions are
recognized in net income and were immaterial for the three years ended December
31, 2000.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
3. RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards Board ("the FASB") issued
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
133 establishes accounting and reporting standards for derivative financial
instruments and hedging activities, and requires the Company to recognize all
derivatives as either assets or liabilities on the balance sheet and measure
them at fair value. Gains and losses resulting from changes in fair value would
be accounted for depending on
F-25
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3. RECENT ACCOUNTING PRONOUNCEMENTS: -- (CONTINUED)
the use of the derivative and whether it is designated and qualifies for hedge
accounting. In June 1999, the FASB issued SFAS 137, which defers the
implementation of SFAS 133. The Company will be required to implement SFAS 133
in fiscal year 2001. The adoption of SFAS 133 has not had a material impact on
the Company's financial statements.
On June 26, 2000 the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101B which extended the implementation date of
SAB 101, "Revenue Recognition" to the three-month period ending December 31,
2000. SAB 101 provides guidance on the recognition, presentation, and disclosure
of revenue in financial statements. Management has determined that the adoption
of SAB 101 has not had a material impact on the Company's financial position and
results of operations.
4. ACQUISITIONS AND DIVESTITURES:
During 1998, Hillman acquired the assets of three companies that supply
keys, letters, numbers and signs and other products to retail hardware stores,
which were integrated into its existing operations. Net cash consideration paid
for the acquired businesses, including transaction costs, was $10,839, including
goodwill of $7,009, and the assumption of certain liabilities of $1,132.
On July 1, 1999, the Company sold the assets of Industrial Services'
Fastener Business serving original equipment manufacturers ("OEM") for a cash
consideration, net of expenses, of approximately $9,160 (subject to certain
post-closing adjustments) plus the assumption of certain liabilities. The
Company recorded an after-tax gain on the sale in the amount of $365 or $0.05
per common share. Sales from the OEM Fastener Business aggregated $10,954 for
the six months ended June 30, 1999 and $23,006 for the year ended December 31,
1998.
On March 2, 2000, the Company contributed the interests in its Kar
Products, Inc. and A & H Bolt & Nut Company Limited operations (collectively,
the "Kar" or "Kar Products" business) to a newly-formed partnership affiliated
with Glencoe Capital, L.L.C. ("Glencoe"). Glencoe contributed cash equity to the
new partnership, G-C Sun Holdings L.P. ("G-C"). The Company received $105,000 in
cash proceeds from the transaction through repayment of assumed debt by G-C and
retained a 49% minority ownership in G-C. Affiliates of Glencoe hold a
controlling interest in G-C. SunSource recorded a pre-tax gain on the
transaction of approximately $49,115 in the first quarter of 2000. Sales from
Kar aggregated $22,122 from January 1, 2000 to March 2, 2000, and $124,724 for
the year ended December 31, 1999. The Company accounts for its investment in the
partnership under the equity method. As of December 31, 2000, SunSource's
consolidated balance sheet includes $1,030 in other assets which represents the
Company's investment in G-C.
On April 7, 2000, the Company acquired Axxess Technologies, Inc. ("Axxess"
or "Axxess Technologies") of Tempe, Arizona through a stock merger transaction.
Axxess is a manufacturer of key duplication and identification systems. The
transaction was structured as a purchase of 100% of the stock of the privately
held
F-26
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
4. ACQUISITIONS AND DIVESTITURES: -- (CONTINUED)
company and repayment of outstanding Axxess debt in exchange for $87,000 in cash
and $23,000 in subordinated notes. In connection with the sale of Harding on
April 13, 2000, the Company repaid $9,600 of these subordinated notes leaving a
balance of $13,400 comprised as follows: 1) a $2,400 15% note due April 7, 2001
and 2) an $11,000 note which is payable in seven equal quarterly installments
commencing the earlier of i) the first calendar quarter after payment in full of
the Term Loan extended by the Company's senior lenders or ii) March 31, 2004.
Interest on the $11,000 subordinated note ranges from prime plus 1% to prime
plus 5% with a maximum rate at any time of 15%. The aggregate consideration for
the transaction was $111,537, including $87,000 in cash, $23,000 in subordinated
notes and transaction costs of $1,537, plus the assumption of certain
liabilities aggregating $13,924. Axxess recorded goodwill and other intangible
assets of $48,085 related to this acquisition. Axxess sales aggregated $20,012
for the three months ended March 31, 2000, and $82,132 for the year ended
December 31, 1999. Axxess' results of operations are included in the results of
the Hillman Group from the date of acquisition.
On April 13, 2000, the Company sold substantially all of the assets of
Harding for a cash purchase price of $30,592 plus the assumption by the buyer of
certain liabilities aggregating $12,693, subject to certain post-closing
adjustments.
On October 4, 2000, the Company's Kar Products affiliate through the
partnership formed with Glencoe Capital acquired all of the outstanding stock of
Brampton Fastener Co. Limited, d/b/a Brafasco, based in Toronto, Canada. G-C
purchased the outstanding stock of Brafasco for cash and notes. Brafasco is a
supplier of maintenance and repair products serving primarily industrial
customers. Brafasco had sales of $26,623 ($CDN) for the year ended December 31,
1999. As a result of this transaction, the Company holds a 44% ownership in the
Kar Products affiliate.
On November 3, 2000, the Company's Hillman Group subsidiary purchased
inventory and other assets of the Sharon-Philstone division of Pawtucket
Fasteners, L.P. of Rhode Island. The Hillman Group assumed the sales and
servicing of the Sharon-Philstone division, distributors of fasteners to the
retail hardware marketplace with current annual sales of approximately $14,000.
The purchase price was $1,870 for inventory and other assets acquired at closing
and a commitment to purchase additional inventory and other assets in the amount
of approximately $3,928 over the next fourteen months, subject to certain
post-closing adjustments.
In December 2000, the Board approved a plan to liquidate the Mexican
segment which provided comprehensive inventory management services of
maintenance, repair and operating materials to large manufacturing plants in
Mexico. The Company recorded a pre-tax loss on liquidation of approximately $4.6
million representing non-cash charges for accumulated translation losses, the
write-down of inventories and other assets, and other liquidation costs. The
Company expects to complete the liquidation process during the first half of
2001.
F-27
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
4. ACQUISITIONS AND DIVESTITURES: -- (CONTINUED)
The following disclosures indicate the Company's estimate of financial
results had the 2000 acquisitions been consummated on January 1, 1999:
5. RELATED PARTY TRANSACTIONS:
From January 1, 1997 through September 30, 1998, a former member of the
Company's Board of Directors was a partner in a law firm which represented the
Company in various matters. Payments to this law firm were $389 in 1998. Amounts
payable to this law firm were $109 at December 31, 1998.
An affiliate of a firm which owned beneficially more than 5% of the
Company's Common Shares during 1998 performed investment banking services for
the Company in 1998. Payments for these services were $361 in 1998.
A member of the Company's Board of Directors is an officer of a firm which
performed investment banking services for the Company in 1998. Payments for
these services were $361 in 1998.
6. INCOME TAXES:
The total income tax provision (benefit) was allocated for the three years
ended December 31, of 2000 as follows:
F-28
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
6. INCOME TAXES: -- (CONTINUED)
The components of the Company's provision (benefit) for income taxes from
continuing operations are as follows for the three years ended December 31:
The Company has U.S. federal net operating loss ("NOL") carryforwards for
tax purposes, totaling $29,600 as of December 31, 2000, that are available to
offset future taxable income. These carryforwards expire in 2019.
The Company has state net operating loss carryforwards with an aggregate
tax benefit of $6,317 which expire from 2001 to 2018. A valuation allowance of
$6,140 has been established for these deferred tax assets.
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of the assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
F-29
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
6. INCOME TAXES: -- (CONTINUED)
The table below reflects the significant components of the Company's net
deferred tax assets and liabilities at December 31, 2000 and 1999:
Realization of the net deferred tax assets is dependent on generating
sufficient taxable income prior to their expiration. Although realization is not
assured, management believes it is more likely than not that the net deferred
tax assets will be realized. The amount of net deferred tax assets considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward periods are reduced.
F-30
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
6. INCOME TAXES: -- (CONTINUED)
Below is a reconciliation of statutory federal income tax rates to the
effective tax rates for the twelve months ended December 31, 2000, December 31,
1999 and December 31, 1998:
7. EXTRAORDINARY LOSSES:
In 1999, in connection with the early extinguishment of debt, the Company
expensed capitalized financing costs of $361 and recorded an extraordinary loss
of $235 (net of deferred tax benefits of $126). (See Note 10.)
8. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following at December 31, 2000 and
1999:
- ---------------
(1) Buildings owned in 1999 were sold in 2000.
9. NOTES PAYABLE:
Notes payable consisted of casualty insurance financing of $624 at December
31, 2000 and $376 at December 31, 1999. The interest rate on the outstanding
notes payable borrowings at December 31, 2000 and 1999 was 7.47% and 6.18%,
respectively.
F-31
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
9. NOTES PAYABLE: -- (CONTINUED)
On April 7, 2000, in connection with the acquisition of Axxess, the Company
issued a $12,000 unsecured subordinated note. In connection with the sale of
Harding on April 13, 2000, the Company repaid $9,600 of this unsecured
subordinated note leaving a balance of $2,400. The note is payable on April 7,
2001. Interest on the unsecured subordinated note is payable upon maturity at
15% and compounds quarterly. As of December 31, 2000, the Company's consolidated
balance sheet included $2,677 in the current portion of unsecured subordinated
notes related to the Axxess acquisition of which $277 represents accrued
interest.
10. REVOLVING CREDIT LINE:
On December 15, 1999, the Company refinanced its $60,000 senior notes and
$90,000 bank revolving credit with $155,000 in senior secured credit facilities
(the "Refinancing") consisting of $130,000 in revolving bank credit (the
"Revolver") and a $25,000 term loan (the "Term Loan", see Note 11). The new
credit agreement has a five-year term (the "Credit Agreement") whose Revolver
availability is based on the Company's receivables and inventory balances (the
"Borrowing Base") evaluated on a monthly basis. The Company and its domestic and
foreign corporate subsidiaries are borrowers and guarantors ("Credit Parties")
under the Credit Agreement. Each credit party assigned, pledged and granted a
security interest in and to all its assets as collateral. The Credit Agreement
provided borrowings at interest rates based on the London Interbank Offered
Rates ("LIBOR") plus a margin of between 2.50% and 3.00% (the "LIBOR Margin") in
accordance with debt covenants as stated in the Credit Agreement, or prime.
Letters of Credit commitment fees are based on the average daily face amount of
each outstanding Letter of Credit multiplied by one and one half percent (1.50%)
per annum. On April 7, 2000, the Company amended the Credit Agreement to reduce
the Revolver to $115,000. On December 28, 2000, the Company further amended the
Credit Agreement in connection with the Subordinated Debt Issuance (see Note 11)
and as a result the LIBOR Margin on the Revolver was amended to between 2.25%
and 3.25% in accordance with the Company's fixed charge coverage ratio.
As of December 31, 2000, the Company's Borrowing Base was $80,451
consisting of receivables and inventory balances totaling $87,301 less letter of
credit commitments outstanding of $6,850. The Revolver balance was $55,111 as
reflected on the Company's consolidated balance sheet at December 31, 2000. As
of December 31, 2000, the Company had $26,344 available under the revolver.
Amounts outstanding under the Credit Agreement are due upon its termination on
December 14, 2004.
The Credit Agreement, among other provisions, contains financial covenants
requiring the maintenance of specific coverage ratios, levels of undrawn
availability and restricts the incurrence of additional debt, the sale of assets
and dividends on the Company's common stock. If the Company sells any assets
other than inventory, it must repay the advances under the Credit Agreement in
an amount equal to the net proceeds of such sale. Such repayments shall be
applied first to the outstanding
F-32
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
10. REVOLVING CREDIT LINE: -- (CONTINUED)
principal installments of the Term Loan (see Note 11) and second, to the
remaining advances in such order as the lenders may determine.
As of December 31, 2000, the LIBOR rate was 6.57%, the LIBOR Margin was
2.75% and the prime rate was 9.50%. The Company's weighted-average interest rate
for borrowings under its revolving credit facilities was 9.23%, 7.11%, and 7.05%
for the years ended December 31, 2000, 1999, and 1998, respectively.
11. LONG-TERM DEBT:
On December 15, 1999, the Company as part of the Credit Agreement entered
into a five-year $25,000 Term Loan. Upon closing of the Credit Agreement, the
Company made a principal payment of $3,500 on the Term Loan. The Term Loan is
collateralized in accordance with the provisions of the Credit Agreement (See
Note 10). The Term Loan provides borrowings at interest rates based on LIBOR
plus the LIBOR Margin in accordance with certain leverage ratios as stated in
the Credit Agreement, or prime. During 2000, the Company repaid $19,000 of the
Term Loan, reducing the balance to $2,500 of which $375 is reflected in the
current portion of long-term senior bank debt and $2,125 is reflected in
long-term senior bank debt on the Company's consolidated balance sheet at
December 31, 2000.
On April 7, 2000, in connection with the acquisition of Axxess, the Company
issued an $11,000 unsecured subordinated note. The note is payable in seven
equal quarterly installments commencing the earlier of i) the first calendar
quarter after payment in full of the Term Loan or ii) March 31, 2004. Interest
on the subordinated note ranges from prime plus 1% to prime plus 5% with a
maximum rate at any time of 15%. Interest is payable upon maturity and compounds
annually. The Company can repay interest and principal on this note at any time.
As of December 31, 2000, the Company's consolidated balance sheet included
$11,857 in long term unsecured subordinated notes related to the Axxess
acquisition of which $857 represents accrued interest.
On December 28, 2000, the Company issued $30,000 of unsecured subordinated
notes (the "Subordinated Debt Issuance") which matures December 28, 2006.
Interest on the Subordinated Debt Issuance is 12.5%, and interest payments are
required quarterly commencing January 1, 2001. The Company issued the holder of
the subordinated notes the right to purchase 285,000 shares of the Company's
common stock at a nominal value. In accordance with APB 14 - Accounting for
Convertible Debt and Debt Issued with Stock Purchased Warrants, the Company
recorded the Subordinated Debt Issuance and stock purchase rights issued to the
holders at a fair market value of $29,103 which is included in long term
unsecured subordinated notes as of December 31, 2000. The fair market value of
the Subordinated Debt Issuance reflects a discount of $897 from its face value
which will be amortized over the six-year life of the issuance.
As of December 31, 2000, the Company's weighted-average interest rate for
the Term Loan was 9.50%. Interest is required to be paid monthly on the daily
outstanding principal of the Term Loan. Principal payments of $125 are required
to
F-33
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
11. LONG-TERM DEBT: -- (CONTINUED)
be paid quarterly commencing on April 1, 2001, and on the first day of each
July, October, January and April thereafter until December 14, 2004 when the
entire unpaid principal balance of the Term Loan shall be due and payable.
As of December 31, 2000, the estimated fair value of the Company's Term
Loan is approximately $2,179 as determined in accordance with SFAS 107. The
Company discounted the future cash flows of its Term Loan based on borrowing
rates for debt with similar terms and remaining maturities. The fair value
estimate is made at a specific point in time and is subjective in nature and
involves uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions could significantly affect
the estimate.
12. 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,
2000:
Total rental expense for all operating leases from continuing operations
amounted to $11,407 in 2000, $12,562 in 1999, and $11,035 in 1998. Certain
leases are subject to terms of renewal, and escalation clauses.
13. DEFERRED COMPENSATION PLANS:
SunSource maintains a deferred compensation plan for key employees (the
"Nonqualified Deferred Compensation Plan") which allows for deferral of cash
compensation from salary and annual bonuses. The Nonqualified Deferred
Compensation Plan also includes awards that were made under previous long-term
incentive plans of the Company. Executive deferrals can grow at mutual fund
investment rates.
The Company had established a Rabbi Trust (the "Rabbi Trust") which held
insurance policies to assist in funding the liabilities of the deferred
compensation plan. On December 29, 2000, the Company surrendered the insurance
policies and switched all investments to mutual fund investment accounts. Upon
termination of
F-34
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
13. DEFERRED COMPENSATION PLANS: -- (CONTINUED)
the insurance policies, the Company incurred a cash surrender charge of $506 in
December 2000. The insurance policies had a net cash surrender value which
aggregated $11,530 at December 29, 2000. As of December 31, 2000, the Company's
consolidated balance sheet included $10,955 of the cash surrender value of the
insurance policies in restricted cash and $575 in other current assets.
Except for the cash surrender charge in December 2000, there were no other
amounts charged to income under the Company's deferred compensation plans in
2000, 1999 and 1998. During the three years ended December 31, 2000,
distributions from the deferred compensation plans aggregated $2,714 in 2000,
$252 in 1999, and $26 in 1998. The Company's deferred compensation liabilities
amounted to $12,411 as of December 31, 2000 and $14,728 as of December 31, 1999.
The current portion of these deferred compensation liabilities were $4,543 and
$555 as of December 31, 2000 and 1999, respectively, and were included in other
accrued expenses on the consolidated balance sheets.
14. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE COMPANY'S JUNIOR
SUBORDINATED DEBENTURES:
In connection with the Conversion, Class A interests of the Partnership
were exchanged for Trust Preferred Securities of the Trust, as discussed in Note
1. The Trust was organized in connection with the Conversion for the purpose of
(a) issuing its Trust Preferred Securities to the Company in consideration of
the deposit by the Company of Junior Subordinated Debentures in the Trust as
trust assets, and its Trust Common Securities to the Company in exchange for
cash and investing the proceeds thereof in an equivalent amount of Junior
Subordinated Debentures and (b) engaging in such other activities as are
necessary or incidental thereto.
The Trust had no operating history prior to the issuance of the Trust
Preferred Securities. The terms of the Junior Subordinated Debentures include
those stated in the Indenture (the "Indenture") between the Company and the
indenture trustee, and those made part of the Indenture by the Trust Indenture
Act.
The Company has guaranteed on a subordinated basis the payment of
distributions on the Trust Preferred Securities and payments on liquidation of
the Trust and redemption of Trust Preferred Securities (the "Preferred
Securities Guarantee"). The sole assets of the Trust are the Junior Subordinated
Debentures and the obligations of the Company under the Indenture, the Preferred
Securities Guarantee and the Junior Subordinated Debentures in the aggregate
constitute a full and unconditional guarantee by the Company of the Trust's
obligations under the Trust Preferred Securities.
The Trust Preferred Securities have equity characteristics but creditor's
rights and are therefore classified between liabilities and stockholders' equity
(deficit) on the balance sheet. On September 30, 1997, the Trust Preferred
Securities were recorded at fair value of $115,991 based on the price of the
Class A interests of $11.75 upon close of trading on the New York Stock Exchange
on that date. The Trust Preferred
F-35
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
14. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE COMPANY'S JUNIOR
SUBORDINATED DEBENTURES: -- (CONTINUED)
Securities have a liquidation value of $25.00 per security. The excess of fair
value of the Trust Preferred Securities on September 30, 1997 over their
liquidation value of $105,446, or $10,545 is amortized over the life of the
Trust Preferred Securities. The fair value of the Trust Preferred Securities on
December 31, 2000 was $62,739, based on the closing price on the New York Stock
Exchange of $14.875 per security on that date.
The interest payments on the Junior Subordinated Debentures underlying the
Trust Preferred Securities, aggregating $12,232 per year, are deductible for
federal income tax purposes under current law and will remain an obligation of
the Company until the Trust Preferred Securities are redeemed or upon their
maturity in 2027.
15. STOCKHOLDERS' EQUITY (DEFICIT):
TREASURY STOCK:
On August 6, 1998, the Company's Board of Directors authorized $15,000 for
management to repurchase up to 10% of the Company's outstanding common shares
through open market transactions and private block trades dependent upon market
conditions. The Company subsequently suspended the repurchase program on March
16, 1999. The Company has acquired and placed into treasury 479,100 common
shares through December 31, 2000, at an average cost of $18.17 per common share.
COMMON SHARES ISSUED TO CERTAIN NON-EMPLOYEE DIRECTORS:
Under the Company's Stock Compensation Plan for Non-Employee Directors,
certain non-employee directors were issued 23,581 and 11,293 Common Shares for
the years ended December 31, 2000 and 1999, respectively. Under the terms of the
plan, non-employee directors are issued Common Shares on a quarterly basis to
cover at least 50% and up to 100% of their annual retainer fee. The number of
shares to be issued is dependent upon the market price of the Common Shares, the
number of directors receiving shares, and the percentage of their annual
retainer that each director elects to receive in Common Shares. The Company
recognized an expense of $105 and $119 with respect to the issuance of Common
Shares to non-employee directors in 2000 and 1999, respectively.
STOCK OPTIONS:
On April 28, 1998, the Company adopted the Equity Compensation Plan (the
"Plan"), after approval by stockholders at the 1998 Annual Meeting. Grants under
the Plan may consist of options intended to qualify as incentive stock options
("ISO"), or non-qualified stock options that are not intended to so qualify
("NQSO"). In addition, grants may also consist of grants of restricted stock,
stock appreciation rights (SAR's), or performance units. The option price of any
ISO will not be less than the fair market value on the date the option is
granted (110% of fair
F-36
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
15. STOCKHOLDERS' EQUITY (DEFICIT): -- (CONTINUED)
STOCK OPTIONS: -- (CONTINUED)
value in certain instances). The option price of a NQSO may be greater than,
equal to, or less than the fair market value on the date the option is granted
(but not less than 85% of the fair market value). The number of options
available for the Plan (the "Applicable Percentage") is calculated annually and
cumulatively at the rate of 5% of shares outstanding per year. Prior to April
27, 1999, the maximum number of shares available under the Plan was 25% of the
total outstanding shares or 2,000,000 Common Shares. On April 27, 1999, the
stockholders of the Company approved a proposal to amend the 1998 Equity
Compensation Plan to increase the aggregate number of shares that may be issued
or transferred under the Plan to 2,150,000 shares. However, no more than the
Applicable Percentage of the number of shares issued and outstanding on the
effective date of the Plan and at any time thereafter may be issued or
transferred under the Plan; provided, however, that up to 150,000 shares were
issued under the Plan without reference to the Applicable Percentage in
connection with the hiring of a new chief executive officer of the Company.
The Plan is administered by a committee of the Board of Directors. The
Committee determines the term of each option, provided, however, that the
exercise period may not exceed ten years from the date of grant, and for ISO's,
in certain instances, may not exceed five years. The options granted under the
Plan vest based on the results of financial performance. If threshold financial
performance targets are not met, 100% of the options vest on the ninth
anniversary of the grant. If threshold performance targets are met, stock
options become fully vested within 3 to 5 years from the date of grant,
depending on performance.
A summary of the Company's stock option plan for the twelve months ended
December 31, 2000 is presented below:
F-37
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
15. STOCKHOLDERS' EQUITY (DEFICIT): -- (CONTINUED)
STOCK OPTIONS: -- (CONTINUED)
As of December 31, 2000, the 926,500 options outstanding under the Plan
have exercise prices between $3.00 and $18.88 and a weighted-average remaining
contractual life of 8.56 years.
During 2000, 1999 and 1998, the Company issued certain options at and below
the fair market price of the common stock on the grant date. For those options
issued with an exercise price equal to the fair market value, the
weighted-average exercise price was $4.50, $15.79 and $18.82 and the average
fair market value was $4.50, $16.00 and $18.84 in 2000, 1999 and 1998,
respectively. For options issued with an exercise price below fair market value
for the stock on their grant date, the weighted average exercise price was
$3.83, $12.75 and $15.99 and the average fair market value was $4.50, $15.00 and
$18.81 in 2000, 1999 and 1998, respectively.
Compensation expense of approximately $393 is being recognized over vesting
periods for certain options which were granted at below fair market value in
2000, 1999 and 1998 of which $79 was recognized in 2000, $70 was recognized in
1999 and $25 was recognized in 1998. If compensation cost had been based on the
fair value of the options at the grant dates, consistent with the method
required under SFAS 123, "Accounting for Stock-Based Compensation", the
Company's net income and net income per Common Share would have been:
Such pro forma disclosures may not be representative of future compensation
expense because options vest over several years and additional grants are made
each year.
The estimated weighted-average grant-date fair value of the options granted
during the year ended December 31, 2000 was $4.33 and the weighted-average
remaining contractual life of options outstanding at December 31, 2000 was 8.56
years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options-pricing model with the following weighted-average
assumptions used for grants in 2000, 1999 and 1998: expected volatility of 22.0%
for 2000, 23.1% for 1999 and 28.7% for 1998; risk free interest rates of 5.1% to
6.5% and expected lives of 5 and 9.5 years, based on differing vesting
schedules.
On April 27, 1999, a grant of 150,000 non-qualified stock options was made
to attract and retain a new Chief Executive Officer, (the "CEO Grant"). On
January 26, 2000, the Compensation Committee of the Board of Directors amended
the New CEO
F-38
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
15. STOCKHOLDERS' EQUITY (DEFICIT): -- (CONTINUED)
STOCK OPTIONS: -- (CONTINUED)
Grant by reducing the number of options from 150,000 to 50,000 and issued a
grant of 100,000 shares of restricted stock. One-third of the restricted shares
vested six months from the date of grant. Vesting of the remaining two-thirds of
the restricted shares will be based on achievement of certain performance goals.
In the event that all or some of the performance goals are not achieved within a
three-year period from the date of grant, the then remaining shares will vest on
the third anniversary from their date of grant. The Company incurred a
compensation charge of $240 in 2000 in connection with the issuance of the
restricted stock.
EARNINGS PER SHARE:
The Company computes earnings per share in accordance with SFAS 128,
"Earnings per Share". SFAS 128 requires the presentation of basic and diluted
earnings per share for companies with complex capital structures. As noted above
under "Stock Options", certain executives and key employees were granted a total
of 926,500 options through December 31, 2000 to purchase the Company's Common
Shares having a potentially dilutive effect on earnings per share. Due to market
conditions, the shares granted under the Plan did not have a material dilutive
effect on earnings per share for the twelve months ended December 31, 2000, 1999
and 1998.
The number of outstanding Common Shares as of December 31, 2000 was
6,873,037. The weighted-average number of Common Shares outstanding for the
twelve months ended December 31, 2000 was 6,856,549 for purposes of computing
basic net income (loss) per share and 6,880,613 for purposes of computing
diluted net income (loss) per share, including shares issued to non-employee
directors, net of the 479,100 shares repurchased and held in treasury.
F-39
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
15. STOCKHOLDERS' EQUITY (DEFICIT): -- (CONTINUED)
EARNINGS PER SHARE: -- (CONTINUED)
Following is a reconciliation of net income and weighted-average common
shares outstanding for purposes of calculating basic and diluted net income
(loss) per share, in thousands (except share and per share amounts):
In 2000 and 1998, the Company applied the if-converted method to compute
dilutive stock options, warrants and convertible debentures. The stock options,
warrants and convertible debentures were assumed to have been converted at the
beginning of the period, and the resulting common shares were included in the
calculation, as long as the effects were not anti-dilutive. The weighted-average
diluted common shares outstanding for 2000 and 1998 excludes the dilutive effect
of approximately 904,833 and 211,495 options, respectively, since such options
have an exercise price in excess of the average market value of the Company's
common stock during the year.
COMMON STOCK DIVIDEND:
On June 30, 1999, the Board of Directors of the Company suspended
indefinitely the quarterly cash dividend of $0.10 per Common Share.
16. RETIREMENT BENEFITS:
Certain employees of STS and the Company's divested operations are covered
by defined benefit pension plans and post-retirement benefit plans. In December
1999, the Board of Directors of the Company approved a proposal to freeze the
benefit accruals under the Technology Services defined benefit retirement plan
(the "STS Plan"). As a result, the Company recorded a curtailment gain of $5,608
in accordance with Statement of Financial Accounting Standards No. 88,
Employers'
F-40
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
16. RETIREMENT BENEFITS: -- (CONTINUED)
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits.
In December 2000, the Board of Directors approved a proposal to merge the
STS Plan with another Company owned plan which was held for certain divested
operations, and terminate the merged plans as of December 31, 2000. As a result,
the Company recorded a pre-tax loss on termination of the merged pension plans
of $4,279 in December 2000.
The $4,279 loss on termination of the defined benefit pension plans
represents an estimated surplus upon termination of the defined benefit pension
plans of $3,700, less a write-off of a prepaid pension asset of $7,424, and a
charge for estimated excise taxes of $555. The approved proposal also provides
for a contribution of 25% or $925 of the $3,700 estimated surplus upon
termination to the STS deferred contribution plan. During 2000, the Company
recorded a net periodic benefit of $1,500 related to expected investment returns
on the surplus assets of the STS Plan. As of December 31, 2000, the Company's
consolidated balance sheet included a prepaid pension asset of $3,700 of which
$2,775 was included in other current assets and $925 was in other assets. The
Company expects the termination process to be completed during the second half
of 2001.
The following provides a reconciliation of benefit obligations, plan
assets, and funded status of the Company's post-retirement benefit plan in the
STS division:
F-41
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
16. RETIREMENT BENEFITS: -- (CONTINUED)
Net post-retirement costs include the following components:
The health care cost trend rate, or the expected rate of increase in
health-care costs, is assumed to gradually decrease to 4.5% by 2010.
The impact of a 1% change in health care inflation on post-retirement
benefits is as follows:
Costs (income) charged to operations under all retirement benefit plans are
as follows:
F-42
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
17. COMMITMENTS AND CONTINGENCIES:
Letters of credit are issued by the Company during the ordinary course of
business through major domestic banks as required by certain vendor contracts,
legal proceedings and acquisition activities. As of December 31, 2000, the
Company had outstanding letters of credit in the aggregate amount of $3,800
related to these activities.
As of December 31, 1999, the Company has guaranteed lease obligations of
approximately $520, principally relating to businesses previously divested. The
Company is not currently aware of any existing conditions which would cause a
financial loss related to these guarantees.
Under the Company's insurance programs, commercial umbrella coverage is
obtained for catastrophic exposure and aggregate losses in excess of normal
claims. Beginning in 1991, the Company has retained risk on certain expected
losses from both asserted and unasserted claims related to worker's
compensation, general liability and automobile as well as the health benefits of
certain employees. Provisions for losses expected under these programs are
recorded based on an analysis of historical insurance claim data and certain
actuarial assumptions. As of December 31, 2000, the Company has provided
insurers letters of credit aggregating $3,050 related to certain insurance
programs.
Litigation originally instituted on February 27, 1996 is pending in the
Court of Common Pleas of Montgomery County, Pennsylvania in which Dorman
Products of America, Ltd. ("Dorman"), and its parent, R&B, Inc. ("R&B"), allege
that misrepresentations of certain facts were made by the Company, upon which
R&B allegedly based its offer to purchase the assets of the Dorman Products
division of the Company.
Certain other legal proceedings are pending which are either in the
ordinary course of business or incidental to the Company's business. Those legal
proceedings incidental to the business of the Company are generally not covered
by insurance or other indemnity. In the opinion of management, the ultimate
resolution of the pending litigation matters will not have a material effect on
the consolidated financial position, operations or cash flows of the Company.
F-43
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
18. STATEMENTS OF CASH FLOWS:
Supplemental disclosures of cash flow information are presented below:
19. QUARTERLY DATA (UNAUDITED):
F-44
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
19. QUARTERLY DATA (UNAUDITED): -- (CONTINUED)
- ---------------
(1) Differences from amounts reported in Quarterly Reports on Form 10-Q filed in
2000 and the Annual Report on Form 10-K filed in 1999 are primarily the
result of accounting for the results of the Mexican segment as a
discontinued operation. Also includes certain amounts reclassified in 1999
to conform to current accounting.
20. CONCENTRATION OF CREDIT RISK:
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of cash and cash equivalents
and trade receivables. The Company places its cash and cash equivalents with
high credit quality financial institutions. Concentrations of credit risk with
respect to sales and trade receivables are limited due to the large number of
customers comprising the Company's customer base, and their dispersion across
many different industries and geographies. The Company performs periodic credit
evaluations of its customers' financial condition and generally does not require
collateral.
Concentration of credit risk with respect to purchases and trade payables
are limited due to the large number of vendors comprising the Company's vendor
base, with dispersion across many different industries and geographic areas. One
vendor accounted for 16% of the Company's total purchases and 9% of the
Company's total trade payables on December 31, 2000. No other vendors accounted
for more than 10% of the Company's total purchases in 2000.
21. SEGMENT INFORMATION:
The Company has two reportable segments (see Note 1 "Nature of Operations")
which are disaggregated based on the products and services provided, markets
served, marketing strategies and delivery methods.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. Intersegment sales are
immaterial. The Company measures segment profitability and allocates corporate
resources based on
F-45
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
21. SEGMENT INFORMATION: -- (CONTINUED)
each segment's Earnings Before Interest, Taxes, Depreciation and Amortization
("EBITDA") which is defined as income from operations before depreciation and
amortization. The Company also measures the segments on performance on their
tangible asset base. The table below provides the Company's segment disclosures
and is followed by reconciliations of the segment amounts to the consolidated
amounts where appropriate:
F-46
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
21. SEGMENT INFORMATION: -- (CONTINUED)
F-47
SUNSOURCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
21. SEGMENT INFORMATION: -- (CONTINUED)
22. SALE LEASEBACK TRANSACTION:
On September 30, 1999, the Company sold certain real property of its Kar
Products business for $5,025 which were leased back from the same purchaser
under two separate lease agreements over periods of five and seven years,
respectively. The related leases were being accounted for as operating leases,
and the resulting gains aggregating $2,132 were being amortized over the
respective lives of the leases. As of December 31, 1999, the Company had
outstanding $2,027 of deferred gains relating to the sale leaseback transaction
of which $372 was included in other accrued expenses and $1,655 was included in
other liabilities. On March 2, 2000, the Company contributed the interests in
its Kar Products business to a newly-formed partnership affiliated with Glencoe.
(See Footnote 4 -- Acquisitions and Divestitures).
F-48
APPENDIX A
AGREEMENT AND PLAN OF MERGER
DATED AS OF JUNE 18, 2001
BY AND AMONG
ALLIED CAPITAL CORPORATION,
ALLIED CAPITAL LOCK ACQUISITION CORPORATION,
AND
SUNSOURCE INC.
TABLE OF CONTENTS
i
ii
iii
iv
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of June 18,
2001, is made by and among Allied Capital Corporation, a Maryland corporation
("Parent"), Allied Capital Lock Acquisition Corporation, a Delaware corporation
and a wholly owned subsidiary of Parent ("Sub"), and SunSource Inc., a Delaware
corporation (the "Company"). Certain terms used in this Agreement are defined in
Article XIII.
WITNESSETH:
WHEREAS, Parent, Sub and the Company desire to effect a business
combination by means of the merger of Sub with and into the Company;
WHEREAS, the Board of Directors of Parent and Sub and the stockholder of
Sub and the Board of Directors of the Company have approved the merger of Sub
with and into the Company (the "Merger"), upon the terms and subject to the
conditions set forth herein;
WHEREAS, simultaneously with the execution of this Agreement, certain of
the Named Persons, the current members of the Board of Directors of the Company
and Parent are entering into a Voting Agreement in the form attached hereto as
Exhibit A1 (the "Voting Agreement"), the current members of the Board of
Directors of the Company, certain of the Named Persons and Parent are entering
into Resale Agreements in the form attached hereto as Exhibit A2 (the "Resale
Agreements"), and the Named Persons, Parent and the Company have agreed to enter
into a Stockholders Agreement at Closing in the form attached hereto as Exhibit
A3 (the "Stockholders Agreement").
WHEREAS, for federal income tax purposes, it is intended that the Merger,
if it is effected for stock consideration pursuant to the provisions of Article
IIIA hereof, qualify as a reorganization within the meaning of Section 368(a) of
the Internal Revenue Code of 1986, as amended (the "Code");
WHEREAS, simultaneously with the execution of this Agreement, certain of
the individuals listed on Exhibit F and Parent are entering into an Escrow
Agreement in the form attached hereto as Exhibit B (the "Escrow Agreement"), and
the individuals listed on Exhibit F and Parent are entering into Equity Purchase
Agreements in the form attached hereto as Exhibit C (collectively, the "Equity
Purchase Agreements");
NOW, THEREFORE, in consideration of the premises and the representations,
warranties, covenants and agreements herein contained, the parties hereto agree
as follows:
ARTICLE I
THE MERGER; EFFECT OF MERGER
SECTION 1.1 THE MERGER. Upon the terms and subject to the conditions of
this Agreement and in accordance with the applicable provisions of the Delaware
General Corporation Law, as amended, and any rules and regulations thereunder
(the "Delaware Corporation Law"), Sub shall be merged with and into the Company
and the separate existence of Sub shall thereupon cease. The name of the
Company, as the surviving corporation in the Merger (the "Surviving
Corporation"), may by virtue of the Merger be changed to such name as Parent, in
its sole discretion, may choose.
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SECTION 1.2 CLOSING. Subject to the terms and conditions hereof, the
closing of the Merger and the transaction contemplated by this Agreement (the
"Closing") will take place on the second Business Day after the satisfaction or
waiver (subject to applicable law) of the conditions set forth in Articles VII,
VIII and IX (other than any such conditions which by their terms cannot be
satisfied until the Closing Date, which shall be required to be so satisfied or
waived on the Closing Date, unless another date and time is agreed to by the
parties hereto (the actual date of the Closing being referred to herein as the
"Closing Date")). The Closing shall take place at the offices of Sutherland
Asbill & Brennan LLP, 1275 Pennsylvania Avenue, N.W., Washington, D.C. 20004, or
at such other place as the parties may mutually agree.
SECTION 1.3 EFFECTIVE TIME OF THE MERGER. At the Closing, the parties
shall (i) file a certificate of merger (the "Certificate of Merger") in such
form as is required by and executed in accordance with the relevant provisions
of the Delaware Corporation Law and (ii) make such other filings or recordings
as required under the Delaware Corporation Law. The Merger shall become
effective at such time as the Certificate of Merger is duly filed with the
Secretary of State of Delaware, or such later time as the parties shall agree
and as shall be specified in such filing (the "Effective Time").
SECTION 1.4 EFFECTS OF MERGER. The Merger shall have the effects set forth
in Section 259 of the Delaware Corporation Law.
ARTICLE II
THE SURVIVING CORPORATION
SECTION 2.1 CERTIFICATE OF INCORPORATION. The Certificate of Incorporation
of the Company as in effect immediately prior to the Effective Time shall be the
Certificate of Incorporation of the Surviving Corporation, and thereafter may be
amended in accordance with its terms and as provided by the Delaware Corporation
Law.
SECTION 2.2 BY-LAWS. The by-laws of the Company as in effect immediately
prior to the Effective Time shall be the by-laws of the Surviving Corporation,
and thereafter may be amended in accordance with their terms and as provided by
the Delaware Corporation Law.
SECTION 2.3 OFFICERS AND DIRECTORS. The officers of the Company
immediately prior to the Effective Time shall be the officers of the Surviving
Corporation after the Effective Time and the directors of Sub immediately prior
to the Effective Time shall be the directors of the Surviving Corporation after
the Effective Time, in each case until their respective successors are duly
elected and qualified.
ARTICLE IIIA
CONVERSION OF SHARES INTO PARENT COMMON STOCK
The terms of this Article IIIA are subject to Parent's option pursuant to
Article IIIB to effect the Merger for cash consideration in lieu of stock
consideration.
SECTION 3.1A CONVERSION OF SHARES. (a) At the Effective Time, by virtue of
the Merger and without any action on the part of any Company stockholder:
(1) Conversion of Company Common Stock. Each share of Company Common Stock
outstanding after giving effect to the Company Recapitalization but
immediately prior to the Effective Time (the "Canceled Company Stock")
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shall, subject to adjustment pursuant to this Section 3.1A, be
converted into .4195 fully paid and nonassessable shares of Parent
Common Stock (the "Exchange Ratio"). The Exchange Ratio is calculated
by dividing $10.375 by the Base Stock Price of $24.73. The Exchange
Ratio shall be adjusted ("Adjusted Exchange Ratio") as follows:
(i) If the Average Parent Common Stock Price is not less than $22.26
and not more than $27.20, then there shall be no adjustment to the Exchange
Ratio.
(ii) If the Average Parent Common Stock Price is greater than $27.20,
but not greater than $29.68, or if the Average Parent Common Stock Price is
less than $22.26, but not less than $19.78, then the Adjusted Exchange
Ratio shall be $10.375 divided by the Revised Base Stock Price. The Revised
Base Stock Price shall be one-half (1/2) of the sum of $24.73 and the
Average Parent Common Stock Price.
(iii) If the Average Parent Common Stock Price is less than $19.78, or
greater than $29.68, then Parent shall effect the Merger by means of the
conversion of the Company Common Stock into the right to receive cash in
the amount of $10.375 for each share of Company Common Stock outstanding
immediately prior to the Effective Time, after giving effect to the Company
Recapitalization, in lieu of the right to receive Parent Common Stock,
which shall be treated for purposes of this Agreement as if Parent made a
Cash Election under Article IIIB.
(iv) The Adjusted Exchange Ratio, if applicable, shall be rounded to
the nearest ten-thousandth decimal place (rounding upward from the
mid-point between the ten-thousandth decimal place).
(2) New Preferred Stock. Each share of Company New Preferred Stock
outstanding upon consummation of the Company Recapitalization shall be
converted into one validly issued, fully paid and nonassessable share
of Company Common Stock.
(3) Cancellation of Company Treasury Stock. All shares of Company Common
Stock which are held in the treasury of the Company upon consummation
of the Company Recapitalization shall be canceled and shall cease to
exist without any conversion thereof.
(4) Conversion of Sub Common Stock. Each share of common stock, par value
$.01 per share, of Sub issued and outstanding immediately prior to the
Effective Time shall be converted into that number of validly issued,
fully paid and non-assessable shares of Company Common Stock equal to
96.58% (subject to adjustment to reflect any adjustment to the number
of shares of Company Common Stock to be purchased for cash as part of
the Company Recapitalization and the number of shares of Company Stock
to be issued if the provisions of Article IIIA are applicable, pursuant
to Section 6.16) of the total number of shares of Company Common Stock
issued pursuant to Section 3.1A(a)(2) and this Section 3.1A(a)(4).
(b) The shares of Company Trust Preferred Securities issued by the
SunSource Capital Trust shall remain outstanding at the Effective Time.
(c) If, at any time prior to the Effective Time, the outstanding
shares of Parent Common Stock shall be changed into a different number of
shares or a
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different class by reason of any reclassification, recapitalization,
split-up, combination, exchange of shares or readjustment, or if a stock
dividend thereon shall be declared with a record date within such period,
the Exchange Ratio or, if applicable, the Adjusted Exchange Ratio, shall be
correspondingly adjusted. The issuance of shares of Parent Common Stock
pursuant to Parent's dividend reinvestment plan consistent with past
practices shall not constitute a stock dividend for this purpose.
(d) At the Effective Time the Canceled Company Stock shall cease to
exist, and each certificate previously representing such Canceled Company
Stock shall (subject to Section 3.3A) thereafter represent for all
corporate purposes the shares of Parent Common Stock into which such shares
of Canceled Company Stock have been converted pursuant to the Merger.
Certificates previously representing such shares of Canceled Company Stock
shall be exchanged for a confirmation of ownership of Parent Common Stock
issued in consideration therefor upon surrender in accordance with Section
3.2A, without interest.
(e) The Parent shall issue shares of Parent Common Stock to be issued
in the Merger in uncertificated form, and in accordance with Section 3.2A
shall send to each person entitled to receive such shares the information
required under Section 2-210(c) of the Maryland General Corporation Law
with respect to such shares (a "Confirmation").
SECTION 3.2A SURRENDER. (a) Prior to the Closing, Parent shall select a
person or persons to act as exchange agent for the Merger (the "Exchange
Agent"), which person or persons shall be reasonably acceptable to the Company,
for the purpose of exchanging certificates representing Canceled Company Stock
for Confirmations as to the Share Consideration (as defined below). On the
Closing Date, Parent shall deliver to the Exchange Agent, in trust for the
benefit of the holders of Canceled Company Stock immediately prior to the
Effective Time (the "Converting Stockholders"), the Share Consideration and
related information. As soon as reasonably practicable after the Effective Time
but in no event more than five Business Days after the Effective Time, Parent
shall cause the Exchange Agent to send a notice and a letter of transmittal to
each Converting Stockholder advising such holder of the effectiveness of the
Merger and the procedure for surrendering to the Exchange Agent for cancellation
such holder's certificates representing Canceled Company Stock ("Certificates"),
in exchange for the Share Consideration. Each Converting Stockholder will be
entitled to receive, upon surrender to the Exchange Agent for cancellation of
one or more Certificates, a Confirmation representing the number of shares of
Parent Common Stock into which the shares of Canceled Company Stock represented
by such Certificates are converted in the Merger. Parent Common Stock into which
Canceled Company Stock shall be converted in the Merger shall be deemed to have
been issued at the Effective Time (the "Share Consideration"). In the event that
any Converting Stockholder's Certificates have been lost, stolen or destroyed,
such Converting Stockholder will be entitled to receive the Share Consideration
only after providing an affidavit of loss and indemnity bond, in form
satisfactory to the Exchange Agent.
(b) Converting Stockholders shall be entitled, at and after the Effective
Time, to vote the number of shares of Parent Common Stock into which their
shares of Canceled Company Stock shall have been converted so long as they
remain record holders of such shares of Parent Common Stock, regardless of
whether the
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Certificates formerly representing the Canceled Company Stock shall have been
surrendered in accordance with this Section 3.2A or a Confirmation with respect
to such shares of Parent Common Stock shall have been issued.
(c) Any Converting Stockholder who has not exchanged his Certificates for
Parent Common Stock in accordance with subsection (a) within six months after
the Effective Time shall have no further claim upon the Exchange Agent, and
shall thereafter look only to Parent and the Surviving Corporation for payment
in respect of his shares of Canceled Company Stock. Until so surrendered,
Certificates shall represent solely the right to receive the Share
Consideration. If any Certificates entitled to payment pursuant to Section 3.1A
shall not have been surrendered for such payment prior to such date on which any
payment in respect thereof would otherwise escheat to or become the property of
any Governmental Entity, the shares of Canceled Company Stock represented
thereby shall, to the extent permitted by applicable law, be deemed to be
canceled and no money or other property will be due to the holder thereof.
SECTION 3.3A DIVIDENDS; TRANSFER TAXES. No dividends that are declared or
made with respect to Parent Common Stock will be paid to persons entitled to
receive Confirmations representing Parent Common Stock pursuant to this
Agreement until such persons surrender their Certificates, together with a
properly completed letter of transmittal. Such dividends shall instead be paid
to the Exchange Agent on behalf of, and as nominee for, such person, and held by
the Exchange Agent in a non-interest bearing account. Such persons shall not be
entitled to participate in Parent's dividend reinvestment plan until such
persons surrender their Certificates. Upon such surrender, there shall be paid
to the person in whose name the Confirmation representing such Parent Common
Stock shall be issued dividends which shall have become payable with respect to
such Parent Common Stock in respect of any record date occurring after the
Effective Time. In no event shall the person entitled to receive such dividends
be entitled to receive interest on such dividends. Dividends paid to the
Exchange Agent pursuant to this Section 3.3A that remain unclaimed by the
holders of Canceled Company Stock shall not revert or be returned to the Parent,
and the Parent hereby waives any rights it may have to such assets. In the event
that any portion of the Share Consideration for any shares of Parent Common
Stock is to be delivered to a person other than that in which the Certificates
surrendered in exchange therefor are registered, it shall be a condition of such
delivery that the Certificate or Certificates so surrendered shall be properly
endorsed or be otherwise in proper form for transfer (including signature
guarantee) and that the person requesting such delivery shall pay to the
Exchange Agent any transfer or other Taxes required by reason of such delivery
to a person other than that of the registered holder of the Certificate
surrendered, or shall establish to the satisfaction of the Exchange Agent that
such Tax has been paid or is not applicable. Notwithstanding the foregoing,
neither the Exchange Agent nor any party hereto shall be liable to a holder of
shares of Canceled Company Stock for any shares of Parent Common Stock or
dividends thereon delivered to a public official pursuant to any applicable
escheat laws.
SECTION 3.4A FRACTIONAL SECURITIES. Parent shall issue fractional shares
of Parent Common Stock to the extent the conversion results in a fraction of a
share, in which case such fraction shall be rounded to the nearest
one-thousandth of a share (rounding upward from the mid-point between
thousandths of a share).
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SECTION 3.5A CLOSING OF COMPANY TRANSFER BOOKS. Immediately prior to the
Effective Time, the Company Common Stock transfer books shall be closed and no
transfer of Canceled Company Stock shall thereafter be made.
SECTION 3.6A STOCKHOLDER APPROVAL. The Company shall take all action
necessary, in accordance with applicable law and its Certificate of
Incorporation and By-Laws, to convene a special meeting of the holders of
Company Common Stock (the "Company Meeting") as promptly as practicable for the
purpose of considering and taking action upon this Agreement and the Company
Recapitalization. The Board of Directors of the Company has approved the Merger
and the Company Recapitalization and adopted this Agreement and recommended that
holders of Company Common Stock vote in favor of and approve the Merger and the
Company Recapitalization and the adoption of this Agreement at the Company
Meeting. Notwithstanding the foregoing, nothing in this Section 3.6A shall
preclude or limit the Board of Directors of the Company from complying with its
fiduciary duties under applicable law.
SECTION 3.7A TAX TREATMENT, ETC. The Merger is intended, for federal
income tax purposes, to constitute a reorganization under Section 368(a) of the
Code, unless the Cash Election is made pursuant to Article IIIB of this
Agreement. Neither Parent, Sub, nor the Company shall have any liability for
transfer or other Taxes payable by any Company stockholder as a consequence of
the Merger.
SECTION 3.8A ROLLOVER OPTIONS. Each Rollover Option shall remain in effect
at the Effective Time without any change in the terms and conditions of such
Rollover Option as in effect prior to the Effective Time, except that the
Rollover Options shall vest in accordance with the terms of the Stock Option
Plan at the Effective Time and shall not be adjusted as a result of the
consummation by the Company of the transactions contemplated hereby.
ARTICLE IIIB
CONVERSION OF SHARES FOR CASH
Parent may elect, at its sole option, to effect the Merger by means of the
conversion of the Company Common Stock into the right to receive cash in lieu of
the right to receive Parent Common Stock (the "Cash Election"). The Cash
Election, if made by Parent, shall be irrevocable. Parent may elect the Cash
Election at any time but no later than 11:59 pm local time on June 29, 2001. The
Cash Election shall be made by notice from Parent to the Company in the manner
provided by Section 14.2 of this Agreement. If the Cash Election is made by
Parent, or deemed to be made pursuant to Section 3.1A(a)(1)(iii), then the
provisions of Article IIIA of this Agreement shall have no force or effect, and
the provisions of this Article IIIB shall be effective. If the Cash Election is
not made by the Parent, and not deemed to be made pursuant to Section
3.1A(a)(1)(iii), then the following provisions of this Article IIIB shall have
no force or effect.
SECTION 3.1B CONVERSION OF SHARES. (a) At the Effective Time, by virtue of
the Merger and without any action on the part of any Company stockholder:
(1) Conversion of Company Common Stock. Each share of Company Common Stock
outstanding immediately prior to the Effective Time, after giving
effect to the Company Recapitalization (the "Canceled Company Stock")
shall be converted into the right to receive, without interest thereon,
from Parent an
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amount in cash equal to $10.375. The total number of shares of Company
Common Stock which will be outstanding immediately prior to the
Effective Time, after giving effect to the Company Recapitalization
shall be no less than 6,900,280 (subject to increase for the exercise
of up to 148,000 In-the-Money Company Stock Options) (the "Cash
Consideration").
(2) New Preferred Stock. Each share of Company New Preferred Stock
outstanding upon consummation of the Company Recapitalization shall be
converted into one validly issued, fully paid and nonassessable share
of Company Common Stock.
(3) Cancellation of Company Treasury Stock. All shares of Company Common
Stock which are held in the treasury of the Company upon consummation
of the Company Recapitalization shall be canceled and shall cease to
exist without any conversion thereof.
(4) Conversion of Sub Common Stock. Each share of common stock, par value
$.01 per share, of Sub issued and outstanding immediately prior to the
Effective Time shall be converted into that number of validly issued,
fully paid and non-assessable shares of Company Common Stock equal to
96.58% (subject to increase for the exercise of up to 148,000
In-the-Money Company Stock Options) of the total number of shares of
Company Common Stock issued pursuant to Section 3.1B(a)(2) and this
Section 3.1B(a)(4).
(b) The shares of Company Trust Preferred Securities issued by the
SunSource Capital Trust shall remain outstanding at the Effective Time.
SECTION 3.2B PAYMENT FOR SHARES IN THE MERGER. The manner of making
payment for and conversion of shares of the Company Common Stock in the Merger
shall be as follows:
(a) As soon as practicable after the Effective Time, Parent shall send
or cause to be sent a notice announcing the consummation of the Merger and
summarizing the provisions of Sections 3.1B and 3.2B to each holder of a
Certificate which immediately prior to the Effective Time evidenced shares
of the Company Common Stock and which was not previously surrendered. Such
notice shall be accompanied by the form of transmittal letter and stock
power referred to in Section 3.2B(b).
(b) After the Effective Time, each holder of record of a certificate
representing Canceled Company Stock (a "Certificate") (other than a holder
of Dissenting Shares) shall surrender such Certificate to Parent or its
transfer agent (as specified in the notice from Parent), together with (i)
separate stock transfer powers duly endorsed by such holder and (ii) a
letter of transmittal from such holder.
(c) Upon surrender of a Certificate or Certificates representing the
shares of the Company Common Stock in the manner provided in Section
3.2B(b), each holder shall be entitled to receive from Parent in exchange
therefor a check for the amount of cash into which the holder's shares of
the Company Common Stock previously evidenced by such Certificate(s) was
converted in the Merger pursuant to Section 3.1B. Parent or its transfer
agent shall issue such checks as soon as practicable following such
surrender. In the event that any such holder's Certificates have been lost,
stolen or destroyed, such holder will be entitled to
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receive the Cash Consideration only after providing an affidavit of loss
and indemnity bond, in form satisfactory to Parent and its transfer agent.
(d) Each Certificate which immediately prior to the Effective Time
evidenced shares of the Company Common Stock (other than Dissenting Shares)
shall, from and after the Effective Time until such Certificate is
surrendered to Parent or its transfer agent, be deemed, for all corporate
purposes, to evidence the right to receive that amount of cash described in
Section 3.1B. Upon receipt of such Certificate by Parent or its transfer
agent, there shall be paid to such holder, without interest, the amount of
any cash payable to such holder pursuant to Section 3.1B.
(e) Any holder of the Company Common Stock who has not exchanged his
Certificates for Cash Consideration in accordance with this Section 3.2B
within six months after the Effective Time shall have no further claim upon
Parent's transfer agent, and shall thereafter look only to Parent for
payment in respect of his shares of Company Common Stock. Until so
surrendered, Certificates shall represent solely the right to receive the
Cash Consideration. If any Certificates entitled to payment pursuant to
Section 3.1B shall not have been surrendered for such payment prior to such
date on which any payment in respect thereof would otherwise escheat to or
become the property of any Governmental Entity, the right to receive Cash
Consideration represented thereby shall, to the extent permitted by
applicable law, be deemed to be canceled and no money or other property
will be due to the holder thereof.
SECTION 3.3B DISSENTING SHARES. Notwithstanding anything in Sections 3.1B
through and including 3.7B to the contrary, each share of Company Common Stock
that is issued and outstanding immediately prior to the Effective Time and that
is held by a stockholder who has properly exercised and perfected appraisal
rights under the provisions of the Delaware Corporation Law ("Dissenting
Shares"), shall not be converted into or exchangeable for the right to receive
the Cash Consideration, but shall entitle the holder thereof to receive payment
therefor as shall be determined pursuant to the provisions of the Delaware
Corporation Law; provided, however, that if such holder shall have failed to
perfect or shall have effectively withdrawn or lost his right to appraisal and
payment under the Delaware Corporation Law, each share of Company Common Stock
of such holder shall thereupon be deemed to have been converted into and to have
become exchangeable for, as of the Effective Time, the right to receive the Cash
Consideration, in accordance with Section 3.1B, and such shares shall no longer
be Dissenting Shares.
SECTION 3.4B CLOSING OF COMPANY TRANSFER BOOKS. Immediately prior to the
Effective Time, the Company Common Stock transfer books shall be closed and no
transfer of Company Common Stock shall thereafter be made. In the event of a
transfer of ownership of Company Common Stock which is not registered in the
transfer records of the Company, the Cash Consideration to be distributed
pursuant to this Agreement may be delivered to a transferee, if a Certificate is
presented to Parent or its transfer agent, accompanied by all documents required
to evidence and effect such transfer and by payment of any applicable stock
transfer taxes. Parent shall be entitled to rely upon the stock transfer books
of the Company to establish the identity of those persons entitled to receive
the Cash Consideration specified in this Agreement for their shares of Company
Common Stock, which books shall be conclusive with respect to the ownership of
such shares. In the event of a dispute
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with respect to the ownership of any such shares, Parent shall be entitled to
deposit any Cash Consideration represented thereby in escrow with an independent
party and thereafter be relieved with respect to any claims to such Cash
Consideration.
SECTION 3.5B NO FURTHER OWNERSHIP RIGHTS IN COMPANY COMMON STOCK. All Cash
Consideration issued upon surrender of a Certificate in accordance with the
terms hereof shall be deemed to have been issued in full satisfaction of all
rights pertaining to such shares of Company Common Stock represented thereby.
If, after the Effective Time, Certificates are presented to Parent for any
reason, they shall be cancelled and exchanged as provided in this Article IIIB.
SECTION 3.6B STOCKHOLDER APPROVAL. The Company shall take all action
necessary, in accordance with applicable law and its Certificate of
Incorporation and By-Laws, to convene a special meeting of the holders of
Company Common Stock (the "Company Meeting") as promptly as practicable for the
purpose of considering and taking action upon this Agreement and the Company
Recapitalization. The Board of Directors of the Company has approved the Merger
and the Company Recapitalization and adopted this Agreement and recommended that
holders of Company Common Stock vote in favor of and approve the Merger and the
Company Recapitalization and the adoption of this Agreement at the Company
Meeting. Notwithstanding the foregoing, nothing in this Section 3.6B shall
preclude or limit the Board of Directors of the Company from complying with its
fiduciary duties under applicable law.
SECTION 3.7B ROLLOVER OPTIONS. Each Rollover Option shall remain in effect
at the Effective Time without any change in the terms and conditions of such
Rollover Option as in effect prior to the Effective Time, except that the
Rollover Options shall vest in accordance with the terms of the Stock Option
Plan at the Effective Time and shall not be adjusted as a result of the
consummation by the Company of the transactions contemplated hereby.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Sub that, except as set
forth in the disclosure schedule attached hereto (the "Company Disclosure
Schedule"), which Company Disclosure Schedule shall be arranged in paragraphs
corresponding to the numbered and lettered paragraphs contained in this Article
IV and may be amended from time to time pursuant to the provisions hereof:
SECTION 4.1 EXECUTION AND DELIVERY. The Company has the corporate power
and authority to enter into this Agreement and each other agreement, document or
instrument contemplated hereby or to be executed in connection herewith to which
the Company is a party (the "Company Documents") and, subject to approval of
this Agreement by the holders of the Company Common Stock, to carry out its
obligations hereunder and thereunder. The execution, delivery and performance of
this Agreement and the Company Documents and the consummation of the
transactions contemplated hereby and thereby have been recommended to the Board
of Directors by a special committee thereof consisting solely of directors who
are not officers or employees of the Company or any of its Subsidiaries, and
have been duly and validly authorized by the Company's entire Board of
Directors. In connection with the foregoing, the Company's Board of Directors
has taken such actions as are
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necessary on its part to render the provisions of Section 203 of the Delaware
Corporation Law and all other applicable takeover statutes inapplicable to this
Agreement, the Merger, the transactions required or contemplated by this
Agreement, and the Voting Agreement. This Agreement constitutes the valid and
binding obligation of the Company and the Company Documents, when executed and
delivered, will constitute the valid and binding obligations of the Company, in
each case enforceable in accordance with their respective terms, except as
enforcement may be limited by bankruptcy, insolvency or other similar laws
affecting the enforcement of creditors' rights generally and except that the
availability of equitable remedies, including specific performance, is subject
to the discretion of the court before which any proceeding therefor may be
brought. Except for the approval of the holders of a majority of the outstanding
shares of Company Common Stock, no other corporate proceedings on the part of
the Company are necessary after the date of this Agreement to authorize this
Agreement and the Company Documents and the transactions contemplated hereby and
thereby.
SECTION 4.2 CONSENTS AND APPROVALS. The execution and delivery by the
Company of this Agreement and the Company Documents, the performance by the
Company of its obligations hereunder and thereunder, and the consummation by the
Company of the transactions contemplated hereby and thereby, as the case may be,
do not require the Company to obtain any consent, approval or action of, or make
any filing or registration with, or give any notice to, any person or any
Governmental Entity, other than (i) in connection, or in compliance, with the
provisions of the H-S-R Act and any similar law applicable in a non-United
States jurisdiction, if applicable, the Exchange Act, and the Securities Act,
which will be duly obtained or made, as the case may be, on or prior to the
Closing, and will be in full force and effect on the Closing Date, (ii) in the
case of the performance by the Company of its obligations hereunder and under
the Company Documents and the consummation by the Company of the transactions
contemplated hereby and by the Company Documents, the approval of the holders of
the Company Common Stock as specified in Section 4.1, (iii) the filing of the
Certificate of Merger with the Secretary of State of Delaware, and (iv)
consents, approvals, actions, filings, registrations or notices under (a)
contracts and other agreements listed in Section 4.16 of the Company Disclosure
Schedule, which consents, approvals, actions, filings, registrations, and
notices referred to in this clause (a) are listed in Section 4.2 of the Company
Disclosure Schedule; and (b) any other contract and other agreement not referred
to in the preceding clause (a).
SECTION 4.3 NO BREACH. Except as set forth in Section 4.3 of the Company
Disclosure Schedule and assuming that the consents, approvals, actions, filings,
registrations, and notices referred to in Section 4.2 are duly made or effected,
the execution, delivery and performance by the Company of this Agreement and the
Company Documents and the consummation by the Company of the transactions
contemplated hereby and thereby in accordance with the terms and conditions
hereof and thereof will not (i) violate any provision of the Certificate of
Incorporation or By-Laws of the Company; (ii) violate, conflict with or result
in the breach of any of the terms of, result in any modification of the effect
of or loss of material rights under, otherwise give any other contracting party
the right to terminate, or constitute (or with notice or lapse of time or both,
constitute) a default under, any contract or other agreement or instrument to
which the Company or any of its Subsidiaries is a party or by or to which the
assets or properties of the Company or any of its
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Subsidiaries may be bound or subject; (iii) violate any order, judgment,
injunction, award or decree of any Governmental Entity against, or binding upon,
or any agreement with, or condition imposed by, any Governmental Entity binding
upon, the Company or any of its Subsidiaries, or the securities, assets or
business of the Company or any of its Subsidiaries; (iv) violate any statute,
law or regulation of any jurisdiction as such statute, law or regulation relates
to the Company or any of its Subsidiaries, or to the securities, assets or
business of the Company or any of its Subsidiaries; (v) result in the creation
or imposition of any lien or other encumbrance or the acceleration of any
indebtedness or other obligation of the Company or any of its Subsidiaries; or
(vi) result in the breach of any of the terms or conditions of, constitute a
default under, or otherwise cause a violation of, any Permit of the Company or
any of its Subsidiaries; except in the case of (ii) through (vi) above, for
violations, conflicts, breaches, defaults, modifications, loss of rights,
impairments, liens or other encumbrances that would not, individually or in the
aggregate, have a Company Material Adverse Effect.
SECTION 4.4 ORGANIZATION, STANDING AND AUTHORITY. The Company is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware and has all requisite corporate power and
authority to own, lease and operate its assets, properties and business and to
carry on its business as now being conducted. Except as set forth in Section 4.4
of the Company Disclosure Schedule, the Company is duly qualified as a foreign
corporation to do business, and is in good standing, in each jurisdiction where
the character of its properties owned or held under lease or the nature of such
activities make such qualification necessary, except where the failure to so
qualify would not, individually or in the aggregate, have a Company Material
Adverse Effect. All such jurisdictions are set forth on Section 4.4 of the
Company Disclosure Schedule. The copies of the Certificate of Incorporation and
By-Laws of the Company included as part of Section 4.4 of the Company Disclosure
Schedule constitute accurate and complete copies of such organizational
instruments and accurately reflect all amendments thereto through the date
hereof.
SECTION 4.5 CAPITALIZATION OF THE COMPANY. The authorized capital stock of
the Company consists of 21,000,000 shares of capital stock of which 20,000,000
are Company Common Stock and 1,000,000 are preferred stock. As of the date of
this Agreement there were 6,889,844 shares of Company Common Stock outstanding
and 0 shares of the Company's preferred stock outstanding. Except as set forth
in Section 4.5 of the Company Disclosure Schedule, as of the date hereof there
are no bonds, debentures, notes or other indebtedness having the right to vote
on any matters on which the Company's stockholders may vote issued or
outstanding. Section 4.5 of the Company Disclosure Schedule sets forth a true
and complete list as of the date indicated of the holders of all (i) outstanding
vested and unvested Company Stock Options and (ii) outstanding Company Warrants,
showing as to each such holder the number of Company Stock Options (vested or
unvested) or Company Warrants so held, such holder's mailing address and in the
case of Company Stock Options, the date of grant, vesting schedules and exercise
price of all such Company Stock Options. All outstanding shares of Company
Common Stock are duly authorized and are validly issued, fully paid and
non-assessable and free of preemptive rights.
SECTION 4.6 OPTIONS AND OTHER STOCK RIGHTS. Except as set forth in Section
4.5 or 4.6 of the Company Disclosure Schedule, there is no (i) outstanding
option,
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warrant, call, unsatisfied preemptive right or other agreement of any kind
binding upon the Company to purchase or otherwise to receive from the Company
any of the outstanding, authorized but unissued, unauthorized or treasury shares
of Company Common Stock or any other security of the Company, or cash based on
the increase in the market price of Company Common Stock, (ii) outstanding
security of any kind binding upon the Company convertible into any security of
the Company, and (iii) outstanding contract or other agreement binding upon the
Company or any of its Subsidiaries to purchase, redeem or otherwise acquire any
outstanding shares of Company Common Stock or any other security of the Company.
SECTION 4.7 SUBSIDIARIES. (a) Section 4.7 of the Company Disclosure
Schedule sets forth (i) the name of each Subsidiary of the Company; (ii) the
name of each corporation, limited liability company, partnership, joint venture
or other entity (other than such Subsidiaries) in which the Company or any of
its Subsidiaries has, or pursuant to any agreement has the right or obligation
to acquire at any time by any means, directly or indirectly, an equity interest
or investment; (iii) in the case of each such Person described in clauses (i) or
(ii) above, (A) the jurisdiction of organization and (B) the capitalization
thereof and the percentage of each class of capital stock or other equity
interest (including any rights, options, warrants or convertible securities
outstanding or other agreements to acquire shares of capital stock or other
equity interest) and issuance of outstanding debt owned by the Company or any of
it Subsidiaries and by any other person.
(b) Except as set forth in Section 4.7(b) of the Company Disclosure
Schedule, each Subsidiary of the Company listed in Section 4.7(a) of the
Company Disclosure Schedule has been duly organized, is validly existing
and in good standing under the laws of the jurisdiction of its
organization, has the corporate, limited liability company, partnership or
similar power and authority to own and lease its properties and to conduct
its business and is duly registered, qualified and authorized to transact
business and is in good standing in each jurisdiction in which the conduct
of its business or the nature of its properties requires such registration,
qualification or authorization, except where the failure to be so qualified
would not reasonably be expected to have a Company Material Adverse Effect.
All such jurisdictions are set forth in Section 4.7(b) of the Company
Disclosure Schedule. All of the issued and outstanding equity or other
participating interests of each Subsidiary have been duly authorized and
validly issued, are fully paid and nonassessable, and, to the extent owned
by the Company as indicated in Section 4.7 of the Company Disclosure
Schedule, are owned free and clear of any mortgage, pledge, lien,
encumbrance, security interest, claim or equity, except as set forth in
Section 4.7 of the Company Disclosure Schedule.
(c) As of the date hereof, except as listed in Section 4.7 or Section
4.16 of the Company Disclosure Schedule, the Company has not made any
investments in, and does not own, directly or indirectly, any securities of
or other interests in, any other Person.
SECTION 4.8 CORPORATE RECORDS. The Company has heretofore delivered to
Parent true and complete copies of the minute books of the Company and each of
its Subsidiaries for the five years prior to the date hereof through and
including the date hereof, all as in effect on the date hereof.
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SECTION 4.9 INFORMATION IN DISCLOSURE DOCUMENTS. None of the information
with respect to the Company and its Subsidiaries to be included in (i) the joint
prospectus/proxy statement of the Company and Parent (the "Proxy Statement")
required to be mailed to the stockholders of the Company in connection with the
Merger and (ii) if applicable pursuant to Section 3.1A, the Registration
Statement to be filed with the Commission by Parent on Form N-14 under the
Securities Act for the purpose of registering the shares of Parent Common Stock
to be issued in the Merger (the "Registration Statement") will, in the case of
the Proxy Statement or any amendments or supplements thereto, at the time of the
mailing of the Proxy Statement and any amendments or supplements thereto, and at
the time of the Company Meeting, or, in the case of the Registration Statement,
at the time it becomes effective and at the Effective Time, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading; provided, however,
that this provision shall not apply to statements or omissions in the
Registration Statement or Proxy Statement based upon information furnished by
Parent for use therein. The Proxy Statement will comply as to form in all
material respects with the provisions of the Exchange Act and the rules and
regulations thereunder. No representation or warranty made by the Company
contained in this Agreement and no statement contained in any certificate
delivered pursuant to Article VII or any exhibit to this Agreement and the
Company Disclosure Schedule, as the same may be amended pursuant to the
provisions hereof, contains any untrue statement of a material fact or omits or
will omit to state a material fact necessary to make the statements contained
therein, in light of the circumstances under which they were made, not
misleading.
SECTION 4.10 SEC DOCUMENTS; FINANCIAL STATEMENTS. (a) The Company and its
Subsidiaries have filed and will file with the SEC all forms, reports,
schedules, statements, exhibits and other documents (collectively, the "Company
SEC Documents") required to be filed on or before the date hereof or the Closing
Date, respectively, by it under the Securities Act or the Exchange Act. The
Company has furnished or made available to Parent true and correct copies of all
Company SEC Documents filed by the Company and its Subsidiaries since January 1,
1998 and will promptly furnish to Parent any other Company SEC Document filed by
or on behalf of the Company with the SEC from the date hereof to the Closing
Date. At the time filed, the Company SEC Documents filed by the Company and its
Subsidiaries since January 1, 1998 (i) did not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading and (ii) complied in all material
respects with the applicable requirements of the Securities Act or Exchange Act,
as the case may be.
(b) The audited consolidated financial statements of the Company and
its Subsidiaries for the three years ended December 31, 2000, together with
the reports and opinions thereon of PricewaterhouseCoopers LLP (the
"Company Audited Financial Statements"), which are included in the Company
SEC Documents and have previously been delivered to Parent, and the
unaudited consolidated financial statements of the Company and its
Subsidiaries for the three months ended March 31, 2001 (the "Company
Interim Financial Statements"), which are included in the Company SEC
Documents and have previously been delivered to Parent, are collectively
referred to herein as the
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"Company Financial Statements". The Company Financial Statements comply as
to form in all material respects with applicable accounting requirements
and the published rules and regulations of the SEC with respect thereto;
and fairly present, in all material respects, on a consolidated basis, the
financial position of the Company at the respective balance sheet dates
specified therein, and the results of its operations for each of the
periods then ended, and were prepared in conformity with GAAP applied on a
consistent basis, except as otherwise disclosed therein and subject, in the
case of the Company Interim Financial Statements, to normal recurring
year-end adjustments, the absence of footnote disclosures, and any other
adjustments described therein.
SECTION 4.11 LIABILITIES. To the Knowledge of the Company, the Company and
its Subsidiaries do not have any direct or indirect liability, contingent or
otherwise, including but not limited to all liabilities retained, and all
indemnification obligations created, in connection with the disposition of
assets, that is required by GAAP to be reflected or reserved for on the
financial statements of the Company (collectively, the "Liabilities"), that was
not adequately reflected or reserved against on the Company Audited Financial
Statements for the 12-month period ended December 31, 2000 or the Company
Interim Financial Statements for the three-month period ended March 31, 2001,
other than (i) liabilities set forth in Section 4.11 of the Company Disclosure
Schedule, (ii) liabilities incurred in the ordinary course of business since
December 31, 2000 consistent with past practices, or (iii) liabilities permitted
by this Agreement to be incurred in connection with the transactions
contemplated by this Agreement.
SECTION 4.12 NO COMPANY MATERIAL ADVERSE EFFECT. Except as disclosed in
Section 4.12 of the Company Disclosure Schedule or as set forth in the Company
SEC Reports filed prior to the date of this Agreement, since December 31, 2000,
there has not been any change, event, occurrence or state of facts that has
caused, or would reasonably be expected to cause, a Company Material Adverse
Effect.
SECTION 4.13 COMPLIANCE WITH LAWS. To the Knowledge of the Company, except
as disclosed in Section 4.13 of the Company Disclosure Schedule, neither the
Company nor any of its Subsidiaries is in violation of any applicable order,
judgment, injunction, award or decree, law, ordinance or regulation or any other
requirement of any Governmental Entity applicable to the Company or any of its
Subsidiaries or any of its or their businesses, except for violations which
would not, individually or in the aggregate, have a Company Material Adverse
Effect. Neither the Company nor its Subsidiaries has received written notice or,
to the Knowledge of the Company, any other notice, that any such material
violation has been alleged or is being reviewed or investigated. This Section
4.13 shall not apply to Taxes.
SECTION 4.14 PERMITS. To the Knowledge of the Company, except as set forth
in Section 4.14 of the Company Disclosure Schedule, (i) the Company and its
Subsidiaries have obtained all Permits that are necessary for the ownership and
conduct of their respective businesses as presently conducted or currently
proposed to be conducted, other than any Permits, the absence of which would
not, individually or in the aggregate, have a Company Material Adverse Effect;
(ii) such Permits are in full force and effect and are sufficient for the
ownership and conduct of such businesses as presently conducted; (iii) no
violations exist or have been recorded in respect of any Permit, except
violations which would not, individually or in the aggregate, have a Company
Material Adverse Effect; and (iv) no proceeding is
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pending or threatened, that would suspend, revoke or limit any Permit, except
proceedings which would not, individually or in the aggregate, have a Company
Material Adverse Effect.
SECTION 4.15 ACTIONS AND PROCEEDINGS. Except as disclosed in Section 4.15
of the Company Disclosure Schedule or the Company SEC Documents filed prior to
the date of this Agreement, there are no outstanding orders, judgments,
injunctions, awards or decrees of any Governmental Entity against or involving
the Company, any of its Subsidiaries or any of its or their directors, officers
or employees (in their capacities as such) in excess of $250,000 individually or
in the aggregate, or which materially impair the operation of the Company or its
Subsidiaries or materially detract from its business. Except as disclosed in
Section 4.15 of the Company Disclosure Schedule or the Company SEC Documents
filed prior to the date of this Agreement, there is no claim (including without
limitation any indemnification claim arising out of any assets or stock sold by
the Company or its Subsidiaries), action, suit, litigation, legal,
administrative or arbitration proceeding, whether formal or informal (including,
without limitation, any written, or to the Knowledge of the Company, any other
inquiry, claim or notice of intent to institute any matter) (a "Proceeding"),
which is pending or, to the Company's Knowledge, threatened against or involving
the Company, any of its Subsidiaries or any of its or their directors, officers
or employees (in their capacities as such) or properties, capital stock or
assets.
SECTION 4.16 CONTRACTS AND OTHER AGREEMENTS. (a) Other than (1) contracts
and other agreements disclosed in Section 4.16 of the Company Disclosure
Schedule or (2) contracts between the Company and its direct or indirect wholly
owned Subsidiaries or between the Company's direct or indirect wholly owned
Subsidiaries, none of the Company or any of its Subsidiaries is a party to or
bound by any:
(i) commitments, contracts and other agreements, including employment,
bonus, consulting, management or severance contracts, commitments and
agreements with, or loans to, any current or former officer,
director, employee, consultant, agent or other representative of the
Company or its Subsidiaries, or any current stockholder of the
Company, or any affiliate (excluding the Company and its
Subsidiaries) or Family Member of the foregoing persons which involve
the payment or receipt by the Company or its Subsidiaries of an
amount in excess of $150,000 in any one year or in excess of $300,000
in the aggregate for any such individual, other than pursuant to
Plans described in Section 4.22 of the Company Disclosure Schedule;
(ii) contracts and other agreements with any labor union or association
representing any employee;
(iii) contracts and other agreements for the purchase or sale of equipment
or services, which involve the receipt or payment by the Company or
its Subsidiaries of an amount in excess of $300,000 (in the
aggregate in the case of any related series of contracts and other
agreements);
(iv) contracts and other agreements for the sale of any of the assets or
properties of the Company or its Subsidiaries or for the grant to any
person of any preferential rights to purchase any of the assets or
properties of the Company or its Subsidiaries, for which there
remains any
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obligation to or from the Company or its Subsidiaries, which involve
the receipt or payment by the Company or its Subsidiaries of an
amount in excess of $250,000 (in the aggregate in the case of any
related series of contracts and other agreements);
(v) contracts and other agreements calling for an aggregate purchase
price or payments in any one year of more than $250,000 payable by
the Company or its Subsidiaries (in the aggregate in the case of any
related series of contracts and other agreements);
(vi) contracts and other agreements relating to the acquisition by the
Company or its Subsidiaries of any business of, or the disposition of
any business involving the Company or its Subsidiaries to, any other
person for which there remains any obligation to or from the Company
or its Subsidiaries;
(vii) contracts relating to the disposition or acquisition of any
investment or of any interest in any person, which involve the
receipt or payment by the Company or its Subsidiaries of an amount
in excess in any one year of $250,000 (in the aggregate in the case
of any related series of contracts and other agreements) for which
there remains any obligation to or from the Company or its
Subsidiaries;
(viii) joint venture and similar agreements which would involve the receipt
or payment by the Company or its Subsidiaries of an amount in excess
of $250,000 (in the aggregate in the case of any related series of
contracts or other agreements) for which there remains any
obligation to or from the Company or its Subsidiaries;
(ix) contracts and other agreements under which the Company or its
Subsidiaries agreed to indemnify any party or agreed to retain
liability of any party or to share liability of any party which
indemnity obligation remains in effect, including but not limited to
Tax liability, which could involve the payment by the Company or its
Subsidiaries of an amount in excess of $150,000 (in the aggregate in
the case of any related series of contracts or other agreements);
(x) contracts and other agreements containing covenants of the Company or
its Subsidiaries, or, to the Company's Knowledge, its officers,
directors or employees, not to compete in or solicit employees in any
line of business or with any person in any geographical area or
covenants of any other person not to compete with or solicit
employees from the Company in any line of business or in any
geographical area;
(xi) contracts and other agreements relating to the borrowing of money by,
or indebtedness of, the Company or its Subsidiaries or the direct or
indirect guaranty by the Company or its Subsidiaries of any
obligation or indebtedness of any other person or Governmental Entity
(other than any accounts receivable or accounts payable of the
Company or its Subsidiaries), including, without limitation, any (a)
agreement or arrangement relating to the maintenance of compensating
balances, (b) agreement or arrangement with respect to lines of
credit, (c) agreement to advance or supply funds to any other person
other than in the ordinary course of business, (d) agreement to pay
for property, products or services of any other person even if such
property, products or services are not conveyed,
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delivered or rendered, (e) keep-well, make-whole or maintenance of
working capital or earnings or similar agreement, and (f) guaranty
with respect to any lease or other similar periodic payments to be
made by any such person;
(xii) contracts and other agreements relating to the provision by or to
the Company or its Subsidiaries of third party management or
administration services, which involve the receipt or payment by the
Company or its Subsidiaries of an amount in excess of $300,000 (in
the aggregate in the case of any related series of contracts and
other agreements);
(xiii) each lease of personal property which requires annual lease
payments in excess of $100,000 and each Lease;
(xiv) contracts and other agreements between the Company or its
Subsidiaries and any Governmental Entity involving the current or
future receipt or payment by the Company or its Subsidiaries of an
amount in excess of $300,000;
(xv) contracts and other agreements which require payments of an amount in
excess of $250,000 generated by, or contracts and other agreements
required to be set forth in any other clause of Section 4.16 of the
Company Disclosure Schedule which would terminate upon, a change in
control of the Company; and
(xvi) contracts and other agreements relating to disposal of any
controlled or Hazardous Materials for which there remains any
obligation to or from the Company or its Subsidiaries.
(b) Except as disclosed in Section 4.16(b) of the Company Disclosure
Schedule, each contract or other agreement to which the Company or any
Subsidiary is a party is valid, in full force and effect and binding upon
the Company and its Subsidiaries, and, to the Company's Knowledge, the
other parties thereto in accordance with its terms, except for failures to
be in full force and effect that would not, individually or in the
aggregate, have a Company Material Adverse Effect, and neither the Company
nor any of its Subsidiaries is in default under any of them, except for
defaults that would not, individually or in the aggregate, have a Company
Material Adverse Effect, and the Company has no Knowledge of any threat of
cancellation or termination thereunder. No Permits or other documents or
agreements with, or issued by or filed with, any person, have been granted
to any other person that provide the right to use any real or tangible
personal property comprising any portion of the assets of the Company,
except for grants that would not, individually or in the aggregate, have a
Company Material Adverse Effect. Except as set forth in Section 4.16(b) of
the Company Disclosure Schedule, neither the Company nor any of its
Subsidiaries is a party to any contract, commitment, arrangement or
agreement which would, following the Closing, restrain or restrict Parent
or any affiliate of Parent, from operating the business of the Company in
the manner in which it is currently operated, except for contracts,
commitments, arrangements or agreements that would not, individually or in
the aggregate, have a Company Material Adverse Effect.
SECTION 4.17 REAL PROPERTY. (a) Section 4.17 of the Company Disclosure
Schedule sets forth (i) a list of all leases, subleases, licenses, occupancy
agreements
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or other agreements, written and oral, together with any amendments or
modifications thereto (each a "Lease" and collectively, the "Leases") with
respect to (A) all real property leased by the Company or its Subsidiaries
(whether as lessor or lessee and including those in the names of nominees or
other entities) and used or occupied in connection with the business of the
Company or its Subsidiaries (the "Leased Real Property") and (B) all real
property leased or subleased by the Company or its Subsidiaries, as lessor or
sublessor, to third parties; and (ii) a list of all real property owned by the
Company or its Subsidiaries (the "Owned Real Property").
(b) Each Lease is, with respect to the Company and its Subsidiaries,
in full force and effect, and to the Company's Knowledge, is in full force
and effect with respect to each other party thereto, except for failures to
be in full force and effect that would not, individually or in the
aggregate, have a Company Material Adverse Effect. To the Knowledge of the
Company, the Company and each of its Subsidiaries have performed all
obligations required to be performed by it to date under, and is not in
default in respect of, any Lease, and, to the Knowledge of the Company, no
event has occurred which, with due notice or lapse of time or both, would
constitute such a default by the Company or its Subsidiaries, except with
respect to non-performance or defaults that would not, individually or in
the aggregate, have a Company Material Adverse Effect. To the Knowledge of
the Company, there is no default asserted thereunder by any other party
thereto. All material rentals and other payments due under each such Lease
have been duly paid.
(c) Except as set forth in Section 4.17 of the Company Disclosure
Schedule, the Company or its applicable Subsidiary, as the case may be, has
good and marketable title to the Owned Real Property and improvements
thereon, subject only to the title exceptions specified therein and such
other liens and imperfections of title, if any, as do not materially
interfere with the present use of the property affected thereby or which
would not, individually or in the aggregate, have a Company Material
Adverse Effect. None of the Owned Real Property is subject to any right or
option of any other person, to purchase or otherwise obtain title to such
property. No person other than the Company or its Subsidiaries, as the case
may be, has any right to use, occupy or lease all or any portion of the
Owned Real Property.
(d) The Company has not received any written, or to the Knowledge of
the Company, any other notice of any violation of any applicable building,
zoning, land use or other similar statutes, laws (other than Environmental
Laws which are addressed in Section 4.30), ordinances, regulations, permits
or other requirements (including, without limitation, the Americans with
Disabilities Act) in respect of the Owned Real Property and the Leased Real
Properties, which has not been heretofore remedied, and, to the Company's
Knowledge, there do not exist any such violations which, individually or in
the aggregate, would reasonably be expected to have a Company Material
Adverse Effect. The Company has not received any notice that any operations
on or uses of the Owned Real Property and the Leased Real Properties
constitute non-conforming uses under any applicable building, zoning, land
use or other similar statutes, laws, ordinances, regulations, permits or
other requirements. The Company has no Knowledge of nor has received any
notice (other than published notice not
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actually received) of any pending or contemplated rezoning proceeding
affecting the Owned Real Property and the Leased Real Properties.
(e) Neither the Company nor any of its Subsidiaries has received
notice from any insurance carrier regarding defects or inadequacies in the
Owned Real Properties and the Leased Real Properties, which, if not
corrected, would result in termination of the Company's or its
Subsidiaries' insurance coverage therefor or an increase in the cost
thereof which defects, inadequacies or terminations would result,
individually or in the aggregate, in a Company Material Adverse Effect.
(f) To the Knowledge of the Company, there is no pending or
threatened: (i) condemnation of any part of the Leased Real Properties by
any Governmental Entity; (ii) special assessment against any part of the
Leased Real Properties; or (iii) litigation against the Company or any of
its Subsidiaries for breach of any restrictive covenant affecting any part
of the Leased Real Properties.
(g) The Owned Real Property, the Leased Real Properties and the
equipment of the Company are in good condition and repair, ordinary wear
and tear excepted, and have not suffered any casualty or other damage which
has not been repaired, except to the extent the failure of any of the
foregoing to be true would not reasonably be expected to have a Company
Material Adverse Effect.
SECTION 4.18 INTELLECTUAL PROPERTY. (a) The Company and its Subsidiaries
own free and clear of all liens or security interests, other than Permitted
Liens, or possess a license for the life of the intellectual property right (i)
to make, use, offer for sale or sell any system or method under or (ii) to use,
reproduce, publicly display or create derivative works from, as the case may be,
all patents (and applications therefor), patent rights and disclosures;
trademarks, trade names, domain names, trade dress and service marks (and
applications or registrations therefor) and rights relating thereto; inventions,
discoveries, systems, scientific, engineering and marketing data, technology,
trade secrets, formulae, and techniques, and all research records relating
thereto; and all software programs and codes (both source and object) and
related documentation as well as all supporting database information,
modifications, enhancements and derivative works based on such software; that
are used in the normal course of their businesses in any territory in which the
Company and its Subsidiaries, are currently conducting such businesses and have
plans to conduct such businesses, and any other proprietary information
(collectively, the "Intellectual Property Rights"). The Company and its
Subsidiaries are the sole and exclusive owners of all right to sue and keep any
damage awards for past infringements by third parties of the Intellectual
Property Rights. Section 4.18(a)(i) of the Company Disclosure Schedule sets
forth a true and complete list of the owned Intellectual Property Rights of the
Company and of its Subsidiaries. Section 4.18(a)(ii) of the Company Disclosure
Schedule sets forth a true and complete list of the licensed Intellectual
Property Rights of the Company and of its Subsidiaries, other than
shrink-wrapped licensed Intellectual Property Rights.
(b) Except as disclosed in Section 4.18(b) of the Company Disclosure
Schedule, to the Knowledge of the Company, neither the Company nor any of
its Subsidiaries has received notice or otherwise has reason to know of any
conflict or alleged conflict with the rights of others pertaining to the
Intellectual
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Property Rights; and to the Knowledge of the Company, neither the Company
nor any of its Subsidiaries has received notice that the businesses of the
Company and of its Subsidiaries, as presently conducted, infringe upon or
violate any intellectual property right of others.
(c) Except as disclosed in Section 4.18(c) of the Company Disclosure
Schedule, to the Knowledge of the Company, none of the Intellectual
Property Rights is presently involved in, or subject to, any interference,
reexamination, reissue, opposition, cancellation or other administrative
proceeding before the United States Patent and Trademark Office, United
States Copyright Office, or any comparable foreign office, or any other
administrative agency or registrar of the United States, a foreign country,
or an international organization.
(d) Except as disclosed in Section 4.18(d) of the Company Disclosure
Schedule, neither the Company nor any of its Subsidiaries is currently
obligated or under any existing liability to make royalty or other payments
to any owner of, licensor of, or other claimant to, any patent, trademark,
service mark, trade dress, domain name, trade name, copyright or other
intangible asset, with respect to the use thereof or in connection with the
conduct of its business as now conducted or otherwise.
(e) Except as disclosed in Section 4.18(e) of the Company Disclosure
Schedule, the employees of the Company and of the Subsidiaries are under an
obligation to assign all Intellectual Property Rights developed by the
employee to the Company or the relevant Subsidiary; to the Knowledge of the
Company, no employee of the Company or of its Subsidiaries has violated any
employment agreement or proprietary information agreement which he had with
a previous employer, or is a party to or threatened by any litigation
concerning any patents, trademarks, service marks, trade names, domain
names, trade dress, trade secrets, copyrights, licenses and the like, the
result of which would materially detract from the value of the property
subject thereto or materially impair the use of or the access to the
property subject thereto, or materially impair the operation of the Company
or its Subsidiaries or materially detract from its business; and to the
Knowledge of the Company, none of the employees, agents or representatives
of the Company or of its Subsidiaries has engaged in any acts of
inequitable conduct, fraud or misrepresentation of material information in
securing any Intellectual Property Rights with the United States Patent and
Trademark Office, United States Copyright Office, comparable foreign
office, or any state agency or office.
(f) Except as disclosed in Section 4.16 or Section 4.18(f) of the
Company Disclosure Schedule, neither the Company nor any of its
Subsidiaries has granted to any third party (i) any license or similar
rights in or to any of the Intellectual Property Rights required to be
disclosed in Section 4.18(a)(i) of the Company Disclosure Schedule or (ii)
any sublicense or similar rights in or to any Intellectual Property Rights
required to be disclosed in Section 4.18(a)(ii) of the Company Disclosure
Schedule. Section 4.18(f) of the Company Disclosure Schedule specifies the
territory in which any such granted licenses, sublicenses, or similar
rights are applicable, and whether they are exclusive or non-exclusive.
(g) The Company and its Subsidiaries have taken reasonable measures
and engaged in compliance monitoring, as necessary to protect the secrecy,
confidentiality and value of the Intellectual Property Rights, except where
failure
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to do so would not reasonably be expected to have a Company Material
Adverse Effect.
SECTION 4.19 RECEIVABLES. All accounts receivable and vendor receivables
which exceed $10,000 for a single receivable reflected in the Company Audited
Financial Statements, and all accounts receivable and vendor receivables which
exceed $10,000 for a single receivable arising subsequent to December 31, 2000,
represent bona fide transactions that have arisen in the ordinary course of
business and are valid and existing. The Company has made and will make
adjustments to the carrying value of such receivables reasonably considered
adequate for receivables not collectible in the ordinary course of its business
in accordance with GAAP, consistently applied.
SECTION 4.20 BANKING. Section 4.20 of the Company Disclosure Schedule
contains a complete list of all of the bank accounts and lines of credit owned
or used by the Company and its Subsidiaries, and the names of all persons with
authority to withdraw funds from, or execute drafts or checks on, each such
account, other than accounts or lines of credit involving less than $10,000.
SECTION 4.21 LIENS. Except as set forth in Section 4.21 of the Company
Disclosure Schedule, the Company and its Subsidiaries have good title to all of
its respective assets and properties, in each case free and clear of any lien or
other encumbrance, except for (i) liens or other encumbrances securing Taxes,
assessments, governmental charges or levies, or the claims of materialmen,
carriers, landlords and like persons, all of which are not yet delinquent or
which are being contested in good faith or (ii) liens or other encumbrances of a
character that do not materially detract from the value of the property subject
thereto or impair the use of or the access to the property subject thereto, or
impair the operation of the Company or its Subsidiaries or detract from its
business (collectively, "Permitted Liens").
SECTION 4.22 EMPLOYEE BENEFIT PLANS. (a) Section 4.22(a) of the Company
Disclosure Schedule sets forth all "employee benefit plans," as defined in
Section 3(3) of ERISA, and all other employee benefit arrangements, including,
without limitation, any such arrangement providing severance pay, sick leave,
vacation pay, salary continuation for disability, retirement benefits, deferred
compensation, bonus pay, incentive pay, stock options, hospitalization
insurance, medical insurance, life insurance, scholarships or tuition
reimbursement plans or agreements, maintained by the Company or its Subsidiaries
or to which the Company or its Subsidiaries has any liability (contingent or
otherwise) thereunder for current or former employees of the Company or its
Subsidiaries. Each of the employee benefit plans, practices and arrangements set
forth in Section 4.22 of the Company Disclosure Schedule shall hereafter be
referred to as a "Plan" (or "Plans" as the context may require).
(b) Except as disclosed in Section 4.22(b) of the Company Disclosure
Schedule, none of the Plans is a "multiemployer plan," as defined in
Section 3(37) of ERISA or a "defined benefit plan," as defined in Section
3(35) of ERISA.
(c) Each of the trusts maintained under a Plan that is intended to
qualify under Section 401(a) of the Code has been determined to be exempt
from federal income taxation under Section 501 of the Code by the IRS (or
the Plan remains within the remedial amendment period for obtaining an
initial
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determination of exemption from Tax), and nothing has occurred with respect
to the operation of any such Plan which could cause the loss of such
qualification or exemption or the imposition of any liability, penalty or
Tax under ERISA or the Code.
(d) All contributions (including all employer contributions and
employee salary reduction contributions) required to have been made under
the Plans or by law to any funds or trusts established thereunder or in
connection therewith have been made by the due date thereof (including any
valid extensions), and all contributions of any period ending on or before
the Effective Time which are not yet due will have been paid or accrued on
or prior to the Effective Time.
(e) True, correct and complete copies of the following documents, with
respect to each of the Plans, have been delivered to Parent by the Company:
(i) the most recent plan document and related trust documents, and
amendments thereto; (ii) the IRS Forms 5500 for the most recent two (2)
Plan years; (iii) the last IRS determination letter; and (iv) the most
recent summary plan descriptions.
(f) Except as set forth in Section 4.21(f) of the Company Disclosure
Schedule, there are no pending actions, claims or lawsuits which have been
asserted or instituted against the Plans, the assets of any of the trusts
under such plans, the plan sponsor, the plan administrator, or any
fiduciary of the Plans with respect to the operation of such Plans (other
than routine benefit claims or actions seeking qualified domestic relations
orders), nor does the Company have Knowledge of any threatened claim or
lawsuit, or have reason to believe that such an action, claim or lawsuit
may be asserted or instituted.
(g) The Plans have been maintained substantially in accordance with
their terms and with all provisions of ERISA and the Code (including
applicable regulations thereunder) and other applicable federal and state
laws and regulations, and the Company has not engaged in a "prohibited
transaction" within the meaning of Section 406 of ERISA or 4975 of the Code
that would result in a material liability to the Company or its
Subsidiaries or Parent. No fiduciary has engaged in any conduct which could
give rise to any material liability for breach of fiduciary duty or any
other failure to act or comply in connection with the administration or
investment of the assets of any Plan.
(h) Except as disclosed in Section 4.22(h) of the Company Disclosure
Schedule, none of the Plans provides life or health benefits coverage to
former employees of the Company or their dependents or beneficiaries except
as may be required under applicable state law, Section 4980B of the Code or
Section 601 of ERISA or at the expense of the participant or the
participant's beneficiary or death benefits under the Company's retirement
plan.
(i) Except pursuant to the Employment Agreements and except as
disclosed in Section 4.22(i) of the Company Disclosure Schedule, neither
the execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will (i) result in any payment becoming
due to any employee (current, former or retired) of the Company, (ii)
increase any benefits otherwise payable under any Plan or (iii) result in
the acceleration of the time of payment or vesting of any benefits under
any Plan.
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SECTION 4.23 EMPLOYEE RELATIONS. (a) Except as disclosed in Section
4.23(a) of the Company Disclosure Schedule, the Company and its Subsidiaries are
in compliance with all laws regarding employment, wages, hours, equal
opportunity and collective bargaining and payment of social security and other
Taxes, except for non-compliances that would not, individually or in the
aggregate, have a Company Material Adverse Effect. Neither the Company nor any
of its Subsidiaries is engaged in any unfair labor practice or discriminatory
employment practice, no complaint of any such practice against the Company or
its Subsidiaries has been filed or, to the Company's Knowledge, threatened to be
filed with or by the National Labor Relations Board, the Equal Employment
Opportunity Commission or any other administrative agency, federal or state,
that regulates labor or employment practices, and no grievance has been filed
or, to the Company's Knowledge, threatened to be filed, against the Company or
its Subsidiaries by any employee pursuant to any collective bargaining or other
employment agreement to which the Company is a party or is bound. The Company
and its Subsidiaries are in compliance with all applicable foreign, federal,
state and local laws and regulations regarding occupational safety and health
standards, except for non-compliances that would not, individually or in the
aggregate, have a Company Material Adverse Effect, and have received no
complaints from any foreign, federal, state or local agency or regulatory body
alleging violations of any such laws and regulations.
(b) Except as set forth in Section 4.23(b) of the Company Disclosure
Schedule, the employment of all persons employed by the Company and its
Subsidiaries is terminable at will without any penalty or severance
obligation of any kind on the part of the employer. All sums due for
employee compensation and benefit and all vacation time owing to any
employee of the Company or its Subsidiaries have been duly and adequately
accrued on the accounting records of the Company and its Subsidiaries. To
the Company's Knowledge, all employees of the Company and its Subsidiaries
located in the United States are either United States citizens or resident
aliens specifically authorized to engage in employment in the United States
in accordance with all applicable laws.
SECTION 4.24 INSURANCE. Section 4.24 of the Company Disclosure Schedule
sets forth a list of all policies or binders of errors and omissions, fire,
liability, product liability, workmen's compensation, vehicular and other
insurance (excluding Plans) held by or on behalf of the Company or its
Subsidiaries (collectively, the "Insurance Policies"). Such Insurance Policies
are in full force and effect and in amounts of a nature which are adequate to
meet all existing obligations relating to maintenance of insurance and customary
for the Company's and its Subsidiaries' businesses. In addition, Section 4.24 of
the Company Disclosure Schedule sets forth in respect of the Insurance Policies
(i) a description of occurrences reported involving amounts in excess of $10,000
and (ii) the aggregate amount paid out under each such policy during the period
from January 1, 1999 through the date hereof. There have been no disputes
regarding denial or nonpayment of claims under any Insurance Policy since
January 1, 1999, other than routine disputes under Insurance Policy coverage
provided under the Plans.
SECTION 4.25 OFFICERS, DIRECTORS, EMPLOYEES, CONSULTANTS. Section 4.25 of
the Company Disclosure Schedule sets forth (i) the name of each officer and
director of the Company or its Subsidiaries and the amount of compensation paid
during fiscal year 2000 and the amount reasonably expected to be paid during
fiscal 2001, and (ii) the name of each other employee or class of employees of
the Company or its
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Subsidiaries who either (x) received compensation in fiscal year 2000 in excess
of $150,000 or (y) is anticipated to receive, based on current compensation
levels, compensation in fiscal year 2001 in excess of $150,000, indicating the
amount of such compensation for such persons for fiscal year 2000 and fiscal
year 2001. Except as disclosed in Section 4.25 of the Company Disclosure
Schedule, the Company or any of its Subsidiaries does not employ any individual
as a consultant, whose employment cannot be terminated on not less than 30 days'
notice without penalty.
SECTION 4.26 TRANSACTIONS WITH DIRECTORS, OFFICERS AND AFFILIATES. Except
as disclosed in Section 4.26 of the Company Disclosure Schedule or in the
Company SEC Documents filed prior to the date of this Agreement, since January
1, 1999, there have been no transactions between the Company or its Subsidiaries
and any director, officer, employee, stockholder or other affiliate of the
Company or its Subsidiaries or loans, guarantees or pledges to, by or for the
Company or its Subsidiaries from, to, by or for any of such persons. Since
January 1, 1999, other than as disclosed in the Company SEC Documents filed
prior to the date of this Agreement or in Section 4.26 of the Company Disclosure
Schedule, none of the officers, directors or employees of the Company or its
Subsidiaries, or any Family Member of any of such persons, has been a director
or officer of, or has had any direct or indirect interest in, any person or
business enterprise which during such period has been a supplier, customer or
sales agent of the Company or its Subsidiaries or has competed with or been
engaged in any business of the kind being conducted by the Company or its
Subsidiaries.
SECTION 4.27 OPERATIONS OF THE COMPANY. Except as disclosed in Section
4.16 or 4.27 of the Company Disclosure Schedule or as set forth in the Company
SEC Documents filed prior to the date of this Agreement, and except as may
result from the transactions contemplated by this Agreement, since December 31,
2000, neither the Company nor any of its Subsidiaries has:
(i) amended its certificate of incorporation or by-laws or merged with or
into or consolidated with any other Person, subdivided or in any way
reclassified any shares of its capital stock or changed or agreed to
change in any manner the rights of its outstanding capital stock or
the character of its business;
(ii) (A) issued or sold or purchased, or issued options or rights to
subscribe to, or entered into any contracts or commitments to issue
or sell or purchase, any shares of its capital stock or any of its
bonds, notes, debentures or other evidences of indebtedness or (B)
modified the terms of its options, rights or any contracts or
commitments to issue or sell or purchase any shares of its capital
stock or any of its bonds, notes, debentures or other evidences of
indebtedness;
(iii) entered into or amended any agreement contract or commitment
required to be disclosed in Section 4.16(a)(i) or Section 4.22(i) of
the Company Disclosure Schedule, made any wage or salary increase or
bonus, loan or increase in any other direct or indirect
compensation, including but not limited to severance benefits, for
or to any of its officers, directors, employees, individuals who are
consultants, agents or other representatives or any current
stockholder of the Company, or any affiliate (excluding the Company
and its Subsidiaries) or Family Members of the foregoing persons,
such that after giving effect to such increase, bonus, or
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loan, would require disclosure of the agreement, contract or
commitment in Section 4.16(a)(i) or Section 4.22(i) of the Company
Disclosure Schedule;
(iv) in the case of the Company, except in the ordinary course of business
consistent with past practice, declared or made any Distributions to
any stockholder or made any direct or indirect redemption,
retirement, purchase or other acquisition of any shares of its
capital stock;
(v) made any change in its accounting methods or practices or made any
change in depreciation or amortization policies, except as required
by law or GAAP;
(vi) made any loan or advance to its stockholders or to any of the
directors, officers or employees of the Company or any of its
Subsidiaries, consultants, agents or other representatives, or
otherwise than in the ordinary course of business made any other loan
or advance;
(vii) except in the ordinary course of business consistent with past
practice, (A) entered into any Lease; (B) sold, abandoned or made
any other disposition of any of its assets or properties; (C)
granted or suffered any lien or other encumbrance on any of its
assets or properties; (D) entered into or amended any contract or
other agreement to which it is a party, or by or to which it or its
assets or properties are bound or subject which if existing on the
date hereof would need to be disclosed in Section 4.16 of the
Company Disclosure Schedule;
(viii) made or entered into any agreement to make any acquisition of all or
a substantial part of the assets, properties, securities or business
of any other person;
(ix) paid, directly or indirectly, any of its Liabilities before the same
became due in accordance with its terms or otherwise than in the
ordinary course of business;
(x) terminated or failed to renew, or received any written threat (that
was not subsequently withdrawn) to terminate or fail to renew, any
contract or other agreement that is or was material to the assets,
liabilities, properties, business, operations, condition (financial
or otherwise), operations or prospects of the Company and its
Subsidiaries, taken as a whole;
(xi) made any revaluation of any assets or write-down of the value of any
loans or receivables of the Company or any of its Subsidiaries in
excess of $50,000, unless required by GAAP;
(xii) except in the ordinary course of business consistent with past
practice, accelerated the collection, or made any sale to third
parties, of any receivables of the Company or any of its
Subsidiaries, or delayed the payment of any payables of the Company;
(xiii) entered into any other contract or other agreement or other
transaction that obligates the Company or any of its Subsidiaries
to pay an amount in excess of $50,000, which contract is not
terminable by the Company or its applicable Subsidiary upon not
more than 30 days' notice;
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(xiv) suffered any damage, destruction or loss, whether covered by
insurance or not, which has had or could have a Company Material
Adverse Effect; or
(xv) changed any of the Tax accounting methods or practices used by it
unless required by applicable law, make or terminate any Tax
election, take any Tax Return position inconsistent with past
practices, file any amended Tax Return or settle or compromise any
claim relating to Taxes in excess of $50,000.
SECTION 4.28 BROKERAGE. Except for the engagement of Janney Montgomery
Scott LLC by letter dated December 15, 2000, relating to the rendering of a
fairness opinion, no broker, agent or finder has acted, directly or indirectly,
for the Company or, to the Knowledge of the Company, any of the Company
stockholders, nor has the Company or, to the Knowledge of the Company, any of
the Company stockholders, incurred any obligation to pay any brokerage fee,
agent's commission or finder's fee or other commission in connection with the
transactions contemplated by this Agreement. The Company has furnished to Parent
a copy of any engagement letter relating to such broker, agent or finder.
SECTION 4.29 TAXES. (a) The Company and, as applicable, each of its
Subsidiaries (i) have duly and timely filed (or there have been filed on their
behalf) accurate and complete copies of all Tax Returns required to be filed
(after taking into account all available extensions), (ii) have timely paid or
adequately provided for in accordance with GAAP all Taxes due in respect of the
periods covered by such Tax Returns, and (iii) have withheld and, if due, paid
all Taxes required to have been withheld and, if due, paid in connection with
amounts paid or owing to any employee, independent contractor, creditor,
stockholder, or other third party.
(b) Except as set forth in Section 4.29 of the Company Disclosure
Schedule, as of the date of this Agreement to the Knowledge of the Company
(i) no claim for assessment or collection of Taxes is presently being
asserted against the Company or its Subsidiaries, (ii) neither the Company
nor any of its Subsidiaries is a party to any pending action, proceeding,
or investigation by any governmental taxing authority relating to Tax, and
(iii) no such action, proceeding or investigation has been threatened.
(c) Except as set forth in Section 4.29 of the Company Disclosure
Schedule, neither the Company nor any of its Subsidiaries is, or has ever
been, a party to or bound by any Tax indemnity agreement, Tax sharing
agreement, Tax allocation agreement, Tax indemnification agreement, or
similar allocation agreement or similar contract or arrangement.
(d) Except as set forth in Section 4.29 of the Company Disclosure
Schedule, neither the Company nor any of its Subsidiaries has requested any
extension of time within which to file any income Tax Return which return
has not since been filed, nor is there outstanding any power of attorney
with respect to any matter relating to Taxes that could affect the Company,
nor has the Company or any of its Subsidiaries waived the running of any
statute of limitations with respect to any income Taxes.
(e) Except as set forth in Section 4.29 of the Company Disclosure
Schedule, the Company has delivered to Parent true and correct copies of
all filed income Tax Returns (including information returns and Forms
1120), examination reports, closing agreements and statements of deficiency
of the Company and its
A-26
Subsidiaries which refer to any period of time from January 1, 1997 through
the date of this Agreement or to any event which occurred during that
period of time. Neither the Company nor any of its Subsidiaries has filed
an election under Section 341(f) of the Code that is applicable to the
Company, any of its Subsidiaries or any asset held by the Company or any of
its Subsidiaries. Neither the Company nor any of its Subsidiaries has
agreed, or is required, to make any adjustment under Section 446(e) or
481(a) of the Code (or any similar provision of law) by reason of a change
in accounting method or otherwise. Except as set forth in Section 4.29 of
the Company Disclosure Schedule, neither the Company nor any of its
Subsidiaries is subject to or a member of any joint venture, partnership or
other arrangement or contract which is treated as a partnership for federal
income Tax purposes. The Company has not been a United States real property
holding corporation within the meaning of Section 897(c)(2) of the Code
during the applicable period specified in Section 897(c)(1)(A)(ii) of the
Code.
(f) Except as set forth in Section 4.29 of the Company Disclosure
Schedule, neither the Company nor any Subsidiary has been a member of an
affiliated group filing a consolidated federal income Tax Return (other
than the affiliated group of which the Company is now the common parent),
or has any liability for Taxes of any Person under Treas. Reg. Section
1.1502-6, or any similar provision of state, local or foreign law or
regulation, as a transferee or successor, by contract or otherwise.
(g) Section 4.29 of the Company Disclosure Schedule lists each state
in which the Company and its Subsidiaries are required to file Tax Returns.
To the Knowledge of the Company, no claim has been made after January 1,
1997 by any authority in a jurisdiction where the Company or any of its
Subsidiaries does not file Tax Returns that it is or may be subject to
taxation by that jurisdiction.
(h) Neither the Company nor any of its Subsidiaries has any net
operating loss carryovers that are subject to limitation under Section 382
of the Code.
SECTION 4.30 ENVIRONMENTAL LAWS. Except as or as set forth in Section 4.30
of the Company Disclosure Schedule:
(a) To the Knowledge of the Company, the Company and its present and
former Subsidiaries (i) are in compliance in all material respects with all
Environmental Laws, except for non-compliances which would not reasonably
be expected to have a Company Material Adverse Effect; (ii) have obtained
and currently maintain in full force and effect all Environmental Permits,
the failure to obtain or maintain would, individually or in the aggregate,
have a Company Material Adverse Effect; and (iii) are in compliance with
all terms and conditions of such Environmental Permits except for
noncompliances that would not, individually or in the aggregate, have a
Company Material Adverse Effect.
(b) To the Company's Knowledge, no event has occurred which, upon the
passage of time, the giving of notice, or failure to act would reasonably
be expected to give rise to liability to the Company or any of its present
or former Subsidiaries under any Environmental Law, the result of which
would materially detract from the value of the property subject thereto or
materially impair the use of or access to the property subject thereto, or
materially impair the
A-27
operation of the Company of its Subsidiaries or materially detract from its
business.
(c) To the Company's Knowledge, no Hazardous Material has been
released, spilled, discharged, dumped, disposed of, or otherwise come to be
located in, at or beneath any of the Owned Real Property or the Leased Real
Property or any properties or assets formerly owned, operated or otherwise
controlled or occupied by the Company or its present or former Subsidiaries
and used in the conduct of the Company's and its Subsidiaries' businesses
(i) in violation of any Environmental Law, or (ii) in such manner as would
reasonably be expected to cause an environmental liability of the Company
or its present or former Subsidiaries.
(d) To the Company's Knowledge, there are no: (i) aboveground or
underground storage tanks or surface impoundments containing Hazardous
Materials; (ii) asbestos containing materials or (iii) PCBs or
PCB-containing equipment, located within any portion of the Owned Real
Property or the Leased Real Property or any property formerly owned,
operated or otherwise controlled or occupied by the Company or its present
or former Subsidiaries.
(e) To the Company's Knowledge, no liens have been placed upon any
Owned Real Property or Leased Real Property (including formerly owned real
property and leased property) in connection with any actual or alleged
liability under any Environmental Law.
(f) There is no pending or, to the Knowledge of the Company,
threatened, material claim, litigation or administrative proceeding against
the Company or its present Subsidiaries or, to the Knowledge of the
Company, former Subsidiaries arising under any Environmental Law;
(g) Neither the Company nor any of its Subsidiaries has received any
written, or to the Knowledge of the Company, any other notice, claim,
demand, suit or request for information from any Governmental Entity or
private entity with respect to any liability or alleged liability under any
Environmental Law, nor, to the Knowledge of the Company, has any other
entity whose liability therefor, in whole or in part, may be attributed to
the Company or any of its present or former Subsidiaries, received such
notice, claim, demand, suit or request for information. Neither the Company
nor any of its present Subsidiaries, nor, to the Company's Knowledge, any
former Subsidiary or prior owner or operator of the Leased Real Property
(including formerly leased property) has generated, disposed of, or
arranged for the disposal of any Hazardous Material except in compliance
with Environmental Law, except for such non-compliances that would not,
individually or in the aggregate, have a Company Material Adverse Effect.
(h) Neither the Company nor any of its present Subsidiaries or, to the
Knowledge of the Company, former Subsidiaries has, and, to the Knowledge of
the Company, no other entity whose liability therefor, in whole or in part,
may be attributed to the Company or its present or former Subsidiaries,
disposed of any Hazardous Material at any location which is identified on
the current or proposed (i) National Priorities List under 40 C.F.R. 300
Appendix B or (ii) similar state priority list.
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(i) To the Knowledge of the Company, the Company has made available to
Parent all material environmental studies and reports and other records
pertaining to the Owned Real Property or the Leased Real Property
(including formerly owned real property or leased property), and the
operations conducted thereon, that are in the Company's possession.
(j) The representations and warranties set forth in this Section 4.30
and in Section 4.16(a)((xvi) shall be the exclusive representations and
warranties with respect to environmental matters, including, but not
limited to, Environmental Permits and Environmental Laws.
SECTION 4.31 COMPANY ACTION. The Board of Directors of the Company (at a
meeting duly called and held) has by the requisite vote of all directors present
(a) determined that the Merger is advisable and fair and in the best interests
of the Company and its stockholders, (b) approved the Merger in accordance with
the applicable provisions of the Delaware Corporation Law and (c) recommended
the approval of this Agreement and the Merger by the holders of the Company
Common Stock and directed that the Merger be submitted for consideration by the
Company's stockholders at the Company Meeting.
SECTION 4.32 OPINION OF FINANCIAL ADVISOR. The Board of Directors of the
Company has received, on the date of this Agreement, the oral opinion of Janney
Montgomery Scott, to be confirmed in writing, to the effect that, as of such
date and subject to the assumptions and qualifications contained therein, the
Exchange Ratio or, if applicable, the Cash Consideration in the Merger is fair
to the holders of the Company Common Stock from a financial point of view. A
copy of the written opinion of Janney Montgomery Scott will be delivered to
Parent as soon as practicable after the date of this Agreement.
SECTION 4.33 STATUS OF CERTAIN EMPLOYMENT AND OTHER AGREEMENTS. The
Company has provided to Parent a true and correct copy of the employment
agreement, severance agreement or similar agreement between the Company or one
of its Subsidiaries, as applicable, and each person listed in Exhibit F, and
each such agreement is as of the date of this Agreement in full force and
effect.
SECTION 4.34 RIGHTS AGREEMENT. The Company has amended the Rights
Agreement dated as of July 31, 1997 between Company and Registrar and Transfer
Company (the "Rights Agent") (the "Rights Agreement") to exclude Parent, and Sub
as Acquiring Persons (as that term is defined in the Rights Agreement), and
accordingly, the Company has taken all action necessary to ensure that, so long
as this Agreement shall not have been terminated pursuant to Article XII, no
Rights (as that term is defined in the Rights Agreement) have been exercised or
are exercisable in connection with the execution and delivery of this Agreement
or the consummation of the Merger. A copy of the executed amendment to the
Rights Agreement is attached hereto as Exhibit D. The Board of Directors of the
Company (at a meeting duly called and held) has by the requisite vote of all
directors present, approved such amendment to the Rights Agreement.
SECTION 4.35 STOCKHOLDERS AGREEMENT. The Stockholders Agreement dated as
of July 31, 1997 among the Company and the parties who are signatories thereto
has been terminated and a copy of the termination agreement, executed by all
parties to such Stockholders Agreement is attached hereto as Exhibit E. The
Board of Directors
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of the Company (at a meeting duly called and held) has by the requisite vote of
all directors present, approved the termination of such Stockholders Agreement.
SECTION 4.36 CUSTOMER RELATIONSHIP. Section 4.36 of the Company Disclosure
Schedule contains a list of all contracts, agreements, arrangements or
correspondence, formal or informal, by the Company or its Subsidiaries, with the
entities listed on Schedules 1 and 2, and the Company's or its Subsidiaries'
internal policies and procedure manuals, guidelines or schedules, relating to
the terms of their relationship with such customers including, but not limited
to, pricing, rebates and slotting fees. Neither the Company nor any of its
Subsidiaries has received any notice (written or verbal) from any of the
entities listed on Schedules 1 and 2 of a change or intention to change the
terms of their relationship with the Company or any of its Subsidiaries,
including, but not limited to a termination of the relationship, and a material
change in rebates or slotting fees. None of the entities listed in Schedule 2 to
this Agreement has expressed since January 1, 2001 an intention to reduce
materially the amount of business that it does with the Company so that, after
taking into account any increases in sales to these and other customers, it is
reasonably likely that the Hillman Subsidiary's aggregate level of annual sales
will be materially reduced relative to the level in effect on the date hereof.
SECTION 4.37 INVENTORY. All inventory of the Company and its Subsidiaries,
required to be reflected in the Company Financial Statements in accordance with
GAAP, consists of a quality and quantity usable and salable in the ordinary
course of business, except for obsolete items and items of below-standard
quality, all of which have been written off or written down to net realizable
value in the Company Financial Statements or on the accounting records of the
Company or its Subsidiaries as of the Closing Date, as the case may be. All
inventories are valued at the lower of cost or market on a principally first in,
first out basis. The quantities of inventory (whether raw materials,
work-in-process, or finished goods) are not excessive, including reserves, but
are reasonable in the present circumstances of the Company and its Subsidiaries.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
Parent and Sub represent and warrant to the Company that, except as set
forth in the disclosure schedule attached hereto (the "Parent Disclosure
Schedule"), which Parent Disclosure Schedule and shall be arranged in paragraphs
corresponding to the numbered and lettered paragraphs contained in this Article
V:
SECTION 5.1 EXECUTION AND DELIVERY. Each of Parent and Sub has the
corporate power and authority to enter into this Agreement and each other
agreement, document or instrument contemplated hereby or to be delivered in
connection herewith to which such person is a party (the "Parent Documents") and
to carry out its respective obligations hereunder and thereunder. The execution,
delivery and performance by Parent and Sub of this Agreement and the Parent
Documents to which it is a party and the consummation of the transactions
contemplated hereby and thereby have been duly authorized by the Board of
Directors of Parent and Sub, as applicable (and, in the case of this Agreement,
by the Board of Directors of Sub and by Parent as the sole stockholder of Sub).
This Agreement constitutes the valid and binding obligation of Parent and Sub
and the Parent Documents will constitute the valid and binding obligations of
Parent and Sub, when executed by such person,
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in each case, enforceable in accordance with their respective terms, except as
enforcement may be limited by bankruptcy, insolvency or other similar laws
affecting the enforcement of creditors' rights generally and except that the
availability of equitable remedies, including specific performance, is subject
to the discretion of the court before which any proceeding therefor may be
brought. No other corporate proceedings on the part of Parent or Sub are
necessary to authorize this Agreement or the Parent Documents and the
transactions contemplated hereby and thereby.
SECTION 5.2 CONSENTS AND APPROVALS. The execution and delivery by Parent
and Sub of this Agreement and the Parent Documents to which such person is a
party, the performance by Parent and Sub of their respective obligations
hereunder and thereunder and the consummation by Parent and Sub of the
transactions contemplated hereby and thereby do not require Parent or Sub to
obtain any consent, approval or action of, or make any filing or registration
with or give any notice to, any Governmental Entity, other than (i) in
connection, or in compliance, with the provisions of the H-S-R Act and any
similar law applicable in a non-United States jurisdiction, and, if applicable,
the Securities Act, the Exchange Act, the 1940 Act and the corporation,
securities or blue sky laws or regulations of various states, all of which will
be duly obtained or made, as the case may be, on or prior to the Closing, and
will be in full force and effect on the Closing Date, (ii) the filing of the
Certificate of Merger with the Secretary of State of Delaware and (iii) as to
which the failure to so obtain, file or register would not have a Parent
Material Adverse Effect.
SECTION 5.3 NO BREACH. Assuming the filings, registrations, consents and
approvals referred to in Section 5.2 are duly made or effected, the execution,
delivery and performance by Parent and Sub of this Agreement and the Parent
Documents to which either is a party and the consummation of the transactions
contemplated hereby and thereby in accordance with the terms and conditions
hereof and thereof will not (i) violate any provision of the Certificate of
Incorporation or By-Laws of Parent or Sub; (ii) violate, conflict with or result
in the breach of any of the terms of, result in any modification of the effect
of or loss of material rights under, otherwise give any other contracting party
the right to terminate, or constitute (or with notice or lapse of time or both,
constitute) a default under, any contract or other agreement or instrument to
which Parent or any of its Subsidiaries is a party or by or to which the assets
or properties of Parent or any of its Subsidiaries may be bound or subject;
(iii) violate any order, judgment, injunction, award or decree of any
Governmental Entity against, or binding upon, or any agreement with, or
condition imposed by, any Governmental Entity binding upon, Parent or any of its
Subsidiaries, or the securities, assets or business of Parent or any of its
Subsidiaries; (iv) violate any statute, law or regulation of any jurisdiction as
such statute, law or regulation relates to Parent or any of its Subsidiaries, or
to the securities, assets or business of Parent or any of its Subsidiaries; (v)
result in the creation or imposition of any lien or other encumbrance or the
acceleration of any indebtedness or other obligation of Parent or any of its
Subsidiaries; or (vi) result in the breach of any of the terms or conditions of,
constitute a default under, or otherwise cause an impairment of, any Permit of
Parent or any of its Subsidiaries; except in the case of (ii) through (vi) for
violations, conflicts, breaches, defaults, modifications, loss of rights,
impairments, liens or other encumbrances that would not, individually or in the
aggregate, have a Parent Material Adverse Effect.
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SECTION 5.4 SEC DOCUMENTS; FINANCIAL STATEMENTS. (a) Parent has filed and
will file with the SEC all forms, reports, schedules, statements, exhibits and
other documents (collectively, the "Parent SEC Documents") required to be filed
on or before the date hereof or the Closing Date, respectively, by it under the
Securities Act or the Exchange Act. Parent has furnished or made available to
the Company true and correct copies of all Parent SEC Documents filed by Parent
since January 1, 1999 and will promptly furnish to the Company any other Parent
SEC Document filed by or on behalf of Parent with the SEC from the date hereof
to the Closing Date. At the time filed, the Parent SEC Documents filed by Parent
since January 1, 1999 (i) did not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading and (ii) complied in all material respects
with the applicable requirements of the Securities Act or Exchange Act, as the
case may be.
(b) The audited consolidated financial statements of Parent for the
three years ended on December 31, 2000, together with the reports and
opinions thereon of Arthur Andersen LLP, which are included in the Parent
SEC Documents and have previously been delivered to the Company and the
unaudited consolidated financial statements of Parent as of and for the
three months ended March 31, 2001 (the "Parent Interim Financial
Statements"), which are included in the Parent SEC Documents and have been
previously delivered to the Company, are collectively referred to herein as
the "Parent Financial Statements". The Parent Financial Statements comply
as to form in all material respects with applicable accounting requirements
and the published rules and regulations of the SEC with respect thereto;
and fairly present, in all material respects, on a consolidated basis, the
financial position of Parent at the respective balance sheet dates
specified therein, and the results of its operations for each of the
periods then ended, and were prepared in conformity with GAAP applied on a
consistent basis, except as otherwise disclosed therein and, subject, in
the case of the Parent Interim Financial Statements, to normal recurring
year-end adjustments, the absence of footnote disclosures, and any other
adjustments described therein.
SECTION 5.5 SHARES OF PARENT COMMON STOCK. The shares of Parent Common
Stock will, when issued and delivered to the Company stockholders pursuant to
Section 3.1A(a), be duly authorized, validly issued, fully paid, non-assessable,
and free of all liens and other encumbrances of any kind or nature whatsoever.
SECTION 5.6 ORGANIZATION, STANDING AND AUTHORITY OF PARENT AND SUB. Each
of Parent and Sub is a corporation duly incorporated, validly existing and in
good standing under the laws of the State of Delaware (in the case of Sub) or
Maryland (in the case of Parent), and has all requisite power and authority to
own, lease and operate its assets, properties and businesses and to carry on its
businesses as now being conducted. Parent is duly qualified as a foreign
corporation to do business, and is in good standing, in each jurisdiction where
the character of its properties owned or held under lease or the nature of such
activities make such qualification necessary, except where the failure to so
qualify would not, individually or in the aggregate, have a Parent Material
Adverse Effect. Sub has not engaged in any business (other than certain
organizational matters) since the date of its incorporation. The copies of the
Certificate of Incorporation and By-Laws of Parent and Sub included as part of
Section 5.6 of the Parent Disclosure Schedule constitute accurate and complete
copies
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of such organizational instruments and accurately reflect all amendments thereto
through the date hereof.
SECTION 5.7 CAPITALIZATION. (a) The authorized capital stock of Parent
consists of 200,000,000 shares of Parent Common Stock, par value $0.0001 per
share. As of June 15, 2001, there were 91,517,429 shares of Parent Common Stock
outstanding and there have been no material changes in such numbers through the
date hereof. As of the date hereof, there are no bonds, debentures, notes or
other indebtedness issued or outstanding having the right to vote on any matters
on which Parent's stockholders may vote. All outstanding shares of Parent Common
Stock are duly authorized and are validly issued, fully paid and nonassessable.
(b) The authorized capital stock of Sub consists of 1,000 shares of
Sub Common Stock, all of which are duly authorized, validly issued, fully
paid and nonassessable.
SECTION 5.8 BROKERAGE. No broker, agent or finder has acted, directly or
indirectly, for Parent or Sub, nor have Parent and Sub incurred any obligation
to pay any brokerage fees, agent's commissions or finder's fee or commission in
connection with the transactions contemplated by this Agreement.
SECTION 5.9 INFORMATION IN DISCLOSURE DOCUMENTS. None of the information
supplied by Parent or Sub for inclusion in the Registration Statement (if
applicable) and the Proxy Statement will, in the case of the Proxy Statement or
any amendments or supplements thereto, at the time of the mailing of the Proxy
Statement and any amendments or supplements thereto, or, in the case of the
Registration Statement, at the time it becomes effective and at the Effective
Time, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading; provided, however, that this provision shall not apply to
statements or omissions in the Registration Statement or Proxy Statement based
upon information furnished by the Company for use therein. The Registration
Statement will comply as to form in all material respects with the provisions of
the Securities Act, and the rules and regulations promulgated thereunder. No
representation or warranty made by Parent contained in this Agreement and no
statement contained in any certificate delivered pursuant to Article VII or any
exhibit to this Agreement and the Parent Disclosure Schedule, contains any
untrue statement of a material fact or omits or will omit to state a material
fact necessary to make the statements contained therein, in light of the
circumstances under which they were made, not misleading.
SECTION 5.10 NO MATERIAL ADVERSE CHANGE. Since December 31, 2000, there
has not been any change, event, occurrence or state of facts that has caused, or
would reasonably be expected to cause, a Parent Material Adverse Effect.
SECTION 5.11 SUB ACTION. The Board of Directors of Sub (at a meeting duly
called and held) has by the requisite vote of all directors present approved the
Merger in accordance with the provisions of Section 251 of the Delaware
Corporation Law. The sole stockholder of Sub has taken all actions necessary to
adopt the Merger.
SECTION 5.12 OPTIONS AND OTHER STOCK RIGHTS. Except for options to
purchase Parent Common Stock outstanding under Parent's Amended Stock Option
Plan, as amended to date, there is no (i) outstanding option, warrant, call,
unsatisfied
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preemptive right or other agreement of any kind to purchase or otherwise to
receive from Parent any of the outstanding, authorized but unissued,
unauthorized or treasury shares of Parent Common Stock, Parent Preferred Stock
or any other equity security of the Parent (other than promissory notes not
convertible into equity interests), (ii) outstanding equity security of any kind
convertible into any equity security of Parent, and (iii) outstanding contract
or other agreement to purchase, redeem or otherwise acquire any outstanding
shares of Parent Common Stock or any other equity security of Parent.
SECTION 5.13 LIABILITIES. Neither Parent nor any of its Subsidiaries has
any liabilities or obligations of any nature, whether or not accrued, contingent
or otherwise that is required by GAAP to be reflected or reserved for on the
financial statements of the Parent, except (a) liabilities or obligations
disclosed or reserved against in the audited consolidated financial statements
of Parent as of and for the fiscal year ended December 31, 2000 and the Parent
Interim Financial Statements included in the Parent SEC Documents or disclosed
in the footnotes thereto or otherwise disclosed in Parent's 2000 Form 10-K or
Form 10Q for the three months ended March 31, 2001, and (b) liabilities or
obligations which do not, individually or in the aggregate, have a Parent
Material Adverse Effect.
SECTION 5.14 COMPLIANCE WITH LAWS. To the Knowledge of Parent, Parent is
not in violation of any applicable order, judgment, injunction, award or decree,
law, ordinance or regulation or any other requirement of any Governmental Entity
applicable to Parent or any of its businesses except for violations which would
not, individually or in the aggregate, have a Parent Material Adverse Effect;
Parent has not received written notice, or to the Knowledge of Parent, any other
notice that any such material violation has been alleged or is being
investigated. This Section 5.14 shall not apply to Taxes.
SECTION 5.15 PERMITS. To the Knowledge of Parent (i) Parent has obtained
all Permits that are necessary for the ownership and conduct of its businesses
as presently conducted or currently proposed to be conducted, other than any
Permits, the absence of which would not, individually or in the aggregate, have
a Parent Material Adverse Effect; (ii) such Permits are in full force and effect
and are sufficient for the ownership and conduct of such businesses as presently
conducted; (iii) no violations exist or have been recorded in respect of any
Permit, except violations which would not, individually or in the aggregate,
have a Parent Material Adverse Effect; and (iv) no proceeding is pending or
threatened, that would suspend, revoke or limit any Permit, except proceedings
which would not, individually or in the aggregate, have a Parent Material
Adverse Effect.
SECTION 5.16 ACTIONS AND PROCEEDINGS. There are no outstanding orders,
judgments, injunctions, awards or decrees of any Governmental Entity against or
involving Parent or any of its directors, officers or employees (in their
capacities as such). Except as disclosed in the Parent SEC Documents, as of the
date of this Agreement there is no Proceeding which is pending or, to Parent's
Knowledge, threatened against or involving Parent, any of its Subsidiaries, or
any of their directors, officers or employees (in their capacities as such) or
properties, capital stock or assets, except where the failure of any of the
foregoing to be true does not individually or in the aggregate have a Parent
Material Adverse Effect.
SECTION 5.17 NO PRIOR ACTIVITIES. Except for obligations incurred in
connection with its incorporation or organization or the negotiation and
consummation of this
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Agreement and the transactions contemplated hereby, Sub has neither incurred any
obligation or liability nor engaged in any business or activity of any type or
kind or entered into any agreement or arrangement with any person.
SECTION 5.18 TAXES. Parent (i) has duly and timely filed (or there have
been filed on Parent's behalf) accurate and complete copies of all Tax Returns
required to be filed (after taking into account all available extensions), (ii)
has timely paid or adequately provided for in accordance with GAAP all Taxes due
in respect of the periods covered by such Tax Returns, and (iii) has withheld
and, if due, paid all Taxes required to have been withheld and, if due, paid in
connection with amounts paid or owing to any employee, independent contractor,
creditor, stockholder, or other third party.
ARTICLE VI
COVENANTS AND AGREEMENTS
Each of Parent, Sub and the Company (as applicable) covenant and agree as
follows:
SECTION 6.1 CONDUCT OF BUSINESS. Prior to the Effective Time, except as
set forth in Section 6.1 of the Company Disclosure Schedule or unless Parent
shall otherwise agree in writing:
(i) The Company shall, and shall cause its Subsidiaries to, carry on their
respective business in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted, and shall use
its reasonable efforts to preserve and cause its Subsidiaries to
preserve intact their present business organizations, keep available
the services of their present officers and employees and preserve
their relationships with customers, suppliers and others having
business dealings with them to the end that their goodwill and ongoing
businesses shall be unimpaired at the Effective Time. The Company
shall and shall cause its Subsidiaries to (i) maintain insurance
coverages and their books, accounts and records in the usual manner
consistent with prior practices; (ii) comply in all material respects
with all laws, ordinances and regulations of Governmental Entities
applicable to the Company and its Subsidiaries; (iii) maintain and
keep their properties and equipment in good repair, working order and
condition, ordinary wear and tear excepted; and (iv) perform in all
material respects its obligations under all contracts and commitments
to which it is a party or by which it is bound, in each case other
than where the failure to so maintain, comply or perform, either
individually or in the aggregate, would result in a Company Material
Adverse Effect. The Company shall cause its management and that of its
Subsidiaries to consult on a regular basis and in good faith with the
employees and representatives of Parent concerning the business of the
Company and its Subsidiaries and shall promptly advise Parent of any
reduction in the prices charged to customers, or increases in the rate
of rebates payable to customers or slotting fees payable to
distributors. The Company shall not, and shall cause its Subsidiaries
not to make, or commit to make in the future, any reduction in the
prices charged to customers, or increase the rate of rebates payable
to customers or slotting fees payable to distributors except in the
ordinary course of business.
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(ii) The Company shall not and shall cause its Subsidiaries not to
undertake any of the actions specified in Section 4.27 irrespective of
any exception for items (i) required by such Section 4.27 to be
disclosed on the Company Disclosure Schedule, or (ii) set forth in the
Company SEC Documents.
SECTION 6.2 LITIGATION INVOLVING THE COMPANY. Prior to the Closing Date,
the Company shall notify Parent of any actions or proceedings of the type
required to be described in Sections 4.15, 4.29 or 4.30 of the Company
Disclosure Schedule that are threatened or commenced against the Company, any of
its Subsidiaries, or against any officer or director, property or asset of the
Company, or with respect to the Company's affairs, promptly upon the Company
becoming aware thereof, and of any requests of the Company or, to the Knowledge
of the Company, any Company stockholder, for additional information or
documentary materials by any Governmental Entity in connection with the
transactions contemplated hereby promptly upon the Company becoming aware
thereof. As to compliance with such requests for such information, the Company
shall consult with and obtain the consent of Parent, which consent shall not be
withheld unreasonably; provided that such consent shall be unnecessary where
such information is required by law to be provided.
SECTION 6.3 CONTINUED EFFECTIVENESS OF REPRESENTATIONS AND WARRANTIES OF
THE PARTIES. (a) From the date hereof through the Closing Date, (a) the Company
shall use all reasonable efforts to conduct its affairs in such a manner so
that, except as otherwise contemplated or permitted by this Agreement, the
representations and warranties of the Company contained in Article IV shall
continue to be true and correct in all material respects (or in all respects in
the case of any representation or warranty which refers to a Company Material
Adverse Effect or otherwise includes a concept of materiality) on and as of the
Closing Date as if made on and as of the Closing Date, except that any such
representations and warranties that are given as of a particular date and relate
solely to a particular date or period shall be true and correct in all material
respects (or in all respects in the case of any representation or warranty which
refers to a Company Material Adverse Effect or otherwise includes a concept of
materiality) as of such date or period; (b) Parent and Sub shall use their
respective reasonable efforts to conduct their affairs in such a manner so that,
except as otherwise contemplated or permitted by this Agreement, the
representations and warranties contained in Article V shall continue to be true
and correct in all material respects (or in all respects in the case of any
representation or warranty which refers to a Parent Material Adverse Effect or
otherwise includes a concept of materiality) on and as of the Closing Date as if
made on and as of the Closing Date, except: (i) that any such representations
and warranties that are given as of a particular date and relate solely to a
particular date or period shall be true and correct in all material respects (or
in all respects in the case of any representation or warranty which refers to a
Parent Material Adverse Effect or otherwise includes a concept of materiality)
as of such date or period and (ii) if the Cash Election is made by Parent, then
upon the date of the Cash Election, the representations and warranties contained
in Sections 5.4(a), 5.5, 5.7, 5.12, 5.13, 5.14, 5.15, 5.16 and 5.18 shall, for
all purposes of this Agreement terminate and shall have no further force or
effect, as if such representations and warranties had never been contained in
this Agreement; (c) the Company shall promptly notify Parent and Sub of any
event, condition or circumstance occurring from the date hereof through the
Closing Date of which the Company becomes aware that would cause any material
revisions to the Company Disclosure Schedule provided by the Company pursuant to
this Agreement, or that
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would constitute a violation or breach of this Agreement by the Company; and (d)
Parent and Sub shall promptly notify the Company of any event, condition or
circumstance occurring from the date hereof through the Closing Date of which it
becomes aware that would cause any material revisions to the Parent Disclosure
Schedule provided by Parent or Sub pursuant to this Agreement, or that would
constitute a violation or breach of this Agreement by Parent or Sub. No such
notification shall be deemed an amendment to the Disclosure Schedules to this
Agreement, except as otherwise provided by this Agreement.
(b) The Company agrees that on the Closing Date, it shall provide
Parent with the written certification of Messrs. Maurice Andrien, Joseph
Corvino, Max Hillman (only as to the Hillman Subsidiary of the Company),
Rick Hillman (only as to the Hillman Subsidiary of the Company), Stephen
Miller (only as to the Hillman Subsidiary of the Company), Justin Jacobi
(only as to the SunSource Technology Services Subsidiary of the Company),
Jim Waters (only as to the Hillman Subsidiary of the Company) and Chuck
Freeman (only as to the SunSource Technology Services Subsidiary of the
Company), each in his corporate capacity and not in his individual
capacity, that each of them have reviewed all Company Disclosure Schedules
and have concluded that, to his actual knowledge, they are accurate in all
material respects.
SECTION 6.4 CORPORATE EXAMINATIONS AND INVESTIGATIONS; CONFIDENTIALITY. (a)
The Company shall cooperate with Parent as Parent shall reasonably request in
connection with the Parent's due diligence review of the Company, including, but
not limited to, Parent's continued due diligence review of Owned Real Property
and Leased Real Property (including formerly leased property or property or
assets formerly owned, operated or otherwise controlled, or occupied by the
Company or its present or former Subsidiaries). Notwithstanding the foregoing,
Parent will not contact, in connection with the transactions contemplated by the
Agreement, any customers, suppliers or employees of the Company without
obtaining the prior consent of the Company, which consent shall not be
unreasonably withheld. Upon reasonable notice, the Company shall, and shall
cause its Subsidiaries to, afford to Parent and to the officers, employees,
accountants, counsel, financial advisors and other representatives of Parent,
reasonable access during normal business hours during the period prior to the
Effective Time to all its properties, books, contracts, personnel and records.
(b) Prior to the Closing, and following any termination of this
Agreement, the Confidentiality Agreement shall remain in full force and
effect in accordance with its terms. If this Agreement is not terminated,
the Confidentiality Agreement shall expire and be of no further force or
effect following the Effective Time.
SECTION 6.5 INDEMNIFICATION OF COMPANY OFFICERS AND DIRECTORS. (a) Parent
agrees, for a period of six years following the Effective Time, not to amend the
indemnification provisions set forth in the Certificate of Incorporation or
By-Laws of the Surviving Corporation in a manner that would adversely affect the
rights of the Company's officers, directors and employees to indemnification
thereunder for events occurring prior to the Effective Time and agrees to cause
the Surviving Corporation to fulfill and honor such obligations to the maximum
extent permitted by law; provided, however, that nothing in this Section 6.5
shall prevent Parent from
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effecting any merger, reorganization or consolidation of the Surviving
Corporation, so long as the successor in any such transaction assumes such
obligations.
(b) Parent shall cause to be maintained, for a period of not less than
six (6) years after the Effective Time, all of Company's and its
Subsidiaries' current directors' and officers' insurance and
indemnification policies to the extent that such policies provide coverage
for events occurring prior to the Effective Time (collectively, the "D&O
Insurance") for all current or former directors, officers or employees of
the Company or its Subsidiaries; provided, however, that Parent may, in
lieu of maintaining such existing D&O Insurance as provided above, and
shall, if the existing D&O Insurance expires or is terminated or canceled
during such six (6) year period, cause comparable coverage to be provided
under any policy maintained for the benefit of the directors, officers and
employees of Parent or any of its Subsidiaries; and provided, further, that
(i) the issuer thereof shall have a claims-paying rating at least equal to
the issuer of the existing D&O Insurance; and (ii) the terms thereof shall
be no less advantageous to the directors, officers and employees of Company
and its Subsidiaries than the existing D&O Insurance.
SECTION 6.6 REGISTRATION STATEMENT/PROXY STATEMENT. As promptly as
practicable after the execution of this Agreement, the Company and Parent shall
prepare and file with the SEC preliminary proxy materials which shall constitute
the preliminary Proxy Statement and, if applicable, a preliminary prospectus
with respect to the Parent Common Stock to be issued in connection with the
Merger. As promptly as practicable after comments are received from the SEC with
respect to the preliminary proxy materials and after the furnishing by the
Company and Parent of all information required to be contained therein, the
Company shall file with the SEC the definitive Proxy Statement and Parent shall,
if applicable, file with the SEC the Registration Statement and Parent and the
Company shall use all reasonable efforts to cause the Registration Statement to
become effective as soon thereafter as practicable.
SECTION 6.7 COMPLIANCE WITH THE SECURITIES ACT. (a) If the Cash Election
is not made by Parent, and is not deemed to be made pursuant to Section
3.1A(a)(1)(iii), then prior to the Effective Time the Company shall deliver to
Parent a list of names and addresses of each person who, in the Company's
reasonable judgment, is an affiliate within the meaning of Rule 145 of the rules
and regulations promulgated under the Securities Act (the "Affiliates").
(b) The Company shall use its reasonable efforts to obtain a written
agreement from each person who is identified as a possible Affiliate
pursuant to clause (a) above, in the form previously approved by the
parties and attached hereto as Exhibit 6.7(b), that he or she will not
offer to sell, sell or otherwise dispose of any of the Parent Common Stock
issued to him or her pursuant to the Merger, except in compliance with Rule
145 or another exemption from the registration requirements of the
Securities Act. The Company shall deliver such written agreements to Parent
on or prior to the Effective Time.
SECTION 6.8 NYSE LISTING. If the Cash Election is not made by Parent, and
is not deemed to be made pursuant to Section 3.1A(a)(1)(iii), then Parent shall
use its reasonable efforts to list on the New York Stock Exchange the Parent
Common Stock to be issued pursuant to the Merger.
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SECTION 6.9 ACQUISITION PROPOSALS. (a) The Company agrees that neither it
nor any of its Subsidiaries, nor any of the officers and directors of any of
them shall, and that it shall direct and use its reasonable efforts to cause its
and its Subsidiaries' employees, agents and representatives (including any
investment banker, attorney or accountant retained by them or any of their
Subsidiaries) not to, directly or indirectly, initiate, solicit or encourage any
inquiries or the making of any proposal or offer with respect to a merger,
reorganization, share exchange, consolidation or similar transaction, or any
purchase of all or 10% or more of the assets or any equity securities of the
Company or any of its Subsidiaries (any such proposal or offer being hereinafter
referred to as an "Acquisition Proposal"), it being understood that any such
activities engaged in prior to the date of this Agreement do not violate this
Section 6.9. The Company further agrees that from and after the date hereof
neither it nor any of its Subsidiaries nor any of the officers and directors of
any of them shall, and that it shall direct and use its reasonable efforts to
cause its and its Subsidiaries' employees, agents and representatives (including
any investment banker, attorney or accountant retained by them or any of their
Subsidiaries) not to, directly or indirectly, engage in any negotiations
concerning, or provide any confidential information or data to, or have any
discussions with, any person relating to an Acquisition Proposal, or otherwise
knowingly facilitate any effort or attempt to make or implement an Acquisition
Proposal; provided, however, that nothing contained in this Agreement shall
prevent the Company or its Board of Directors from (A) complying with Rules
14d-9 and 14e-2 promulgated under the Exchange Act with regard to an Acquisition
Proposal; (B) providing information in response to a request therefor by a
Person who has made a bona fide written Acquisition Proposal that was not
solicited in violation of this Section 6.9(a) if the Board of Directors receives
from the Person so requesting such information an executed confidentiality
agreement on terms substantially similar to those contained in the
Confidentiality Agreement; (C) engaging in any negotiations or discussions with
any person who has made a bona fide written Acquisition Proposal that was not
solicited in violation of this Section 6.9(a); or (D) recommending such an
Acquisition Proposal to the stockholders of the Company, if and only to the
extent that, (i) in each such case referred to in clause (B), (C) or (D) above,
the Board of Directors of the Company determines in good faith after
consultation with outside legal counsel that such action is consistent with its
directors' fiduciary duties under applicable law and (ii) in each case referred
to in clause (C) or (D) above, the Board of Directors of the Company determines
in good faith (after consultation with its financial advisor) that such
Acquisition Proposal, if accepted, is reasonably likely to be consummated,
taking into account all legal, financial and regulatory aspects of the proposal
and the person making the proposal and would, if consummated, result in a
transaction or a combination of transactions more favorable to the Company's
stockholders from a financial point of view than the transactions contemplated
by this Agreement (any such more favorable Acquisition Proposal being referred
to in this Agreement as a "Superior Proposal"). The Company agrees that it will
immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties conducted heretofore with respect
to any Acquisition Proposal. The Company agrees that it will take the necessary
steps to promptly inform the individuals or entities referred to in the first
sentence hereof of the obligations undertaken in this Section 6.9. The Company
agrees that it will notify Parent by the end of the next business day following
receipt if any such inquiries, proposals or offers relating to an Acquisition
Proposal are received by, any such
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information is requested from, or any such discussions or negotiations are
sought to be initiated or continued with, any of its representatives indicating,
in connection with such notice, the name of such person (unless disclosure of
such name is precluded by the terms of the proposal or offer in question) and
the material terms and conditions of any proposals or offers and thereafter
shall keep Parent informed, on a current basis, on the status and terms of any
such proposals or offers and the status of any such discussions or negotiations.
The Company also agrees that it will promptly request each Person that has
heretofore executed a confidentiality agreement in connection with its
consideration of acquiring it or any of its Subsidiaries to return or destroy
all confidential information heretofore furnished to such Person by or on behalf
of it or any of its Subsidiaries.
(b) Notwithstanding anything in this Section 6.9 to the contrary, if,
at any time prior to obtaining the Company stockholders' approval of the
Merger, the Company's Board of Directors determines in good faith, on the
basis of the advice of its financial advisors and outside counsel, in
response to an Acquisition Proposal that did not result from a breach of
Section 6.9(a), that such proposal is a Superior Proposal, the Company or
its Board of Directors may terminate this Agreement if, and only if, the
Company shall prior to or promptly following such termination enter into a
definitive agreement containing the terms of a Superior Proposal; provided,
however, that the Company shall not terminate this Agreement pursuant to
this sentence, and any purported termination pursuant to this sentence
shall be void and of no force or effect, unless the Company shall have
complied with (i) all the provisions of this Section 6.9, including the
notification provisions in this Section 6.9, (ii) the following proviso,
and (iii) the payment of the termination fee described in Section 12.2(b)
within the time period required by such Section; and provided further,
however, that the Company shall not exercise its right to terminate this
Agreement pursuant to this Section 6.9 until after three Business Days
following Parent's receipt of written notice (a "Notice of Superior
Proposal") advising Parent that the Company's Board of Directors has
received such a Superior Proposal and that such Board of Directors will,
subject to any action taken by Parent pursuant to this sentence, cause the
Company to accept such Superior Proposal, specifying the material terms and
conditions of such Superior Proposal and (unless disclosure of such name is
precluded by the terms of the proposal or offer in question) identifying
the person making such Superior Proposal (it being understood and agreed
that any amendment to the price or any other material term of such a
Superior Proposal shall require an additional Notice of Superior Proposal
and a new three Business Day period).
SECTION 6.10 PARENT AND SUB APPROVALS. Parent and Sub shall take all
reasonable steps necessary or appropriate to obtain as promptly as practicable
all necessary approvals, authorizations and consents of any person or
Governmental Entity required to be obtained by Parent and Sub to consummate the
transactions contemplated hereby, and will cooperate with the Company in seeking
to obtain all such approvals, authorizations and consents. Parent and Sub shall
use all reasonable efforts to provide such information to such persons, bodies
and authorities as such persons, bodies or authorities or the Company may
reasonably request.
SECTION 6.11 COMPANY APPROVALS. The Company shall take all reasonable
steps necessary or appropriate to obtain as promptly as practicable all
necessary approvals, authorizations and consents of any third party or
Governmental Entity
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required to be obtained by the Company to consummate the transactions
contemplated hereby and will cooperate with Parent in seeking to obtain all such
approvals, authorizations and consents. The Company shall use all reasonable
efforts to provide such information to such persons, bodies and authorities as
such persons, bodies and authorities or Parent may reasonably request.
SECTION 6.12 EXPENSES. Except as otherwise specifically provided herein,
Parent, Sub and the Company shall bear their respective expenses incurred in
connection with the preparation, execution and performance of this Agreement and
the transactions contemplated hereby, including, without limitation, all fees
and expenses of investment bankers, agents, representatives, counsel and
accountants. In any action, suit or proceeding under or to enforce any provision
of this Agreement, the prevailing party shall be entitled to recover its
reasonable attorney's fees and other out-of-pocket expenses from the losing
party.
SECTION 6.13 FURTHER ASSURANCES. (a) Each of Parent, Sub and the Company
shall execute such documents and other papers and take such further actions as
may be reasonably required or desirable to carry out the provisions hereof and
the transactions contemplated hereby. Each of Parent, Sub and the Company shall
use all reasonable efforts to cause all actions to effectuate the Closing for
which such party is responsible under this Agreement to be taken as promptly as
practicable, including using all reasonable efforts to obtain all necessary
waivers, consents and approvals (including, but not limited to, if applicable,
filings under the H-S-R Act and with all applicable Governmental Entities) and
to lift any injunction or other legal bar to the Merger (and, in each case, to
proceed with the Merger as expeditiously as possible). Notwithstanding the
foregoing, there shall be no action required to be taken and no action will be
taken in order to consummate and make effective the transactions contemplated by
this Agreement if such action, either alone or together with another action,
would result in a Company Material Adverse Effect or a Parent Material Adverse
Effect.
(b) In case at any time after the Effective Time any further action is
necessary or desirable to carry out the purposes of this Agreement, the
proper officers and/or directors of Parent and the Surviving Corporation
shall take all such necessary action.
SECTION 6.14 HART-SCOTT-RODINO. Each of the Company and Parent (i) shall
file, and shall cause their "ultimate parent entities" to file, as soon as
practicable a "Notification and Report Form For Certain Mergers and
Acquisitions" under the H-S-R Act or any similar law applicable in a non-United
States jurisdiction, with respect to the Merger and the transactions
contemplated hereby, (ii) shall use all reasonable efforts to obtain the
required approval under the H-S-R Act or any such similar law, and (iii) will
comply at the earliest practicable date with any request for additional
information received by it from the FTC or Justice or any similar agency
pursuant to the H-S-R Act or any such similar law.
SECTION 6.15 UPDATING SCHEDULES. In connection with the Closing, Parent,
Sub and the Company will, promptly upon becoming aware of any fact requiring
supplementation or amendment of the Parent Disclosure Schedule (in the case of
Parent or Sub) or the Company Disclosure Schedule (in the case of the Company),
supplement or amend the applicable Disclosure Schedules to reflect any matter
which, if existing, occurring or known on the date of this Agreement, would have
been required to be set forth or described in such Disclosure Schedules which
was or
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has been rendered inaccurate thereby. No such supplement or amendment to the
Disclosure Schedules shall have any effect for the purpose of determining
satisfaction of the conditions set forth in Articles VII, VIII and IX hereof, or
the compliance by any party hereto with its covenants and agreements set forth
herein. Notwithstanding anything in this Section 6.15 to the contrary, if the
Cash Election is made by Parent, then on and after the date the Cash Election is
made, Parent shall have no obligation to supplement or amend the Disclosure
Schedules applicable to Sections 5.4(a), 5.5, 5.7, 5.12, 5.13, 5.14, 5.15, 5.16
and 5.18 of this Agreement.
SECTION 6.16 STOCK OPTIONS. The Company shall take all action necessary in
accordance with the terms of the Stock Option Plan to provide written notice to
each Grantee (as that term is defined in the Stock Option Plan) of the Merger
and to require that all Grantees surrender their outstanding Company Stock
Options (other than Rollover Options) in exchange for a payment by the Company
in Company Common Stock in an amount for each Company Stock Option equal to the
amount by which $10.375, or, if the provisions of Article IIIA are effective,
the product of Average Parent Company Stock Price and the Exchange Ratio, or
Adjusted Exchange Ratio, whichever is applicable, exceeds the exercise price (as
that term is defined in the Stock Option Plan) of the Company Stock Options.
SECTION 6.17 VOTING AGREEMENT. The Company shall take no action which will
result in termination, amendment, waiver or modification of any provision of or
otherwise interfere with or frustrate the purpose of the Voting Agreement.
SECTION 6.18 COMPANY RECAPITALIZATION. The Company shall use all
reasonable efforts to consummate the Company Recapitalization prior to the
Effective Time, including the obtaining of the necessary consents of the
Company's stockholders thereto.
SECTION 6.19 SUBORDINATED DEBT. At or prior to the Effective Time, Parent
will lend the Surviving Corporation $10,000,000 in subordinated debt.
SECTION 6.20 WARRANT. (a) If the Cash Election is made pursuant to Article
IIIB of this Agreement, or deemed to be made pursuant to Section
3.1A(a)(1)(iii), then immediately prior to the Company Recapitalization if
Parent and the Company shall determine that the conditions precedent to the
Merger specified in Articles VII, VIII and IX have been or will promptly be
satisfied or waived, Parent shall exercise the Warrant and the Company shall
deliver the Warrant Shares (as defined in the Warrant) to Parent. Immediately
following the exercise of the Warrant, Parent shall sell to the Company and the
Company shall purchase from Parent 121,524 Warrant Shares at a cash price of
$10.375 per share (the "Warrant Share Purchase").
(b) If the Cash Election is not made and not deemed to be made, then
immediately prior to the Company Recapitalization if Parent and Company
shall determine that the conditions precedent to the Merger specified in
Articles VII, VIII and IX have been or will promptly be satisfied or
waived, Parent shall exercise the Warrant in part, on a cashless basis
pursuant to Section 11 of the Warrant and receive that number of Warrant
Shares equal to the quotient obtained by dividing: A by B, where:
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Any unexercised portion of the Warrant shall remain in effect at the
Effective Time without any change in the terms and conditions of the Warrant as
in effect prior to the Effective Time.
SECTION 6.21 TAX-FREE REORGANIZATION. Unless the Cash Election is made
pursuant to Article IIIB of this Agreement, or deemed to be made pursuant to
Section 3.1A(a)(1)(iii), each of Parent, Sub, and the Company shall take all
necessary actions to obtain tax-free reorganization treatment of the Merger
under Section 368(a) of the Code and shall not take any action or any reporting
position that is inconsistent with such treatment, except pursuant to or
following a "determination" defined in Section 1313 of the Code, that the Merger
is not entitled to such treatment. Notwithstanding the prior sentence, the
parties agree that Parent, Sub, and the Company may engage in the transactions
contemplated by this Agreement or described in Exhibits G and H.
ARTICLE VII
CONDITIONS PRECEDENT TO EACH PARTY'S OBLIGATION
TO EFFECT THE MERGER
The respective obligations of each party to effect the Merger shall be
subject to the satisfaction on or prior to the Closing of the following
conditions, any one or more of which may be waived by them, to the extent
permitted by law:
SECTION 7.1 COMPANY STOCKHOLDER APPROVAL. This Agreement and the
transactions contemplated hereby shall have been approved and adopted by the
requisite vote of the Company's stockholders.
SECTION 7.2 LISTING OF SHARES. If the Cash Election is not made by Parent,
and not deemed to have been made pursuant to Section 3.1A(a)(1)(iii), the shares
of Parent Common Stock issuable in the Merger shall have been approved for
listing on the New York Stock Exchange.
SECTION 7.3 HART-SCOTT-RODINO. All applicable waiting periods with respect
to any "Notification and Report Form For Certain Mergers and Acquisitions"
required to be filed by Parent, the Company or any of their "ultimate parent
entities" in compliance with the H-S-R Act or any similar law applicable in a
non-United States jurisdiction in connection with the transactions contemplated
hereby shall have passed, or early termination of such waiting periods shall
have been granted.
SECTION 7.4 EFFECTIVENESS OF REGISTRATION STATEMENT. If the Cash Election
is not made by Parent, and not deemed to have been made pursuant to Section
3.1A(a)(1)(iii), the Registration Statement shall have become effective in
accordance with the provisions of the Securities Act, and no stop order
suspending the effectiveness of the Registration Statement shall have been
issued by the SEC and remain in effect.
SECTION 7.5 NO INJUNCTIONS OR RESTRAINTS, ILLEGALITY. No action, suit or
proceeding shall have been instituted and be continuing or be threatened by any
Governmental Entity to restrain, modify or prevent the carrying out of the
transactions contemplated hereby. No law, rule or regulation shall have been
adopted or promulgated, and no temporary restraining order, preliminary or
permanent injunction or other order, decree or ruling issued by a court or other
Government Entity of competent jurisdiction shall be in effect having the effect
of making the Merger illegal or otherwise prohibiting the consummation of the
Merger
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or limiting or restricting Parent's conduct or operation of the business of the
Company or its Subsidiaries after the Merger.
ARTICLE VIII
CONDITIONS PRECEDENT TO THE OBLIGATION OF
PARENT AND SUB TO EFFECT THE MERGER
The obligation of Parent and Sub to effect the Merger shall be subject to
the satisfaction on or prior to the Closing of the following additional
conditions, any one or more of which may be waived by them, to the extent
permitted by law:
SECTION 8.1 REPRESENTATIONS AND COVENANTS. The representations and
warranties of the Company contained in this Agreement (including those contained
in the Company Disclosure Schedule) shall be true and correct on the date hereof
and as of the Closing Date with the same force and effect as though made on and
as of the Closing Date, (except that any such representations and warranties
that are given as of a particular date and relate solely to a particular date or
period shall be true and correct as of such date or period), except where the
failure of such representations and warranties to be true and correct (without
giving effect to any materiality or Company Material Adverse Effect limitations
therein) would not have, and would not reasonably be expected to have,
individually or in the aggregate, a Company Material Adverse Effect. The Company
and the Company stockholders who are parties to the Voting Agreement shall have
performed and complied, respectively, in all material respects with all
covenants (except for Section 6.16 which shall be performed in all respects) and
agreements required by this Agreement and the Voting Agreement to be performed
or complied with by the Company or such Company stockholders on or prior to the
Closing Date. The Company shall have delivered to Parent and Sub certificates,
dated the Closing Date, and signed by an Executive Officer of the Company to the
foregoing effect.
SECTION 8.2 ABSENCE OF MATERIAL ADVERSE CHANGE. Since the date hereof,
there shall not have been any change, event, occurrence or state of facts that
has caused or would reasonably be expected to cause a Company Material Adverse
Effect.
SECTION 8.3 EFFECTIVENESS OF EMPLOYMENT AGREEMENTS. On the Closing Date,
the Employment Agreements shall be in full force and effect without any change
from the form delivered to Parent on the date of this Agreement, and no employee
thereunder shall have expressed an intention not to perform such Employment
Agreement in accordance with its terms unless he has, as of the Closing Date,
confirmed his intention to perform such Employment Agreement.
SECTION 8.4 RECEIPT OF CERTIFICATES. On or prior to the Closing Date,
Parent shall have received the Certificates required by Section 6.3(b) of this
Agreement.
SECTION 8.5 COMPANY RECAPITALIZATION. The Company Recapitalization shall
have been consummated no later than the Effective Time of the Merger.
SECTION 8.6 SECTION 1445 CERTIFICATION. Parent shall have received on or
before the Closing Date, pursuant to Treas. Reg. sec. 1.1445-2(c)(3), a copy of
a statement issued by the Company complying with the requirements of Treas. Reg.
sec. 1.897-2(h) and certifying that the interests in the Company being acquired
in the Merger are not U.S. real property interests.
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SECTION 8.7 PURCHASE OF WARRANT SHARES. The Company shall have delivered
the Warrant Shares pursuant to Section 6.20(a), or if applicable, the number of
Warrant Shares calculated pursuant to Section 6.20(b) upon exercise of the
Warrant by Parent and, if the Cash Election is made pursuant to Article IIIB of
this Agreement, or deemed to be made pursuant to Section 3.1A(a)(1)(iii), shall
have consummated the Warrant Share Purchase.
SECTION 8.8 DISSENTERS. The holders of not more than ten percent (10%) of
the outstanding shares of the Company Common Stock are Dissenting Shares.
ARTICLE IX
CONDITIONS PRECEDENT TO THE OBLIGATION OF THE
COMPANY TO EFFECT THE MERGER
The obligation of the Company to effect the Merger shall be subject to the
satisfaction on or prior to the Closing of the following additional conditions,
any one or more of which may be waived by the Company, to the extent permitted
by law:
SECTION 9.1 REPRESENTATIONS AND COVENANTS. The representations and
warranties of Parent and Sub contained in this Agreement (including those
contained in the Parent Disclosure Schedule) except for the representations and
warranties contained in Sections 5.4(a), 5.5, 5.7, 5.12, 5.13, 5.14, 5.15, 5.16
and 5.18 if the Cash Election is made by Parent shall be true and correct on the
date hereof and as of the Closing Date with the same force and effect as though
made on and as of the Closing Date, (except that any such representations and
warranties that are given as of a particular date and relate solely to a
particular date or period shall be true and correct as of such date or period),
except where the failure of such representations and warranties to be true and
correct (without giving effect to any materiality or Parent Material Adverse
Effect limitations therein) would not have, and could not reasonably be expected
to have, individually or in the aggregate, a Parent Material Adverse Effect.
Parent and Sub shall have performed and complied in all material respects with
all applicable covenants and agreements required by this Agreement to be
performed or complied with by Parent or Sub on or prior to the Closing Date.
Parent and Sub shall have delivered to the Company certificates of an Executive
Officer of Parent and Sub, dated the Closing Date, to the foregoing effect.
SECTION 9.2 ABSENCE OF MATERIAL ADVERSE CHANGE. Since the date hereof,
there shall not have been any change, event, occurrence or state of facts that
has caused or would reasonably be expected to cause a Parent Material Adverse
Effect.
SECTION 9.3 TAX OPINION. Unless the Cash Election is made pursuant to
Article IIIB or deemed to be made pursuant to Section 3.1A(a)(1)(iii) of this
Agreement, the Company shall have received the opinion of Morgan, Lewis &
Bockius LLP, counsel to the Company (or, if such counsel does not render such
opinion, such other counsel as shall be reasonably acceptable to the Company),
based on the representations of the Company, Parent and Sub, (which
representations shall be in substantially the form attached hereto as Exhibits G
and H, respectively), to the effect that the Merger will be treated as a
reorganization within the meaning of Section 368(a) of the Code and such opinion
shall not have been withdrawn or modified in any material respect. On and after
June 29, 2001, the Company may not waive this condition (unless waived prior to
such time) without the consent of Parent.
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ARTICLE X
CLOSING
INTENTIONALLY OMITTED
ARTICLE XI
NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES,
COVENANTS AND AGREEMENTS
SECTION 11.1 NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND
AGREEMENTS. Notwithstanding any right of Parent and Sub to investigate fully
the affairs of the Company, or any right of the Company to investigate fully the
accuracy of the representations and warranties of Parent and Sub, and
notwithstanding any knowledge of facts determined or determinable by Parent, Sub
or the Company, as the case may be, pursuant to such investigation or right of
investigation, Parent, Sub and the Company, as the case may be, have the right
to rely fully upon the representations, warranties, covenants and agreements of
the Company, Parent and Sub, as the case may be, contained in this Agreement. No
representations, warranties, covenants or agreements in this Agreement, except
the covenants and agreements contained in Articles I, II, IIIA or IIIB,
whichever is applicable, XIII and XIV and Sections 6.5 and 6.12, shall survive
the Effective Time.
ARTICLE XII
TERMINATION OF AGREEMENT
SECTION 12.1 TERMINATION. This Agreement may be terminated prior to the
Closing as follows:
(a) by either Parent or the Company if the Merger shall not have been
consummated on or before December 31, 2001; provided, however, that the
right to terminate under this Section 12.1(a) shall not be available to any
party whose failure to fulfill any obligation under this Agreement has been
the cause of, or resulted in, the failure of the Effective Time to occur on
or before such date;
(b) by either Parent or the Company if a court or other Governmental
Entity of competent jurisdiction shall have issued an order (which order
the parties shall use reasonable efforts to lift) that permanently
restrains, enjoins or otherwise prohibits the transactions contemplated by
this Agreement, and such order shall have become final and nonappealable;
(c) by the Company if any of the conditions specified in Article VII
or IX have not been met or waived by the Company at such time as any such
condition is no longer capable of satisfaction;
(d) by Parent if any of the conditions specified in Article VII or
VIII have not been met or waived by Parent at such time as any such
condition is no longer capable of satisfaction;
(e) by Parent if the Company or the Company stockholders who are
parties to the Voting Agreement shall have breached any of their respective
obligations under Article VI of this Agreement or the Voting Agreement in
any material respect and such breach continues for a period of ten days
after the receipt of notice of the breach from Parent;
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(f) by the Company if Parent or Sub shall have breached any of their
respective obligations under Article VI of this Agreement in any material
respect and such breach continues for a period of ten days after the
receipt of notice of the breach from the Company;
(g) by the Company if its Board of Directors, in the exercise of its
fiduciary duties, accepts an Acquisition Proposal in accordance with
Section 6.9;
(h) at any time on or prior to the Closing Date, by mutual written
consent of Parent, Sub and the Company.
SECTION 12.2 EFFECT OF TERMINATION. (a) Subject to Section 12.2(b), if
this Agreement is terminated and the transactions contemplated hereby are not
consummated as described above, this Agreement shall become void and be of no
further force and effect and there shall be no obligation on the part of Parent,
Sub or the Company, except for the provisions of this Agreement relating to the
obligations of parties under Sections 6.4(b), 6.12, 12.1 and 12.2(b) and
Articles XIII and XIV. None of the parties hereto shall have any liability in
respect to a termination of this Agreement prior to Closing, except to the
extent that termination results from the intentional, willful or knowing
violation of the representations, warranties, covenants or agreements of such
party under this Agreement and except as provided in Section 12.2(b) hereof.
(b) In the event that this Agreement is terminated by the Company
pursuant to Section 12.1(g), then the Company shall, promptly, but in no
event later than one Business Day after the date of such termination, pay
to the Parent a termination fee of $2,270,000 payable by wire transfer of
same day funds.
ARTICLE XIII
DEFINITIONS
SECTION 13.1 DEFINITIONS. The following terms when used in this Agreement
shall have the following meanings:
"Acquisition Proposal" has the meaning set forth in Section 6.9.
"Adjusted Exchange Ratio" has the meaning set forth in Section 3.1A(a)(1).
"Affiliate" (or "affiliates" as the context may require), with respect to
any person, means any other person controlling, controlled by or under common
control with such person.
"Affiliates" has the meaning set forth in Section 6.7(a).
"Agreement" has the meaning set forth in the preamble.
"Average Parent Company Stock Price" shall mean the average of the closing
prices of Parent Common Stock on the New York Stock Exchange Composite
Transactions Reporting System, as reported in the Wall Street Journal, for the
twenty (20) trading days immediately preceding the fifth trading day prior to
the Effective Time.
"Base Stock Price" shall mean the average of the closing prices of Parent
Common Stock on the Nasdaq National Market or the New York Stock Exchange
Composite Transactions Reporting System, whichever is applicable, as reported in
the
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Wall Street Journal, for the twenty (20) trading days immediately preceding the
second trading day prior to the date of this Agreement.
"Business Day" means any day other than a Saturday or a Sunday, or a day on
which banking institutions in the District of Columbia are obligated by law or
executive order to close.
"Canceled Company Stock" has the meaning set forth in Section 3.1A(a)(1) or
3.1B(a)(1), whichever is applicable.
"Cash Consideration" has the meaning set forth in Section 3.1B(a).
"Cash Election" has the meaning set forth in Article IIIB or Section
3.1A(a)(1)(iii), if applicable.
"Certificates" has the meaning set forth in Section 3.2A(a) or 3.2B(b),
whichever is applicable.
"Closing" has the meaning set forth in Section 1.2.
"Closing Date" has the meaning set forth in Section 1.2.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" has the meaning set forth in the preamble.
"Company Audited Financial Statements" has the meaning provided in Section
4.10.
"Company Common Stock" means, the common stock of the Company, having a par
value of $.01 (one cent) per share. The term "Company Common Stock" does not
include the Company New Preferred Stock.
"Company Disclosure Schedule" has the meaning set forth in the preamble to
Article IV.
"Company Documents" has the meaning set forth in Section 4.1.
"Company Financial Statements" has the meaning set forth in Section 4.10.
"Company Interim Financial Statements" has the meaning set forth in Section
4.10.
"Company Material Adverse Effect" means (a) a material adverse effect on
the business, properties, assets, condition (financial or otherwise),
liabilities, or operations of (i) the Company and its Subsidiaries, taken as a
whole, or (ii) the Hillman Subsidiary, taken individually, or (b) a material
adverse effect on the ability of the Company to consummate the transactions
contemplated hereby, but excluding from such definition any change, effect,
event, occurrence or state of facts resulting from or arising in connection with
(A) changes in economic, regulatory or political conditions generally, (B) the
United States securities markets, (C) changes or conditions generally affecting
the industries in which the Company or its Subsidiaries operate, or (D) this
Agreement, the transactions contemplated hereby or the announcement thereof.
"Company Meeting" has the meaning set forth in Section 3.6A, or 3.6B,
whichever is applicable.
"Company Recapitalization" means a recapitalization of the Company
immediately prior to the Effective Time, pursuant to which (A) each of the
following
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individuals will purchase a number of shares of Company Common Stock (subject to
adjustment as specified in the second sentence of the definition) from Parent
(which Parent will own pursuant to Section 6.20) pursuant to the terms of the
Equity Purchase Agreements as follows: (i) Max Hillman will purchase 23,202
shares of Company Common Stock for $240,717 cash, (ii) Richard Hillman will
purchase 41,205 shares of Company Common Stock for $427,500 cash, (iii) Gary
Seeds will purchase 2,410 shares of Company Common Stock for $25,000 cash, (iv)
Terry Rowe will purchase 3,855 shares of Company Common Stock for $40,000 cash,
(v) Jim Waters will purchase 2,410 shares of Company Common Stock for $25,000
cash, (vi) Dennis Blake will purchase 24,096 shares of Company Common Stock for
$250,000 cash, (vii) Rick Buller will purchase 2,410 shares of Company Common
Stock for $25,000 cash, (viii) Ken Foskey will purchase 2,410 shares of Company
Common Stock for $25,000 cash, (ix) John McDonnell will purchase 57,831 shares
of Company Common Stock for $600,000 cash, and (x) John Marshall will purchase
3,373 shares of Company Common Stock for $35,000 cash, (B) the Company New
Preferred Stock will be created, (C) each of the following individuals will
purchase a number of shares of the Company New Preferred Stock as follows: (i)
Maurice Andrien will contribute 19,880 shares of Company Common Stock for 19,880
shares of Company New Preferred Stock, (ii) Joseph Corvino will contribute 8,711
shares of Company Common Stock for 8,711 shares of Company New Preferred Stock,
(iii) Max Hillman will contribute 55,422 shares of Company Common Stock for
55,422 shares of Company New Preferred Stock, (iv) Steve Miller will contribute
20,000 shares of Company Common Stock for 20,000 shares of Company New Preferred
Stock, (v) Richard Hillman will contribute 41,205 shares of Company Common Stock
for 41,205 shares of Company New Preferred Stock, (vi) Gary Seeds will
contribute 2,410 shares of Company Common Stock for 2,410 shares of Company New
Preferred Stock, (vii) Terry Rowe will contribute 3,855 shares of Company Common
Stock for 3,855 shares of Company New Preferred Stock, (viii) Jim Waters will
contribute 2,410 shares of Company Common Stock for 2,410 shares of Company New
Preferred Stock, (ix) Dennis Blake will contribute 24,096 shares of Company
Common Stock for 24,096 shares of Company New Preferred Stock, (x) Rick Buller
will contribute 2,585 shares of Company Common Stock for 2,585 shares of Company
New Preferred Stock, (xi) Ken Foskey will contribute 2,410 shares of Company
Common Stock for 2,410 shares of Company New Preferred Stock, (xii) John
McDonnell will contribute 57,831 shares of Company Common Stock for 57,831
shares of Company New Preferred Stock, and (xiii) John Marshall will contribute
3,373 shares of Company Common Stock for 3,373 shares of Company New Preferred
Stock.
The amount of cash and number of shares indicated above are calculated
using the Cash Election price of $10.375. If the provisions of Article IIIA are
effective, then (i) the actual amounts of shares of Company Common Stock to be
purchased for cash shall, for each respective individual named in clause (A) of
the preceding sentence, be equal to the quotient obtained by dividing A by B
where A = the amount of cash shown in such clause (A) with respect to such
individual and B = the product of the Average Parent Common Stock Price and the
Exchange Ratio or Adjusted Exchange Ratio, whichever is applicable and (ii) the
number of shares of Company Common Stock to be contributed by such individual
pursuant to clause (B) of the preceding sentence, as well as the number of
shares of New Preferred Stock to be issued pursuant to such clause (B) shall be
reduced or increased accordingly.
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"Company SEC Documents" has the meaning set forth in Section 4.10.
"Company Stock Option" means any option for the purchase of Company Common
Stock.
"Company Trust Preferred Securities" means the 11.6% Trust Preferred
Securities of SunSource Capital Trust.
"Company Warrant" means any warrant for the purchase of Company Common
Stock.
"Confidentiality Agreement" means the Mutual Non-Disclosure Agreement dated
as of April 4, 2001 between Parent and the Company. "Confirmation" has the
meaning set forth in Section 3.1A(d).
"Contracts and other agreements" mean all contracts, agreements, supply
agreements, undertakings, indentures, notes, bonds, loans, instruments, leases,
mortgages, commitments or other binding arrangements.
"Converting Stockholder" has the meaning set forth in Section 3.2A(a).
"Delaware Corporation Law" has the meaning set forth in Section 1.1.
"Distribution" means any distribution of cash, securities or property on or
in respect of the Company Common Stock whether as a dividend or otherwise.
"Dissenting Shares" has the meaning set forth in Section 3.3B.
"D&O Insurance" has the meaning set forth in Section 6.5.
"Effective Time" has the meaning set forth in Section 1.3.
"Employment Agreements" means employment agreements, satisfactory in form
and substance to Parent, between the Surviving Corporation (or its applicable
Subsidiary), on the one hand, and Maurice Andrien, Joseph Corvino, Max Hillman
and Steve Miller, respectively, on the other, to become effective at the
Effective Time.
"Environmental Laws" means all applicable federal, state, and local laws,
ordinances, rules, regulations, codes, duties under the common law or orders,
including, without limitation, any requirements imposed under any Environmental
Permits, licenses, judgments, decrees, agreements or recorded covenants,
conditions, restrictions or easements, the purpose of which is to protect the
environment.
"Environmental Permits" shall mean all Permits, licenses, approvals,
authorizations, consents or registrations required under applicable
Environmental Laws in connection with the ownership, use and/or operation by the
Company or its Subsidiaries of their properties.
"Equity Purchase Agreements" has the meaning set forth in the preamble.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Escrow Agreement" has the meaning set forth in the preamble.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the regulations and rulings issued thereunder.
"Exchange Agent" shall mean American Stock Transfer Company.
"Exchange Ratio" has the meaning set forth in Section 3.1A(a)(1).
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"Executive Officers" means, as to Parent and the Company, respectively, its
chairman of the board, its president, its chief executive officer or its chief
operating officer.
"Family Member" means, with respect to any person, a parent, spouse,
sibling or lineal descendent of such person.
"FTC" means the Federal Trade Commission or any successor agency or
department.
"GAAP" means generally accepted accounting principles in the United States
of America from time to time in effect.
"Governmental Entity" means (a) any international, foreign, federal, state,
county, local or municipal government or administrative agency or political
subdivision thereof, (b) any governmental agency, authority, board, bureau,
commission, department or instrumentality, (c) any court or administrative
tribunal, (d) any non-governmental agency, tribunal or entity that is vested by
a governmental agency with applicable jurisdiction, or (e) any arbitration
tribunal or other non-governmental authority with applicable jurisdiction.
"Hazardous Materials" means (i) any substance or material regulated or
identified as hazardous, toxic, pollutant or contaminant under Environmental
Laws, including gasoline, diesel fuel or other petroleum hydrocarbons, PCBs or
asbestos; or (ii) any pollutant, toxic substance, or contaminant.
"Hillman Subsidiary" means Hillman Group, Inc.
"H-S-R Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended, and the rules and regulations promulgated thereunder.
"Insurance Policies" has the meaning set forth in Section 4.24.
"In-the-Money" as applied to Company Stock Options means vested Company
Stock Options having an exercise price of less than $10.375 per share.
"Intellectual Property Rights" has the meaning set forth in Section
4.18(a).
"IRS" means the Internal Revenue Service or any successor agency or
department.
"Knowledge of Company" or "of which Company is aware" or words of similar
import shall, for purposes of this Agreement be deemed to mean the actual
knowledge of directors and actual knowledge after due inquiry of the following
officers and key employees of the Company and its Subsidiaries: Maurice Andrien,
Joseph Corvino, Max W. Hillman, Jr., Richard P. Hillman, Stephen Miller, Justin
Jacobi, Jim Waters, Chuck Freeman, plus, for purposes of Section 4.30 only,
Barry Pullin, Kim Schearer, James Slone and William Valdmanis.
"Knowledge of Parent" or "of which Parent is aware" or words of similar
import shall be deemed to mean the actual knowledge of the following
individuals: Joan M. Sweeney, G. Cabell Williams III and Daniel L. Russell.
"Justice" means the Antitrust Division of the Department of Justice or any
successor agency or department.
"Leased Real Property" has the meaning set forth in Section 4.17(a).
"Lease" has the meaning set forth in Section 4.17(a).
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"Liabilities" has the meaning set forth in Section 4.11.
"lien or other encumbrance" (or "liens or other encumbrances" or "liens or
other encumbrance" or "lien or other encumbrances" as the context may require or
any similar formulation) means any lien, claim, pledge, mortgage, assessment,
security interest, charge, option, right of first refusal, easement, servitude,
adverse claim, transfer restriction under any stockholder or similar agreement
or other encumbrance of any kind.
"Merger" has the meaning set forth in the recitals.
"Named Persons" means each of Maurice Andrien, Joseph Corvino, Max Hillman,
Steve Miller, Rick Hillman, George Heredia, Gary Seeds, Terry Rowe, Jim Waters,
Dennis Blake, Rick Buller, Ken Foskey, Mike Mueller, Mark Yeary, John McDonnell
and John Marshall.
"New Preferred Stock" means preferred stock, par value $.01 per share, of
the Company created pursuant to the Company Recapitalization and having powers
and rights identical to the Company Common Stock and voting together with the
Company Common Stock as a single class.
"1940 Act" shall mean the Investment Company Act of 1940, as amended, and
the regulations and rulings issued thereunder.
"Notice of Superior Proposal" has the meaning set forth in Section 6.9(b).
"Owned Real Property" has the meaning set forth in Section 4.17.
"Parent" has the meaning set forth in the preamble.
"Parent Common Stock" means the common stock, par value $0.0001 per share,
of Parent.
"Parent Disclosure Schedule" has the meaning set forth in the preamble to
Article V.
"Parent Documents" has the meaning set forth in Section 5.1.
"Parent Financial Statements" has the meaning set forth in Section 5.4.
"Parent Interim Financial Statements" has the meaning set forth in Section
5.4.
"Parent Material Adverse Effect" means (a) a material adverse effect on
business, properties, assets, condition (financial or otherwise), liabilities,
or operations of Parent and its Subsidiaries, taken as a whole, or (b) a
material adverse effect on the ability of Parent to consummate the transactions
contemplated hereby, but excluding from such definition any change, effect,
event, occurrence or state of facts resulting from or arising in connection with
(A) changes in economic, regulatory or political conditions generally, (B) the
United States securities markets, (C) changes or conditions generally affecting
the industries in which Parent or its Subsidiaries operate, or (D) this
Agreement, the transactions contemplated hereby or the announcement thereof.
"Parent SEC Documents" has the meaning set forth in Section 5.4.
"Permitted Liens" has the meaning set forth in Section 4.21.
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"Permits" (or "Permit" as the context may require) mean all licenses,
permits, certificates, certificates of occupancy, orders, approvals,
registrations, authorizations and qualifications with and under all federal,
state, or local or laws.
"person" (or "persons" as the context may require) means any individual,
corporation, limited liability company, partnership, firm, joint venture,
association, joint-stock company, trust, unincorporated organization,
Governmental Entity or other entity.
"Plan" or "Plans" has the meaning set forth in Section 4.22(a).
"Proceeding" has the meaning set forth in Section 4.15.
"property" (or "properties" as the context may require) means real,
personal or mixed property, tangible or intangible.
"Proxy Statement" has the meaning set forth in Section 4.9.
"Receiving Party" has the meaning set forth in Section 14.1.
"Registration Statement" has the meaning set forth in Section 4.9.
"Releasing Party" has the meaning set forth in Section 14.1.
"Resale Agreements" has the meaning set forth in the Preamble.
"Revised Base Stock Price" has the meaning set forth in Section 3.1A(a)(1).
"Rollover Options" means the Company Stock Options set forth on Exhibit F.
"SEC" means the Securities and Exchange Commission or any successor agency
or department.
"Securities Act" means the Securities Act of 1933, as amended, and the
regulations and rulings issued thereunder.
"Share Consideration" has the meaning set forth in Section 3.2A(a).
"Stockholders Agreement" means an agreement between Parent and each of the
Named Persons, pursuant to which such persons agree to certain conditions and
restrictions applicable to their Company Common Stock.
"Stock Option Plan" means the SunSource Inc. 1998 Equity Compensation Plan.
"Sub" has the meaning set forth in the preamble hereof.
"Subsidiaries" (or "Subsidiary" as the context may require), means each
entity as to which a person, directly or indirectly, owns or has the power to
vote, or to exercise a controlling influence with respect to, 50% or more of the
securities of any class of such entity, the holders of which are ordinarily, in
the absence of contingencies, entitled to vote for the election of directors (or
persons performing similar functions) of such entity, provided that, with
respect to Company or Parent, the term "Subsidiary" or "Subsidiaries" shall not
include any person that is not required to be consolidated on consolidated
financial statements of Company or Parent respectively, prepared in accordance
with GAAP.
"SunSource Technology Services Subsidiary" means SunSource Technology
Services LLC.
"Superior Proposal" has the meaning set forth in Section 6.9.
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"Surviving Corporation" has the meaning set forth in Section 1.1.
"Taxes" (or "Tax" as the context may require) means all federal, state,
county, local, foreign and other taxes (including, without limitation, income,
intangibles, premium, excise, sales, use, gross receipts, franchise, ad valorem,
severance, capital levy, transfer, employment and payroll-related, and property
taxes, import duties and other governmental charges and assessments), and
includes interest, additions to tax and penalties with respect thereto.
"Tax Returns" means any return or report relating to Taxes.
"Voting Agreement" has the meaning set forth in the preamble.
"Warrant" means the common stock warrant dated as of December 28, 2000
issued by the Company to Parent and labeled as Certificate No. 1.
"Warrant Shares" has the meaning set forth in Section 6.20.
"Warrant Share Purchase" has the meaning set forth in Section 6.20.
ARTICLE XIV
MISCELLANEOUS
SECTION 14.1 PUBLICITY. The Company and Parent shall agree on the form and
content of the initial press release regarding the transactions contemplated
hereby, and thereafter, so long as this Agreement is in effect, prior to making
a press release or other public statement with respect to the transactions
contemplated by this Agreement, each party (a "Releasing Party") will consult
with the other party (the "Receiving Party") and provide such other party with a
draft of such press release, in each case except as may otherwise be required by
law or stock exchange regulations.
SECTION 14.2 NOTICES. Any notice or other communication required or
permitted hereunder shall be in writing and shall be delivered personally, sent
by facsimile transmission or sent by certified, registered, express mail or
nationally recognized courier service, postage prepaid. Any such notice shall
deemed given when so delivered personally or successfully sent by facsimile
transmission or, if mailed, five days after the date of deposit in the United
States mails, as follows:
(i) if to Parent or Sub to:
Allied Capital Corporation
1919 Pennsylvania Avenue, 3rd Floor
Washington, D.C. 20006
Attention: Daniel L. Russell
Telecopy No.: (202) 973-6351
with a concurrent copy to:
Sutherland Asbill & Brennan LLP
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
Attention: James D. Darrow
Telecopy No.: (202) 637-3593
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(ii) if to the Company to:
SunSource Inc.
3000 One Logan Square
Philadelphia, PA 19103
Attention: Maurice P. Andrien, Jr.
Telecopy No.: (215) 282-1309
with a copy to:
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, PA 19103
Attention: Thomas J. Sharbaugh
Telecopy No. (215) 963-5299
Any party may by notice given in accordance with this Section 14.2 to the
other parties designate another address or person for receipt of notices
hereunder.
SECTION 14.3 ENTIRE AGREEMENT. This Agreement (including the exhibits and
schedules hereto) and the agreements contemplated hereby, including but not
limited to the Confidentiality Agreement, contain the entire agreement among the
parties with respect to the subject matter hereof, and supersede all prior
agreements, written or oral, with respect thereto.
SECTION 14.4 WAIVERS AND AMENDMENTS; NON CONTRACTUAL REMEDIES; PRESERVATION
OF REMEDIES; LIABILITY. This Agreement may be amended, superseded, canceled,
renewed or extended, and the terms hereof may be waived, only by a written
instrument signed by each of the parties or, in the case of waiver, by the party
waiving compliance. No delay on the part of any party in exercising any right,
power or privilege hereunder shall operate as a waiver thereof, nor shall any
waiver on the part of any party of any such right, power or privilege, nor any
single or partial exercise of any such right, power or privilege, preclude any
further exercise thereof or the exercise of any other right, power or privilege.
The rights and remedies herein provided are cumulative and, except as provided
in Section 12.2, are not exclusive of any rights or remedies that any party may
otherwise have at law or in equity. The rights and remedies of any party based
upon, arising out of or otherwise in respect of any inaccuracy in or breach of
any representation, warranty, covenant or agreement contained in this Agreement
shall in no way be limited by the fact that the act, omission, occurrence or
other state of facts upon which any claim of any such inaccuracy or breach is
based may also be the subject matter of any other representation, warranty,
covenant or agreement contained in this Agreement (or in any other agreement
between the parties) as to which there is no inaccuracy or breach.
SECTION 14.5 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAWS.
SECTION 14.6 BINDING EFFECT; NO ASSIGNMENT. This Agreement shall be
binding upon and inure to the benefit of the parties and their respective
successors and assigns and heirs and legal representatives. Neither this
Agreement, nor any right hereunder, may be assigned by any party without the
prior written consent of the
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other party hereto; provided, however, that Parent may assign its rights (but
not its obligations) hereto to its Subsidiaries.
SECTION 14.7 THIRD PARTY BENEFICIARIES. Except for Section 6.5, nothing in
this Agreement is intended or shall be construed to give any person, other than
the parties hereto, any legal or equitable right, remedy or claim under or in
respect of this Agreement or any provision contained herein.
Without limiting the foregoing, no direct or indirect holder of any equity
interests or securities of any party hereto (whether such holder is a limited or
general partner, member, stockholder or otherwise), nor any affiliate of any
party hereto, nor any director, officer, employee, representative, agent or
other controlling person of each of the parties hereto and their respective
affiliates, shall have any liability or obligation arising under this Agreement
or the transaction contemplated hereby, except as may be provided in a separate
written agreement signed by such Person.
SECTION 14.8 COUNTERPARTS. This Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute one
and the same instrument. Each counterpart may consist of a number of copies
hereof each signed by less than all, but together signed by all of the parties
hereto.
SECTION 14.9 EXHIBITS AND SCHEDULES. The exhibits and schedules hereto are
a part of this Agreement as if fully set forth herein. All references herein to
Articles, Sections, subsections, clauses, exhibits and schedules shall be deemed
references to such parts of this Agreement, unless the context shall otherwise
require.
SECTION 14.10 HEADINGS. The headings in this Agreement are for reference
only, and shall not affect the interpretation of this Agreement.
SECTION 14.11 SUBMISSION TO JURISDICTION; VENUE. Any action or proceeding
against any party hereto with respect to this Agreement shall be brought in the
courts of the State of Delaware or of the United States located in the State of
Delaware, and, by execution and delivery of this Agreement, each party hereto
hereby irrevocably accepts for itself and in respect of its property, generally
and unconditionally, the jurisdiction of the aforesaid courts. Each party hereto
irrevocably consents to the service of process at any of the aforementioned
courts in any such action or proceeding by the mailing of copies thereof by
registered or certified mail, postage prepaid, to such party at its address set
forth in Section 14.2, such service to become effective 30 days after such
mailing. Nothing herein shall affect the right of any party hereto to serve
process on any other party hereto in any other manner permitted by law. Each
party hereto irrevocably waives any objection which it may now have or hereafter
have to the laying of venue of any of the aforesaid actions or proceedings
arising out of or in connection with this Agreement brought in the courts
referred to above and hereby further irrevocably waives and agrees not to plead
or claim in any such court that any such action or proceeding brought in any
such court has been brought in an inconvenient forum.
SECTION 14.12 SPECIFIC PERFORMANCE. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and
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provisions hereof in any court of the United States or any state having
jurisdiction, this being in addition to any other remedy to which they are
entitled at law or in equity.
SECTION 14.13 SEVERABILITY. If any court of competent jurisdiction
determines that any provision of this Agreement is not enforceable in accordance
with its terms, then such provision shall be deemed to be modified so as to
apply such provision, as modified, to the protection of the legitimate interests
of the parties hereto to the fullest extent legally permissible and shall not
affect the validity or enforceability of the remaining provisions of this
Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
ALLIED CAPITAL CORPORATION
By: /s/ PHILIP A. MCNEILL
------------------------------------------
Title: Managing Director
Name: Philip A. McNeill
ALLIED CAPITAL LOCK ACQUISITION
CORPORATION
By: /s/ PHILIP A. MCNEILL
------------------------------------------
Title: Managing Director
Name: Philip A. McNeill
SUNSOURCE INC.
By: /s/ MAURICE P. ANDRIEN, JR.
------------------------------------------
Title: President and Chief Executive Officer
Name: Maurice P. Andrien, Jr.
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[LETTERHEAD OF JANNEY MONTGOMERY SCOTT LLC]
APPENDIX B
August 15, 2001
Board of Directors
SunSource Inc.
One Logan Square
Philadelphia, PA 19103
Members of the Board:
You have requested our opinion as to the fairness, from a financial point
of view, to the stockholders of SunSource Inc. (the "Company") of the
consideration to be received by such stockholders in connection with the
proposed merger (the "Merger") pursuant to the Agreement and Plan of Merger
dated as of June 18, 2001 (the "Agreement") by and among Allied Capital
Corporation ("Allied"), Allied Capital Lock Acquisition Corporation, a wholly
owned subsidiary of Allied, and the Company. Pursuant to the Agreement, the
Company will become a wholly owned subsidiary of Allied, and Allied will
exchange for each share of common stock, par value $0.01 per share, of the
Company consideration equal $10.375 per share, in cash (the "Merger
Consideration"), subject to the provisions of and as more fully described in the
Agreement.
In arriving at our opinion, we have reviewed (i) selected publicly
available financial and stock market data for the Company and certain other
publicly traded companies; (ii) publicly available information regarding the
financial terms of certain recent business combinations; (iii) certain internal
financial analyses and forecasts for the Company; (iv) the terms of the Merger
Agreement and certain related documents in draft form; and (v) such other
studies and analyses, and considered such other information and factors, as we
deemed appropriate. In addition, we held discussions with certain members of the
management of the Company regarding its business, operating results, financial
condition and prospects.
In giving our opinion, we have relied upon and assumed, without independent
verification, the accuracy and completeness of all information that was publicly
available or that was furnished to us by the Company or otherwise reviewed by
us, and we have not assumed any responsibility or liability therefore. In
particular, we have relied upon the assessment of the management of the Company
regarding its business and prospects, and assumed that the budgets and financial
projections provided to us were prepared by the Company's management on the
basis of reasonable assumptions and reflect the best currently available
estimates and good faith judgements of its future financial performance. We have
not conducted any valuation or appraisal of any assets or liabilities, nor have
any such valuations or appraisals been provided to us. We have also assumed that
the Agreement and certain related documents reviewed by us in draft form will
not vary materially from the drafts reviewed by us.
Our opinion is necessarily based on economic, market, financial and other
conditions and on the information made available to us as reflected in our
report delivered to the Company's Board of Directors on June 18, 2001, revised
as of
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August 15, 2001. It is understood that this letter is provided to the Board of
Directors of the Company in connection with its evaluation of the Merger and
does not address the relative merits of the Merger or any other business
strategies being considered by the Company's Board of Directors, nor does it
address the Board's decision to proceed with the Merger. Our opinion does not
constitute a recommendation to any stockholder of the Company as to how such
stockholder should vote on the proposed Merger, or as to any other matter.
Janney Montgomery Scott LLC ("Janney") is acting as financial advisor to
the Company in connection with the Merger and will receive a fee from the
Company for our services. In addition, the Company has agreed to indemnify
Janney against certain liabilities arising out of the rendering of this opinion.
Janney is a nationally recognized investment banking firm and, as part of its
investment banking activities, is regularly engaged in the valuation of
businesses and securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of securities, private
placements and valuations for corporate and other purposes.
Based upon and subject to the foregoing, we are of the opinion, as of June
18, 2001, that the Merger Consideration to be received by the stockholders of
the Company pursuant to the Merger is fair to the stockholders, including the
unaffiliated stockholders, of the Company from a financial point of view.
Very Truly Yours,
/s/ Janney Montgomery Scott LLC
Janney Montgomery Scott LLC
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APPENDIX C
DELAWARE GENERAL CORPORATION LAW
SECTION 262 APPRAISAL RIGHTS -- (a) Any stockholder of a corporation of
this State who holds shares of stock on the date of the making of a demand
pursuant to subsection (d) of this section with respect to such shares, who
continuously holds such shares through the effective date of the merger or
consolidation, who has otherwise complied with subsection (d) of this section
and who has neither voted in favor of the merger or consolidation nor consented
thereto in writing pursuant to sec. 228 of this title shall be entitled to an
appraisal by the Court of Chancery of the fair value of the stockholder's shares
of stock under the circumstances described in subsections (b) and (c) of this
section. As used in this section, the word "stockholder" means a holder of
record of stock in a stock corporation and also a member of record of a nonstock
corporation; the words "stock" and "share" mean and include what is ordinarily
meant by those words and also membership or membership interest of a member of a
nonstock corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec. 251 (other than a merger effected pursuant to sec.
251(g) of this title), sec. 252, sec. 254, sec. 257, sec. 258, sec. 263 or sec.
264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of sec. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to sec.
251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock
anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or
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designated as a national market system security on an interdealer
quotation system by the National Association of Securities Dealers, Inc.
or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsection (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of such
stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of
such stockholder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must
do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to sec. 228
or sec. 253 of this title, then, either a constituent corporation before
the effective date of the merger or consolidation, or the surviving or
resulting corporation within ten days thereafter, shall notify each of the
holders of any class or series of stock of such constituent corporation who
are entitled to appraisal rights of the approval of the merger or
consolidation and that appraisal rights are available for any or all
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shares of such class or series of stock of such constituent corporation,
and shall include in such notice a copy of this section. Such notice may,
and, if given on or after the effective date of the merger or
consolidation, shall, also notify such stockholders of the effective date
of the merger or consolidation. Any stockholder entitled to appraisal
rights may, within 20 days after the date of mailing of such notice, demand
in writing from the surviving or resulting corporation the appraisal of
such holder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identify of the stockholder and that the
stockholder intends thereby to demand the appraisal of such older's shares.
If such notice did not notify stockholders of the effective date of the
merger or consolidation, either (i) each such constituent corporation shall
send a second notice before the effective date of the merger or
consolidation notifying each of the holders of any class or series of stock
of such constituent corporation that are entitled to appraisal rights of
the effective date of the merger or consolidation or (ii) the surviving or
resulting corporation shall send such a second notice to all such holders
on or within 10 days after such effective date; provided, however, that if
such second notice is sent more than 20 days following the sending of the
first notice, such second notice need only be sent to each stockholder who
is entitled to appraisal rights and who has demanded appraisal of such
holder's shares in accordance with this subsection. An affidavit of the
secretary or assistant secretary or of the transfer agent of the
corporation that is required to give either notice that such notice has
been given shall, in the absence of fraud, be prima facie evidence of the
facts stated therein. For purposes of determining the stockholders entitled
to receive either notice, each constituent corporation may fix, in advance,
a record date that shall be not more than 10 days prior to the date the
notice is given, provided, that if the notice is given on or after the
effective date of the merger or consolidation, the record date shall be
such effective date. If no record date is fixed and the notice is given
prior to the effective date, the record date shall be the close of business
on the day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of holders
of such shares. Such written statement shall be mailed to the stockholder within
10 days after such stockholder's written request for such a statement is
received by the surviving or resulting corporation or within 10 days after
expiration of the period for delivery of demands for appraisal under subsection
(d) hereof, whichever is later.
C-3
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery
C-4
may be enforced, whether such surviving or resulting corporation be a
corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
proceeding in the Court of Chancery shall cease. Notwithstanding the foregoing,
no appraisal proceeding in the Court of Chancery shall be dismissed as to any
stockholder without the approval of the Court, and such approval may be
conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
C-5
REVOCABLE PROXY
SUNSOURCE INC.
SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ___________, 2001
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF SUNSOURCE
INC. The undersigned hereby appoints Joseph M. Corvino and Maurice P. Andrien,
Jr., the attorneys, agents and proxies of the undersigned, with full power of
substitution (the "Proxy"), to attend and act as proxy of the undersigned at the
Special Meeting of Stockholders (the "Special Meeting") of SunSource Inc. to be
held at the law offices of Morgan, Lewis & Bockius LLP, 1701 Market Street, Room
18A and B (18th Floor), Philadelphia, Pennsylvania on ____, 2001 at 10:00 a.m.,
local time, or any adjournment thereof, and to vote as specified herein the
number of shares which the undersigned, if personally present, would be entitled
to vote.
This Proxy, when properly executed, will be voted as specified. If no
instruction is specified with respect to the matter to be acted upon, the shares
represented by the Proxy will be voted "FOR" the merger agreement and the merger
and the grant of discretionary authority listed in Proposals 1 and 2. If any
other business is properly presented at the Special Meeting, this Proxy confers
authority to and shall be voted in accordance with the best judgment of the
Proxy. This Proxy is solicited by the Board of Directors of SunSource, and may
be revoked prior to its exercise by filing with the Secretary of SunSource a
duly executed proxy bearing a later date or an instrument revoking this Proxy,
or by attending the meeting and electing to vote in person.
ADDRESS CHANGES:
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If you noted address changes above, please mark the
corresponding box on the reverse side.